Netflix in the fourth quarter saw revenue growth slow further even as the streaming giant added 7.66 million global paid subscribers, with the lion’s share of net additions coming from international markets.
In reporting Q4 results, Netflix said revenue, operating profit and membership growth exceeded the company’s expectations, alongside a content slate that also outperformed.
As disclosed last quarter, Netflix is hoisting revenue up as its key metric, as it looks to new revenue streams with the introduction of a streaming plan with ads last year, as well as paid sharing that will be rolled out more widely this year – and fluctuations in subscriber patterns that come alongside those changes.
Revenue in Q4 reached $7.85 billion, reflecting 1.9% growth year over year. It compares to 16% year over year revenue growth Netflix recorded in the same period a year ago, and marks the fourth quarter in a row where revenue growth slowed. Operating income was $550 million (down year over year but above Netflix guidance) and net income was $55 million.
Netflix is forecasting Q1 revenue growth of 4%, driven by a combo of year over year growth in average paid memberships and ARM.
On the subscriber front, the net additions well beat Netflix’s forecast for 4.5 million, a better performance which it attributed both to strong acquisition and retention, driven by a successful Q4 content slate (such as hits “Wednesday,” “Harry & Megan” and “Glass Onion: A Knives Out Mystery”).
In Q4 Netflix added 909,000 paid subscribers domestically (U.S. and Canada) – its best showing in the market this year after net losses in Q1 and Q2 of 2022 and additions of 104,000 in Q3. Still, it’s less than the 1.2 million Netflix added in Q4 2021. The stronger Q4 subscriber metrics weren’t enough to push Netflix into the positive for 2022 domestically, where it posted subscriber net losses of 919,000 for the full year.
Europe, Middle East and Africa (EMEA) added 3.19 million net subscribers in Q4, while Latin America contributed 1.76 million and Asia-Pacific (APAC) brought in 1.79 million paid users.
Netflix ended 2022 with around 231 million global paid subscribers (a 4% increase year over year) including 74.2 million in the U.S. and Canada.
“2022 was a tough year, with a bumpy start but a brighter finish. We believe we have a clear path to reaccelerate our revenue growth: continuing to improve all aspects of Netflix, launching paid sharing and building our ads offering. As always, our north stars remain pleasing our members and building even greater profitability over time,” Netflix said in a letter to shareholders.
Pleased with early results of Netflix with ads
Arguably the biggest change for Netflix in the fourth quarter was the launch of its Basic with Ads plan, and in the letter to shareholders the company said it was “pleased with early results, with much more still to do.”
Notably, the letter said that “as expected, we’ve seen very little switching from other plans.” That comment counters data released this week from Kantar Research, which found that nearly all of Netflix’s ad-supported users in the U.S. had traded down from a pricier ad-free tier.
Since launching in 12 countries in November, Netflix noted there's much work to be done, specifically around better targeting and measurement but said it’s pleased so far across each element including member experience, value to advertisers and incremental contribution to the business.
Netflix also said engagement on the plan with ads is better than expected, and consistent to those on comparable ad-free plans, with the belief that the lower $6.99 per month price point is driving incremental subscriber growth.
“Overall the reaction to this launch from both consumers and advertisers has confirmed our belief that our ad-supported plan has strong unit economics (at minimum, in-line with or better than the comparable ad-free plan) and will generate incremental revenue and profit, though the impact on 2023 will be modest given that this will build slowly over time,” the letter stated.
Update on paid sharing
Another key initiative for Netflix as it looks to reaccelerate revenue growth is making money off of users that are sharing their accounts with different households, with plans to roll out paid sharing more widely starting later in Q1. Netflix estimates more than 100 million households are using the streaming service but not paying for it as they share some else’s login credentials.
The streaming service noted that the rollout of paid sharing will likely result in “a very different quarterly paid net adds pattern in 2023” with paid net adds likely to be larger in Q2 than Q1 of 2023.
“From our experience in Latin America, we expect some cancel reaction in each market when we roll out paid sharing, which impacts near term member growth,” Netflix told shareholders. “But as borrower households begin to activate their own standalone accounts and extra member accounts are added, we expect to see improved overall revenue, which is our goal with all plan and pricing changes.”
As it starts to charge for sharing accounts, Netflix said subscribers “in many countries” will also have the option to pay extra if they want to share the SVOD with people that live in a different household, while all subscribers will still be able to access the service while traveling.
The end of the fourth quarter also marks the completion of a leadership change, with former co-CEO Reed Hastings moving into the executive chairman role as Greg Peters steps up from COO to the new co-CEO alongside Ted Sarandos.
More details on progress of the ad-supported plan and paid sharing could come during Netflix’s earnings interview, which is scheduled for later on Thursday.