Netflix Stock Plummets. It Lost Subscribers—and Expects to Lose Even More.

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Streaming video giant Netflix posted disappointing results for the March quarter, including a net loss of subscribers, and the stock was falling more than 25% in premarket trading Wednesday.

The company (ticker: NFLX) lost 200,000 net subscribers in the quarter. That left it well short of the company’s forecast for 2.5 million net additions, though the number includes the loss of 700,000 subscribers in Russia where the company has suspended service. Without that factor, the company would have added 500,000 net new subscribers in the quarter.

Even worse, Netflix expects to lose 2 million net subscribers in the June quarter, again falling shy of Wall Street’s estimates.

Netflix shares fell 25.2% to $260.86 early Wednesday. The miss triggered a broad selloff in other streaming-related stocks, with

roku

(ROKU) down 6.2%,

Warner Bros Discovery

(WBD) off 3.7%,

waltdisney

off 4.3%; and

fuboTV

(FUBO) down 6.1%.

CEO Reed Hastings made some news on the earnings conference call, saying the company is exploring ways to add lower-priced ad-supported subscription tiers that would likely be phased in over several years.

That’s a huge change for Netflix. Hastings has long been resistant to offering an ad-supported version of the service. Other services, like Hulu, already offer ad-supported options.

Revenue in the quarter was $7.87 billion, up 9.8%, and just shy of the FactSet consensus estimate of $7.94 billion. Profits were $3.53 a share, ahead of the Street’s call for $2.95. For the June quarter, Netflix sees revenue of $8.05 billion, with profits of $3 a share; the former Street consensus call was for $8.2 billion in revenue and profits of $3 a share.

“Our revenue growth has slowed considerably as our results and forecast … show,” the company said in a letter to shareholders. “Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration—when including the large number of households sharing accounts—combined with competition, is creating revenue growth headwinds. The big COVID boost to streaming obscured the picture until recently.”

In the letter, Netflix outlined multiple factors contributing to the weaker-than-expected performance, including the sharing of accounts. It estimates that in addition to about 222 million paying households, there are another 100 million using shared accounts, including 30 million in the US and Canada. The company said those nonpaying households offer “a big opportunity,” to reduce sharing beyond individual families.

The company also acknowledged that competition is becoming a bigger issue. “Over the last three years, as traditional entertainment companies realized streaming is the future, many new streaming services have also launched,” the company said “While our US television viewing share, for example, has been steady to up according to Nielsen, we want to grow that share faster. Higher view share is an indicator of higher satisfaction, which supports higher retention and revenue.”

Management also called out “macro factors,” including sluggish economic growth, increasing inflation, Russia’s invasion of Ukraine, and some continued disruption related to Covid-19.

“Our plan is to reaccelerate our viewing and revenue growth by continuing to improve all aspects of Netflix—in particular the quality of our programming and recommendations, which is what our members value most,” the company said. Netflix said its goal is to sustain double-digit revenue growth, with faster growth in operating income, resulting in growing positive free cash flow.

On the earnings call, Netflix CFO Spencer Neumann said the company still expects to show positive growth for the full year in both revenues and net new subscribers.

Netflix said it had $923 million in net cash from operating activities in the quarter, with $802 million in free cash flow. The company ended the quarter with $14.6 billion in gross debt, and $8.6 billion in net debt. Netflix didn’t repurchase any shares in the quarter.

The subscriber weakness in the quarter was felt in multiple parts of the world. In the US and Canada, the company lost a net 640,000 subscribers, reducing the total to 74.6 million. Netflix blamed the losses on a recent round of price increases in both countries.

In the Europe, Middle East, and Africa region, the company lost 300,000 subscribers, including the loss of all Russian subscribers. In Latin America, the company had 350,000 net subscriber losses. That was offset by a net 1.09 million additions in the Asia-Pacific region.

Write to Eric J. Savitz at [email protected]