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Updated: 18-Oct-24 11:01 ET
Netflix streams to a new all-time high on beat-and-raise; ads tier is gaining scale (NFLX)

Netflix (NFLX +11%) is nicely higher following its Q3 report last night. NFLX reported another nice double-digit EPS beat with revenue upside. The Q4 guidance was impressive with pretty significant upside EPS guidance. Netflix also guided to Q4 revs that was above analyst expectations. Importantly, Netflix expects to achieve a key milestone in Q4 with its first ever $10 bln revenue quarter. NFLX also guided to FY25 revs of $43-44 bln with 28% operating margin.

  • Let's dig into it. Global streaming paid net adds in Q3 were a healthy +5.07 mln, which was above street estimates. NFLX had cautioned that Q3 would be lapping the first full quarter with paid sharing last year. That tempered estimates for growth this time around. However, NFLX expects paid net adds to be higher in Q4 than in Q3 due to normal seasonality and a strong content slate. Netflix no longer officially guides for net adds and in 1Q25 it will stop reporting the metric altogether.
  • Advertising was a bright spot in Q3 with ads membership up 35% quarter on quarter. Also, ads plan accounted for over 50% of sign-ups in its 12 ads countries (has not been rolled out everywhere yet). Netflix views this metric as a leading indicator about growth in the future for its ads tier. Netflix expects to be at critical scale in each of its 12 ads countries in 2025. Also, its ad tech platform is on track to launch in Canada in Q4 and more broadly in 2025.
  • The primary goal is to grow its ad-tier memberships so that Netflix can get to a sufficient scale to be relevant in each market for advertisers. A big way to drive advertising is live programming and Netflix is expanding there. It has the Tyson-Paul fight in December, it's broadcasting two NFL games on Xmas. It also has 52 weeks of WWE coming in January.
  • On pricing, Netflix recently increased prices in a few countries in EMEA plus Japan and starting today it will increase prices in Spain and Italy. NFLX phased out the Basic plan in the US and France this past quarter and will do the same in Brazil in Q4. Its ads plan offers a lower price point for consumers, which is proving to be popular. Netflix is also pleased with engagement on its ads plan with view hours per membership similar to its standard plan.
  • Another metric that stands out is operating margin, which we think will become a more important measuring stick as NFLX phases out reporting its net add metric in 1Q25. In Q3, it came in at 29.6% vs 28.1% prior guidance. It also raised its FY24 forecast to 27% from 26% and guided for Q4 at 21.6%. NFLX also guided to 2025 operating margin of 28%, a slight improvement from 27% in 2024.

Overall, Netflix's sizeable beat-and-raise in Q3 was quite impressive and it stands in stark contrast to the struggles we are seeing from other streaming platforms. They are struggling to break a profit, meanwhile NFLX is boasting about 28% operating margins in 2025. What stood out to us is that its ads business is really taking off with 50% of sign-ups coming from its ads tier in countries where it has been rolled out. Ads should be a more meaningful contributor in 2025.

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