What We Learned From Netflix’s Latest Quarterly Update

After topping second-quarter earnings expectations, Netflix (NFLX) leaders discussed the streaming giant’s strategic advertising push, its paid subscriber growth, potential headwinds, and more in the company’s latest quarterly update.

Phasing Out Ad-Free Basic Plan in Advertising Push

As part of its strategy to boost its advertising business, Netflix said it is planning begin phasing out its ad-free basic plan in the U.S. and France.

The company said it has already seen some positive results from similar efforts in other markets. Netflix already phased out the basic plan in the U.K. and Canada, which Netflix said contributed to a 34% sequential jump in memberships with ads in the second quarter.

The streaming giant also said that integrating ads into its offerings allows it to offer lower prices to users and creates an additional source of revenue for the company.

Netflix CEO Spencer Neumann said the “attractive entry point in terms of price point and feature set for our ads plan” could help support Netflix’s subscriber growth.

Subscribers Numbers Grow, Before Netflix Stops Reporting Them

Netflix added more than 8 million paying subscribers in the second quarter, reporting a total of 277.65 million global streaming paid memberships, better than analysts’ expectations.

Neuman said the subscriber growth was driven by Netflix’s content slate with a “wide variety of titles that delivered across genres and regions.”

Netflix highlighted content that performed well in the quarter, including its original shows like “Bridgerton,” and “Baby Reindeer,” as well as “The Roast of Tom Brady,” which the company said attracted its largest live audience to date. The streaming giant has also recently pushed into live sports and related content to better position itself against competitors.

The company has long reported quarterly subscriber numbers as a metric of business performance, but will stop doing so in 2025 as it says revenue and operating margin are better financial metrics, while engagement or watch hours better reflect customer satisfaction.

Soft Guidance as Netflix Scales Ad Business

Netflix said it expects $9.73 billion in revenue for the third quarter, slightly lower than analyst projections compiled by Visible Alpha.

During the earning call, co-CEO Theodore A. Sarandos noted that the company expects “some headwinds” in engagement due to the continued effects of its password-sharing crackdown and competition from Alphabet’s (GOOGL) YouTube.

Company leaders said the advertising business is an opportunity for “a multi-year trajectory to have a big and increasing revenue and profit impact on the business.”

Netflix shares were 0.8% lower at $638.12 as of 12:45 p.m. ET Friday, though they’ve gained over 30% since the start of the year.