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After two consecutive quarters in which its forecast growth in the number of subscribers has been exceeded, Netflix Inc. hopes to put an end to the sharp fluctuations in its stock by slightly changing its accounting.
At the start of the Technology Gains Season on Tuesday, Netflix
NFLX, + 3.98%
experienced a surge in subscriber growth over the quarter, resulting in a nearly 14% jump in after-hours trading. Three months ago, Netflix announced a weaker than expected subscriber growth, dropping its stock by about 12% on the next trading day.
Since the last quarter: do the Netflix shares fall on a mountain or fall on a molehill?
As a result, Netflix will no longer include free trial subscriptions in its total net additions from 2019, as this data "adds noise to our membership forecasts in a non-proprietary way. significant, "said the company's senior executives Tuesday in a letter to shareholders.
The result will be a slightly lower number of subscribers-prospects, as these will exclude those who sign up for a free 30-day trial, and then cancel the service after viewing a couple of looped shows.
"Paid net additions are a more reliable indicator of revenue growth," added Netflix.
The changes will begin with the fourth quarter results in January 2019, when Netflix will provide guidance only on its paid members. A year later, he will stop reporting the number of free trials at the end of the quarter.
In addition, for the next quarter, Netflix indicated that it would also reclassify some staff costs for overhead and administrative expenses and transfer them to content and marketing. This will also shift some technology and development costs to other revenue costs, as more and more employees are involved in content development as we migrate to produce even more content than licensing original or non-original content. " move will give investors more information about its spending in creating original content.
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"This reclassification would have no impact on total operating expenses, operating profit or operating margin," Netflix management said. "If this law is passed, we will provide quarterly pro forma minutes for investors to see the change properly.
Both initiatives show that Netflix is growing and maturing and is changing its way of doing things to reflect this new reality. If the company can more accurately predict its paying subscribers by removing the less predictable unsubscribe element of free trials, Netflix shares should be less volatile.
The information also represents more transparency for investors in Netflix, which is beneficial for a company that is still doing strange things, such as the pre-recorded and overvalued analyst interview instead of a call for results. Netflix is ready to try new approaches as it seeks stability in a rapidly changing environment. The priority should be to directly change the way it communicates the results to its investors.
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