🍿 Netflix: Password-Sharing Crackdown Delivers
And a look at the impact of the Hollywood strike on financials
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Netflix (NFLX) reported its Q2 FY23 earnings.
We gained insights into the effect of the password-sharing crackdown.
Spoiler: It’s working!
Today at a glance:
Netflix Q2 FY23.
Recent business highlights.
Key quotes from the earnings call.
What to watch looking forward.
Don’t forget to check out our YouTube Channel, where we dive into how Netflix makes money! Get up to speed on everything you need to know in this insight-packed 8-minute video (you can thank us later!).
Netflix’s recent strategy to curtail password sharing — now officially known as "paid sharing" — is showing signs of success.
Netflix ended Q2 FY23 with over 238 million paid subscribers, adding nearly 6 million during the quarter. Growth was most notable in the EMEA region, which added 2.4 million paid subscribers. All regions reported the addition of over 1 million subscribers during the quarter.
The password-sharing crackdown, introduced in the US and parts of EMEA in May, was designed to address the widespread practice of sharing Netflix account passwords between non-household members. The Q2 report provides our first glimpse into the broad impact of this new initiative.
As management previously pointed out, due to variables such as subscription plans and pricing, advertising, and the introduction of paid sharing, revenue growth is now a better performance indicator than paid subscribers.
Management has three goals:
Accelerate revenue growth.
Expand operating margin.
Grow free cash flow.
So let's dive into the Q2 numbers to evaluate Netflix's performance against these indicators in an increasingly competitive environment.
1. Netflix Q2 FY23
Netflix is a straightforward business.
You get the revenue by multiplying two things:
👨👩👧👦 The number of paid memberships.
💵 The average revenue per membership (ARM).
Netflix has raised its price regularly over the years, but not since January 2022. As a result, while the number of paid membership is growing, ARM growth has been muted.
Q2 FY23 Memberships key metrics:
Total paid memberships grew +8% Y/Y to 238.4 million.
Net paid membership adds were +5.9M Q/Q (vs. ~1.8M expected).
Average Revenue per membership declined -1% Y/Y on a constant currency basis (to $11.45/month).
Here is the bird’s-eye view of the income statement.
Some notes for context:
More than half of the revenue comes from outside the US and Canada (UCAN), creating significant currency headwinds for the business. Revenue grew +6% Y/Y on a foreign exchange neutral basis (a better representation of the growth).