Netflix's profit drops 18% as streaming giant winds down DVD business

The company reported a net profit of more than $1.3 billion in the March quarter

Netflix's number of paid subscribers jumped 5 per cent year on year to nearly 232.5 million in the three months to March 31. AFP

Netflix reported an 18.2 per cent year-on-year drop in first-quarter net profit, despite gaining paid subscribers between January and March.

The company announced its results after declaring it would wind down its 25-year-old DVD-by-mail business on which it was built.

The world’s largest streaming service reported a net profit of more than $1.3 billion in the three-month period to the end of March.

The company earned a revenue of more than $8.16 billion during the quarter, up nearly 3.7 per cent on an annual basis but falling slightly short of analysts' estimate of more than $8.18 billion.

Earnings for each share dropped 18.4 per cent on a yearly basis to $2.88, exceeding estimate of $2.86.

The number of paid subscribers jumped 5 per cent year on year to nearly 232.5 million in the three months to March 31. Netflix added 1.75 million streaming subscribers during the January-March period, missing analyst estimates of 2.06 million.

The company said it would ship its final discs from DVD.com on September 29.

“Our goal has always been to provide the best service for our members but as the DVD business continues to shrink, that’s going to become increasingly hard,” Netflix said.

“Our members loved the choice and control that direct-to-consumer entertainment offered … DVD paved the way for streaming, ensuring that so much of what we started will continue long into the future.”

The company’s operating income in the last quarter reached $1.7 billion, compared to $2 billion it earned in the same period last year.

This was above its guidance forecast of $1.6 billion due to "ongoing expense management and timing of hiring and content spend".

The streaming giant also pushed back the broad introduction of its password-sharing crackdown.

More than 100 million households, or over 42 per cent of Netflix’s global user base, are enjoying the video streaming platform through sharing of passwords but they are not directly paying to Netflix, according to the company’s records.

Cast of Netflix's Stranger Things series. Its season four hit more than one billion hours viewed. Reuters

Paid sharing is an important initiative as “widespread account sharing undermines our ability to invest in and improve Netflix for our paying members, as well as build our business”, the company said.

Earlier, the California-based company said password-sharing crackdown would take place in the first quarter, but on Tuesday it announced it would implement it in the second quarter.

“While this means that some of the expected membership growth and revenue benefit will fall in the third quarter rather than second quarter, we believe this will result in a better outcome for both our members and our business,” the company said.

“The launch in the second quarter will be broad, including the US and the bulk of our countries when we think about it from a revenue perspective,” said Netflix’s co-chief executive Greg Peters on earnings call.

After the earnings announcement, shares of Netflix dropped more than 10 per cent in after-hours trade but soon recovered to gain 1.4 per cent. They were trading 0.34 per cent down at $332.5 a share at 7pm New York time. The company’s shares have jumped more than 13 per cent since the start of the year.

The company expects revenue of more than $8.2 billion and a net income of $1.28 billion in the current quarter that will end on June 30.

Netflix said it is on track to meet its full-year 2023 financial objectives.

Netflix delivered a strong content slate in the first quarter. This included successful returning seasons such as Outer Banks, You, Ginny & Georgia and a big sequel film Murder Mystery 2.

The company said it expected to spend in the range of nearly $17 billion in 2024 on content.

The company’s net cash generated by operating activities last quarter stood at $2.2 billion, up nearly 144 per cent on an annual basis. Free cash flow jumped to $2.1 billion during the period.

Assuming no material swings in the foreign exchange, Netflix now expects at least $3.5 billion of free cash flow for the full year of 2023, up from its prior expectation of at least $3 billion.

Gross debt at the end of first quarter totalled $14.5 billion, in line with the company’s targeted range of $10 billion to $15 billion.