Netflix (NFLX, Financial) is trading slightly higher today after its Q2 earnings report. Initially, the stock dipped but recovered during the call. NFLX reported a double-digit EPS beat with modest revenue upside. The Q3 guidance was mixed with higher EPS but slightly lower revenue. Netflix tweaked its FY24 revenue guidance to +14-15% from +13-15%.
- Global streaming paid net adds in Q2 were +8.05 million, above street estimates. Although down from Q1's +9.33 million, it was still strong. Netflix no longer provides specific net add guidance but indicated that Q3 2024 will be lower than Q3 2023's +8.76 million, which benefited from the first full quarter with paid sharing. The crackdown on password sharing last summer boosted net adds.
- Netflix had a variety of hit series in Q2, including "Bridgerton S3," "Baby Reindeer," and "Queen of Tears," along with popular films like "Under Paris," "Atlas," and "Hit Man." "The Roast of Tom Brady" attracted its largest live audience yet. Netflix began testing a new, simpler TV homepage in June to improve the discovery experience.
- Advertising was a bright spot in Q2. Netflix is making steady progress in scaling its ads business. Ads tier membership grew 34% sequentially. NFLX is building an in-house ad tech platform to be tested in Canada in 2024 and launched more broadly in 2025. This platform will offer new ways for advertisers to buy, leverage insights, and measure impact.
- NFLX's ad revenue is becoming a more meaningful contributor. However, building this business from scratch takes time. The company admitted that it is scaling faster than it can monetize its growing ad inventory and is adding more sales and operations staff to address this.
- Operating margin is becoming a more important metric as NFLX phases out reporting its net add metric in Q1 2025. In Q2, the operating margin was 27.2% vs. 26.6% prior guidance. NFLX raised its FY24 forecast to 26% from 25% and guided for Q3 at 28.1%. However, NFLX cautioned that margins could fluctuate due to FX, content spend, and other investment opportunities.
Overall, Netflix's Q2 report had mixed results. It posted strong EPS and operating margin upside, and net adds were solid. However, Q3 revenue guidance was light and concerns about monetizing the ads business remain. As a result, the stock is trading roughly flat.
