Netflix (Minutes): Programmatic advertising will be an important source of revenue in the future

The following are the minutes of Netflix FY25 Q3 earnings call. For earnings interpretation, please refer to "Netflix: Another Plunge! Has the 'King of Shows' Become Mediocre?"

I. Review of Core Financial Data

1. Earnings Actually Exceeded Expectations: An additional cost provision of $619 million impacted the current profit margin by more than 5 points, creating a false impression of underperformance. This expense mainly involves municipal service tax levied by Brazil on streaming companies, which had been disputed and not previously provisioned by Netflix. In Q3, Netflix confirmed the cumulative expenses from 2022 to date, recognizing them as other cost items, thus significantly impacting Q3 performance.

The guidance provided last quarter did not include this expenditure. Excluding this impact, actual operating profit was $3.87 billion, up 33% year-on-year, with a profit margin of 33.6%, exceeding market consensus. The subsequent impact of this tax on overall company profits is relatively small, so the guidance for Q4 performance is roughly in line with market expectations.

2. Flat Revenue is the Main Cause of Decline: The revenue side, which reflects growth, remained unremarkable, with current and next quarter guidance basically meeting expectations. Q3 revenue grew 17% year-on-year, with currency exchange rates in different regions having a hedging effect, showing no expected forex tailwind.

Revenue growth is still driven by price increases and advertising.

(1) Subscription

Through our simple estimation, prices in core regions of Europe and America increased gradually at the beginning of the year (mostly by 10%-20%), but after offsetting the impact of advertising package penetration (short-term comprehensive ARPPU of ad-tier users is less than the original Base tier), it is estimated that ARPPU in Europe and America only grew by 6-8%. After being diluted by most of the Asia-Pacific region, which did not see price increases, and the high inflation in Latin America, overall ARPPU is estimated to have increased by only 3-5%. Therefore, the remaining growth is mainly contributed by subscription numbers, but quarter-on-quarter, it is estimated that subscription users only net increased by about 4 million, lower than the net increase in each quarter over the past two years.

However, the content in Q3 was not considered dull, with "KPop" becoming the most popular movie in Netflix history, "Squid Game" wrapping up its third season, and "Wednesday" gaining explosive popularity after its second season launch, making it into the historical TOP10 list of viewership. This series of popularity also led the market to have high expectations for Netflix's Q3 performance.

Yet the results were quite average, seemingly a bit disconnected. Considering Musk's "Cancel Netflix Subscription" initiative in early October, Dolphin Research speculates that the price increase in core regions since the beginning of the year has gradually shown payment pressure on standard and premium packages for some users, permanently canceling the low-cost ad-free Base package, forcing users to switch to ad packages that affect viewing experience. During the short-term adaptation period, the same scale and quality content supply is difficult to leverage the previous net increase scale. However, Dolphin Research is confident in another quarter with top IP content support, hoping to reverse the awkward situation of flat user growth.

(2) Advertising

Q3 marked the first full quarter of operation after the 1P advertising system was launched in 12 core regions, but this self-developed system may still need optimization through collected backtest data. Additionally, macroeconomic turbulence caused by tariffs is unfavorable to Netflix's high-priced ads. However, the company temporarily maintains its advertising revenue target for this year, still aiming for double growth, with Q4 introducing Amazon DSP system. Combined with market expectations, we estimate this year's advertising revenue to be around $1.5 billion.

3. Controlling Content Investment: Cash flow usage mainly involves content investment and shareholder buybacks. Q3 spent $1.9 billion repurchasing 1.5 million shares, with an average price of around $1,250, increasing the buyback scale compared to last quarter. Content investment spent $4.6 billion, also increasing by $500 million compared to last quarter.

However, the scale of content investment is visibly shrinking. So far this year, content investment is only $12.6 billion, lagging behind the annual target of $18 billion set at the beginning of the year. While the annual profit guidance was lowered due to the Brazilian service tax, the free cash flow target was raised again from $8-8.5 billion to $9 billion for the year.

This can only indicate that this year's investment scale is estimated to not reach the set target, expected to be in the range of $17-17.5 billion. As a leader, Netflix has controlled the expansion of investment scale for two consecutive years, possibly related to the still relatively relaxed competitive environment, and possibly also due to the optimization effect of generative AI. As for the threat of 100% tariffs on foreign-produced films, since there is still room for negotiation, it should not be the main reason affecting Netflix's reduction in content investment.

4. Performance Indicators Overview

II. Q&A Session

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 ahead. Third-quarter revenue met expectations, and excluding the impact of Brazilian taxes, operating profit would exceed forecasts.

User interaction remains strong, with TV viewing share in the US and UK reaching new highs, and advertising sales hitting record levels. The advertising business is expected to achieve double revenue growth this year. The company continues to expand live and gaming products and announced the launch of Netflix Games playable on TV. Future focus will be on core areas, driving continuous improvement in technology and content to ensure long-term stable growth.

Q: Can you elaborate on the nature of the tax expenditure and why it exceeded the operating line?

A: The Brazilian tax issue is quite complex; it is not an income tax but a cost required for operating business in Brazil, specifically named "The Contribution for Intervention and Economic Domain." This tax is a 10% total amount tax levied on Brazilian companies making payments abroad, not specifically set for Netflix or the streaming industry, so other companies may also be affected.

In 2022, a local court ruled that we were not subject to this tax, so no provision was made previously. The core issue is whether the tax applies to service payments not involving technology transfer. In August this year, the Brazilian Supreme Court made a ruling on another company, expanding the tax applicability, prompting us to reassess and consider the loss "likely to occur," thus accounting for it in Q3 cost expenses.

This expense covers the period from 2022 to Q3 2025, with about 20% attributed to 2025, and the rest involving 2022 to 2024. It is emphasized that this is not an income tax but an operating cost. Excluding this impact, the company's Q3 operating income and profit margin would exceed expectations, and we anticipate this matter will not have a significant impact on future performance.

Q: Can you share your preliminary views on revenue and operating profit growth for 2026?

A: We will release the 2026 full-year guidance at the next call in January. Current financial targets remain unchanged, still focusing on achieving stable revenue growth, expanding profit margins, and increasing free cash flow.

Q: Given your mention in the earnings letter of doubling previous commitments, does this imply that advertising expenditure for the full year 2026 could also double?

A: Our progress in 2025 is exciting, with advertising revenue achieving double growth. Although the current base is still small compared to subscription revenue, we have proven scalability, with vast future growth potential.

Especially in the US, advertising pre-sale commitments have grown more than twofold, with some realized in 2025 and some in 2026, which is the key point you mentioned. More notably, programmatic advertising growth rate is higher, which is crucial for future incremental revenue.

We believe programmatic advertising will become an important revenue source in the future. The core driving force of this growth lies in advertisers' expectations for our expanding scale and highly engaged audience. Meanwhile, the comprehensive deployment of the advertising tech stack enables us to offer more ad formats, a more complete measurement system, and richer purchasing channels. Our advertising resource library is also a key differentiating competitive advantage.

Although we do not provide specific guidance for 2026, we are confident in the current growth trajectory.

Q: Looking ahead to next year, what are the core development focuses of the advertising business?

A: The current core focus is simplifying the ad placement process for advertisers on our platform while expanding the diversity of advertisers—this is the key direction supporting revenue growth. We are introducing more demand-side resources (such as Amazon DSP, Japan AJA) and continuously enhancing our own ad sales and market expansion capabilities while iterating ad formats. Later this quarter, we will launch ad interaction features.

Looking ahead to 2026, we will continue to develop along these directions: providing more purchasing methods, enhancing global targeting and media planning data support, launching modular interactive ad formats, strengthening AI capabilities, and expanding measurement functions in all markets.

In 2027, we will shift focus to data capability investment, including machine learning-based optimization, advanced measurement technology, and precise targeting technology. We are steadily advancing. We are steadily advancing, but there is still a lot of work ahead. Frankly, with existing technology and data science assets and expertise, we expect to achieve transformation faster than other streaming platforms.

Q: As the ad suite and new demand-side partnerships continue to expand, does your ad fill rate meet expectations?

A: Our current focus remains on optimizing overall revenue metrics. In terms of fill rate, there has indeed been improvement. As market expansion capabilities, measurement systems, and targeting functions continue to strengthen, we expect fill rates to continue to improve.

Q: Does user engagement meet expectations?

A: Yes. Total viewing hours growth in Q3 2025 was slightly higher than in the first half of the year. We achieved a quarterly highest viewing share of 8.6% in the US and 9.4% in the UK. We believe viewing hours will continue to grow steadily and further enhance user engagement by expanding the range of program content. Meanwhile, we see some content creating excess value. For example, the Canelo vs. Crawford fight became the most watched men's boxing match of the century, and "KPop Demon Hunters" became the company's most successful movie, with profound cultural impact.

We will continue to deepen our understanding of these differentiated values, and we will benefit long-term from the trend of audiences migrating from linear TV to streaming.

Q4 has a strong lineup, including movie releases and the final season of "Stranger Things," and will continue the growth momentum into 2026. Looking ahead to 2026, we will launch new seasons of popular series and heavyweight new films, covering action, romance, and international content. Following a strong Q4, 2026 will usher in an even more exciting content cycle.

Q: Regarding the latest collaboration with Spotify, can you talk about this partnership? How actively will the company expand its podcast-related business in the future?
A: This collaboration is a video co-exclusive partnership agreement with Spotify, selecting its top podcast content to provide members with more entertainment options in pop culture, lifestyle, sports, etc., available for viewing anytime, anywhere. We will continue to develop this segment based on member demand, just like expanding other content categories.

This is also an important opportunity to integrate high-quality video content, further expanding Netflix's content landscape beyond film and television works to live events, talk shows, and games. We believe this will further strengthen Netflix's value as the world's most important entertainment service platform.

Q: After "KPop Demon Hunters" achieved strong theatrical performance, can you share new views on the commercialization of theatrical window content? Especially regarding the latest views on adopting exclusive or non-exclusive cooperation models?
A:Our strategy has not changed; it is still to provide members with Netflix-exclusive premiere movies. We will arrange theatrical releases for some films in the fall, like "KPop Demon Hunters," as part of the distribution, promotion, and market strategy, and will continue to do so.

The success of "KPop Demon Hunters" is precisely because it was first launched on Netflix. The film gradually accumulated popularity, with core fans repeatedly watching, driving the recommendation algorithm to spread it more widely. Netflix's distribution model eliminates barriers for audiences to access content, helping the film become popular globally and reinforcing our "streaming premiere, accumulate momentum" strategy. Additionally, the film's offline viewing events and sing-along sessions provide fans with a unique experience.

Eight weeks after its launch, we held special screenings in theaters and achieved good performance. We plan to continue hosting similar events during the Halloween weekend and expand to more international markets.

Q: What are your observations on the Canelo vs. Crawford fight in September? Do such live events affect platform user engagement, acquisition, and retention?
A: This match was the most watched men's boxing championship of the century. Such large-scale events can attract public attention, offering unique value to members, significantly enhancing discussion and new member acquisition effects, and we also believe they will positively impact retention.

Although live content accounts for a small proportion of overall spending, its impact is significant. We are confident in the future of the live business and plan to continue expanding, including the Jake Paul vs. Hang Davis match in November and next year's World Baseball Classic broadcast in Japan.

Q: Can you talk about the importance of global sports rights and local rights to Netflix? Do you plan to acquire sports rights that require significant acceleration of advertising business growth?
A: The choice between local and global mainly lies in the scale difference—the balance between local costs and audience scale. Therefore, our overall strategy remains unchanged, still focusing on large live events, with sports events being just a part, and currently not focusing on full season rights.

For global and local events, we will decide based on specific circumstances. For example, the Canelo vs. Crawford match has global appeal, while Japan's World Baseball Classic is a project designed and budgeted for a specific market.

In terms of advertising, our core goal is to inspire audience enthusiasm, as both advertising and subscription revenue stem from audience investment and love for content. Looking ahead, we are confident in the upcoming live events—including the Jake Paul vs. Tank fight on November 14, the NFL doubleheader on Christmas, and the 2026 Japan World Baseball Classic, the 2027 and 2031 FIFA Women's World Cup, etc. We are excited about these events and more future activities.

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 continuously conducting various promotional tests to help members experience features they may be interested in. For example, members using 4K TVs will receive notifications to try "Skycraper live" to understand the 4K effect. Our goal is to enhance member satisfaction and retention through multi-tier packages and flexible pricing.

Q: Do you think potential industry consolidation will reshape the competitive landscape? Will this be an opportunity or a threat? How might this change affect Netflix's content strategy and differentiation?
A:We have always preferred organic growth rather than relying on mergers and acquisitions. There is still ample space to achieve profitable expansion without changing strategy. If suitable opportunities arise, we will evaluate them based on established standards—whether they can strengthen the content matrix, enhance capabilities, or accelerate strategy, but we have no interest in traditional media assets.

The entertainment industry competition is always fierce, and past mergers (such as Disney acquiring Fox, Amazon acquiring Time Warner, etc.) have not fundamentally changed the landscape. The real challenge lies in global content creation, AI application, user experience, and international execution, which require long-term accumulation and cannot be quickly obtained through mergers and acquisitions. We will continue to focus on building core capabilities and stable growth.

Q: If industry consolidation simultaneously integrates film production and streaming assets, will it lead to fewer channels for Netflix to acquire third-party content?
A: Original content has always been the core driving force of our business. For over a decade, we have continuously expanded investment in original content, developing multi-type creations globally. While we also welcome licensed content from third parties, acquisition channels have always been volatile, and we have never relied on any single supplier.

Competitors are both content providers and platform participants, and their licensing strategies often adjust, but this has not had a substantial impact on us. Content from any single supplier accounts for only a small proportion of total viewing hours. More importantly, Netflix has proven to be the best platform to help external IP accumulate audiences and enhance value.

Q: Netflix recently launched party games playable on TV. How do you think games will change the time members spend on Netflix daily?
A: Games are an important entertainment form with a global scale of about $140 billion. We focus not only on games themselves but also on expanding interactivity—complementing interaction with linear storytelling to create new entertainment experiences.

We are testing interactive features like real-time voting, such as "David Chang's Dinner Time" and "Star Search," and will launch more interactive live projects in the future.

In game development, we have established a complete foundation, including R&D capabilities, listing services, and player connection mechanisms. Next, we will focus on core categories, launching more boutique games based on our own IP, such as "Squid Game: Unlock Edition," "Black Mirror Universe: Angel," etc., and expanding children's games (like "Peppa Pig") and family party games (like "Word Party," "Guess the Word Game Night," "Tetris," "Party Breakers").

Users can play directly with their phones without additional equipment, which is the core of the experience. In the future, we will further utilize phone functions to enhance interactive experiences. Overall, these attempts are enhancing user engagement and retention, and we will continue to prudently increase investment.

Q: Last quarter, you mentioned Netflix is a great platform for some YouTube creators. Since then, your company announced a new Crater collaboration agreement with Mark Rober. Can we expect more progress in this area? What specific types of content is your company seeking?
A: We hope 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 Rober and Ms. Rachel are very compatible. In fact, this is not a new attempt—we have long collaborated with online creators like Miranda Sings, King Bach, etc., to launch shows and movies such as "Enemies Scatter," "The Babysitter," "Killer Queen," etc. Now we are also creating a video podcast area, continuing to provide broader development space for global creators.

Q: How has Netflix's view on the use of artificial intelligence and related technical capabilities evolved? What impact do new AI content creation applications like Sort have? From a user engagement perspective, do you think this will form new competition?
A: Our attitude towards artificial intelligence has always been clear. Over the past fifteen years, AI and machine learning have been deeply embedded in our technical systems and business processes. We have vast data assets and scalable products, enabling us to seize new opportunities brought by AI.

Generative AI shows potential in multiple areas—it can enhance productivity, accelerate innovation, and create better outcomes for members and creators. Most applications can be directly integrated into existing tools, with key investment directions including product experience, content creation, and advertising business.

In content creation, AI currently has the most significant impact on UGC creators, providing more powerful creative tools but cannot replace creativity. Just as AI music is widely present but has not replaced top artists, we believe AI will become an auxiliary tool for creators, helping them tell stories more efficiently and innovatively. Our goal is to make AI truly a tool to enhance creativity, not replace creativity itself.

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