Shares of Netflix jumped 12% in after-hours trading Wednesday after the company beat Wall Street expectations for its third quarter of 2023.
The streaming behemoth reported net income of $1.67 billion, or diluted earnings of $3.73 per share. Total revenue increased 7.8% year over year to $8.54 billion. Analysts surveyed by Zacks Investment Research were expecting earnings of $3.46 per share on revenue of $8.53 billion.
The company added 8.76 million subscribers during the quarter for a total of 247.15 million globally.
Revenue in the United States and Canada came in $3.73 billion, while the Europe, Middle East and Africa region, Latin America and Asia-Pacific region came in at $2.69 billion, $1.14 billion and $948 million, respectively. Average revenue per user was $16.29 in the U.S. and Canada, $10.98 in the EMEA region, $8.85 in Latin America and $7.62 in the APAC region.
Netflix reported operating income of $1.9 billion, up 25% year over year, and an operating margin of 22.4%.
It also generated $2 billion in net cash during the quarter and repurchased $2.5 billion of its stock during the quarter, or 6 million shares, under its previous $5 billion authorization. Additionally, the board increased its authorization for an additional buyback of $10 billion on top of the remaining $1 billion under the prior authorization.
Chief financial officer Spencer Neumann said in Netflix’s third quarter earnings interview that the company ramped up its repurchase program because of better financial visibility and a build up of some excess cash on the balance sheet.
“Our target minimum cash is roughly two months of revenue. So plus or minus $6 billion of cash that we look to hold on our balance sheet and we’ve gotten ahead of that, we’re still a little ahead of that,” Neumann said. “So that’s really what we’re managing to is to primarily drive the business forward, grow the business, expand our cash flow, and then as the excess cash builds on the balance sheet, to return it to shareholders.”
Netflix’s password sharing crackdown on an estimated 100 million households globally, including 30 million in the U.S. and Canada, has officially launched in every region the company operates in.
“The cancel reaction continues to be low, exceeding our expectations, and
borrower households converting into full paying memberships are demonstrating healthy retention,” the company added. “As a result, we’re revenue positive in every region when accounting for additional spin off accounts and extra
members, churn and changes to our plan mix.”
Moving forward, Netflix said it would continue to refine its strategy to convert additional borrower households into either full paying or extra members over the next several quarters.
Additionally, the company has adjusted its subscription prices in the U.S., U.K. and France. In the U.S., the ad-free basic tier is increasing by $2 to $11.99 per month and the premium tier will increase by $3 to $22.99 per month. Pricing for the $6.99 per month ad-supported tier and $15.49 per month standard plan will remain the same.
In the U.K and France, pricing will be £4.99 and 5.99€ per month for the ad-supported tier, £7.99 and 10.99€ for the basic tier, £10.99 and 13.49€ for the standard tier and £17.99 and 19.99€ for the premium tier, respectively. Similar to the U.S., the ad-supported and standard plans in the U.K. and France remain the same.
Netflix’s ad-supported tier saw membership increase nearly 70% quarter-over-quarter, with the offering now accounting for roughly 30% of all new sign-ups. As of August, the ad tier had over 10 million monthly active users globally.
At Bloomberg’s Screentime conference last week, Netflix co-CEO Ted Sarandos acknowledged that the ad tier was still in its infancy and “definitely not at the scale we want it to be at yet.” Netflix has tapped Amy Reinhard as its new advertising president, following the exit of Jeremi Gorman after about a year.
The company noted that phasing out its ad-free basic plan in the U.S., U.K., Italy and Canada helped drive the ad tier’s gains and that it plans to make the same change in Germany, Spain, Japan, Mexico, Australia and Brazil next week. Going forward, it also plans to introduce a download feature to the offering and will include the ad plan in device and ISP partner bundles.
While ad revenue will not be material to Netflix in 2023, the company remains “very optimistic” about its long-term opportunity.
The latest quarterly results come as the Writers’ Guild of America recently ratified its new contract agreement with the Alliance of Motion Picture and Television Producers and concluded its 148-day strike. However, negotiations between the AMPTP and SAG-AFTRA, who have been on strike since July 14, have broken down.
“The last six months have been challenging for our industry given the combined writers and actors strikes in the US. While we have reached an agreement with the WGA, negotiations with SAG-AFTRA are ongoing,” the company wrote in its quarterly shareholder letter. “We’re committed to resolving the remaining issues as quickly as possible so everyone can return to work making movies and TV shows that audiences will love.”
During Screentime, Netflix co-CEO Ted Sarandos said that a proposal from the actors guild for an added levy based on subscribers was a “bridge too far” from the studios’ original offer of a “success-based bonus.” At the time, Sarandos said that the actors guild’s proposal would cost four to five times as much as the agreement for writers, but noted that the studios embraced the potential by “wrap[ping] their arms” around it.
“That issue that we got resolved with the writers was not only accepted in the deal, but ratified by a 99% vote of the writers’ guild,” he added. “I know that all these guilds are not created equal and they all have different needs and more bespoke needs, but like I said, that is one that worked that rewarded success, which we agreed with.”
In a statement sent to its members and posted to social media, SAG-AFTRA accused the studios of using “bully tactics” with the guild, saying the AMPTP “intentionally misrepresented” the cost of the guild’s proposal, overestimating it by 60%.
Looking ahead, Netflix expects revenue to grow 11% year over year to $8.7 billion in the fourth quarter, with paid net additions similar to the third quarter (+/- a few million). It also expects net income of $956 million and diluted earnings of $2.15 per share.
Meanwhile, global average revenue per member for the quarter is expected to be
roughly flat year-over-year, primarily due to limited price increases over the last
eighteen months. The company expects a roughly $200 million drag on Q4 revenue and ARM, citing the U.S. dollar’s strengthening over other currencies in the past few months.
Additionally, its fiscal year 2023 operating margin is forecast to hit 20% – the high end of its previous guidance. Assuming no material swing in foreign exchange rates, Netflix expects an operating margin of 22% to 23% in fiscal year 2024.
Netflix is also anticipating free cash flow of roughly $6.5 billion (+/- a few hundred million dollars) for 2023, up from its previous forecast of at least $5 billion. The free cash flow estimate includes roughly $1 billion in “lower-than-planned cash content spend” in 2023 due to the WGA and SAG-AFTRA strikes. Cash content spend is expected to hit around $13 billion in 2023.
Assuming the SAG-AFTRA strike is resolve in the near future, cash content spend for 2024 is expected to be up to roughly $17 billion in 2024. Netflix reiterated its plan to deliver “very substantial positive free cash flow” in 2024.
The company also plans to make “substantial changes” to its executive pay model after significant shareholder pushback.
In June, the streamer’s proposal for a $166 million executive pay package was rejected, with only 25.7% voting to approve it. In 2022, executive chairman and former co-CEO Reed Hastings’ total compensation stacked up to $51.1 million, while Sarandos brought in $50.3 million and co-CEO Greg Peters received $28.1 million.
“We recognize we don’t have wide support for our executive compensation model of the last 20 years. We are listening to our shareholders and plan on substantial changes for 2024 to a more conventional model,” Netflix said. “Our executive compensation plan will continue to be built on pay for performance.”
