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Netflix Bounces Back in Q3 With 2.4 Million Subscriber Gain, Issues Upbeat Q4 Forecast but Doesn’t Expect ‘Material’ Lift From Ad-Plan Launch

The Crown Season 5
Netflix

After two straight quarters of subscriber losses, Netflix returned to growth in the third quarter of 2022 — and told investors it’s expecting a strong Q4 to finish the year, even though it doesn’t expect big gains right away from the launch of its cheaper, ad-supported plans.

The streaming giant reported 2.41 million net new paid subscribers in Q3, including a gain of 100,000 in the U.S./Canada region, to stand at 223.1 million worldwide as of the end of September. That handily topped Netflix’s previous forecast of a 1 million pickup for the period.

For Q4, Netflix expects to gain 4.5 million new streaming customers, compared with 8.3 million in the year-earlier quarter. Netflix Basic With Ads is slated to launch in the U.S. on Nov. 3 and priced at $6.99 per month — three dollars less than the regular Basic plan. Similar ad tiers are also coming next month to 11 other countries: Australia, Brazil, Canada, France, Germany, Italy, Japan, Mexico, South Korea, Spain and the U.K.

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Shares of Netflix shot up more than 14% on the subscriber-number beat and forecast. The company also announced that, starting with the fourth quarter earnings report, it will no longer provide subscriber guidance for the next quarter.

Netflix didn’t say how many of the 4.5 million expected new subscribers in Q4 will be on the ad-supported plan. “While we’re very optimistic about our new advertising business, we don’t expect a material contribution in Q4’22 as we’re launching our Basic With Ads plan intra-quarter and anticipate growing our membership in that plan gradually over time,” the company said in its Q3 letter to shareholders.

It’s not clear how many of the customers who sign up for Netflix’s ad plan will be existing subscribers shifting to the lower-cost package. However, COO Greg Peters has previously said the company believes revenue per subscriber on the ad-supported tier will be “neutral to positive.”

The company reported Q3 revenue of $7.93 billion, up 5.9% year over year, and diluted earnings per share of $3.10, beating expectations. Wall Street consensus estimates had pegged revenue at $7.84 billion and earnings of $2.13 per share, according to financial data provider Refinitiv.

For Q4, Netflix anticipates revenue of $7.8 billion, attributing the expected quarter-over-quarter decline to be “entirely due to the continued strengthening of the U.S. dollar against other currencies.” On a constant-currency basis, the Q4 top-line guidance equates to 9% year-over-year revenue growth.

Netflix touted “big hits” across TV and film in Q3, releasing some of its most-watched titles of all time, including Ryan Murphy’s “Dahmer — Monster: The Jeffrey Dahmer Story,” which is now its No. 2 English original series in the initial 28-day window, the final two episodes of “Stranger Things 4,” “Extraordinary Attorney Woo,” “The Gray Man” and “Purple Hearts.”

The results come after Netflix — for the first time in more than a decade — reported subscriber losses in the first half of 2022, dropping 200,000 in Q1 and 970,000 in Q2 (although the latter wasn’t as many as the 2 million the company forecast). Netflix has faced heightened competition in the sector, while rising inflation has pinched consumers’ wallets and household adoption of subscription streaming services has plateaued in the U.S. and other regions.

Meanwhile, Netflix continues its efforts to convert viewers who are illicitly borrowing passwords into paying customers. On Monday, it announced the global rollout of a profile-transfer feature to make it easier for a user on another customer’s account to create their own paid membership.

The company said it expects to more broadly launch different options for password-sharing accounts starting in early 2023, after testing them in several Latin American countries this year. Those will let password-sharing members create sub-accounts (adding an “Extra Member”) if they want to pay for family or friends who have been piggybacking on their services.

On the games front, Netflix said it now offers 35 games on the service, all included in every Netflix subscription without in-game ads or in-app purchases, one year after launching mobile games. “[W]e’re seeing some encouraging signs of gameplay leading to higher retention,” the company said in the shareholder letter, saying it has 55 more games in development, including those based on Netflix franchises. The company said after the launch of the anime series “Cyberpunk: Edgerunners” (49 million hours viewed) in Q3, gameplay of CD Projekt’s “Cyberpunk 2077” game surged on PCs.

Pictured above: Elizabeth Debicki as Princess Diana in Netflix’s “The Crown” Season 5, premiering Nov. 9

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