Netflix Inc.’s stock initially plunged in after-hours trading on Tuesday after the streaming giant posted weaker subscriber growth and forecast a lower profit than Wall Street expected. . But the shares later erased most of their losses on the company’s disclosures that its new ad-supported service is a success and its crackdown on shared accounts in the United States comes this quarter.
reported that subscribers grew by 1.75 million in the first quarter of the year, missing the average analyst estimate of 2.2 million. Netflix reported first-quarter net income of $1.31 billion, or $2.88 per share, compared with $3.53 per share in the year-ago quarter.
Revenue improved to $8.16 billion from $7.87 billion a year ago. Analysts polled by FactSet had expected average net income of $2.86 per share on revenue of $8.18 billion.
For the second quarter, Netflix executives forecast earnings of $2.84 per share on revenue of $8.24 billion, while analysts on average expected earnings of $3.07. $ per share on sales of $8.18 billion. Netflix no longer provides advice on subscriber additions, a sign that its years of rapid growth are clearly cooling off.
Also see: As the original Netflix dies, a new era of ad and password crackdowns is born
Shares plunged 10% lower below $300 in after-hours trading immediately after the earnings release, after closing the regular session with a 0.3% rise at $333.70 . After briefly moving into positive territory, stocks ended the extended session down just 0.2%.
In their first earnings video call without the company’s co-founder and former CEO Reed Hastings, Netflix’s management team called the first quarter “business as usual” as they transition from growth hyper number of subscribers to greater profitability.
Netflix executives hoped to boost their bottom line with cheaper ad-supported options and a crackdown on password sharing. In a letter to shareholders on Tuesday, company executives said the US advertising plan “already has a higher total ARM (subscription + ads) than our standard plan.”
At the same time, they revealed that a password crackdown in the United States would take place in the second quarter, a little later than expected.
“We have moved the general launch timing from late Q1 to Q2,” Netflix executives wrote. “While this means that some of the expected revenue growth in membership and earnings will decline in Q3 rather than Q2, we believe this will result in a
better results for our members and our business.
Additionally, Netflix also announced that it would be ending the DVD-by-mail business that launched the company into consumers’ homes. Revenue from the DVD business has grown from $911 million in 2013 to $146 million in 2022.
“This is a catch-22 environment for streaming companies as they shift from chasing subscribers to chasing profits, while at the same time inflation-weary consumers reassess their habits. discretionary spending,” KPMG U.S. national media chief Scott Purdy said in assessing the results. . “Today’s figures, an indicator for the industry as a whole, signal that winter is coming for the consumer. All grants end. Consumers can expect to be hit with ads, higher prices and a crackdown on password sharing. »
Investor expectations ahead of Netflix’s quarterly report were mixed. The focus was on Netflix shifting to better monetization with an ad-supported service and a continued crackdown on shared accounts. Analysts, in particular, were closely watching the performance of Netflix’s new “Basic with Ads” plan ($6.99 per month) and its effectiveness in stemming subscriber defection to competing services from Walt Disney Co.
and Apple Inc.
Netflix’s rollout of the ad-supported tier could also have a temporary impact on margins: Netflix reported an operating margin of 21%, compared to around 25% in the prior year quarter.
Meanwhile, Netflix ended paid shared accounts in some Latin American countries last year and expanded plans to Canada, New Zealand, Portugal and Spain in February.
“We believe cracking down on password sharing will lead to more subscribers as well as revenue because the primary account holder will pay additional fees for members who have left home or those sharing accounts will become subscribers in their own right,” Bank of America analysts said in a recent note.
Netflix shares have soared 12% so far this year, while the broader S&P 500 index
increased by 8%.