Netflix Inc. missed Wall Street’s third-quarter profit projections due to an unexpected tax bill in Brazil, but the firm provided a somewhat better outlook for the remainder of the year.
The streaming giant’s shares fell 5.6% to $1,171.24 in after-hours trading on Tuesday as investors responded to the earnings release.
At the time of writing, the Netflix stock is down around 6.5% in pre-market trading.
Unexpected setback from Brazil tax dispute
Netflix reported third-quarter net income of $2.5 billion, below analysts’ estimates of $3.0 billion, with diluted earnings per share of $5.87 versus the expected $6.97, according to LSEG data.
Revenue came in at $11.5 billion, in line with forecasts.
The results were weighed down by a $619 million tax charge related to a surprise dispute in Brazil.
Netflix said its operating margin, excluding the charge, would have exceeded its forecast of 31.5%, though the reported margin for the quarter was 28%.
The company characterised the tax issue as a one-time event and does not expect it to materially affect upcoming results.
Analyst Paolo Pescatore of PP Foresight called the quarter “robust” overall but noted the expense could pressure the stock.
Looking ahead: slightly higher Q4 outlook
Netflix estimated fourth-quarter revenue of $11.96 billion, slightly higher than Wall Street’s projection of $11.90 billion.
It forecasted diluted profits per share of $5.45, a cent above analysts’ expectations.
The firm claimed it was “finishing the year with good momentum,” highlighting an “exciting Q4 slate” that included the final season of Stranger Things in November and December, as well as two live National Football League games on Christmas Day.
Netflix also stated that the third quarter was its best-ever period for advertising sales, but declined to offer exact data.
Analysts saw this as a positive indication for the company’s ad-supported tier, but they also emphasised that subscription income continues to drive the majority of Netflix’s growth.
Shifting focus beyond subscriptions
After exceeding 300 million customers across the world, the company sought to broaden its business base.
Netflix recently ceased reporting subscribers, pushing investors to pay attention to revenue and profit instead.
The company has lately been branching into video games and advertising, but neither of those divisions can drive significant revenue at this point.
As Netflix sees more competition from services like YouTube, Amazon’s Prime Video, Disney+ and others, executives have referred to both segments as opportunities for growth over time.
The broader media business is also undergoing a significant transformation, with the likely sale of Warner Bros Discovery (WBD.O) gaining attention.
According to CNBC, Netflix was one of the parties interested in assessing Warner Bros.’ assets.
Cautious approach to industry consolidation
Netflix Co-CEO Ted Sarandos emphasized that the company remains selective in its acquisitions, prioritizing intellectual property over traditional media networks.
“We can and will be choosy,” Sarandos told analysts, adding that “nothing is a must-have for us to achieve our business objectives.”
Co-CEO Greg Peters echoed this stance, noting that potential consolidation among competitors would not materially affect Netflix’s outlook.
“Watching some of our competitors potentially get bigger via mergers and acquisitions does not change in and of itself, at least our view, the competitive landscape,” Peters said to shareholders.
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