Netflix stock surged as the company's third-quarter earnings report exceeded analysts' expectations, with the streamer gaining 2.4 million subscribers.
One of the top entertainment providers in the world, Netflix has 221 million paying subscribers in more than 190 countries who enjoy TV shows, documentaries, feature films, and mobile games in a range of genres and languages. Members get unlimited access to watch any screen that is connected to the internet at any time. Without interruptions or obligations, members may play, pause, and restart viewing at any time.
After reporting better-than-anticipated subscriber growth for the third quarter, Netflix (NFLX) shares are trading significantly higher. This gave the streaming behemoth a boost as it attempted to implement two significant strategy moves targeted at increasing its income and user base.
Netflix's third-quarter adjusted earnings per share of $3.10 exceeded analysts' expectations of $2.13 per share.
The company exceeded its own projection of 1.09 million additions by reporting 2.41 million net new subscribers for the quarter.
Netflix's revenue for the third quarter increased from $7.837 billion to $7.93 billion.
Following the report, the company's stock gained 14% in after-hours trading. Netflix's stock was down roughly 60% this year as of Tuesday.
Mr. Hastings, Netflix's Chief Executive Officer, expressed relief over the company's financial performance during a video interview conducted by an analyst, which Netflix aired on Tuesday evening.
Back-to-back quarters of customer defections sparked concerns about Netflix's capacity to grow its user base in the face of growing competition.
According to subscriber data firm Antenna, the percentage of client defections across premium streaming services increased to 5.7% in August, up from 4.9% the previous year.
The streaming service announced that it now has 223 million customers globally, exceeding its previous expectation of around one million additions for the quarter. In the first quarter, Netflix lost 200,000 customers, and over one million in the second.
“After a challenging first half, we believe we’re on a path to re-accelerate growth,” Netflix said in its quarterly letter to shareholders. “The key is pleasing members.”
Netflix grew members in every area for which it discloses statistics for the September quarter, adding 104,000 new customers in the United States and Canada, with Asia once again providing the most growth, acquiring 1.43 million new subscribers during the period. Its client base in Europe, the Middle East, and Africa surpassed that of the United States and Canada for the first time, although North America remains its largest revenue region.
Netflix earned $7.9 billion in revenue in the third quarter, up roughly 6% from the same period last year. Profit was around $1.4 billion, a 3% decline from the previous year.
“We’re still not growing as fast as we’d like,” Spencer Neumann, Netflix’s chief financial officer, said during the company’s earnings call. “We are building momentum, we are pleased with our progress, but we know we still have a lot more work to do.”
In addition, Netflix highlighted its superior streaming capabilities in comparison to rivals, stating that "Building a large, successful streaming business is hard—we estimate they are all losing money, with combined 2022 operating losses well over $10 billion, vs. Netflix's $5 to $6 billion annual operating profit."
Netflix stated in a letter to shareholders that it expected to add 4.5 million new customers in the fourth quarter, a 46 percent decrease from the 8.3 million users it attracted in the same period the previous year. Furthermore, Netflix announced that it will no longer provide investors with forecasts on its expected subscriber growth beginning in the next quarter.
It is crucial to make sure that all streaming firms are making the most money from their users, as they are all up against fierce competition and are finding it difficult to attract new users.
By historical standards, the scale of Netflix's quarterly membership gains remained modest. In the third quarter of last year, Netflix added 4.4 million new subscribers. The 8.3 million subscribers it added in the fourth quarter of 2021 is nearly twice as much as the 4.5 million subscribers the firm anticipates adding in the last quarter of 2022. At the end of September, 223 million people were Netflix customers.
Two significant strategy moves are now being implemented by Netflix in an effort to boost both its income and subscriber base. The launch of Netflix's first layer of ad-supported programming will help raise the company's average income per member. Netflix said last week that it would start offering the tier next month and charge $6.99 per month for it. Netflix added that it had thus far had high demand from advertisers and that it anticipated the ad tier to generate substantial revenue and profit.
The business intends to establish an ad-supported membership tier in November in order to assist in reducing early subscriber losses.
The majority of experts continue to be optimistic about the new ad tier's financial prospects.
After years of emphasising its ad-free experience as a selling feature for users, Netflix made a 180-degree turn by deciding to provide an advertising option. However, co-CEO Reed Hastings changed his position this year when the firm reported subscriber losses on its first-quarter earnings call, claiming that an advertising-supported plan would allow users to customise their experiences.
The stock's price objective was recently increased by $52 to $250 per share by UBS analyst John Hodulik, while JPMorgan analyst Doug Anmuth claimed that the lower price point of the ad tier ($6.99 in the U.S.) demonstrates Netflix's confidence in advertising income.
The next ad tier "may indicate considerable upside" in free cash flow, according to Citigroup analyst Jason Bazinet, and Evercore ISI's Mark Mahaney forecasted that by 2024, ad-supported will generate an additional $1 to $2 billion in income.
Netflix Worldwide Advertising President Jeremi Gorman stated on a teleconference prior to the ad tier announcement that the platform "almost sold out all of its ad inventory" internationally for launch, defying the general trend of a decline in global ad expenditure.
The streamer expressed "extreme optimism" about its new advertising business. While it does not expect the new tier to have a significant impact on its fourth-quarter earnings, it does anticipate membership progressively increasing over time. Its current subscriber growth prediction is based on its future programming slate as well as the regular seasonality that occurs during the last three months of the year.
The second is to cut down on password sharing and have viewers who share accounts pay to do so. The corporation has explored several techniques to persuade families to pay extra to share and has stated that it intends to implement a sharing policy in 2023. According to MoffettNathanson research, 16 percent of Netflix customers exchange passwords, which is more than any other major U.S. streaming provider. Netflix estimated in April that credentials were being shared with an extra 100 million homes.
The corporation has also reduced its expenditures. Netflix fired roughly 150 employees, predominantly in the United States, in May, accounting for about 2% of its overall workforce. Netflix stated in a statement that the cuts were prompted by the company's slower revenue growth.
While Netflix used to be one of only a few available streaming services, it is now one of roughly a dozen mainstream offerings, with many more niche services vying for viewing time. It also competes for viewers' attention with sites such as Google-owned YouTube and TikTok.
The freedom that streaming services have long provided consumers—the ability to pay monthly and turn off services as desired—sets them apart from cable's long-term, restrictive contracts. They also made it easy for clients to toggle services on and off after finishing a particular blockbuster show or movie.
"The greatest approach to preventing churn is to keep people entertained," Ted Sarandos, co-CEO of Netflix, said on the company's earnings call. He went on to say that Netflix was becoming better at ensuring that popular material was delivered on a regular basis.
Netflix stated about a year after launching videos on its platform that it would take several years to discover what gamers prefer, but that it was seeing some positive indicators. In addition to the 35 games available on its service, the company stated that it has 55 more games in development.
