Starting in 2025, the company will no longer report one of its most closely watched metrics.
Netflix (NFLX -9.09%) just filed an impressive first quarter report, but the most surprising part of the earnings wasn’t in the headline numbers.
Instead, it was management’s decision to stop reporting quarterly subscriber numbers. This represents a fundamental shift in the way investors view businesses.
For years, subscriber growth has been the benchmark by which Netflix is judged. The stock has a history of swinging wildly based on quarterly subscriber growth versus management’s own guidance and investor expectations.
Netflix stopped providing guidance to its subscribers last year because management decided it wasn’t as important to understanding the business as overall revenue growth. The move foreshadowed Thursday’s decision to stop reporting the indicator altogether from 2025.
Image source: Netflix.
Why subscriber growth isn’t that important
A company’s decision to stop reporting key metrics often looks like obfuscation. Management doesn’t want to report certain metrics because they can make the company look bad. For example, some companies in the retail and restaurant sectors have stopped reporting comparable sales on a monthly basis, much to the chagrin of investors looking for more frequent updates than quarterly.
But Netflix’s decision to divest from subscriber numbers appears to be justified. The business model has changed significantly in recent years with the launch of ad-supported tiers and a crackdown on password sharing. We currently have multiple ad-free slots at a wide range of price points, as well as additional member options.
That means Netflix has several ways to make money from users who pay a variety of fees, including ad revenue.
Additionally, Netflix says it focuses on engagement over individual subscriptions because it believes engagement is the best indicator of future growth and success. For example, a highly engaged subscriber in an ad-supported tier can earn a higher rate of return than a subscriber who only watches a few hours a month because advertisers pay to display ads. Masu.
Why it’s a win for the entire streaming space
After stumbling in the aftermath of the pandemic, Netflix has regained its momentum thanks to the launch of ad-supported slots, a crackdown on paid sharing passwords, and a normalization of streaming demand.
The company just reported its best fourth quarter of subscriber growth on record, excluding the pandemic, and achieved a record operating margin of 28.1% in the first quarter.
While most of Netflix’s traditional media peers have struggled with the transition to streaming, the company’s decision to stop reporting quarterly subscriber numbers could help by covering similar efforts. be. Quarterly subscriber growth is notoriously volatile, and Netflix’s stock has plummeted several times in its history by a quarter of its earnings, then as subscriber numbers improve. It rebounded in the next quarter. Quarterly subscribers may be influenced by new content on the platform, competitive activities and other television events, such as the Olympics.
Focusing on revenue growth instead smoothes out the growth of a subscription model over a full year, not just the number of net new subscribers who joined the service in a given quarter.
Netflix’s competitors include: disney, warner bros discoveryand paramount global, many companies have reported that their subscriber growth has slowed recently, but by having investors judge their efforts based on financial metrics such as revenue growth and operating margins, It could make these companies look better. And if they have a history of copying each other’s moves, by launching their own ad-supported tiers or cracking down on password sharing, that’s easy to do.
It’s unclear whether these competitors will use this opportunity to pull back from their subscriber growth reports, but it could be in their interest to do so since other numbers are less volatile.
Once again, Netflix is setting the standard for the streaming industry, but its peers can also benefit from its latest decisions. Shifting the focus away from quarterly subscriber growth could be a win for the streaming sector as a whole.
Jeremy Bowman has held positions at Netflix and Walt Disney. The Motley Fool has positions in and recommends Netflix, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
