Looking at historical trends, investors may initially voice objections, but in the end, they tend to acquiesce to management's decisions.
Despite Netflix surpassing revenue and profit expectations in its Q1 report and forecasting higher profits for this quarter, along with a significant increase in new subscribers exceeding consensus estimates, shares of the company have dropped by nearly 6% in after-hours trading.
It appears that following a 25% increase in value so far this year, investors are cashing in their profits due to what seems to be limited potential for further gains in the current quarter. Tonight's decline marks a reversal from the significant surges the stock experienced in the previous two quarters. While the substantial increase in subscribers reported in January resulted in an 11% rise in the stock's value at that time, it's evident that the addition of subscribers doesn't always guarantee positive performance for the stock.
However, there's also a disappointing revelation in the forecast section of the shareholder letter: Netflix intends to cease disclosing its membership numbers starting next year.
In the first quarter, revenue reached $9.37 billion, marking a 15% increase year over year, while profit per share amounted to $5.28, surpassing Street consensus estimates of $9.27 billion and $4.52, respectively, according to FactSet. Additionally, the number of "net" subscriber additions stood at 9.3 million, more than doubling the consensus forecast of 4.59 million.
The company reported ongoing advancement in its advertising-supported initiatives, noting a 65% increase in members on its ad-supported plan. However, Netflix remains steadfast in its decision not to disclose the specific numerical figures.
The company's free cash flow significantly exceeded expectations, totaling $2.1 billion compared to the consensus forecast of $1.8 billion.
For the ongoing quarter, the company anticipates revenue of $9.5 billion and a profit of $4.68 per share. While this profit estimate surpasses the consensus forecast of $4.54, the revenue projection is slightly below the consensus estimate of $9.53 billion.
The company stated that net additions will be lower this quarter compared to the last due to the typical "seasonal" pattern of the business.
For the entirety of 2024, the company anticipates a revenue increase of 13 to 15%, surpassing its previous projection of "healthy double-digit" growth. Additionally, Netflix raised its operating margin forecast by one percentage point to 25% for the year, exceeding the current Street consensus by one point.
In the shareholder letter, management elaborated on how a strict membership count holds less significance for its business. As a result, the company plans to discontinue reporting member numbers starting next year.
As we've emphasized in previous communications, our primary financial metrics are focused on revenue and operating margin, while engagement, measured by time spent, serves as our best indicator of customer satisfaction. In our early stages, when revenue and profit were minimal, membership growth signaled our future potential strongly. However, now that we're generating substantial profit and free cash flow, and exploring new revenue streams like advertising and additional member features, memberships represent just one aspect of our growth strategy. Moreover, with the evolution of our pricing and plans into multiple tiers with varying price points across different countries, each new paid membership has a unique business impact. This is why we ceased providing quarterly paid membership guidance in 2023, and starting from our Q1'25 earnings report, we will no longer report quarterly membership numbers and ARM (Average Revenue per Membership).
The decision to withhold certain disclosures echoes moves made by other tech giants, such as Apple's cessation of reporting iPhone unit sales a few years ago. In these instances, the absence of disclosure doesn't appear to have a detrimental effect on the companies. While investors may initially voice objections, they typically align with management's decision in the end.
A more pressing concern for the business is how advertisers will react to the absence of such disclosure. During last year's July earnings call, co-CEO Greg Peters underscored that the size of the company's audience is crucial in attracting advertisers.
"The primary focus we have is on scale," he stated. "We recognize that reach is one of the primary factors, if not the most important factor, that advertisers take into account when deciding where to allocate their advertising budgets."
If the company's paying membership base currently stands at 269.6 million and is projected to increase by double digits to over three hundred million within a year, the question arises whether this expanded membership base will suffice for advertisers if the company discontinues disclosing the number. It's possible that the company may selectively disclose the number to its top advertisers to address concerns about audience scale and reach.
The absence of total disclosure, coupled with the lack of information regarding the number or percentage of subscribers on an advertising-supported plan, results in a compounded lack of transparency.
As noted by Bernstein analyst Laurent Yoon in his Thursday night report, Netflix is effectively replacing the cable box with a black box.
He expresses uncertainty about how this approach will resonate with investors, suggesting that it signifies a maturing business.
Starting in 2025, Netflix will cease disclosing subscriber and ARM data. On one hand, this move shifts away from a historical focus on a single near-term KPI, namely Net Sub Adds, which may overemphasize short-term performance and growth prospects, especially considering the likelihood of reaching peak growth. Such a reduction in disclosures aligns with a pattern observed among major tech companies like Apple, Google, and Meta. On the other hand, the removal of growth disclosures signifies the maturation of the business and provides shareholders with even fewer data points to assess and forecast performance. The ultimate response from investors to this change remains to be seen.