Streaming TV service specialist Netflix's (NFLX 3.55%) third-quarter report Wednesday afternoon showed shareholders that its efforts to reaccelerate revenue growth are working. Q3 revenue rose nearly 8% year over year -- up from 3% growth in the prior quarter. Even more, the company laid out several reasons to expect more robust growth going forward. Suffice it to say, it was a good update for shareholders.
Though there was a lot to like in the report, one of the most exciting insights management provided was about the early momentum of its ads business. Sure, it's not a material business yet. But there are some early signs that this nascent revenue driver has the potential to transform into a massive catalyst.
NASDAQ: NFLX
Key Data Points
Promising metrics
Sure, Netflix's ads business remains small. The company didn't launch ads until late 2022, so these are still early days for this important part of the streaming service specialist's business. But that doesn't mean investors can't look for signs of a promising future for this new revenue stream.
Fortunately, Netflix provided a glimpse into the business -- and it's looking good.
"In Q3'23, our ads membership increased nearly 70% quarter-over-quarter and now accounts for [approximately] 30% of all new sign-ups in our 12 ads countries," management wrote in its Q3 shareholder letter.
This is helping Netflix achieve its "immediate priority" for its ads business, which is to grow its subscriber count in its ad tiers "so that Netflix becomes an essential buy for advertisers, which is key for advertising to become material to our business," management explained in its Q3 update.
This isn't the first quarter the company provided promising details on the new revenue stream. The company revealed in its Q1 update earlier this year that its ads plan in the U.S. has average revenue per member exceeding the average revenue per member of its standard ad-free plan. Furthermore, management said there's been "very little switching from our standard and premium plans." So, these more affordable plans are largely driving incremental subscribers to its platform.
Patience is required
Of course, Netflix once again took the time to remind investors that it's going to take time for the company to fully build out its ads business and all the technologies needed to scale the business properly.
"It takes time to build a new business from scratch, which is why we have said ad revenue would not be material to our business in 2023," management said in its Q3 shareholder letter.
While this new business is small today, management's visibility into its momentum gives it confidence in its long-term potential. Management said it expects the business to become "a multi-billion dollar revenue stream over time."
To capture the big opportunity ahead of it in advertising, management said it's investing aggressively in the space. Indeed, it said that it's expanding beyond the capabilities Microsoft provides Netflix's ad business. Specifically, Netflix said it is investing in its own sales team and "technical infrastructure to complement Microsoft's capabilities."
