Breaking it down: Netflix had already pushed expectations as low as it could, projecting that it would lose 2 million subscribers last quarter after shedding 200,000 in the first three months of the year. That created room for a positive surprise.
"We're talking about losing 1 million instead of losing 2 million," Chairman Reed Hastings said on a call with analysts. "So our excitement is tempered by the less bad results."
Netflix's most substantial subscriber loss came from its biggest market, the United States and Canada, where the streamer said it lost 1.3 million users in the second quarter.
That was offset by increased subscriptions elsewhere, a sign the company's investment in foreign language programming is paying off. The release of the fourth season of the wildly popular show "Stranger Things" also provided a boost.
Looking ahead: Netflix still has work to do to convince investors that it's on the right track. Its stock is down almost 67% year-to-date. Other tech firms, like Google parent Alphabet and Facebook's Meta are off 21% and 48%, respectively. The S&P 500 is 17% lower.
That will mean making major changes to the business. Netflix, partnering with Microsoft, is racing to develop a new lower-priced option that will be supported by ads, an attempt to scoop up customers that are watching their wallets as inflation bites. It's expected to launch early next year.
It's also looking at clamping down on password sharing. The company estimated that 100 million households use Netflix but aren't paying for it directly.
"We know this will be a change for our members," it told shareholders. "Our goal is to find an easy-to-use paid sharing offering that we believe works for our members and our business that we can roll out in 2023."
Rich Greenfield, an analyst at LightShed Partners, thinks there's significant room for Netflix's pivot to advertising to be a success.
"Netflix's advertising opportunity is REAL and directly tied to its enormous time spent vs. all other streaming services," he tweeted.
But engineering this big of a move won't be easy. Netflix's entrance into the ad space will be complicated. Competition for viewers among streaming services is tight. And if a large batch of subscribers downgrades to the lower-cost version to save money, it would hurt revenue even as new users sign up.
"We urge caution to the belief that Netflix will be able to use advertising to grow revenue in a vacuum," Bank of America analysts said in a report published late last month. "The advertising ecosystem is large, complex, costly, and its competitors using ads have a several-year lead on them."
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