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Investors Should Pay Close Attention to These Numbers From Netflix's Q3 Earnings Report

By Rachel Warren, Brian Withers, and Neil Patel – Nov 2, 2021 at 10:00AM

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Overall, it was another solid quarter for the video-streaming giant.

Netflix (NFLX -0.27%) released its earnings for the third quarter of 2021 on Oct. 19. In this segment of Backstage Pass, recorded on Oct. 19, Fool contributor Neil Patel delves into the highlights from the company's quarterly report and points out some very important numbers that investors need to be watching closely from this report and in future quarters. 

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Brian Withers: Neil, we are ready with Netflix earnings? That's pretty cool, 23 minutes after the hour.

Neil Patel: Yeah, they just reported. Like you said, 4 o'clock. There's some positive updates I would like to give about that. Let me share my screen here. Can everybody see that?

Brian Withers: Yeah, looks good.

Neil Patel: Just reported, like you said, a little over 20 minutes ago, fairly, for the most part, positive quarter revenue of $7.48 billion was largely in line with what management expected. EPS beat management's expectations. Diluted EPS came in at $3.19, which was up 83% from the prior year. Management was expecting, I think $2.55 there, and subscriber growth. This is the main driver for the stock price. There's a lot of people who follow the company know this is what Wall Street fixates on. This is what investors should fixate on.

Management expected 3.5 million adds for the quarter, and you can see they beat that pretty handily, 4.4 million. That's almost doubled the number of subscribers that Netflix added in the third quarter of 2020. The subscriber number also beat the 3.9 million that Wall Street analysts were expecting as well. Then Netflix provides next quarter's outlook. Revenue of $7.7 billion would be 16% higher than the fourth quarter of 2020. Subscriber growth of 8.5 million for the fourth quarter, and that's the same amount that the company added in the fourth quarter of last year.

Just some high-level things that stood out, so Netflix, international growth is one of their biggest focal points going forward. They added 4.3 million international subscribers. The Q3 operating margin was 23.5%. Netflix is forecasting for the full-year, an operating margin of 20%. If you look at the past few years, management has said, we expect a 300-basis-point margin expansion annually. You're seeing that trend play out, and it's good to see management follow through, and those numbers come through like that, so that's a positive.

Another thing is, since production was delayed and paused during COVID and much of last year, you're going to expect a lot of content coming out the past quarter and then this Q4. One thing I want to point out is, for example, this ties into the international number where a good example of the success of a lot of the content that Netflix is releasing, Squid Game is a big one.

The company was produced as a local-language Korean show. You're seeing that a lot of Netflix's local-language productions are having international success, not just Squid Game, Lupin, Money Heist. That's a positive sign for investors because Netflix management always says, or has been saying that their next leg of growth has to come overseas, so to see international content be successful worldwide is a big thing. I think the number that I saw was 142 million membership households saw or watched Squid Game in the first 28 days, so that's by far, their most popular show.

Then the continuation of a renewed free cash flow position. This is, they said a few quarters ago, they said they do not need to access external financing to run their day-to-day operations anymore. Again, a positive. After breaking even on free cash flow in 2021, starting next year, management expects to be free cash flow positive sustainably. I think that's one of the biggest bear arguments against the company over the past few years is: When are they going to start generating cash?

I think you're going to see the company turn the corner there. Also to support that, management has instituted a share buyback program. I think they bought back $100 million the latest quarter and then $500 million in the quarter before that. And there's a $5 billion authorization. Pretty strong free cash flow position. 

Rachel Warren has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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