Netflix Forecasts a Fourth Straight Quarter of Slowing Sales Growth
Netflix’s fourth-quarter revenue forecast fell short of analysts’ estimates and pointed to a fourth consecutive quarter of slowing sales growth. Bloomberg’s Ed Ludlow said the forecast offered investors little sign of a stronger finish to the year; earnings per share was the only measure to beat estimates, and then by just a few cents. Netflix said its advertising business was on pace to bring in $300 million less than expected, one factor in the revenue shortfall.
The forecast, not the quarter, set the tone
Netflix reported third-quarter revenue of $12.87 billion, exactly in line with estimates. Its fourth-quarter revenue forecast—$13.44 billion against an estimate of $13.51 billion—was slightly weaker. For Ed Ludlow, the distinction was that the quarter’s results offered little upside while the forecast gave investors no sign of a stronger finish to the year. He said the stock fell about 6% after the results.
When you're closing out a year, and you're telling investors this is the balance of the year, there's no upside.
The growth forecast gives that weak finish broader significance. Netflix’s sales growth had slowed from 17.6% in the final quarter of the prior year, and the company projected growth of 11.5% for this year’s fourth quarter. That would be a fourth consecutive quarter of slowing sales growth, tying the forecast gap to a longer-running deceleration rather than a single soft estimate.
The other headline measures were also below expectations, though Ludlow qualified the picture: third-quarter earnings per share was the only measure that beat estimates, and then only by a few cents. Netflix’s full-year operating-margin estimate was 31.5%, below the 31.7% estimate. Ludlow noted that consensus estimates span a range, from bullish to less bullish, but described the overall numbers as in line or slightly below expectations.
Revenue now carries more weight in judging Netflix’s growth because the company no longer reports subscriber numbers. Ludlow said investors are left to assess the business through revenue and other traditional financial measures, and to infer what those figures say about revenue per viewer. Without subscriber counts, that relationship is harder to see directly.
The company’s advertising business provides one explanation for the revenue shortfall: it was on pace to deliver $300 million less than Netflix expected. That shortfall matters alongside the broader guidance. The forecast points to another quarter of slower sales growth, while the advertising miss identifies a part of the business that is not delivering the revenue the company had anticipated. It does not, by itself, explain the whole growth slowdown.
The changes have not yet produced a growth rebound
Norah Mulinda Norah Mulinda noted that Netflix shares were down about 27% year to date and asked whether investors had entered the report with a high bar, amid questions about the company’s ability to produce quality content.
Ed Ludlow Ludlow pointed to recent changes at the company: about 1,000 layoffs, along with the departures of the chief content officer and the head of the film studio. He described the scale and seniority of those changes as a signal to the market that something needed to change. He also recalled a recent acknowledgment by co-CEO Ted Sarandos that growth was not where Netflix wanted it to be.
The results and guidance did not yet show that the changes had altered the trajectory. Sales growth was set to decline for a fourth straight quarter, Ludlow said. The figures therefore leave a gap between the changes Netflix has made and evidence of a near-term effect on growth. He expected the company to return to its content slate on the earnings call, but the guidance offered no sign that a new approach was already lifting sales.
A hit matters less if viewers do not return
Alexis Christoforous Alexis Christoforous asked whether Netflix might ask Wall Street to be patient while recent changes took effect. Ed Ludlow Ludlow expected the company to point to the quality and volume of its content slate. He named The Diplomat and The Gentlemen as shows the hosts enjoyed, but said that swapping recommendations does not resolve the business question.
In Ludlow’s account, Netflix has struggled to keep audiences across seasons. A successful first season does not ensure that viewers return for seasons two and three. The challenge is not only to attract attention to a new title, but to retain its audience over time. He suggested investors may ask directly what the changes in senior content leadership are meant to do for the slate.
Christoforous also asked whether Netflix performs better in some regions than others, pointing to programming aimed at international audiences and the Greek-language series Maestro in Blue. Ludlow said the company asks investors to judge it on traditional financial measures, rather than subscriber counts. But those measures do not make regional performance directly comparable: a unit of revenue from a viewer in India has a different value from one based on a viewer in the United States. Regional business models, price points, and use of the ad-supported tier vary, so the same financial measure can reflect different conditions across markets.