Netflix in Q2 kept a lock on streaming growth, with quarterly subscribers, revenue and profits all increasing year over year. That includes sequential ad tier membership growth of 34% compared to Q1.
Overall Netflix gained 8.05 million paid net subscribers, compared to adding 5.89 million in the same period a year ago. Its global base now stands around 277 million, representing 16.5% growth year over year. Quarterly revenue of $9.5 billion was up 16.8% over the prior year quarter while operating margin improved five percentage points to 27.2%.
Netflix launched its plan with ads in the fourth quarter of 2022. It didn’t provide a subscriber update in Q2 earnings but had 40 million monthly active users at last disclosure in May. In earnings materials, the company said the tier now accounts for over 45% of signups across the markets its available.
On the earnings call Netflix co-CEO Greg Peters said engagement on the plan with ads is roughly the same as ad-free members at about two hours per member per day.
Netflix expects to reach “critical ad subscriber scale” needed for advertisers across its ad countries in 2025, which is the first piece of its roadmap, and grow further from there. In a letter to shareholders the company categorized ad revenue as “growing nicely” and “becoming a more meaningful contributor our business.”
That said, Netflix still has work to do on the ad front, not only to scale its base but to build out capabilities desired and needed for advertisers to be more comfortable buying. It announced multiple changes in recent months, including plans to build an in-house ad server that will first test in Canada this year before a broader launch in 2025. In a surprising happening Thursday, news broke that Peter Naylor – a senior ad exec that joined Netflix in 2022 as it started the foray into advertising – is exiting the company. Naylor’s exit follows the departure of Jeremi Gorman from Netflix last year. Gorman had joined the streamer from Snap to manage ad sales operations and was replaced by Amy Reinhard.
Personnel changes aside, Netflix executives on Thursday expressed continued optimism for the outlook of advertising on the platform, although expect efforts to span multiple years.
The relative nascent nature of its ads business alongside its long-time subscription model that drives large amounts of revenue means Netflix doesn’t expect advertising to be a primary driver of revenue growth this year or next. On the earnings call Netflix CFO Spencer Neumann said advertising is already a meaningful contributor to revenue but getting into 2026 and beyond will become more so, with hopes that eventually it will be a primary generator.
And they positioned it as somewhat of a good problem to have – as the size of its ad base is growing more quickly than Netflix is able to monetize and fill its growing ad inventory.
In terms of where the company needs to improve to drive more ad revenue, Peters cited two main fronts, including go-to market. There it’s adding more sales and ad operations personnel and aiming to provide advertisers more effective ways to buy inventory.
One major point of feedback from advertisers, he noted, was adding more demand sources that are already integrated into buyers’ processes, saying for some “that was a threshold item for them to buy in us.”
While Microsoft was Netflix’s initial ad partner, in addition to bringing adtech in house, it’s expanding capabilities on the programmatic side to DSPs The Trade Desk, Google DV 360 and SSP Magnite this summer.
The other focus is its own product and tech stack with work to build its own ad server. According to Peters this is expected to open up new opportunities for a better ad experience for users and more features for advertisers that relate to targeting, ROI/ROAS, and incrementality measurement.
He said it’s about bringing benefits of digital related to targeting, relevance, measurement and such, and the better creative format of TV advertising “as well as the ability to put those advertisements next to content, titles, stories that are impacting the social conversation, which is important for advertisers.”.
The company is hearing a lot of enthusiasm from advertisers around the ad capabilities mentioned, which it expects to build up over the next several years.
“The biggest negative feedback we get is that we aren’t there right now,” Peters said, adding it’s building as quickly as possible to close the gap.
It’s also happy with the low $6.99 entry point for its ads tier, which undercuts other ad-supported plans from the likes of Disney, Hulu and others. “That means we are more accessible for more people in our ads market,” Peters said.
But it doesn’t mean eventual price increases won’t happen. The co-CEO said it thinks of pricing similar to the ad-free plan, where it needs to increase features offered and once it gets customer signals related to acquisition, engagement and retention, it finds “the right moment to ask our members to pay a bit more to keep that flywheel spinning.”
In terms of content, analysts on the call questioned whether Netflix’s move into live sports is necessary to build a successful advertising business, where ads would be served to both its ad-supported and ad-free base - and how the company “threads the needle” for licensing sports rights without becoming beholden to leagues rising costs when it’s time to renew.
On the content side, co-CEO Ted Sarandos suggested live sports and events are a win-win. For subscribers “it drives a ton of engagement and it drives a ton of excitement,” he said, and advertisers like it for the same reason. Upcoming Netflix has a live boxing match between Mike Tyson and Jake Paul, postponed until November. On the sports side it picked up two Christmas Day NFL games this year under a multi-year deal, and in 2025 will start weekly live coverage of WWE under a 10-year $5 billion deal.
And Netflix doesn’t plan to sink under the weight of live sports rights, where it’s more interested in creating specific live events and moments that ramp up excitement rather than having a full season of major sports. And where economics have longer-term growth opportunities and events can tie into its content strategy of the storytelling and drama of sports.
Sarandos said it’s able to thread that proverbial need by making live sports “Netflix events, and not necessarily taking on a lot of tonnage from any one league.”
The Christmas Day games create a lot of real excitement, he noted, but it still represents just one day of football. And Netflix is “in love with the kind of very profitable storytelling version of sports,” where airing now, it has series like Receiver that follows the 2023 season of five NFL players.
Separately, with a deal like WWE, the Sarandos cited economics Netflix likes and can grow into as it thinks about expanding costs and viewing over a longer-term period.
“It’s not a matter of there’s an automatic disconnect between you can’t do sports and net profit. It’s very difficult to have big league sports and profit when you offer them entire seasons,” he said. “But when you offer them in this event model that we’re building on, we’re really excited about our opportunity to do that without the risk [of becoming beholden to leagues].”