Highlights

• Netflix gains 8 million new subscribers in Q2
• Diluted per-share earnings exceed forecasts at $4.88
• Cautious guidance for Q3 subscriber growth
• Advertising business grows 34% but not a primary revenue driver until 2026

Netflix reported a better-than-expected addition of over 8 million subscribers in its second quarter, surpassing analyst predictions of 5 million.

The streaming giant attributed this growth to its password-sharing crackdown and popular titles like “Bridgerton” and “The Roast of Tom Brady”.

The company’s diluted per-share earnings reached $4.88, exceeding consensus forecasts of $4.74.

Revenue for the quarter was in line with estimates at $9.56 billion.

Netflix’s total global subscribers now exceed 277 million.

Cautious Outlook

Despite the positive results, Netflix issued a cautious guidance for the third quarter.

The company expects subscriber gains to be lower than the same period in 2023 when it had just initiated its password-sharing restrictions.

“Netflix is still the best and most profitable streaming company out there, but with technology stocks generally retreating over the last several days, some investors may sell on the generally good news and taking profits now while waiting for a possible better re-entry point for the stock,” said Michael Ashley Schulman, chief investment officer at Running Point Capital.

“Netflix’s commitment to its ads business is just beginning to show signs of scaling, meaning it’s headed in the right direction,” says Forrester’s Proulx. “That’s notable because ad revenue is a critical component to Netflix’s go-forward growth calculus. It’s because the company can’t rely on net paid subscriptions alone as the primary contributor to revenue growth because they aren’t trending upward.”

Advertising Business

Netflix’s advertising business grew 34% from the previous quarter.

However, the company stated that advertising would not be a primary driver of revenue growth until at least 2026.

This cautious stance on advertising growth led to the departure of Peter Naylor, the vice president of ad sales.

Netflix announced plans to release a multiplayer game based on “Squid Game” later this year, coinciding with the debut of the series’ second season.

The company also plans to develop games tied to “Emily in Paris” and “Selling Sunset”.

Third Bridge analyst Jamie Lumley said Netflix’s advertising business “has yet to prove itself from a revenue standpoint.” Lumley also noted, “Our experts highlight that Amazon has made a much bigger splash in the ad market and that Netflix needs to continue working on scale in this segment if it wants to be a major player.” 

“By combining its ad-supported model with live sports streaming, Netflix not only attracts a dedicated viewer base but also creates new monetization opportunities through dynamic ad placements and exclusive content,” says Sabya Das, president and chief operating officer at AI video company Magnifi. “This dual approach underscores Netflix’s ability to turn what I would have deemed a survival strategy to retain subscribers into a massive growth opportunity, solidifying itself as an entertainment hub and paving the way for innovation in personalized advertising and user experience.”

Market Response

Netflix shares initially dipped but later rose 1% in after-hours trading.

The stock has seen a nearly one-third increase so far this year.

However, some analysts suggest investors might sell on the good news, waiting for a better re-entry point amidst a general retreat in technology stocks.

As Netflix faces market saturation in the US, it plans to stop regularly reporting new subscriber additions next year.

The company’s focus appears to be shifting towards its advertising business and gaming initiatives as potential sources of future growth.

Netflix’s Entry into Sports

Netflix’s foray into live sports, marked by a significant 10-year $5 billion deal with WWE Raw and a three-year agreement to stream NFL games on Christmas Day, is expected to enhance its revenue by attracting more advertisers.

The company’s strategic combination of ad-supported models with live sports streaming is anticipated to create new monetization opportunities through dynamic ad placements.

This move, alongside the success of live events like “The Roast of Tom Brady,” positions Netflix to leverage its growing ads business for substantial revenue growth.

In response to strong Q2 growth, Netflix has revised its annual revenue growth forecast to 14%-15% and expects an operating margin of 26%.

Moving forward, the company plans to focus on revenue and operating margin as primary financial metrics, shifting from its previous emphasis on subscriber numbers and average revenue per user.

What’s New On Netflix

Beyond its ads business, Netflix is enhancing its original content and gaming offerings.

Starting this month, the company will release a new game each month, many based on popular Netflix titles like “Selling Sunset” and “Squid Game.”

Additionally, Netflix is revamping its home screen interface with a ‘My Netflix’ section to highlight recently watched or saved content.

Despite a slight dip in stock prices, Netflix remains well-positioned for continued success as it adapts to the changing media landscape.

“Ads are going to be a bigger piece of the puzzle, but it won’t be in 2024 or 2025,” Spencer Neumann, Netflix’s chief financial officer, told analysts during a conference call Thursday.

“Our goal and our mission is we have to spend the next billion dollars of programming better than anyone else in the world,” Netflix co-CEO Ted Sarandos said during the conference call.

“Despite this progress, we continue to view advertising as a longer term story and do not expect a material revenue contribution until 2025,” BofA Global Research analyst Jessica Reif Ehrlich said in a note on Monday.

“More live-event announcements will ensue as the company looks to improve its ad-supported time spent, amid an industry-wide reduction in scripted content production,” Ross Benes, senior analyst at Emarketer, said.

FAQs

How many new subscribers did Netflix add in the second quarter?

Netflix added over 8 million new subscribers in the second quarter, surpassing analyst expectations of 5 million.

What were Netflix’s earnings per share in the second quarter?

Netflix reported diluted per-share earnings of $4.88, exceeding the consensus forecast of $4.74.

What is Netflix’s outlook for the third quarter?

Netflix has issued a cautious guidance for the third quarter, expecting subscriber gains to be lower than the same period in 2023.

How is Netflix’s advertising business performing?

Netflix’s advertising business grew 34% from the previous quarter, but it is not expected to be a primary revenue driver until at least 2026.

What are Netflix’s plans for gaming?

Netflix plans to release a multiplayer game based on “Squid Game” later this year, along with developing games tied to “Emily in Paris” and “Selling Sunset.”

Also Read: How Does Netflix Gaming Work?

Also Read: Netflix Implements Password Sharing Restrictions in India: Learn About the New Rules, and More

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