Netflix 3Q25 Earnings Quick Interpretation: The third-quarter performance was generally average, basically in line with expectations (including guidance for the fourth quarter). The operating profit miss was due to a one-time large recognition of expenses related to tax issues in Brazil. Excluding this impact, the actual operating profit exceeded expectations.
However, the sharp decline after hours once again replicated the market reaction from the previous quarter—without surprising performance, short-term adjustments are used to release the pressure of high valuations.
1. Additional Cost Recognition, Impacting Profit Margin by 5 Points: This is an additional cost recognition of as much as $619 million, mainly involving municipal service taxes levied by Brazil on streaming companies. This cumulative expense covering from 2022 to the present was recognized in one go under other cost items, impacting the current gross margin by more than 5 points.
The guidance provided by the company last quarter did not include this expenditure. Without considering the short-term impact, the actual operating profit reached $3.87 billion, a year-on-year increase of 33%, with a profit margin of 33.6%, exceeding market consensus expectations. Subsequently, the impact of this tax on the company's overall profit is relatively small, so the guidance for Q4 performance is also basically close to expectations.
2. Flat Revenue, No Surprises in Guidance: Although profits can be adjusted, the revenue side, which reflects growth, remains unspectacular, with both the current and next quarter's guidance basically in line with expectations. Third-quarter revenue grew by 17% year-on-year, with exchange rate effects of the dollar in different regions being hedged, and overall did not bring the forex tailwind we expected.
The third quarter content was not dull, for example, the finale of the third season of 'Squid Game' and the second season of 'Wednesday' were very popular, with viewership entering Netflix's historical TOP10. However, short-term ARPU may continue to weaken the effect of price increases due to the increased penetration rate of ad-supported plans, and the cancellation of the original low-price Base plan in core regions during price increases has caused dissatisfaction among some users.
Meanwhile, the third quarter was the period when the 1P advertising system was fully operational for an entire quarter, but it may still need optimization through data collection.
Additionally, the macroeconomic volatility brought by tariffs is not favorable for Netflix's high-priced ads. However, the company's advertising revenue target for this year remains unchanged, still aiming for double growth, and Amazon DSP system will be introduced in Q4. Combined with market expectations, we estimate this year's advertising revenue to be around $1.5 billion.
3. Controlling Investment Scale: The third quarter saw $1.9 billion spent on repurchasing 1.5 million shares, with an average price of about $1,250. Although the annual profit guidance has been adjusted downward accordingly, the free cash flow target has been raised again from $8-8.5 billion to $9 billion for the year.
This may be related to the reduced scale of content investment this year. As of Q3, this year's content cash investment was $12.6 billion, and based on the trend, it is expected to be $4.5-5 billion in the fourth quarter, with a total of $17-17.5 billion for the year, below the initial target of $18 billion.
However, there are also news reports today that Netflix is interested in participating in the acquisition of Warner Bros. Discovery (WBD), which marks a change from Netflix's consistent business style of 'prioritizing more cost-effective internal production.' Dolphin Research suggests not to speculate too much for now and to continue to monitor subsequent developments. $Netflix(NFLX.US)
