Netflix Halts Subscriber Data, Focuses on Sales, Profit

Key Takeaway

• Netflix's stock fell sharply after announcing it will stop reporting subscriber numbers, shifting focus to sales and profit metrics.
• The move aligns with practices of Apple and Meta, raising concerns about transparency but aiming to reduce sentiment volatility.
• Despite a strong Q1 with 9.33 million new subscribers, Netflix aims to highlight revenue and cash flow over traditional metrics.

Netflix's Strategic Shift

Netflix Inc. experienced a notable decline in its stock value, the most significant drop in nine months, despite reporting impressive first-quarter financial results. This downturn was primarily attributed to the company's announcement that it would cease the quarterly reporting of subscriber data, a metric historically crucial to Wall Street's assessment of Netflix's performance. With nearly 270 million subscribers, Netflix aims to redirect focus towards sales and profit metrics, a strategy previously adopted by other tech giants like Apple Inc. and Meta Platforms Inc. Analyst Michael Morris from Guggenheim Securities expressed concerns that this move might raise questions about Netflix's confidence in further subscriber growth. However, he also noted the potential for reducing quarterly sentiment volatility.

Financial Performance and Market Reaction

Netflix's first-quarter results surpassed expectations with an addition of 9.33 million new subscribers. However, the company's shares slumped following its forecast of slower user growth and the decision to halt the reporting of customer numbers. This decision reflects a broader trend among big tech companies to limit the disclosure of certain metrics. For instance, Apple ceased reporting unit sales for iPhones, Macs, and iPads in 2018, focusing instead on its services unit. Similarly, Meta Platforms recently stopped reporting subscriber numbers for its family of apps. Analysts at Bernstein highlighted that while reducing disclosures can signal a maturing business, it also leaves shareholders with fewer data points for forecasting.

Netflix's Growth and Operational Changes

Netflix's growth in the latest quarter was bolstered by a crackdown on account sharing and the introduction of a new ad-supported tier, which contributed to attracting new customers globally. Co-Chief Executive Officer Greg Peters explained that these initiatives make traditional metrics like subscriber numbers and average revenue per user less relevant. Netflix's decision to focus on revenue, operating margin, and free cash flow as primary indicators of customer satisfaction marks a significant shift in how the company wishes to be evaluated. This change is set against a backdrop of Netflix's substantial profit and free cash flow generation, as well as the development of new revenue streams such as advertising.

Street Views

• Michael Morris, Guggenheim Securities (Neutral on Netflix):

  "Eliminating regular reporting of membership data raises questions around management’s confidence to further grow the base, though it is not implausible that the change is intended to reduce quarterly sentiment volatility around relatively small changes in true economic drivers."

Management Quotes

• Greg Peters, co-Chief Executive Officer of Netflix:

  "All of that means that historical simple math that we all did, number of members times the monthly price is increasingly less accurate in capturing the state of the business."