Netflix (NFLX -5.4%) shares declined after its Q2 report, despite beating EPS expectations and offering modest revenue upside. The company also guided Q3 above analyst predictions and increased its FY25 revenue guidance to $44.80-45.20 billion, along with a higher full-year operating margin forecast.
- Netflix no longer reports paid memberships and ARM quarterly, but revenue rose 15.9% year-over-year to $11.08 billion, marking its first-ever $11 billion quarter. However, this was only slightly above guidance, with the full-year revenue increase primarily due to F/X gains, which may reduce the appeal of the numbers.
- Revenue growth in Q2 was driven by increased memberships, higher subscription prices, and ad revenue. All regions showed double-digit F/X neutral revenue growth, with UCAN revenue growth accelerating to 15% year-over-year from 9% in Q1, thanks to price changes implemented in January.
- Operating margin was a highlight at 34.1%, compared to prior guidance of 33.3%. Netflix forecasts a Q3 margin of 31.5%. NFLX expects lower operating margins in the second half due to higher content amortization and marketing costs. Nonetheless, FY25 F/X neutral operating margin guidance was raised to 29.5% (30% reported).
- Netflix reported stable retention and engagement metrics, with no significant shifts in plan mix or take rate. The company remains resilient in economic downturns, offering entertainment starting at $7.99 in the US.
- Although advertising is a smaller segment, Netflix expects ad sales to double by 2025. The Netflix Ads Suite, its in-house ad tech platform, has been fully rolled out, with advertisers enthusiastic about its scale and engaged audience.
The stock decline is partly attributed to the F/X-driven upside and high investor expectations following a 50% stock run-up since April. While the Q2 results were not as impressive as Q1, Netflix's performance underscores its dominance in the industry.
