Netflix executives pulled “less-bad results” than expected out of the hat in second quarter earnings and while the immediate and mid-term future remain paved with challenges as well as opportunities, Stranger Things and a few other headlines in Tuesday’s Q2 call did enough to brighten Wall Street’s view on streaming.
Co-CEO Reed Hastings’s assessment was a reasonable one: losing 970,000 global paid subs in one quarter is a record for the 25-year-old company he would rather forget. However, it is a markedly better outcome than the two million membership decline forecast three months ago in that shocking first quarter report, when the net loss of 200,000 subscribers was laid bare, triggering a Netflix stock crash and apocalyptic naysaying about VoD growth.
Back then April really was the cruellest month for Netflix as it faced a catastrophic confluence of “headwinds”, to use an industry euphemism: a tough economy and war in Ukraine, more intense streaming competition than ever before, initial member churn after a recent price hike, and lost potential revenue from password sharing.
Three months later, Netflix has examined the impact of all this and implemented cost-cutting to position the company for growth. In fact Hastings, co-CEO Ted Sarandos and their top business executives have forecast a one million net member gain in the third quarter. It’s not the 8.8 million paid net adds of Q4 2019 or the unprecedented, perhaps never-to-be-repeated 15.8 million gain in Q1 2020 when there was nothing else to do but stay home. However, once jittery investors will take it over a two million decline. Disaster averted.
The Q2 report acknowledged the impact of exchange rates – particularly the strong dollar, which impacts the majority of the streamer’s non-US revenues and its USD expenses – although revenue was roughly in line with expectations, earnings per share beat forecasts, and CFO Spencer Neumann described cash flow as “strong”.
Results pushed Netflix stock up by around 6% to close on a little over $201, the highest level since early June. That triggered incremental gains in the value of big media companies that own platforms and sent a shuddering “phew” around Hollywood and the investment community.
There is the sense that recent nightmarish visions of a teetering house of cards have been banished and fears over the future of streaming have been assuaged – for now at least.
Viewing records
The fresh record-breaking viewership of Stranger Things season 4 will have put smiles on the faces of investors who live and die by quarterly earnings. That and the positive messaging from a supremely confident coterie of business executives at a market-leading industry pioneer. The bottom line from Tuesday’s call was Netflix still commands the biggest global membership of just over 220 million, the company is working hard to offer entertainment at the best value, and co-CEO Ted Sarandos has his eyes on “billions” more potential members out there who love streaming.
Growth potential clearly lies outside the US, although the ad-supported tier could become a game-changer. There was a 1.3 million net loss in US and Canadian members, reinforcing the view that North American subscriptions have saturated. EMEA membership also declined sharply, Latin America made a 10,000 gain, and Asia Pacific delivered the encouraging news, increasing by 1.08m in the quarter.
To tackle the headwinds, Netflix has laid off around 450 people since April, roughly 4% of its 11,000-strong global workforce (observers say more redundancies are likely on the way). It has begun the fight against the 100 million-plus global account-holders that share passwords, announcing “add a member” fees of up to $2.99 to offending subscriber’s monthly bills in a trial in five South American and Caribbean territories. The goal is to broaden this initiative in 2023.
And of course the streamer is introducing its ad-supported tier, which will launch in early 2023 in countries with robust advertising markets. Executives haven’t specified a price point although speculation has hovered around $9.99 – the same as the streamer’s cheapest ad-free tier – and there is talk of ad revenue reaching $150m in 2023 and increasing more than tenfold by 2025. Microsoft is the tech and sales partner.
Paying less for ads will doubtless be very attractive to consumers, especially at a time when soaring inflation is forcing people to rethink discretionary spend. Disney+ plans to introduce its ad-supported tier later this year and Hulu, HBO Max, Paramount and Peacock all carry their own versions.
Sarandos said almost all the content on ad-free Netflix will be available on the lower-cost ad tier – that’s the company’s original content; licensed content could be trickier. He didn’t say that he hopes most of the higher paying subscribers stick to their ad-free plans.
Netflix execs said total content spend for 2022 and most likely the next few years will settle on around $17bn. Global film and TV heads Scott Stuber and Bela Bajaria know the pressure is on to find or keep finding the best material. Stuber is looking to make fewer but better films and has lined up some big names. The Russo brothers’ action thriller The Gray Man starring Ryan Gosling debuts on Friday July 22. Coming up are an Extraction sequel starring Chris Hemsworth, Gal Gadot action thriller Heart Of Stone, and the Russo brothers’ sci-fi The Electric State.
There are plenty of potential spanners in the works as Netflix resets and looks to the future: a worsening economy, subscriber churn and formidable rivals, to name a few challenges that are knowable. But the same factors will impact other streamers.
As of now, with almost one million net adds forecast over the next three months, a spending plateau, 4% fewer employees and an intriguing 2023 in store, streaming’s big kahuna has done enough to ensure investors aren’t feeling quite as bad about streaming as they did in April. All eyes turn to the next round of media earnings.
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