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Netflix Stock Surges On Q2 Earning Beat, Subscriber Growth Bets; Plans Low-Cost Ad Supported Service

Updated at 5:17 pm EST

Netflix Inc.  (NFLX) – Get Netflix Inc. Report posted better-than-expected second quarter earnings Tuesday, but lost nearly 1 million subscribers and forecast softer near-term additions as the streaming service continues to face intense competition and rising input costs. 

Netflix said profits for the three months ending in June were pegged at $3.12 per share, a figure that was 5% higher than the same period last year and firmly ahead of the Street consensus forecast of $2.97 per share.

Group revenues, Netflix said, came in at $7.97 billion, up 8.6% from last year but just behind analysts’ estimates of an $8.04 billion tally. 

Netflix lost 970,000 paid subscribers over the quarter, the company said, less than half of the anticipated 2 million exodus as rival services from Disney  (DIS) – Get The Walt Disney Company Report and Comcast  (CMCSA) – Get Comcast Corporation Class A Common Stock Report enticed customers and lockdown orders eased in major economies around the world. 

Netflix said it will add around 1 million subs over the three months ending in September, but that tally is still south of the market’s 1.8 million forecast. It’s third quarter earnings forecast of $2.14 per share was also well shy of the Street’s expectation of $2.72 per share.

“While we always have room to improve, we’re very pleased with how far we’ve come in providing so much satisfaction and enjoyment to our members,” Netflix said in a letter to shareholders published alongside the earnings report. “In the near term, a key priority to re-accelerate revenue growth is to evolve and improve our monetization,: the letter added. “In the early days of streaming, we kept our pricing very simple with just one plan level. In 2014, we introduced three price tiers to better segment demand.”

“Going forward, we will focus on better monetizing usage through both continued optimization of our pricing and tiering structures as well as the addition of a new, lower-priced ad-supported tier,” Netflix said..  

Netflix shares, which closed 5.6% higher on the Tuesday session, were marked 7.25% higher in after-hours trading immediately following the earnings release to indicate a Wednesday opening bell price of $216.25 each.

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Netflix said earlier this month that it’s working with Microsoft  (MSFT) – Get Microsoft Corporation Report on an ad-supported version of its service that will be “more integrated and less interruptive” than traditional television.

The launch of the service, after years of push-back from co-founder Reed Hastings, marks not only a sea-change for Netflix but also for its larger streaming rivals. 

Walt Disney which is nipping at Netflix’s heels in terms of subscriber additions, said late Monday secured a record $9 billion in ad spending commitments for its coming fiscal year.

Known as “up fronts”, the advertising purchases suggest faith in both the group’s expanding digital platforms, including ESPN and Hulu, as well as its plans to introduce a tiered service for its Disney+ streaming platform.

An ad-support plan could bring in an additional 4.3 million subscribers in the U.S. and Canada, Netflix analyst John Blackledge from Cowen estimated earlier this month, helping its global total rise to around 240 million by the end of next year. 

“We’ll likely start in a handful of markets where advertising spend is significant,” Netflix said. “Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering.” 

Netflix lost 200,000 subscribers over the the first three months of the year thanks to a mix of rising prices, increasing competition and password sharing.

The group moved to address at least part of that equation earlier this week when it unveiled plans to raise prices in five countries in Latin America for customers accessing Netflix in more than one home.

  We’re in the early stages of working to monetize the 100m+ households that are currently enjoying, but not directly paying for, Netflix. We know this will be a change for our members,” Netflix said in its shareholder letter. 

“Our goal is to find an easy-to-use paid sharing offering that we believe works for our members and our business that we can roll out in 2023,” the letter added. “We’re encouraged by our early learnings and ability to convert consumers to paid sharing in Latin America.”

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