Unexpected Tax Charge Impacts Q3 Earnings
Netflix shares dropped 9% on Wednesday morning after the streaming giant reported a third-quarter earnings miss late Tuesday. The setback was attributed to a dispute with Brazilian tax authorities over a 10% tax on specific payments made from Brazilian operations to entities abroad.
Netflix had not included this tax liability in its prior forecast. Executives said the company decided to account for the charge in Q3 after determining it was reasonably likely to lose a legal challenge on the matter.
“This tax isn’t specific to Netflix or even to streaming,” said CFO Spence Neumann during the earnings call. “Without this charge, we would have exceeded our Q3 operating income and margin forecast. We do not expect it to materially impact future results.”
Q3 Performance in Line on Revenue, Miss on Profit
Despite the one-time tax hit, Netflix’s revenue rose 17% year over year, supported by subscriber growth, pricing updates, and higher ad revenue. For Q3 ending September 30:
- Earnings per share: $5.87 (vs. $6.97 expected)
- Revenue: $11.51 billion (in line with forecasts)
Net income was reported at $2.55 billion, up from $2.36 billion a year earlier. Full-year revenue is expected to reach $45.1 billion, a 16% annual increase, matching prior growth projections.
However, the company revised its operating margin forecast down from 30% to 29% for 2025 due to the Brazilian tax issue.
Ad Business Grows, But Transparency Lacking
Netflix said Q3 was its best quarter ever for advertising sales. Co-CEO Greg Peters confirmed the company is on track to more than double ad revenue this year. Yet, no specific ad revenue figures were disclosed.
“Netflix had its best ad sales quarter to date, but still did not provide a figure,” noted Ross Benes, senior analyst at EMarketer. “This implies that continued revenue growth will mostly rely on subscription fees.”
Earlier this year, Netflix raised prices across several tiers, including its ad-supported subscription, further supporting revenue.
Strong Content Lineup and Licensing Expansion
Netflix’s Q4 content lineup is packed with major releases, including:
- Final season of “Stranger Things”
- New seasons of “The Diplomat” and “Nobody Wants This”
- Guillermo del Toro’s “Frankenstein”
- Rian Johnson’s “Wake Up Dead Man: A Knives Out Mystery”
The platform continues to ride the success of “KPop Demon Hunters”, now its most-watched film with over 325 million views. Netflix announced licensing partnerships with toy giants Hasbro and Mattel to launch dolls, plush toys, and games tied to the film by spring 2026.
Additionally, Netflix is exploring opportunities in live experiences, publishing, beauty, lifestyle, and food and beverage linked to the animated hit. “KPop Demon Hunters” will also return to theaters over the Halloween weekend.
