Shares of Netflix (NFLX 1.18%) are popping in after-market hours on Tuesday as investors received some upbeat news from the company. Not only did the streaming giant lose fewer subscribers than it anticipated, but management guided for a return to subscriber growth in the third quarter.
The report is likely a breath of fresh air for Netflix shareholders after the stock has been battered and bruised during the year. Even including the stock's rebound in after-market hours, shares are down more than 60% in 2022 alone.
Let's take a look at what management is saying in the company's second-quarter shareholder letter about Q2's results, as well as its expectations for the current quarter. And, of course, let's check on what Netflix's latest plans are for its long-awaited ad-supported tier.
The subscriber numbers investors should know
Netflix reported about 220.7 million subscribers at the end of Q2, down about one million from the subscribers it reported at the end of the first quarter. Investors should note, however, that subscribers still grew on a year-over-year basis, increasing by 5.5%. This year-over-year growth rate has steadily decelerated in recent quarters, falling from a growth rate of 8.4% in the second quarter of 2021.
Second-quarter year-over-year subscriber growth was driven by Netflix's Asia Pacific (APAC) segment, where the company added 1.1 million paying members.
Management didn't have much to say about its better-than-expected performance other than to note that it under-forecasted. To management's credit, in the grand scheme of its approximately 221 million subscribers, the margin of error in its forecast was small.
Looking to Q3, Netflix expects to add one million subscribers -- a welcome change after two quarters of sequential subscriber losses.
A "position of strength"
Looking beyond subscriber trends, Netflix management is confident about the company's current position. It called it one of "strength," citing its $30 billion-plus in annualized revenue, $6 billion of operating profit last year, swelling free cash flow, and a healthy balance sheet. For 2022, Netflix is forecasting total free cash flow of about $1 billion, plus or minus a few hundred million dollars.
Looking even further out, management says it expects to remain free cash flow positive on an annual basis with "substantial growth" in the key cash flow metric, which is defined by subtracting capital expenditures from operating cash flow, in 2023.
Given its improving cash flow, the company believes it is sustainably "self-funding," able to continually invest in new content without having to borrow money or sell equity to raise capital.
Here comes Netflix's ad-supported tier
Of course, any review of Netflix's second-quarter update without mentioning the company's plans for an ad-supported service would be insufficient. Investors are counting on the company's ad business launch to fuel Netflix's next leg of growth.
The ad-supported tier, Netflix said, likely won't go live until "around the early part of 2023." Furthermore, Netflix confirmed that ads are not coming to the company's existing plans. They will remain ad-free. An ad-supported tier, Netflix said, will complement its existing plans, giving viewers more choice as to how they consume content.