Netflix shares plummet 7% as Q3 profit misses expectations
What's the story
Netflix's shares fell by nearly 7% in extended trading on Tuesday, following a disappointing third-quarter earnings report. The company attributed the lower-than-expected results to an ongoing dispute with Brazilian tax authorities. Netflix reported a 17% increase in revenue to $11.5 billion for the quarter, matching analyst expectations and marking its best-ever ad sales quarter during this period.
Tax implications
Brazilian tax dispute impacts financial results
The Brazilian tax dispute stems from a 10% levy on certain payments made by local companies to foreign operations. Netflix had not initially factored this expense into its forecast but later decided to account for it in the third quarter after it became likely that the company would lose a legal battle over the tax assessment. "It's not a tax that's specific to Netflix. It's not even specific to streaming," said Chief Financial Officer Spence Neumann during an earnings call.
Financial performance
Netflix's 3rd-quarter performance and 4th-quarter expectations
For the third quarter, Netflix reported a net income of $2.55 billion or $5.87 per share, up from $2.36 billion or $5.40 per share in the same period last year. The company expects its fourth-quarter revenue to grow by 17% year-over-year as trends such as membership growth, pricing adjustments, and increased ad revenue continue to drive performance.
Revenue outlook
Full-year revenue and operating margin forecast adjustments
For the full year, Netflix expects $45.1 billion in revenue, a 16% increase from last year and in line with previous growth expectations of 15-16%. However, the company has revised its operating margin forecast for the year to 29%, down from an earlier estimate of 30%. This adjustment is due to the Brazilian tax dispute.
Business growth
Best-ever ad sales quarter and strong content pipeline
Despite the tax dispute, Netflix reported its best-ever ad sales quarter during the period. Co-CEO Greg Peters said that the company is poised to more than double its ad revenue this year. The streamer raised prices in January, including for its ad-supported tier. Its fourth-quarter content slate includes highly anticipated titles like Stranger Things (season 5), new seasons of The Diplomat and Nobody Wants This, Guillermo del Toro's Frankenstein, and Rian Johnson's Wake Up Dead Man: A Knives Out Mystery.