Netflix tops financial, user expectations, though cash flow growth pauses

Netflix stock (NASDAQ:NFLX) dipped 2% in immediate postmarket reaction as the company surpassed revenue growth and user growth expectations in its second-quarter earnings, though free cash flow took a step back.

Revenues grew 17% to $9.559B, topping consensus expectations for $9.53B, largely on the back of user growth: Paid memberships rose 16.5% on average to 277.65M globally (net adds of 8.05M) vs. consensus expectations of 273.78M gathered by Bloomberg.

The revenues grew 22% on a foreign exchange-neutral basis. Meanwhile, average revenue per membership ticked up just 1% (5% on an F/X-neutral basis). Those exchange differences were again linked largely to heavy devaluation of the Argentine peso relative to the dollar.

Meanwhile, operating income rose 42% year-over-year to $2.6B, and operating margin improved by nearly five percentage points, to 27.2%.

Earnings per share rose 48% and also topped expectations.

The biggest shortfall vs. analyst consensus was in free cash flow, which dipped to $1.213B (vs. expected $1.6B) from a year-ago total of $1.339B, and last quarter’s seasonally strong $2.137B.

As usual, the company noted it was continuing to invest in expanding entertainment. As for the burgeoning advertising business: “We’re making steady progress scaling our ads business. Ads tier membership grew 34% quarter on quarter, and we’re building an in-house ad tech platform that we’ll test in Canada in 2024 and launch more broadly in 2025.”

The “exceptional” performance in Q2 “led to management increasing their [fiscal 2024 revenue growth] guidance to 14-15%, up from 13-15%,” Seeking Alpha analyst Michael Del Monte said in response to the report. “Ad tier experienced substantial growth sequentially, which may be supported in part by cost-conscious consumers pressured by the overall cost of living.”

Netflix’s (NFLX) live Q&A interview with executives is set to begin at 4:45 p.m. ET.