A year and a half after launching ads, ads are finally making a meaningful contribution to Netflix’s bottom line.
Last quarter, Netflix grew its overall revenue by 17% year over year – a huge jump from Q2 last year, when that number was just 3%. Now that the platform’s ad-supported membership is hitting a certain level of scale, ad revenue is becoming a source of profit, CFO Spencer Neumann told shareholders during the company’s earnings call on Thursday.
Netflix’s operating margins last quarter grew 5% YoY, and “we see a lot of room to continue to grow profit margin,” Neumann said, pointing to the sign-up rate for the ad-supported plan.
Currently, 45% of new member sign-ups are for the ads plan, up from 40% in April.
Although it’ll take at least another two years before advertising is a primary revenue source, Neumann said the recent growth in profit margins is an indicator that advertising will make Netflix a sustainable and profitable business in the long term.
In the meantime, he said, Netflix is staying focused on building its own ad tech platform, which it will test in Canada later this year before rolling it out more broadly in 2025.
Netflix looks to ad tech for profits
Netflix expects in-housing ad tech will attract more brands that want to advertise on Netflix, which, in turn, will keep raising profit margins.
For Netflix, having more control over its ad tech should improve ad targeting, personalization and measurement for brands, said Co-CEO Greg Peters during the earnings call. Netflix’s in-house ad tech platform will also give buyers more way to buy Netflix inventory, Peters said. This summer, Netflix will make its ad inventory available via The Trade Desk, Google’s DV360 and Magnite, in addition to the company’s original programmatic and ad sales partner, Microsoft.
All of these upgrades to Netflix’s ad tech stack, Peters said, are upgrades that advertisers have been demanding ever since Netflix first launched ads. “We have a lot of work to do to close those gaps as soon as we can.”
Scale has been Netflix’s top priority ever since it first launched ads at the end of 2022. But now that its ad-supported membership base is growing quickly enough to raise margins, Netflix can “shift more energy into effectively monetizing that rapidly growing [amount of] ad inventory,” Peters said, referring to the investment required to build out an ad tech stack.
Perhaps the only downside to Netflix’s ad-supported membership growth is that subscription revenue growth is still outpacing that of ad revenue – Netflix’s ad tier subscriptions grew 34% last quarter since the prior quarter, while overall paid memberships grew 16% YOY – which dilutes the average revenue per user (ARPU). Netflix’s ARPU grew just 1% YOY last quarter, the same growth rate as the prior quarter. As far as ARPU is concerned, “we’re lagging,” Peters said.
Netflix, however, has reason to be optimistic about its future in advertising.
Most Netflix subscribers are still ad-free because Netflix has only been running ads for 18 months. But if Netflix can profit from advertising to what is still a “relatively small user base,” Neumann said, the profits can only go up from here.
