Netflix (NFLX.US) Q3 earnings call: Revenue growth continues to be driven by price increases and advertising.

Recently, Netflix (NFLX.US) held its 2025 fiscal third-quarter earnings conference call. The company's actual operating profit was 38.7 billion, a 33% year-on-year increase, with a profit margin of 33.6%, exceeding market expectations. The subsequent taxes and fees had a relatively small impact on the company's overall profit, so the company's guidance for Q4 performance was also in line with market expectations. The company's revenue growth continues to be driven by price increases and advertising. Through simple estimation, the core regions of Europe and America gradually raised prices at the beginning of the year (mostly 10%-20%), but after offsetting the impact of advertising package penetration (the short-term advertising layer users' comprehensive ARPPU is lower than the original Base layer), it is estimated that the ARPPU in Europe and America only increased by about 6-8%, and after dilution by most of the unraised regions in the Asia-Pacific region and the high inflation in Latin America, the overall ARPPU is estimated to only have increased by 3-5%. Therefore, the majority of the remaining growth is still contributed by subscription numbers, but estimated net new subscriptions increased only by about 4 million month-on-month, lower than the net increase in each quarter of the past two years. But the actual content in the third quarter was not dull. For example, "KPop" became the most popular movie in Netflix's history, the third season of "Squid Game" concluded, and the second season of "Wednesday" was launched with a surge in popularity, pushing the number of views into the TOP10 of the historical list. This series of viral events also raised high expectations in the market for Netflix's Q3 performance. The third quarter of the company was the first complete quarter after the launch of the 1P advertising system in 12 core regions, but this self-developed system may still need optimization through collecting backtesting data. In addition, the macroeconomic turbulence brought about by tariffs is not favorable for Netflix's high-price advertising. However, the company's advertising revenue target for this year remains unchanged, aiming for doubling growth, and Q4 will introduce the Amazon.com, Inc. DSP system. Combining with market expectations, it is estimated that this year's advertising revenue will be around 1.5 billion. Q&A Q: As 2025 draws to a close and looking ahead to 2026, how does the company view the overall health of the business and future opportunities? A: The company believes the business is very healthy, satisfied with the progress of core strategic advancement, and sees plenty of growth opportunities in the future. The third-quarter revenue met expectations, and without considering the Brazilian tax impact, operating profit will exceed forecasts. User engagement remains strong, with TV viewing shares reaching new high points in the United States and England, and advertising sales setting new records. The advertising business is expected to double revenue this year. The company continues to expand live and gaming products, and announced the launch of Netflix Games function for TV gaming. In the future, the focus will remain on core areas, driving continual improvement in technology and content to ensure long-term steady growth. Q: Can you provide details on the nature of tax expenditures and why they exceeded the operating line? A: The issue of Brazilian taxes is complex, it is not an income tax, but a cost that Brazilian operations must bear, specifically named "The Contribution for Intervention and Economic Domain." This tax is a 10% total tax levied on Brazilian companies for payments made to foreign entities, not specifically targeting Netflix or the streaming media industry, thus other companies may also be affected. In 2022, a local court ruled that we were not subject to this tax, so we had not made any provisions for it prior. The core issue lies in whether the tax is applicable to service payments that do not involve technology transfer. In August of this year, the Brazilian Supreme Court ruled on another company, expanding the scope of taxable transactions, leading us to reevaluate and consider the loss "could occur," hence incurring the cost in the third quarter. This expense covers the period from 2022 to the third quarter of 2025, with about 20% belonging to 2025, and the rest covering 2022 to 2024. It should be emphasized that this is not an income tax, but an operating cost. Excluding this impact, the company's operating revenue and profit margin for the third quarter would have exceeded expectations, and we do not expect this matter to have a significant impact on future performance. Q: Can you share some preliminary thoughts on revenue and operating profit growth in 2026? A: We will announce the full-year guidance for 2026 at the next earnings call in January. The financial goals remain unchanged, focusing on achieving steady revenue growth, expanding profit margins, and increasing free cash flow. Q: Given your commitment to doubling the previous ad sales, does this mean that ad spending for the full year of 2026 may also double? A: We have made exciting progress in 2025, with ad revenue doubling. Although the current base is still small compared to subscription revenue, we have demonstrated the ability to scale, indicating substantial growth potential in the future. The presold ad commitments in the United States have more than doubled, with some being realized in 2025 and some in 2026, as you mentioned. Of particular note is the higher growth rate of programmatic advertising, crucial for future incremental revenue. We believe that programmatic advertising will become a crucial revenue source in the future. This growth is driven by advertisers' high expectations for our expanding scale and highly engaged audience. The comprehensive deployment of advertising technology allows us to offer more ad formats, a more sophisticated measurement system, and richer purchasing channels. Our ad asset library is also a key differentiating competitive advantage. While we do not currently provide specific guidance for 2026, we are confident in our current growth trajectory. Q: Looking ahead to next year, what are the core development focuses for the advertising business? A: The current core focus is on simplifying the advertising placement process for advertisers on our platform and expanding the diversity of advertiser groups - a key direction for driving revenue growth. We are introducing more demand-side resources (such as Amazon.com, Inc. DSP, and Japan AJA), and continuously improving our in-house advertising sales and market expansion capabilities. At the same time, we are continuously iterating on our ad formats. Interactive ad features will be launched later in the quarter. Looking to 2026, we will continue to develop along these lines: providing more purchasing options, enhancing global targeting and media planning data support, launching modular interactive ad formats, strengthening AI capabilities, and expanding measurement capabilities in all markets. In 2027, we will focus on investing in data capabilities, including machine learning optimization, advanced measurement technologies, and precision targeting technologies. We are steadily moving forward. While significant progress has been made, there is still much work to be done ahead. Honestly, with our existing technology and expertise in data science, we expect to achieve transformation faster than other streaming platforms. Q: As ad packages and new demand-side partnerships continue to expand, is your ad fill rate meeting expectations? A: Our main focus currently remains on optimizing overall revenue metrics. In terms of fill rates, there has indeed been improvement. With the continued strengthening of market expansion capabilities, measurement systems, and targeting functions, we expect fill rates to continue to increase. Q: Is user engagement meeting expectations? A: Yes. Total viewing time in the third quarter of 2025 grew slightly faster than in the first half of the year. We achieved a 8.6% quarter-high TV viewing share in the United States and 9.4% in England. We believe viewing time will continue to grow steadily and enhance user engagement by expanding the range of program content. At the same time, we see that some content has created excess value. For example, the Carlaw vs. Crawford boxing match was the most watched men's boxing match of the century, and "KPop Demon Hunters" became the most successful movie in the company's history, with profound cultural influence. We will continue to deepen our understanding of these differentiated values, and we will continue to benefit from the trend of audiences shifting from linear TV to streaming platforms. The fourth quarter has a strong lineup, including a lineup of movies and the final season of "Stranger Things," and growth momentum will continue into 2026. Looking ahead to 2026, we will launch new seasons of multiple popular series and heavyweight movies, covering action, romance, and international content. After a strong fourth quarter, 2026 will usher in an even more exciting content cycle. Q: Regarding the recent collaboration with Spotify, can you talk about this partnership? Will the company be more actively expanding its podcast-related business in the future? A: This collaboration is a video exclusive partnership agreement reached with Spotify, featuring selected top podcasts to provide members with more entertainment options in areas such as popular culture, lifestyle, sports, etc., and can be watched anytime, anywhere. We will continue to develop this segment based on member demand, just as we are expanding other content categories. This is also a significant opportunity to integrate high-quality video content, extending Netflix's content offering beyond films and TV shows to live events, talk shows, and games. We believe this will further strengthen Netflix's value as the world's most important entertainment platform. Q: After the strong performance of "KPop Demon Hunters" in cinemas, can you share your new views on the commercialization of theatrical windows? Particularly, what is your latest perspective on exclusive or non-exclusive cooperation models? A: Our strategy remains unchanged, still focusing on providing Netflix-exclusive premiere movies for members. As with "KPop Demon Hunters," we are scheduling theatrical releases for some films in the fall as part of our distribution, marketing, and advertising strategy, and will continue to do so. The success of "KPop Demon Hunters" was precisely because it premiered on Netflix first. The film gradually gained popularity, with repeat views by core fans driving recommendations and wider spread. Netflix's distribution model eliminates barriers for audiences to access content, propelling the film to international acclaim, and reinforcing our strategy of "streaming first, building momentum." In addition, offline viewing activities and group singing sections provided a unique experience for fans. Eight weeks after its launch, we held special screenings in theaters, which performed well. We plan to continue these events over the Halloween weekend and expand into more international markets. Q: What are your observations on the boxing match between Carlaw and Crawford in September? Do live events like this impact user engagement, user acquisition, and user retention on the platform? A: This match was the most-watched men's boxing championship of the century. Large-scale events like this attract public attention, have unique value for members, significantly increase discussion and new user acquisition, and we believe they also have positive effects on user retention. While live content accounts for a small percentage of overall spending, its impact is significant. We are confident in the future of our live business and plan to expand further, including matches like the Jake Paul vs. Fisher Davis fight in November and the World Baseball Classic in Japan next year. Q: Can you talk about the importance of global sports rights compared to local rights to Netflix? Will the sports rights you plan to acquire significantly accelerate the growth of the advertising business? A: The choice between global and local rights is mainly about balancing the scale differences - the balance between local costs and audience scale. Therefore, our overall strategy remains unchanged, focusing on large live events, with sports being just one part of it, and we are not currently concentrating on securing rights for complete season events. For global and local events, we will make decisions based on specific circumstances. For example, the Carlaw vs. Crawford match has global appeal, while the World Baseball Classic in Japan is designed for specific markets and budgeted projects. In terms of advertising, our core goal is to inspire audience enthusiasm because both advertising and subscription revenue come from audience engagement and love for content. Looking ahead, we are confident in the upcoming live events - including the Jake Paul vs. Fisher Davis fight on November 14th, the NFL doubleheader on Christmas, and the 2026 World Baseball Classic in Japan, the 2027 and 2031 FIFA Women's World Cups, etc. We are excited about these events and more to come in the future. Q: Are you testing free trials for premium members? We recently saw a 4K upgrade prompt when opening Netflix. Is this a regular promotional activity or are you selectively testing free trials? A: Yes. We are continually testing various promotional offerings to help members experience features they may be interested in. For example, members using a 4K TV will receive a notification to preview "Skycraper live" to see the 4K effect. Our goal is to increase member satisfaction and retention through tiered pricing and flexible pricing. Q: Do you believe potential industry consolidation will reshape the competitive landscape? Is this an opportunity or a threat? How might these changes affect Netflix's content strategy and differentiation? A: We have always preferred organic growth rather than relying on acquisitions. There is still ample room for profitable expansion without changing our strategic approach. If the right opportunity arises, we will evaluate it based on established standards - whether it can strengthen our content matrix, enhance capabilities, or accelerate strategic goals, but we have no interest in traditional media assets. Competition in the entertainment industry is fierce, and past mergers and acquisitions (such as Walt Disney Company's acquisition of Fox, Amazon.com, Inc. acquiring Time Warner, etc.) have not fundamentally altered the landscape. The real challenge lies in global content creation, AI applications, user experience, and international execution capabilities, all of which require long-term accumulation and cannot be quickly acquired through mergers. We will continue to focus on building core capabilities and steady growth. Q: If industry consolidation combines film and TV production with streaming assets, could this reduce Netflix's channels for acquiring third-party content? A: Original content has always been the core DRIVE of our business. For over a decade, we have continued to expand our investments in original content, developing a wide variety of content globally. While we welcome licensed content from third parties, the channels for acquiring such content are always fluctuating, and we have never relied on any single supplier. Competitors serve both as content providers and platform players, their licensing strategies often changing, but this has not had a substantial impact on us. Content from any single supplier only makes up a tiny proportion of total viewing time. More importantly, Netflix has proven to be the best platform for helping external IP accumulate audiences and increase value. Q: Netflix recently launched party games that can be played on TVs. How do you think games will change the amount of time members spend on Netflix every day? A: Games are a significant entertainment form globally, worth approximately $1.4 trillion, and our focus is not just on games themselves, but on expanding interactivity - complementing interactivity with linear storytelling to create new entertainment experiences. We are testing real-time voting and other interactive features, like "David Zhang's Dinner Time" and "Star Search Coming," and will launch more interactive live projects in the future. Regarding game development, we have established a complete infrastructure, including development capabilities, service launches, and player connection mechanisms. The focus will remain on core categories, launching more high-quality games based on our IP, such as "Squid Game: Unlock Edition," "Black Mirror Universe: Angels," and expanding children's games (such as "Peppa Pig") and family party games ("Spelling Party," "Guess the Word Game Night," "Tetris," "Party Breaker") and more. Users can play directly on their phones without additional equipment, as this is the core of the experience. In the future, we will further enhance interactive experiences using mobile capabilities. Overall, these efforts are increasing user engagement and retention, and we will continue to carefully invest in them. Q: You mentioned last quarter that Netflix is a great platform for some YouTube creators. Since then, the company has announced a new partnership agreement with Mark Roffel's Crater. Can we expect more progress in this area? What types of content is the company specifically seeking? A: We aim to collaborate with the world's best creators, whether from Hollywood, Korea, Paris, or social media platforms. Not all YouTube content is suitable for us, but creators like Mark Rovelle and Rachel are very compatible. In fact, this is not a new venture - we have long collaborated with internet creators like Miranda Sing and King Bach to produce programs and films, such as "Enemies Retreat," "Babysitter," "Murder Queen," etc. We are also building a dedicated area for video podcasts, offering global creators a broader platform for development. Q: How has Netflix's view of using artificial intelligence and related technological capabilities evolved? What impact does new AI content creation applications like Sort have? From a user engagement perspective, do you think this will create new competition? A: Our stance on artificial intelligence has always been clear. For the past fifteen years, AI and machine learning have been deeply embedded in our technology and business processes. We have vast data assets and scalable products that allow us to capitalize on new opportunities brought by AI. Generative AI shows potential in various fields - it can enhance productivity, accelerate innovation, and create better results for members and creators. While most applications can be directly integrated into existing tools, our investment focus areas include product experiences, content creation, and the advertising business. In content creation, AI currently has the most significant impact on user-generated content creators, providing powerful creation tools, but not replacing creativity. Just as AI music is widespread but cannot replace top artists, we believe AI will be an auxiliary tool for creators, helping them tell stories more efficiently and innovatively. Our goal is to make AI a tool that truly enhances creativity rather than replacing it.