Netflix gave a forecast for the second quarter that fell short of analysts’ expectations, sending its shares tumbling in extended trading.
The streaming pioneer also announced that chairman and co-founder Reed Hastings is stepping down from the board at the company’s annual meeting after 29 years to pursue philanthropy and personal interests.
In the current quarter Netflix forecast earnings per share of 78 cents, less than the 84 cents predicted by Wall Street.
Revenue projections for the second quarter were also tepid. Netflix said revenue would be $12.57 billion in the three months ending in June, compared with estimates of $12.64 billion, according to data compiled by Bloomberg. The shares fell about 9 per cent in trading after the news.
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The results are the first since Netflix walked away from a contentious battle for control of Warner Bros Discovery in February.
The company’s shares had suffered during the months-long tussle with Paramount Skydance as investors were concerned about the amount of debt Netflix would shoulder under a potential deal. Wall Street also fretted that it was a sign the company had run out of ideas.
In a letter to shareholders, co-chief executive officers Ted Sarandos and Greg Peters said Warner Bros “would have been a nice accelerant for our strategy, but only at the right price”.
Paramount snagged Warner Bros for $110 billion, and the deal is now undergoing regulatory scrutiny in the US and Europe and faces vehement opposition from Hollywood.
On a call with investors, Sarandos said the bidding process taught them “so much about deal execution”. While mergers and acquisitions remain “a tool to help achieve our goals”, he said pulling out of the Warner Bros fight showed that “we’ll remain very disciplined as to how we approach it”.
Now Wall Street is looking for signs Netflix can keep subscribers engaged. Management said customer retention had improved in every region during the first quarter. The company raised its subscription prices in March, boosting its standard plan without ads by $2 to $20 a month.
Revenue rose 16 per cent in the first three months of the year to $12.3 billion, compared with estimates for $12.2 billion. Earnings per share for the quarter were $1.23 compared with estimates of 76 cents. That was due in part to a $2.8 billion breakup fee paid to Netflix by Paramount.
“These are great numbers. What people wanted was even better,” Ross Gerber, CEO of Gerber Kawasaki Wealth and Investment Management, told Bloomberg TV. “They didn’t up their guidance for the year, which I think people were hoping for.”
Sarandos and Peters sought to reassure investors that they remain confident and have a plan for the future, outlining three key priorities: delivering more quality programming, implementing new technologies and generating more money from members.
The company plans to boost spending on programming this year, which is a big reason its earnings for the current quarter may disappoint.
On the call with investors, Sarandos said the company planned to ramp up sports programming globally, including big events like the World Baseball Classic which led to record subscriber gains in Japan.
He said the company was also in discussions about expanding its relationship with the National Football League.
Netflix plans to launch an updated mobile experience later this month that will include a vertical video discovery feed, which should make it easier for people to engage with its content, according to the company. In addition to film and TV shows, Netflix is spending on video game and podcast offerings.
Separately, Netflix reported that the pay for its co-CEOs fell last year, with Sarandos earning $53.9 million and Peters $53.2 million.
Hastings’ departure marks the end of an era for streaming industry pioneer. Hastings (65) provided the initial capital to start Netflix as a DVD-by-mail service and replaced co-founder Marc Randolph as CEO in 1999.
He guided the company through its battle with Blockbuster Video and was the driving force behind its move into streaming.
Under Hastings’ leadership, Netflix introduced the service in more than 190 territories, outmanoeuvring Hollywood studios to build the most valuable entertainment company in the world. He stepped down as CEO in January 2023, ceding the job to Sarandos and Peters.
“My real contribution at Netflix wasn’t a single decision; it was a focus on member joy, building a culture that others could inherit and improve, and building a company that could be both beloved by members and wildly successful for generations to come,” he said in the shareholder letter.
Addressing a question on the earnings call, Sarandos said Hastings’ departure wasn’t related to the Warner Bros. bidding.
“Sorry if anyone was looking for some palace intrigue here,” Sarandos said. “Reed was a big champion for that deal. He championed it with the board. The board unanimously supported the deal.” – Bloomberg
