Netflix Tops Q3 Expectations, Confirms Price Hikes Are On The Way

Netflix beat Wall Street expectations for earnings per share and subscriber growth in the third quarter, cheering investors (if not consumers) with news that a new round of price hikes is on the way.

The company matched the Street estimate for revenue in the period ending September 30, with $8.54 billion. EPS came in at $3.73 and total subscribers hit 247.15 million, a gain of 8.76 million. That increase dwarfs the uptick of 2.4 million in the year-ago third quarter. Typically, the holiday-season fourth quarter sees the biggest subscriber momentum of the year. Netflix expects subscriber growth next quarter to be roughly in line with that of the third quarter.

Analysts had predicted an increase of 6 million subscribers and earnings per share of $3.49. On the rosy report, Netflix shares rose more than 12% in after-hours trading, to about $388. They came into earnings on a month-long slump, during which they had fallen by 18% over concerns about the company’s profit outlook.

The streaming giant has been working to fully implement two key corporate initiatives in recent months: paid password sharing and advertising-backed subscriptions. Significant progress has been made on both fronts. Subscriber growth in the previous quarter handily beat expectations in large part because pricing options made it cheaper for those being asked to pay to share a password to sign up for the $7-a-month ad tier.

In its latest letter to shareholders, the company said subscriptions to the ad plan rose 70% on a sequential basis, and 30% of sign-ups are on the cheaper ad tier in the countries where it is available. Despite those positives, the letter noted the company has “more work to do to scale this business.” Former ad sales chief Jeremi Gorman exited the company earlier this month after reports that initial take-up of the ad tier had been lighter than the company expected. Netflix vet Amy Reinhard was installed as Gorman’s replacement.

Paid sharing has caused few subscribers to cancel, “exceeding our expectations,” the letter said, “and
borrower households converting into full paying memberships are demonstrating healthy retention. As a result, Netflix said it is “revenue positive” in every region, factoring in the effects of additional spin-off accounts and extra members, churn and changes to its mix of plans.

Netflix is moving forward with price increases, though the Basic with Ads and Standard plans in the U.S. ($6.99 and $15.49 per month, respectively) are staying the same for now. The move keeps the leading service in step with the streaming field overall, where price hikes have been rampant as newer players confront the daunting economics of the direct-to-consumer business.

The shareholder letter said the past six months have been “challenging for our industry” due to the WGA and SAG-AFTRA strikes. Co-CEO Ted Sarandos has stepped into a primary role as a strike negotiator, taking part in the multi-day marathon that recently concluded the 5-month WGA impasse and taking a similar role with SAG-AFTRA. Last week, in the wake of a breakdown in talks with the actors, he said a demand by the guild for a per-subscriber levy on top of other payments was “a bridge too far.” SAG-AFTRA Chief Negotiator and National Executive Director Duncan Crabtree-Ireland called that claim “preposterous.”

While the strikes have squeezed production and shut off talent from the promotional process, Netflix has saved a considerable amount of money in the process. In 2023 to date, the company revealed, it has generated more than $5 billion in free cash flow, up from $1.3 billion in the same period in 2022. For the full year, the company is estimating $6.5 billion in free cash, compared with earlier forecasts for $5 billion. Last year’s full-year tally was $1.6 billion.

The strikes will “create some lumpiness” in free cash flow the rest of this year and in 2024 given the uncertainties around when and how the SAG-AFTRA situation will be settled.

Content spending will total about $13 billion this year, well below initial forecasts for $17 billion.