Netflix (NFLX) shares bumped higher Tuesday ahead of its highly-anticipated second quarter earnings after the close of trading, with investors focused on the group's plans for an ad-supported addition to its market leading streaming service.
Netflix, which lost 200,000 subscribers over the the first three months of the year, warned that it expects to have lost another 2 million over the second quarter thanks to a mix of rising prices, increasing competition and password sharing.
The group moved to address at least part of that equation earlier this week when it unveiled plans to raise prices in five countries in Latin America for customers accessing Netflix in more than one home.
Netflix is also working with Microsoft (MSFT) on an ad-supported version of its service that will be "more integrated and less interruptive” than traditional television.
"It's very early days and we have much to work through. But our long term goal is clear," Netflix said earlier this month. "More choice for consumers and a premium, better-than-linear TV brand experience for advertisers. We're excited to work with Microsoft as we bring this new service to life."
The launch of the service, after years of push-back from co-founder Reed Hastings, marks not only a sea-change for Netflix but also for its larger streaming rivals.
Walt Disney (DIS), which is nipping at Netflix's heels in terms of subscriber additions, said late Monday secured a record $9 billion in ad spending commitments for its coming fiscal year.
Known as "up fronts", the advertising purchases suggest faith in both the group's expanding digital platforms, including ESPN and Hulu, as well as its plans to introduce a tiered service for its Disney+ streaming platform.
An ad-support plan could bring in an additional 4.3 million subscribers in the U.S. and Canada, Netflix analyst John Blackledge from Cowen estimated earlier this month, helping its global total rise to around 240 million by the end of next year.
"Connected TV advertising is still early innings in Latin America and (the Asia Pacific region), so an ad-supported tier likely would not be material at launch," said KeyBanc Capital Markets analyst Justin Patterson," who carries a 'sector weight' rating on Netflix stock. "By contrast, the U.S. and Western Europe are fairly developed (the U.S. significantly more so), which provides Netflix more opportunity to ramp."
Estimates vary as to how much Netflix will be able to charge advertisers for the so-called "cost per thousand", or CPM, an industry term for the price of a thousand ad impressions, but Patterson suggests its could be as high as $60, around twice what Roku (ROKU) is able to change.
The service is likely to cost subscribers around $10, compared to $15.49 for a standard plan and $19.99 for a premium Netflix subscription.
"However, it is unclear whether that is strictly for tentpole content like Stranger Things or also achievable on smaller originals like Too Hot to Handle," he added, noting that once those details are established, it will be easier for analysts to calculate "the growth required to outpace licensed cost increases."
Netflix's first quarter earnings were essentially solid, with a bottom line of $3.53 per share that came in firmly ahead of the Street consensus forecast of $2.89 per share and group revenues that were 10% higher than last year, at $7.87 billion, and just behind analysts' estimates of a $7.93 billion tally.
Netflix also said it expects to be free-cash flow positive for the 2022 year and beyond, with first quarter free cash flow rising 15.9% to $802 million.
For the three months ending in June, Netflix is expected to post a bottom line of $2.95 per share with revenues rising 9.5% from last year to $8.04 billion.
Netflix shares were marked 0.43% higher in early Tuesday trading to change hands at $191.93 each, a move that would still leave the stock nursing a year-to-date decline of around 69%.
