After the bell on Tuesday, markets witnessed what may be remembered as the first of this quarter’s earnings debacles.
Netflix reported a net 200,000 loss in paid customers. It was an egregious miss.
The decision to wind down paid memberships in Russia resulted in a 700,000 impact on paid net adds. Simple math dictates that excluding that impact, paid nets would’ve been 500,000 in the first quarter.
There are two problems with that. First, the company’s own guidance was for 2.5 million net adds in Q1. Second, that guidance itself represented a bitter disappointment last quarter.
Allow me to drive the point home. Headed into Q4 2021 earnings, the Street expected Netflix to guide for more than six million paid net adds in Q1 2022. As of January 19, on the eve of the company’s Q4 results, consensus for Q1 (i.e., consensus for the quarter Netflix detailed on Tuesday afternoon) was 6.3 million net adds. Fast forward three months and the actual figure was -200,000. Or +500,000 excluding the Russia impact (figure below).
“The main challenge for membership growth is continued soft acquisition across all regions,” the company said Tuesday.
Forgive me while I make the obvious joke. Netflix, a subscription service, just told investors that, currently, the “main challenge” is lackluster interest in subscriptions in every region where the service is offered. If you think that sounds problematic, you’re not wrong.
“Retention was also slightly lower relative to our guidance forecast, although it remains at a very healthy level,” the company went on to say, in the shareholder letter.
As for Q2, Netflix guided for a net two million loss in paid memberships. The forecast “assumes current trends persist such as slow acquisition and the near-term impact of price changes,” the company explained. Those factors are on top of “typical seasonality.” Paid net adds usually fall sequentially in Q2. Consensus expected a 2.4 million net add for the current quarter.
Q1 represented the first customer decline in a decade. Assuming Q2 ends up showing a net loss, that would be two quarters in a row. That’s a black swan.
Both EPS and revenue guidance were short. Netflix sees Q2 EPS of $3 and revenue of $8.05 billion. The Street wanted $3.02 and $8.23 billion, respectively. Revenue was also short of consensus for Q1, but that was a footnote compared to the rest of the bad news.
Recall that Netflix came into the year facing two distinct challenges. The pandemic boom was in the rearview and competition in the streaming space was heating up. Although the company beat estimates for paid adds in Q4, full-year subscriber growth in 2021 was just half of 2020’s pandemic-driven surge. That’s illustrated in the figure (above).
2021’s total was also well short of cumulative adds in 2019 and 2018. To get an annual figure as low as 2021’s 18.2 million, you’d need to go all the way back to 2016. Suffice to say 2022 isn’t off to a great start.
“In the near term, we’re not growing revenue as fast as we’d like,” the company mused, before conceding that last year’s slowdown wasn’t all payback from the pandemic surge after all.
“COVID clouded the picture by significantly increasing our growth in 2020, leading us to believe that most of our slowing growth in 2021 was due to the COVID pull forward,” the letter said. “Now, we believe there are four main inter-related factors at work.”
Those factors: The pace of on-demand entertainment adoption, account sharing, competition and “macro” considerations, which the company helpfully identified, citing “sluggish economic growth, increasing inflation, geopolitical events such as Russia’s invasion of Ukraine and some continued disruption from COVID.”
Always enjoy the header graphics, but this one merits a vigorous nod of approval.
Back to the topic at hand here, I’ll be curious to see what the percentage of adds were in India and such where the monthly fees are rather low.
Recently Disney+ touted large subscriber growth but upon lifting the hood, proved to be in India at a monthly charge of about $2.50.
We might shrug and suggest that it’s just a happy bit of incremental income. But surprise, Indian consumers want customized local content, not just old Disney reruns.
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Maybe they can create their own version of WeCrashed…that might be worth watching.
The fact of the matter is there is just too much content out there to compete with and Netflix is falling behind.
Agree they’re falling behind. Funny how when they first made their content available it seemed they had rich content when compared to their cable competition. They also produced a lot of good content in their own studios, which other cable companies didn’t do very well. It seemed like Netflix had a kind of monopoly. But how things have changed over the years!
BTW – Derek, I agree with you about the header graphics.
H, this one is killer. I work as a writer and use Photoshop to manipulate graphics, as appropriate. I must say, this one is very appropriate for your purpose.
I have a “love hate” relationship ship Netflix. I bought the stock sometime in 2014- when I was thinking, “what a great concept”. I held for over a year snd the stock did absolutely nothing— until right after I
I sold it! I have canceled and reactivated my account too many times to count.
However, based on the potential ad revenues, capturing the non-paying account sharers, and a possible over-reaction, I am actually thinking of doing a short term trade. I will see what tomorrow brings.
Sorry- accidentally hit “submit”.
Honestly, I still think the service is a bargain. I mean, it’s not expensive. And the shows are good. I’m not sure why anyone would cancel it. I rarely watch it, but then again, I rarely watch anything. I’m a reader, not a watcher. But when I do watch something, Netflix is the first place I look.
So who’s going to buy Netflix? At its current capitalization it’s per-subscriber cost is roughly half that of ATT/Discovery. I bet there is someone who would like access to
those subscribers, even the ones who are borrowing passwords.
We have hit peak subscription services. I think Netflix will survive this period but in the interim with every single cable channel and movie studio and tech company creating subscription services, they are going to take some hits. At some point consumers are going to settle on the ones that meet enough of their needs to justify keeping, I think Netflix hits that mark. But the shares should become ultra discounted before they get through this.
the issue that streaming services and content providers of all types are going to have is that there are only 24 hours in a day. i have money to spend on their services, but i am out of time and can’t even get around to all the services i already pay for.
I’ve essentially been Rip Van Winkle smart tv and streaming wise but in my limited experience HBO / WBD is the highest quality library of content mixed with new programming…
Granted, growth for this service will slow or decline but the price action in the stock implies the market sees a loss of 66 million subscribers. Seriously? A bit of overkill or an admission of prior stupidity?
I like the content on Netflix, and I like how they present it. Something people who are not in the tech industry might not be aware of is Netflix is an extremely elite tech company. Most of the industry follows what they do in AWS, and they were ahead of everyone when it came to doing hip and with it cloud computing and Data Science. They open source all sorts of stuff that the rest of us use. It would be a real shame if they ever went under!