Netflix (NFLX) reported its second-quarter earnings on Thursday, initially sending its stock 6% lower in after-hours trading due to a revenue outlook that fell short of Wall Street’s expectations. However, shares rebounded during the earnings call as investors digested a substantial gain of over 8 million subscribers and a beat on both revenue and earnings.
For Q2, Netflix reported revenue of $9.56 billion, a 16.8% increase year-over-year, surpassing analyst expectations of $9.53 billion according to Bloomberg. The revenue growth was driven by top-line initiatives, including a crackdown on password sharing, the introduction of an ad-supported tier, and last year’s price hikes on certain subscription plans.
Looking ahead, Netflix projected third-quarter revenue of $9.73 billion, below the consensus estimate of $9.83 billion. Nonetheless, the company raised its full-year 2024 revenue growth projection to 14%-15%, up from 13%-15%, and expects full-year operating margins to reach 26%, up from the previous 25%.
“Our updated revenue forecast reflects solid membership growth trends and business momentum, partially offset by the strengthening of the US dollar against most other currencies,” management stated in the earnings release.
Diluted earnings per share (EPS) came in strong at $4.88, beating the consensus expectation of $4.74 and significantly higher than the $3.29 EPS reported in the same period last year. Netflix’s guidance for third-quarter EPS is $5.10, ahead of analyst expectations of $4.74.
Subscriber growth was robust, with Netflix adding 8.05 million new users, far exceeding the 4.7 million expected by analysts. This follows the addition of 9.3 million net subscribers in the first quarter and 5.9 million in Q2 2023. Key programming, such as the latest season of “Bridgerton,” contributed to this surge.
Netflix’s stock has been performing well, with shares up more than 30% since the beginning of the year. In May, Netflix secured the streaming rights to two NFL games set to air on Christmas Day as part of a three-season deal. The company also announced a significant increase in its ad tier users, reaching 40 million global monthly active users, up from 15 million in November and a 35 million-user increase compared to the previous year.
In the earnings release, Netflix reported “steady progress scaling [its] ad business,” with ad tier memberships growing 34% quarter-over-quarter. To further boost the ad tier, Netflix will phase out its basic plan in the US and France, following similar moves in the UK and Canada. The basic tier had been the cheapest ad-free plan at $9.99 in the US.
“Given this sustained progress, we believe that we’re on track to achieve critical ad subscriber scale for advertisers in our ad countries by 2025, creating a strong base from which we can further increase our ad membership in 2026 and beyond,” the company stated.
The growth in ad-tier subscriptions and the crackdown on password sharing have significantly contributed to Netflix’s top-line growth and subscriber base expansion. However, the company’s decision in April to stop reporting subscriber figures and the key profitability metric, average revenue per member (ARM), starting next year has raised concerns about the sustainability of its long-term subscriber growth momentum.
