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Earnings Results: Netflix lost fewer subscribers than forecast and expects to win them back quickly, boosting stock

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Netflix Inc. lost half as many subscribers as feared in the second quarter and expects to add even more in the current quarter, helping the stock shoot higher in after-hours trading Tuesday.

Netflix
NFLX,
+5.61%

reported a net loss of 970,000 paid subscribers in the second quarter, while analysts on average were forecasting a reduction of 2 million net additions, according to FactSet. Netflix told Wall Street to expect 2 million subscribers to leave three months ago, while reporting its first subscriber decline in more than a decade and a miss on revenue.

In a letter to shareholders, Netflix executives said they expect 1 million new subscribers to join in the third quarter, with revenue forecast to grow to $7.84 billion from $7.48 billion a year ago. Analysts on average were estimating revenue of $8.09 billion and a net subscriber gain of 1.4 million for the third quarter, according to FactSet.

Shares jumped more than 8% in after-hours trading following the release of the results, after closing with a 5.6% increase at $201.63.

Netflix has rolled out some steps to reverse subscriber losses: It scheduled “Stranger Things” on a split season straddling quarters to retain more members, and it is partnering with Microsoft Corp.
MSFT,
+2.08%

to bring a cheaper, ad-supported platform to the service in early 2023. In a blog post Monday, Netflix said it plans to make customers in several Latin American markets pay extra if they want to add additional homes to their accounts in a move to crack down on shared accounts.

“If one thing stood out, it was ‘Stranger Things,’” Netflix co-Chief Executive Reed Hastings said in a video call late Tuesday. “Our excitement was tempered by less-bad results.”

“These initiatives — paid sharing and advertising — do introduce some additional complexity, but our approach has always been to keep our business model as simple as possible within the context of our growth objectives,” Netflix executives wrote in a letter to shareholders Tuesday. “In this vein, these initiatives are similar to expanding into originals, launching our service across the world, and building our own studio, each of which also increased complexity but are natural extensions intended to enhance our existing business.”

It remains unclear, though, how much of an impact an advertising option will have on Netflix’s bottom line, analysts say. “Given demand from brands, [Netflix’s] advertising product will likely boost [average revenue per user] eventually. But there’s no evidence yet it will lessen opt outs or meaningfully bring in more subscribers,” Insider Intelligence’s Ross Benes said.

Netflix also announced on Tuesday the acquisition of animation studio Animal Logic, to help it “accelerate the development of our animation production capabilities and reinforces our commitment to build a world-class animation studio,” Netflix said in the letter and a separate statement. Gaming is an area where the company sees ample opportunity to gain subscribers.

The streaming-video giant’s downturn after a pandemic-boosted surge has only intensified pressure from rival streaming services at Walt Disney Co.
DIS,
+4.09%
,
Apple Inc. 
AAPL,
+2.67%
,
 Amazon.com Inc.
AMZN,
+3.91%
,
 Warner Bros. Discovery Inc.
WBD,
+2.67%
,
 Comcast Corp. 
CMCSA,
+1.90%

and Paramount Global 
PARA,
+2.16%
.

Netflix’s subscription woes in large part are a result of its decision to raise prices this year, according to a streaming satisfaction survey by tech-entertainment firm Whip Media of nearly 2,500 U.S. respondents. HBO Max led the industry in customer satisfaction, with 94% of respondents saying they were “satisfied” or “very satisfied” with the service. Netflix, which ranked second in 2021, dropped to fourth this year at 80%, behind Disney+ (88%) and Hulu (87%).

“This is a pivotal moment in time for Netflix. The competition is catching up and, in some ways, surpassing the once-untouchable giant. Price-conscious consumers now have other choices to satisfy their streaming entertainment needs,” Forrester Research Director Mike Proulx said.

Netflix announced second-quarter earnings of $1.6 billion, or $3.20 a share, up from $2.97 a share a year ago. Netflix revenue improved to $7.97 billion in the quarter from $7.34 billion in the same period a year ago, but missed diminished expectations. Analysts polled by FactSet expected earnings of $2.95 a share on sales of $8.03 billion, estimates that had fallen in recent weeks.

Netflix missed on revenue in the second quarter and its revenue guidance for the third quarter, which projects the company’s first sequential revenue decline in a decade. Executives pointed to the stronger U.S. dollar, and said they would begin to offer some numbers based on a steady foreign-exchange rate established at the beginning of each year.

The steady drumbeat of disappointing subscription news has pummeled Netflix shares, which have declined 66% so far this year while the broader S&P 500 index 
SPX,
+2.76%

has declined 17%.

Netflix is “still the king of streaming, but to continue to lead, they can’t just focus on subscriber acquisition. They have to focus on keeping their current subscribers coming back,” Tien Tzuo, chief executive at cloud-based subscription-management platform Zuora Inc.
ZUO,
+2.22%
,
said. “Beyond more shows, Netflix should rethink the binge, offer annual plans, and unbundle their content to create smaller, cheaper and ad-free offerings.”

: Is Netflix cracking down on password sharing? Here’s what you need to know if you share an account

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