Shares of Netflix were flat in after-hours trading on Tuesday after the company reported mixed earnings results for its first quarter of 2023.
The streaming behemoth posted net income of $1.31 billion, or earnings per share of $2.88, on revenue of $8.162 billion. Analysts surveyed by Zacks Investment Research were expecting earnings per share of $2.53 on revenue of $8.2 billion. The stock briefly dropped by as much as 11% in the minutes after the release of the results as investors digested the news, but rapidly bounced back.
Netflix added 1.75 million subscribers during the quarter for a total of 232.5 million globally, but noted that it lost 400,000 users in Latin America due to “pull forward from Q4 and ongoing macroeconomic softness.”
The company’s average revenue per user came in at $16.18 in the United States and Canada, $10.89 in the Europe, Middle East and Africa region, $8.60 in Latin America and $8.03 in the Asia-Pacific region. Revenue in the U.S. and Canada grew 8% year over year to $3.6 billion, while revenue in Latin America grew 3% year over year to $1.07 billion, EMEA revenue fell 6% year over year to $2.5 billion and APAC revenue fell 13% year over year to $934 million. Netflix reported operating income of $1.7 billion and free cash flow of $2.1 billion.
Netflix launched a $6.99 per month Basic With Ads tier in November as it looked to reaccelerate revenue growth. The company said in its shareholder letter that engagement on the ads tier has been above initial expectations and that it’s seen “very little switching” from its standard and premium plans. It also emphasized that the ad tier’s average revenue per paid membership in the U.S. is greater than its standard plan.
“Given current healthy performance and trajectory of our per-member advertising economics,
particularly in the U.S., we’re upgrading our ads experience with more streams and improved
video quality to attract a broader range of consumers,” the company added. “We believe these enhancements will make our offering even more attractive to a broader set of consumers and further strengthen engagement for existing and new subscribers to the ads plan.”
In January, CFO Spencer Neumann said the company expected that advertising could one day account for 10% of Netflix’s revenue, or around $3 billion. The company did not break out a figure for advertising revenue or subscribers to the ad-based tier.
Netflix has also sought to tighten up on password sharing in an effort to persuade free-riders to start paying for their own subscriptions, another potential source of revenue growth.
The company’s add-a-member feature, which launched in Latin America in March 2022, was expanded to Canada, New Zealand, Portugal and Spain in February. An add-a-home option was also unveiled in August, which asked users in the Dominican Republic, Honduras, El Salvador and Guatemala to pay an extra $3 monthly fee if they stream through a TV or TV-connected device located outside a primary household. The password-sharing crackdown will roll out in the U.S. during the second quarter.
“We’re pleased with the results of our Q1 launches in Canada, New Zealand, Spain and Portugal,
strengthening our confidence that we have the right approach. As with Latin America, we see a cancel reaction in each market when we announce the news, which impacts near term member growth,” Netflix said. “But as borrowers start to activate their own accounts and existing members add ‘extra member’ accounts, we see increased acquisition and revenue.”
Netflix also said that delaying its password-sharing features in the U.S. will result in some of that membership growth happening in the third quarter, rather than the second. “We believe this will result in a better outcome from both our members and our business,” the company said.
Looking ahead, Netflix is forecasting revenue of $8.2 billion in the second quarter, a 3% year over year increase, and operating income of $1.6 billion, roughly flat year over year. It also anticipates revenue growth to accelerate over the course of the second half of 2023 as it continues to improve the service, more broadly roll out paid sharing and grow its advertising business.
Assuming no material swings in foreign exchange rates, Netflix expects at least $3.5 billion in free cash flow for full year 2023, up from previous guidance of at least $3 billion. The change reflects lower cash spend on content than previously forecasted, resulting in a year over year decrease in cash content spend. For 2024, Netflix expects cash content spend to be in the range of roughly $17 billion, consistent with prior expectations for the 2022-2024 period.
Additionally, the company said it would be shuttering its DVD business after 25 years, shipping the final discs to customers on September 29. Netflix’s DVD library has fallen from more than 100,000 titles at its peak to less than 4,000, according to Paste magazine. Netflix reported $145.7 million in DVD revenue for 2022, but did not break out figures for the business in its most recent quarterly report.