Netflix profit misses forecasts as Brazil tax dispute hits earnings

Netflix profit dipped despite the hit film 'KPop Demon Hunters'. Photo / AFP

Netflix shares sank on Tuesday after the streaming television powerhouse reported quarterly profit that fell short of market expectations.

Netflix recorded a profit of US$2.5 billion (NZ$4.4b) on revenue of $11.5b in the recently ended quarter, saying it was hit with a $619 million expense because of an ongoing dispute with Brazilian tax authorities.

Netflix executives told financial analysts on an earnings call that absent the hefty cost in Brazil, it would have exceeded its operating margin forecast in the quarter.

“It’s not an income tax; it’s a cost of doing business in Brazil,” said Netflix chief financial officer Spencer Neumann.

“It’s not even specific to streaming, so we assume other companies will be impacted by this.”

A recent court ruling involving a different company doing business in Brazil boosted the likelihood of Netflix being hit with the expense, so it recorded it in the recently-ended quarter, according to Neumann.

Netflix shares were down more than 6% to slightly less than $1163 in after-market trades that followed release of the earnings figures.

Ads and demon hunters

Netflix viewership in Britain and the US reached their highest levels in about three years, powered by a lineup that included its most popular film ever, KPop Demon Hunters, according to the earnings release.

Netflix expressed confidence in its momentum in the current quarter, citing attention-getting shows including the final season of Stranger Things and The Diplomat.

A new Knives Out Mystery is also slated for release on the platform this quarter, as well as ramped up live events, including professional American football and boxing.

An ad-supported membership level had its best sales quarter to date as Netflix continues to challenge traditional television programming, the company said.

Netflix has more than doubled its ad revenue this year, albeit off a small base relative to the number of subscribers who pay to watch shows without marketing messages, according to co-chief executive Greg Peters.

Peters said interest in Netflix is gaining momentum with advertisers, given the platform’s size, engaged audience, data analytics, and rich slate of content.

“Netflix had its best ad sales quarter to date but still did not provide a figure for how large the ad business is,” said Emarketer senior analyst Ross Benes.

“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.”

Netflix touts itself as one of the world’s leading entertainment services with over 300 million paid memberships in over 190 countries.

Buying and building

It is rumoured to be interested in acquiring global entertainment company Warner Bros. Discovery, analyst Benes noted.

“For that potential purchase to best complement Netflix, the planned split of WBD would make its studio more attractive without bogging it down with TV networks that aren’t as agile as Netflix,” Benes told AFP.

Netflix co-chief executive Ted Sarandos said on the call that the streaming service focuses on growing “organically” and is choosy when it comes to acquisitions.

“It’s our responsibility to look at every significant opportunity,” Peters said when asked whether Netflix is interested in buying Warner Bros. Discovery.

“We have a clear framework to evaluate those opportunities, and we’ll do whatever we think is best.”

Warner Bros. Discovery on Tuesday put out word it is reviewing its options as a result of unsolicited interest from “multiple parties” for all or parts of the company.

- Agence France-Presse