Netflix beats estimates as ad-supported memberships rise 34pc

Netflix reported second-quarter earnings overnight in the US that showcased the media giant’s position at the head of the streaming race as it added more global subscribers and saw strong growth in its advertising business.

The streamer said its ad-supported memberships grew 34 per cent during the period compared to the same quarter last year.

Advertising has become an increasingly important business model for media companies to boost — or in some cases, achieve — profitability for streaming. Netflix’s stock has been boosted in recent quarters by its push to gain subscribers on its cheaper, ad-supported tier, in addition to its crackdown on password sharing.

Revenue came in at $US9.56 billion ($14.25b), up 17 per cent compared to the year-earlier period, driven primarily by the increase in average paid memberships.

Netflix said it now expects full-year reported revenue growth of 14 per cent to 15 per cent, compared with previous guidance of 13 per cent to 15 per cent.

The company reported net income of $US2.15b, up from $US1.49b during the second quarter of 2023.

Netflix’s global paid memberships rose 16.5 per cent year-on-year to 278 million. This marks one of the last updates Netflix will release regarding its membership numbers.

Last quarter, the company warned investors it would stop providing quarterly membership numbers or average revenue per user beginning in 2025, noting the company is “focused on revenue and operating margin as our primary financial metrics — and engagement (i.e. time spent) as our best proxy for customer satisfaction”.

Netflix began focusing on different business strategies to drive revenue growth after the streamer saw subscriber growth slow in 2022. In May, Netflix said it would launch its own ad platform and no longer partner with Microsoft for that technology.

The company also has begun adding live sports, such as NFL games on Christmas Day over the next three years, a move that will likely attract more ad dollars for the streamer.

“We’re in live [TV] because our members love it, and it drives a ton of engagement and a ton of excitement ... and the good thing is advertisers like it for the exact same reason,” said Netflix co-chief executive Ted Sarandos on Thursday’s earnings call.

Netflix had been dipping its toe into live content even before its deal with the NFL, with Sarandos noting the company’s focus on “buzzy, exclusive live entertainment”.

Still, original shows like Bridgerton and Baby Reindeer continue to drive engagement for the streamer.

The company said its cheaper, ad-supported tier has been gaining traction among its base, with these subscribers accounting for more than 45 per cent of sign-ups in the markets where the option is offered.

However, Netflix noted that the ad-supported business is still young, and it doesn’t expect ad revenue to be a “primary driver of our revenue growth in 2024 or 2025”.

“The near term challenge (and medium term opportunity) is that we’re scaling faster than our ability to monetise our growing ad inventory,” the company said in its earnings release, meaning the streamer isn’t able to meet advertiser demand yet.

Netflix co-CEO Greg Peters said on the earnings call that Netflix has so far been focused on scaling its ad-supported subscriber base. With the company on track to achieve its subscriber goals for 2025, Netflix is now shifting its focus to monetising its ad inventory, he said.

As the company beefs up its advertising operation, it’s giving “advertisers more effective ways to buy ... a big point of feedback we heard from advertisers,” Peters said.

On this note, Netflix added it believes it’s on track to “achieve critical ad subscriber scale for our advertisers” next year, allowing it to further increase its ad-tier memberships in 2026 and beyond.

CNBC