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Netflix outpaces subscriber addition expectations; The results behind the stock's wild after hours ride

AInvestThursday, Jul 18, 2024 5:06 pm ET
2min read

Netflix (NFLX) reported its Q2 '24 financial results, delivering better-than-expected earnings but with revenue that was roughly in line with Wall Street estimates. The company posted earnings per share (EPS) of $4.88, surpassing the consensus estimate of $4.74. Revenue for the quarter reached $9.56 billion, slightly above the expected $9.53 billion. Operating income came in at $2.60 billion, which represents a 42% year-over-year increase, and the operating margin improved to 27.2% from 22.3% last year, exceeding the forecasted 26.5%.

Subscriber growth was a key highlight, with Netflix adding 8.05 million global streaming paid memberships, significantly higher than the 4.87 million expected by analysts. This brought the total global memberships to 277.7 million, above Wall Street's estimate of 274.5 million. Regionally, subscriber additions were strong across all markets, particularly in the Asia-Pacific region, which saw 2.83 million new subscribers compared to the 1.25 million expected.

The news led to an interesting response in the stock. Initially, shares tumbled 60 points to test the $600 psychological level. The selling was likely in response to price action in tech over the past few days which is leading to a shoot first, ask questions later response. However, the stock has rebounded to recover most of its losses in the after hours. The price action could lead to investors testing the water and buying dips in the beat down tech sector in Friday trade.

The company's ad business continues to show robust growth, with ads tier membership growing 34% quarter-on-quarter. This growth is attributed to Netflix's strategic pricing and the phased elimination of the Basic plan in key markets like the UK and Canada. Netflix is also advancing its advertising technology, planning to test an in-house ad tech platform in Canada in 2024, with a broader launch in 2025. This platform aims to provide advertisers with new buying options, insights, and impact measurement capabilities.

Looking ahead, Netflix provided guidance for Q3 '24 with revenue expected at $9.73 billion, slightly below the consensus estimate of $9.82 billion. However, the company forecasted EPS of $5.10, above the expected $4.74. For the full year, Netflix raised its revenue growth outlook to 14-15%, up from the previous guidance of 13-15%, and projected an operating margin of 26%, up from the earlier estimate of 25%.

Despite the positive earnings and subscriber growth, Netflix's stock slipped 2.2% in after-hours trading, reflecting some investor concerns. The company's forecast of lower paid net additions in Q3 compared to the prior year, along with slightly conservative revenue guidance, may have contributed to this reaction.

Netflix's cash flow and capital structure remained strong, with free cash flow (FCF) of $1.21 billion in Q2, slightly down from $1.3 billion a year ago. The company continues to expect approximately $6 billion in FCF for the full year, assuming stable foreign exchange rates. During the quarter, Netflix repurchased 2.6 million shares for $1.6 billion and has $5 billion remaining under its current buyback authorization.

Management emphasized the company's strategic focus on scaling its ad business and enhancing its advertising technology. Despite the rapid growth of its ad inventory, Netflix aims to build a strong foundation for future revenue and profit growth from advertising, which is expected to become a key component of its long-term strategy.

Overall, Netflix's Q2 '24 results reflect strong operational performance, with significant gains in subscriber numbers and earnings. The company's proactive approach to expanding its ad business and strategic investments in content and technology position it well for sustained growth, despite some near-term market volatility.

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