Netflix executives plan major changes after disclosing that ‘revenue growth has slowed considerably’ amid loss of 200,000 subscribers in first quarter, which is expected to grow to a loss of 2 million customers in the second quarter
Netflix Inc. disclosed Tuesday that it is losing streaming subscribers overall for the first time since the service was in its infancy, and executives revealed plans to make moves they have long avoided as the stock plunged again.
The dual dangers of dwindling subscribers and deepening stock losses led Netflix NFLX, +3.18% executives to consider a crackdown on password sharing, and Co-Chief Executive Reed Hastings even went so far as to say that the company could offer a lower-priced subscription tier that includes commercials, a move he has resisted for years.
“It’s pretty clear that it’s working for Hulu, Disney’s doing it, HBO did it. I don’t think we have a lot of doubt that it works,” Hastings said in a video interview with J.P. Morgan analyst Doug Anmuth posted late Tuesday. “All those companies have figured it out. I’m sure we’ll just get in and figure it out as opposed to test it and maybe do it or not do it. I think we’ll really get in.”
Executives also said they expect to crack down on password-sharing, with Hastings saying Netflix has been working for two years on a model that would help it bring in revenue for everyone who watches the service. In a letter to shareholders announcing the results Tuesday, executives said they estimate an additional 100 million households are using the accounts of Netflix’s 222 million subscribers.
Netflix reported a net loss of 200,000 paid subscribers in the first quarter, while analysts on average were forecasting 2.5 million net additions, according to FactSet, which was what Netflix executives had forecast. The decline arrived after a price increase in the U.S. and Canada, where the company lost 640,000 subscribers, and executives on Tuesday forecast a loss of 2 million subscribers in the current quarter, while analysts were expecting net adds of 2.55 million.
Shares plunged more than 25% in after-hours trading following the release of the results, after closing with a 3.2% increase at $348.61. Netflix ended the session with a market capitalization just shy of $155 billion, suggesting that it could lose nearly $40 billion in valuation if the losses were to hold through Wednesday’s trading session, after losing nearly $50 billion following earnings three months ago.
Netflix reported earnings of $1.6 billion, or $3.53 a share, down from $3.75 a share a year ago, when Netflix first revealed its expectations for a severe pullback in new additions after a pandemic-fueled surge in 2020. Netflix revenue improved to $7.87 billion in the quarter from $7.16 billion in the same period a year ago, but missed diminished expectations. Analysts polled by FactSet expected earnings of $2.90 a share on sales of $7.93 billion, estimates that had also fallen in recent weeks.
Netflix’s subscription slowdown after a pandemic surge has only intensified pressure from rival streaming services at Apple Inc. AAPL, +1.41%, Walt Disney Co. DIS, +3.23%, Amazon.com Inc. AMZN, +3.49%, Warner Bros. Discovery WBD, +1.37%, Comcast Corp. CMCSA, +2.67% and Paramount Global PARA, +0.86%. Compounding matters, Netflix is emerging through a dry patch of programming after a back-loaded slate of original movies like “Don’t Look Up” and “Red Notice” and TV series such as “The Witcher” arrived to wrap up 2021.
The subscriber forecast was not the only forecast miss. In a letter to shareholders, Netflix executives said they expect revenue to grow to $8.05 billion from $7.34 billion in the second quarter a year ago, coming up short of analysts’ average estimate of $8.22 billion, though their profit estimate was in line with estimates.
The problem, as executives see it, is the range of new competitors that have arrived in the streaming arena, and the number of customers who are sharing their passwords with potential subscribers who instead use the service for free.
“Our revenue growth has slowed considerably as our results and forecast below show,” Netflix executives wrote. “Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration — when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds.”
Company executives also blamed sluggish economic growth, inflation and geopolitical events such as Russia’s invasion of Ukraine and “some continued disruption from COVID.” Suspension of operations in Russia and “winding-down of all Russian paid memberships” resulted in a loss of 700,000 paid net adds, according to Netflix. Excluding those actions, Netflix would have ended up with paid net additions of 500,000 in the first quarter.
Reversing numbers ultimately comes down to acquiring more subscribers through improved content in TV series, films and — now — gaming, Netflix Co-CEO Ted Sarandos said in the video interview. When asked by Anmuth about adding sports content, Sarandos said he was “not so sure” but did not rule it out. Apple, Disney and Amazon have bolstered their streaming services through exclusive pro sports packages with the NFL, MLB and soccer.
Netflix stock declined 37.8% in the first quarter, the worst performance for the stock since it was still being pummeled by the “Qwikster” debacle in 2012. Most of the decline occurred after a disappointing subscription forecast three months ago that wiped out $49.1 billion in market capitalization, though a loss to Apple in the Best Picture category at the Academy Awards in March also hurt — Apple TV+’s “CODA” beat out Netflix’s “The Power of the Dog.”
A major question moving forward is how many billions of dollars Netflix is willing to sink into content to keep pace with its rivals. Access to original content (39%) and a broad array of content (38%) are the top two reasons U.S. consumers subscribe to steaming services, though the same consumers say they’re canceling paid SVOD services because of cost (41%), price increases (30%) and lack of new content (30%), according to Deloitte’s recent Digital Media Trends Survey.
The cascade of disappointing news has punished Netflix shares as much as any company. The stock has collapsed 42% so far this year, while the broader S&P 500 index SPX, +1.61% has edged down 7% in 2022.