Netflix beat expectations for the second quarter, reporting a decline of about 970,000 subscribers to end the period with a global total of 220.67 million.
While the decline is still large in historical terms for the longtime leader in streaming, which has moved ever upward quarter by quarter for more than a decade, it was smaller than analysts’ prediction of a downturn of anywhere from 1.5 million to 4 million. The company itself had warned of a potential loss of up to 2 million subscribers in the period ending June 30.
Investors cheered the results, sending Netflix shares up 7% in after-hours trading. They closed the regular trading session at $201.63, up almost 6%, reaching their highest level since April.
But the news wasn’t uniformly positive. Netflix’s guidance for the third quarter for an addition of 1 million subscribers was strikingly conservative. Such a growth level would be below previous third quarters, and the cautious outlook is likely being influenced by inflation and a host of other adverse macroeconomic factors. Some marquee films and series have debuted or will soon in the period. The last two episodes of Stranger Things 4 arrived this month, and later in the quarter the platform will see debuts for new series Sandman and a fifth outing for Cobra Kai, plus such big-budget, star-driven movies as The Gray Man and Day Shift.
A recent price increase in the U.S. and Canada this year, which saw Netflix’s most popular plan go to $15.49 a month — highest in all of general-entertainment streaming — seems to be getting absorbed. Subscriber retention improved over the course of the second quarter and, while churn (aka the number of subscribers canceling in a given period) remains “slightly elevated,” the company said it nearly has returned to where it was before the price hike.
Revenue increased 9% to $7.97 billion, while earnings per share ticked up to $3.20 from the year-ago mark of $2.97. The earnings tally blew past the consensus forecast by analysts, while the revenue figure fell slightly short.
In its quarterly letter to shareholders, the company said it had incurred $70 million in severance costs related to layoffs during the quarter, as well as an $80 million non-cash impairment of some real estate leases “primarily related to rightsizing our office footprint.” Excluding that $150 million and the foreign currency impact of a strengthening U.S. dollar, the company said operating profit and operating margin came in slightly ahead of it guidance forecast.
When reporting its disappointing first-quarter numbers in April, the company said its second-quarter subscriber numbers could drop by up to 2 million, 10 times the size of the first-quarter pullback, which was the company’s first year-over-year subscriber decline in more than a decade. The second quarter historically has been the company’s softest, but the mere notion of the pace-setter in streaming moving backward so quickly spooked investors. Netflix shares, which were slashed by 70% in recent months, prompting chatter that the company could become a takeover target, have been on the upswing heading into today’s earnings report.
Wall Street and the entire entertainment business had been nervously awaiting the Netflix numbers, given the outsized influence the streaming giant has on investor sentiment about the rest of the sector. When Netflix was surging to all-time highs in 2021, its stock price touching $700 a share, the widely held goal was to go “all-in” on streaming. Many of the media companies who once freely licensed their programming to Netflix decided to claw back rights to many titles and ramp up their own competing services. In 2022, however, with Netflix stumbling and showing the first declines in its subscriber base in more than a decade, many of those trying to master the direct-to-consumer game have seen their shares pummeled amid rising anxiety about the economics of streaming.
Beyond the subscriber numbers, investors and other stakeholders have been keen to get updates from Netflix about its plans for a cheaper, ad-supported subscriber tier as well as its efforts to get paid when customers share their passwords. Ad-supported streaming, the investor letter said, is expected to debut in early 2023, and tests on a small fee for password sharing have been expanded in Latin America.
“We’ve been through hard times before,” the company wrote in the investor letter. “We’ve built this company to be flexible and adaptable and this will be a great test for us and our high performance culture. We’re fortunate to be in a position of strength as the leader in streaming entertainment by all metrics (revenue, engagement, subscribers, profit and free cash flow). We’re confident and optimistic about the future.”
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