Netflix (NFLX) reported an unexpected decline in first-quarter net subscribers as the company navigated an exit from Russia and an increasingly saturated North American market. Shares slumped by more than 20% in after-hours trading following the report.
Here were the key metrics from Netflix’s quarterly report, compared to consensus estimates compiled by Bloomberg:
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Revenue: $7.87 billion vs. $7.95 billion expected, $7.16 billion Y/Y
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Earnings per share: $3.53 vs. $2.91 expected, $3.75 Y/Y
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Net subscribers: -200,000 vs. +2.51 million expected, +3.98 million million Y/Y
Netflix’s drop in new users came as a surprise to Wall Street, with analysts looking for a slowdown but still positive growth in subscriptions in the first three months of 2022. Subscribers grew by nearly 4 million in the same quarter last year. In total, Netflix exited the first quarter with 221.64 million global subscribers.
For the current quarter, Netflix said it expected an even steeper decline in new users. The streamer said it sees subscribers declining by 2 million in the fiscal second quarter, whereas consensus analysts were looking for a gain of 2.4 million.
“Our relatively high household penetration — when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds,” Netflix said in its letter to shareholders Tuesday afternoon. “The big COVID boost to streaming obscured the picture until recently.”
“While we work to reaccelerate our revenue growth — through improvements to our service and more effective monetization of multi-household sharing — we’ll be holding our operating margin at around 20%,” Netflix added. “Key to our success has been our ability to create amazing entertainment from all around the world, present it in highly personalized ways, and win more viewing than our competitors.”
Netflix has been grappling with slowing user growth for much of the past year, with new users slowing to a trickle after a pandemic-fueled surge in sign-ups. But further exacerbating this slowdown was Netflix’s exit from Russia in early March, which came following the country’s invasion of Ukraine earlier this year. Netflix said in its investor letter that suspending service in Russia removed 700,000 net paid subscribers during the quarter.
The company also said it saw a contraction in subscribers in the U.S. and Canada, which combined lost a net 600,000 paying users. Earlier this year, Netflix had announced another price hike for North American viewers, which the company cited as cause for the attrition during the quarter, though it added the overall effect of the price hike was “significantly revenue positive.”
Heading into these results, some analysts also suggested Netflix might continue to see elevated levels of churn especially in the U.S. and Canada following these price increases. With competition mounting from the likes of Disney+, HBO Max and others newcomers, users now have more options than ever to turn to in lieu of Netflix, should they choose to end one subscription in favor of another, some analysts said.
“Content dumps, where all episodes of a new season are delivered at the same instant, will likely keep churn high, as price conscious consumers can swap out of Netflix and shift to a competitor service after viewing the content they desire,” Wedbush analyst Michael Pachter said in a note head of Netflix’s report. “Sustainable profit growth should continue so long as Netflix is able to continue raising subscription prices, but competition may limit future price increases.”
But while a saturated North American market has left Netflix with relatively less runway to continue adding users, the company’s international growth prospects have recently been riper. For the first quarter, Netflix added nearly 1.1 million users in its Asia Pacific geographic segment. Still, however, it also shed subscribers on net across both its Europe, Middle East and Africa (EMEA) and Latin America (LATAM) segments.
Amid concerns over subscriber growth, Netflix’s shares have fallen to underperform the broader market so far this year. Shares have declined by 42% for 2022-to-date through Tuesday’s close, compared to an about 6% drop in the S&P 500 over that period.
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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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