Earlier this week Netflix (Nasdaq: NFLX) reported its first-quarter performance that failed to impress the market. With the global pandemic restrictions easing, the company appears to be struggling to attract and grow its user base.

Netflix’s Financials

Netflix’s Q1 revenues grew 9.8% to $7.87 billion, falling short of the Street’s forecast of $7.93 billion. EPS was $3.53, ahead of the market’s forecast of $2.89.

During the quarter, it lost 200,000 subscribers, compared with the 2.5 million paid subscribers that it had expected to add. The market was expecting it to add 2.7 million net new subscribers. For North America, Q1 revenue was $3.4 billion with paid memberships of 74.6 million. It lost 640,000 net customers in the US and Canadian markets. Europe, Middle East, and Africa revenue was $2.7 billion, and paying customers were 73.7 million, a net loss of 300,000 subscribers. Latin America’s revenue was $999 million from 39.6 million paid members, with a net loss of 350,000 subscribers. Asia-Pacific revenue was $917 million from 33.72 million subscribers, recording a growth of 1.09 million net subscribers.

For the current quarter, Netflix forecast earnings of $3.00 per share on revenue of $8.05 billion. The market was looking for revenues of $8.21 billion and an EPS of $2.79 for the quarter.

Netflix’s Next Games Acquisition

Recently, Netflix announced its acquisition of Finland-based Next Games for an estimated €65 million (~$68 million). Founded in 2013 and led by Teemu Huuhtanen, Next Games is known for making and operating mobile games that are focused on global appeal and deliver an authentic and social fan experience. It develops games based on popular entertainment IP, such as Stranger Things: Puzzle Tales, a story-driven puzzle role-playing game (RPG) inspired by one of Netflix’s most-watched series.

For 2020, Next Games had reported revenues of €27.2 million (~$28.6 million) 2020, with 95% of revenues coming from in-game purchases. The acquisition will allow both companies to work together and develop games based on some of Netflix’s popular entertainment IP. Prior to the acquisition, Next Games had raised $20.8 million in 4 rounds of funding led by Business Finland, Lionsgate, Ridge Ventures, Jari Ovaskainen, AMC Networks, Lowercase Capital, Nuard Ventures, and IDG Capital. Its most recent round was held in November 2019 where it raised €2 (~$2.1 million).

Netflix’s Strategy

At the start of the pandemic, when people were stuck indoors, viewership for Netflix and other streaming services had soared. But, the ebbing pandemic, opening of the economy, and global conditions have resulted in the recent drop in the subscriber base. By expanding its presence into the gaming market, Netflix is hoping to diversify its offerings, as well as attract and retain its user base.

Meanwhile, the company continues to invest heavily in content and has been forced to recover its investments by increasing prices for its services. Last quarter’s price hike is expected to have fueled the loss of 600,000 subscribers in the U.S. and Canada. It also suspended its services in Russia, winding down all Russian paid memberships that resulted in a loss of 700,000 subscribers.

The company is also seriously mulling over adding an advertising-based tier in its subscription offerings. For all these years, Netflix has managed to keep advertising away from its content. But the rising costs are making it reconsider that decision. With an ad-supported tier, Netflix is hoping to reach out to more users of different economic backgrounds, while getting access to advertising revenues. Some analysts estimate that Netflix could add $9 billion to its top-line with the advertising business. Netflix is not the only player to offer an ad-based tier. Disney+ is expected to release an ad-based tier itself later this year.

Netflix is also cracking down, yet again, on password sharing, and is hoping that its actions will help address the lull in paid subscriptions. Netflix estimates that in the US and Canadian markets, over 100 million subscribers are sharing passwords. It recently introduced new password-sharing pricing plans that are expected to monetize this market segment as well.

Its stock is trading at $188.32 with a market capitalization of $83.7 billion. It hit a 52-week high of $700.99 in October last year and a 52-week low of $185.60 in April.