Netflix Inc. shares fell the most in more than seven months after the world's most valuable entertainment company said a tax dispute with Brazil cut into third-quarter earnings.
Operating income was $3.24 billion in the three months ended Sept. 30, according to a statement Tuesday, about $400 million below its own forecast and analysts' estimates. The company's outlook for the current quarter is largely in line with Wall Street projections.
Netflix had to pay about $619 million to settle a multiyear tax dispute with Brazilian authorities going back to 2022. The company had identified the potential risk in previous filings – but not in its earnings guidance — and said it would have beaten forecasts if not for the expense. Future payments will be smaller.
"We don't expect this matter to have a material impact on future results," the company said.
Netflix shares fell as much as 9.1% to $1,128.70 on Wednesday, the most since March. The stock hit an all-time high of $1,341.15 on June 30, the final day of the previous quarter, and has drifted lower over the last few months.
The dispute depressed what many investors thought would be a big quarter for the Los Gatos, California-based streaming leader.
Netflix benefited from a strong slate of programming that included its most popular movie of all time, KPop Demon Hunters, the second season of the hit show Wednesday and a sequel to the comedy Happy Gilmore. It also streamed a popular boxing match between Canelo Alvarez and Terence Crawford.
Investors have worried that Netflix customers aren't increasing the amount of time they spend on the service and about the potential danger of video created by artificial intelligence. The vast majority of the growth in streaming has been going to free services like YouTube, Roku and Tubi.
Netflix sought to address those concerns in its letter to shareholders, touting record subscriber engagement in the most recent quarter. The company has an even stronger lineup of programming set for the final three months of the year, including the last season of Stranger Things, a sequel to the mystery film Knives Out and new movies from Guillermo del Toro and Kathryn Bigelow.
Despite this array of programming, Netflix generated $2.66 billion in free cash flow in the third quarter, beating Wall Street estimates, and increased its forecast for the year to about $9 billion.
The company will use some of that money to repurchase shares and invest in programming. But it also flagged the possibility of mergers and acquisitions. Netflix has expressed interest in buying some of the assets owned by Warner Bros. Discovery Inc., Bloomberg has reported.
No deal is needed for Netflix to achieve its goals, Co-Chief Executive Officer Ted Sarandos said on a call with analysts Tuesday. But the company looks at all opportunities and is interested in intellectual property that makes its service more appealing to customers. Management has no interest in buying cable TV networks and is primarily focused on using its extra cash on other initiatives
"We believe we can and will be choosy," Sarandos said.
For the third quarter, Netflix sales rose 17% to $11.5 billion, matching Wall Street estimates. Because of the Brazilian tax expense, earnings came to $5.87 a share, missing analysts' estimates of $6.94. For the fourth quarter, Netflix expects to earn $5.45 a share on sales of $12 billion. That compares with Wall Street estimates of $11.9 billion and earnings per share of $5.42.
