Netflix Lost 200K Users in Q1 2022, Sees Further Losses Ahead

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Subscriber Loss

The firm released its financial results for the first quarter of the year, on Tuesday after markets closed, which revealed the loss of 200,000 paid users, with total subscribers standing at 221.64 million [1]. This happened for the first time since the third quarter of 2011, when the firm's total subscriber base had diminished by 290K subscribers. [2]

The company noted that 700,000 paid net users were relinquished due to the suspension of its service in Russia and the winding-down of all Russian paid memberships. Had this not happened, Netflix would have added 0.5 million paid users.

Even without the adverse impact from the discontinuation of its operations in Russia, Netflix (NFLX) would have still missed its own projections, by a big amount. Back in January, it had forecast an addition of only 2.5 million paid users for Q1 [3], which was disappointing. Markets had then reacted negatively to this projection and had caused the stock to plunge.

The forward guidance was once again very poor, as the company now projects the loss of 2 million paid subscribers paid users in Q2 2022.

Revenue, Net Income & EPS

Despite the decline in its user base, the company's top line was less bad, since Revenues rose to $7.868 billion in the first quarter of the year, from 7.709 billion in the previous quarter and $7.163 billion in Q1 2021. For the second quarter, the company projects Revenue growth of 9.7% year-over-year, to 8.053 billion.

Earlier in the year, Netflix (NFLX) had raised its prices in the United States and commented yesterday, that this change is "significantly revenue positive", although it acknowledged the contribution in the loss of subscribers.

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The streaming giant reported Net Income of $1.597 billion, which was lower compared to the year-ago figure, but significantly higher that the 607 million posted in Q4 2021.

Similarly, Earnings of $3.53/share marked a decline compared to Q1 2021, but were more than double, compared to the fourth quarter figures.

Ad-Supported Plan & Password-Sharing Crackdown

Netflix has refrained from including advertisements on its streaming platform. The bad news from the subscriber figures though, seem to have changed this, since they could increase the user base, via cheaper, ad-supported tiers.

During yesterday's earnings call, it was revealed that Netflix is looking into lower-priced, ad-supported subscription plans. Its co-CEO Reed Hastings, noted that although he is against the complexity of such schemes, he is a fan "of consumer choice" and that the company is now "quite open to offering even lower prices with advertising". [4]

Some competitors have gone down this path and last month, Disney+ announced that it will introduce an ad-supported subscription offering towards the end of the year in the US, with international expansion planned for 2023. [5]

Although the firm's Revenues rose, they are not growing "as fast as" it would have liked and identified password sharing as a source of "revenue growth headwinds', with more than 100 million households using another household's account.

Netflix had not taken any steps to crackdown on this and acknowledged that password sharing "likely helped fuel our growth by getting more people using and enjoying Netflix", but amidst increasing competition, these days may be coming to an end.

The streaming king said yesterday that it has been testing different approaches to "monetize sharing" since last year and introduced two new paid sharing features in three Latin American markets last month. It added that, "we won't be able to monetize all of it right now, we believe it's a large short- to mid-term opportunity".

Increasing Competition

Netflix is the undisputed king of streaming, with 15 years of service, having essentially created the market. Competition is heating up though, since more firms are trying to get into the action, especially after the pandemic changed the way people consume content, turning them towards direct-to-consumer offerings.

The firm acknowledged competition as one of the factors that have negative impact on its growth, noting that "over the last three years, as traditional entertainment companies realized streaming is the future, many new streaming services have also launched".

Netflix has largely focused on creating robust content and expanding into movies and has done a very good job at it, producing movies and TV shows that are both critically acclaimed and beloved by the audiences.

However, this may not be enough, as more and more legacy entertainment companies are getting into the market. The Walt Disney Company for example, has decades worth of content and owns Marvel Entertainment and Lucas Films, holding the keys to two of the most important franchises in the entertainment industry – the Marvel Cinematic Universe (MCU) and Star Wars.

The firm launched its streaming service, Disney+, in late 2019 and it has seen meteoric rise since then, counting 129.8 million paid users as of January 1 2022. [6]

Oscars Disappointment

The growing competition was evident in this year's Oscar ceremony as well, with Netflix going into it with a strong arsenal and two nominations in the Best Picture category.

However, the Oscar for Best Picture went to CODA and Apple TV+, which made history, since it became the first streamer to win the coveted prize. Netflix was left with just one victory overall, while Apple got three, Disney clinched six and Warner Bros. came on top with seven statuettes. [7]

Tough Road Ahead?

Netflix was one of the main beneficiaries from the pandemic lockdowns as people stayed home and turned to direct-to-consumer services, but as the world moves on, it has been adversely impacted.

It has 15 years of streaming and if far ahead than anyone else, but this leaves less room to grow, which becomes even harder as consumer now have many more choices, while the entry into the streaming market of legacy companies such as Disney, makes things even harder.

One also needs to take into account, the surge in inflation, with headline CPI in the United States, having hit the highest level in March, since December 1981. This could have an adverse impact on the streaming business as a whole, since consumers may be less inclined to have multiple subscriptions on many providers.

Netflix's focus on content creation, as well the recent entry into gaming may not be enough to fuel growth and we believe that the offering of lower ad-supported subscription options maybe they key for the company.

Stock Movement

NFLX.us had collapsed after the last earnings results in January (highlighted area) and the then disappointing subscriber growth guidance. It shed nearly 40% in the first quarter of the year and April is its sixth straight losing month.

The stock could be in for an ugly open today, after yesterday's disappointing release. In this case the 252.28-231.23 region could be in danger.

Big Tech in the Spotlight

As usual, Netflix was the first of the FAANGs to report its quarterly earnings, but the rest of them report next week. Apple, Amazon, Meta (Facebook), Alphabet (Google) all report next week, along with other tech juggernauts such as Microsoft and Twitter.

Today however, focus will shift to the king of the electric vehicle (EV) market, Tesla, which reports after markets close.

Nikos Tzabouras

Senior Market Specialist

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 Apr 2022 https://s22.q4cdn.com/959853165/files/doc_financials/2022/q1/FINAL-Q1-22-Shareholder-Letter.pdf

2

Retrieved 20 Apr 2022 https://s22.q4cdn.com/959853165/files/doc_financials/quarterly_reports/2011/q3/Investor-Letter-Q3-2011.pdf

3

Retrieved 20 Apr 2022 https://s22.q4cdn.com/959853165/files/doc_financials/2021/q4/FINAL-Q4-21-Shareholder-Letter.pdf

4

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

5

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

6

Retrieved 20 Apr 2022 https://thewaltdisneycompany.com/app/uploads/2022/02/q1-fy22-earnings.pdf

7

Retrieved 05 Oct 2022 https://www.oscars.org/oscars/ceremonies/2022

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