Netflix Q3 2024 Earnings Report Review: Impressive Performance! Significant Expansion in Operating Profit Margin | Moomoo Research

On Thursday after the market close in the Eastern U.S., Netflix released its third-quarter report, with results that significantly exceeded expectations and an upward revision of future performance guidance, leading to a more than 5% increase in after-hours stock price. In the third quarter, the company's revenue grew by 15% year-on-year to $9.825 billion, operating profit increased by 51.8% year-on-year to $2.909 billion, and the operating profit margin stood at 29.6%. The diluted earnings per share (EPS) was $5.40, reflecting a year-on-year increase of 44.8%.

Netflix's impressive earnings report alleviated market concerns, resulting in a stock price increase of over 5% after hours. Next, we will analyze Netflix's financial report in detail to see how much growth potential remains for the company's stock price.

In Q3 2024, the company’s revenue grew by 15% year-on-year to $9.825 billion, surpassing the company's guidance and Bloomberg consensus estimates, primarily driven by an increase in subscription users. The net addition of paid subscribers in the third quarter was 5.07 million, exceeding the Bloomberg consensus estimate of 4.47 million, bringing the total number of paid members to 283 million, a year-on-year increase of 14.39%.

Chart: Net Increase in Subscription Users from Q1 2019 to Q3 2024 (Units: Thousands)

Source: Company Announcements

In Q3, the ad-supported tier continued to attract new users, with the base of ad-supported subscribers growing 35% quarter-over-quarter, showing strong momentum. The company has been promoting the growth of ad-tier users through adjusted pricing plans, bundled sales, and live events. The paid sharing policy continues to play a stable role in converting users and increasing Average Revenue per Member (ARM), but its effectiveness has begun to wane over time.

Regionally, thanks to the success of localized content, the Asia-Pacific region became the largest source of new users, while subscription numbers in Latin America experienced negative growth due to price increases and weak content. The specific data is as follows:

– In Q3, the Asia-Pacific region (APAC) saw a net increase of 2.28 million subscribers, primarily due to a strong lineup of local content in Japan, South Korea, Thailand, and India.

– The Europe, Middle East, and Africa region (EMEA) saw a net increase of 2.17 million subscribers.

– The U.S. and Canada (UCAN) experienced a net increase of 690,000 subscribers, slightly below expectations.

– In Q3, Latin America saw a net decrease of 70,000 subscribers, mainly due to price increases and a reduction in high-quality content, which had a short-term negative impact. However, with the launch of localized high-quality content in Latin America in Q4, membership numbers are expected to recover in early Q4.

The strong content lineup in Q4 and throughout 2025 is anticipated to drive accelerated user growth. In Q3, the company launched a series of high-quality content to ensure the healthy growth of core users, such as "The Perfect Couple," "Nobody Wants This," "Tokyo Swindlers," "Emily in Paris," "Cobra Kai," and "Beverly Hills Cop: Axel F." In Q4, the company is set to release an even stronger content lineup, including "Squid Game S2," the Jake Paul/Mike Tyson fight, and two NFL games airing on Christmas. The return of popular shows like "Wednesday" and "Stranger Things" in 2025 is also on the horizon.

Due to the negative impact of the low-cost ad-supported membership growth, ARM growth in Q3 remained essentially flat year-on-year. The growth of the low-cost ad-supported membership has a dilutive effect on ARM, particularly when ad monetization has not yet ramped up. Regionally, only North America (UCAN) achieved a year-on-year ARM growth of 5%, while other regions did not see any growth, indicating that the purchasing power of users in North America is significantly higher than in other regions.

Chart: Regional Revenue and ARM Performance

Source: Company Announcements

The company's current focus is on expanding the scale of its ad-supported subscriptions to achieve growth in advertising revenue. Following the cancellation of the basic plan in the UK and Canada, the company began gradually phasing out the basic plan in the U.S. and France during Q3. This move will force users on the $11.99 monthly basic plan to switch to the $6.99 ad-supported tier or upgrade to the $15.49 standard plan, with the ad-supported tier set as the default option. Additionally, the company announced it will also eliminate the basic plan in Brazil in Q4.

To promote stable ARM growth and offset the negative impact of the low-cost ad-supported plans, the company is gradually increasing subscription pricing. In early October, the company raised subscription prices in some EMEA countries and Japan, and announced price hikes in Spain and Italy effective October 18.

In Q3, the company experienced a substantial expansion in its operating profit margin, benefiting from revenue growth and cost optimization. Operating profit grew by 51.8% year-on-year to $2.909 billion, with an operating profit margin of 29.6%, an increase of 7.2 percentage points year-on-year, significantly exceeding expectations. The net profit for Q3 was $2.364 billion, a 41% year-on-year increase, with a diluted earnings per share (EPS) of $5.40, reflecting a year-on-year growth of 44.8%.

Chart: Operating Profit Margin and Net Profit Margin from Q1 2017 to Q3 2024

Source: Company Announcements

Regarding operating costs, the company's content production costs benefited from an improved competitive landscape in the film and television industry, with Q3 operating costs increasing by only 3.84%, resulting in a gross margin of 47.89%. As the share of the streaming market gradually increases, most traditional media companies are willing to open up their copyrights to obtain licensing fees, allowing Netflix to access a large source of high-quality content, thereby alleviating the pressure of content production. Additionally, since 2023, the content arms race in the streaming industry has slowed down, leading to expectations that content production costs will remain stable in the short term.

On the operational cost side, the operating expense ratio fell steadily to 18.27% in Q3, with the company's marketing, R&D, and administrative expense ratios showing a consistent declining trend in recent years, primarily due to ongoing optimization of operational costs.

As a result of the unexpected growth in operating profit, the company raised its full-year free cash flow guidance. In Q3, the company generated $2.2 billion in free cash flow, an increase of $300 million compared to Q3 last year. The company expects free cash flow in 2024 to be between $6 billion and $6.5 billion. In Q3, the company spent $1.7 billion to repurchase 2.6 million shares, leaving a remaining repurchase capacity of $3.1 billion.

Chart: Free Cash Flow of the Company from Q1 2019 to Q3 2024 (Units: Millions of USD)

Source: Company Announcements

In this earnings season, Netflix's performance continues to be driven by user growth. Additionally, due to revenue growth and cost optimization, the company's operating profit margin has significantly expanded to 29.6%, driving accelerated EPS growth. Looking ahead, the strong content lineup in Q4 and early 2025 will help ensure sustained user growth and performance growth, while the continued expansion of the operating profit margin will drive accelerated growth in EPS and free cash flow.

The earnings guidance is more optimistic than expected. The company anticipates a revenue growth of 14.7% year-on-year in Q4, reaching approximately $10.128 billion, with an operating profit margin of 21.6%, an increase of 4.7 percentage points year-on-year. The diluted EPS is projected to grow by 105% year-on-year to $4.23. For the full year of 2024, the company expects a revenue growth of 15% and an increase in operating profit margin to 27%. For 2025, revenue is projected to grow by 11% to 13%, with the operating profit margin rising to 28%. Based on estimates, the company anticipates year-on-year operating profit growth of 50.58%, 17.19%, and 19.93% for 2024, 2025, and 2026, respectively.

Currently, the company’s shareholder returns are relatively low, with approximately $1.7 billion spent on stock buybacks per quarter, totaling around $6.8 billion for the year, which is about 2.3% of its total market value of $295.1 billion. However, considering the continuous expansion of the company's profit margins, future shareholder returns are expected to benefit from increased free cash flow, with projections suggesting that free cash flow could exceed $10 billion by 2026.

As of pre-market on October 18, the company’s stock price was around $727. Based on our EPS estimates, the expected forward P/E ratios for 2024, 2025, and 2026 are 37x, 31x, and 26x, respectively, indicating a relatively reasonable valuation.

Overall, driven by both revenue growth and the expansion of operating profit margins, the company's profits are expected to maintain nearly 20% high growth in 2025 and 2026. As free cash flow continues to improve, it is anticipated that the company will be able to enhance shareholder returns in the future.