Netflix shares slump on profit decline as it loses 200,000 paid subscribers

CEO Reed Hastings said that he is now open to experimenting with lower-cost, ad-supported content

Netflix, the world's largest streaming service, reported a 6.4 per cent yearly drop in first-quarter net profit as it lost 200,000 subscribers between January and March.

It is the first time the streaming service has reported a loss of paid subscribers in more than a decade.

The company earlier told shareholders it expected to add 2.5 million net subscribers during the first quarter, whereas analysts had predicted that number will be almost 2.7 million.

Following the earnings announcement, the company’s stock dropped more than 26 per cent to $257.9 a share in the after-hours trading.

Netflix CEO Reed Hastings told Variety that he is finally open to experimenting with lower-cost ad-supported packages.

“Those that have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription,” Mr Hastings said. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice. And allowing consumers who would like to have a lower price and are advertising-tolerant, get what they want, makes a lot of sense.”

Net income during the first quarter stood at more than $1.5 billion, nearly $110 million less than the profit earned in the first quarter of last year. But it was more than 163 per cent up on a quarterly basis.

Total sales grew by nearly 9.8 per cent from a year ago to more than $7.86bn in the first quarter, missing analyst expectations of $7.95bn.

“Our revenue growth has slowed considerably … streaming is winning over linear, as we predicted, and Netflix titles are very popular globally,” the company said in a statement to its stakeholders.

“However, our relatively high household penetration — when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds."

The company said various macro-economic factors such as sluggish economic growth, increasing inflation, geopolitical events such as Russia’s invasion of Ukraine, and some continued disruption from the Covid-19 pandemic have affected its growth.

The suspension of its service in Russia and winding-down of all Russian paid memberships resulted in a loss of 700,000 paid subscribers.

The company saw a huge rise in the number of users last year as more people stayed indoors and moved to the online platform for home entertainment.

Its global paid subscribers stood at 221.64 million at the end of the first quarter on March 31.

Its operating income remained flat on the same period last year to more than $1.9bn.

The company predicted a revenue of more than $8bn and net income of $1.4bn in the current quarter that will end on June 30.

It forecast a quarterly drop of almost 1 per cent in the paid memberships to 219.64 million in the April-June period.

But the company aims to “reaccelerate viewing and revenue growth by continuing to improve all aspects of Netflix, in particular the quality of our programming and recommendations”.

On content, Netflix said it was “doubling down on story development and creative excellence”.

On the product side, it recently launched “double thumbs up” so members can better express what they really enjoyed compared to what they simply like, allowing the company to improve its personalised recommendations.

Some of the big hits of the first quarter include Bridgerton (627 million hours viewed), Inventing Anna (512 million hours viewed) and the Adam Project (233 million hours viewed).

Netflix is now producing films and TV shows in more than 50 countries as it intends to achieve a high degree of integration in local entertainment ecosystems.

It told stakeholders that its goal is to “sustain double-digit revenue growth, increase operating income even faster and generate growing positive free cash flow”.

Net cash generated by operating activities in the first quarter stood at $923m, almost 19 per cent more than the first three months of 2021. Free cash flow amounted to $802m, 16 per cent up on an annualised basis.

The company said it expected to be free cash flow positive for the full year of 2022 and beyond.

Netflix finished the first quarter with gross debt of $14.6bn and it is now within the top end of its gross debt target range of $10bn and $15bn.

During the first quarter, Netflix completed two acquisitions (visual effects company Scanline and gaming studio Boss Fight Entertainment), which had a $125m impact on cash.

It also announced the purchase of Helsinki-based gaming company Next Games. It completed the tender offer and expected to complete the transaction in the second half of this year.