Netflix added more than 5 million customers in the third quarter and eclipsed Wall Street’s expectations on every major financial metric despite a new programming slate constrained by last year’s strikes in Hollywood.
Sales for the period grew 15 per cent to $9.83 billion (€9 billion), the company said in a shareholder letter Thursday, while earnings increased to $5.40 a share. Analysts were predicting Netflix would add 4.52 million subscribers.
Shares of Netflix rose as much as 5.4 per cent to $724.89 in after-hours trading. The stock has more than quadrupled since May 2022, when a slowdown in the company’s growth led to a major sell-off and spooked investors about the entertainment business.
Since then, Netflix has added more than 60 million customers, thanks to a crackdown on password sharing and the introduction of a lower-priced subscription with advertising. The company finished the quarter with 282.7 million subscribers.
“We’re feeling really good about the business,” co-chief executive Ted Sarandos said on a call with analysts. “We had a plan to reaccelerate growth and we delivered on that plan.”
Most analysts believe the boost from the password crackdown is temporary, and that Netflix will soon need to find another way to grow. The company has yet to see material financial returns from its investment in advertising or video games, and some on Wall Street now worry the stock is overvalued.
Subscriber growth “does seem like it’s slowing back down,” according to Dave Heger, an analyst with Edward Jones.
Yet Netflix continues to deliver stronger growth than expected, and its leadership has sought to reassure investors by saying the company will benefit from the crackdown on password sharing in the years ahead.
The company on Thursday predicted sales next year will increase between 11 per cent to 13 per cent – to as much as $44 billion – through a mix of new members and price increases. Netflix will increase prices in Spain and Italy on Friday, and said it will phase out one of its cheaper-priced plans in Brazil later this quarter.
Two regions – Europe, the Middle East and Africa, and the Asia-Pacific – accounted for almost all of the company’s new customers. Netflix lost customers in Latin America for the first time since early 2023. New subscribers in the current, fourth quarter will exceed the third-quarter total, the company also said.
While Netflix acknowledges its advertising business is progressing slowly, management said that it has grand ambitions for the next couple of years. The company is building its own advertising technology and has struck several deals to sell its advertising-supported service alongside other streaming services. Advertising sales will double next year, co-CEO Greg Peters said.
“We have much more work to do improving our offering for advertisers, which will be a priority over the next few years,” the company wrote in the letter to shareholders.
Netflix has started to invest in live programming as one way to increase the amount of inventory it has to sell advertisers. It will offer a live boxing match next month, followed by two National Football League games on Christmas Day. Starting next year, Netflix will offer customers three hours of live wrestling every week.
Two Hollywood labour stoppages last year delayed Netflix’s slate of programming for much of this year, and output has yet to fully recover. Yet the company still scored big hits with The Perfect Couple, a new season of Emily in Paris and a series on the infamous murderers, the Menendez brothers, from producer Ryan Murphy, as well as the movies Rebel Ridge and The Union. The company said it has a particularly strong slate in the fourth quarter, including the return of Squid Game, its most-watched series ever.
Sarandos raved about the company’s slate for 2025, which will include new seasons of Wednesday and Stranger Things, as well as the third Knives Out film.
Spending on advertising and new programming will slow the company’s upward trajectory in profitability, management said. The company’s net income has quadrupled over the last five years, yet its operating margin will increase by just one percentage point to 28 per cent next year from the level projected for 2024.
“We want to balance near-term margin growth with investing appropriately in our business,” the company said. “We still see plenty of room to increase our margins over the long term.” – Bloomberg
