As Wall Street watched for signs that the world’s largest streaming service can keep growing, Netflix reported mixed second-quarter results Wednesday.
The streaming behemoth posted net income of $1.48 billion, or diluted earnings per share of $3.29, on revenue of $8.2 billion. Analysts surveyed by Zacks Investment Research were expecting earnings per share of $2.83 on revenue of $8.26 billion. Netflix also disclosed that it added 5.9 million paid subscribers in the quarter, ending June with a total of 238.4 million globally.
Revenue came in at $3.6 billion in the U.S. and Canada, $1.07 billion in Latin America, $2.5 billion in the Europe, Middle East and Africa region and $919 million in the Asia-Pacific Region. Average revenue per user was $16 in the United States and Canada, $10.87 in the EMEA region, $8.58 in Latin America and $7.66 in the APAC region.
“While we’ve made steady progress this year, we have more work to do to reaccelerate our growth,” the company wrote in its quarterly letter to shareholders. “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.”
While membership to Netflix’s ad-supported plan has nearly doubled since the the first quarter, current ad revenue is not material for the company due to a smaller membership base. During its upfront presentation to advertisers in May, the company reported that the ad tier had nearly 5 million monthly active users.
“Building an ads business from scratch isn’t easy and we have lots of hard work ahead, but we’re confident that over time we can develop advertising into a multi-billion dollar incremental revenue stream,” the company said.
During the second quarter, Netflix phased out its basic ad-free plan in Canada for new and rejoining members and did the same in the U.S. and U.K. on Wednesday.
“We believe our entry prices in these countries — $6.99 in the U.S., £4.99 in the U.K. and $5.99 in Canada — provide great value to consumers given the breadth and quality of our catalog,” the company said.
In May, Netflix rolled its paid sharing initiative out in over 100 countries, representing more than 80% of its revenue base. According to the company, revenue in each region is now higher than pre-launch, with sign-ups exceeding cancellations.
“The cancel reaction was low, and while we’re still in the early stages of monetization, we’re seeing healthy conversion of borrower households into full paying Netflix memberships as well as the uptake of our extra member feature,” the company said.
Starting Wednesday, Netflix will address the remaining countries where the paid sharing features have not yet rolled out, such as Indonesia, Croatia, Kenya and India. The company will not offer the add an extra member option in those markets following recent price cuts and relatively low penetration, but households borrowing Netflix can transfer existing profiles to new and existing accounts.
The latest quarterly results came less than a week after SAG-AFTRA joined the Writers Guild of America on the picket lines, marking the first double strike in Hollywood in more than 60 years. The rush to picket lines Friday came after both guilds were unable to reach agreements in their contract negotiations with the Alliance of Motion Picture and Television Producers over issues including pay, streaming residuals and protections against artificial intelligence.
Looking ahead, Netflix expects its revenue growth to accelerate in the second half of the year as it continues to expand its password sharing crackdown and subscriptions to its ad-supported tier grow. For the third quarter, the company is expecting revenue of $8.5 billion, a 7% year over year increase, and paid net adds similar to the second quarter. It also anticipates free cash flow of at least $5 billion for 2023, up from its previous estimate of at least $3.5 billion.
“Our updated expectation reflects lower cash content spend in 2023 than we originally anticipated due to timing of production starts and the ongoing WGA and SAG-AFTRA strikes,” the company said. “While this may create some lumpiness in [free cash flow] from 2023 to 2024, we plan to deliver substantial positive [free cash flow] in 2024.”
Netflix reported operating income of $1.83 billion and free cash flow of $1.3 billion. It ended the second quarter with gross debt of $14.5 billion and cash and short-term investments of $8.6 billion and repurchased 1.8 million shares for $645 million.
“We now have $3.4 billion of capacity remaining under our $5 billion share buyback authorization. We’re currently running a bit above our targeted minimum cash level, so we expect to increase our stock repurchase activity in the second half of 2023, assuming no material change in our business,” the company added.
Shares of Netflix fell over 8% in after-hours trading Wednesday following the earnings announcement.