Netflix shares jump as it gains 2.4mn subscribers

Elbert Grims

Netflix stemmed its subscriber losses in the third quarter, as popular programmes including the fourth season of Stranger Things and Dahmer Monster: The Jeffrey Dahmer Story helped it add 2.4mn members.

The result was more than double the number of subscribers Netflix had forecast, leaving it with 223mn paying members at the end of the third quarter, up 2.6 per cent from a year earlier. The company expects to reach 227mn by the end of the current quarter, according to its earnings release on Tuesday.

“Thank God we’re done with shrinking quarters,” said Reed Hastings, chief executive, during a video call with investors. “We’re back to the positivity.”

Netflix shares rose as much as 15.5 per cent in after-hours trading.

The video streaming pioneer, which shocked investors with its revelation in April that it had lost subscribers, reported a slight decline in net income — from $1.44bn a year ago to $1.4bn. Earnings per share fell 2.8 per cent to $3.10, better than $2.10 a share which Wall Street had expected.

It also warned revenue and earnings would drop in the fourth quarter because of the effect of the strong dollar and macroeconomic headwinds such as inflation. Hastings said the guidance for the fourth quarter was “reasonable, but not fantastic”, adding: “We’ve got to pick up the momentum.”

The company has launched two major initiatives to shore up its business in the face of maturing subscription growth in major markets: a lower-cost advertising-supported streaming service and an effort to limit widespread password sharing.

Netflix moved quickly to create its advertising tier, developing the platform within only six months in partnership with Microsoft. It will begin rolling out the service next month in 12 markets. Some analysts have warned that the advertising tier will prompt users to switch to lower-cost accounts, especially given rising inflation and the proliferation of streaming services.

But Greg Peters, chief product officer, said he did not expect many subscribers to “trade down” from premium subscriptions to the ad-supported versions. “We don’t see a lot of plan switching,” he said.

Netflix is also planning to crack down on password sharing early next year, a problem it had largely ignored when it was enjoying red-hot subscription growth. The company will offer account holders the ability to create “subaccounts” for family or friends who piggyback off a single account.

With these two potential new sources of revenue, the company said it would stop providing guidance to investors on its number of new subscribers — a symbolic shift for a company whose share price rocketed for years based on its membership growth. The new ad service and its effort to monetise shared accounts mean subscriptions will become “just one component of our revenue growth”, the company said in a letter to shareholders.

Netflix’s warning this spring that its subscriber growth had gone into reverse shifted investor sentiment on the streaming video market, leading to more scrutiny of high spending on content and increased focus on profitability.

Ted Sarandos, co-chief executive, said the company will hold its content spending to about $17bn per year. “We’re spending at about the right level,” he said. “As we reaccelerate our revenue we will revisit that number.”

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