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Netflix beat its own gloomy guidance for second-quarter subscriber additions, but still lost nearly 1 million subscribers, half what it predicted after a disastrous Q1 report led to major corporate changes. The company said it expected a return to growth in subscriber rolls in its third quarter.
Share prices, which had been trending upward the past week, jumped sharply both before and after market close today, up about $26 to $215 in the first hour after the earnings were released. At their peak last November, share prices topped $680.
“It’s tough in some ways, losing a million (subscribers) and calling it success,” Co-CEO Reed Hastings said in a subsequent earnings call. “But really, we’re set up really well for the next year.”
The good news for the world’s biggest streaming service is that revenues jumped substantially, a net 9 percent, thanks in part to subscription price increases in the United States and some other markets. The big jump in revenues came despite a $339 million negative impact from currency exchange issues caused by the strong U.S. dollar.
Netflix is also on target to generate about $1 billion in free cash flow for the year, a closely watched Wall Street metric of the company’s financial health.
The less good news is that the company’s total subscribers still drooped for the second quarter in a row, after a decade-long run of increases, especially in the first year of the pandemic. The company predicted in April that it would lose 2 million subscribers this quarter, but actually lost about 970,000. In 2021’s Q2, the company added 1.5 million subscribers after a record 2020 Q2 driven by the initial pandemic lockdown.
The company predicted Q3 2022 subscriber rolls will start growing again, by 1 million, compared to the 4.4 million added last year in the quarter. Q3 revenues are expected to grow 5 percent (up 12 percent year over year).
The more-money/fewer-subscribers dialectic played out even more in the highly competitive U.S.-Canada market, where customers have six other major subscription services attracting viewership with premium programming, as well as increasingly popular ad-supported free services such as Pluto and Tubi, and social-video giants YouTube and TikTok.
UCAN revenues were up 10 percent year-over-year, not including the foreign-exchange issues, but paid net subscriber adds dropped by 1.3 million, more than three times the UCAN losses in Q2 2021.
The company said churn in the UCAN market remains “slightly elevated (but) it is now back near pre-price change levels” after subscription increases in the United States, United Kingdom, Ireland, and some other EMEA markets
In April’s Q1 earnings announcement, the company reported a 200,000 drop in global subscribers that sent its share prices plummeting by nearly half. In response, Netflix laid off more than 600 employees (and eliminated around 1,600 positions of the 11,300 it reported at year end). Numerous feature and episodic projects were cancelled, and the company announced plans to launch an ad-supported tier.
“We’ve adjusted our cost structure for our current rate of revenue growth,” the investor letter said. “This resulted in approximately $70 million of severance costs and an $80m non-cash impairment of certain real estate leases primarily related to rightsizing our office footprint.”
Netflix is on target to spend about $17 billion this year on content, Chief Financial Officer Spence Neumann said. He and other Netflix executives called that spending level “around the right zip code” for content spending for the next few years to come.
The company reported strong growth in the Asia-Pacific region with $900 million in revenue that is approaching the scale of Netflix’s Latin America region, the company said in its letter to investors.
The quarter featured some hugely popular shows, including the third season of The Umbrella Academy, final season of Ozark, and the first season of The Lincoln Lawyer.
The quarter’s big exclamation point, though, came from the record-setting fourth season of Stranger Things, which the company said attracted 1.3 billion hours of view time in its first four weeks of release. It’s worth noting the final two episodes of the latter were delayed about a month because of COVID-related production issues until July 1, after Q2 ended.
But hits like Stranger Things and the $200 million action thriller The Gray Man, which is debuting Friday on the service, are examples of the broadly appealing, heavily marketed shows the company plans to emphasize going forward, in part because they have a halo effect on the rest of the company’s programming, Co-CEO Ted Sarandos said.
“Engagement is such an important metric,” Sarandos said. “You’ve come in (to see a high-profile show) and been exposed to everything else we do as well…You’re bound to be exposed to something you’ll love. We’ve just got to do that constantly. People should expect that back to back.”
Parrot Analytics, which tracks a variety of social and other platforms to see which programs are generating “demand share” from fans, said Netflix programming continued to see a relative decline in the quarter, to 41.2 percent. That still leads the market, but was at the lowest level Parrot has tracked. For the first time, Netflix’s six top competitors combined attracted more attention than Netflix programs did in the quarter.
“Netflix can often count on healthy overall demand growth even when its share drops, but the total demand for Netflix originals remained virtually flat in Q2 2022, despite record setting US and global demand for new episodes of Stranger Things,” wrote Wade Payson-Denney, a Parrot executive. “Consumers in the US and worldwide are responding to content available on Netflix’s competition.”
Netflix, however, touted new figures from Nielsen that show the company far exceeds its competitors and legacy broadcasters in terms of minutes viewed on U.S. TVs. Netflix shows racked up 1,334 billion minutes viewed in June, according to Nielsen. No.2 on the list, broadcaster CBS, had about half as many, 753 billion minutes viewed.
Netflix named Microsoft last week as its partner in building the technology needed for an ad-supported tier. In concert with that, the company also has been experimenting with ways to crack down on password sharing, which it said affect 100 million of its accounts.
“Our focus across paid sharing and advertising are (on creating) ways to better monetize viewing and grow members,” Neumann said. “We believe we can do it in both a revenue-accretive way and a profit-accretive way.”
Company executives said they are taking a “crawl-walk-run” approach to building the new ad-supported tier, with an early 2023 initial launch that will evolve over several years of iterations, COO and Chief Product Officer Greg Peters said.
The ad tier will create “opportunities for a wider range of pricing,” while also allowing the company to explore new ways of presenting advertising to leverage addressability, privacy, frequency and other challenges. It also will lead to “slightly more complicated” tiers, with the need to differentiate what each provides consumers, Peters said.
“Microsoft
The pivot to an ad-supported platform won’t come quickly, but it may indeed play into a strength of Netflix and Youtube: the ability to provide a bottomless well of new things to watch that tend to keep audiences around, wrote the analysts at LightShed Partners in a Monday note.
“We have repeatedly talked about how the more someone uses a streaming service, the less likely they are to churn, which ties to Netflix having the lowest churn amongst SVOD services,” wrote analysts Rich Greenfield, Brandon Ross, and Mark Kelley. “However, the importance of time spent becomes the critical driver of revenue when you are trying to sell advertising. Time spent creates inventory (impressions) that can be monetized. In the connected TV world, Netflix and YouTube dominate time spent and are actually strengthening their lead relative to peers…”
Separately, Netflix
The company announced on a blog that it was conducting a trial in Argentina and four Central American countries of a second approach to reducing password sharing. Depending on the account level, a customer can add one to three “extra homes” to their account, for fee per add of about $2.99 (about half that in Argentina).
Peters said the model and another one that underwent testing in three countries are being considered for rollout early next year, though it’s too early to say which approach the company might take.
And though the ad-supported tier and password-sharing crackdown aren’t related, Peters said they both help the company generate more revenue, and in turn make more programming.
You can watch the earnings call video recording on Netflix’s investor-relations page here.
Source: https://www.forbes.com/sites/dbloom/2022/07/19/netflix-revenues-up-subscribers-down-but-not-as-much-as-warned/