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Netflix’s Million-Customer Loss Avoids Worst-Case Scenario

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·5 min read
Netflix’s Million-Customer Loss Avoids Worst-Case Scenario
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(Bloomberg) -- After losing more than a million customers in the first half of 2022, Netflix Inc. has a message for investors: It could have been worse.

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The leader in paid streaming TV lost 970,000 subscribers in the second quarter, according to a statement Tuesday. That was less than half what Wall Street feared, thanks in large part to a new season of “Stranger Things,” the service’s most popular English-language series.

“We’re talking about losing 1 million instead of 2 million -- our excitement is tempered by the less-bad results,” Chairman Reed Hastings said on an earnings call. “But looking forward, streaming is working everywhere. Everyone is pouring in.”

Shares of Netflix climbed 0.8% at 9:36 a.m. in New York, paring a larger gain earlier in the premarket session. The stock has lost two-thirds of its value so far this year.

This quarter, Netflix expects to sign up 1 million subscribers. While that’s well short of the 1.83 million analysts forecast this period, it reverses the losses of the first half.

Despite concerns about increased competition and a potential recession, Netflix remains confident in its position. The company said its share of total TV viewing in the US hit an all-time high in June at 7.7%.

“We believe the prospect of a prolonged period of subscriber losses is becoming increasingly unlikely,” Stifel analyst Scott Devitt wrote in a research report on Wednesday. He upgraded his rating on Netflix to buy from hold following the earnings release.

Management has responded to the subscriber slide by cutting costs and adjusting its strategy on several fronts. The company plans to introduce a lower-priced version of the service with advertising around early 2023, and is testing ways to charge customers for password sharing.

For the second quarter, revenue grew 8.6% to $7.97 billion, Netflix said. That missed Wall Street estimates of $8.04 billion, in part because of the strong dollar.

Read more: Streaming-video stocks rise on Netflix news

During the quarter, Netflix lost 1.3 million customers in the US and Canada, its largest region, and another 770,000 in Europe, the Middle East and Africa, its second-largest. Those are the steepest quarterly declines the company has reported in either place since it started supplying individual results from those markets.

Growth in the Asia-Pacific region offset those declines. Netflix added 1.1 million customers in APAC, after cutting prices in India.

Hastings had positioned Netflix as an advertising-free alternative to cable TV, but now says commercials are necessary to appeal to people who find the service too expensive. Netflix has raised prices several times and is now one of the most expensive streaming services.

“At a high level, Netflix’s ambitions are to accelerate revenue growth while moderating its content investment growth,” Morgan Stanley analysts led by Benjamin Swinburne wrote in a note to clients. “If successful, shares should outperform. However, it remains early in its monetization initiatives and while success is not priced in, neither in our view is failure.”

The company will introduce the advertising-supported option first in a handful of countries, and just tapped Microsoft Corp. to handle ad sales and technology. Advertising will start small and look a lot like other video businesses ads. But Netflix believes it can be substantial, Chief Operating Officer Greg Peters said.

Read more: Netflix chooses Microsoft as ad partner

Netflix has also started to release new episodes of shows in batches, breaking with its tradition of dropping every episode of a season at the same time. It released the drama “Stranger Things” and the final season of “Ozark” in two batches.

The batching strategy allows Netflix to extend the life of its biggest shows. When every episode is released at once, the majority of the viewing happens in the first couple of weeks. The number of people who cancel Netflix has jumped 87% since a year ago, according to Antenna.

The popularity of the fourth season of “Stranger Things” exceeded the expectations of Netflix executives. The supernatural drama has been one of the service’s most successful titles since its debut in 2015, and turned star Millie Bobby Brown into one of the most in-demand female actors in Hollywood.

The release of “Stranger Things” meant that fans who had Netflix in the second quarter would want to keep the service until the start of the third quarter to finish the season. The company is looking to turn hits like “Stranger Things” into franchises that can outlast any individual show. The creators of the show are developing a spinoff series, and Netflix has also announced plans for a Broadway play.

On Tuesday, Netflix said it will acquire Animal Logic, an Australian animation studio that worked on “The Lego Movie.”

“We have some headwinds right now; we’re navigating through them,” co-Chief Executive Officer Ted Sarandos said on the call. “This company and this team has navigated through a lot of change.”

Total subscribers in the second quarter came to 220.7 million, compared with estimates of 220.2 million. Earnings of $3.20 a share beat analysts’ projections.

This quarter, Netflix forecasts revenue of $7.84 billion, shy of Wall Street estimates of $8.1 billion. The company sees earnings of $2.14 a share, compared with estimates of $2.72, and says total membership will reach 221.7 million, also shy of estimates.

(Updates shares in fourth paragraphs.)

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