Second-quarter revenue rose 12%, ignoring exchange rate impacts, to $12.6bn ($12.6bn expected), driven by membership growth, pricing, and increased ad revenue.
Operating profit rose 11.1% to $4.2bn ($4.1bn expected), margins declined 0.7 percentage points to 33.4% as content costs increased.
Free cash flow fell 33% to $1.5bn and net debt increased by $3.1bn to $5.2bn. Share buybacks totalled $4.7bn, with $27.1bn remaining on the current plan.
Looking at the third-quarter, management expects revenue growth of 11%, with margins of 33.2%. For the full-year, revenue is expected to land between $51-51.4bn, growing around 12%, with operating profit growth of above 20% and margins at 31.5%.
The shares fell 8.9% in after-hours trading.
Our view
Netflix delivered a solid second quarter, but full-year guidance was left broadly unchanged despite recent price increases, while the third-quarter outlook came in slightly below expectations. With growth moderating and no obvious near-term catalyst, investors are questioning whether management is simply being conservative or seeing signs that momentum is becoming harder to sustain.
That puts greater focus on Netflix’s efforts to broaden its appeal. Live events, video podcasts, creator-led programming and partnerships with traditional media groups could help the platform reach audiences beyond its core film and series offering. These look like sensible additions rather than a change of direction, but they are still developing, and it remains unclear how much they can contribute financially.
Engagement remains an area to watch, particularly as YouTube and short-form platforms compete for attention. Viewing hours grew 2% in the first half, despite major sporting events elsewhere, which should ease the most bearish fears. However, Netflix will now publish its detailed engagement report annually rather than twice a year. With subscriber disclosures already removed, investors have fewer ways to assess underlying health.
Still, Netflix continues to perform well across most key metrics. Its ability to reduce churn is rooted in its best-in-class original content, which keeps viewers engaged for longer. While content is expensive, the business is highly cash generative, giving Netflix flexibility to fund investment. Content costs are expected to rise this year, though growth should slow in the second half.
The ad-supported tier is also gaining traction, proving more popular than many expected. It allows Netflix to enter new markets and reach users priced out of the fully paid service. Advertising revenue is expected to roughly double to $3bn this year, while improved technology should help make better use of growing inventory.
Internationally, Netflix retains a clear edge through its production and distribution network. Executing localised content well is difficult, but the group has built an enviable track record. This matters because longer-term subscriber growth will need to come from non-US markets.
With Warner Bros acquisition noise removed, management is back to business and buybacks have accelerated – though there’s no guarantee that will continue. We’re encouraged to see the three capital levers being pulled (investing back in the business, keeping a strong balance sheet, and then buybacks).
All in, Netflix remains a market leader and a high-quality business. The fundamentals remain strong, but the investment case is becoming more complicated as revenue growth moderates and competition for viewers’ time intensifies. Solid financial delivery alone may no longer be enough. Investors want clearer evidence that Netflix can sustain engagement, and reduced disclosure makes that harder to judge.
Environmental, social and governance (ESG) risk
The media industry’s ESG risk is relatively low. Product governance is the key risk driver, alongside business ethics, labour relations and data privacy & security.
According to Sustainalytics, Netflix’s management of material ESG issues is average.
Netflix has to comply with significant and often complex regulations and laws, across a very large number of different countries. The group has a global anti-corruption policy, but this is not publicly disclosed, making its effectiveness difficult to assess.
There are both internal and external audits on IP infringement risk, as well as its independent ethics hotline available for employees. Cybersecurity issues are addressed by the audit committee. But it’s unclear there is any managerial or board-level responsibility for privacy management.
Netflix key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.