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Why Netflix's big planned change to its earnings reports is a bad sign

By Therese Poletti

Netflix will stop regularly posting subscriber numbers starting next year, which could signal that growth there is expected to slow

On Wall Street, less disclosure is never a good thing, and Netflix Inc. investors should be displeased that the company plans to stop giving quarterly membership data beginning next year.

Subscriber additions are a closely watched signal of Netflix's business health, and the company's decision to stop giving out that number on a regular basis next year could be a sign that Netflix expects a growth slowdown in the near future.

The disclosure of the upcoming change was a seemingly odd bombshell Thursday following a quarter when Netflix (NFLX) added 9.33 million new subscribers. That number was more than five times the number of customers added in the same quarter a year ago, and it was due in large part to its crackdown on password sharing.

It's very likely that Netflix's password crackdown - which was initiated to get new subscribers and thus more revenue out of consumers who had previously used a shared account - will lead to peak subscriber growth this year. Raymond James analyst Andrew Marok said in a note to clients ahead of earnings that there's still a "runway for paid-sharing tailwinds" but added that "that effect should diminish over the next couple of quarters."

Read more: Netflix earnings live blog recap

Wall Street reacted negatively to Netflix's report, which also brought a muted sales outlook. Netflix tried to cushion its planned changes by saying it will "announce major subscriber milestones as we cross them" once the new reporting structure kicks in. The company also said the move reflects its improved financials, which will be in greater focus without publicly available subscriber metrics.

Netflix shares tumbled nearly 5% in after-hours trading Thursday.

Julia Alexander, vice president of strategy at Parrott Analytics, tweeted that the lack of subscription numbers would also make it more challenging for analysts to calculate both stagnation and churn numbers.

Daniel Morgan, a senior portfolio manager at Synovus Trust Company, added in emailed comments that the move "lowers the visibility on the financial metrics of the company in a time when the model is pivoting to harvesting its estimated [100 million] nonpaying users with paid sharing and ad-tier pricing programs."

One precedent that investors are obviously worrying about is when Apple Inc. (AAPL) decided in late 2018 to stop giving Wall Street iPhone unit shipment numbers. That worked out well for the company initially, but now Apple is in one of its slowest growth eras, and analysts expect its iPhone revenue to fall nearly 10% in the March quarter.

At least Apple is still providing revenue breakdowns for its product lines, though the company hasn't been keen to expand its disclosures there. Roughly a decade after the Apple Watch's release, the company still doesn't tell investors how much that product hauls in.

Netflix, too, could see revenue growth decelerate later this year from rates seen in the first three months of 2024. For the full year, it is predicting revenue growth of between 13% and 15%, while first-quarter revenue grew 15%. It is also focused on raising revenue from its growing advertising business, which will become a more meaningful contributor in 2025 and beyond, according to its shareholder letter.

"Everything that we've learned about how do you grow members...we're applying it to our ads tier now," Netflix Co-Chief Executive Greg Peters said in response to a question on its analyst video interview, adding that ads were up 65% in the quarter, on a sequential basis, after two quarters of 70% growth. "It's exciting to see that growth rate stay high even as we've grown the base so much," he said.

Investors are going to have to rethink how they look at Netflix going forward. The company has been all about subscriber growth rates for the past several years, and its stock has reacted accordingly, even as the company sported financial progress on areas like margins.

Now, with a focus on the far more boring and arcane business of advertising - which is also turning the once-vaunted streaming medium closer into a replica of traditional television - some investors may decide Netflix is not a stock for them without an ability to track subscriber progress.

-Therese Poletti

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.


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04-20-24 0555ET

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