Key Takeaways
- Netflix gained 5.9 million subscribers in Q2 after implementing its password-sharing crackdown
- Unfortunately, it wasn’t enough to translate into revenue gains for the quarter, which missed expectations
- Netflix shares are down 8.41% this week as investors were left unimpressed
Your favorite streaming service Netflix has been in the doldrums lately – as reflected in the company’s latest earnings report. While there was a healthy gain to the subscriber base that confirmed Netflix’s password-sharing crackdown had worked, the revenue didn’t translate to significant gains.
Netflix isn’t alone – the wider streaming service world is also struggling with costly content, winning over subscribers and now, a Hollywood strike. Can the industry transform, or is this a fallow period for investors? Read on to find out the temperature reading.
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What happened with Netflix’s earnings beat?
Even though Netflix got a big boost to its subscriber base after cracking down on password sharing, the second-quarter figures left traders wanting. Netflix’s Q2 revenue was $8.17 billion, up 2.7% from the same time last year, but missing its own $8.24 billion and analysts’ expectations of $8.29 billion.
The earnings per share came in at $3.29, beating expectations of $2.84. Netflix’s operating margin was healthy at 22.3% for the second quarter, surpassing Netflix’s own prediction of 19%. The free cash flow figure, at $1.34 billion, was over double the estimates of $542 million.
In a press release, Netflix said it expected revenue growth to accelerate in the year’s second half, but recognized it had work to do. “We remain focused on: creating a steady drumbeat of must-watch shows and movies; improving monetization; growing the enjoyment of our games; and investing to improve our service for members”, the company said.
Q3 and Q4 projections
Netflix also posted its expectations for the rest of the year. For the third quarter, the streaming service anticipates pulling in $8.52 billion in revenue, up 7.5% from the previous year, with a profit of $3.52 on the shares. That’s also under Wall Street’s prediction of $8.67 billion in revenue for the third quarter.
It also expects net subscriber additions to be roughly the same as they reported for the second quarter. As for the fourth quarter, Netflix has some plans to boost its revenue streams “as we further monetize account sharing…and steadily grow our advertising revenue”. It anticipates a full-year operating margin of 18% to 20%.
Netflix’s crackdown on passwords
If the line on ‘further monetizing account sharing’ has spooked you, Netflix has already rolled out the next step in its grand scheme: scrapping the lowest-price tier without any ads in the U.S. and U.K., which it announced earlier this week. New users can no longer sign up for the $9.99 basic ad-free tier, instead choosing from the $6.99 ad-supported tier or the more expensive ad-free plans, which start at $15.49.
The move comes after Netflix announced the controversial decision to crack down on password-sharing in the spring, a practice it had previously encouraged on its social media channels, in a bid to boost ailing subscriber numbers. In the first half of 2022, Netflix lost over a million subscribers as the cost of living woes began to bite; it had been estimated that 100 million households were sharing passwords.
While customers may not have been happy with the decision, it more than paid off for Netflix. The company finished the second quarter with an additional 5.9 million subscribers in just three months. Compared to the first quarter, which saw 1.75 million new subscribers, that’s a massive boon for the streaming service.
But there was a fly in the ointment. Netflix said while subscriptions for the cheapest ad-supported tier had nearly doubled in the second quarter, ad revenue didn’t form part of the picture for the quarterly earnings – which may have left investors disappointed.
The market reaction
A jump in subscribers wasn’t enough to quell the revenue woes for Wall Street investors, who had expected revenue to bolster with more subscribers and some tangible results stemming from advertising revenue. Netflix’s share price has plunged 8.41% this week. The drop in the share price had a knock-on effect on Netflix’s yearly gain, which is now at 48.3%.
In an attempt to allay investor fears, Netflix’s CFO, Spencer Neumann, said on this week’s earnings call that price increases weren’t the priority as they rolled out the password-sharing crackdown. He anticipated a “gradual revenue build” for advertising, but admitted it’s “not expected to be a big contributor this year”.
How are Netflix’s competitors faring?
The figures might not look great, but Netflix isn’t alone in facing financial challenges. Last week, Disney CEO Bob Iger confirmed the company was cutting back on creating streaming content for the Star Wars and Marvel franchises to slash costs. The company is undertaking a massive $5.5 billion restructuring of the business, $3 billion of which comes from cutting content.
Warner Bros Discovery has had a similar content-cutting trajectory, with both companies laying off employees. Paramount Global and NBCUniversal have said this year will mark their streaming businesses’ most significant annual losses.
Then there’s the not-so-small matter of the writers and actors’ strike, which could shut Hollywood down for months. Netflix doesn’t seem worried – in fact, it increased its free cash flow guidance to $5 billion for the entire year, up from $3.5 billion, but we’ll have to wait and see what the rivals’ earnings reports look like to see if Netflix is an outlier.
The bottom line
Netflix has been under the microscope recently as investors have waited for the company to announce a solution to its ailing subscriber base. Now it’s here, but there’s a lag with the revenue. It’s enough for traders to worry, but Netflix has stressed it’s at the beginning of a longer transformation. Wall Street has to trust the process to reap the rewards.
Netflix might be down right now, but the big yearly gains for the stock are symptomatic of a bigger trend of the tech market soaring. Your portfolio can get in on the action with Q.ai’s Emerging Tech Kit, which packages up tech stocks and ETFs so you don’t have to navigate the market alone.
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