squid game It might have been from Netflix (NASDAQ:NFLX) is the first truly international phenomenon, but future hedging programs could be even more damaging to investors.
Streaming giant plans to start hedging international revenue next year This segment currently accounts for 60% of annual sales.
Netflix (NFLX) saw fluctuations in revenue due to fluctuations in dozens of foreign currencies and more than 190 currencies. Country It works there. The current geopolitical outlook is complicated around the world by wars in Israel and Ukraine, trade tensions between the United States and China, and many other factors.
“We have exposure to over 45 currencies, and fluctuations in foreign currency rates impact both our revenue and operating income. Our currency risk management program allows us to avoid overreacting to short sales and short-term “Exchange rates will fluctuate during the period,” Netflix said in its third-quarter earnings report. “In the medium term, we will continue to appropriately adjust our pricing and cost structure to account for currency fluctuations.”
Foreign currency hedging can be a lifesaver for companies that rely heavily on income from volatile countries such as India, Argentina, and Sri Lanka.
On the other hand, hedging itself is an additional cost, and the balance between risk and reward tends to be proportional, with less risk taking leading to lower profits. Hedging is also complex, especially when done across multiple countries, each with its own geopolitical dynamics and subsequent impacts. And once volatility subsides, hedging may prove to be a mistake.
international growth
Wedbush analyst Alicia Reese said Asia-Pacific is a fast-growing region for Netflix.
“There’s been quite a bit of volatility in the Asia-Pacific region, and minimizing that would certainly help,” Reese said in a recent phone interview with Seeking Alpha.
Additionally, Netflix (NFLX) has become increasingly focused on revenue as subscriber growth slows, meaning regional average revenue per user is “more important than ever.” ,” Reese said.
In Asia Pacific, subscriber numbers grew 17% year-over-year in the third quarter, but revenue grew only 6% in the same period. In fact, average revenue per user decreased from $8.34 in the year-ago period to $7.62, a decrease of 9%. If the exchange rate were neutral, the decline would have been only 6%.
loss
Netflix (NFLX) reported a loss of nearly $173 million in the third quarter due to foreign currency revaluation losses on debt, an improvement from the $348.5 million loss reported a year earlier. Foreign currency remeasurement involves restating the value of accounts payable, receivable and cash balances recorded in a foreign currency to the end-of-period corporate currency, according to currency software management company Cantox.
“Our approach is to utilize standard futures contracts with the goal of reducing the volatility of operating income,” Netflix said in its earnings report. “We do not intend to hedge all currencies, but rather focus on the currencies with the greatest exposure and greatest risk/volatility, among other factors.”
Netflix (NFLX) declined to provide further information for this article.
Participating city
As competition heats up and streaming services cut prices (around Black Friday, but last for months), Netflix (NFLX) is the first player in streaming to gain a huge number of subscribers compared to its rivals. Reese explained that the company has a significant competitive advantage in that it boasts a
In the most recent quarter, Netflix (NFLX) added 9 million subscribers, bringing its total paid membership to 247 million, while Walt Disney (DIS) added 9 million subscribers to its Disney+ and Hulu services. The total added just 3 million people to 150 million and 48.5 million, respectively. (Hulu remains a minority shareholder owned by Comcast (CMCSA), but Disney is expected to take full control next month.)
Conversely, Warner Bros. Discovery’s (WBD) Max streaming service ended the period with 1,009,510,000 users, losing 1 million subscribers from a year ago.
“You have streamers operating at a loss because they don’t yet have the subscriber numbers to make their content productive,” Reese said of the competition. “Netflix is already profitable and having an international presence also helps, for example, with content from different regions available. squid game. ”
It can also be much cheaper to produce content internationally and play it in different regions, Rees says.
Despite facing the ups and downs of foreign currencies, “this is built in as a competitive advantage,” she said.