Netflix operating profit jumps 36% in Q2, lifted by strong APAC growth

Netflix has reported a 19% annual lift in revenue and a 36% jump in operating profit for its second quarter, led by significant growth in the Asia-Pacific region.

In the three months ended June 30, revenue was US$7.34 billion, up 2.5% from $7.16 billion in the prior quarter, and up 19% year-on-year. Operating income was $1.85 billion, up 36% year-on-year. Net income witnessed an even greater jump, up 88% to $1.35 billion, from $720 million the year prior.

Cost of revenues rose to $4.02 billion in the quarter, up by 10% year-on-year, as Netflix spent more on marketing, technology and development, and administrative costs.

Marketing spend rose 39% year-on-year to $604 million in the quarter, from $434 million in the same period in 2020. This is the most the company has spent on marketing in the second quarter over the past few years, and is only eclipsed by the busy Christmas period.

Technology and development costs rose 24% year-on-year to $537 million—the company's highest quarterly spend in recent years. General and administrative costs increased 21% to $335 million.

Regional breakdown

Netflix said its Q2 revenue growth came from an 11% increase in average paid memberships, the majority of which came from APAC, and an 8% growth in average revenue per membership.

The APAC region witnessed by far the biggest annual revenue jump, up 40% year-on-year to $799 million. It was followed by Europe, Middle East and Africa (EMEA), which reported $2.4 billion in revenue, up 27%, and US and Canada, which reported $3.23 billion, up 14% year-on-year. Latin America brought in the lowest annual revenue increase of 10% to $861 million.

The US and Canada continues to be Netflix's biggest region, accounting for 44% of total revenue in the quarter. But it was the only region to lose paid members. While it lost 433,000 paid members in the quarter, APAC added 1.02 million members, LATAM added 764,000 and EMEA added 188,000.

APAC accounted for two-thirds (66%) of net paid membership additions in the quarter. And in an earnings call with investors, Netflix CFO Spence Neumann claimed the company is "roughly 10% penetrated" in the APAC region—with plenty of headroom for growth.

Netflix has adapted its pricing strategy as it seeks to capture growth in lower-income markets. It introduced a cheaper, mobile-only plan in India in July 2019 and rolled it out to 78 countries this quarter, including many markets in APAC, COO and chief product officer Greg Peters said on the call. He said the company is trying to figure out how to seek broader reach without cannibalising revenues.

"Very much what we’re trying to do is, as we bring in lower price-plan offerings that decrease average revenue per member, we’re also thinking about that from the calculus of expanding the funnel in a way that delivers total net positive revenue," he said.

Meanwhile, EMEA reported the biggest lift in average revenue per membership (ARM), a key measure for Netflix. EMEA's ARM rose 11% year-on-year to $11.66, the US and Canada's ARM followed with a 10% year-on-year lift to $14.54, and APAC's ARM was up 9% year-on-year to $9.74. LATAM reported a marginal gain of 1% year-on-year to just $7.50—much lower than other regions.