What to watch in Netflix earnings: Subscriber turnaround?
Ore Huiying

Netflix (NASDAQ:NFLX) posts its highly anticipated third-quarter earnings report after the closing bell Tuesday, and as has been the case for a few quarters in a row now, investor attention will be less on the top-line revenues and more on the direction of the company's subscriber trends.
Two rough earnings reports in 2022 (in January and April) sent the stock tumbling this year (it's down 59% year-to-date). It had beaten subscriber-addition expectations for the third quarter of 2021, but January brought a report that fourth-quarter adds of 8.28M subscribers fell short of guidance for 8.5M, sending the stock reeling. April's first-quarter report brought another tumble: Shares slid 35% after the company actually lost 200,000 subs, and it warned it would also lose 2M subscribers in its second quarter.
That second quarter brought a bit of relief when the company lost "only" 970,000 net subs. But Netflix forecast a turnaround to net growth in the third quarter, and expectations are for even stronger adds in the fourth quarter.
Netflix forecast it would add 1M net subscribers for Q3, which will be the key number Tuesday afternoon. If it can achieve that, it will have wiped out the 970,000 losses for Q2 and brought the company back to the brink of its peak global membership of 221.8M subscribers.
Consensus expectations suggest that growth in other regions - especially in Asia Pacific, where Netflix is expected to post 1.3M net adds - will make up for a continuing decline in its home markets of the U.S. and Canada (-292,000 subs expected). And for the fourth quarter, the company is expected to add 4.1M net subs worldwide, which would be its best performance since Q3 2021.
Netflix is forecasting $7.84B in revenue for Q3 (which would mark 4.7% year-over-year growth), and it sees operating income dipping to $1.255B (on a newly narrower margin of 16%). The company expects diluted earnings per share of $2.14; Wall Street sees it coming in at $2.17.
Another key factor that will likely come up in the company's shareholder letter and quarterly executive interview will be the just-announced advertising-supported service tier. Coming Nov. 3 at $6.99 a month, it marks about a $3 discount to the company's cheapest ad-free plan, and it's a dollar a month cheaper than the upcoming ad-supported plan at Disney (DIS) and a few dollars cheaper than HBO Max's (WBD) ad plan (at $9.99 per month), but just a bit above Peacock's and Paramount's $4.99/month ad tiers. (CMCSA) (PARA) (PARAA)
Netflix stock bears believe that people flocking to the company's ad-supported plan will cannibalize the higher revenues it's been enjoying, while bulls suggest the mix is right, and that the company will come out ahead as ad revenues more than mitigate any subscriber-sales trade-outs (Citi's Jason Bazinet says the plan is discounted by $3 per sub per month while it should generate $10 in ad revenue per ad-tier sub per month).
Yesterday, Netflix also signaled moves on the password-crackdown front as it introduced Profile Transfer, a way for users to carry their viewing data to a new subscription more easily. (Would you watch Netflix with ads? Vote in our "Weekend Bite" poll.)