Netflix shares drop as Brazilian tax dispute hits earnings 

Netflix Earnings Decline Due to Unexpected Brazilian Tax Issue

Impact of Brazilian Tax Dispute on Netflix Earnings

By Lisa Richwine

Quarterly Performance Overview

LOS ANGELES (Reuters) -Netflix missed Wall Street's third-quarter earnings targets because of an unexpected expense from a Brazilian tax dispute while it offered a forecast a touch ahead of Wall Street projections for the rest of the year.

Future Projections and Strategies

The report failed to impress investors accustomed to fast-paced growth from the streaming video pioneer. Shares of Netflix, which had risen 39% this year ahead of the earnings release, fell 5.6% to $1,171.24 in after-hours trading on Tuesday.

Advertising and Gaming Expansion

Netflix is seeking to expand in new areas such as advertising and video games after attracting more than 300 million customers around the world. It faces competition from YouTube, Amazon's Prime Video, Disney+ and others. The media business is facing major changes including the potential sale of industry titan Warner Bros Discovery and the rise of generative artificial intelligence with the ability to produce short videos. CNBC reported that Netflix was among the parties interested in examining Warner Bros' assets.

Response to Market Competition

Netflix Co-CEO Ted Sarandos, in response to analysts' questions about possible media consolidation, said the company "can and will be choosy" about acquisition targets. He said the company has no interest in owning legacy media networks but would evaluate opportunities to buy intellectual property.

"Nothing is a must-have for us to meet our goals that we have for the business," Sarandos said.

Co-CEO Greg Peters said he did not believe media industry consolidation would make things more challenging for Netflix.

"Watching some of our competitors potentially get bigger via (mergers and acquisitions) does not change in and of itself, at least our view, the competitive landscape," Peters said.

Netflix posted net income of $2.5 billion and diluted earnings-per-share of $5.87 for July through September, a period when the animated "K-Pop Demon Hunters" became the most-watched movie in Netflix history. Analysts had expected $3.0 billion and $6.97, respectively, according to LSEG.

Revenue was even with forecasts, at $11.5 billion.

Netflix reported an operating margin of 28% for the third quarter. Without the Brazilian tax expense of roughly $619 million, the margin would have exceeded the company's guidance of 31.5%, it said, adding that it did not expect the matter to have a material impact on future results.

PP Foresight analyst Paolo Pescatore said he believed the tax issue weighed on Netflix shares.

"All things considered, this was another robust quarter, despite a blip due to an unforeseen expense," Pescatore said.

For the fourth quarter, Netflix forecast revenue of $11.96 billion, compared with Wall Street's projection of $11.90 billion. It projected diluted earnings-per-share a penny ahead of analysts' targets, at $5.45.

For the third quarter, Netflix said it recorded its best ad sales quarter in history but did not disclose a number.

"This gives the impression that the sustained revenue growth achieved this quarter, and forecasted for next quarter, will predominantly continue to come from subscription fees," eMarketer analyst Ross Benes said.

Netflix will release the final season of one of its biggest hits, "Stranger Things," in November and December and stream two live National Football League games on Christmas.

"We're finishing the year with good momentum and have an exciting Q4 slate," Netflix said in its quarterly letter to shareholders.

Earlier this year, Netflix stopped reporting subscriber numbers and urged investors to focus on revenue and profit.

It has expanded into video games and advertising, two areas that have contributed little to revenue so far, according to analysts and investors. 

(Reporting by Lisa Richwine; Editing by Richard Chang)