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Earnings Results: Netflix’s CEO says, ‘Thank God we’re done with shrinking quarters,’ as first growth of 2022 sends stock soaring

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Netflix Inc. added more than 2 million subscribers in the third quarter after stumbling into 2022 with two consecutive quarterly subscriber declines, a rebound that sent shares more than 15% higher in after-hours trading Tuesday. Shares were up about 11.5% in premarket trades early Wednesday.

Netflix 
NFLX,
-1.73%

reported a net gain of 2.41 million subscribers in the third quarter, while analysts on average were forecasting 1.1 million net additions, according to FactSet. That follows a decline of roughly 200,000 subscribers in the first quarter and nearly a million in the second quarter, which has led the company to plan massive changes, including a cheaper, ad-supported streaming tier set to arrive in the fourth quarter.

In a letter to shareholders, Netflix executives said they expect 4.5 million new subscribers to join in the fourth quarter, with revenue forecast to grow to $7.78 billion from $7.71 billion a year ago. Analysts on average were estimating revenue of $7.97 billion and a net subscriber gain of 4 million for the fourth quarter, according to FactSet.

“After a challenging first half, we believe we’re on a path to reaccelerate growth,” executives wrote in the letter.

“Thank God we’re done with shrinking quarters,” Netflix co–Chief Executive Reed Hastings joked of core subscriber growth during a video interview late Tuesday. He deemed the next two quarters a welcome relief but just a start. Ted Sarandos, Hastings’s fellow co-CEO, noted the popularity of “Stranger Things” Season 4 and its recent Jeffrey Dahmer series.

The news sent Netflix shares up about 15% in after-hours trading following the release of the results, after closing with a 1.7% drop at $240.86. The stretch of subscriber declines has filleted Netflix shares, which have swooned 60% so far this year while the broader S&P 500 index
SPX,
+1.14%

has declined 22.8%.

The streaming-video giant’s downturn after a pandemic-boosted surge has only intensified pressure from rival streaming services at Walt Disney Co. 
DIS,
+1.18%
,
 Apple Inc. 
AAPL,
+0.94%
,
Amazon.com Inc. 
AMZN,
+2.26%
,
Warner Bros. Discovery Inc. 
WBD,
+4.55%
,
Comcast Corp. 
CMCSA,
-0.23%

and Paramount Global 
PARA,
+1.56%
.

That didn’t stop Netflix executives from taking a pot shot at streaming rivals over profitability. “Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard — we estimate they are all losing money, with combined 2022 operating losses well over $10 billion, vs. Netflix’s $5 [billion] to $6 billion annual operating profit,” Netflix executives said in the shareholder letter.

Netflix Chief Financial Officer Spencer Neumann said the company would remain in the $17 billion “zip code” for content spending this year.

A dramatic shift in the video-streaming climate, one in which Disney surpassed Netflix as market leader in July, has prompted a radical makeover at Netflix. Last week, the company announced its long-awaited advertising-supported tier, which debuts Nov. 3 in the U.S. for $6.99 a month. Another 11 countries, including Canada and Mexico, will get the service by Nov. 10. [The dozen countries account for more than half of Netflix’s total revenue.] The company has also vowed a crackdown on shared accounts, and is pushing forward on gaming. On Tuesday at the TechCrunch Disrupt conference, Netflix vice president of game development Mike Verdu said the company is considering a cloud-gaming service.

The advertising-supported tier directly acknowledges competition and the necessity of Netflix “adapting to the streaming landscape’s new normal,” Insider Intelligence analyst Ross Benes said in a note late Tuesday.

For more: Netflix lost its streaming crown to Disney. Here’s how execs expect to win it back.

Netflix announced third-quarter earnings of $1.4 billion, or $3.10 a share, down from $3.16 a share a year ago. Netflix revenue improved to $7.93 billion in the quarter from $7.48 billion in the same period a year ago, but missed diminished expectations. Analysts polled by FactSet expected earnings of $2.14 a share on sales of $7.84 billion, estimates that had dipped in recent days.

Tuesday’s results follow some serious self-reflection among Netflix executives on how to stanch a decline in visits among subscribers that has led to cancellations. Co-CEO Hastings has consulted with staff to find ways to make subscribers visit the platform more frequently, according to reports by The Wall Street Journal and Bloomberg News.

One such strategy is cracking down on multiple users sharing the same account. In the shareholder letter, Netflix said it has “landed on a thoughtful approach to monetize account sharing and we’ll begin rolling this out more broadly starting in early 2023.”

Read more: Netflix will crack down on password sharing next year — here’s how it will work

“After listening to consumer feedback, we are going to offer the ability for borrowers to transfer their Netflix profile into their own account, and for sharers to manage their devices more easily and to create sub-accounts (‘extra member’), if they want to pay for family or friends,” the letter said. “In countries with our lower-priced ad-supported plan, we expect the profile transfer option for borrowers to be especially popular.”

The next few years of the streaming market will be largely defined by “battling it out over price and content,” Hastings said during the video call. “It’s about competitive excellence and straight-ahead execution.”

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