Netflix Publishes Surprisingly Positive Q3 Results Ahead of the New Ad-based Streaming Release

“After a challenging first half, we believe we’re on a path to reaccelerate growth.” The company statement read.

The streaming giant which boasts over 220 million subscribers and a presence in 190 countries has been scrambling to reverse the 1.2 million drop in subscribers it had in the first half of the year.

The decrease in popularity was due mostly to the uncertain state of the global economy, an increase in competition from other streaming companies, firm price increases in key markets, the decision to suspend its services in Russia, and the impact of inflation on people’s ability to afford the service.

The strength of the US dollar relative to other currencies has also had a negative impact on Netflix‘s earnings, as has been similar to many international companies with US headquarters. Since consumers abroad have less buying power as a result of a high US dollar, and US enterprises already have a price disadvantage, foreign demand for US exports generally suffers. In that case, Netflix suffered when repatriating its profits in weaker foreign currencies into the US.

Prior to Tuesday’s earnings announcement, the stock price of Netflix had dropped by up to 70% just this year, leaving many to wonder how it could possibly recover. However, the company’s projection that it will add 4.5 million subscribers in the fourth quarter helped drive the stock price up more than 10% in after-hours trading. As you can see on the bottom left part of the following chart from the online ActivTrader trading platform, the global sentiment is extremely positive on Netflix’s shares, as 80% of traders are buying the stock.

More on the Q3 Numbers

Netflix’s Q3 revenue growth of 6% over the previous quarter was said to have been fueled by a 5% increase in average paid memberships, and a 1% increase in average revenue per membership (ARM). Revenue and ARM increased 13% and 8%, respectively, year over year when the effects of foreign currency were excluded. The sequential sales reduction was said to be completely attributable to the strength of the US dollar.

The company’s Q3 operating income was $1.5 billion, down from Q3 2021’s $1.8 billion during the boom of the pandemic. The combination of greater revenue and the deferral of certain expenditures from the third to the fourth quarter helped with the achievement of a larger operating income than was anticipated at the start of the quarter. Earnings per share were $3.10 compared to $3.19 from the previous year.

A big part of the turnaround was the extremely popular season four of Netflix’s sci-fi “Stranger Things” which concluded during Q3, while the serial killer series “Dahmer – Monster: The Jeffrey Dahmer Story” became one of Netflix’s surprisingly most viewed series ever, with hundreds of millions of hours of viewing despite its gruesome content.

Major Competition

In its statement, the company noted that the streaming market is becoming very competitive, with new companies launching often. Consumers also now have a wide variety of other entertainment options, including social media, gaming, other streaming sites, YouTube, and TikTok.

Netflix still sees many opportunities for future growth though, as it takes a relatively small piece of the overall viewership in comparison to the other options available. The streaming service currently accounts for only around 8% of total TV time in the US and the UK.

The firm also speculated on other companies’ financial standings for the year in its statement.

“Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard – we estimate they are all losing money, with combined 2022 operating losses well over $10 billion, vs. Netflix’s $5 to $6 billion annual operating profit.”

Netflix Q4 Outlook

Next month, Netflix is set to roll out its new ad-supported plan in a dozen countries that will be priced at around $7, compared to the usual premium option of around $15 to 20.

Reuters quoted an analyst, speaking about the new service, who was confident that the move to a cheaper option would mean that current subscribers would be tempted to downgrade their membership. Further hinting that there might be fewer cancellations as a result and hopefully some new users.

Despite the high level of optimism over the new advertising business, the company said it didn’t anticipate a major contribution in Q4 since they are going to be introducing the Basic with Ads plan throughout the quarter. The aim is to gradually increase the number of members in that plan over time and to increase the options available to potential new members, rather than to disenfranchise the present ones.

The company pointed to the strengthening US currency as continuing to be a big obstacle in the fourth quarter. Because of the tightening monetary policy cycle voted by the Federal Reserve since the beginning of the year, the greenback strengthened strongly against its counterparts, such as the EUR, the GBP, and the JPY among others. The EUR/USD went below parity this year for the first time since 2002, while the USD/JPY reached today a new high, almost reaching 150.

Netflix anticipates sales of $7.8 billion next quarter, with the sequential reduction fully attributable to the US dollar’s ongoing strengthening against foreign currencies. This also corresponds to a 9% increase in income from the previous year on a constant currency basis.

An anticipated 4.5 million new subscriptions are expected and ARM growth to total 6% from the previous year excluding foreign exchange.

After nearly two years one of Netflix’s most popular series, The Crown, is back for its third and final season, while many other popular programs and movies are set for release in Q4, including a vast selection of holiday-themed movies.

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