Earnings season for the major streamers will kick off on Thursday with Netflix. The streaming behemoth is slated to deliver its fourth-quarter results after the market close, but its figures may look very different from previous quarters as the company has shifted its main priority from subscriber growth to revenue.
The third quarter of 2022 saw Netflix bounce back after two consecutive quarters of subscriber losses, giving the company and competitors like Disney and Warner Bros. Discovery hope that there is more room to run in streaming after the subscriber boom during COVID-19 lockdowns fizzled out.
At the same time, Netflix made clear that subscribers are not the only metric of success and that it would establish new revenue streams through an ad-supported tier and monetized account sharing. That shift has prompted its competitors to reevaluate their strategies as many of them are looking to reach profitability after massive operating losses in their direct-to-consumer divisions.
Ahead of Thursday’s earnings release, Netflix stock has climbed approximately 10% year to date, but is still down about 36% in the past year. Here are four major areas Wall Street will be watching that will affect not only Netflix investors but the streaming industry as a whole as they follow with their quarterly reports in the coming weeks:
Average revenue per user
Average revenue per user allows streamers to determine the value of its customers on an individual basis and the return on investment with regard to marketing efforts. It can also help the company evaluate its pricing structure and determine whether there’s room to charge consumers more.
Netflix has been at the front of the pack on ARPU, reporting $16.37 in the U.S. and Canada, $10.81 in the Europe, Middle East and Africa region, $8.58 in Latin America and $8.34 in the Asia Pacific region in its latest quarter.
In comparison, Hulu reported ARPU of $12.23 for its SVOD service and $86.77 when combining SVOD with Hulu and Live TV, Warner Bros. Discovery boasted global ARPU of $7.52, domestic ARPU of $10.66 and international ARPU of $3.68, and Disney+ lagged behind with $6.10 domestically and $5.83 internationally when excluding the Indian service Disney+ Hotstar.
For its fourth quarter, Netflix is forecasting average revenue per user growth of 6% year-over-year, excluding the impact of foreign exchange.
Subscribers
Netflix revealed last quarter that it would no longer provide long-term guidance on subscribers, but noted the company would continue to offer its regional subscriber breakdowns.
While the reduced emphasis on subscribers mitigates the risk to its stock associated with meeting Wall Street expectations and allows the company to focus its efforts on getting the most money possible out of its existing base, offering some insight into its subscriber counts allows Netflix to continue to flex the service’s popularity.
Netflix, which has a total of 223.09 million subscribers globally, is forecasting that number to increase to 227.59 million subscribers globally for its fourth quarter of 2022. That would translate to 4.5 million paid net adds in the fourth quarter of 2022, compared to 8.3 million net additions during the same period in 2021.
“Netflix had a huge quarter in terms of quality of content, with hits like ‘Glass Onion’ and ‘Wednesday,’ and it will be interesting to see if the buzz translated into subscriber gains,” Loyola Marymount University professor David Offenberg told TheWrap. “The fourth quarter is normally better for streaming subscriptions, as people are stuck inside in the winter, so Netflix has Mother Nature on their side.”
Password sharing crackdown
In addition, investors will seek an update on Netflix’s password sharing crackdown. The company previously said it would monetize account sharing beginning in early 2023. Last year, the company identified 100 million households globally who are sharing passwords, including 30 million in the United States and Canada.
Citi analyst Jason Bazinet has previously estimated that the major streamers in the U.S. collectively lose about $25 billion a year in potential revenue due to password sharing. Netflix accounts for 25% of that total based on his estimate, meaning the company alone could potentially be missing out on $6 billion in revenue.
In response, Netflix has been testing an “add a home” feature in Argentina, the Dominican Republic, Honduras, El Salvador and Guatemala and transfer profile and “add an extra member” features in Chile, Costa Rica and Peru.
The “add a home” feature has charged a fee of 219 pesos per month in Argentina and $2.99 per month in the Dominican Republic, Honduras, El Salvador and Guatemala, while the “add an extra member” feature has cost 2,380 CLP in Chile, $2.99 in Costa Rica, and 7.9 PEN in Peru. However, official pricing hasn’t been disclosed.
“The pricing offering has to be attractive enough to bring these customers onto the service without creating a spin-down response from current higher-priced, multi-stream subscribers,” analysts at MoffettNathanson wrote in a note to clients on Wednesday.
Advertising Tier
Netflix previously said that while it’s “very optimistic” about its $6.99 per month Basic With Ads tier, it doesn’t expect a “material contribution in Q4 ’22.” As a result, most analysts on Wall Street don’t expect to hear too much on that front.
But Netflix shares slid in December following a report from Digiday that advertisers are getting money back for ads that have yet to run, and in some cases, Netflix has delivered only 80% of the expected audience.
In addition, research firm Antenna found that the Basic With Ads tier accounted for 9% of Netflix’s sign-ups in the U.S. in November, making it the least popular of their plan options, and found that 0.1% of existing U.S. subscribers switched to the ad-tier that same month. Netflix has disputed Antenna’s data, but hasn’t disclosed its own sign-up figures for its ad-supported plan.
Ampere Analysis estimated in August that Netflix will generate $5.5 billion in advertising income and an additional $3.5 billion in ad-tier subscription fees by 2027.
“The ad tier will hedge against a stagnant audience in North America, while in the Western Europe and Asia Pacific regions, the ad tier will boost Netflix’s business,” Ampere Analysis analyst Ben French said in a statement at the time. “But in Latin America, the case for advertising is less clear cut.”
Streaming media analyst Dan Rayburn told TheWrap that it is “far too early to judge the success of [Netflix’s] AVOD offering.”
“It will have only been live in the market, and the U.S. market only, for 58 days in Q4,” he argued. “For anyone to suggest it’s not going well, or won’t, based on such a short amount of time, with limited data is 100% ‘speculation’ and opinion based. It’s not a fact as many make it out to be.”
