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Netflix: Q1 Subscriber Growth Miss Not Enough to Dampen This Year's Rally

Published 04/19/2023, 02:33 PM
Updated 07/09/2023, 06:31 AM
NFLX
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Shares of Netflix (NASDAQ:NFLX) are moving modestly lower on Wednesday after the streaming giant reported mixed financial results for Q1 2023 and said it was delaying the wider launch of its password-sharing crackdown.

Mixed Q1 Results

Netflix reported Q1 earnings per share (EPS) of $2.88, beating the analyst consensus of $2.86 per share. Net income stood at $1.31 billion, down from $1.6 billion, or $3.53, last year.

Revenue rose to $8.16 billion from $7.87 billion in the same quarter last year, though slightly below the expected $8.16 billion. The company added 1.75 million streaming subscribers in the quarter, notably below the consensus projections of 2.06 million.

Analysts viewed the Q1 report as mixed, mainly due to worse-than-expected subscriber growth.

"Netflix is a mature business reinforcing less reliance on subscriber growth. However, this metric still moves the needle for key stakeholders," said Paolo Pescatore, an analyst at PP Foresight.

Meanwhile, Netflix significantly reduced content spending in the first quarter to $2.5 billion, from $3.6 billion in Q1 2022, according to the earnings report.

The cost-cutting measures come as part of Netflix’s broader focus on increasing cash flow instead of spending more to lure new subscribers. The company’s total subscriber count barely moved in the first quarter in the U.S. and Canada, adding just 100,000 users during that period. Netflix reported 74.4 million subscribers at the end of the quarter in the US and Canada, around 200,000 less than what it reported in the year-ago quarter.

But even though its subscriber growth slowed notably, the Los Gatos, California-based company hiked its full-year free cash flow outlook from $3 billion to $3.5 billion as reduced content spending helped it generate more cash. The company said its overall content spend in 2024 would be $17 billion, roughly the same as it was in 2022 and is expected to be this year.

Password-sharing Crackdown Delayed

Netflix initially planned to roll out the crackdown in Q1, but it said it has pushed back those plans to Q2.

“While this means that some of the expected membership growth and revenue benefit will fall in Q3 rather than Q2, we believe this will result in a better outcome from both our members and our business,” the company said in its earnings release.

During the earnings call, Netflix said it shifted a broader rollout of its effort to clamp down on unsanctioned password sharting into Q2 to make certain improvements. The move is expected to delay some financial gains, though the streaming giant claimed it was satisfied with results so far.

The streaming company started launching its password-sharing solution in 12 countries in February, but it is now postponing the wider rollout.

Last year, Netflix said it would take steps to force users who have been borrowing other users’ accounts to make their own. The new password-sharing solution involves a "paid sharing" option - meaning that those who want to watch Netflix content on someone else’s account must pay for the extra slot.

Netflix said it has over 100 million households share accounts, representing 43% of its global user base. The company claimed this has restricted its ability to invest in new content. Because of this, Netflix searched for new ways to drive profits, including the crackdown on password sharing and the recently added ad-supported subscription plans.

"We believe it will result in a better outcome for our members and our business," Netflix said, adding it was "on track to meet our full-year 2023 financial objectives."

Netflix co-CEO Greg Peters said the wider rollout of the password-sharing solution would include the U.S.

Upon the rollout earlier this year, Netflix shared guidance about the feature in four countries including Portugal, Canada, Spain, and New Zealand. The company said it would ask users from those countries to set a “primary location” for their accounts, and allow them to create up to two “sub accounts,” or paid extra slots, for those who want to watch the content from the same account but don’t live in the same household.

In Canada, Netflix said it has seen its user base grow in the wake of the paid sharing option launch, while revenue growth has picked up the pace and “is growing faster than in the U.S.”

In other countries, such as Latin America, the company saw users canceling their subscriptions after the crackdown was announced, weighing on its short-term growth in the region. However, the company said those who were borrowing passwords would create their own accounts via extra member slots, pushing the revenue back up.

Summary

While Netflix’s Q1 top and bottom line numbers came somewhere in line with Street estimates, the number of new subscribers added in the quarter trailed analyst expectations. Known as a pure play among investors, Netflix is working to increase revenue by growing its userbase through pushback on password sharing. Yet the delay in password-sharing crackdown efforts has been a factor in Netflix stock trading lower on Wednesday.

Shares are up 8.5% since the start of the year.

. . .

Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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