Shares of Netflix (NFLX) fell about 7% on Tuesday after the streaming giant’s third-quarter earnings report came out. The report fell short of analysts’ estimates for both revenue and profit. The corporation quickly blamed the shortfall mostly on an unanticipated, one-time cost that came up because of a long-running tax battle in Brazil.
Q3 Results: Revenue Growth but Missed Estimates
The company kept making more money each year, but the main profitability measures didn’t meet Wall Street’s expectations:
The $11.51 billion in revenue was a little below than the Bloomberg consensus of $11.52 billion and Netflix’s own estimate of $11.53 billion.
The earnings per share (EPS) were $5.87. Even though this was up from $5.40 in the same quarter last year, it was a big miss of the $6.94 that analysts had expected.
The company’s operating performance was the most affected. Netflix said its operating margin was 28%, which is a lot lower than the 31.5% it had predicted.
The Real Culprit: The Brazilian Tax Hit
Netflix executives were clear that the shortfall wasn’t because the company’s core business was slowing down; it was because of an unforeseen, one-time event: a tax issue in Brazil.
The business recorded the cost after deciding that it was likely to lose a lawsuit over a 10% tax on some payments made by Netflix’s Brazilian units to its international operations. The charge, which was said to be $619 million, was recorded in the third quarter.
On the earnings call, Chief Financial Officer Spence Neumann made it clear that this tax does not apply only to Netflix or even the streaming business. He stressed that the company’s financial fundamentals are still strong: “Without this cost, we would have exceeded our Q3… operating margin forecast, and we don’t expect this issue to have a big effect on our results going forward.” The corporation says this was just a one-time accounting mistake.
Backlash on social media vs. the truth about money
The earnings miss happened just a few weeks after a “Cancel Netflix” movement that got a lot of attention on social media, thanks to Tesla entrepreneur Elon Musk. Musk publicly attacked what he called the streamer’s “woke” programming, pointing to a director who supposedly made fun of Charlie Kirk’s death as an example. He also said he had canceled his own subscription.
After the stock market fell, several people on social media tried to link the two events, saying that Musk’s criticism was to blame for the company’s poor financial performance. One X user said, “Musk says ‘Cancel $NFLX,’ and the company misses earnings for all kinds of reasons.” Hmmmm… But the company’s thorough report and financial analysts say that the Brazilian tax penalty was the main technical cause for the failure in profitability, which was more important than the operational performance.