NFLX Q3 Earnings Miss on Brazilian Tax Dispute, Posts Record Ad Sales

Core Insights - Netflix reported Q3 2025 earnings of $5.87 per share, missing estimates by 14.8% due to a one-time $619 million expense related to a tax dispute in Brazil, although this represents an 8.7% increase from $5.40 per share in the same quarter last year [1][2] - Despite the earnings miss, Netflix shares fell 5-7% in after-hours trading, but the stock has gained over 48.6% in the past year, reflecting strong operational performance and a successful content strategy [2] - Revenues increased by 17.2% year over year, driven by membership growth, higher subscription pricing, and increased advertising revenues, although it missed the consensus mark by 0.12% [3] Financial Performance - Operating income totaled $3.25 billion, up 12% year over year, but the operating margin was 28%, below the guidance of 31.5% due to the Brazilian tax dispute [8] - Marketing expenses rose 22.3% year over year to $786.3 million, while technology and development expenses increased 16.1% to $853.6 million [9] - Non-GAAP free cash flow was reported at $2.66 billion, an increase from $2.26 billion in the previous quarter, indicating improved operational efficiency [25] Content and Engagement - The animated film "KPop Demon Hunters" became Netflix's most-watched film ever with over 325 million views, significantly contributing to merchandise deals [10][12] - The third quarter saw record engagement, with Netflix achieving its highest quarterly viewing share in the U.S. and U.K. [6] - The return of "Wednesday Season 2" garnered 13.4 million views in its first week, contributing to a strong content slate [14] Advertising and AI Integration - Netflix recorded its best advertising sales quarter ever, on track to more than double ad revenues in 2025 [18] - The company is leveraging AI for ad formats and content recommendations, enhancing its advertising technology [19][23] - Netflix declared itself "all in" on generative AI, utilizing it for content creation and operational efficiencies [21][22] Future Outlook - For Q4 2025, Netflix expects revenues of $11.96 billion, a 16.7% year-over-year growth, and projects earnings per share of $5.45 [27] - The full-year 2025 revenue forecast is set at $45.1 billion, reflecting a 16% growth year over year, with an adjusted operating margin forecast of 29% [28] - The company anticipates free cash flow of approximately $9 billion for the full year, up from previous estimates [29] Upcoming Content - The Q4 2025 content slate includes the final season of "Stranger Things" and major film releases like Guillermo del Toro's "Frankenstein" [30] - Netflix is expanding its live programming strategy with significant events, including an NFL Christmas Day doubleheader [32]