Netflix Finally Shreds an Outdated Metric
Netflix (NASDAQ: NFLX) really shouldn't be measured by the number of subscribers it adds in each quarter. This end-all, be-all metric of yesteryear is now so insignificant that the company will stop providing guidance for it.
What's new?
Along with Tuesday's impressive third-quarter report, Netflix also laid out some long-expected changes to its quarterly guidance program. Specifically, this report will be the last time Netflix provides guidance for the next period's paid subscriber totals or quarter-by-quarter membership growth. In January's fourth-quarter update, these targets won't be there anymore.
Instead, Netflix's management suggests that investors should focus on the company's top-line revenue.
"We are increasingly focused on revenue as our primary top line metric," the letter to shareholders stated. "This will become particularly important heading into 2023 as we develop new revenue streams like advertising and paid sharing, where membership is just one component of our revenue growth."
The subscriber counts aren't going away. Netflix will continue to report these results, both from a global perspective and for each of its geographic operating regions. But the forward-looking guidance -- which has often had market-moving powers in the past -- is going away.
Out with the old, in with the new. Image source: Getty Images.
A brief history of Netflix guidance changes
This is not the first time Netflix has updated its guidance policy. Once upon a time, investors paid close attention to the company's total subscriber count, including people enjoying the service with a free trial. The last guidance for free trials came in the fourth quarter of 2019. "Under this new reporting format, we'll only provide membership guidance for global paid memberships for the next quarter with each earnings report," the company said in its shareholder letter.
These days, Netflix doesn't even offer free trials to new subscribers.
These guidance changes are usually tied to a significant shift in Netflix's overall business. The end of guidance for free trial accounts came when Netflix redesigned its reporting of domestic and international figures. In the old model, the company broke out financial results for the U.S. market and international streaming. Now it gives numbers for Latin America, Asia Pacific, EMEA (Europe, Middle East, and Africa), and a combined tally for the U.S. and Canada. Updating the guidance structure at the same time made plenty of sense.
Go all the way back to the end of 2011, and you'll see the opposite end of this week's policy change. That was the first time Netflix reported paid membership figures at all, immediately advising investors to focus on the new metric above all else.
"Since paid membership drives revenue and profit, we believe a focus on this metric is most relevant for our financial discussions," said the letter to shareholders in the fourth quarter of 2011.
That was then, and this is now. Over the years, Netflix has evolved its thinking and business model, and paid subscribers are no longer the bee's knees.
The redesigned guidance structure points to significant differences in the company's overall operations. It's all about the revenue now, even if that focus occasionally leads to stagnant or lower subscriber tallies.
Netflix is moving on
Netflix added 2.4 million subscribers in the third quarter and expects to add 4.5 million names in the current operating period. But you should really shrug those numbers off and refocus on revenue and average revenue per member (ARM) instead.
On that note, Netflix expects a 6% higher ARM in the fourth quarter and a 9% year-over-year revenue boost, all measured globally while backing out currency exchange effects.
That's the deal nowadays. Netflix has refocused on robust revenue streams, feeding into growing earnings and free cash flows over time. Netflix critics have been asking for this sort of strategy shift for years, and now it's here. The bears have been fed, and I think this sets Netflix investors up to make money in the long run after a painful plunge in 2022.
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Anders Bylund has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
