Netflix Inc. added more than 2 million subscribers in the third quarter after stumbling into 2022 with two consecutive quarterly declines, a rally that sent shares more than 15% higher in after-hours trading Tuesday.
reported a net gain of 2.41 million subscribers in the third quarter, while analysts on average had forecast 1.1 million net additions, according to FactSet. It follows a drop of roughly 200,000 subscribers in the first quarter and nearly a million in the second quarter, which has led the company to plan massive changes, including a cheaper, ad-supported streaming tier to arrive in the fourth quarter.
In a letter to shareholders, Netflix executives said they expect 4.5 million new subscribers to join in the fourth quarter, with revenue expected to grow to $7.78 billion from $7.71[ads1] billion a year ago. Analysts on average estimated revenue of $7.97 billion and a net subscriber gain of $4 million for the fourth quarter, according to FactSet.
“After a challenging first half of the year, we believe we are on track to accelerate growth again,” executives wrote in the letter.
The news sent Netflix shares up about 15% in after-hours trading after the results were released, after finishing down 1.7% at $240.86. The streak of subscriber declines has filled Netflix shares, which have swooned 60% so far this year, while the broader S&P 500 index SPX,
has decreased by 22.8%.
The streaming video giant’s slump after a pandemic-enhanced wave has only intensified pressure from rival streaming services at Walt Disney Co. HAZE,
Apple Inc. AAPL,
Amazon.com Inc. AMZN,
Warner Bros. Discovery Inc. WBD,
Comcast Corp. CMCSA,
and Paramount Global PARA,
That didn’t stop Netflix executives from taking on streaming rivals over profitability. “Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is difficult – we estimate that they all lose money, with combined operating losses in 2022 well over $10 billion, compared to Netflix’s annual operating of 5 to 6 billion dollars. profit,” Netflix executives said in the shareholder letter.
A dramatic shift in the video streaming climate, one that saw Disney overtake Netflix as the market leader in July, has led to a radical makeover at Netflix. Last week, the company announced its long-awaited ad-supported tier, which will debut on November 3 in the US for $6.99 a month. Another 11 countries, including Canada and Mexico, will get the service by November 10. The company has also promised to crack down on shared accounts, and is pushing ahead with games.
The ad-supported tier recognizes direct competition and the necessity for Netflix to “adapt to the new normal of the streaming landscape,” Insider Intelligence analyst Ross Benes said in a note late Tuesday.
For more: Netflix lost the streaming crown to Disney. Here’s how leaders expect to win it back.
Netflix announced third-quarter earnings of $1.4 billion, or $3.10 per share, down from $3.16 per share a year ago. Netflix revenue rose to $7.93 billion in the quarter from $7.48 billion in the same period a year ago, but missed reduced expectations. Analysts polled by FactSet expected earnings of $2.14 a share on sales of $7.84 billion, estimates that had fallen in recent days.
Tuesday’s results follow serious self-reflection among Netflix executives about how to stem a decline in visits among subscribers that has led to cancellations. Co-CEO Reed Hastings has been consulting with employees to find ways to get subscribers to visit the platform more often, according to reports from The Wall Street Journal and Bloomberg News.
One such strategy is to crack down on multiple users who share the same account. In the shareholder letter, Netflix said it has “landed on a thoughtful approach to monetizing account sharing, and we will begin to roll this out more broadly beginning in early 2023.”
“After listening to consumer feedback, we’re going to offer the ability for borrowers to transfer their Netflix profile to their own account, and for sharers to more easily manage their devices and create sub-accounts (‘extra members’) if they wish to pay for family or friends,” the letter says. “In countries with our cheaper ad-supported plan, we expect the profile transfer option for borrowers to be particularly popular.”