Netflix Lost 970,000 Subscribers in Q2, Beating Its Estimate by More Than 1 Million Subs

Netflix reported its second-quarter 2022 earnings Tuesday, revealing it lost 970,000 subscribers during the three-month period that included the launch of the first part of “Stranger Things” Season 4. While that’s obviously a hit to the overall tally the platform prides so much, it’s much less of a hit than Netflix had forecast.

The streamer had projected a net loss of 2 million streaming subscribers for the second quarter, which spans April 1-June 30, following a surprise decline of 200,000 in Q1 (which included the loss of 700,000 Russian customers after exiting the country over the invasion of Ukraine).

Netflix revealed in its Q2 letter to shareholders it currently has 220.67 million subscribers globally and is expecting to return to gains in Q3, projecting an addition of 1 million subs from July 1-Sept. 30.

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In terms of actual financial performance for Q2, Wall Street forecast earnings per share (EPS) of $2.96 on $8.04 billion in revenue for the streamer’s second quarter, according to analyst consensus data provided by Refinitiv. Netflix reported diluted EPS of $3.20 on $7.97 billion in revenue.

Revenue was up 8.6% year over year, or “13% excluding a $339 million foreign currency impact,” per Netflix. Operating income for the quarter was $1.6 billion, with net income at $1.4 billion. Free cash flow for the quarter was at $13 million versus the previous quarter at $802 million.

The company also stated it took a $70 million hit for severance costs in the second quarter following several rounds of layoffs, and is adjusting its operating model for slower top-line growth. Netflix also took an $80 million non-cash impairment charge for “certain real estate leases primarily related to rightsizing our office footprint.”

During its Q1 earnings presentation in April, Netflix said it was focusing on cracking down on password sharing and exploring a cheaper ad-supported option. It has since made movement on both fronts, creating payment plans for password-sharing households in several countries and picking Microsoft as its partner in building the ad-supported tier, which Netflix said in its Q2 letter to shareholders Tuesday it now expects to launch in “the early part of 2023.”

“We’ll likely start in a handful of markets where advertising spend is significant,” per the letter. “Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering. So, our advertising business in a few years will likely look quite different than what it looks like on day one. Over time, our hope is to create a better-than-linear-TV advertisement model that’s more seamless and relevant for consumers, and more effective for our advertising partners. While it will take some time to grow our member base for the ad tier and the associated ad revenues, over the long run, we think advertising can enable substantial incremental membership (through lower prices) and profit growth (through ad revenues).”

With “Stranger Things” Season 4, which just last week garnered 13 Emmy nominations, including outstanding drama series, Netflix deviated from its binge-release practice. The first seven eps were released May 27 (to spur signups and reduce churn in Q2) with the two concluding segments dropping July 1 (so they would fall in Q3).

The break from tradition paid off in viewership, with Volume 1 of “Stranger Things 4” becoming Netflix’s most-watched English-language series, a datapoint that is determined by how much a title is watched over its first 28 days of availability.

Netflix stock closed Tuesday at $201.63 per share. The regular U.S. stock markets will reopen Wednesday at 9:30 a.m. ET.

Co-CEOs Reed Hastings and Ted Sarandos and other Netflix executives will discuss the quarter in greater detail on a pre-taped web interview that will be released at 6 p.m. ET.