Netflix Lost Fewer Users in Q2 2022 than Projected, Sees Launch of Ad-Supported Tier Next Year

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Smaller than Expected User Loss

The streaming giant released its results for the second quarter of the year on Tuesday after market close, which showed that it relinquished a whopping 970,000 subscribers, hot on the heels of the 200K loss of Q1, bringing total paid subscribers to 220.67 million worldwide. [1]

This is by all accounts a significant shrinkage of the user base, but it was also much better than the company's shocking forecast for a two million loss, so it seems that it had done a good job in managing expectations.

Furthermore, Netflix (NFLX) believes it will swiftly recoup most of those first-half losses, as it now projects the addition of one million users in the third quarter.

Co-CEO Reed Hastings acknowledged the loss, as he talked of "tempered" excitement, but was optimistic for the future, saying that "we're set up very well for the next year". [2]

Q2 Financials

The appreciation of the US Dollar against many other currencies, led to $339 million hit in Netflix's Revenue in the reported quarter, which came in at $7.97 billion. This marked an around 9% increase compared to a year ago, but also the continuation of the slowing growth trend.

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The firm's bottom line however shrank, since it Net Income declined to 1.441 billion, while Operating Margin also dropped to 19.8% in Q2.

The forecast for the third quarter don't look very encouraging, as all three of the above metrics are projected lower than the figures reported for the second quarter.

Ad-Supported Subscription Tier

Last quarter's decline in the streamer's user base for the first time in more than 10 years, along with increasing competition and higher inflation, caused management to pivot towards allowing advertisement in its platform.

Netflix (NFLX) had long resisted such action, but as we have commented before, cheaper ad-supported subscription plans maybe the future of the streaming industry, given the current environment. Today it offered more details on this strategy, announcing that it expects to launch this tier early next year, while maintaining the existing ad-free plans.

Last week, it had selected Microsoft (MSFT) as its global advertising technology and sales partner, noting though that this service is in the early stages and needs much work. [3]

Other streamers have already embraced ad-supported subscriptions, while Disney+ expects to offer such option towards the end of the year in the US, before expanding internationally [4].

Earlier in the week, the Walt Disney Company secured a record $9 billion in commitments from advertisers for fiscal 2022-23, with streaming services Disney+, ESPN+ and Hulu accounting for 40%, as reported by Reuters. [5]

Password Sharing

Netflix had for long allowed the sharing of passwords without any fee or restrictions, but having identified account sharing as a culprit of slowing growth, it has been trying to monetize it.

Latin America is the testing ground for this strategy, with two different approaches: The "add extra member" feature and the new "add home" option which will launch next month. [6]

The firm said that it is "encouraged" so far by the ability to convert consumers to paid sharing in the tested region and hopes for a 2023 rollout.

Focus on Content

The recent poor results have led Netflix to rethink the two aforementioned key aspects of its philosophy, but its focus on binge-watching, movie releases directly to the platform and the overall focus on robust content has not changed.

The streaming giant has an impressive line-up of original TV shows and movies, with the recently aired fourth season of Stranger Things for example becoming the best English series debut ever. It also clinched 13 nominations for this year's Emmy Awards, which were announced just last week. [7]

However, Netflix has been facing increasing competition, especially as more legacy entertainment firms step up into the streaming arena. Disney for example holds the keys to some of the most important franchises of the entertainment industry, with Star Wars and the Marvel Cinematic Universe, while also owning Pixar Animation Studios.

HBO of Warner Bros., is another such entry into streaming, with decades worth of audience-loved and critically acclaimed content, which topped this year's Emmy nomination, leaving Netflix at the second place.

Netflix Stock

NFLX.us has wiped out more than 50% of its value during the first half of the year, due to two extremely disappointing quarterly results in January and April. This was a worse performance than the broader tech sector and the Big Tech Basket, as NAS100 erased around 30% and FAANG nearly 40%.

Markets however reacted positively to yesterday's Q2 results, as the stock is up in today's premarket at the time of writing. Furthermore, NFLX.us has steadied over the last couple of months and runs a profitable July, but it early to judge whether a credible bottom has formed.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 20 Jul 2022 https://s22.q4cdn.com/959853165/files/doc_financials/2022/q2/FINAL-Q2-22-Shareholder-Letter.pdf

2

Retrieved 20 Jul 2022 https://www.youtube.com/watch

3

Retrieved 20 Jul 2022 https://about.netflix.com/en/news/netflix-partners-with-microsoft

4

Retrieved 20 Jul 2022 https://www.businesswire.com/news/home/20220304005303/en/

5

Retrieved 20 Jul 2022 https://www.reuters.com/business/media-telecom/disney-secures-9-billion-upfront-ad-sales-2022-07-18/

6

Retrieved 20 Jul 2022 https://about.netflix.com/en/news/update-to-paid-sharing

7

Retrieved 29 Mar 2024 https://www.emmys.com/404-search

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