Netflix kicked off 2024 with growth, on Thursday reporting revenue and subscriber gains for the first quarter, including membership on its streaming plan with ads growing 65% compared to the fourth quarter.
However, starting next year, Netflix will no longer report quarterly subscriber numbers and average revenue per user updates.
In the first three months of 2024 Netflix added 9.3 million net paid subscribers – not as many as the whopping 13 million it added in Q4 but a significant increase from the 1.8 million it added in Q1 of 2023 and the 200,000 net losses it reported in Q1 2022. Its global subscriber base now stands at 269.6 million. Revenue in the quarter was up 14.8% year over year to $9.37 billion, while Q1 operating income of $2.63 billion was up 54% yoy.
That said, Netflix is now prioritizing financial results versus adding to its subscriber count. Noting that it now generates substantial profit and free cash flow, alongside variations in pricing and plans across regions and new revenue avenues like advertising and paid sharing, in its Q1 letter to shareholders, the SVOD giant said starting with Q1 2025 it will no longer be reporting quarterly subscriber figures or average revenue per member (aka ARM, which is Netflix’s metric for ARPU). It does plan to continue providing regional revenue breakouts and to announce “major subscriber milestones as we cross them.”
Asked by investment analysts on Thursday’s earnings call to elaborate on the decision, Netflix Co-CEO Greg Peters suggested subscriber and ARM metrics are no longer the best indicators for the company’s business. He noted Netflix continues to develop its revenue model to include aspects such as advertising and paid sharing that aren’t directly connected to the number of subscribers. It’s introducing multiple plan tiers and pricing plans, which vary across countries and where price points “are going to become increasingly different,” where Peters noted each incremental subscriber brings different business impacts.
“All of that means that that historical simple math that we all did…is increasingly less accurate in capturing the state of the business,” Peters said, adding the move is motivated by instead wanting to focus on key results such as revenue, margins, EPS, net income and free cash flow, among others.
Going forward, Netflix in its shareholder letter cited engagement as a key subscriber metric focus, where it will continue to release reports such as last year’s inaugural bi-annual Netflix Engagement Report released. On Thursday Co-CEO Ted Sarandos said that the company will look at the frequency of its reports and different ways it can make it easier for the market to track engagement progress.
“Why we focus on engagement is because we believe it’s the single best indicator of member satisfaction with our offering,” Sarandos said. “And it is a leading indicator for retention and acquisition over time.”
Q1 subscriber growth
As for the first three months of 2024, Netflix grew subscribers across all its major regions. And while we still get them, here are subscriber results for Netflix in Q1:
US/Canada: Added 2.53 million net subscribers in the quarter, for a domestic base of 82.65 million. Average revenue per member was up 7% year over year to $17.30.
Europe, Middle East and Africa (EMEA): Added 2.9 million subscribers for a base of 91.7 million. ARM was flat at $10.92.
Latin America (LATAM): Added 1.7 million paid subscribers for a base of 47.7 million. ARM was down 4% year over year to $8.29.
Asia-Pacific (APAC): Added 2.15 million subscribers for a base of 47.49 million. ARM was down 8% yoy to $7.35.
With member households across more than 190 countries and more than two people on average per household, Netflix’s shareholder letter said “we have an audience of over half a billion people [emphasis Netflix's].”
It follows a letter to shareholders from Amazon CEO Andy Jassy that disclosed Prime Video, which just launched ads on its service in January, counts more than 200 million monthly viewers globally.
In terms of what’s driving subscriber growth and a reversal from the declines seen a couple of years ago, Sarandos, zeroed in on consistently popular content, both domestically and abroad.
“This consistent and dependable and expected drumbeat of hit shows, films and games. That’s the business that we’re in,” Sarandos said.
He also called out “huge success” with recent forays into unscripted local content, specifically the second season of “Physical: 100” in Korea and “Love is Blind” in Sweden.
And Peters gave nods to Netflix’s technology and product, indicating the SVOD is getting better and better at being able to find audiences for its breadth of titles, with features that enable viewers discover content they like and will engage with on the platform.
As for promotion, Netflix thinks its own platform is a key tool. According to the letter to shareholders, trailers on Netflix generate over 6 billion impressions on Netflix every month, which it said is “more than 40x what they get on YouTube.”
Ads monetization lagging growth
On the ads front, Netflix reiterated that priorities are to scale the member base and to bolster capabilities for advertisers. At its last disclosure in January Netflix’s plan with ads, which launched in late 2022, had 23 million monthly active users.
In Q1 membership on Netflix plans with ads grew 65% quarter over quarter, with more than 40% of all signups coming from plans with ads in the markets its available.
However, it’s still early stages for the company’s advertising efforts, where Netflix CFO Spencer Neumann said monetization is lagging growth.
“We’ve been growing our inventory at quite a fast clip and so monetization hasn’t fully kept up with that growth and scale and inventory, as we’re still early in building out our sales capabilities and our ads products,” Neumann said.
Netflix still offers premium content with an engaged and growing audience, so CPMs remain strong, according to Neumann. The finance chief said ad revenue will follow engagement over time but acknowledged currently “is a bit of a drag on our ARM” because it’s under monetizing ads relative to supply.
“But over time we expect to be similar in revenue on our ads tier, combination of subscription as well as ads revenue, with those kind of non-ads offerings,” he commented.
Scaling ads plan, boosting awareness
Discussing plans to scale the ad-supported plan, Peters said Netflix in general is taking everything from the streamers’ SVOD membership growth playbook and applying it to the ads plan, including partners channels, device integrations, bundles, and integrated payments.
“Those are all important tools for growth, just as they are and will continue to be in our non ads offering,” Peters said.
And boosting awareness of the ads experience on Netflix– particularly as it compares to that of traditional linear TV – with a low ad load and cheaper price of $6.99 per month (in the U.S.) through marketing and other efforts is “part of our growth mechanism.”
The chief executive cited excitement over Q1’s continually high growth rate on the ads plan (which followed two quarters of around 70% sequential growth), while also noting “much much more to do” in terms of scaling, technical features and effective go-to-market efforts for the tier.
Executives also commented on how Netflix is thinking about the ideal price difference between its ads and ad-free plans, where Peters said the company doesn’t have a fixed position on the optimal pricing spread.
Some analysts, such as TVREV’s Alan Wolk, previously projected streamers would increase the disparity between ad-supported and ad-free tiers, in part to drive uptake of the latter and better capitalize on lucrative ad revenue.
Peters on Thursday said it’s taking signals from customers, such as plan take rates and conversion rates, to get to the right pricing. Ideal pricing is “not really a static position” as it will change as the product evolves, he added.
Citing a good general guideline long-term for Netflix, the co-CEO said, “it would be healthy for us to land overall monetization between our ads and non-ad offerings in roughly an equivalent position.”
For 2024 Netflix is forecasting full-year free cash flow of approximately $6 billion and cash content spend of up to $17 billion.