Shares of Netflix Inc. (NASDAQ: NFLX) were up 11% on Wednesday, a day after the company delivered a solid quarter which saw better-than-expected revenue and earnings along with a rebound in subscriber growth. The streaming giant is also rolling out new plans with regards to account-sharing and its ad-supported offering. However, there are still challenges in terms of revenue and profit growth in the near-term.
Subscriber growth – a pleasant surprise
The biggest highlight of Netflix’s third quarter 2022 earnings report was the rebound in subscriber growth. After continuous subscriber losses through the first half of this year, Netflix bounced back with paid net additions of 2.41 million, which was more than double its own forecast of 1 million additions and ahead of Street expectations.
The company credited hit TV shows and films such as Monster: The Jeffrey Dahmer Story, Stranger Things season 4, The Gray Man, and Purple Hearts for the growth in subscribers during the quarter. Netflix forecasts paid net additions of 4.50 million for the fourth quarter of 2022.
By region, Asia-Pacific saw the highest number of paid net additions at 1.43 million in Q3. The EMEA and Latin America regions recorded net additions of 570,000 and 310,000 respectively. The US-Canada region saw the lowest number of net additions at 100,000.
Ads and account sharing
As part of its efforts to improve its pricing strategy, in November, Netflix plans to launch its ad-supported subscription plan across 12 markets including the US, UK, Canada, Mexico, Australia, France and Spain. The company is optimistic that providing this choice to price-conscious customers will generate meaningful revenue and operating profit over time.
To tackle account sharing, Netflix will offer users who have been borrowing accounts the option to create their own account. It will also give account sharers the option to create sub-accounts to pay for the usage of their accounts by family or friends. The company expects this strategy to work particularly in places with its low-price ad-supported plan.
In Q3, Netflix delivered revenue and earnings which surpassed its own forecasts and market estimates. Revenue grew 6% year-over-year to $7.9 billion, driven by a 5% increase in average paid memberships and a 1% growth in average revenue per membership. Net income amounted to $1.39 billion, or $3.10 per share. Although the bottom line declined versus last year, it came ahead of projections.
Netflix’s outlook is a bit disappointing. For the fourth quarter of 2022, the company expects revenue to be $7.78 billion, reflecting only a slight increase from the year-ago period. It is also below Street projections of $7.98 billion.
Net income is estimated to be $163 million, or $0.36 per share, in Q4. The outlook for EPS is way below analysts’ estimates of $1.12. Operating margin is expected to be 4%. The Q4 guidance reflects the impact of the strengthening US dollar.
Excluding currency impacts, revenue is expected to grow 9% and average revenue per membership is expected to grow 6% YoY. Operating margin is expected to be 10%.
Going forward, Netflix will not give guidance for paid membership as it looks to focus on revenue as its primary top line metric. It will, however, continue to report its global and regional membership each quarter.
Netflix believes it has higher engagement compared to its rivals with further opportunity for growth. The streaming giant stated that it currently accounts for around 8% of TV time in the US and UK, which is higher than its rivals. It also said it is profitable with $5-6 billion in annual operating profit as opposed to its competitors who are estimated to have well over $10 billion in combined operating losses.
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