Netflix beat Wall Street expectations for its second quarter of 2024, posting a 17% year over year increase in revenue and 44% increase in profits after posting stronger than expected subscriber growth during the three-month period. The growth was attributed to a mix of strong performance across a variety of its titles and a continued benefit from paid sharing.
“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,” chief financial officer 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. So you put all that together, and it was a nice quarter for subscriber growth, but even more importantly, a nice quarter in terms of driving healthy revenue growth and healthy profit growth.”
But the company 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 F/X headwinds and plan and country mix.”
Here are the top-line results:
Net income: $2.15 billion, compared to $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, compared to $9.53 billion expected by analysts surveyed by Zacks Investment Research.
Subscribers: Netflix added 8.05 million subscribers in the quarter for a total of 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 came in at $4.296 billion in the U.S. and Canada, $3.008 billion in the EMEA region, $1.204 billion in Latin America and $1.052 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.
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 and announce major subscriber milestones as it crosses them.
In Nielsen’s latest gauge report for the month of June, Netflix reported a share of 8.4%, with only YouTube ahead of it with a 9.9% share. The company estimated that its streaming, pay TV, film, games and branded advertising currently account for roughly 6% of a more than $600 billion market opportunity.
“Looking to the future, we believe 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.”
In order to expand its share amongst consumers, Netflix will continue to ramp 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. Netflix plans to spend approximately $17 billion on content in 2024.
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 immersive trailers and bigger box art to make browsing easier. It will also 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.
The company continued to see steady progress scaling its ad tier, with membership growing 34% quarter over quarter. The offering, which reached 40 million monthly active users in May, now accounts for over 45% of Netflix’s sign-ups in the countries where its available.
“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, creating a strong base from which we can further increase our ad membership in 2026 and beyond,” the company wrote in its quarterly shareholder letter. “Our ad revenue is growing nicely and is becoming a more meaningful contributor to our business. 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.”
The company 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.
In order to help 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 will shift to an in-house ad tech platform that will begin testing in Canada in 2024 and launch more broadly in 2025.
Looking ahead, Netflix is increasing 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 US dollar vs. most other currencies.” It also raised its operating margin forecast for the year to 26% from 25% due to an improved revenue outlook and “ongoing expense discipline.”
“Our goal is to increase our operating margin each year, though the rate
of expansion will vary year to year,” the company said.
Additionally, Netflix continues to anticipate full year free cash flow of approximately $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.
Despite the dip in after-hours trading, Netflix shares are up 32% in the past six months, 35% in the past year and 104% in the past five years.
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