After the US stock market closed on Thursday, October 17th Eastern Time, streaming giant Netflix delivered impressive third quarter results: both revenue and profit exceeded expectations with double-digit increases. At the same time, its revenue guidance for the fourth quarter was significantly stronger than expected, and it slightly raised its annual guidance for this year.
After the financial report was released, Netflix's stock price, which closed down about 2% on Thursday, rose after hours and then turned up, with a post hours increase of over 5% at one point.
The operating revenue for the third quarter was 9.825 billion US dollars, a year-on-year increase of 15%. Analysts expected 9.78 billion US dollars, and the company's guidance increased by 13.9% to 9.727 billion US dollars. The second quarter saw a year-on-year increase of nearly 17%; Diluted earnings per share (EPS) for the third quarter were $5.40, a year-on-year increase of 44.8%, analysts expected $5.16, and the company's guidance was $5.10, a year-on-year increase of 48% for the second quarter; The operating profit for the third quarter was $2.909 billion, a year-on-year increase of 51.8%. Analysts expected $2.72 billion, and the company's guidance was $2.73 billion, a year-on-year increase of 42% in the second quarter; The operating profit margin for the third quarter was 29.6%, up 7.2 percentage points year-on-year, with analyst expectations of 27.8% and company guidance of 28.1%. In the second quarter, it increased by 4.9 percentage points to 27.2%. These three indicators are significantly higher than the same period last year and exceed Wall Street's expectations.
The net profit for the third quarter was 2.364 billion US dollars, a year-on-year increase of 41%, and the company's guidance was 2.237 billion US dollars, a growth of 44.3% in the second quarter.
Netflix's net increase in paid subscribers for streaming media in the third quarter was 5.07 million, a year-on-year decrease of 42%. Analysts expect an increase of 4.52 million, with a net increase of 8.05 million users in the second quarter; At the end of the season, the total number of paid members was 282.7 million, with analysts expecting 282.15 million. At present, Netflix's global paying user base has reached 282.7 million, a year-on-year increase of 14%. In the third quarter, Netflix's paid user growth in its largest markets, the United States and Canada, fell short of expectations. However, this slowdown was offset by an unexpected surge in users in the Asia Pacific region, reflecting Netflix's efforts to provide adaptive products for the region and the strong performance of content launched in Japan, South Korea, and Thailand during the quarter.
Its Asia Pacific region saw a net increase of 2.28 million subscribers, a year-on-year growth of 21%, and analysts expect an increase of 1.56 million. In the third quarter, Netflix's revenue in the Asia Pacific region also performed the best among major markets worldwide, with a growth rate of 19%. Regarding the strong performance in the Asia Pacific region, Netflix specifically mentioned that the company has improved its products that are suitable for the region, enhanced the compatibility between products and the market, and launched strong content locally in Japan, South Korea, and Thailand in the third quarter.
In the quarterly letter to shareholders, the company spent a lot of space discussing its content and advertising hierarchy, planning to significantly expand in these two areas.
In terms of programming, Netflix has stated that user engagement with its programs is "healthy" and plans to expand its share in the streaming market by increasing investment in film and television shows, "continuing to enhance the diversity and quality of the content we offer," rather than bundling with other streaming services. Netflix also stated that it is now back on track after last year's SAG-AFTRA and WGA strikes affected production. Due to last year's strike, our 2024 program schedule has become more scattered than in previous years. However, our production has rebounded and we are looking forward to future programs, "the letter wrote. In terms of advertising, Netflix once again emphasizes that its advertising business is "a priority in the coming years," and although it is still in the early stages, they "are expected to reach the number of advertising users that we believe are of critical scale for advertisers in all advertising countries by 2025
The company has also adjusted its expectations for advertising hierarchy, telling shareholders that "we do not expect advertising to be the main driver of revenue growth in 2025." "The short-term challenge (as well as the medium-term opportunity) is that our development speed exceeds our ability to monetize our growing advertising inventory," the letter continued. Looking ahead, the company stated that due to its content arrangement and typical seasonal factors, it expects a greater improvement in user base in the fourth quarter compared to the third quarter.
Looking ahead to the fourth quarter, Netflix's performance guidance is expected to generate revenue of $10.13 billion in the fourth quarter, with analysts expecting $10.05 billion, and revenue of $43 billion to $44 billion in 2025, with analysts expecting $43.4 billion. Diluted EPS for the fourth quarter is expected to be $4.23, with analysts expecting $3.9. The expected operating profit for the fourth quarter is 2.19 billion US dollars, with an operating profit margin of 21.6% and an analyst expectation of 21.2%; The target operating profit margin for 2025 is 28%. The expected net profit for the fourth quarter is 1.847 billion US dollars.
Netflix will cease reporting user numbers and average revenue per member (ARPU) starting from the first quarter of 2025, and this timeline is approaching. This adjustment has raised concerns among investors about Netflix's long-term user growth trend. Netflix stated that the adjustment is due to the company's future focus shifting from subscription user growth to revenue and operating profit margin as the main financial indicators, measuring customer satisfaction through user engagement (i.e. time spent on the platform). Netflix executives have stated that the number of subscribers does not reflect the company's financial situation very well.
Currently, investment banks such as Goldman Sachs and Loop Capital have raised their target price for Netflix.
Goldman Sachs analyst Eric Sheridan stated that Netflix maintains its holding rating and has raised its target price from $659 to $705. Loop Capital analyst Alan Gould maintains a buy rating and has raised the target price from $750 to $800.