Netflix’s third-quarter earnings report drew significant attention from investors, particularly as it marked the company’s first earnings release among major tech companies. Following a period of underperformance relative to previous highs, expectations were set for Netflix to showcase both subscriber growth and strong financial metrics. Analysts from Goldman Sachs anticipated around 6 million new subscriptions for the quarter, along with an upward adjustment of free cash flow guidance to $6 billion. Although Netflix no longer provided detailed subscriber guidance, the consensus believed the company would meet or exceed expectations. The results exceeded analysts’ predictions across various key performance indicators, indicating a robust recovery despite challenges related to content generation from labor strikes earlier in the year.
Netflix reported revenues of $9.82 billion for the quarter, a 15% year-over-year increase that surpassed estimates of $9.78 billion. Additionally, earnings per share reached $5.40, significantly higher than the $3.73 recorded a year prior and above market estimates of $5.12. The company’s operating margin stood at 29.6%, brilliantly beating the anticipated 27.8%, and showcasing an improvement from the previous year’s 22.4%. Similarly, operating income surged by 52% year-over-year, totaling $2.91 billion, and also outstripped estimates of $2.72 billion. Free cash flow for the quarter reached $2.19 billion, a strong 16% increase compared to last year, further defying expectations.
While Netflix’s overall financial performance illustrated a strong recovery, the subscriber numbers revealed some inconsistencies. The company managed to add 5.07 million new subscribers in the quarter, exceeding the 4.5 million expected by analysts. However, the growth was primarily driven by EMEA and Asia-Pacific regions, while the U.S./Canada market saw modest misses, and Latin America actually recorded a decline in subscribers, contrary to expectations for growth. In terms of streaming paid net change, Netflix saw a year-over-year decline of 42%, though it still performed better than forecasts. Specifically, the U.S./Canada region missed estimates slightly, gaining only 690,000 new members during the quarter, contrasting with expectations for higher growth.
Segmented results revealed that the U.S./Canada market’s revenue increased by 16% year-over-year, primarily attributed to rising average paid memberships and average revenue per member. The EMEA region demonstrated consistent growth with a similar 16% revenue increase, aligning with an uptick in average paid memberships. Meanwhile, robust local content offerings in the Asia-Pacific region boosted a revenue growth rate of 19%, the highest among all regions. Conversely, Latin America encountered challenges with a slight decline in subscribers, attributed to recent price changes and a weaker content offering during the quarter. However, Netflix noted early recovery in member growth for Q4, reflecting a promising trend for the upcoming period.
As Netflix looks to the future, the company has provided optimistic guidance for Q4, projecting revenues of $10.13 billion, marginally above analyst expectations of $10.05 billion. This forecast translates to an estimated operating income of $2.19 billion, coupled with a profit margin of 21.6%, both exceeding earlier projections. The company anticipates a notable uptick in paid net additions for Q4, attributing this to regular seasonality factors and a strong content lineup. Moreover, for the full year of 2024, Netflix sees revenue growth at the higher end of its previous expectations, along with an increase in the operating margin, signifying a healthy outlook on profitability.
Long-term projections exhibit continued ambitions for growth. For 2025, Netflix forecasts revenue to fall between $43 billion and $44 billion, reflecting an 11% to 13% growth rate against the expected 2024 revenue of $38.9 billion. The operating margin is anticipated to reach 28% by 2025, following significant margin improvements in 2024. While maintaining key investments to bolster long-term profitability, Netflix aims to balance margin expansion with ongoing commitments to enhance content offerings and investments in advertising and gaming initiatives. Analysts noted that although organic subscriber growth from the password-sharing crackdown has provided a temporary boost, Netflix will need to devise strategies for sustainable growth moving forward.
Despite the initial mixed market reception following the earnings release, where earlier stock dips were noted, Netflix’s shares ultimately rebounded, spiking nearly 4% in after-hours trading after dropping briefly. Comments from Goldman Sachs analysts highlighted strong revenue and operating margin results but expressed cautious optimism regarding future subscriber growth and monetization processes. The lack of concrete guidance on subscriber expectations and pricing increases in certain markets added to the broader market speculation regarding Netflix’s sustainability and valuation. Overall, Netflix’s earnings report depicted a company navigating through a challenging yet potentially reinvigorating phase in its growth trajectory, setting the stage for forthcoming discussions on content strategies and advertising efforts.
