Netflix's second quarter revenue came in at $8.2bn, in-line with guidance. The group added 5.89m net new subscribers, higher than previously thought, reflecting the impact of stopping password sharing in its core markets. Operating profit rose 15.8% to $1.8bn, this was also in-line with expectations.
Netflix also said it's cancelling its cheapest ad-free version, amid its introduction of different-priced tiers.
Average revenue per membership (ARM) fell 1%, ignoring the effect of exchange rates. This partly reflected a lack of price increases over the quarter.
The group had net debt of $13.2bn as at the end of June, which includes amounts owed for content creation. There was free cash flow of $1.3bn.
Looking ahead, Netflix expects revenue growth of 7% to $8.5bn in the third quarter and flat to slightly negative ARM.
The shares fell 6.7% in pre-market trading.
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Our view
We had been concerned Netflix's account sharing crackdown would spark an exodus of subscribers. We're pleased to say that worry was unneeded. An enormous amount of people have chosen to become legitimate customers, giving Netflix the opportunity to spread its costs over a larger customer base.
Netflix's ability to reduce churn (customers flipflopping to rivals) is firmly rooted in its best-in-class original content. Audiences engage more with original content, and while it's expensive to make, it does keep eyeballs on screens in a bigger way. That's partly why Netflix spends about $17bn a year on content.
And keeping eyes glued to the Netflix app is front of mind in the inflationary environment, which is why the ad-supported tier was born. Initial progress seems positive, but we are realms away from knowing for sure if this venture is the cash cow it's been sold as. Netflix needs to squeeze as much juice as it can from different avenues, given a recent lack of price increases could suggest that inflation is starting to bite Netflix's ability to crank up its subscription price, as households look to trim their spending.
The group also has a market-leading international production and distribution network. Doing localised content right isn't easy and Netflix has an enviable footprint here. This is important because longer-term subscriber growth will need to come from emerging markets.
Looking nearer-term, Netflix faces challenges of the economic variety in its core markets like the US and UK. As people dial down spending in the wake of inflation, the risk from fever-pitch competition has increased. While cheaper plan options will help mitigate this, Netflix can't take its foot off the gas - there are plenty of rivals waiting in the wings to pounce on market share.
The balance sheet, although carrying a fair whack of debt, isn't in bad health. That said, investors shouldn't be holding their breath for shareholder returns any time soon. The priority now is investing in the business and content for growth.
Netflix is a market leader, and there are plenty of moving parts these days which could add up to longer-term growth. We also note the valuation isn't as unreasonable as it has been. In the short-term, the group's valuation is likely to fluctuate with the wider market mood music, which will depend on the performance of major western economies.
Netflix key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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