TheChek News Flow

Streaming giant expects to lose two million subscribers in the spring quarter

Netflix Inc. NFLX 3.18% lost subscribers globally in the first quarter and expects to lose even more this spring, as the streaming giant grapples with growing competition from rival services and rampant account sharing among its customers.

The company ended the first quarter with 200,000 fewer subscribers than it had in the fourth, missing on its own projection of adding 2.5 million customers in the period. Netflix said it expected to lose two million global subscribers in the current quarter.

Netflix shares fell 17% in after-hours trading. Through Tuesday’s close, the stock had declined by more than 40% so far this year.

Netflix blamed password sharing among its members and increasing competition in the streaming space for creating what it called “revenue growth headwinds.” Netflix estimated that besides its almost 222 million paying households, the service is being shared with an additional 100 million homes including 30 million alone in the U.S. and Canada alone.

“It’s harder to grow membership in many markets,” the company said in its letter to investors. Netflix said it is testing password sharing subscription modes that it believes will allow it to monetize sharing and build revenue.

The streaming giant said revenue growth has “slowed considerably” and warned that the gains Netflix made during the Covid-19 pandemic hid the fault lines that have emerged in its business over the past few years.

“Covid clouded the picture by significantly increasing our growth in 2020, leading us to believe that most of our slowing growth in 2021 was due to the Covid pull forward.” the company said.

Besides competition and password sharing, the other reasons Netflix cited as causes for slowing growth include a slower-than-expected adoption of smart TVs, data costs and world events including increasing inflation, the effects of Russia’s invasion of the Ukraine and continuing disruption from the pandemic.

Netflix said shutting down its service in Russia also resulted in the loss of 700,000 subscribers.

Netflix isn’t the only streaming service facing challenges. Walt Disney Co. ’s Disney+ is adding a lower-priced advertising supported version of the platform later this year in an attempt to boost subscribers.

While Netflix has no plans to launch an advertiser-supported tier, at a recent investment conference its chief operating officer, Spencer Neumann, said, “never say never.”

With growth that has been the envy of the industry for more than a decade, Netflix is seen as a barometer for streaming. That it is now seeing growth slowing, there is concern that the direct-to-consumer streaming business is about to hit some speed bumps.

Netflix said its plan to right itself will be heavily focused on improving the quality of its programming and the recommendations that platform provides to its customers to keep them engaged in the content and on the service. Netflix already spends more than any other entertainment provider with a programming budget that is expected to surpass more than $20 billion this year.

The decline brought Netflix’s paid global subscriber base to 221.6 million, down from 221.8 million in the prior quarter. Revenue rose roughly 10% to $7.87 billion, below analysts’ projections of $7.93 billion. The company’s quarterly profit was $1.6 billion, down from $1.71 billion a year earlier.

Groups with financial firepower to finance takeover are concerned about profitability of social media service

Elon Musk’s $43bn bid to take Twitter private is struggling to draw interest from several large institutions with the financial firepower to pull off such a large leveraged buyout in part due to concerns over whether the social media group can become more profitable.

Blackstone Group, Vista Equity Partners and Brookfield Asset Management are among some of the biggest private equity industry groups who have decided against providing an equity cheque for a buyout, people familiar with their thinking told the Financial Times.

Musk or any other bidder wanting to take Twitter private would need well over $20bn of new equity to complete the deal, with the remainder of the financing coming from debt or the participation of existing investors who would swap their publicly traded stakes for an interest in the private company.

Musk’s gambit has tantalised many Wall Street groups with the possibility of participating in one of the most prominent tech buyouts of recent times. The potential for a mega-deal that would generate hundreds of millions of dollars in fees has meant that virtually every big bank and financier is closely studying the rationale for a transaction.

But the lukewarm reception to a Twitter buyout from some of the most influential private equity firms shows that the outlook for the social media group divides opinion. That is particularly true as private equity sponsors weigh working with billionaire Musk, the founder of Tesla who has built a stake of over 9 per cent in Twitter, and launched an unsolicited takeover bid.

The Wall Street Journal reported on Monday that Apollo Global was considering investing along with Musk in a potential take-private of Twitter.

However, according to multiple people briefed on the discussions, Apollo is only considering providing debt or preferred equity funding, rather than an equity cheque. The people said the chances of even that happening were slim given scarce details on how Musk plans to run the company more profitably.

Bank of America, Royal Bank of Canada and Deutsche Bank are also among the lenders studying whether it is feasible to provide debt financing for a deal, but no decision has yet been taken, according to people briefed on their thinking.

The main concern for groups interested in financing a Musk-led deal is that Twitter does not generate enough cash to service the massive amount of debt he would need to take on to the company’s balance sheet to complete a transaction.

Additionally, many potential lenders are concerned about Musk’s desire to promote greater freedom of expression on the platform, which risks hurting Twitter’s business by making it less attractive to advertisers, the company’s main source of revenue.

Blackstone Group, the world’s largest private equity firm, is not seriously considering providing debt funding for a bid until a financial sponsor steps forward with an offer, the people said.

Even if such a bid materialises, Blackstone is sceptical about the sheer size of a Twitter takeover and Musk’s participation, in particular. Blackstone would instead be more comfortable considering financing a deal led by a consortium of private equity firms.

Software buyout firm Thoma Bravo has also started scrutinising a bid for Twitter, believing that the San Francisco-based company has not reached its full potential and can still grow its revenues, according to people briefed on the matter. But it has not yet decided on its next move.

Silver Lake and Elliott Management, two of the technology industry’s most influential investors, acquired large stakes in Twitter in the spring of 2020 and have been supportive of Parag Agrawal, chief executive, who took over from co-founder Jack Dorsey in November.

Both firms have not commented on whether they would pursue a takeover or how they view Musk’s bid.

Last week, Twitter’s board of directors, which includes a Silver Lake representative, unanimously agreed to implement a so-called poison pill, a manoeuvre designed to block Musk from building a greater than 15 per cent stake in the open market.

Despite Twitter’s defensive move, the maverick entrepreneur is still considering tendering an offer to all shareholders in an effort to put pressure on the social media company’s board to accept his bid, according to one person advising him.

Coinbase is off 42% so far this year as trading volume sinks; Silvergate Capital, Marathon Digital and Riot Blockchain are down sharply as well

The picks and shovels of the cryptocurrency world have been a worse bet lately than cryptocurrencies themselves.

The cryptocurrency market has been in selloff mode recently even as hundreds of millions of people now trade bitcoin, ether and other digital assets. Bitcoin is down 12% this year. Ether is down 19%. The entire crypto market has fallen about 19%, though prices are off their year lows, according to data from CoinMarketCap.

Stocks of publicly traded, crypto-focused companies, however, are doing worse, falling as much as 60% so far this year, according to FactSet.

The largest U.S. exchange, Coinbase COIN +3.78% Global Inc., is down 42% year to date. Silvergate Capital Corp. SI +13.40% is down 22%. Marathon Digital MARA +4.16% Holdings Inc. is down 36%. Riot Blockchain Inc. RIOT +1.56% is down 34%. Easton, Md.-based miner TeraWulf Inc. WULF +3.68% is down 60%.

The combined market capitalization of crypto companies that trade publicly has fallen to roughly $60 billion from $100 billion in November, when bitcoin rose to a record, according to JPMorgan analysts. More than half that slide—roughly $20 billion—came from Coinbase alone.

On Monday, Coinbase closed at $145.16, the lowest price since its public debut in April 2021.

The divergence between cryptocurrencies and cryptocurrency companies shouldn’t be a surprise, said Nicholas Colas, co-founder of research firm DataTrek. There is always some difference between the value of an asset and the companies that build businesses around that asset, he said.

Bitcoin and its peers, Mr. Colas said, are driven by consumer interest and usage, but companies such as Coinbase, Silvergate and Marathon derive their value from how well they sell their products to customers

The same dynamic can be seen in the oil and gold markets, as well as for other commodities.

For Coinbase, whose $32 billion market cap makes it the largest U.S. crypto company, the overriding issue is simply that trading volume has fallen sharply. For the top 10 exchanges, trading volume declined 40% from the fourth quarter to the first, according to research firm CoinGecko.

Coinbase derives substantially all of its revenue from transaction fees. Coinbase was averaging about $4 billion in trading volume a day in January, according to data from analytics firm Nomics. So far in April, it has averaged $2.6 billion a day.

Additionally, Coinbase said it planned to invest heavily in the business in 2022 and that could push the company into a loss if trading continued to fall.

Analysts slashed their estimates of Coinbase’s first-quarter earnings per share from $1.89 in November to 2 cents in April, according to analysts on FactSet.

Crypto stocks have also been swept up in the fintech selloff that began in the fall and have decoupled to an extent from the underlying crypto market, said BTIG analyst Mark Palmer.

Technology stocks have been slumping since the Federal Reserve and other central banks signaled a rise in interest rates. The higher rates make riskier investments relatively less attractive. Affirm Holdings Inc. is down 65% this year, while PayPal Holdings Inc. and Lemonade Inc. are each down 47%.

The stock prices of crypto mining companies—the companies that actually process crypto transactions and keep the networks alive—tend to be volatile because their shareholder base is mostly individual investors, said D.A. Davidson analyst Chris Brendler.

“Miners are a different animal in a lot of ways,” he said.

Miners do nothing but run hardware that processes crypto transactions, mostly bitcoin. The category doesn’t attract a lot of institutional investment. The fewer number of long-term holders tends to lead to a boom-and-bust trade, he said.

Mining hardware is expensive and must run 24 hours a day, seven days a week. Investors are concerned about how they will finance new equipment purchases with stock prices down and lower crypto prices cutting into mining profitability, Mr. Brendler said.

Heavy borrowing in dollars and euros, coupled with surge in food and energy prices, hits public finances

Surging inflation and sharply higher borrowing costs in the US and Europe threaten to push indebted emerging market and developing economies into further financial distress, a top IMF official has warned.

Almost a quarter of emerging market countries that have issued “hard currency” debt have bonds now trading in distressed territory, with spreads more than 1,000 basis points above US Treasuries, according to the multilateral lender.

Borrowers around the world have taken advantage of aggressive monetary easing by the Federal Reserve and the European Central Bank and issued dollar- and euro-denominated debt at ultra-low rates. But borrowing has become more expensive as central banks seek to tackle price pressures with tighter monetary policy.

Tobias Adrian, who heads the fund’s monetary and capital markets department, suggested levels of distress were at risk of rising further if central banks in advanced economies moved too abruptly or aggressively to unwind the monetary policy stimulus injected at the onset of the pandemic.

“There are certainly many countries that are either already in distress or will potentially be in distress in the near future,” he said in an interview with the Financial Times. The IMF on Tuesday cut its forecast for growth in emerging markets and developing economies to 3.8 per cent this year — down one percentage point from its January estimate.

“At some point, some major emerging market could also come into distress and the picture could change . . . That is not in our baseline right now, but it depends on how adverse the evolution of financial sector shocks is going to be,” Adrian added, noting that the amount of debt at risk is not “systemic in nature at this point”.

Countries that were particularly vulnerable included commodity and food importers such as Egypt and Bhutan, he said. Tunisia and Sri Lanka have also run into trouble, with the latter defaulting on its debts this month.

In its twice-yearly Global Financial Stability Report, published on Tuesday, the IMF said central banks in advanced economies were walking a narrow “tightrope” as they attempted to tame the highest inflation in roughly four decades against the backdrop of mounting geopolitical tensions, weakening global growth and whipsawing financial markets.

Traders now expect the federal funds rate to jump to 2.5 per cent by the end of the year from its current level of between 0.25 and 0.50 per cent. The ECB is also expected to lift rates for the first time in more than a decade later this year.

The Fed’s attempts to combat price pressures could hit emerging markets laden with foreign currency debt, the IMF warned on Tuesday.

The fund said: “A disorderly tightening of global financial conditions would be particularly challenging for countries with high financial vulnerabilities, unresolved pandemic-related challenges and significant external financing needs.”

Debt levels across emerging market economies have risen sharply in recent years, with the total amount outstanding jumping to nearly $100tn at the end of 2021 from less than $65tn roughly five years ago, according to the Institute of International Finance.

Global financial conditions have already tightened in recent months as inflationary pressures have become more acute following Russia’s invasion of Ukraine.

Adrian said the shift towards less accommodative monetary policy had been smooth, but warned the Fed and other central banks would have to proceed carefully and communicate clearly to ensure that remained the case.

“Right now, monetary policy in the vast majority of countries is being tightened and so this is exacerbating downward movements in sovereign debt.”

In addition to raising rates, the Fed will shrink its $9tn balance sheet by halting reinvestments of the proceeds from maturing Treasuries and agency mortgage-backed securities it holds. Should its actions roil markets and lead to a destabilising sell-off, Adrian said he expected the US central bank to moderate the pace at which it allowed its holdings of securities to shrink.

The shift in central bank policy — coupled with the fallout from the Ukraine war and sanctions imposed by the US and its allies on Russia — has also dented market liquidity, leading to larger price swings. The IMF on Tuesday warned that there were “some signs” that the uptick in volatility could be weighing on the ability of banks to lend and trade.

The fund pointed to the chaos in commodity markets that led to an eight-day suspension of trading in nickel on the London Metal Exchange this year. JPMorgan Chase disclosed a $120mn loss tied to the trade last week.

Huge swings in commodity prices have triggered big margin calls on short positions. Those margin calls were, the fund said, “testing the resilience of corners of global financial markets that were little known by the broader public only a few weeks ago”.

Fans of small modular reactors say they are cheap and quick to build, but they also come with challenges

Nuclear power enthusiasts are thinking big about going small. Engineering groups worldwide are developing 70 different types of small, modular nuclear reactors (SMRs). Rolls-Royce expects its mini-nuke design to receive regulatory approval by mid-2024. Its plants could be producing grid power as early as 2029.

Soaring energy costs, a renewed emphasis on energy security and the shift to net zero should benefit businesses specialising in SMRs. Advocates say the plants will be cheap and quick to build. Parts would be mass-produced in factories to cut costs, before being quickly assembled on site.

Compatibility with renewables is another selling point of SMRs. At times of plentiful wind or solar electricity, their energy would be used to make hydrogen or synthetic aviation fuel.

Rolls-Royce expects shorter lead times will help keep costs below one-twelfth of the £23bn bill for the Hinkley Point C reactor under construction in Somerset. Estimates suggest the mega project should come on stream in 2026.

Rolls-Royce, a jet engine maker hurt by pandemic lockdowns, badly needs to generate some good news. It owns 80 per cent of its SMR special purpose vehicle. It has invested £280mn in collaboration with BNF Resources UK Limited, Constellation (formerly Exelon Generation) and the Qatar Investment Authority. The UK government has put in £210mn.

SMRs have much to prove. The first plants would spring up on existing nuclear sites. Getting public approval for greenfield developments would be harder. There would be engineering challenges too. Analysts foresee a high risk the first reactors would be well over budget.

Champions of SMRs such as Rolls-Royce need to demonstrate big savings to counterbalance the diseconomies of scale of the small plants. The reason why big nuclear plants have been favoured until now is that building costs do not expand in proportion to power output.

Savings would need to come in part from a few developers making most of the world’s SMRs. So only a few of the 70-odd contenders can ultimately succeed. To make that cut, Rolls-Royce must prove its SMR is a world-beater.

Western sanctions have cut off Moscow from nearly half of its foreign exchange holdings

Russia plans to take legal steps to recover $300bn of its foreign currency reserves frozen by western governments in a bid to overturn one of the most painful measures imposed on Moscow in response to its invasion of Ukraine.

The pledge to mount a legal challenge against the measure was announced by the head of Russia’s central bank without any details or timeframe.

“Of course, this is an unprecedented freeze, so we will be preparing lawsuits, and we are preparing to apply them, as this is unprecedented on a global scale,” Elvira Nabiullina was quoted as saying by Interfax on Tuesday.

Two days after Russia began its invasion of Ukraine in late February, G7 countries and the European Commission announced they would impose sanctions on Russia’s central bank to block it from accessing its foreign exchange holdings.

The central bank is unable to access nearly half of its $609.4bn in reserves to support the rouble, which fell sharply after the invasion. This has forced Russia to impose capital controls and instruct exporters to convert their foreign revenues into roubles.

A central bank official declined to say which jurisdictions Russia was planning to sue in or what grounds it would claim for the legal action.

Russia has also threatened legal action if the sanctions force it to default on its sovereign debt. It missed two payments on dollar-denominated debt when US authorities refused to let American banks process them.

There have been few examples of successful efforts by individuals or governments to overturn western economic sanctions.

The UK Supreme Court last year blocked a bid by Venezuela to release gold reserves frozen by the Bank of England, while the US has rejected a lawsuit by Russian oligarch Oleg Deripaska to have personal sanctions against him lifted.

While some individuals have challenged EU sanctions that affect them personally, no EU sectoral sanctions imposed on Russia since the 2014 annexation of Crimea have been overturned by a legal challenge.

“The European sanctions are based on a very clear legal framework and part of the EU sanctions mechanism is the ability for all those who have been sanctioned to appeal the sanctions decision at the European Court. There is a perfect legal pathway to be explored,” said Peter Stano, a spokesperson for the European Commission.

“What the Russian authorities, what the Russian institutions will do is fully in their hands,” he added. “The reason for us to impose the sanctions are very clear, they are based on a clear legal framework, and the reasons are the illegal aggression against Ukraine and its people.”