Netflix Q2 earnings: subscriber bleed slows and company readies for 2023 ad tier rollout

The news comes amid a firestorm that followed Netflix’s revelation that it lost 200,000 subscribers in the first quarter (representing its first decline after a decade of ongoing growth) after hiking subscription rates. It said earlier this year that it expected to lose 2 million more subscribers during the second quarter, spurring a major market dip. The company beat its own estimates heftily but still suffered major losses – it reported today that 970,000 subscribers canceled during Q2.

It’s the first time in Netflix’s history that it has sustained two consecutive quarters of subscription losses. Still, shares jumped 9% in after-hours trading today following the news, indicating that – despite the ongoing hemorrhaging – investors are pleased with the fact that subscriptions didn’t drop as low as projected.

The company also shared new details about the launch of its free ad-based tier, saying that ads could hit screens as soon as early next year. Just last week, the streamer announced that it has tapped Microsoft to help launch the new service.

What do the results show?

• Netflix’s global paid net subscribers dropped 970,000, beating estimates of a loss of 2 million. The company attributed these losses primarily to rate-hike-induced churn. Leadership said on a call today with investors and analysts that, despite elevated churn after price changes in the US, UK, Ireland and some parts of EMEA, churn is already returning to pre-hike levels, particularly in the US market. The company did not speak directly about the impact that other factors – such as the economic downturn and an increasingly crowded streaming market – have in regard to subscription losses.

• The company tallied a revenue jump of 9% (or 13%, adjusted for constant currency), reaching $7.97bn, versus a projection of $8.035bn outlined in a Refinitiv survey.

• Earnings per share were $3.20 for the quarter, compared with a Refinitiv estimate of $2.94.

• Operating income for the quarter was $1.6bn.

• Net income reached $1.4bn for the quarter.

• Overall, company leadership continues to project optimism. “We’re executing really well on the content size with names like Ozark, Stranger Things, lots of titles,” said Reed Hastings, co-chief executive, in an earnings call today. “We’re talking about losing one million instead of losing two million, so our excitement is tempered by the less bad results. But, looking forward, streaming is working everywhere, everyone is pouring into it. It is definitely the end of linear TV.”

• Spencer Neumann, the company’s chief financial officer, added: “The business ... remains really resilient. The minus a million versus minus 2 million is slightly better [than expected] in terms of member growth, and then ... if you adjust for our restructuring costs [and rising inflation], our operating income was above guidance, our EPS was above guidance and our cash flow remained strong. So overall, [we are] generally delivering as expected.”

What does Netflix predict for the future?

• The company anticipates adding 1 million subscribers in the coming quarter – it’s a modest estimate compared to the 1.8 million average analyst estimate, per StreetAccount. If it wins only 1 million new subscribers next quarter, the company will still see subscriber losses for nine months of the year.

• Netflix hopes to roll out its ad-supported offering in early 2023, which, per a New York Times report, is a slight delay from an initial planned launch of late 2022.

• The company anticipates a continuation of its success in original content, citing decreasing production costs post-Covid and the creative momentum that’s helped the platform clinch 35 Emmy nominations for shows it’s created this year. (In fact, many of the platform’s most popular programs of all time have been produced within the past year alone, including Squid Game, Stranger Things season 4 and Bridgerton seasons 1 and 2). The company said on today’s earnings call that it expects to spend $17-18bn on content this year.

• Under Netflix’s new chief marketer Marian Lee Dicus, the company is focused on promoting its original content in bolder, bigger ways. On today’s call, co-chief executive and chief content officer Ted Sarandos cited the recent global campaign for the new season of Stranger Things – which saw major landmarks such as New York’s Empire State Building splashed with larger-than-life video projections – calling it “one of the strongest marketing campaigns” he’s ever seen.

• Despite the looming threat of recession, the company is confident that it will weather any coming storms with ease. “If you zoom out a bit and look at past economic cycles, at least in the US, most forms of entertainment have been fairly resilient to downturn,” said the company’s vice-president of finance Spencer Wang. “There’s a level of escapism that entertainment provides. Also, if you look at the paid TV business, it tends to be a bit more resilient as well, because the value of in-home entertainment increases as folks perhaps don’t go out as much.” He tempered his optimism, noting: “Every recession and cycle is different, so we don’t want to take that for granted, and we’re monitoring pretty closely.”

What will Netflix’s ad business look like?

• Following the announcement that it will partner with Microsoft to launch its ad-supported tier, company leadership offered further insight into the reasons underlying the decision. “They’ve got the technical components we need; they’ve got the go-to-market components we need,” said Greg Peters, the company’s chief product officer. “And they met a bunch of sort of fundamental ... table stakes pieces, [including] a strong commitment to privacy and data protection for consumers – things that we cared a lot about, and were fundamental to us. Beyond those things ... we saw a high degree of strategic alignment in their interest in innovating in this space.”

• Peters clarified that the partnership with Microsoft is exclusive and indicated that there could be an opportunity for future collaborations with Microsoft in the future (though he was adamant that Amazon will remain Netflix’s cloud provider for the foreseeable future).

• Leadership said its new ad-supported tier aims to help expand access to the platform. The company also hopes to use the new offering to rope in new users, re-engage users who have left Netflix and help assuage the prevalence of account-sharing.

• In fact, the move fits well into the streaming giant’s ongoing efforts to combat – or if not combat, then cash in on – account-sharing. Peters referenced Netflix’s recent efforts to crack down on account sharing by offering users a range of subscription options, including subscriptions for multi-user accounts and multi-household accounts. Just this week the company announced it will begin asking subscribers in Latin America to cough up an additional $2.99 monthly to add a “second home” to their accounts.

• Peters explained that the rollout of the new ad-supported model will likely be iterative as the platform and its ad partners learn what works and what doesn’t – for all players. “We have a real opportunity here to [evolve] through a period of years and iteratively. This is what we call the ‘crawl, walk, run’ model,” he said on today’s call. “At the beginning, it’ll look [like] what you’re familiar with, but over time, there’s a tremendous opportunity to leverage that innovation DNA that we have, as well as a bunch of enabling characteristics around addressability and measurability to provide an incredible experience for consumers who choose to take the ad-supported offering, but also to provide an incredible experience for brands and advertisers who want to work with us.”

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