Netflix has exceeded initial forecasts in its Q3 2024 results, reporting a 15% year-on-year lift in revenue to US$9.8, while operating income soared 52% YoY to US$2.9 billion with an ample operating margin of 30%. Earnings per share (EPS) increased to $5.40, a 45% rise compared to $3.73 in Q3 2023.

The results have been reflected on the stock market, with Netflix shares lifting 5.38% in the last five days, hitting a record high of US$763.89 on Monday.

Overall, paid memberships increased 14.4% YoY to 282.72 million, however paid net additions in Q3 were lower at 5.07 million compared to 8.76 million in Q3 2023.

The global streaming platform has also continued to scale its ad tier, with membership up 35% quarter-on-quarter, now accounting for 50% of sing-ups in countries where the ad tier is available. Netflix said it is "on track" to reach what it believes to be "critical ad subscriber scale for advertisers" in 2025, across all ad-tier enabled markets. The platform noted that it was also "pleased" with the level of engagement on the ad plans, with a similar level of view hours per members to standard plans.

Netflix indicated that improving its offering for advertising would be a priority in the coming years, with the in-house first party ad tech platform on track to roll out in Canada in November, with a broader launch to all ad countries in 2025. In addition, the streamer has expanded its programmatic capabilities with The Trade Desk and Google DV 360.

Netflix said it did not expect advertising to be a primary revenue driver in 2025, pointing to the near-term challenge that it is "scaling faster than our ability to monetize our growing ad inventory".

"While this creates a short term drag on ARM, we are balancing building ads scale (for more meaningful ads revenue and ARM contribution over time) while still delivering healthy overall revenue growth in the near term (as noted, we expect our total company revenue to grow 15% year over year in 2024). And we’re making progress with ads monetization, as we saw in this year’s US Upfront - closing deals with all major holding companies as well as independent agencies, with a 150% plus increase in upfront ad sales commitments over 2023, in-line with our expectations."

Looking to Q4 2024, Netflix expects a revenue growth of 15% year-on-year, with a projected operating margin of 22%. The full year 2024 revenue is anticipated to align with the high end of the previous guidance range (14%-15%), with a forecasted operating margin of 27%.

Revenue growth in Q3 was led by APAC at 19% YoY, ahead of 16% in UCAN, 16% in EMEA, and 9% in LATAM.

Net cash provided by operating activities in Q3 was $2.3 billion, with free cash flow totalling $2.2 billion. Netflix repurchased 2.6 million shares for $1.7 billion during the quarter, and total debt rose to $16 billion, although net debt decreased from $7.4 billion to $6.8 billion.

Commenting on the results, Forrest VP Research Director, Mike Proulx, said: “On the surface, Netflix is trending in all the right directions. Financially, revenue and operating margins continue to increase and expenses are down. Viewer engagement is also notably up. However, a steep decline in net new subscribers is what’s concerning. While there’s room for net subscriber growth internationally, in the US things are getting tapped out.

“That’s why accelerating growth via advertising becomes paramount to Netflix’s go-forward strategy and also why the company will stop reporting on subscriber numbers come 2025. In a way it’s a ‘don’t look here’ tactic to draw attention away from a material deceleration in new subscribers and, instead, draw focus to overall revenue which gives a fuller picture of the company’s financial health.

“As consumers have more and more choice in streaming services, there will be increased fragmentation in the overall streaming user base and only so many ad dollars to go around. For its long-term growth, Netflix must demonstrate that its ad solutions can scale, reach the right audiences, and ultimately deliver tangible results to brands more so than its competition.”