Earnings Results: Netflix misses on subscriber growth and earnings forecast, but stock recovers on ad plans, password-sharing crackdown

United States

Netflix Inc.’s stock initially plunged in after-hours trading Tuesday, after the streaming giant posted weaker subscriber growth and forecast a smaller profit than Wall Street expected. But shares later erased most of their losses on company disclosures that its new ad-supported service is a success and its crackdown on shared accounts in the U.S. is coming this quarter.

Netflix NFLX, +0.29% reported that subscribers increased by 1.75 million in the first quarter of the year, missing analysts’ average estimate of 2.2 million. Netflix reported fiscal first-quarter net earnings of $ 1.31 billion, or $ 2.88 a share, compared with $ 3.53 a share in the year-ago quarter.

Revenue improved to $ 8.16 billion from $ 7.87 billion a year ago. Analysts surveyed by FactSet had expected on average net earnings of $ 2.86 a share on revenue of $ 8.18 billion.

For the second quarter, Netflix executives guided for earnings of $ 2.84 a share on $ 8.24 billion in revenue, while analysts on average were expecting earnings of $ 3.07 a share on sales of $ 8.18 billion. Netflix no longer provides guidance on subscriber additions, a sign its years of rapid growth are clearly cooling.

Also see: As the original Netflix dies, a new era of ads and password crackdowns is born

Shares plunged 10% lower, below $ 300, in after-hours trading immediately following the release of the results, after closing the regular session with a 0.3% increase at $ 333.70. After briefly crossing into positive territory, shares ended the extended session down just 0.2%.

In their first video earnings call without company co-founder and former CEO Reed Hastings, Netflix’s executive team called the first quarter “business as usual” as they transition from hyper subscriber growth to greater profitability.

Netflix executives have hoped to goose their financial results with cheaper, ad-supported options and a crackdown on password sharing. In a letter to shareholders Tuesday, company executives said the ads plan in the U.S. “already has a total ARM (subscription + ads) greater than our standard plan.”

At the same time, they disclosed a password crackdown in the U.S. will occur in the second quarter, a bit later from previous expectations.

“We shifted out the timing of the broad launch from late Q1 to Q2,” Netflix executives wrote. “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 for both our members and our business.”

Additionally, Netflix also announced that it will end the DVD-by-mail business that launched the company into consumers’ homes. Revenue from the DVD business had declined from $ 911 million in 2013 to $ 146 million in 2022.

“This a catch-22 environment for streaming companies as they are pivoting from chasing subscribers to chasing profits while at the same time inflation-weary consumers are reassessing their discretionary spending habits,” KPMG U.S. National Media Leader Scott Purdy said, in assessing the results. “Today’s figures, a bellwether for the industry at large, signal that winter is coming for the consumer. All of the subsidies are ending. Consumers can expect to be hit with ads, higher prices, and password sharing crackdown.”

Expectations among investors heading into Netflix’s quarterly report were muted. The focus was on Netflix’s switch toward better monetization with an ad-supported service and a rolling crackdown on shared accounts. Analysts in particular were closely watching the performance of Netflix’s new “Basic with Ads” plan ($ 6.99 a month) and its effectiveness in stanching the defection of subscribers to competing services from Walt Disney Co. DIS, +0.63% and Apple Inc. AAPL, +0.75%.

Netflix’s rollout of the ad-supported tier could also have a temporary impact on margins: Netflix reported an operating margin of 21%, compared with about 25% in the year-ago quarter.

At the same time, Netflix put an end to paid shared accounts in some Latin American countries last year, and expanded plans to do so Canada, New Zealand, Portugal and Spain in February.

“In our view, the password-sharing crackdown will result in a greater number of subs as well as revenue because the primary account holder will either pay an additional fee for members who have moved out of the household or those sharing accounts become full subscribers,” Bank of America analysts said in a recent note.

Shares of Netflix have climbed 12% so far this year, while the broader S&P 500 index SPX, +0.09% has advanced 8%.