Netflix’s quarter — and stock price — was dragged down by a hefty $619 million tax-related expense that took Wall Street by surprise.
Netflix otherwise had another standout quarter, notching record revenue fueled by robust viewership for Korean-themed megahits like “Kpop Demon Hunters” and “Squid Game,” as well as its live boxing event, “Canelo vs. Crawford.”
Netflix’s revenue rose 17.2% to a record $11.5 billion in the third quarter, largely in line with expectations from analysts and the company’s guidance.
The company said its ad tier, a key growth area for the streamer, had its “best ad sales quarter ever” and doubled commitments from US advertisers.
The stock sank 6% in after-hours trading following the release after its earnings per share significantly missed expectations.
A $619 million surprise for Wall Street
The streaming titan’s operating income was up 7.7% year-over-year to $2.55 billion, or $5.87 per share, which was well under analyst estimates of $6.94 and Netflix’s guidance of $6.87.
Netflix said that the miss on operating income and margins came after an “ongoing dispute” with Brazilian tax authorities that cost it $619 million.
Netflix finance chief Spencer Neumann said on the earnings call that the company accounted for expenses it incurred from 2022 through last quarter, after determining that it would likely be subject to a 10% transactions tax in Brazil following a ruling from the country’s high court in August in a case involving another firm.
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“Absent this expense, we would have exceeded our Q3’25 operating margin forecast,” Netflix said in its shareholder letter.
While Netflix’s bottom-line miss wasn’t in its third-quarter forecast, the company had disclosed in its second-quarter 10-Q filing that it was “involved in a number of matters with Brazilian tax authorities regarding nonincome tax assessments.” Netflix had said that although a loss was “not probable,” it warned “the final outcome may be materially different from our expectations.”
“We don’t expect this matter to have a material impact on future results,” Netflix wrote in its third-quarter release after disclosing the expense.
Netflix execs talk M&A, generative AI
Netflix has faced questions of whether it could be a suitor for Warner Bros. Discovery, which has said it’s planning to split itself next year.
Paramount CEO David Ellison is reportedly planning to bid on all of WBD, which said on Tuesday that it’s open to the sale of the entire company or parts of it, and has received interest from multiple interested parties. That includes Netflix and Comcast, CNBC and Bloomberg reported.
Asked about M&A, Netflix executives didn’t directly address those reports, nor did they hint at a deal in the works.
“It’s true that historically, we’ve been more builders than buyers. And we have plenty of runway for growth without fundamentally changing that playbook,” Netflix co-CEO Ted Sarandos said on the earnings call. He added that “nothing is a ‘must-have'” for the company to hit its goals.
However, Sarandos didn’t rule out future transactions via “selective M&A,” either. When evaluating potential M&A, Netflix looks at factors including whether the investment is “a big opportunity,” Sarandos added.
“We can be — and we will be — choosy,” Sarandos added.
When asked about AI, Netflix co-CEO Greg Peters said the company’s view of the technology hasn’t changed much, and that it’s planning to use AI tools to improve its product, content, and advertising.
As for whether generative AI apps like OpenAI’s Sora 2 are a threat, Sarandos said they’re more likely to take viewership away from apps focused on user-generated content, which include TikTok, Instagram, and YouTube. Sarandos suggested that Netflix’s professionally produced content is less at risk.
“It takes a great artist to make something great,” Sarandos said.
Healthy engagement drives revenue
Netflix’s robust revenue growth suggests that its never-ending mission to improve engagement is working.
Despite stiff competition from YouTube, content creators, and AI-powered video apps like Sora, Netflix had its best-ever quarter of viewership on US-based smart TVs, according to Nielsen data dating back to May 2021. Nielsen found that Netflix averaged an 8.6% viewership share from July through September — far higher than any other paid streaming service.
However, Netflix is still well behind YouTube in engagement. The Google-owned streamer averaged an enviable 13% viewership share on smart TVs in the third quarter, per Nielsen.
Netflix is trying to close the gap with likely its biggest rival by adding video podcasts and luring YouTubers like Ms. Rachel. Some Wall Street analysts believe the streaming powerhouse should go even further by investing in short-form video.
