Some good news for Netflix, with subscriber gains in the third quarter
After two consecutive quarters of subscriber decline, Netflix said its prospects look brighter for the second half of the year as it prepares to launch a cheaper streaming plan with ads.
The Los Gatos, Calif.-based streamer added 2.4 million subscribers in the third quarter, beating projections by the company and Wall Street. Netflix said it expects to add 4.5 million customers in the fourth quarter.
“Thank God we’re done with shrinking quarters,” Reed Hastings, Netflix’s co-chief executive, said in an earnings discussion Tuesday. “We’re back to the positivity.”
The company posted revenue of $7.9 billion in the third quarter, up 6% from a year earlier. Net income was nearly $1.4 billion, down 3.5% compared with the third quarter of last year. Still, the results slightly beat analysts’ expectations.
Analysts polled by FactSet estimated $7.8 billion in revenue, net income of $966 million and 1.08 million new subscribers in the quarter. Netflix had previously projected it would have 1 million net adds.
Although the pace of subscriber growth is slower than in the early days of the pandemic, analysts are hopeful that the new cheaper ad-supported plan will attract more customers to the streaming service.
In a radical departure from its long-standing practice of eschewing commercials, Netflix will offer a $6.99 monthly subscription next month that includes 15- to 30-second ads before and during programs.
“The reaction from advertisers so far has been extremely positive and we believe that more choice, especially for more price conscious consumers, will translate into meaningful incremental revenue and operating profit over time,” Netflix said in its letter to shareholders Tuesday.
The program will launch in 12 countries outside the U.S., including nine where Netflix has a less than 50% penetration of broadband households, according to a Guggenheim Securities report.
“In combination with the continued development and release of local-market content, we believe the lower-priced ad-supported tier offers an outsized potential for membership growth in these countries,” Michael Morris, a Guggenheim equity research analyst, wrote in the report. Morris has a buy recommendation on the stock.
Netflix‘s stock rose about 14% to $275.36 in after-hours trading.
The plan, which starts Nov. 3, would bring 4 to 5 minutes of commercials per hour to Netflix programs like “Emily in Paris.”
Over the years, the company had resisted advertising, but as its competitors, including Hulu and HBO Max, have offered cheaper plans with ads, Netflix faced growing pressure to follow suit.
For the record:
10:14 a.m. Oct. 19, 2022This story was updated to correct the number of hours people watched “Dahmer — Monster: The Jeffrey Dahmer Story.”
In its third quarter, Netflix’s “Dahmer — Monster: The Jeffrey Dahmer Story” became its second-most-viewed English-language TV show, with more than 824 million hours of watch time since it was launched Sept. 21. The company touted its ability to have high engagement with its viewers.
“We believe the ability for our members to immerse themselves in a story from start to finish increases their enjoyment but also their likelihood to tell their friends, which then means more people watch, join and stay with Netflix,” the company said in its letter to shareholders.
Other highlights from the quarter included the launch of the popular “Stranger Things 4,” which generated 1.35 billion hours of watch time; “Cobra Kai,” with 270 million hours viewed; and Korean-language series “Extraordinary Attorney Woo,” generating 402 million hours of watch time in each series’ first 28 days, Netflix said.
Netflix also said it was pleased with its original films, noting that the action movie “The Gray Man” reached 118 million households and generated 254 million hours of watch time in its first 28 days. “The Gray Man” was the fourth-most-watched English-language film on Netflix, behind thriller “Bird Box,” dark comedy “Don’t Look Up” and action movie “Red Notice.”
The oft-nostalgic Netflix series succeeds in Season 4 by treating adolescence as the torturous experience it is for those who don’t fit in.
The company also continues to invest in other areas, including gaming. It currently has roughly 35 games and 55 more in development.
Although it remains the dominant subscription streaming service with 223 million subscribers, Netflix’s market share is slipping as rivals pick up business. Its percentage of U.S. internet streaming subscription revenue will fall to 29% by the end of the year, down from 49% in 2018, according to research service Insider Intelligence.
“Amidst this formidable, diverse set of competitors, we believe our focus as a pure-play streaming business is an advantage,” Netflix said in its shareholder letter. “Our aim remains to be the first choice in entertainment, and to continue to build an amazingly successful and profitable business.”
Free, ad-supported streaming TV services are growing fast and expected to command significantly more advertising dollars this year.
Some analysts said they believe Netflix’s cheaper plan may cause some customers to think twice before quitting the service entirely.
“Diversifying revenue sources by adding a small but growing advertising business to the mix will give Netflix room to reduce churn and keep those relationships similarly monetized when the customer is looking to downgrade,” Insider Intelligence Forecasting Analyst Peter Newman said in a statement.
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