Netflix says tax dispute hurt solid quarter; shares tumble
The company has expressed interest in buying some of the assets owned by Warner Bros Discovery
[LOS ANGELES] Netflix said that a tax dispute with Brazil cut into third-quarter earnings, marring results that otherwise fell in line with Wall Street estimates.
The world’s most valuable entertainment company posted quarterly operating income of US$3.2 billion, according to a statement on Tuesday (Oct 21), about US$400 million below its own forecast and analysts’ estimates. The company’s outlook for the current quarter is largely in line with Wall Street projections.
Netflix had to pay about US$619 million to settle a multiyear tax dispute with Brazilian authorities going back to 2022. The company had identified the potential risk in previous filings, but not in its earnings guidance, and said that it would have beaten forecasts if not for the expense. Future payments will be smaller.
“We don’t expect this matter to have a material impact on future results,” the company said.
Shares of Netflix fell as much as 7.5 per cent to US$1,147.64 in extended trading after the results were announced. The stock hit an all-time high of US$1,341.15 on Jun 30, the final day of the previous quarter, and has drifted lower over the last few months.
The dispute depressed what many investors thought would be a big quarter for the Los Gatos, California-based streaming leader.
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Netflix benefited from a strong slate of programming that included its most popular movie of all time, KPop Demon Hunters, the second season of the hit show on Wednesday and a sequel to the comedy Happy Gilmore. It also streamed a popular boxing match between Canelo Alvarez and Terence Crawford.
Investors have worried that Netflix customers are not increasing the amount of time they spend on the service and about the potential danger of video created by artificial intelligence. The vast majority of the growth in streaming has been going to free services such as YouTube, Roku and Tubi.
Netflix sought to address those concerns in its letter to shareholders, touting record subscriber engagement in the most recent quarter. The company has an even stronger lineup of programming set for the final three months of the year, including the last season of Stranger Things, a sequel to the mystery film Knives Out and new movies from Guillermo del Toro and Kathryn Bigelow.
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Despite this array of programming, Netflix generated US$2.66 billion in free cash flow in the third quarter, beating Wall Street estimates, and increased its forecast for the year to about US$9 billion.
The company will use some of that money to repurchase shares and invest in programming. But it also flagged the possibility of mergers and acquisitions. Netflix has expressed interest in buying some of the assets owned by Warner Bros Discovery, Bloomberg has reported.
No deal is needed for Netflix to achieve its goals, co-chief executive officer Ted Sarandos said on Tuesday. But the company looks at all opportunities and is interested in intellectual property that makes its service more appealing to customers. Management has no interest in buying cable TV networks and is primarily focused on using its extra cash on other initiatives.
“We believe we can and will be choosy,” Sarandos said.
For the third quarter, Netflix sales rose 17 per cent to US$11.5 billion, matching Wall Street estimates. Because of the Brazilian tax expense, earnings came to US$5.87 a share, missing analysts’ estimates of US$6.94.
For the fourth quarter, Netflix expects to earn US$5.45 a share on sales of US$12 billion. That compares with Wall Street estimates of US$11.9 billion and earnings per share of US$5.42. BLOOMBERG
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