Netflix (NFLX) Q2 2024 Earnings Review

Streaming giant Netflix (NFLX) dropped its Q2’24 earnings report (April-June 2024) after the bell on 7/18, delivering numbers that beat the Street’s expectations. The company outperformed on both top and bottom lines.

Netflix Q2 2024 Earnings Highlights

Netflix knocked it out of the park this quarter. Paid net adds came in at a whopping 8.05 million, reaching 277.65 million subscribers. This not only blew past the consensus estimate of 4.87 million but also nearly matched the most bullish analyst projections of around 8 million. The stellar performance can be attributed to two key strategies: the paid sharing program and the ad-supported tier. Subscriber growth of 3% QoQ and 16.5% YoY was the main driver behind revenue growth that exceeded company guidance (16.8% YoY vs. expected 15.9%).

While net adds were down from the previous two quarters, they still outpaced the 5.89 million from the same quarter last year and significantly beat the company’s conservative guidance. This demonstrates Netflix’s sharp insight and execution in adapting to market changes and user demands.

Netflix’s new strategies resonated positively across all operating regions, though growth patterns showed clear regional differences. Except for EMEA (Europe, Middle East, and Africa), all regions saw higher net adds compared to the same quarter last year. Notably, the APAC region was the star performer, adding a massive 2.83 million users and becoming the main growth engine for the quarter. North America, EMEA, and LATAM also showed robust growth, adding 1.45 million, 2.24 million, and 1.53 million users respectively.

However, it’s worth noting that except for APAC, all regions saw a decline in net adds compared to the previous quarter, with drops ranging from 11% to 43%. Beyond seasonal factors, this trend hints at potentially diminishing marginal returns from the password-sharing crackdown. It underscores the necessity for Netflix to lean more heavily on its ad-supported tier to maintain future growth.

Average Revenue per Membership (ARM) grew 1% YoY, or 5% FX-neutral, primarily in line with company expectations. The discrepancy is mainly due to the unique situation in Argentina, where severe inflation led to price hikes while the peso significantly depreciated against the USD.

ARM performance varied by region: North America led with 7% YoY growth, reflecting the price hike in the U.S. in Q4 last year. EMEA, LATAM, and APAC saw YoY declines of 1%, 3%, and 6% respectively. This regional disparity highlights both the challenges and opportunities Netflix faces in its global pricing strategy.

Q2 operating profit surged 42.5% YoY to $2.603 billion, surpassing the company’s forecast of $2.52 billion. The operating margin hit 27.2% (above the expected 26.6%), a significant improvement from 22.3% in the same quarter last year, though slightly below Q1’s 28.1%. Net income reached $2.147 billion, up 44% YoY, including a $43 million non-cash unrealized gain from FX remeasurement on Euro-denominated debt.

However, Q2 free cash flow came in at $1.2 billion, lower than last year’s $1.3 billion and analysts’ expectations of $1.6 billion. Since FCF is currently one of investors’ most closely watched profitability metrics, this figure might disappoint some bulls.

Netflix Q2 2024 Earnings Call

Earnings Call on July 18, 2024, at 8:45 PM (GMT)

Games and Live Streaming

Netflix announced plans to launch an online game based on Squid Game in the second half of this year, aligning with the release of the IP’s second season. This move showcases the company’s strategic thinking in IP extension and user engagement enhancement. Additionally, the company is venturing into live streaming, including Joe Rogan’s live performances, NFL Christmas game broadcasts, and weekly WWE wrestling streams. These initiatives not only enrich the content library but also lay the groundwork for advertising business development.

Netflix’s games business achieved a 3x growth in user engagement in 2023, with 2024 trending similarly positive. The company highlighted the success of interactive story-based games built on its own IPs, which enhance user experience and complement other content types.

Advertising Business

Netflix’s ad business is undergoing a transformation from a peripheral to a core component. Currently, in markets where the ad-supported tier is available, 45% of new sign-ups opt for this option, up from 34% in the previous quarter. The company plans to test its in-house ad platform on a small scale in 2024, with a full rollout expected in 2025. While ad revenue isn’t projected to significantly impact overall revenue until 2026, Netflix has laid out a clear path toward this goal.

Netflix attributed the strong subscriber growth this quarter to three key factors:

1. A robust content slate
2. The continued effects of the paid sharing policy
3. The positive impact of the ad-supported tier

The company specifically noted that the growth trajectory in India mirrors that of other regions, suggesting success in its globalization strategy. Notably, user engagement has increased compared to a year ago, even after accounting for accounts affected by paid sharing, indicating the effectiveness of the company’s content strategy.

Coexistence and Competition with YouTube

Facing YouTube as a formidable competitor, Netflix has adopted a stance of both competition and cooperation. While acknowledging that they compete for users’ time and attention, Netflix recognizes that many of its movies and series generate heated discussions on YouTube and social media. This suggests that the relationship isn’t purely competitive but partly mutually beneficial. Therefore, Netflix believes that in the long run, the most significant opportunity lies in capturing the 80% market share outside of Netflix and YouTube’s current reach.

Forecast for Q3

Streaming giant Netflix reaffirmed its focus on revenue as the primary growth metric, with operating margin and free cash flow as crucial profitability indicators. The company emphasized its primary goal of pursuing revenue growth and expanding profitability.

Netflix forecasts Q3 revenue to grow 14% YoY to $9.727 billion, or 19% FX-neutral, slightly below the market expectation of $9.81 billion. However, EPS is projected at $5.1, beating the consensus of $4.73. The company expects Q3 paid net adds to be lower than the 8.76 million from the same quarter last year, which was the first full quarter reflecting the impact of the password-sharing crackdown. Global ARM is expected to remain roughly flat YoY.

Netflix raised its full-year 2024 revenue guidance, now projecting 14-15% YoY growth from the previous 13-15%, reflecting robust paid membership growth. On the profitability front, considering improved revenue outlook and continued cost discipline, the company upped its 2024 full-year operating margin forecast to 26% from the previous 25%.

Netflix emphasized its goal of improving profit margins each year, although the magnitude of margin expansion may vary annually. Additionally, Netflix reiterated its annual free cash flow forecast of $6 billion unchanged.

Review and Analysis

Strengths and Opportunities:

• Netflix maintains industry-leading capabilities in content production and audience matching, continually increasing content investment, creating a positive flywheel effect
• Competitors reducing content production and aggressively licensing content benefit Netflix in customer acquisition and access to high-quality third-party content
• Increasing subscriber numbers, revenue scale, and cash flow enable Netflix to make more significant content investments, improving per-unit content production efficiency
• Building an in-house ad tech platform demonstrates long-term commitment to the advertising business, with the ad-supported tier showing strong growth momentum and potential for significant future ARM contribution
• Entry into sports broadcasting has the potential to attract new audience segments and improve retention rates
• The trend of cable TV transitioning to streaming video is still in its mid-stage, leaving room for further development

Weaknesses and Threats:

• Apple and Amazon are ramping up investments in video content
• The games business strategy remains unclear and unproven
• Potential long-term competition from short-form video content

Expanding Streaming Scale Advantages

Netflix’s Q2 2024 earnings report again demonstrates its dominant position in the streaming video sector. All key metrics showed positive trends, including revenue, user growth, retention rates, ad tier adoption, and content investment. These figures reflect Netflix’s continuously expanding economies of scale.

In the winner-take-most streaming media market, the positive feedback loop created by scale advantages is crucial. Netflix has the most extensive user base and the ability to consistently invest in high-quality content, attracting even more users and creating a virtuous cycle. This advantage is difficult for competitors to break and tends to strengthen over time.

The positive impact of paid sharing is gradually diminishing, as expected. Netflix now views it as part of its overall product competitiveness rather than a short-term growth driver. This shift indicates that Netflix is moving from tactical thinking to a more strategic approach to user acquisition and retention.

Advertising

This quarter’s report further confirms Netflix’s shift in strategy regarding sports event streaming. With improved financial strength, sports broadcasting rights that were once considered expensive have become more affordable. This is another advantage brought by economies of scale: Netflix now can compete for high-cost content that could bring long-term value to the company.

Netflix will likely continue increasing its investment in sports events and other live content. This not only attracts new users but, more importantly, drives growth in the advertising business. Live content, especially sports events, has always been a crucial arena for television advertising. This move can be seen as an essential step towards the maturation of Netflix’s advertising business.

Netflix’s ad-supported tier is growing in user numbers, but the revenue contribution per user is temporarily declining. This is actually a positive signal. This pattern has been seen repeatedly in the development of social media platforms like Facebook: user growth comes first, initially lowering per-user revenue, but as advertisers gradually flood in, monetization capabilities eventually catch up. Netflix is recreating this script. Although its advertising platform is not as mature as Meta’s, which may lead to a slower increase in monetization capabilities, the direction is correct.

Netflix has significantly increased its R&D spending by building its own advertising platform. This is a wise long-term investment. A platform capable of precise targeting and rapid feedback is essential to succeed in online advertising. Netflix’s ambition is not limited to simply moving traditional TV advertising to streaming platforms. By building its ad tech stack, Netflix is preparing for a larger advertising business landscape.

Netflix’s increased investment in its advertising platform will inevitably affect its advertising business cooperation with Microsoft. Although Microsoft may maintain its position as an essential distributor, Netflix is clearly taking back complete control of its advertising business, including at the technical level. This shift reflects Netflix’s recognition of the importance of the advertising business. In the long run, mastering core technology and data will put Netflix in a more advantageous position in the increasingly competitive streaming advertising market.

Games

In the games sector, Netflix is still in the exploration stage. Although it has achieved initial success in specific game genres, there’s still a long way to go before establishing itself in this competitive field. Considering the complexity and fierce competition in the games market, Netflix might want to consider accelerating the implementation of its games strategy through acquisitions. This would help Netflix acquire expertise and technology quickly and secure a foothold faster in this potentially huge market. Netflix’s ambition is clearly not limited to being a streaming video giant but to build a comprehensive digital entertainment empire. Games are undoubtedly a crucial part of this blueprint.

Conclusion

Netflix’s competitive advantage comes from economies of scale and how effectively it allocates its growing resources. In this regard, Netflix seems to have found the right direction, including creating better content, building better technology platforms, increasing investment in live sports broadcasting, and investing in R&D for the advertising platform. These all appear to be correct decisions for Netflix’s long-term growth.

Netflix’s success will depend on its ability to continuously innovate and balance content, technology, and user experience. Suppose Netflix can maintain its execution capabilities and continue investing in critical areas. In that case, it’s likely to continue dominating the streaming media market and thrive in the ever-changing digital entertainment landscape.