Netflix's ad business has been seen as a valuable growth opportunity. So why is management cutting its ad forecast?
Netflix's ad business has been seen as a valuable growth opportunity.
So why is management cutting its ad forecast?
Netflix (NFLX -1.66%) released third-quarter earnings after hours on Tuesday, and it was another disappointment for investors. The stock was trading down 6% after hours.
While its headline numbers were slightly ahead of expectations, Netflix's engagement remained weak, and its trend of slowing growth continued. In fact, the company reported its slowest top-line growth in three years, and it expects it to continue to moderate in the fourth quarter.
Overall revenue rose 11.8% to $12.87 billion, which matched expectations, while its operating margin came in at 34% due to the timing of its content spend. On the bottom line, earnings per share improved from $0.59 to $0.87, beating estimates of $0.82.
However, beyond the existing concerns about engagement and its weak original content slate, one number underscored Netflix's troubles. The company cut its ad revenue guidance for the year from $3 billion to $2.7 billion, indicating weakness in what's supposed to be a key growth market for the streamer.
Netflix was late to launch its advertising business, finally pulling the trigger in 2022 after years of resistance. The decision has turned out to be a success, giving customers a lower-priced option and allowing advertisers to meet audiences where they are, on streaming. The two-tiered advertising model has become the norm in the streaming industry, and all of Netflix's rivals offer some version of a higher-priced ad-free tier and a lower-priced tier with ads.
Netflix cut its ad revenue forecast due to a "slightly slower than expected rollout of some ad product capabilities," which places the blame for the shortfall on a technical issue rather than a business issue like weak demand from advertisers or poor engagement. That's a good sign for investors, but still a disappointment, nonetheless.
Advertising still makes up a small fraction of Netflix's revenue. The streamer expects to bring in $51.1 billion in revenue this year, meaning that advertising makes up less than 6% of its revenue. The subscription business still dominates.
However, advertising is a key part of the growth story, and it could face increased scrutiny from Wall Street, especially given the disappointing engagement trends.
Averytin News Financial update.