Netflix (NFLX) Q3 2024 Earnings Review (Jul-Sep 2024)

The streaming giant Netflix (NFLX) released its Q3 2024 (Jul-Sep 2024) earnings report after market close on 10/17, exceeding Wall Street analysts’ consensus expectations in revenue and profit. Netflix had already delivered four consecutive quarters of accelerating growth before this quarter’s earnings, and this strong performance continues that momentum.

Netflix (NFLX) Q3 2024 Financial Results

• Revenues: $9.825B (YoY +15%)
• EPS: $5.40 (YoY +44.8%)
• Paid Memberships: 282.7M (QoQ +5.07M)

Once again, Netflix’s quarterly financial data demonstrated its dominance in the streaming market. Net paid subscriber additions reached 5.07 million, bringing the total to 282.7 million, surpassing market expectations of 4.52 million. This growth was primarily driven by two key strategies: password sharing crackdown and the introduction of ad-supported subscription plans. Although net subscriber additions declined compared to the previous two quarters and were significantly lower than last year’s 8.76 million, this was mainly because that period fully reflected the initial impact of the password sharing crackdown.

Regional Performance

The APAC region emerged as a new growth engine, adding 2.28 million subscribers, primarily benefiting from a strong lineup of localized content and reflecting the enormous potential of the streaming market in this region. In comparison, UCAN added 690,000 subscribers, and EMEA added 2.17 million. Growth in UCAN and EMEA regions remained stable but slower, consistent with the maturity of these markets.

LATAM experienced its first subscriber decline since Q1 2023, which Netflix attributed to recent price adjustments and relative content library limitations. This highlights Netflix’s challenges in emerging markets: balancing growth with ARPU improvement.

Notably, net subscriber additions were lower across all regions compared to the previous quarter, indicating that the effects of the password sharing crackdown may be diminishing, necessitating greater reliance on ad-supported plans for growth.

Earnings

Operating profit increased 52% year-over-year to $2.91 billion, exceeding analyst predictions of $2.72 billion, primarily due to better-than-expected revenue growth. The operating margin reached 29.6% (versus market consensus of 27.8%), higher than last year’s 22.4% and showing significant improvement from the previous quarter’s 27.2%. Q3 net income was $2.364 billion, up 41% year-over-year, surpassing analyst expectations of $2.245 billion, including a $91 million foreign exchange loss from the revaluation of Euro-denominated debt. Q3 free cash flow was $2.194 billion, higher than last year’s $1.888 billion and analyst expectations of $1.67 billion.

Netflix (NFLX) Q3 2024 Earnings Call

Netflix currently has over 600 million viewers and continues to grow. The company actively invests in various programs and movies, covering a broader range than other companies, including content across different tastes, cultures, and languages. When users enjoy certain content, they continue watching, discuss it more frequently, and give higher ratings.

Data shows that viewing time is the best indicator of member satisfaction. At this year’s Emmy Awards, Netflix received 107 nominations and won 24 awards. According to Nielsen’s rankings, viewing hours for Netflix’s nominated works exceeded the total of other streaming platforms. Netflix currently accounts for approximately 7.9% of U.S. TV viewership, more than double that of different streaming platforms (excluding YouTube).

Strategic Adjustments

Despite some reduction in viewing hours due to the password sharing crackdown, paid members still maintain an average daily viewing time of about two hours. Excluding the impact of shared account payment plans, viewing hours in the first three quarters of 2024 grew compared to last year, indicating increased viewing time among core users.

Netflix optimizes plans and pricing strategies to boost revenue, ensuring diverse price options for different needs. The company has eliminated the basic plan in the U.S. and France, with plans to implement similar measures in Brazil. Price increases have been implemented in EMEA and Japan, with future adjustments planned for Spain and Italy.

Advertising Business

In regions with ad-supported plans, approximately 50% of new subscribers chose the ad-supported tier in Q3, with membership growing 35% quarter-over-quarter. The average viewing time for ad-supported members matches that of standard plan subscribers. The company expects to reach an impactful subscription scale by 2025, with significant revenue contribution beginning in 2026.

Live Streaming and Sports

Netflix is actively expanding into live programming, which offers high user engagement and better attracts advertisers. In sports content, beyond the scheduled two NFL games on Christmas Day, the platform will livestream the Jake Paul vs. Mike Tyson boxing match on November 15. Next year, Netflix will stream three hours of weekly WWE content.

AI

Following last quarter’s discussion of machine learning and AI usage in content recommendations, Netflix maintains that generative AI has significant potential to improve recommendation systems and content discovery experiences. This quarter, Netflix emphasized focusing on how AI can enhance program quality rather than reduce costs. The company views technology and entertainment as complementary, with the key being AI’s ability to help creators produce better content rather than merely cutting expenses.

Outlook for Q4 2024

Netflix reaffirmed revenue as its primary growth metric, with operating margin and free cash flow as profitability indicators. For Q4, Netflix projects:

• Revenue growth of 14.7% to $10.128 billion (17% excluding currency headwinds)
• EPS of $4.23, exceeding the market consensus of $3.93
• Operating margin of 22%

These projections indicate:

• Full-year 2024 revenue growth of 15%
• Increased 2024 operating margin guidance from 26% to 27%
• Raised annual free cash flow forecast to $6.0-6.5 billion from $6.0 billion

Outlook for 2025

For 2025, Netflix expects:

• Revenue of $43-44 billion (11-13% growth)
• Operating margin of 28%

Starting Q1 2025, quarterly membership numbers and ARM will no longer be reported.

Market Data

According to JustWatch, Amazon Prime Video leads the U.S. SVOD market with 22% market share, slightly ahead of Netflix’s 21%. Together, they control 43% of the market. Prime Video has maintained a slight lead since Q4 2022, though Netflix briefly caught up last quarter.

Nielsen data shows streaming media reached 41% of U.S. TV viewership in September, up from 40.3% in June and significantly higher than 37.5% year-over-year. While September’s share slightly declined from July-August peaks, this aligns with seasonal patterns.

Review and Analysis

From a purely numerical perspective, Netflix is entering a natural and healthy growth phase. As the base expands, revenue growth is expected to gradually adjust from the current 15% range to around 10%. This slowdown signals not a warning but rather an inevitable result of scale expansion.

More noteworthy is the breakthrough in operational efficiency. Maintaining operating margins above 27% for three consecutive quarters demonstrates Netflix’s successful establishment of solid operational leverage. This economy of scale brings enhanced profitability and injects continuous cash flow, providing significant advantages in content investment and business expansion. This is undoubtedly the most decisive competitive element in the current streaming landscape.

Netflix’s measured approach to advertising business is deeply reflected in its corporate culture. In stark contrast to Tesla’s Musk, even while recognizing the strategic importance of advertising, Netflix opts for a gradual implementation approach. This methodology embodies Netflix’s business philosophy of prioritizing core values.

Currently, advertising revenue accounts for approximately 3% of total income, expected to exceed 5% by 2025. Notably, ad inventory growth outpacing order growth indicates healthy development.

Although no significant progress was seen this quarter in live and sports content, this remains an unavoidable strategic direction for Netflix. As cash flow strengthens, the high entry barriers for live and sports content will gradually diminish. Netflix is expected to adopt a gradual approach similar to its advertising business strategy.

Netflix’s stance on AI reflects its pragmatic business mindset. While cost reduction in production is essential, expanding economies of scale has a more crucial impact on profitability improvement. For example, using AI technology in special effects could save millions of dollars per production. However, Netflix’s cautious positioning on AI issues demonstrates thoughtful consideration of the Hollywood ecosystem.

In the current market structure, Netflix does not need to follow competitors’ bundling strategies. Bundle strategies typically serve as value proposition enhancement tools for products with weaker competitiveness, while Netflix, as the streaming market leader, should focus on consolidating its core advantages.

Strengths and Opportunities

• The trend of cable TV transitioning to streaming remains ongoing
• Competitors reducing content production investment benefits Netflix in both customer acquisition and content costs
• Competitors’ more open attitude toward content licensing benefits Netflix in acquiring quality third-party content
• Netflix maintains industry leadership in content production and audience matching. Increased subscriber numbers improve the efficiency of each unit of content production
• Entry into sports broadcasting could open new audience segments and improve retention rates
• AI will effectively reduce content production costs
• Improvements in operating margins and cash flow expansion enable Netflix to make more significant content investments, creating a positive flywheel effect
• Ad-supported plans show strong growth momentum, with significant future growth potential in ARM contribution
• Netflix’s development of its advertising technology platform demonstrates a long-term commitment to the advertising business

Weaknesses and Threats

• Amazon is increasing investment in video content
• Apple TV+ and Prime Video announced collaboration, adopting a bundling model.
• Competition for attention from short-form video content
• Gaming business strategy lacks apparent effectiveness