Netflix beats subscriber targets, cautions on ad growth

By Dawn Chmielewski and Lisa Richwine

(Reuters) -Netflix said on Thursday it added more than 8 million subscribers in its second quarter as the streaming service benefited from a password-sharing crackdown and the popularity of such titles as "Bridgerton," "Baby Reindeer" and "The Roast of Tom Brady." 

While the subscriber gains topped analyst predictions of 5 million, Netflix issued cautious guidance for the third quarter and said its advertising business would not become a primary driver of revenue growth until at least 2026.

Netflix shares reversed initial losses after it reported results to trade up 1% in after-hours trading. The stock has surged nearly a third so far this year.

"Netflix is still the best and most profitable streaming company out there, but with technology stocks generally retreating over the last several days, some investors may sell on the generally good news and taking profits now while waiting for a possible better re-entry point for the stock," said Michael Ashley Schulman, chief investment officer at Running Point Capital.

The streaming video pioneer is facing saturation in the United States and plans to stop regularly reporting new subscriber additions next year. Investors have been zeroing in on the company's relatively new advertising business as a potential source of growth.

On Thursday, Netflix said third-quarter subscriber gains would be lower than the comparable period in 2023 when it had just started the password clamp-down.

The company also said its vice president of ad sales, Peter Naylor, was departing.

Third Bridge analyst Jamie Lumley said Netflix's advertising business "has yet to prove itself from a revenue standpoint."

"Our experts highlight that Amazon has made a much bigger splash in the ad market and Netflix needs to continue working on scale in this segment if it wants to be a major player," Lumley said.

For April through June, Netflix posted diluted per-share earnings of $4.88, compared with consensus forecasts of $4.74 a share, according to LSEG. Revenue for the quarter reached $9.56 billion, in line with estimates.

At the end of June, the new sign-ups brought the total number of global Netflix subscribers to more than 277 million.

Netflix said its ad tier membership grew 34% from the prior quarter, but it did not say how many subscribers chose that option.

"Our ad business is growing nicely and is becoming a more meaningful contributor to our business," Netflix said in a letter to investors. "But building a business from scratch takes time - and coupled with the large size of our subscription revenue - we don't expect advertising to be a primary driver of our revenue growth in 2024 or 2025."

On a post-earnings video, Netflix Chief Financial Officer Spencer Neumann said the company's advertising business is "growing nicely," but it is building off a small base.

"It's a meaningful contributor," Neumann said. "And then we get (to) '26 and beyond, it can be even more meaningful, and hopefully comes to the point where it's a primary contributor."

The company said it expects third-quarter revenue growth of 14% compared with a year ago.

Three years into its videogame initiative, Netflix said it planned to release a multiplayer game based on "Squid Game" later this year when it debuts Season Two of the dystopian Korean series. It also plans games tied to "Emily in Paris" and "Selling Sunset."

(Reporting by Dawn Chmielewski and Lisa Richwine in Los AngelesAdditional reporting by Juby Babu in Mexico CityEditing by Sayantani Ghosh and Matthew Lewis)