Netflix to ‘reclassify’ personnel costs under content and marketing

For the next quarter, Netflix has revealed plans to “reclassify” certain personnel costs from general and administrative (G&A) to under content and marketing. It would also do the same from technology and development to other cost of revenues. According to Netflix, the change reflects the “ongoing evolution” of its business to include self-production of content.

The streaming giant explained that a growing number of employees are becoming involved in developing content as the platform migrates to self-produce more of its content versus only licensing original and non-original content.

“We expect to make the same change with marketing and other tech employee costs to maintain consistency in approach. The change would result in a comprehensive view of our total spending on content and marketing,” the statement said. The reclassification is not expected to have impact on total operating expenses, operating profit or operating margins. It looks to provide quarterly pro-formas so investors will see the change cleanly.

In terms of content, the streaming giant said it would continue to expand its international originals via projects across India, Middle East, Mexico, Spain, Italy, Germany, Brazil, France and Turkey, to name a few.

Marketing spend on the rise

For the three months ending 30 September 2018, Netflix saw a marketing spend of US$435.3million, up from US$312.5 million the year before. Domestic streaming saw a marketing spend of US$183.5million, up from US$128.9 million the year before. Meanwhile, marketing spend on international streaming was at US$251.7million, up from US$183.6million the year before.

(Read also: Netflix to increase marketing spend to US$2bn)

Overall, streaming revenue for the company grew 36% year on year (YOY), with average paid membership increasing 25% and ASP rising 8%. Operating margins had increased to 12%, exceeding Netflix’s forecast of 10.5% due to the timing of content and marketing spend – a portion of which was moved into Q4.

Netflix also saw an increase in memberships by 31% to 7 million, up from 5.3 million last year and representing a new third quarter record. According to the streaming giant, this was due to “greater-than-expected acquisition globally”, with strong growth broadly across all markets including Asia.

Netflix is forecasting paid net additions of 7.6 million, and total net additions of 9.4 million in Q4, up 15% and 13% compared with 6.6 million and 8.3 million in Q4 last year. It is also expecting operating margin to dip to 5% from 7.5% in the previous year’s quarter.

The move is a welcomed change from Netflix, having missed its membership growth forecast of 6.2 million for the second quarter of 2018 (Q2 2018), witnessing only a 5.2 million growth to 130 million memberships. This saw the global streaming service provider post a revenue of US$3,907 million for Q2 18, compared to US$2,785 million during the same period last year.

“As we have written in previous letters, this sequential decline in operating margin in the second half of 2018 is due to the timing of content spend and a higher mix of original films in Q4 2018 (film amortisation is more accelerated than series amortisation due to more front-loaded viewing),” the statement explained.

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(Photo courtesy: 123RF)

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