Netflix saw a significant boost in new customers, thanks to its crackdown on password-sharing in more than 100 countries including the U.S., as well as its advertising-supported tier.
The Los Gatos, Calif.-based streamer added 5.89 million subscribers in the second quarter, after pressuring nonpaying users to sign up for their own plans or risk losing access to their favorite Netflix shows and films. The boost exceeded analysts’ expectations of 1.81 million additional subscribers, according to FactSet.
The subscriber jump boosted revenue and earnings.
Netflix’s revenue rose 2.7% to about $8.2 billion during the second quarter, compared with a year earlier. Net income was about $1.5 million, compared with $1.4 million a year earlier. The company slightly missed analysts’ revenue expectations but beat estimates of $1.29 million in profit.
Netflix said it expects that its revenue will grow to $8.5 billion in the third quarter, up 7% from the same period a year earlier, and that it will add subscribers at roughly the same number as in the second quarter as it continues to push nonpaying Netflix users to subscribe and expands its advertising base.
The company said its efforts to enforce password restrictions have reached more than 80% of its revenue base and it has seen sales increase in those regions compared with before its paid-sharing plans went into effect.
More password crackdowns at other streamers could be on the horizon if Netflix’s trajectory continues.
“If it works for Netflix, of course [other companies will] do it,” said Michael Pachter, a managing director of equity research at Wedbush Securities, who has an outperform rating on Netflix’s stock.
The boost comes after a difficult first half of 2022, when Netflix suffered subscriber declines and scrambled to increase revenue by announcing plans to crack down on password-sharing and launch a new, cheaper, ad-supported plan after years of being averse to commercials on its platform.
Those bets appear to be paying off.
Netflix said its ad plan subscriptions have doubled since the first quarter, but ad revenue isn’t yet significant enough to report because of the small number of members using the tier.
“Building an ads business from scratch isn’t easy and we have lots of hard work ahead, but we’re confident that over time we can develop advertising into a multi-billion dollar incremental revenue stream,” Netflix said in a shareholder letter released Wednesday.
The ad-supported plan, launched last year, has attracted new users to Netflix, according to data from audience analytics firm Samba TV and market research company HarrisX, which surveyed U.S. adults in March. The majority of U.S. adult Netflix customers who participated in the survey and signed up for its $6.99 monthly ad-supported plan did not downgrade from a more expensive tier, according to the firms’ data.
The cost of watching Netflix without ads has also gone up. The company eliminated its cheapest ad-free tier, which cost $9.99 a month, for new or rejoining members in the U.S. and Britain. Existing U.S. users of the basic plan can continue watching without ads for that price. Netflix’s standard plan costs $15.49 a month in the U.S.
In the second quarter, Netflix launched shows that attracted large audiences. Popular programs included “Queen Charlotte” and “XO, Kitty,” spin-offs based on the queen featured in romance series “Bridgerton” and the youngest sister in the “To All the Boys I’ve Loved Before” movies.
But there are challenges ahead.
Netflix and other Hollywood studios are embroiled in strikes led by film and TV writers and actors. Organized by the actors guild SAG-AFTRA and the Writers Guild of America, the groups are pushing for more pay from streaming shows, protections against artificial intelligence threatening their jobs and more transparency on how well programs are performing on streaming services.
Some have called it the “Netflix strike,” because the company was seen as a pioneer in changing the business models for how writers and actors get paid.
Netflix co-Chief Executive Ted Sarandos said the strike “was not the outcome that we wanted,” adding that his father was part of an electricians union. Having grown up in a union household, Sarandos said he is aware of the toll a strike can take emotionally and financially on families.
“We’re super committed to getting to an agreement as soon as possible,” Sarandos said during an earnings presentation on Wednesday.
Analysts say Netflix is one of the best positioned entertainment studios in a prolonged strike because of its large catalog of content, with a significant portion that is produced abroad in places such as South Korea. Some of the international programs have become worldwide successes and in general are cheaper to make, including “Squid Game,” Netflix’s most popular series ever.
“Netflix, because of its mix of catalog and in particular, its mix of international, it can back fill with Scandinavian shows, Korean shows,” Pachter said. “So they’re the least motivated to settle.”
Netflix’s stock closed at $477.59 a share, up 0.6% on Wednesday. In after-hours trading the stock was down 8.7%.
