Netflix earnings: What investors need to know about the streaming giant's Q3 miss

Netflix Q3 Results and Stock Movement [00:00]

• The stock experienced a 5% drop in after-hours trading following the release of Q3 results.
• Q3 EPS came in at $0.587, missing the Street's estimate of $0.694.
• Q3 revenue reached $11.51 billion, narrowly missing the Street's estimate of $11.52 billion.
• For Q4, Netflix projects EPS of $0.545, slightly above the estimate of $0.542.
• Q4 revenue is projected to be $11.96 billion, above the Street's $11.9 billion estimate.
• Full-year revenue guidance was maintained at $45.1 billion, within the previously stated range of $44.8 to $45.2 billion.
• The stock was up approximately 40% year-to-date entering this earnings report.
• "> Remember, we were up about 40% year to date heading into this report."

Analyst Questions and Market Speculation [00:59]

• Key questions for analysts include viewer engagement metrics and trends within the advertising business.
• There's speculation about Netflix's potential interest in acquiring parts of Warner Brothers Discovery.
• The stock initially fell about 6% in after-hours trading.
• "> Um more color and commentary you're going to want on viewer engagement."

Impact of Tax Dispute and Margin Guidance [01:35]

• The company attributed the quarter's impact, particularly on the bottom line, to a tax dispute with Brazil.
• Investors had been anticipating an increase in full-year 2025 operating margin guidance from 30% to 31-32%.
• However, the guidance was actually lowered, with much of the Q3 operating margin miss attributed to this tax issue.
• Despite a strong content slate expected for Q3 and Q4, and encouraging engagement metrics, the tax dispute was an unforeseen factor.
• "> Uh, down in the after hours here, it sounds like Netflix Gita is saying calling out this tax dispute with Brazil."

Subscriber Engagement and Content Slate [02:47]

• The company is touting what it calls record subscriber engagement.
• Viewer engagement in the first half of the year was muted compared to the previous year.
• However, Q3 engagement metrics showed a significant surge of 20-22%.
• This surge is attributed to major titles like "K-pop Demon Hunters" (called the biggest movie of all time), "Squid Game Season 3," and "Wednesday Season 2."
• Engagement is seen as the key metric for evaluating the company going forward, as it drives monetization and pricing power.
• "> We've seen something like a 20 to 22% surge in engagement and a lot of that just from all of those big monster titles."

Potential Acquisition of Warner Brothers Discovery Assets [04:07]

• Strategically, acquiring IP from Warner Brothers Discovery could help with subscriber trends, lower churn, and increase engagement.
• Historically, Netflix has spent very little on M&A, around $1 to $1.5 billion, preferring a "build versus buy" strategy, which investors have favored.
• A potential acquisition of Warner Brothers Discovery assets is viewed as a "once in a generational opportunity" due to the studio's IP and potential synergies.
• However, it's not considered a make-or-break situation for Netflix.
• "> So, you can be sure that is going to come up on the call as well."

The Mega AI Trend and its Impact on Netflix [05:24]

• In the near term, AI is expected to be more of a tailwind for Netflix.
• AI is already used in the user interface for better personalization, rankings, and recommendations.
• In content production, AI is being used for visual effects, such as de-aging, leading to better and faster content creation.
• AI can also reduce content costs by an estimated 5-10%, potentially saving $1.5 to $2 billion on an $18 billion annual spend.
• "> They're already using AI pretty effectively."

Resurgence in M&A and IPO Activity [06:41]

• There has been a resurgence in deal and IPO activity, with significant momentum building.
• Companies are looking to M&A for growth, efficiency, and cost-effective service delivery.
• The regulatory environment is seen as more rational than in the prior four years.
• Debt markets are cooperative, with tight spreads and good terms, despite higher base rates.
• This combination is driving an invigorated M&A market for both private equity and corporate acquirers.
• "> We have seen this resurgence in deal activity in IPO activity as well."

Private Equity Exits and Valuation Dynamics [08:03]

• More exits are expected due to the current M&A dynamics.
• Valuations of companies acquired in 2021-2022 were high, requiring more time to grow into expected returns.
• A large inventory of companies acquired in that period will mature for realization events.
• "> I think you're going see more exits occur because of this dynamic."

Regulatory Environment and Antitrust Policy [09:08]

• There's a risk of the pendulum swinging too far in the regulatory direction after a period of perceived over-regulation.
• Currently, regulatory authorities (FTC, DOJ) and policymakers are focused on rational and prudent antitrust policies, emphasizing fundamentals over simply saying "no."
• The focus is on what is best for customers and whether there's a prudent rationale for consolidations.
• "> Will what's the risk of the pendulum swinging too far, which tends to happen, right?"