Netflix blames tax dispute in Brazil for rare earnings letdown

Netflix missed the earnings target set by stock market analysts during the video streamer’s latest quarter, a disappointment that the company blamed on a tax dispute in Brazil.

The results announced on Tuesday broke Netflix's six-quarter streak of posting a profit that eclipsed analysts' projections.

The California-based company cited an unexpected $619 million (€533mn) expense tied to the Brazilian tax dispute for the earnings shortfall. It simultaneously praised its line-up of distinctive TV series and films for keeping its audience engaged and delivering a mix of subscriber fees and increased ad sales that helped it deliver revenue that matched analyst forecasts.

Investors, though, weren't placated by the explanation, with Netflix shares falling by about 6% in extended trading.

What is really behind the earnings figures?

Analysts varied in their interpretation of the third-quarter report.

Investing.com analyst Thomas Monteiro worries Netflix is using the Brazilian tax hit as a way to mask signs of a slowdown in subscriber growth and advertising amid economic uncertainty.

“The truth is that the company failed to deliver the kind of growth we’ve grown used to over the past couple of years,” he said.

But Zacks analyst Jeremy Mullin said he sees little reason for concern, asserting that Netflix's “underlying story remains solid”.

Netflix earned $2.5 billion (€2.15bn), or $5.87 per share, in its July-September quarter, an 8% increase from the same time last year.

Revenue climbed 17% from last year to $11.5bn (€9.90bn). Analysts surveyed by FactSet Research had predicted the company would earn $6.96 per share on revenue of $11.5bn.

Subscriber numbers

Delivering solid financial growth has become more important than ever for Netflix as management has steered investors from fixating on how many subscribers its service gains from one quarter to the next. As part of that process, Netflix stopped disclosing its subscribers at the end of last year.

The shift has paid off so far, with Netflix’s stock price rising about 40% so far this year, although the downturn in extended trading signalled some of those gains are about to evaporate.

Although Netflix no longer reveals subscriber numbers, this year’s revenue growth suggests that its worldwide customer count has increased from the roughly 302 million it had at the end of last year. That's by far the most among video streamers, even as rivals with deeper pockets such as Amazon and Apple expand their programming selections.

In the company's quarterly conference call, Netflix co-CEO Ted Sarandos said the streaming service's total worldwide audience — including multiple people living in the same subscriber household — is approaching 1 billion.

“We have a better understanding of the streaming business than any of our competitors,” Greg Peters, Netflix's other co-CEO, boasted during the call.

A bid for Warner Bros Discovery assets?

Netflix has maintained its lead by adding more live sports and video games to supplement its wide array of scripted programming, a diversification effort that will expand into video podcasts from Spotify next year.

And now Netflix may have another opportunity to add even more compelling programming, as Warner Bros Discovery announces it may sell all or part of its holdings. These include HBO, DC Studios and CNN. Analysts are already speculating that Netflix may join the bidders looking to grab a piece of Warner Bros Discovery.

In response to a question about Netflix's acquisition strategy, Sarandos noted that the company traditionally has been “more builders than buyers” without ruling out a potential bid for some of Warner Bros Discovery's properties other than cable TV networks like CNN and TBS. “We can be and will be choosy,” Sarandos said.

The company has also mining a new vein of revenue by selling commercials as part of a low-priced option of its service it introduced three years ago.

Although the advertising business still isn’t large enough to require the company to disclose its sales, management expects its revenue to more than double from last year. A recent analysis by S&P forecast $1.1bn (€947.14bn) in ad sales for Netflix this year — a figure that would represent about 2% of its projected total revenue.

It’s getting to the point that Netflix may be in danger of trying to juggle too many balls at once, said Forrester Research analyst Mike Proulx. “If the company goes too broad to become all things entertainment, it risks diluting its core.”