Netflix Inc.


NFLX 5.61%

suffered two consecutive quarters of subscriber losses for the first time in its history as the streaming giant faces continued pressure from stepped-up competition and high penetration in major markets.

The company lost 970,000 paid subscribers, fewer than the 2 million it had expected to lose. Netflix estimated it would add 1 million net new subscribers in the current quarter.

Netflix shares were up 6% in after-hours trading. The stock has had a rough 2022, losing about two-thirds of its value since the start of the year.

Revenue came in lower than expected, growing 8.6% to about $8 billion, while operating income fell 15%. Netflix said foreign-exchange fluctuations weighed on revenue and profitability, and projected that revenue growth would slow to 4.7% in the third quarter.

“Our challenge and opportunity is to accelerate our revenue and membership growth,” the company said in a letter to investors on Tuesday.

Netflix is working on a series of moves to boost its subscriber base and revenue, including introducing a lower-price ad-supported version of its service in early 2023 and cracking down on password sharing. It also has been looking to cut costs. The company laid off about 5% of its workforce in recent months, according to a person familiar with the matter.

In a letter to shareholders Tuesday, Netflix said it would likely start its ad-supported tier “in a handful of markets” where advertising spending is significant. “Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering. So, our advertising business in a few years will likely look quite different than what it looks like on day one,” the company said.

Netflix last week said

Microsoft Corp.

would supply technology to facilitate the placement of video ads. The company has said it is trying to create an ad experience that is less disruptive than ads on traditional TV but it hasn’t specified how many ads per hour of content the new service will feature or what format they may take.

When it comes to limiting password sharing, Netflix said it was working on monetizing the 100 million-plus households that are watching Netflix without directly paying for it. It said it launched two different approaches in Latin America to learn more. “Our goal is to find an easy-to-use paid sharing offering that we believe works for our members and our business that we can roll out in 2023,” the company said in its letter.

After years of breakneck growth fueled by international expansion, Netflix saw the pace of customer additions slow over the past couple of years as it faced competition from an array of new entrants, including

Walt Disney Co.

’s Disney+,

Warner Bros. Discovery Inc.’s

HBO Max and

Apple Inc.’s

Apple TV+.

A scene from ‘Bridgerton’ season 2. Netflix executives have said they need to release a hit nearly every month to keep subscribers engaged.



Photo:

NETFLIX

The industry’s competitive challenges are heightened by a tougher economic environment, which means consumers may pull back spending on things like streaming, Morgan Stanley analysts said in a note Monday. The bank expects economic strains on consumer budgets might make them trim the number of streaming services they use.

The second quarter included the release of the first seven episodes of the fourth season of “Stranger Things,” one of Netflix’s most popular franchises. Unlike earlier seasons, Netflix stretched out the release of the series’ latest season, with the first part landing May 27 and the final two episodes landing on July 1. That staggered release means the season was spread over three calendar months and two quarters.

“Stranger Things” drew 1.3 billion hours of viewing in its first month, Netflix said, its largest-ever season of an English-language TV series.

Netflix’s subscriber count fell for the first time in nearly a decade, causing its stock to post its worst one-day percentage decline since 2004. WSJ’s Joe Flint walks us through three strategies the company might try to continue growing, and what the changes could mean for other streamers. CORRECTION: An earlier version of this caption said Netflix’s stock plummeted to its lowest point since 2004.

Other releases the company highlighted in its letter as successes during the quarter include “Hustle,” a drama starring Adam Sandler, legal drama “The Lincoln Lawyer” and the third season of action series “The Umbrella Academy.” Netflix executives have said they need to release a hit nearly every month to keep subscribers engaged.

Netflix continues to invest in animated features, build out its gaming pipeline and add new shows and movies in languages other than English to appeal to global audiences, the company said.

The service’s rate of customer defections—known in the industry as churn—increased in the U.S. when it raised prices in January and since then has remained elevated relative to the company’s typical churn rate, according to data from research firm Antenna. That churn is still lower than what many rival subscription streaming services have experienced in recent months, according to Antenna.

Net profit was $1.44 billion, up 6.5% from $1.35 billion a year earlier.

Write to Sarah Krouse at sarah.krouse+1@wsj.com

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