Netflix earnings come in mixed despite password crackdown, ad tier rollout

Netflix (NFLX) reported second-quarter financial results Wednesday that came in mixed as the platform continues efforts to trim costs and boost engagement in an increasingly competitive streaming landscape.

Revenue, although 2.7% higher compared to the year-ago period, missed estimates despite new initiatives like the crackdown on password sharing, which rolled out in the US in late May, along with the recently launched ad-supported tier.

The streamer also guided to third-quarter revenue of $8.52 billion, below expectations of $8.67 billion.

Shares dipped lower as a result, sinking as much as 5% in after-hours trading.

Here are Netflix's second-quarter results compared to Wall Street's consensus estimates, as compiled by Bloomberg:

Revenue: $8.19 billion versus $8.30 billion expected

Adjusted earnings per share (EPS): $3.29 versus $2.90 expected

Subscribers: 5.89 million net additions versus 2.1 million net additions expected

Despite the revenue miss, profitability metrics like operating margin and free cash flow steadily beat expectations.

Operating margin hit 22.3% in the quarter, surpassing Netflix's own projection of 19%. The company reiterated its full-year operating margin guidance of 18% to 20%.

Free cash flow impressed at $1.34 billion, significantly above consensus calls of $542 million. Netflix boosted its full-year free cash glow guidance to $5 billion, up from the prior $3.5 billion, citing the impact of the double Hollywood strikes.

"We expect revenue growth to accelerate in the second half of ‘23 as we start to see the full benefits of paid sharing plus continued steady growth in our ad-supported plan," Netflix said in the release. "While we’ve made steady progress this year, we have more work to do to reaccelerate our growth. We remain focused on: creating a steady drumbeat of must watch shows and movies; improving monetization; growing the enjoyment of our games; and investing to improve our service for members."

This content is not available due to your privacy preferences.Update your settings here to see it.Just ahead of the results, the company quietly removed its lowest-priced ad-free streaming plan in the US.

The "Basic" plan had been offered to US consumers for $9.99 a month. The removal of this plan, which the company also did in Canada last month, comes as Netflix more heavily leans on the ad tier, which comes at a cost of $6.99 per month.

In regards to the password sharing crackdown, Netflix said it plans to roll out paid sharing to almost all of the remaining countries on Wednesday.

Revenue in each region is now higher than pre-launch, the company said, with sign-ups exceeding cancellations.

Still, Netflix attributed the year-over-year decline in average revenue per user to the timing of the paid sharing rollout, which occurred late in the quarter, coupled with limited price increases over the past 12 months and a higher mix of membership growth from lower revenue countries.

Netflix best positioned amid Hollywood strikesPeople carry signs as SAG-AFTRA members walk the picket line in solidarity with striking WGA (Writers Guild of America) workers outside Netflix offices on July 11, 2023, in Los Angeles, California. (Photo by Mario Tama/Getty Images)Against the backdrop of earnings, Netflix executives will likely address the double strike in Hollywood as actors join writers on the picket lines.

SAG-AFTRA — the union that represents approximately 160,000 actors, announcers, recording artists, and other media professionals around the world — announced a strike last week after failing to negotiate a deal with the Alliance of Motion Picture and Television Producers (AMPTP), which bargains on behalf of studios.

According to a new report by Moody's released on Monday, Netflix is among the best-positioned companies in the event of a prolonged work stoppage, along with Comcast (CMCSA), Fox (FOXA), Sony Group (SONY), Amazon (AMZN), and Apple (AAPL).

"Major studios, network owners and streamers that are well-diversified by business, content genre (news and sports) or by geographic production and library, and have relatively strong balance sheets are least at risk," the report said.

Wedbush's Pachter echoed this viewpoint in a recent interview with Yahoo Finance Live, emphasizing Netflix's ability to pivot amid the strikes.

"Netflix would love this to drag on for five more years," he quipped, adding the studio will "not be the first" to cave to demands given its strong presence overseas, broad breadth of content, and profitable balance sheet.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at here for the latest stock market news and in-depth analysis, including events that move stocks

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