Netflix (NFLX) shares nudged lower Tuesday ahead of its first quarter earnings report as investors look to the impact of its recent password sharing crackdown on the streaming entertainment group's top and bottom lines.
Analysts expect Netflix to post March quarter profits of $2.86 per share, a 19% decline from the same period last year on revenues of $8.175 billion. Netflix itself forecast earnings in the region of $2.82 per share and revenues of $8.17 billion earlier this year.
The likely focus of the report, however, will be any commentary or data Netflix provides to indicate that its recently-adopted strategy of paid sharing -- which allows users to share a single password for an extra monthly fee -- is adding to incremental revenue gains or increasing customer churn.
Netflix no longer provides specific guidance on new subscribers, adding this year that it only that it sees a "modest" increase in new additions over the first quarter, but Street forecasts suggest the gain could be as high as 2 million.
Revenue from that boost however, is likely to be mixed, following the launch of its password-sharing crackdown earlier this year and the unveiling of price cuts in certain countries aimed at maintaining market share.
The price cuts are likely to lower the growth rate for Average Revenue Per User, often called ARPU, heading into a year in which streaming competition is expected to intensify.
Netflix has said password sharing, which involves an estimated 100 million households that aren't currently paying for the service, "undermines our long-term ability to invest in and improve".
Netflix's new password sharing crackdown, which uses location services data, could provide an offsetting revenue spike as users pay the added fee required to use a device to access Netflix at different locations.
Netflix rolled out the first phase of its 'paid sharing' effort last month in Canada, New Zealand, Spain and Portugal, and will likely launch its main U.S. focus before the first half of the year.
That will boost overall net subscriber additions, which are expected to rise by 3.43 million over the three months ending in June, but the revenue gains for each new sub gained by signing up to a password sharing account will be around half of a full-scale membership.
"Our search query analysis suggests churn from paid sharing reaches a peak in its first 2-3 weeks, before returning to more normal levels<" said KeyBanc Capital Markets analyst Justin Patterson, who carries a 'sector weight' rating on Netflix.
"If Netflix provides a timeline toward subscriber or revenue incrementality, we suspect shares trade higher independent of results and guidance," he added. "If new details are not provided and/or the 2Q paid net add inflection is walked back, we believe shares could experience some near-term headwinds."
And, with overall viewership figures down when compared to last year, Netflix will also have to lean on its newly-launched ad service, also priced at less than half the cost of its basic streaming offering, to offset ARPU weakness.
Netflix said it's "ridiculously early" to judge its success, but indications are that the product experience is solid and advertising take rates are improving. CFO Spencer Neumann even went as far as to say it could be as big as Hulu -- the market leader that's partly owned by Walt Disney DIS -- "over the next several years."
This quarter's earnings will also be the first without co-founder Reed Hastings at the helm following his decision to transition to the role of executive chairman late last year.
Hasting's co-CEO, Ted Sarandos, will remain in place, but will relinquish his role as chief content office -- replaced by Bela Bajaria -- and will be joined by current COO Greg Peters.
The leadership changes come amid the biggest outside challenge to Netflix's market leadership, particularly as Disney (DIS) vows to boost content spending.
Even with Disney shifting focus from from subscriber growth 'at any cost' to longer-term profitability, its broad slate of live and on-demand offers, from television to sports to legacy films, makes it a formidable opponent and, at $10.99 per month, remains priced at a discount to Netflix's ad-free platform at $15.99 per month.
Paramount Global (PARA) and Comcast-owned (CMCSA) Peacock are also ramping-up content spending, leaving Netflix with few options but to carry on ploughing around $17 billion a year into new programing -- not all of it designed to fit in an ad-based structure -- in order to ensure subscriber retention.
Warner Bros Discovery WBD, meanwhile, will launch its new 'Max' streaming service, which pairs Discovery reality shows with HBO's broad range of movies and television, on May 23,
"Beyond the (ad supported platform) introduction and streaming competition, Generation Z preference for short-form TikTok content versus traditional linear streaming content is another competitive element," said Benchmark analyst Matthew Harrigan. "Management indicated it has still not found a way to make live sports economic although it is experimenting with fitness."
Netflix shares were marked 0.4% lower in early Tuesday trading to change hands at $331.37 each, a move that would trim the stock's year-to-date gain to around 13%.
