Netflix reported better than expected subscriber numbers in Q4 ’22 despite melting earnings

Autor: Financial Market
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Netflix yesterday reported financial results that were above analysts′ expectations. A significant increase in paid subscribers was euphorically received, giving shareholders hope for a brighter future after a difficult previous year.

Wall Street saw the increase in new subscriptions as significant, despite melting earnings:

• Revenues: $7.9 billion vs 7.79 expectations and $7.7 billion in Q4 2021 (1.9% y/y growth)

• Earnings per share (EPS): $0.12 vs $0.45 (Refinitiv) and $1.33 in Q4 2021

• Subscriptions: 231 million at the end of 2022, up 7.66 million in Q4 vs 4.5 million forecasts

• Net income: $55 million vs $607 million in Q4 2021

• Operating income: $550 million vs $632 million in Q4 2021

The company expects first-quarter 2023 revenue growth of 4% vs 3.7% Wall Street forecasts. Margins of 7% in Q4 ′22 also beat analysts’ expectations.

Netflix’s earnings per share fell largely due to a loss related to euro-denominated debt. The company spent $4 billion on content in Q4 2022 ($5.7 billion in Q4 2021) and plans to cut its budget to $17 billion in 2023.

Ads with brighter future?

Subscriber growth has slowed recently so Netflix has taken steps to improve its business model. Company introduced a cheaper version of the service with ads in partnership with Microsoft which has been launched for users in November.

The company conveyed yesterday that it is „pleased with early results”. The promotion to CEO of Greg Peters, who was responsible for launching the ad service, potentially indicates that the new business is important to Netflix, and the outlook around its future is optimistic.

According to CFO Spencer Neumann, the company wouldn’t have introduced ads when it wasn’t confident that the segment would account for at least 10% of revenue in the future, with the goal of matching Hulu’s revenue.

The company did not disclose how much of the new subscriptions came from users who opted for the service with ads. The Wall Street Journal reports that only 15% of new Netflix subscribers in the U.S. signed up for the cheapest plan with ads in November (versus 9% estimates in November).

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Netflix indicated that it did not register a significant number of people switching to cheaper subscriptions. This means that premium subscribers taking advantage of the expensive offerings rarely cancelled, which is generally a positive sign of their commitment.

Netflix premieres ‘Wednesday’, ‘Harry and Meghan’ and ‘Glass Onion’ were the most popular content in Q4.

Time to fight with password sharing

• In Q1 2023, Netflix will initially launch a paid sharing program aimed at generating revenue from users who have shared passwords with people outside their own household;
• The company intends to allow users to buy a package for people outside the household with whom they want to share the platform. Netflix expects some users to drop out because of this, but ultimately the ability to charge for an additional account is expected to improve revenue;
• Netflix co-founder and former CEO Reed Hastings is stepping down; he will be executive chairman. The role of CEO will be held by Greg Peters and Ted Sarandos.

Netflix said it will not give guidance on the projected number of subscribers. The stock price has reacted based on these forecasts over the years, and now the company intends to focus more on revenue than subscriber growth.

″Our long term financial objectives remain unchanged – sustain double digit revenue growth, expand operating margin and deliver growing positive free cash flow. For the full year 2023, as we continue to improve our service, grow our advertising business and launch paid sharing, we expect constant currency revenue growth to accelerate over the course of the year. We also expect year over year operating profit growth and operating margin expansion for the full year.″