Vivien Killilea
Squid Game may have been Netflix’s (NASDAQ:NFLX) first true international phenomenon, but its upcoming hedging program may be a bigger hit for investors.
The streaming giant is is slated to start hedging foreign currency revenue next year as its international segment now accounts for 60% of annual sales.
Netflix (NFLX) has seen fluctuations in income with the volatility of the dozens of foreign currencies and more than 190 countries in which it operates. The current geopolitical outlook is complicated around the world with wars in Israel and Ukraine and trade tensions between the U.S. and China, among many other factors.
“We have exposure to over 45 currencies and fluctuations in foreign currency rates impact both our revenue and operating profit. An F/X risk management program will allow us to better balance delivering on our near term financial objectives without having to over-react to short term swings in F/X rates,” Netflix said in its third-quarter earnings report. “Over the medium term, we’ll continue to adjust our pricing and cost structure as appropriate given fluctuations in F/X.”
Hedging foreign currencies can be a lifesaver for a company heavily dependent on income coming from less stable countries like India, Argentina and Sri Lanka.
On the other hand, hedging itself is an additional cost and the risk-reward balance tends to be proportional, with less risk-taking leading to lower profits. Hedging is also complex, particularly when done across multiple countries, each with unique geopolitical dynamics and subsequent implications. And if volatility subsides, hedging may prove to have been a mistake.
International growth
Asia Pacific is a fast-growing area for Netflix, according to analyst Alicia Reese of Wedbush.
“There’s quite a bit of fluctuation in Asia Pacific and minimizing that would certainly be helpful,” Reese said in a recent phone interview with Seeking Alpha.
In addition, Netflix (NFLX) is increasingly focusing on revenue as subscriber additions slow, which means regional average sales per user “is more important than ever,” Reese said.
For the Asia-Pacific region, subscribers grew by 17% in the third-quarter from a year earlier, while revenue rose just 6% in that same time. Average revenue per user actually dropped to $7.62 from $8.34 a year earlier, or down by 9%. Had that been FX-neutral, the decline would have been just 6%.
Loss
Netflix (NFLX) reported a loss of nearly $173M in the third-quarter from foreign currency remeasurement loss on debt, an improvement over the $348.5M loss reported a year earlier. Foreign currency remeasurement restates the value of payables, receivables and cash balances posted in a foreign currency to the company currency at period end, according to Kantox, a currency software management company.
“In terms of our approach, we’re using standard forward contracts with the goal of reducing volatility in our operating profit,” Netflix said in its earnings report. “We won’t hedge all of our currencies and are focusing on the currencies where we have the largest exposure and greatest risk/volatility, among other factors.”
Netflix (NFLX) declined to provide further information for this story.
Subscriber city
Amid increasing competition and streaming services that are cutting prices (albeit surrounding Black Friday but lasting for months), Netflix (NFLX) has a significant competitive advantage being the first player in streaming and boasting a massive number of subscribers compared to rivals, Reese explained.
In their most recent quarters, Netflix (NFLX) added 9M subscribers to bring its total to 247M paid memberships, while Walt Disney (DIS) added just 3M combined subscribers for its Disney+ and Hulu services at 150M and 48.5M, respectively. (Hulu is still minority owned by Comcast (CMCSA), though Disney is expected to take full control next month.)
Conversely, Warner Bros. Discovery’s (WBD) Max streaming service lost 1M subscribers from a year-ago, ending the period at 1M 95.1M users.
“They have streamers operating at a loss because they don’t have the subscriber numbers yet to make that content productive,” Reese said of the competition. “Netflix is already profitable and they have an international base, which also helps — they can use content from a variety of regions, like Squid Game.”
It can also be a lot cheaper to produce content internationally and playback in various regions, Reese said.
“It’s a built-in competitive advantage,” she said, even as it faces the ups and downs of foreign currency.
