Netflix ( NFLX ) said its operating margins have more room to run as the streamer leans on initiatives such as its crackdown on password sharing, a cheaper ad-supported tier and newly announced price hikes.
“We don’t think we’re anywhere near the margin ceiling. We’ve had a long runway of margin growth,” Netflix CFO Spencer Newman said on the company’s third-quarter earnings call on Wednesday.
Operating margin, a key profit measure, hit 22.4% in the quarter, just ahead of Netflix’s own forecast of 22.2%. The company expects full-year operating margin to reach 20% — up from its previous forecast of 18% to 20%.
The update is an encouraging sign for investors paying close attention to the company’s margin outlook after Neumann last month doubled its full-year margins to 18% to 20%. Consensus estimates are below 20% for the full year to 2023.
Newman said the company’s full-year operating margin should improve to roughly 22% to 23% next year, assuming no foreign currency swings.
Netflix did not provide a long-term forecast, although management believes the company has the ability to protect margins like other media networks, which have historically been in the 40% to 50% range.
“We have a very scalable business model,” Newman said. “It’s a global network that, in many ways, isn’t seen with traditional entertainment networks. So we think we have a long way to go.”
The executive noted that the platform will continue to take a “disciplined approach” while balancing margin improvement with investments for future growth.
He explained that Netflix can continue to invest in existing content categories at home and abroad, in addition to developing new content categories such as its advertising capabilities, live programming and gaming.
However, consumers will increasingly bear the cost of those investments after Netflix said it would raise prices again in the US, UK and France.
Starting Wednesday, Netflix said its basic and premium plans will now cost $11.99 and $22.99 respectively in the US. This is up from the previous $9.99 and $19.99 price points. Netflix’s $6.99 ad-supported plan and $15.49 standard plan stay the same price.
Management’s price increases should help improve average revenue per member, or ARM, which fell 1% year over year in the quarter, along with other metrics such as operating margins.
“While we’ve largely discontinued paid sharing, our overall approach remains the same — with prices and plans to meet a variety of needs, and while providing more value to our members, we occasionally ask them to pay a little more,” the company said in its shareholder letter.
“Our starting price is very competitive with other streamers and is $6.99 per month in the US, for example, which is much lower than the average price of a movie ticket,” the letter continued.
Netflix reported that it added nearly 9 million subscribers in the third quarter as the company beat revenue expectations on both the top and bottom lines. The stock soared in after-hours trading as a result, rising more than 12%.
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