January 28, 2023


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Netflix Q4 preview: Ad tier brings highest US sign-up rate since 2020

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Netflix’s new cheaper, ad-supported plans have given the streaming giant the subscriber-acquisition lift it was hoping for.

Netflix reports fourth quarter 2022 earnings results after the market close on Thursday, and one of the key areas of focus for investors will be the performance of the ad-supported tier ($6.99/month in the US), which debuted in 12 markets in early November.

Earlier reports suggested that Netflix’s Basic with Adds package was off to a slow start. But new data suggests the launch was a success: Netflix on Nov. 3 saw its highest daily subscription sign-up rate in the U.S. since the pandemic began in April 2020 with the introduction of its ad-supported plan, according to a study released Thursday by research firm Ampere Analysis. . In particular, the streamer’s average daily sign-up volume increased 58% from November 3-5 compared to the three days prior to launch, according to the researcher.

Since the launch of the ad-supported service, 8% of Netflix customers who have signed up or changed their plans accept ad levels, Ampere found. Of these, three out of four are new sign-ups – mostly former customers who are re-subscribing (64%) with the remainder (36%) representing first-time users. Among Netflix sub-members who moved down to the add-on tier, 67% moved from the Basic tier, 21% from the Standard plan, and 12% from the Premium tier.

Netflix’s Basic with Ads plan “has succeeded in bringing back more price-sensitive Netflix subscribers who previously churned,” said Maysa Jamil, an analyst at Ampere. Rather than representing a cannibalistic risk to its original ad-free packages, the cheaper $6.99/month plan “will help retain customers in the long term,” Jamil said. Ampere’s Subscription Video Economics database tracks daily sign-up and cancellation activity for streaming services in the US based on a panel of “several million” households.

When reporting Q3 earnings, Netflix did not provide guidance on how many subscriptions it expected for the ad tier, but the company told investors that Netflix Basic With Ads would not represent a “material” contribution to Q4 earnings. Execs said they expect the ad-supported package to be neutral or positive in terms of revenue per subscriber compared to its no-ad plan.

A diversity Earlier this month at the Entertainment Summit at CES, Netflix’s president of advertising Jeremy Gorman said the company was “pleased with the growth we’ve seen” in ad-supported levels since launch. He declined to divulge the number of subscribers but added, “You’ll be able to see if I’m an anxious person — I wear it on my face.”

Overall, Netflix expects a net gain of 4.5 million subscribers worldwide in Q4, the last forward-looking guidance the streamer will provide on this front. “As discussed in previous letters, we are increasingly focused on revenue as our primary top-line metric,” Netflix said in its Q3 letter to shareholders.

In Q4, Netflix had “healthy viewing time” based on an analysis of the company’s reported metrics, largely driven by a significant outperformance from hit series “Wednesday,” Morgan Stanley’s Ben Swinburne wrote in a Jan. 18 note. “Higher engagement probably means lower churn.” Netflix’s share of the top 50 streaming titles across a select number of Nielsen-tracked services also showed “a significant sequential increase” in November and December, he added. Additionally, Netflix mobile app downloads fell just 12% globally in the year 4 — according to Swinburne, “assuming a modest decline in the churn year, the company could top the 4.5 million sub growth forecast.” Morgan Stanley raised its 12-month price target on Netflix’s stock from $275 to $300 based on favorable currency exchange rate trends.

Meanwhile, analysts will also look for updates on Netflix’s plans to require password-sharing families to pay extra for users who illegally share their accounts. The company said it will introduce “a thoughtful approach to account sharing monetization” as early as 2023, expanding beyond its initial test market in Latin America — pointing to a more honor-system approach rather than a punitive one.

It’s still early days for the company’s two new growth initiatives, which “will take time to scale,” UBS analyst John Hodulik wrote in a Jan. 16 research note. Netflix’s password-sharing upsell program “should be an income tax but probably will drive churn,” Hodulik noted. “We also expect similar comments [the advertising tier] With a ‘crawl, walk, run’ approach to management.”

With Netflix management no longer providing guidance to customers, Wall Street will focus on revenue and earnings guidance for Q1. According to Refinitiv data, analysts expect revenue of $8.15 billion (up 3.6% year-over-year) and $2.97/share (-16%) for the first quarter of 2023.

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