Written by: Sophie Lund-Yates | Hargreaves Lansdown
Second quarter revenue rose 8.6% to $8.0bn, compared to last year. That reflects a 5.5% annual increase in subscribers, although the number of subscribers fell 970,000 compared to the previous quarter, which was better than previous guidance of 2m.
Excluding the impact of exchange rates, Average Revenue per Membership (ARM) rose in every region except Asia Pacific, the strongest growth came from Latin America. The group’s biggest market, the US and Canada, saw ARM rise 10% to $15.95.
Total costs and expenses increased significantly, with technology and development costs up over 33%% to $716.8m. The group also incurred $70m of severance costs and a $80m non-cash cost relating to the reduction in value of some office leases as the group restructured over the quarter. Operating income fell to $1.6bn from $1.8bn. $4.7bn was spent on additions to content.
Free cash flow swung from an outflow of $175m to a $13m inflow. On a 12 month basis, net debt was $8.5bn as of June 30.
Netflix also outlined plans to better monetise its platform, including introducing ad-free versions and cracking down on account sharing. Microsoft is the group’s tech and sales partner as the tech giant invests “heavily to expand their multi-billion advertising business into premium television video.”
The group’s still targeting full year operating margins of 19-20%, and expects to add 1m subscribers next quarter.
Of the wider environment, Netflix said: “Last quarter, we discussed our slowing revenue growth, which we believe is the result of connected TV adoption, account sharing, competition, and macro factors such as sluggish economic growth and the impacts of the war in Ukraine. We’ve now had more time to understand these issues, as well as how best to address them. First and foremost, we need to continue to improve all aspects of Netflix.”
Netflix shares rose 6.5% in after-hours trading.
This set of results had been anticipated much like a tornado, after the group outlined it expected to lose 2m global subscribers. This storm has been categorically downgraded, with losses much better than feared. Still, with 1m customers signing out for good, things are hardly perfect. In fact, it’s hard to overstate how tough things are. Shareholders will still feel as though Netflix’s foundations are showing some fundamental cracks. Ones that are going to take a lot of time and heavy lifting to fill.
The largest issue is one of a weaker content slate in the recent past. In today’s hyper-competitive landscape, having average content on offer simply won’t cut it. Playing catch up here becomes more difficult when you consider the breadth of M&A happening in the sector, the likes of Amazon snapping up MGM gives it access to pre-made, and crucially, rewatchable content. The current situation means offers from big tech rivals to buy Netflix wouldn’t be a complete shock, that’s especially true when you consider things are already getting pally with Microsoft brought on board as a new advertising tech partner.
Netflix’s head is in the right place, with plans to introduce an ad-tiered system, and a crack-down on account sharing likely to be successful in padding out the top-line. These changes aren’t going to come through until later in the year at the earliest though, so it’s hard to know if these changes are going to generate an abnormal level of customer churn. Today’s cash-strapped consumer may well appreciate having a cheaper version to flock to as times get tougher. Improved content and release windows are also a strategic pivot the market should be supportive of.
Netflix is still the biggest streaming platform, which is reflected in the subscriber beat and the fact subs are expected to start growing again next quarter. Being big makes you stickier and harder to leave, the concern had been whether this giant was losing its edge, which means the benefits of scale start to slip away. That makes costs a big question mark, tech spend is up a third. There’s a sense too that spending, and plans for the future, make sense on paper. But what’s crucial now is evidence showing these billions of dollars are being thrown at growing, rather than protecting, market share. That’s clearly the expectations of management, but turning things around while sticking to a cost profile that’s attractive to investors, is likely going to be a journey with enough twists and turns to resemble one of Netflix’s own blockbusters.