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Netflix Q2 Preview: Maybe it lost only 1m subscribers, analysts advise ‘Wait & See’

Ahead of Tuesday’s second-quarter earnings reveal, the media analysts at Wells Fargo have good news and bad news for Netflix investors

* Photo: Natalia Dyer as Nancy Wheeler in Stranger Things. Tina Rowden/Netflix

Tony Maglio

BY now, Netflix executives know exactly what happened in the second quarter of 2022. At approximately 4 p.m. ET on Tuesday, we will too. For the time being, are Ted Sarandos, Reed Hastings, and their army of accountants breathing a sigh of relief, or hunkering down in the safest part of their Los Gatos, California headquarters?

According to the media analysts at Wells Fargo, Netflix’s Q2 subscriber loss may not be as bad as forecast by both the company and the street — but the net effect is still negative.

In analyzing Netflix mobile downloads and monthly active users (MAUs) across the April-June quarter, Wells Fargo estimates the streamer may have lost only 1 million subs in the quarter that ended June 30, which would be a significant improvement from Netflix’s own April prediction that it would lose 2 million global paid subscribers. Netflix saw declining sessions and time-spent-viewing in April and June, but May was up with the debut of “Stranger Things 4: Volume 1.”

The Wall Street consensus is more bearish, calling for a loss of 1.4-1.8 million subs. However, even the Wells Fargo optimism comes with a caveat. Steven Cahall, managing director and senior analyst for equity research at Wells Fargo Securities, emphasized that while it once relied on MAU-to-subscriber growth (or loss) correlations, “we’ve seen the correlations break down more recently.”

Add to that the international currency fluctuations, along with the continuing sense that streamers struggle for subscribers, and Cahall’s analysts “don’t have the conviction to move estimates outside of the guidance range.” In other words, Wells Fargo’s making the same recommendations it would if Netflix was right and it lost 2 million subs. Cahall and his team opined that Netflix investors “remain in wait & see mode.”

Not content to wait-and-see, Wells Fargo lowered its Netflix Q2 revenue forecast from $7.9 billion to $7.8 billion and its operating income estimate from $1.71 billion to $1.68 billion. Researchers there dropped their earnings per share (EPS) estimate from $2.96 to $2.92.

On Monday, the media analysts at MoffettNathanson reiterated their prediction for a loss of 2 million subscribers. They also see a larger impact from currency fluctuations, and lowered their own revenue estimate by $90 million to $7.95 billion.

This past Thursday, Wedbush analyst Michael Pachter predicted Netflix would lose 1.5 million global subscribers. In a July 6 note, Barclays said Netflix was on track to lose 2.8 million subs this quarter.

Reed Hastings on NFLX Q1 2022 earnings call.YouTube/Netflix

Netflix lost 200,000 subscribers in the first quarter of 2022. At the time, the company warned of losses 10 times that large in the second quarter. The market reacted to that news; boy, did it ever react. Since the Q1 results came out, shares in Netflix have dropped by about 50 percent. That’s compounded by the fact they had already been cut in half since November highs, when the stock traded for $700 per share. At this writing, Netflix has a market cap just under $80 billion; it was north of $300 billion in the fall.

The subscriber decline and the subsequent gigantic reduction in value have not been Netflix’s only losses. Since the spring, the streaming giant has laid off nearly 500 staffers, most of whom worked in the U.S.; Netflix has a global headcount of around 11,000.

Regardless of what we learn on Tuesday, there were definitely some Q2 wins. For starters, “Stranger Things 4” quickly became Netflix’s most-watched English-language TV show ever. And while it likely will not catch Korean sensation “Squid Game,” it’s blown everything else away, globally.

What we can predict with confidence is that co-CEOs Hastings and Sarandos will elaborate on Netflix’s evolving plans to add an ad-supported tier. Last week, Netflix chose Microsoft to be its global advertising technology and sales partner. Execs will probably also give us an update on their password-sharing-crackdown trials. But don’t take our word for it.

“We expect more detail on the AVOD rollout, password sharing, and any rethink to the content strategy to stimulate sub growth,” Wells Fargo wrote in the note sent to clients — and obtained by IndieWire — last Wednesday.

Here’s what else we know: On April 19, Netflix forecast its second-quarter revenue would rise (from both Q2 2021 and Q1 2022) to $8.053 billion, representing year-over-year growth of 9.7 percent. Operating income was estimated to rise 21.5 percent from the same quarter last year to $1.730 billion. Net income, or actual profit, was expected to be flat at $1.354 billion; the company predicted diluted earnings per share of $3.

Based on its April guidance, Netflix foresees ending the March to June quarter with 219.64 million global paid subscribers. “Our forecast assumes our current trends persist (such as slow acquisition and the near term impact of price changes) plus typical seasonality (Q2 paid net adds are usually less than Q1 paid net adds),” Netflix’s Q1 letter to shareholders read.

Netflix Q2 earnings results are due out Tuesday just after the U.S. stock markets close for their regular trading day at 4 p.m. ET. Hastings, Sarandos, CFO Spence Neumann, COO & Chief Product Officer Greg Peters, and vice president of IR & Corporate Development Spencer Wang will speak during an interview with JP Morgan’s Doug Anmuth set for 6 p.m. ET. Find the video interview here.


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