Netflix (NASDAQ: NFLX) lowered its advertising revenue target, which was a bit disappointing. Its subscription business remains solid, but advertising—the part that was supposed to contribute more to growth—is progressing more slowly than the company expected.
The advertising revenue forecast for this year was revised from about $3 billion to around $2.7 billion, a 10% cut. The company said some advertising product features took longer than expected to roll out, so it’s not yet fair to blame the shortfall directly on advertisers being unwilling to spend.
Profitability continued to improve, with the operating margin reaching 34.6% in the third quarter. However, the margin beat the company’s earlier expectations mainly because of the timing of expenses, so we shouldn’t assume this quarter’s margin will carry forward. Subscription revenue growth also exceeded the company’s expectations, and user retention remains healthy. That side of the business hasn’t stumbled along with advertising.
Revenue growth has slowed for several quarters in a row, so personally, I think it’s a little premature to give NFLX a higher valuation on the strength of advertising. The company also plans to roll out its ad-supported plan in 15 new countries next year. If the additional features help accelerate advertising revenue growth, there’ll be a stronger basis for being optimistic about its growth potential.
The advertising revenue forecast for this year was revised from about $3 billion to around $2.7 billion, a 10% cut. The company said some advertising product features took longer than expected to roll out, so it’s not yet fair to blame the shortfall directly on advertisers being unwilling to spend.
Profitability continued to improve, with the operating margin reaching 34.6% in the third quarter. However, the margin beat the company’s earlier expectations mainly because of the timing of expenses, so we shouldn’t assume this quarter’s margin will carry forward. Subscription revenue growth also exceeded the company’s expectations, and user retention remains healthy. That side of the business hasn’t stumbled along with advertising.
Revenue growth has slowed for several quarters in a row, so personally, I think it’s a little premature to give NFLX a higher valuation on the strength of advertising. The company also plans to roll out its ad-supported plan in 15 new countries next year. If the additional features help accelerate advertising revenue growth, there’ll be a stronger basis for being optimistic about its growth potential.