Streaming giant Netflix experienced a significant setback in its stock value as its shares plummeted by approximately 8.4 percent to US $437.42. This marked the most substantial decline since December and came as a surprise to investors who had been optimistic about the company’s new initiatives.
Second-quarter financial results
On the financial front, Netflix demonstrated higher profitability compared to some of its streaming competitors. Second-quarter earnings amounted to US$3.29 per share, exceeding the average analyst estimate of US$2.85 per share.
Looking ahead to 2023, Netflix raised its forecast for free cash flow to US $5 billion, up from the previous projection of at least $3.5 billion. This adjustment was attributed to a strike by writers and actors that disrupted production and resulted in cost reductions. However, the strike’s impact on free cash flow is expected to be temporary, as spending will likely increase once production resumes. The strike’s effect on the company’s new programming output was not discussed.
Overall, while Netflix continues to face challenges in maintaining robust subscriber growth and navigating pricing strategies, its solid financial performance and positive outlook for free cash flow offer some reassurance to investors and stakeholders.
Growth in subscriber numbers
While Netflix saw an 8 percent growth in subscriber numbers during the second quarter, its sales only rose by 2.7 percent to US$8.19 billion, falling slightly short of forecasts. The underwhelming revenue was partly attributed to foreign exchange rates and the impact of price cuts in certain markets. Additionally, the slower subscriber growth led to less revenue generated per customer in the most recent quarter. Looking ahead, the company anticipates third-quarter sales to reach US $8.52 billion, compared to the US 8.67 billion projected by analysts.
Netflix Q2 2023 results. Revenue of US$8.2 billion for the quarter was in line with forecast. Growth is expected in second half of 2023. (Source – SiGMA)
Although the second-quarter results were considered acceptable, they failed to impress investors enough to drive the stock higher, given the significant gains Netflix had made in the past three months. Q2‘23 revenue as seen in chart and operating profit of US $1.8 billion were generally in-line with the company’s forecasts. Revenue growth is expected to accelerate in the second half of 2023 as the company will start to see the full benefits of paid sharing plus continued stedy growth in ad-supported plans. The company is targeting a full year operating margin of 18 percent to 20 percent.
Password crackdown
Co-Chief Executive Officer Greg Peters acknowledged that more work was needed to reaccelerate the company’s growth.
On a positive note, Netflix outperformed analysts estimates in terms of customer acquisition, adding 5.89 million subscribers during the second quarter and ending the period with a total of 238.4 million members. This marked the company’s strongest second quarter since the onset of the pandemic three years ago. The robust growth was attributed, in large part, to the successful crackdown on password sharing, a move that involved charging users in over 100 countries for continued password sharing or prompting them to set up individual accounts.
However, the implementation of this strategy was not popular among users and analysts had differing opinions about its impact on growth. While Netflix initially expected a decline in subscriber growth or an uptick in cancellations due to the password crackdown, the company revealed that new sign-ups were surpassing cancellations. Furthermore, it projected a 7.5 percent growth in sales for the third quarter, indicating confidence in its strategy.
During the second quarter, the company witnessed a notable increase of 5.9 million paid net additions, demonstrating the popularity of the new sharing option among users.
Paid Sharing Option
Netflix is now extending the paid sharing option to almost all countries, expanding to a broader global audience.
This move by Netflix marks a strategic step in giving a boost to its revenue streams and adapting to evolving consumer preferences. The positive response from users further underscores the company’s commitment to providing enhanced services and experiences for its diverse subscriber base. As the paid sharing feature becomes accessible to more regions, Netflix aims to solidify its position as a global entertainment leader while continuing to explore innovative ways for expansion and more audience engagement.
Lowest-Priced Ad-Free plans
In a significant development, Netflix introduced its paid sharing feature in more than 100 countries, accounting for over 80 percent of its revenue base. The successful launch in May has yielded positive results, with revenue in each region surpassing pre-launch figures, and sign-ups outpacing cancellations.
Netflix has stopped offering its US$9.99 per month basic ad-free plan for new or rejoining customers in the US and UK. Existing subscribers on this plan can continue with it. The change means customers will have to choose between a cheaper plan with commercials or a pricier ad-free option, with the cheapest ad-free plan now priced at US$15.49 per month in the US. Netflix is also implementing strategies to accelerate revenue growth, including offering a tier with advertising and cracking down on password sharing by encouraging additional memberships for family or friends using the same account.
