Netflix Rides a Wave of Success: Third Quarter Earnings Exceed Expectations

Netflix (NFLX) revealed impressive financial results for the third quarter of 2024, reporting earnings of $5.40 per share. This figure surpassed the Zacks Consensus Estimate by 6.09% and marked a 44.8% increase compared to the same period last year.

Revenues reached $9.82 billion, reflecting a 15% year-over-year growth and also beating the consensus forecast by 0.6%.

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During this quarter, user engagement remained strong, with members averaging about two hours of viewing per day, indicating healthy member retention.

On the advertising front, membership in the ad-supported tier grew by 35% compared to the previous quarter. Netflix is in the process of developing an in-house ad technology platform, which is set to be tested in Canada during the fourth quarter and expected to launch more broadly in 2025.

Netflix, Inc. Price, Consensus, and EPS Surprise

Netflix, Inc. price-consensus-eps-surprise-chart | Netflix, Inc. Quote

Subscriber Growth Drives Q3 Revenue

The number of paid memberships rose by 15% compared to last year, with the company adding 5.07 million new subscribers this quarter. Notably, over 50% of these new sign-ups came from the ad-supported service in markets where it was available. This result, however, was less than the 8.76 million new subscribers added in the same quarter last year, reflecting the effects of enforcing a crackdown on password sharing that began in 2023.

Average revenue per membership (ARM) remained stable year over year, and on a foreign-exchange neutral basis, it increased by 5% this quarter.

As of the end of the third quarter, Netflix had a total of 282.72 million paid subscribers across more than 190 countries worldwide, marking a 14.4% increase from the previous year.

This company, currently holding a Zacks Rank #3 (Hold), credits its third-quarter growth to the popularity of its intellectual property. Noteworthy titles include The Perfect Couple (65.2 million views) and Monsters: The Lyle and Erik Menendez Story (54.6 million views), as well as the Menendez Brothers documentary released in October (24.2 million views). The company also saw engagement from shows like Nobody Wants This (37 million views) and Simone Biles: Rising (19 million views). Other hits included international series from Mexico, Brazil, Spain, Japan, and Korea.

Returning series such as Emily in Paris (season 4: 51 million views) and Cobra Kai (season 6: 36.5 million views) also contributed to the company’s results. Movies like The Union (111.9 million views) and Rebel Ridge (104.7 million views) attracted significant viewership as well.

Looking ahead, Netflix plans to venture into live events, with notable broadcasts like the Mike Tyson and Jake Paul boxing match on November 15 and two NFL games on Christmas Day featuring the Kansas City Chiefs versus the Pittsburgh Steelers and the Baltimore Ravens versus the Houston Texans.

In the fourth quarter, subscribers can anticipate popular returning series, including Squid Game Season 2, Outer Banks Season 4, and Love is Blind Season 7, alongside new titles such as Black Doves and No Good Deed. In Latin America, Netflix plans to premiere 100 Years of Solitude and Senna, creating excitement for regional audiences.

Netflix’s unscripted content slate includes Aaron Rodgers: Enigma, while its film offerings feature Carry-On, The Six Triple Eight, and Spellbound.

Starting in the first quarter of 2025, NFLX will discontinue reporting paid quarterly membership metrics and revenue per subscriber, moving away from practices seen with tech giants like Apple (AAPL) and Amazon (AMZN). In contrast, Disney (DIS) continues to separately report statistics for Disney+, Hulu, and ESPN+.

In 2023, NFLX shares have delivered a remarkable return of 41.2%, outpacing key competitors like Apple, Amazon, and Disney, which reported returns of 20.6%, 23.4%, and 7.2%, respectively.

Examining Netflix’s Revenue Breakdown

In the United States and Canada (UCAN), Netflix reported revenues of $4.32 billion, marking a year-over-year increase of 15.7% and accounting for 44% of total revenues. Average revenue per user (ARPU) increased by 4.7% from the previous year.

The paid subscriber base in UCAN grew to 84.4 million, reflecting a 9.7% increase. The company gained 0.69 million paid subscribers in this quarter, down from a gain of 1.75 million in the previous year.

In the Europe, Middle East & Africa (EMEA) region, revenues hit $3.13 billion, with a 16.3% year-over-year growth, representing 31.9% of total revenues. The ARPU showed a slight increase of 0.1%.

The paid subscriber base for EMEA reached 96.13 million, up 14.8% compared to the previous year, although growth slowed from 3.95 million in the prior year.

Latin America’s (LATAM) revenues totaled $1.24 billion, marking an 8.6% year-over-year increase and accounting for 12.6% of total revenues, with ARPU down by 5.1% year over year.

LATAM’s paid subscriber base increased to 49.18 million, but it saw a slight reduction of 0.06 million subscribers this quarter, in contrast to a gain of 1.17 million in the previous year.

Asia Pacific (APAC) revenues rose significantly to $1.12 billion, a jump of 18.9% year over year, accounting for 11.5% of total revenues, although ARPU declined by 4.1% year over year.

APAC’s paid subscriber base surged by 24% to 52.6 million, with the company adding 2.28 million paid subscribers in this quarter.

Operating Performance Overview

Marketing expenses grew by 15.1% year over year, reaching $642.9 million, while remaining constant as a percentage of total revenues.

Operating income increased by 51.8% year over year to $2.9 billion, demonstrating the company’s growing profitability amidst a competitive streaming landscape.

Netflix Reports Impressive Growth in Financial Performance

Balance Sheet Overview and Free Cash Flow Growth

As of September 30, 2024, Netflix’s cash and cash equivalents rose to $7.45 billion, up from $6.24 billion at the end of June 2024. Total debt also increased, reaching $15.98 billion from $14.3 billion over the same period. Notably, Netflix successfully raised $1.8 billion through its first investment-grade bond deal during the third quarter.

The company’s streaming content obligations decreased slightly to $22.7 billion, compared to $23.31 billion three months earlier. In terms of cash flow, Netflix reported free cash flow of $2.19 billion for the quarter, a significant rise from the $1.21 billion reported in the last quarter.

During this quarter, Netflix bought back 2.6 million shares for $1.7 billion, leaving $3.1 billion available under its current repurchase program.

Fourth Quarter Guidance and Projections

Looking ahead to the fourth quarter of 2024, Netflix is predicting a 15% increase in revenues, translating to a 17% growth when adjusted for foreign exchange rates. The company anticipates total revenues to reach $10.12 billion, marking a 14.7% year-over-year growth, surpassing the market consensus estimate of $10.02 billion.

For earnings, Netflix projects $4.23 per share, while the Zacks Consensus Estimate currently stands at $3.86 per share. This suggests the company expects to outperform analysts’ estimates for this metric as well.

Netflix is preparing for stronger net additions of paid subscribers in the upcoming quarter, attributed to seasonal trends and a robust lineup of new content. The anticipated operating margin for the fourth quarter is set at 22%, an improvement of five percentage points from the previous year.

Overall, Netflix’s guidance indicates a robust revenue growth of 15% for 2024, aligning with the higher end of its previous expectations of 14-15%. The company now also forecasts a full-year operating margin of 27%, an increase from the previous estimate of 26%, reflecting a six percentage point improvement from 2023.

For 2025, Netflix estimates revenues between $43 billion and $44 billion, which implies an 11-13% growth from the 2024 projections. This expected surge is driven by a growth in paid memberships and average revenue per member (ARM). The operating margin for 2025 is projected to be 28%, compared to 27% for 2024.

Interestingly, the advertising segment is also gaining traction, with anticipated growth expected to double year over year in 2025.

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