Netflix delivers mixed earnings with stock sliding 8% as revenue misses forecasts

The company reported a net profit of $1.48 billion for the three months to the end of June and added 5.89 million new streaming subscribers

Netflix earned a revenue of more than $8.18 billion during the second quarter. AFP

Netflix shares dropped 8.3 per cent in after-hours trading on Wednesday after the company reported an annual 3.3 per cent jump in its second-quarter net profit but fell short of analysts’ sales expectations.

The world’s largest streaming service reported a net profit of more than $1.48 billion in the three-month period to the end of June. It was up 14 per cent from the first quarter of this year.

The company earned a revenue of more than $8.18 billion during the quarter, up nearly 2.7 per cent on an annual basis but falling short of analysts' estimate of nearly $8.30 billion.

Earnings for each share rose 2.8 per cent on a yearly basis to $3.29, exceeding an estimate of $2.86.

"While we’ve made steady progress this year, we have more work to do to reaccelerate our growth," Netflix said.

"We remain focused on: creating a steady drumbeat of must watch shows and movies; improving monetisation; growing the enjoyment of our games; and investing to improve our service for members."

The number of paid subscribers jumped 8 per cent year on year to nearly 238.34 million in the three months to June 30. Netflix added 5.89 million new streaming subscribers during the April-June period.

Netflix said it now expects revenue of $8.52 billion, up nearly 7 per cent on an annual basis, for the third quarter. It attributed the anticipated sales growth to an increasing number of paid memberships.

“Our goal is to accelerate revenue growth, expand our operating margin and deliver growing positive free cash flow,” Netflix said.

“Now that we have launched paid sharing broadly, we have increased confidence in our financial outlook.

"We expect revenue growth will accelerate in the second half of 2023 as monetisation grows from our most recent paid sharing launch and we expand our initiative across nearly all remaining countries."

Paid sharing is an important initiative as “widespread account sharing undermines our ability to invest in and improve Netflix for our paying members, as well as build our business”, the company said in April.

More than 100 million households, or over 42 per cent of Netflix’s global user base, have access to the video streaming platform through sharing of passwords but they are not directly paying to Netflix, the company’s records show.

In May, Netflix said it extended its paid sharing programme to more than 100 countries, which account for more than 80 per cent of its sales.

The company’s second-quarter operating income increased to $1.8 billion, up 16 per cent from the same period in 2022.

Netflix said it expects its third-quarter operating income to jump 26.6 per cent annually to $1.9 billion, and operating margin of 22 per cent compared with 19 per cent a year ago.

“We have been working to improve our monetisation through initiatives like paid sharing and advertising," the company said.

"This will allow us to generate more revenue off a bigger base, which we can reinvest to make Netflix even better for our members."

Netflix said it was too early to give a breakdown of revenue from the advertising-supported tier that was introduced last year.

“While we continue to grow our reach … ads plan membership has nearly doubled since the first quarter … it’s still off a small membership base, so current ad revenue isn’t material for Netflix.”

Netflix’s subscriber growth “blew past expectations as it benefited from the launch of its ad-supported basic subscription tier, as well as ongoing efforts to crack down on illegal password-sharing”, Jesse Cohen, senior analyst at financial markets platform Investing.com, told The National.

The company is positioned to “build on its recent momentum amid improving operating margins”, Mr Cohen said.

The company’s net cash generated by operating activities in the last quarter stood at $1.4 billion, while its free cash flow reached $1.3 billion.

It finished the last quarter with gross debt of $14.5 billion (in-line with the company’s $10 billion to $15 billion target range) and cash and short-term investments of $8.6 billion.