Netflix Beats Q3 Profit Forecasts but Cuts Ad Target as Shares Slide
Netflix reported third-quarter results after the close on Tuesday that beat profit expectations. Earnings per share came in at 87 cents, above the 82 cents analysts expected, and revenue of $12.87 billion matched forecasts exactly. The operating margin reached 34.6%, well above the 33.2% the company had guided, helped by the timing of expenses. Reuters and CNBC reported the figures.
Attention centered on growth outside the United States. Regional revenue rose 17% in Latin America, 12% in Asia-Pacific and 11% each in the United States and Canada and in Europe, the Middle East and Africa, according to figures compiled by Tickeron. Netflix did not disclose subscriber additions by region this quarter.
Co-Chief Executive Ted Sarandos told analysts on the earnings call that titles from Latin America, Europe and Asia-Pacific are driving engagement, subscriber growth, revenue and profit, according to Reuters. The United States, he added, is working, just not growing as fast as the company would like.
Churn, the rate at which subscribers cancel, improved from a year earlier both worldwide and in the United States and came in better than the company forecast, Netflix said in its shareholder letter. The result ran counter to third-party app data before the report that had pointed to rising cancellations in the United States.
The advertising business faced its first real test. Netflix cut its full-year advertising revenue target to about $2.7 billion from about $3 billion, saying some ad product features rolled out more slowly than planned. Co-Chief Executive Greg Peters acknowledged on the call that the business is a bit behind its aggressive target, while calling it a modest short-term hit in exchange for a better long-term strategic position, TheWrap reported. Advertising commitments in this year’s upfront sales nearly doubled, and the company said the ad business is growing more than 80% this year.
Shares fell about 5% in after-hours trading to around $65, according to CNBC and FXStreet, after closing the regular session down 1.66% at $68.69. Investors focused on a soft fourth-quarter outlook. Netflix guided to fourth-quarter revenue of $13.44 billion and earnings of 67 cents a share, below expectations of roughly $13.5 billion and 73 cents. The company put the fourth-quarter operating margin at 26%, short of the 28% analysts expected, and said severance costs from last week’s layoff of about 1,000 workers would trim the margin by roughly 120 basis points.
The full-year outlook also narrowed. Netflix now expects 2026 revenue of $51.1 billion, the low end of its earlier $51 billion to $51.4 billion range, and cut its free cash flow forecast to $12 billion from $12.5 billion. The full-year operating margin target of 31.5% was maintained.
Investor concern over viewing time is growing. Jefferies estimated that average monthly viewing per member fell to 49 hours in the first half of this year from 66 hours in the first half of 2023, Reuters reported. Nielsen data for July showed YouTube accounting for 14.2% of television viewing time in the United States, against 7.8% for Netflix. In its shareholder letter, the company acknowledged investor concern about engagement growth while saying member reaction to this year’s price increases has been consistent and healthy. It said improving monetization is its top priority, with spending on original programming, live events and licensed content.
A leadership change in content added to the quarter’s news. Chief Content Officer Bela Bajaria stepped down and Peter Rice, formerly of Disney, took over the content organization. Sarandos said on the call that Rice would balance artistry with commercial appeal, according to Reuters. Film chief Dan Lin also left the company.
Netflix opened the big technology earnings season. Tesla and Meta report on Wednesday, followed by Alphabet and Microsoft on Oct. 28, the same week the Federal Reserve decides on interest rates.
