Netflix loses 970K subscribers in Q2, forecasts Q3 gains

Netflix continued to lose subscribers in the second quarter, though net global losses of 970,000 weren’t as bad as the streaming giant’s guidance from last quarter which had anticipated losing around 2 million.

Netflix on Tuesday reported its most recent financial results and ended the period with 220.67 million paid global subscribers. Its loss of nearly 1 million subscribers compare to net additions of 1.5 million in Q2 2021 and losses of 200,000 in the first three months of 2022.

Net subscriber losses in Q2 were heaviest in the U.S. and Canada where Netflix shed around 1.3 million, compared to losses of 636,000 in Q1 and losses of 433,000 a year prior. In the EMEA region (Europe, Middle East and Africa) subscriber losses stacked to 767,000 compared to gains of 200,000 in the year ago period. Latin America saw gains of 14,000 (versus 800,000 net adds in Q2 2021), while Netflix added 1.08 million net subscribers in the Asia-Pacific market.  

Overall Netflix grew revenue 9% year over year in Q2 to $7.97 billion. Excluding a negative $339 million foreign currency impact, revenue would’ve grown 13%. Netflix expects slower revenue growth next quarter of 4.7% year over year to reach $7.8 billon. Net income in Q2 was $1.44 billion.  

After two straight quarters of losses, Netflix is forecasting subscriber gains in Q3, though still more tepid than prior years. In Q3 the streamer anticipates adding 1 million net subscribers, compared to the 4.4 million it added in Q3 of 2021.

In a letter to shareholders, Netflix said the company has had more time to understand issues it flagged in the first quarter related to slowing revenue growth (including connected TV adoption, account sharing, competition, macro factors including sluggish economic growth and impact of the war in Ukraine).

“First and foremost, we need to continue to improve all aspects of Netflix. This focus on improving our core service has served us well over the past 25 years, and remains our north star to drive continuous growth,” Netflix told shareholders.

For its near-term priorities, Netflix cited re-accelerating revenue growth by evolving and improving monetization, including introduction of a lower-priced ad-supported tier. Microsoft was recently chosen as its technology and ad sales partner for the new offering.

Netflix for the first time officially disclosed some idea of timing, with a target launch around the early part of 2023. Netflix expects to start “in a handful of markets where advertising spend is significant.”

“Our lower priced advertising-supported offering will complement our existing plans, which will remain ad-free. Our global ARM has grown at a 5% compound annual rate from 2013 to 2021, so it makes sense now to give consumers a choice for a lower priced option with advertisements, if they desire it,” Netflix wrote.

The letter didn’t give too many details about its pick of Microsoft, but said the intention is to roll out an ad-supported tier and quickly iterate to improve based on learnings. The letter noted that Microsoft is “investing heavily to expand their multi-billion advertising business into premium television video, and we are thrilled to be working with such a strong global partner.”

“Over time, our hope is to create a better-than-linear-TV advertisement model that’s more seamless and relevant for consumers, and more effective for our advertising partners.”

Netflix acknowledged it will take time to grow a base for the new tier with ads, along with ad revenue, but longer0term believes advertising can boost incremental membership through lower prices and grow profits via ad revenues. Analysts at LightShed Partners recently pegged potential of a more than $4 billion U.S. advertising opportunity for Netflix.

On the content front, Netflix of course called out “Stranger Things” season four which “was a smash hit by all measures” with an Emmy nod and viewership that generated 1.3 billion hours viewed in its first four weeks.

And while recent survey results indicate Netflix’s value perception among consumers has taken a hit, the streaming giant touted its leadership in TV viewing time.

“While we always have room to improve, we’re very pleased with how far we’ve come in providing so much satisfaction and enjoyment to our members. For instance, in the US, which is one of the most competitive markets in the world, we drew more TV viewing time than any other outlet during the2021-22 TV season…nearly matching the combined total of the two most watched broadcast networks.”

It also cited Nielsen data, with Netflix’s share of U.S. TV viewing share reaching an all-time high of 7.7% in June 2022.

Netflix’s earnings call is slated for later Tuesday evening.