After two successive quarters of negative subscriber growth, paid memberships rebounded in Q3 by 2.41m subscribers, well above expectations of just over 1m, sending the Netflix share price sharply higher after hours. Total subscribers are now at a new record high of 223.09m, with Netflix saying that they expect this to rise 4.5m to 227.59m in Q4. This seems optimistic given the rising cost of living, which shows little sign of abating.
Q3 revenues also beat expectations, coming in at $7.93bn, beating forecasts of $7.85bn, while profits came in at $1.398bn, or $3.10 a share, helped no doubt by the finale of Stranger Things 4, which ended on a bit of a cliff-hanger.
Non-English programming has also continued to act as a big revenue earner, with APAC and LATAM revenue both showing a 19% increase. APAC saw 1.4m adds there, with Latin America adding 0.3m. This is welcome news even before the launch of their new ad tier which starts next month, however the streaming company’s Q4 forecasts do look a little on the weak side, which makes the move higher in the share price somewhat perplexing. Yes, Netflix had a good Q3, but the outlook doesn’t look great if you strip out the optimistic subscriber numbers.
Q4 revenues are expected to come in at $7.78bn, while net income is expected to fall to $163m or $0.36 a share, while operating margin is expected to fall to 4.2%, down from 8.2% a year ago. This means that despite an expectation of an increase in the subscriber base of 4.5m, Netflix expects to see lower revenues. The streaming giant appears to be blaming the strength of the US dollar for the headwinds with respect to its Q4 numbers. From the tone of the shareholder letter, it's clear that Netflix doesn’t expect a material contribution from the new ad tier in Q4. Netflix went on to say that the strength of the US dollar has cost it in the region of $1bn this year alone from a revenue point of view. Full-year operating margin remains on course to meet expectations of 19% to 20%.
As the company looks ahead to 2023, Netflix has said it would no longer be publishing guidance of subscriber numbers, and that they wanted investors to focus on the key metrics of revenue, operating income, margin, and net income.
All in all, yesterday’s Q3 numbers were a decent performance for Netflix, and with the ad tier being added next month, the big question will be whether this model could cannibalise its more premium offering as some customers trade down. Only time will tell, but with such weak guidance, the bar is already quite low.
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