Netflix added 1.5 million subscribers in its latest quarter, another period of much slower growth than the leaps in popularity it enjoyed a year earlier when people around the world were stuck at home and desperate for distraction in lockdown. Though Netflix added subscribers in most regions of the world, it lost members in the US and Canada -- its biggest single market -- for the first time since 2019.
The company also confirmed it would expand into gaming, planning to start with ad-free mobile video games on its existing service at no added cost to subscribers.
The world's dominant streaming video subscription service, Netflix said subscribers grew by 1.54 million to 209.2 million total between April and June, according to its second-quarter results released Tuesday. That narrowly beats Netflix's April guidance that it would add 1 million new members, which analysts' consensus expectation basically matched, according to a survey by Thomson Reuters.
But Netflix's guidance for the third quarter that it expects to add 3.5 million new members paled in comparison with the 5.5 million that analysts anticipated.
The company pointed squarely at the effects of COVID-19 for creating "some lumpiness" in its membership growth. Indeed, Netflix's growth slowed dramatically so far this year, after it enjoyed surges in popularity from people hungry for entertainment during pandemic lockdown last year.
But Netflix has also faced a wave of competition from new rivals like Disney Plus and HBO Max, as media and tech giants have launched their own services to take on Netflix as television transitions to a future of streaming. Executives dismissed the threat posed by its new rivals, saying members are continuing to watch a lot of Netflix.
"Does HBO or Disney or [another entrant] have a differential impact compared to the past?" Reed Hastings, co-CEO of Netflix, said Tuesday. "We're not seeing that."
But Netflix's rare subscriber loss in the US and Canada hinted that the new competition, which is centered in the US, may be pressuring Netflix's membership growth there. In those two countries, Netflix lost 430,000 streaming customers, for a total of nearly 74 million. Netflix posted a loss of US members in 2019. Before that, it hadn't happened since 2011.
"It should be clear by now that the US streaming market has become much more competitive over the past few years, as new entrants and established players have prioritized streaming content while cutting subscription prices to attract new users," MoffettNathanson analyst Michael Nathanson said in a note Wednesday. "Netflix's position as a first mover is clearly being challenged."
Shares in Netflix opened 5.1% lower at $526 on Wednesday. Through Tuesday's close, Netflix stock had fallen 1.3% so far this year, underperforming the market at large.
In addition to citing the "lumpiness" in growth caused by COVID, Netflix has also pointed to a lighter slate of new programming in the first half of the year. Even though its ambitious production schedule kept the service stocked with new titles through much of 2020, COVID-19's delays to movie and TV production finally caught up with Netflix this year, and its cadence of new material was much lighter in the first half than it was a year before. Netflix had long warned that some of the surges in its membership may have pulled forward demand, essentially reeling in subscribers earlier than would they would have joined otherwise. That set up the potential for dry spells, like the one that seems to be playing out now.
Elsewhere in the world, Netflix's growth was muted as well. In Europe, Middle East and Africa, the company added a slim 190,000 members. In Latin America, its membership increased by 760,000. And in the Asia Pacific region, the area with the most growth, Netflix added 1.02 million members.
Overall, Netflix reported a profit of $1.35 billion, or $2.97 a share, compared with $720.2 million, or $1.59 a share, a year earlier. Revenue rose 19 percent to $7.34 billion. Analysts on average had expected earnings of $3.16 per share and revenue of $7.32 billion.
Looking ahead to the third quarter, Netflix predicted $2.55 per share in earnings in the third quarter. On average, Wall Street analysts who track Netflix expect $2.17.
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