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for a closer look now at Netflix's second quarter. We have Jamie Lumley, Third Bridge group sector analyst. All right, Jamie, so at least initially here, investors seem a bit disappointed in the after hours, but but what's your initial reactions to the print? What do you make of it?

Well, going into these earnings, expectations were super high. If you look at the last year for Netflix, it has continued to overdeliver on basically all of its core metrics. We look at operating margin, we look at that subscriber growth, they're definitely a history of really knocking out of the park here. So first thoughts on this, certainly subscriber growth continues to be very healthy. That $8 million number, excuse me, 8 million subscriber number is well above what most analysts were expecting. Most expectations were in that five to six range, and this is a good indication of both the ad supported tier continuing to gain traction. And also the fact that there is room left to run when it comes to growth from that crack down of password sharing. The bigger questions though are, of course, looking out longer term. If we think about the rest of this runway for the crackdown password sharing, how long is that road? We only have a couple more quarters of, you know, getting these numbers on subscriber totals. So investors may be a little bit anxious thinking about how much growth there really is left for that audience base.

So how are you thinking about those questions? And how are you thinking about your how you're modeling for the company is going to change as they stop reporting that streaming number?

So certainly, the way that Netflix has been talking about this is the fact that they're no longer looking just at subscriber numbers is the best way to model their growth story. And they have other metrics which are quite important. Operating margin really jumps out here. Is that's really, if we think about the rest of the landscape,

Which was 27% last year.

Yeah, 27% down from 28%, but above the guidance of 26 and change. So certainly continues to be quite strong, and this is where they can really flex their muscle against the rest of competition. Disney's targeting double digits long-term. You know, that's just over 10, and Netflix is not only there, continues to really be head and shoulders above this. So although we can't necessarily look at just the traditional math of subscribers and our poo, we can continue to really see what the effect of Netflix is initiatives are, how they're thinking about their expenses in addition to their growth to really see where the strength of the company could be.

And Jamie, what about the ad business? How do you see it evolving from here? How bullish are you on that?

So the ad business is quite interesting, because initially, Netflix had some pretty aggressive goals. They were targeting 40 million subscribers by the third quarter of last year. They only hit that target back in May of this year. It does continue to take up a significant part of their growth story from a subscriber standpoint. Uh, but it has yet to really prove itself. So there are definitely levers which can continue to be growth with this business. We've heard from our experts that there's still a lot of flexibility for driving up CPMs, raising that ad load, tailoring the ad experience to different users. Uh, but this business still really needs to, uh, get some work done before it generates substantial revenue. What we've been hearing is that really, uh, Amazon is a big player here when it comes to ads and streaming. They're the player which is disrupting the market, really impacting ad sales, those CPMs we're seeing out there right now. So, as things stand, Netflix still has a bit of work to do on that ad tier.

Um, I want to ask about content, because the company talking about Bridgerton of course, it's big hit. In the second quarter, that's one of the things that seems to have helped their numbers. They talk in the letter today about the Bridgerton universe, as they call it, generating 172 million views. Um, when you look at the third quarter and what looks like a disappointing forecast for subscriber growth, is it because there isn't Bridgerton's done? Like what's the next thing? That's what you always want to know with these streaming services. What's the next big piece of content that's going to generate excitement?

It's a really good point, and that's the big question for all the streaming businesses all the time. You know, what's as good as your last hit was? What is next? And that's something the creatives will continually work on, especially remembering that we're in an interesting time period. We're coming out of that strike period in Hollywood last year, which really disrupted the content slates, the distribution of various types of content, and has made this year be a little bit chunky in terms of what's coming out when and what's really in that pipeline. Going forward, the summer is usually also a softer month. You know, you think about demands on people's times. People are spending more time outside, their leisure time has been in different activities. That's where Netflix is really thinking about competing with all use of leisure time, not just the other streaming platforms. But their content is interesting. We've seen some marquee deals that they've made over the last few months. We have NFL games coming up at Christmas. We have WWE starting next fall, in addition to the ongoing pipeline of originals. So Netflix is definitely trying to diversify their content strategy, find new ways to engage with people, be it finding the next Bridgerton, or finding routine programming to continue to have people come back again and again. Uh, but they're still trying to figure out what exactly the right balance is for their types of content they want to bring to people.

We we should note, Jamie, stock now, you know, off its lows here, that's down about 2%. Uh, I want to ask you a question about sports as well, and how you think Netflix is thinking about sports? And do you, do you think you need Jamie, do you need more sports if you're going to really build a strong, durable ad business?

It's a really good question because advertisers love sports. This is one of the areas which drives steady engagement from viewers. It drives very strong CPMs, and it's something which is really helpful for getting that ad business off the ground. The flip side of this, of course, is the fact that sports incredibly expensive. We're currently in the process of seeing just how expensive the NBA rights are with that $76 billion deal being finalized, or in the process being finalized right now with various distribution partners. Whether Netflix truly wants to compete in that space is an open question. They've dabbled a little bit. They have their live, uh, you know, sports entertainment. They've won off different events, such as the various golf tournaments they've had. It seems right now they're figuring out just how much they want to spend on this. They do like live, management has talked about live extensively. But it does seem unlikely that at least in the short term, they'll really be investing in some of those marquee, massive sports properties.

Um, as Josh just pointed out, the shares are not down as much as they were earlier. There was an interesting note out from bespoke investment research earlier that talked about how much Netflix tends to move versus other companies in reaction to earnings. So by that metric, the 2.1% looks even smaller, I guess, in terms of a drop. I know you don't give investment recommendations on stocks per se, but like, for lack of a better way of putting it, would you be a buyer of Netflix here? I mean, should investors be looking at this as well-positioned in the streaming universe?

So here's how I think about this and what we're hearing from the experts we speak with. So basically, Netflix continues to be at the forefront of the streaming landscape. They have the largest audience. They have a really healthy flow of content. One thing which is really interesting is the fact that last year, in the midst of the strikes, when they pulled back on content spend, they didn't see subscriber churn escalate materially. They continue to have a really strong position and mind share of consumers. They are that go-to spot for consumers for entertainment. Uh, and continue to be at the top of the list really positions them well as they right size their content spend and figure out what their content mixes and find new ways to engage consumers. So if we think about the growth story from here, there's still definitely opportunity to continue to drive revenue growth. They have some softer expectations for the summer, highlighting the challenging compare period if you think back to summer 2023. Uh, but there are still growth drivers at play here. Ads could definitely continue to scale, and as they get larger and larger, that gives them the ability to really ramp up the price of their ad inventory. And then also, we think about that crackdown on password sharing. There's still opportunity there. They talked about 100 million households which were sharing passwords. Over the last year, they've now added about 45 million households. There could still be, you know, ample people who have not paid for Netflix who could still be brought into the fray.

All right, Jamie. Thanks a lot. Just want to mention as well, um, flagging here amongst all the other things that Netflix is talking about. It's going to phase out the basic plan that they have in the UK and Canada. I guess they've been doing that, and they're now going to start doing that in the US and in France, and that that has helped their ads member base in the second quarter. So going to keep watching that trend as well. Thanks, Jamie.