Netflix Is Expected to Log Smaller Profit as It Spends More on Content

This challenge is likely to become more apparent in Netflix’s fourth-quarter earnings results, which are set to be released Thursday afternoon.

Netflix projected 8.5 million net new subscribers for the period, in line with the prior year’s fourth quarter. Wall Street’s consensus forecast is 8.3 million, according to FactSet.

Analysts are expecting the company to report quarterly earnings of 83 cents a share, compared with a profit of $1.19 a year earlier. Revenue is predicted to hit $7.71 billion, up from $6.64 billion.

Netflix’s subscriber growth has faded since a surge in sign-ups occurred during the early days of the pandemic in 2020, when lockdowns intended to deter the spread of Covid-19 led people to spend most of their time at home. The reopening of the economy after the rollout of Covid-19 vaccines has helped drive more people away from their screens. Competition has also grown, with the likes of Amazon.com Inc.’s AMZN -1.65% Prime, AT&T Inc.’s T -0.11% HBO Max and Walt Disney Co. DIS -1.42% ’s Disney+ bolstering their content lineups.

“The industry is still digesting outsize growth from the pandemic,” UBS Securities analyst John Hodulik said.

Netflix backloaded 2021 with hits, including the return of the dark drama “You” and the series “Cobra Kai.” Movies such as “Red Notice,” starring Dwayne Johnson, Ryan Reynolds and Gal Gadot, and “Don’t Look Up,” starring Leonardo DiCaprio and Jennifer Lawrence, also were released during the fourth quarter.

“Don’t Look Up,” a satire about a comet that is on a collision course with Earth, logged more than 152 million hours of viewership on the streaming platform in the week ended Jan. 2, making it the most-viewed show on the service as measured by weekly data going back to the summer. The “Don’t Look Up” results come after the success of “Squid Game,” a South Korean dystopian drama that made its debut in September and became a global phenomenon.

To keep the content flowing, analysts say that Netflix needs to keep raising prices to offset programming costs.

Last week, Netflix increased the price for its monthly plans in the U.S. and Canada, the first such boost from the streaming platform since 2020. By contrast, it cut its prices in India last month to better position itself against rivals in a crucial growth market.

Netflix said in October that its loaded content-release schedule was likely to put pressure on margins during the fourth quarter. The company projects an operating margin of about 6.5%, lower than the 14% it had in the comparable period a year earlier. It expects content write-downs to increase 19% over the prior year, compared with 8% growth at the end of September.

Despite the flood of new content and the success of “Squid Game,” subscriber momentum might have eased in the quarter as other streaming services offered their own original content. Disney+ experienced a bump in app downloads in December thanks to releases such as “Hawkeye” and “The Book of Boba Fett,” as did ViacomCBS Inc.’s VIAC -0.40% Paramount+ with releases such as “Clifford the Big Red Dog,” “Mayor of Kingstown” and the “Yellowstone” prequel “1883,” Mr. Hodulik of UBS said.

Many analysts expect much of Netflix’s growth in the coming year to come from international viewers. Gains in Asia, in particular, might drive potential subscriber upside, Bank of America Global Research Analyst Nat Schindler said.

To attract new audiences, Netflix is expected to spend more in those markets. “This international growth will increase pressure for the company to develop more and more localized content, with content costs continuing to rise in lockstep with subscriber growth,” said Michael Pachter, an analyst at Wedbush Securities.

Disney is following a similar playbook.

After reporting a significant slowdown in Disney+ subscriber sign-ups for its fiscal fourth quarter ended Oct. 2, the company on Wednesday made changes to its streaming management and launched a hub dedicated to international content creation. Longtime Disney executive Rebecca Campbell was appointed to oversee the hub.

Write to Kimberly Chin at [email protected]