Netflix beat Wall Street expectations for its second quarter of 2024, posting a 17% year-over-year increase in revenue and 44% surge in profits, while delivering stronger than expected subscriber growth during the three-month period.
The company attributed the growth to a mix of strong performance across a variety of its titles and the continued benefit from paid sharing.
Subscriber growth of 16.5% in the quarter continued to fuel Netflix’s industry-leading position in streaming, as its rivals — Disney, Warner Bros. Discovery, Paramount and NBCUniversal — struggle to catch up and turn a profit in their direct-to-consumer businesses.
“We’re clearly seeing healthy organic growth in the business, but we’re also continuing to get better and better at translating improvements in our service into business value, including getting better and better at converting unpaid accounts,” CFO Spencer Neumann told analysts on Thursday. “On the paid member front, we’re also probably benefiting from that attractive entry point in terms of price point and feature set for our ads plan.”
Despite Thursday’s strong results, Netflix warned that paid net additions in the third quarter of 2024 would be lower than the year ago period as the impact of paid sharing diminishes. It also expects global average revenue per paid member to be roughly flat year over year in Q3 due to “ongoing [foreign exchange] headwinds and plan and country mix.”
Here are the top-line results:
Net income: $2.15 billion, up 44% from $1.49 billion a year ago.
Earnings per share: $4.88 per share, compared to $4.70 expected by analysts surveyed by Zacks Investment Research.
Revenue: $9.56 billion, up from $8.19 billion last year, compared to $9.53 billion expected by analysts surveyed by Zacks Investment Research.
Subscribers: Netflix added 8.05 million subscribers in the quarter, up 16.5% to 277.65 million globally.
Netflix reported operating income of $2.6 billion and an operating margin of 27.2%. The company generated $1.2 billion in free cash flow during the quarter and had $1.29 billion in net cash from operating activities.
The company added 1.45 million paid subscribers in the U.S. and Canada for a total of 84.11 million; 2.24 million in the Europe, Middle East and Africa region for a total of 93.96 million; 1.53 million in Latin America for a total of 49.25 million and 2.83 million in the Asia-Pacific region for a total of 50.32 million.
Revenue for the quarter was $4.30 billion in the U.S. and Canada, $3.01 billion in the EMEA region, $1.20 billion in Latin America and $1.05 billion in Latin America. Average revenue-per-paid member (ARM) grew 7% to $17.17 in the U.S. and Canada, but fell 1% to $10.80 in the EMEA region, 3% to $8.28 in Latin America and 6% to $$7.17 in the APAC region.
Netflix plans to spend $17 billion on content in 2024, up from $12.6 billion it spent in 2023, which was lower than its expected spend of $17 billion because of the Hollywood strikes.
The company’s shares closed down 0.68% on Thursday to close at $643.04.
Netflix refreshes homepage, ramps up gaming offerings to compete with YouTube
As it shifts its focus to revenue, operating margins and engagement, Netflix will stop reporting its quarterly subscriber count and average revenue-per-paid member figures beginning in the first quarter of 2025. It will continue to provide a breakout of total revenue by region, as well as the impact of foreign exchange changes and announce major subscriber milestones as it crosses them.
Netflix and YouTube are pulling further ahead of rival studios’ nascent streaming businesses. In Nielsen’s latest gauge report for the month of June, Netflix reported an 8.4% share, with only YouTube ahead of it with a 9.9% share. The next-closest competitors are Prime Video at 3.1% and Hulu at 3%. Netflix estimated that its streaming, pay TV, film, games and branded advertising currently account for 6% of a $600 billion market opportunity.
“Our biggest opportunity is winning a larger share of the 80%+ of TV time (primarily linear and streaming) that neither Netflix nor YouTube has today,” the company wrote in its quarterly shareholder letter. “If we execute well — better stories, easier discovery and more fandom — while also establishing ourselves in newer areas like live, games and advertising, we believe that we have a lot more room to grow.”
To expand its consumer share, Netflix is ramping up its games offering with plans to launch one new title per month. It will also premiere a multiplayer game based on the Squid Game universe later this year timed to the launch of the show’s second season.
It’s also testing a new TV homepage design to provide more visible title information, such as synopsis, genre and ratings, and larger and more dynamic title previews with trailers and bigger box art to make browsing easier. It also plans to simplify the navigation bar and move it to the top of the page to create quicker, easier short cuts and add its My Netflix feature currently available on mobile.
“As always with any changes to our product, we’ll listen to the feedback, learn and continue to improve the experience over time,” the company said.
While it views partnerships as opportunities to reach consumers, Netflix said it has no plans to bundle solely with other streamers, noting it “already operates as a go-to destination for entertainment thanks to the breadth and variety of our slate and superior product experience.”
Ad tier progresses but is still not a primary revenue growth driver
The company continued to see steady progress scaling its ad tier, with membership growing 34% quarter over quarter. The offering reached 40 million monthly active users in May and now accounts for over 45% of Netflix’s sign-ups in the countries where it is available.
Netflix noted that the ad tier is scaling faster than its ability to monetize its growing ad inventory, presenting a near-term challenge but medium-term opportunity as its continues to ramp up its sales, measurement and tech capabilities.
“Given this sustained progress, we believe that we’re on track to achieve critical ad subscriber scale for advertisers in our ad countries in 2025,” the company wrote in its quarterly shareholder letter. “But building a business from scratch takes time — and coupled with the large size of our subscription revenue — we don’t expect advertising to be a primary driver of our revenue growth in 2024 or 2025.”
In order to scale the offering, Netflix previously said it planned to retire its ad-free basic plan in countries where the ad-supported offering is available, starting with the United Kingdom and Canada in the second quarter. It also plans to shift to an in-house ad tech platform that will begin testing in Canada in 2024 and launch more broadly in 2025.
Executives also view the addition of live events, such as its partnership to stream NFL games on Christmas Day, as another opportunity to help scale the advertising business.
“We’re in live [TV] because our members love it, and it drives a ton of engagement and a ton of excitement,” Netflix co-CEO Ted Sarandos added, “and the good thing is advertisers like it for the exact same reason.”
Looking ahead, Netflix increased its revenue growth forecast for fiscal year 2024 to 14% to 15%, up from previous guidance of 13% to 15%, reflecting “solid membership growth trends and business momentum,” partially offset by the strengthening of the U.S. dollar vs. most other currencies. It also raised its full-year operating margin forecast to 26% from 25% due to an improved revenue outlook.
“Our goal is to increase our operating margin each year, though the rate
of expansion will vary year to year,” the company said.
Netflix continues to anticipate full year free cash flow of $6 billion, barring no material swings in foreign exchange rates.
For the third quarter, it anticipates revenue growth of 13.9% year over year to $9.73 billion, $2.73 billion in operating income, an operating margin of 28.1%, net income of $$2.24 billion and diluted earnings per share of $5.10.
During the second quarter, Netflix repurchased 2.6 million shares for $1.6 billion and has $5 billion remaining under its existing authorization. Gross debt totaled $14 billion, while cash, cash equivalents, and short-term investments amounted to $6.7 billion. The company has $1.8 billion in debt maturities in the next 12 months, which it plans to refinance.
Netflix shares are up 32% in the past six months, 35% in the past year and 104% in the past five years.
