NFLX

Netflix shares are up 15% in morning trading after the company said it added more than 2.4 million subscribers in the third quarter of fiscal 2022. Wall Street analysts on average had been expecting the company to add only 1 million subscribers during the quarter, reflecting a huge beat by the streaming giant. Netflix is the largest subscription media company in the world with over 223 million global subscribers. Shares in the streaming powerhouse were down 60% year-to-date prior to the earnings results being announced.

For the third quarter, the company reported an adjusted earnings per share of $3.10 versus the average analyst estimate of $2.12, but down from the $3.19 recorded in 2021. Revenue was up 5.9% year over year to $7.93 billion, against the $7.85 billion expected. The strength of the U.S. dollar impacted the miss on the revenue as almost 60% of the company’s top-line comes from outside of the U.S. The company gained 100 thousand subscribers in the U.S. and Canada, against a loss of 271 thousand expected. Further, the company added 570 thousand subscribers in Europe, Middle East, and Africa, crushing the estimate of a gain of only 13 thousand subscribers.

The Latin American region gained 310 thousand subscribers, outperforming the gain of 219 thousand subscribers expected by analysts. But the huge net add was delivered in the Asia, Pacific and China (APAC) region where the company said it gained 1.43 million subscribers compared to the 1.3 million that was forecasted. On the revenue front, however, its important to note that a Netflix subscription in most emerging markets costs significantly less than subscriptions in developed markets such as North America and Europe.

Operating margin came in at 19.3% versus the estimate of 15.9%. Once again, the stronger dollar and inflation continued to impact margins relative to 2023. Perhaps the most impressive metric in a strong quarter, Netflix reported that it generated free cash flow of $472 million versus the $185 million that analysts had modelled. The company also produced $1.53 million in operating income, ahead of the $1.25 million expectation.

On a forward-looking basis, the company said it would launch its much talked about advertising-supported tier for subscribers in November at a price of $7 per month. Based on that initiative, Netflix plans on adding 4.5 million new subscribers in the last quarter of the year, well ahead of the 3.9 million that was expected by investors. Management also plans to start charging for password sharing, a problem that affects all subscription service businesses, in calendar 2023.

Finally, management guided towards lower than expected fourth quarter numbers. It expects revenue to come in at $7.78 billion, lower than the average estimate for $7.98 billion. FX headings are expected to cut into revenue by $1 billion for fiscal 2022. Adjusted earnings are expected to be 36¢ per share, missing analysts forecasts for $1.2 per share. The company projects total paid subscribers to end December at 227 million, ahead of the estimated 225.8 million. Operating margin is forecasted to be around 4.2%, lower than the 7% level last year.

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