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Netflix shares jump as Q2 subscribers beat estimates

Editor’s Note: This post is breaking and will be updated

Netflix (NFLX) reported its fiscal second quarter earnings on Tuesday after market close as the company battles ongoing inflationary pressures, increased competition, and an uptick in subscriber churn.

The streaming giant’s Q2 subscriber numbers showed a narrower loss than expected, causing shares to surge more than 8% in after-hours trading. Revenue and adjusted earnings per share were mixed amid the broader subscriber slowdown, in addition to increased pressures from foreign exchange with the dollar holding strong relative to other currencies.

Here are Netflix’s second quarter results compared to Wall Street’s consensus estimates, as compiled by Bloomberg:

  • Revenue: $7.97 billion versus $8.05 billion expected

  • Adj. earnings per share (EPS): $3.20 versus $2.98 expected

  • Subscribers: Loss of 970,000 versus loss of 2 million users expected

The streaming giant’s anticipated loss of 2 million paying users for the second quarter would have been the worst quarterly decline in the company’s history after the streamer lost 200,000 users in April.

Netflix’s Q3 subscriber guidance of 1 million net additions came in below Wall Street’s consensus estimate of 1.9 million, although analysts have admitted that the second half of the year could see potential downside risks amid macroeconomic concerns.

Q3 revenue guidance also came in lighter than expected at $7.84 billion versus the estimated $8.1 billion.

“Our challenge and opportunity is to accelerate our revenue and membership growth by continuing to improve our product, content, and marketing as we’ve done for the last 25 years, and to better monetize our big audience,” Netflix said in a letter to shareholders.

The platform added that it expects 2022 free cash flow to hit “approximately +$1 billion, plus or minus a few hundred million dollars (assuming no material further movements in [foreign exchange.]”

“Stranger Things” season 4, which debuted episodes one through seven on May 27, may have been Netflix’s savior for the quarter.

In addition to breaking the record for Netflix’s biggest ever premiere weekend, the Duffer Brothers’ production also earned the highest viewership among all English-language Netflix seasons, with 930.3 million hours viewed in its first 28 days and 1.3 billion hours viewed in its first four weeks.

Netflix stock, which closed Tuesday’s trading session at $201 a share on the heels of a market rally, has plummeted roughly 70% year-to-date.

‘Streaming Recession’ on the horizon?

"Stranger Things" (Courtesy: Netflix)

“Stranger Things” (Courtesy: Netflix)

Prior to Netflix’s highly anticipated report, Morgan Stanley (MS) warned that a potential “streaming recession” could be on the horizon — downgrading shares at both Paramount Global (PARA) and Fox Corporation (FOXA) as a result.

“We are lowering net adds expectations across the board to reflect rising churn risk from consumers trimming their streaming portfolios in a more difficult economic environment,” analyst Benjamin Swinburne said in the note, published on Monday.

He added that recession vulnerability could also negatively impact EBITA as advertisers pull back amid the economic uncertainty, with Morgan Stanley lowering its advertising estimates “across the board,” as well.

“A potential recession creates risk to advertising estimates, which may be exacerbated by Disney and Netflix adding advertising inventory as ad budgets come under more pressure,” the analyst explained.

Generally, though, Wall Street is still hopeful that an ad tier could be the answer to at least some of Netflix’s problems — and will be looking for greater clarity on the rollout during the company’s Q2 earnings call.

The platform, which revealed last week that it’s partnered with Microsoft (MSFT) to help launch the new ad-based tier, updated its timeline on when consumers can expect it.

Netflix now anticipates to debut the ad-based offering in the early part of 2023, adding that it will “likely start in a handful of markets where advertising spend is significant…our intention is to roll it out, listen and learn, and iterate quickly to improve the offering.”

Other questions for Netflix’s leadership team include any indications of potential peak subscriber penetration in the U.S. and Canada, further analysis of the company’s content and marketing spend strategy (the streamer is expected to shell out $17 billion on content alone this year), and an update on its password sharing crackdown, which it’s currently testing overseas.

Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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