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 loss of nearly 1 million paying users for the second quarter is the worst quarterly decline in the company's history after the streamer lost 200,000 users in April.
Netflix co-CEO Reed Hastings admitted on the earnings call that "it's tough losing a million [subscribers] and calling it a success," but he reiterated that the company is "set up really well for the next year."
Still, Netflix revealed softer Q3 subscriber guidance, anticipating 1 million net additions for the current quarter — below Wall Street's consensus estimate of 1.9 million.
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?
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 hopeful that an ad tier could be the answer to at least some of Netflix's problems.
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."
On the earnings call, Netflix's leadership team said they're taking an "innovation-oriented view" when it comes to ads, saying they plan to provide an "incredible" experience to consumers, brands, and advertisers alike.
As for the selection of Microsoft, Netflix COO and chief product officer Greg Peters said bluntly, "We picked Microsoft as our ads partner because we think they're going to be great as an ads partner."
He added that the two companies plan to "work together, collaborate and evolve the technical capacity" of the ad experience — citing flexibility as a key component of the partnership.
Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at email@example.com