Netflix blames tax dispute in Brazil for rare quarterly earnings letdown

Netflix missed a profit target set by stock analysts during the video streamer’s latest quarter, a disappointment the company blamed on a tax dispute in Brazil.

The results announced Tuesday broke Netflix’s streak of six consecutive quarters of profits that have eclipsed analysts’ projections.

The Los Gatos, Calif., cited an unexpected $619 million expense related to Brazil’s tax dispute for the revenue shortfall, while praising its lineup of distinctive TV series and films for keeping its audience engaged and providing a mix of subscription fees and increased ad sales that helped it generate revenue that matched analysts’ forecasts.

Investors, however, were not mollified by this explanation, as Netflix shares still fell about 6% in extended trading after the numbers were released.

Analysts varied in their interpretation of the third quarter report.

Investing.com analyst Thomas Monteiro worries that Netflix is ​​using the Brazilian tax as a way to mask signs of slowing subscriber and advertising growth amid economic uncertainty. “The truth is that the company has failed to generate the type of growth that we have been accustomed to over the last two years,” he said.

But Zacks analyst Jeremy Mullin said he saw no reason for concern, saying Netflix’s “underlying story remains strong.”

Netflix earned $2.5 billion, or $5.87 per share, in its July-September quarter, an 8% increase from the same period last year. Revenue climbed 17% from last year to $11.5 billion. Analysts surveyed by FactSet Research forecast the Los Gatos, Calif., company would earn $6.96 per share on revenue of $11.5 billion.

Delivering solid financial growth has become more important than ever for Netflix as management has kept investors from focusing on how many subscribers its service gains quarter over quarter. As part of this process, Netflix stopped disclosing its subscribers late last year.

The shift has paid off so far, with Netflix’s stock price up about 40% year to date, although the slowdown in extended trading has signaled that some of those gains are about to evaporate.

Although Netflix won’t reveal any more details, this year’s revenue growth indicates that its worldwide subscriber count is up from the roughly 302 million it had at the end of last year — by far the largest number among video streamers, even as rivals with deeper pockets like Amazon and Apple expand their programming selections.

During the company’s quarterly conference call, Netflix co-CEO Ted Sarandos said the streaming service’s total global audience, including multiple people living in the same subscriber household, was approaching 1 billion.

“We understand the streaming business better than any of our competitors,” Greg Peters, Netflix’s other co-CEO, boasted on the call.

Netflix has maintained its lead by adding more live sports and video games to complement its wide slate of scripted programming — a diversification effort that will extend to Spotify’s video podcasts next year.

And now Netflix might have another opportunity to add even more compelling programming with Warner Bros. Discovery announcing it may sell all or part of its holdings, which include HBO, DC Studios and CNN. Analysts are already speculating that Netflix could join bidders seeking to grab a share of Warner Bros. Discovery.

In response to a question about Netflix’s acquisition strategy, Sarandos noted that the company has traditionally been “more builders than buyers,” without ruling out a potential bid for some Warner Bros. properties. Discovery other than cable TV networks like CNN and TBS. “We can and will be selective,” Sarandos said.

The company also tapped into a new revenue stream by selling ads as a low-cost option to its service introduced three years ago.

Although the advertising business is not yet large enough to require the company to disclose sales, management expects revenue to more than double from last year. A recent analyst of S & P projects $1.1 billion in ad sales for Netflix this year, a figure that would represent about 2% of its total projected revenue.

It’s getting to the point where Netflix risks trying to juggle too many balls at once, said Mike Proulx, an analyst at Forrester Research. “If the company goes too far to focus entirely on entertainment, it risks diluting its core.”