Netflix said Wednesday that quarterly revenue and subscriptions increased as efforts to curb password sharing take hold.
Here’s what the company reported for the second quarter versus what analysts expected, according to Refinitiv:
- merits: $3.29 per share versus $2.86 per share expected
- Gain: $8.19 billion versus $8.30 billion expected
The streaming giant said it added 5.9 million customers in the second quarter amid its wider crackdown on password sharing in the US. Netflix said it would roll out its new policy to the rest of its customers on Wednesday.
Netflix’s stock fell as much as 8% in after-hours trading.
The company reported revenue of $8.19 billion, up 3% from $7.97 billion in the same period last year. Net income of $1.49 billion increased from $1.44 billion in the year-ago quarter.
The earnings report comes as investors look to learn more about the rollout of Netflix’s ad-supported streaming tier and push to boost subscriptions by banishing account sharing.
However, Netflix said it was too early to provide a breakdown of revenue from the ad-supported tier — which was introduced late last year — as well as the accounts coming from the new password policy.
Netflix said on Wednesday it expects revenue growth in the second half of the year as it “starts to see the full benefits of paid sharing plus the steady growth of our ad-supported subscription.”
Netflix said it now forecasts revenue of $8.5 billion, up 7% year-over-year, for the third quarter. It attributed the expected revenue growth to more average paid memberships.
The company also expects the number of paid net subscribers in the third quarter to be similar to the second quarter. Meanwhile, Netflix expects fourth-quarter revenue growth to “accelerate significantly” as efforts to curb password sharing gain momentum and as ad revenue increases.
In May, Netflix began warning members about its policy of discouraging the use of other people’s accounts. Subscribers can transfer a profile to someone outside their household so they can pay for their own account, or the member can pay an additional fee of $7.99 per person.
According to a report from Antenna, the company’s subscriber base increased in the weeks following the rollout of the sharing policy.
Netflix executives declined the earnings call on Wednesday to provide specific information about the rollout of the paid sharing initiative to date.
Co-CEO Greg Peters said Wednesday that the company will not see the full effect of the policy in the coming quarters.
“It’s not an overnight thing,” Peters said on the phone call. “Partly because of interventions being implemented gradually, and partly because some borrowers don’t sign up for their own account right away, but will do so in the next month or three months or six months or maybe even longer if we launch a title that they’re particularly interested in.”
The executives noted that the password sharers who started their own accounts have similar characteristics to long-term customers, leading the company to expect a high retention rate.
Netflix introduced both the new sharing policy and the new ad level last year as part of its response to its first subscriber loss in more than a decade in 2022.
Netflix’s stock has risen with the rollout of the initiatives. Shares of the company are up more than 60% this year, hitting a 52-week high On Wednesday, it was expected to show growth this quarter.
The company said on Wednesday it hopes the changes will help it “generate more revenue from a larger base,” adding that it wants to use the additional funds to reinvest in the platform.
In May, Netflix said it expanded its paid-sharing policy to more than 100 countries, which account for more than 80% of its revenue.
“The cancellation response has been low and while we are still in the early stages of monetization, we are seeing a healthy conversion of borrower households into full-paying Netflix memberships,” Netflix said Wednesday, adding it would address the issue in the rest of the countries where it is available.
Meanwhile, media companies have turned more to ad-supported streaming as a way to become profitable.
During its pitch to advertisers in May, Netflix revealed few details about its ad-supported tier, albeit enough to push its inventory higher. The company said it had 5 million active users for the new tier and 25% of its new customers were signing up for the tier in areas where it’s available.
On Wednesday, Netflix confirmed that it has dropped its “basic” ad-free plan, making the standard plan with ads the cheapest option at $6.99 per month. The standard and premium tiers without commercials cost $15.49 and $19.99 per month, respectively.
These initiatives come at a time when the media industry is going through one of its most tumultuous periods in ages.
Industry analysts have long suspected that the industry could consolidate, particularly through mergers and acquisitions.
On Wednesday, co-CEO Ted Sarandos said Netflix was looking at opportunities to buy intellectual property and build out its content library.
“Some of those assets are under pressure for a reason,” Sarandos said of potential media companies or assets for sale. “Our M&A activity would be primarily around IP, which we could develop into great content for members. Traditionally, we’ve been very strong builders over buyers and that hasn’t changed.”
Netflix is also dealing with the potential fallout from the writers’ and actors’ strikes in Hollywood.
Analysts expect Netflix to outperform other media companies during the work stoppage due to its extensive content, particularly from international sources.
As a result of the strike, Netflix raised its free cash flow forecast to $5 billion for 2023, up from a previous estimate of at least $3.5 billion due to lower content spending this year.
Sarandos said on Wednesday’s phone call that Netflix has a lot of new content in the pipeline, but didn’t say how long that stream would last. Still, he said the strike must come to an end.
“We have a lot of work to do. There are a handful of complicated issues,” Sarandos said. “We are super committed to reaching an agreement as quickly as possible, one that is fair and that will allow the industry and everyone in it to move forward in the future.”
