Netflix Earnings Beat, Adds Subscribers, Games & Password Sharing Plan

Streaming giant Netflix reported better than expected third quarter earnings after the market close. NFLX added 2.41 million net subscribers during the quarter more than double the 1 million it had forecast. The majority of Netflix’s net subscriber growth came from the Asia-Pacific region with 1.43 million new subscribers. Netflix also outlined its plan to crack down on password sharing next year. NFLX also updated it’s gaming strategy. $NFLX rose to $275.49 up 34.63 or 14.38% after hours adding to the volatility of the 2022 tech wreck. Over the past twelve months, NFLX stock has traded in an extreme range between $162.71 and $700.99.

Barbarians (Season 2)

Netflix Inc NASDAQ: NFLX · Reported After Close Tuesday

Netflix Q3 2022 Earnings

Q3 2022 earnings released after close 4:00 p.m.; conference call to follow

  • Adj EPS: $3.10 Consensus EPS Estimates: $2.17
  • Revenue: $7.93B Consensus Revenue Estimates: $7.85B
  • Q3 Streaming Paid Net Change +2.41Mln est +1Mln
  • Addition of 2.41 million subscribers vs. an addition of 1.09 million subscribers, according to StreetAccount estimates.
  • Majority of Netflix’s net subscriber growth came from the Asia-Pacific region with1.43 million subscribers.
  • U.S. & Canada region had the smallest growth of Netflix’s regions, contributing just 100,000 net subscribers.
  • Shows and movies include “Stranger Things” season four, “The Gray Man” and “Purple Hearts” as hits that helped during the third quarter.

Outlook

  • Sees Q4 EPS $0.36c Est $1.20
  • Sees Q4 $7.78Bln Est $7.98Bln, largely due to strong USD currency pressures overseas.
  • Netflix Sees Q4 Streaming Paid Net Change +4.5Mln Est +3.9Mln
  • Sees Q4’22 operating margin of 4% vs. 8% in the year ago period.
  • The fourth quarter is typically Netflix’s lowest operating margin quarter of the year as it’s usually our largest quarter in terms of content and marketing spend.
  • In addition, the aforementioned F/X impact has a high flow through to operating income (~75%-80% of the revenue impact) as most costs are in US dollars. Excluding the year-over-year impact of F/X, the Q4’22 operating margin forecast would be 10% vs. 8% in Q4’21.

Starting next quarter, Netflix will no longer provide guidance for its paid memberships but will continue to report those numbers during its quarterly earnings release.

“We’re still not growing as fast as we’d like,” Spencer Neumann, Netflix’s chief financial officer, said during the company’s earnings call. “We are building momentum, we are pleased with our progress, but we know we still have a lot more work to do.”

Earnings Insight

  • Netflix has risen above EPS estimates in 5 of the past 8 quarters and beating revenue expectations in 6 of those reports. BUT when it misses it misses big.
  • NFLX has a price-to-earnings ratio (P/E) of 21.76.
  • NFLX price-to-book-value (P/BV) is 5.42.
  • NFLX stock does not offer a dividend.
  • NFLX stock traded between $162.71 and $700.99 over the last year. Monday it traded at around $246.08 +16.08 (+6.99%) -391.89 (-61.43%) over the past year

Account Sharing

Netflix in the report said they will begin to crack down on password sharing next year, opting to allow people who have been borrowing accounts to create their own. The company will also allow people sharing their accounts to create sub-accounts to pay for friends or family to use theirs.

Prior to the Release NFLX had these outlines:

  • The first model is pay a little bit more to add a member and share with those additional members.
  • The second model is pay a little bit more to add an additional home and share the account with the additional homes.
  • NFLX expects to roll it out in 2023.
  • NFLX is currently testing strategies in some Latin America countries.

NFLX views account sharing as a significant factor in its performance. NFLX estimates that over 100 mln households are sharing. In NFLX’s view, it is wonderful that those users love the service, but NFLX knows that it needs to monetize their usage and doing so will be a key near-term focus.

Ad Supported Streaming

Netflix teased the addition of its new lower-priced ad-supported plan, which launches in 12 countries in November. The company said it was “very optimistic” about its new advertising business. While it doesn’t expect the new tier will add a material contribution to its fourth-quarter results, it foresees membership growing gradually over time. Its current forecast for subscriber growth is based on its upcoming content slate and the typical seasonality that comes during the last quarter of the year.

The company believes advertising can fuel substantial incremental membership (through lower prices) and profit growth (through ad revenues).

“After a challenging first half, we believe we’re on a path to reaccelerate growth,” the company said in a statement Tuesday. “The key is pleasing members. It’s why we’ve always focused on winning the competition for viewing every day. When our series and movies excite our members, they tell their friends, and then more people watch, join and stay with us.”

The ad-supported streaming business is viewed positively by J.P. Morgan with the firm forecasting $2.7B in revenue from the business by 2026 before these results. J.P. Morgan analyst Doug Anmuth, who has a neutral rating and $240 price target on Netflix (NFLX) said the new offering could help NFLX generate as much as $2.7B in revenue just from the U.S. and Canada over the next few years.

“The [U.S., Canada] ad-supported tier could generate overall revenue of $1.15B in 2023 and $4.6B in 2026, including incremental revenue of $350M in 2023 and $2.3B in 2026, which would drive 2% upside to our current 2023 estimates and 13% upside to 2026,” Anmuth wrote in a note to clients.

This would suggest Netflix has 7.5M advertising-supported subscribers by the end of next year, an incremental boost of 5%, generating some $600M in revenue. By 2026, that number could surge to 22M subscribers, accounting for a 19% incremental boost to Netflix’s (NFLX) subscriber count in the region, generating $2.65B in sales.

It all Changed for Netflix in 2022

Netflix this year saw heavy subscriber losses in the first quarter sending the stock down nearly 40% on the day after the report. In its Q1 report, Netflix shocked investors by reporting its first global net add subscriber decline in over a decade and guided to an even larger decline in Q2. NFLX management admitted that it misread the impact of the pandemic. COVID boosted subscriber growth a lot in 2020 and 2021. At the time, NFLX thought those results mostly represented pull-forward demand. Netflix conceded that it “believes most of [its] slowing growth in 2021 was due to the COVID pull forward.”

After years of downplaying the threat of competition, NFLX has changed its tune in the last two quarters and has admitted that competition has had an impact. $NFLX had said it doesn’t see Disney’s new service Disney+ with content from Fox Networks, Disney, Pixar, Marvel and Star Wars hurting. The last two earnings reports suggest that the streaming market has become saturated, especially in the US. Subscribers will become harder to get and keep.

Investor focus should shift from net add numbers to overall revenue and cash generation. Netflix enjoys huge advantages with a large subscriber base that has long been the envy of tech land. Key Competitors include, Amazon (AMZN), Apple (AAPL) Walt Disney (DIS), Paramount Global (PARA), Roku (ROKU), and Warner Brothers Discovery (WBD).

Since then, analysts have revised EPS estimates down 29 times and revenue down 36 times. Netflix is going through a transition right now. It was early to the streaming game, dominated and defined it for years.

You can clearly see its success has drawn others and now the competition is intense. It is also working out an ad tier and figuring out how to combat account sharing. The business model will look different in 2023.

Netflix Games

Netflix in the Q3 Release Updated on its gaming strategy.

Beyond TV and movies, we’re coming up on the one-year anniversary of our gaming launch. As we’ve said, this will be a multi-year journey for us to learn how to please game players. Our first year was about establishing our gaming infrastructure and understanding how our members interact with games. We now have 35 games on service (all included in every Netflix subscription without in-game ads or in-app purchases) and we’re seeing some encouraging signs of gameplay leading to higher retention.

With 55 more games in development, including more games based on Netflix IP, we’re focused in the next few years on creating hit games that will take our game initiative to the next level. More generally, we see a big opportunity around content that crosses between TV or film and games. For example, after the launch of the anime Cyberpunk: Edgerunners (49 million hours viewed) in Q3 use of CD Projekt’s game surged on PCs.

Netflix confirmed earlier in the year that it is in the early stages of expanding into games, building off of earlier endeavors around interactivity with “Black Mirror: Bandersnatch” and the company’s “Stranger Things” videogames.

“We view gaming as another new content category for us, similar to our expansion into original films, animation and unscripted TV,” Netflix executives said in a letter to shareholders

“Games will be included in members’ Netflix subscription at no additional cost similar to films and series.” “We really see this as an extension of our core product offering” and not as a separate profit pool, Netflix Chief Operating Officer Greg Peters said. He characterized the gaming push as a multiyear effort that will start “relatively small” and “continuously improve, based on what members tell us what is working.”

We look forward to how this plays out. Netflix sees a chance to differentiate its gaming experience, Peters added, around its vast library of intellectual property and will focus on mobile devices and TV set-top boxes.

“There is a rich opportunity to improve quality-of-game experience,” one that lets fans of Netflix’s original content “go further and put their [gaming] energies there.” “We are a one-product company with a bunch of supporting services,”

Netflix co-Chief Executive Reed Hastings said during the video call. Diversifying into games was inevitable, given the brutal competition with media giants such as Walt Disney Co. (DIS), Apple Inc. (AAPL), AT&T Inc. (T), and slackening growth of new net paid additions later this year for Netflix, which also missed Q2 earnings estimates.

Gaming Challenges

It could lead to a confrontation with Apple.

Netflix would need approval from the App Store to stream multiple games from its mobile app on iPhones and iPads. Apple already quashed attempts by Microsoft Corp. Corp. (MSFT) and Facebook Inc. (FB) to do so.

A major component of Epic Games Inc.’s high-profile antitrust lawsuit against Apple is that App Store has restrictions that aren’t tenable for some developers, creating a lopsided competitive landscape for Apple Arcade, a videogame subscription service available on iOS. Apple allows services that stream movies to offer them all in a single app, but forces services that stream games to separate each game for individual listing and review.

“I can use Netflix with a native app and I can see lots of different movies or TV shows or whatever. Is it that you didn’t want to use a subscription model?” a confused Judge Yvonne Gonzalez Rogers asked at one point during the three-week Apple-Epic trial in May.

Executives from Microsoft and Nvidia Corp. (NVDA) testified about the technological hoops they were made to jump through, at Apple’s request. Lori Wright, vice president of business development at Microsoft, said the software giant spent four months discussing with Apple how to launch xCloud as a native app, only to claim Apple demanded Microsoft, Nvidia, and others list cloud games as separate apps.

Submitting Xbox games one-by-one was too onerous, Wright said, forcing Microsoft to resort to making a web app. This not only represented a technological hurdle for Microsoft, she said, but also inconvenienced consumers. Users aren’t used to installing apps from the web on their iPhones.

“There are less controls over the streaming, so you could argue in some ways it’s worse” than a native app, said Aashish Patel, Nvidia’s director of product management.

Netflix could face the same restrictive scenario

Changing Structure and Pricing?

Netflix’s entry into gaming could change everything up according to analysts.

AB Bernstein analyst Todd Juenger said in a July 15 note

“One option/solution/path Netflix could take would be to segregate video games into the Premium tiers of service,” Juenger said. “For example, if you want videogames, maybe you need to subscribe to the Premium (4S) Plan. If you don’t want them, you can subscribe to the Basic (1S) or Standard (2S) Plan.

That pricing strategy would require Netflix to deviate from a core product tenet they have so far held sacred, which is that all Netflix members have access to all content (that’s available in their market).” “Another option Netflix could choose would be to characterize the games as ‘free-to-play,’ as for so many successful videogames,” Juenger wrote. “The trick here is to ensure subscribers who don’t want videogames believe that they really aren’t’ paying’ for them.”

Morgan Stanley analyst Benjamin Swinburne in a July 16 note.

“The risks and points of caution reflect the lack of success other even larger consumer tech platforms have had despite significant effort and investment… To succeed in gaming will require a significant shift in resources and priorities for the company.” Swinburne points to the struggles of Amazon.com Inc. (AMZN) and Google parent Alphabet Inc. (GOOGL)(GOOGL) in expanding their cloud-based game distribution platforms, Luna and Stadia, respectively, because of “a lack of unique content offerings and technology limitations.”

Netflix Competitors

Netflix now counts TikTok among its rivals.

“TikTok’s growth is astounding, showing the fluidity of internet entertainment,” the company wrote to shareholders. “Instead of worrying about all these competitors, we continue to stick to our strategy of trying to improve our service and content every quarter faster than our peers. Our continued strong growth is a testament to this approach and the size of the entertainment market.”

Walt Disney rolled out its much-awaited streaming service Disney+ last year, intensifying competition in the streaming arena. Armed with a huge repository of original content, gathered after the recent acquisition of the media assets of 21st Century Fox (FOX), Disney is all set to change the on-demand video streaming landscape.

Amazon (AMZN) Prime Video, AT&T (T) Time Warner, and Hulu have been ramping up their technical infrastructure and content portfolio, targeting a slice of Netflix’s market share.

“Questions have included expected announcements from Apple/Disney (as a possible reflection of future competition), pricing power vs. churn (impact on [long-term] margins vs. [short-term sub dynamics) and what content slate investments might yield against forward growth.

Content Library and Costs

Walt Disney Co. $DIS pulled its films off Netflix at the end of 2020 020 end and launched its own streaming service in 2019 that will become the exclusive home for Disney, Pixar, Marvel and Star Wars films.

Millarworld 1

Netflix has made moves on this front with it’s First Acquisition With Comic Publisher Millarworld getting aggressive back in 2018. From there content costs have only gone up sharply.

Source: NetFlix, TradersCommunity,

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