Beating Targets
In the earnings data, Netflix reported a 16% rise in total memberships, which exceeded Wallstreet analyst predictions. Total memberships grew to 269.5 million while Wall Street had been predicting a rise to 264.2 million.
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It also beat quarterly earnings and revenue estimates for Q1 2024.
Netflix Stock Hit
In the wake of the announcement to stop reporting subscriber figures, shares of Netflix on the market dropped 9.1% on Friday. Investors are worried that the obfuscation of the subscriber numbers is a signal that Netflix is not confident in its ability to grow subscribers.
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This drop on Friday followed an earlier 5% drop on Thursday in the hours following the report.
Reason for the Subscriber Policy Change
Netflix explained that the reason behind the change is that it wants to use better metrics for investors than subscriber numbers: wanting to emphasize earnings over subscribers.
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“As we’ve noted in previous letters, we’re focused on revenue and operating margin as our primary financial metrics — and engagement (i.e. time spent) as our best proxy for customer satisfaction,” the company said. “In our early days, when we had little revenue or profit, membership growth was a strong indicator of our future potential.”
Announcing Milestones
Although Netflix will not be updating investors on subscriber numbers in quarterly reports in the future, the company did say that it will still announce “major subscriber milestones as we cross them.”
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“We’ll continue to provide a breakout of revenue by region each quarter and the F/X impact to complement our financials. For guidance, we’ll add annual revenue guidance on top of what we already provide today: our annual operating margin and free cash flow forecast and forecasts for quarterly revenue, operating income, net income, and EPS,” the report said.
Criticism of the Move
Some analysts and industry figures view the move as controversial. Evercore ISI’s Mark Mahaney admitted that while the announcement was not “terribly surprising” he considered it a “chump” decision.
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Goldman Sachs said “The key debate coming out of this earnings report will likely be the removal of two pieces of disclosure.”
Hope For Growth
While some analysts are skeptical of the move to hide subscriber numbers, some are still hopeful that Netflix has the right strategy to grow its subscriber base.
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“Netflix is benefiting from its cheaper ad-supported tier, which is helping to capture customers that would otherwise stay away from the platform because of financial concerns,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.
Echoes of Apple
Tech giant Apple Inc. made a similar move in 2018 when it decided it was going to stop disclosing to investors the sales numbers for individual products like iPhones. “A unit of sale is less relevant to us today than it was in the past,” Apple’s CFO told investors at the time.
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The message behind this idea is that subscriber totals are increasingly not a good way to measure customer engagement and may not correlate perfectly to revenues, profit margins, and other more important metrics.
Success of Apple
Despite making a similar move to the one Netflix is making now, Apple has seen the price of its shares increase more than fourfold since 2018 ended.
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While Apple is currently experiencing a recent share drop due to iPhone sales struggling in a competitive Chinese market, it is still one of the most valuable companies in the world.
Streaming Starts With Engagement
In the earnings report, Netflix affirmed its belief that finding ways to increase different avenues of engagement is the way forward for the company.
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“Success in streaming starts with engagement. When people watch more, they stick around longer (retention), recommend Netflix more often (acquisition) and place a higher value on our service,” Netflix said.
Half a Billion People
As part of the earnings announcement, Netflix also took an opportunity to brag about the massive audience size it has managed to reach.
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“Almost 270M households across 190+ countries now subscribe to Netflix. With more than two people per household on average, we have an audience of over half a billion people. No entertainment company has ever programmed at this scale and with this ambition before,” said the company.
Welcoming the Decision
Some analysts are not turned off by this decision from Netflix, making reference to the success of Apple employing a similar strategy.
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Tim Nollen, Macquarie senior media tech analyst, wrote on Friday that investors “will complain about lack of metrics to use, but we welcome the decision — recall Apple did this with iPhone units to focus the Street toward more important fundamental metrics.”