Netflix (NFLX) posted mixed fourth quarter results. The streamer reported earnings per share of $2.11 per share compared to estimates of $2.19. Revenue of $8.83 billion topped expectations of $8.71 billion. Investors are excited about the 13 million subscribers the company added in the quarter. First quarter guidance was also much better than expected.
Third Bridge Sector Analyst Jamie Lumley tells Yahoo Finance there were a few reasons why the subscriber growth popped in Q4, including the password-sharing crackdown and its scaling of its ad tier.
When it comes to the ad tier, Lumley notes the offering got off to a slower start than expected, but as streamers increasingly raise prices, "ad tiers could become increasingly attractive" to subscribers.

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Editor's note: This article was written by Stephanie Mikulich

Video Transcript

JULIE HYMAN: We have Netflix numbers just coming out here. And a mixed picture overall, but on balance positive for Netflix, whose shares are up 7% here in the after-hours session. Fourth-quarter earnings per share coming in at $2.11, that's actually a miss versus the 2.19 that analysts were estimating. Revenue, however, at $8.83 billion, is above estimates.

And let me give you the two most important numbers, it seems, here. First of all, how many subscribers did they add? Paid subscribers on a net basis up 13.12 million. That is much higher than the just around 9 million that was estimated. So big-- I wouldn't say blow out, but almost a blow out here in the paid subscriber additions here.

The other thing I'm zeroing in on here is the first quarter earnings per share forecast of $4.49, $4.09 is what analysts had been predicting. The revenue number for the first quarter, the revenue forecast from Netflix, is more in line to slightly below what analysts are estimating, but that earnings per share number is a pretty big beat vis-a-vis what analysts were looking for.

JOSH LIPTON: Yeah. I mean, for sure. Look at the initial reaction here, at least. Investors like this report. We are popping 5% here in the after hours. I think, Julie, you called out exactly the right metrics. I'll be really interested to just to get more color on a couple of key points. One, the ad-tier kind of numbers they're seeing there. We got an update recently. But how they see that evolving here, what kind of growth they expect in the quarters ahead?

And also, of course, we were talking about Allie Canal, the WWE deal that's going to come up. Is that a signal that Netflix is going to get more aggressive in traditional sports like Prime, like Peacock? And if so, does that change how much spending they'll do, at least how much investors and the street think they're going to be spending?

JULIE HYMAN: Yeah, a couple of things stand out to me in the shareholder letter, which always has lots of good nuggets here. The company talks about getting that ad-tier more sustainable, bigger, obviously, from a low base. One of the other interesting things they talk about are the changes that have been coming already, that entertainment, as they say, is a fast-changing industry, but that there are going to be more changes, that there's going to be more consolidation among companies with large and declining linear networks, they say.

Netflix says in this letter, we're not interested in acquiring linear assets, nor do we believe that further M&A among traditional entertainment companies will materially change the competitive environment, given that there's already been a lot of consolidation. So I thought that was sort of interesting here. Not that anybody thought that they were buying a linear asset. But it is interesting to hear that they say that.

JOSH LIPTON: The one thing you do hear about is that the kind of moves they've made in gaming. They've been out of that for a while now, and people are interested in how that evolves. So maybe they're not interested in traditional linear assets, but you have heard talk from analysts. Could they make a move in gaming? Something in that space would be interesting. As investors waiting to see how the gaming strategy evolves, and how exactly they're going to make money off it.

JULIE HYMAN: Yes, most definitely. All right, let's get some more perspective on all of this. For a closer look at Netflix's fourth-quarter results and that first quarter forecast we've got Jamie Lumley, Third Bridge Group's sector analyst. Good to see you, Jamie. So, I mean, again, I sort of thought that subscriber add was a wow. I don't know if it was a wow for you. But tell me what you thought of the numbers.

JAMIE LUMLEY: So certainly, the first number everyone looks at is a subscriber growth when we're talking about Netflix. And I think when we look at that 13 million, it certainly is large, it's one of the strongest quarters they've had in years. But they're also a couple of things which were indicators for why Netflix might be able to close out 2023 with momentum. They had the crackdown on password sharing, the page sharing launch, the ongoing scale of the ad-tier.

And what we've been hearing from our experts here at Third Bridge was that they were barely scratching the surface for the subscribers they could tap into with that crackdown on password sharing. So certainly, 13 million is an impressive number, but it will be really interesting to see what kind of momentum the company can continue with going forward.

JOSH LIPTON: And Jamie, with the stock up here in the after hours, more than 4.5%, interested to also get your perspective, and I was just talking to Julie about this too. Just on the ad-tier, Jamie, how you think about that? How you see the ad-tier kind of evolving from here?

JAMIE LUMLEY: So the ad-tier is definitely really interesting because it's a bit of a mixed story so far. When Netflix first launched the ad-tier at the end of 2022, there were very lofty goals, hoping for a 40 million monthly active users by the end of '23. And by the most recent numbers, the company announced they had 23 million earlier this year. It is seeing growth, but it's still a little bit behind expectations.

What we've been hearing is that there might have been a slight misjudgment of how open consumers are to advertising. But overall, as we look around the industry at how expensive non-ad-supported tiers are getting, seeing price increases from almost all the players, Disney, Warner Brothers, Discovery, and Netflix, over the last year, ad-tiers could become increasingly attractive. And as the content that's there is the same as on premium tiers, increasingly, users might look to that if they're looking for more discount options.

JULIE HYMAN: Jamie, I'm curious, and I'm looking, among other things, at the operating margin numbers here, which we did see dip a little bit sequentially in the fourth quarter. How's your satisfaction level with the spend, particularly the content spend that we're seeing from Netflix at this point?

JAMIE LUMLEY: Well, when you think about content spend, 2023 was a bit of an anomaly, as there was both this tempering of overall cap-ex levels for content spend as the industry as a whole starts to grapple more and more with focusing on profitability and seeing the ROI on content spend. And then also, with that as a backdrop, seeing the actors and writers strikes stop Hollywood for months.

We saw this in the Q3 cash flow for Netflix, the billion additional cash flow as a result of the lack of content spends, and also some of that trailing into the fourth quarter. So as we think about where they are today, they're still definitely leaps and bounds above the other streaming competitors out there, but the numbers they have are a little bit impacted by these other factors in 2023 and will definitely shift as we go into 2024 and think about what this company can achieve this year.

JOSH LIPTON: And Jamie, I'm interested to get your take too on this WWE deal, Jamie, and whether you see that as a signal that, yes, Netflix is ready here to get more aggressive in traditional sports, like Prime, like Peacock. Or no, this really isn't sports. This is more like live entertainment.

JAMIE LUMLEY: Well, whether you classify WWE as real sports is definitely a fiery issue. But if we think about what Netflix's ambitions here, I think the bigger focus is on live entertainment. And definitely, Netflix has increased its ambitions for this space. Last year, we saw a couple of events, from live comedy specials to Love is Blind Reunion, to the Golf Tour last fall, and now we have tennis this year. And coming in January 2025, the WWE. It definitely shows that Netflix wants to increase the live programming that it has.

This, just circling back to the ad-tier, is one thing which advertisers definitely like. Live programming is definitely a boon. And it's also a way to diversify that content base. Live programming, particularly something like the WWE, is not something Netflix has and could broaden its appeal and really bring a dedicated subscriber base to the platform. Now, what's next for them? This deal is $5 billion over 10 years for the WWE. That's definitely a lot of money. Whether they're also willing to spend at such levels for sports rights is still a question to be answered.

JULIE HYMAN: Jamie, what are you worried about when it comes to Netflix? Or are there any numbers in this report that you think are of concern?

JAMIE LUMLEY: Well, one of the things which if we circle or turn back time a little bit and think back to 2022, there were some stops and starts with Netflix subscriber numbers. It cannot grow forever, there are only so many people out there. So the question, of course, is ongoing, sustained engagement with consumers, managing churn numbers, and continuing to find new ways to reach audiences. So if we think about some of the newer initiatives for Netflix, there's a live programming, a new way to engage people.

There's also gaming. Is this going to be a big part for the company? How invested are they going to be in this segment? So far, they've made a few investments here and there, picking up a few small game studios, but they've shied away from any major M&A deals. So how invested they get in one of those areas could definitely determine some of the longer-term potential for ongoing engagement. The other thing is just content costs, it's still expensive. This is something Netflix is fighting with. It's something all the other studios are dealing with. So seeing how costs trend going forward is also another factor to keep in mind.

JOSH LIPTON: And Jamie, I just want to get you out of here on a topic you just touched on there, gaming, because it's another big focus for the street. Listen, they've been at it for some time, Jamie. So when you look at that business, though, what do you think they'll do? I mean, do you think they're going to come up with new ways to monetize that business, make money on it? Do you think they're going to pull the trigger on some M&A?

JAMIE LUMLEY: So we've been hearing a few things on this topic. First on the M&A front. The experts that we speak to, by and large, think that Netflix will more likely than not continue on this incremental growth, not want to make any big splashes and potentially have missteps, to define the best way to combine their IP some of the franchises they've been able to build with a new way to engage consumers.

So if we look at where they are right now, it's still a very small portion of Netflix's base which engages with gaming, but it is growing. 2023 saw over 100% growth in downloads and engagement with their apps. So there's definitely some momentum being built there. It's just how they want to approach sustaining this, which is the big question. When it comes to larger M&A, it could help them cement this, find a good way to monetize their IP in a way which Warner Brothers, Discovery, or Disney has, and turning some of their biggest franchises into big hit games. But Netflix is still trying to figure out what makes the most sense for them to continue that growth going.

JULIE HYMAN: Squid Game game maybe, I don't know. Jamie Lumley, thank you so much. Appreciate it.

JAMIE LUMLEY: Thank you.