Market welcomes Netflix leadership shakeup, as subscriber growth jumps

(Alliance News) - Investors were feeling optimistic about the change in leadership at Netflix Inc announced on Thursday, and pleasantly surprised by a jump in subscriptions as the US firm adopted an ad-supported model.

Netflix said it added 7.7 million subscribers in the fourth quarter of 2022, markedly beating a forecast of 4.5 million, though slowing from 8.3 million a year earlier.

This means Netflix ended 2022 with 230.8 million subscribers. It expects "modest" subscriber growth in the first quarter of this year.

Shares in the Los Gatos, California-based video streaming company were up 5.7% in pre-market trade in New York on Friday. The stock had fallen 3.2% to USD315.78 on Thursday, prior to the announcement.

"The big test [is] whether it can sustain that move when US trading reopens later today," said CMC Markets UK chief market analyst Michael Hewson.

The explosion in subscribers seemed to disprove investors' fears that the firm's introduction of an ad tier in the third quarter would "cannibalise" its existing user base, Hewson said.

The firm's new 'basic with ads' offer launched in 12 countries in November, offering an ad-supported subscription plan at a fraction of the cost of its premium offering.

In the UK, the ad-supported tier starts at GBP4.99, compared to GBP15.99 for the premium subscription.

"One of the big concerns for investors has been how Netflix, which doesn't have any other revenue streams will be able to cope against its deeper-pocketed rivals of Amazon, Disney, Apple, and now Paramount," Hewson explained.

However, the gamble seems to have paid off for Netflix.

Not only did subscriber growth surpass estimates, but revenue in the final quarter of 2022 rose 1.9% year-on-year to USD7.85 billion from USD7.71 billion. Netflix guided for USD7.8 billion back in October.

"With such a big increase in subscriber numbers, it's perhaps surprising that revenues weren't higher, which suggests that perhaps there was some cannibalisation because of the roll-out of the new ad tier service," CMC's Hewson said.

Less positively, net income was almost wiped out at USD55 million from USD607 million.

Netflix attributed this to an unreleased loss on its euro debt of USD462 million, as the dollar fell against the euro during the quarter.

Diluted earnings per share plunged to USD0.12 from USD1.33. This was quite a big miss, given that CNN-cited consensus had predicted diluted EPS of USD0.58.

In other big news from Netflix, its founder, Reed Hastings, will switch from co-chief executive to executive chair. The move mirrors those of other tech founders, such as Amazon.com Inc's Jeff Bezos.

"Investors couldn't wait to get rid of Reed Hastings as the joint boss of Netflix judging by the share price reaction to the news of him stepping down. [The jump] in after-hours trading is the market's way of saying it was time for someone new to help steer the ship," AJ Bell investment director Russ Mould said.

Joining Ted Sarandos as a co-chief executive is operating chief Greg Peters.

For the first quarter of 2023, Netflix expects revenue to rise 4% on-year from the USD7.87 billion achieved in the first three months of 2022.

The company also reiterated its intention to use revenue growth as its key growth metric going forward, rather than subscriber adds.

The move is part of a strategy of commercialising more of its intellectual property, as well as generating ad revenue, AJ Bell's Mould commented.

By Elizabeth Winter, Alliance News senior markets reporter

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