Netflix topped Wall Street estimates across the board in the third quarter, marking the start of what the streaming giant hopes is its great comeback.
Global subscriber levels reached 223.09 million, up from 220.67 million in the prior quarter, ending a streak of two quarters when subscriber levels fell. Revenue and earnings per share also both came in ahead of expectations.
The sequential gain of more than 2.4 million subscribers more than doubled analysts’ consensus estimate of 1.09 million. Revenue of $7.93 billion and earnings per share of $3.10 exceeded forecasts for $7.84 billion and $2.19, respectively.
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The company has been on its back foot through most of 2022 after two straight quarters of subscriber declines and a 60% drop in stock price. The stock is up 14% since the company reported second-quarter earnings in April, and is changing hands 12% higher in after-marketing trading.
Execs have made several aggressive moves aimed at showing employees and Wall Street that they are serious about righting the ship, citing an ability to navigate through past fiascoes like their aborted 2011 plan to separate its physical DVD business from streaming. The company in recent months has announced a freeze on content spending increases, laid off hundreds of staffers and, most notable of all, reversed a years-long stance on advertising. Netflix’s new, ad-supported subscription tier — priced at $7 a month, a dollar cheaper than the soon-to-launch basic tier of Disney+ — will go live in 12 markets in early November.
“After a challenging first half, we believe we’re on a path to reaccelerate growth,” the company said in its quarterly letter to shareholders.
In the fourth quarter, the company expects to add 4.5 million net new subscribers, but post a dip in revenue to $7.8 billion due to the strength of the dollar compared with other currencies around the world.
The shareholder letter didn’t name names but it took some pretty heavy shots at rival companies, a retaliation after months of Netflix being kicked while it was down and even rumored as a takeover target due to its depressed stock price. The message is worth relaying at length.
“As it’s become clear that streaming is the future of entertainment, our competitors – including media
companies and tech players – are investing billions of dollars to scale their new services,” the letter said. “But it’s hard to build a large and profitable streaming business – our best estimate is that all of these competitors are losing money on streaming, with aggregate annual direct operating losses this year alone that could be well in excess of $10 billion, compared with our +$5-$6 billion of annual operating profit. For incumbent entertainment companies, this high level of investment is understandable given the accelerating decline of linear TV, which currently generates the bulk of their profit.”
Ultimately, the letter continued, “we believe some of our competitors will seek to build sustainable, profitable businesses in streaming – either on their own or through continued industry consolidation. While it’s early days, we’re starting to see this increased profit focus – with some raising prices for their streaming services, some reigning in content spending, and some retrenching around traditional operating models which may dilute their direct-to-consumer offering. Amidst this formidable, diverse set of competitors, we believe our focus as a pure-play streaming business is an advantage.”
After years of relying on debt and having negative cash flow as it sought scale, Netflix has become a consistently cash-flow-positive company. Free cash flow in the quarter was $472 million, compared with -$106 million in the same period a year ago. For all of 2022, the company expects to be north of $1 billion before experiencing what the letter called “substantial growth” in free cash flow in 2023.
In addition to advertising, which is expected to bring in billions in newfound revenue, the company is also working on the delicate project of extracting cash from customers who want to share their passwords. After testing various approaches in a handful of territories, the shareholder letter explained, Netflix has “landed on a thoughtful approach to monetize account sharing and we’ll begin rolling this
out more broadly starting in early 2023.” On the product side, changes have been phased in to allow those borrowing passwords to transfer their Netflix profile (with viewing history, preferences, etc.) into their own account. Those sharing are also able to manage their devices more easily and to create sub-accounts in order to pay for family and friends. “In countries with our lower-priced ad-supported plan, we expect the profile transfer option for borrowers to be especially popular,” the letter said.
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