Netflix stock falls after CFO says ad tier not material yet, warns of softer margins

Netflix (NFLX) stock dropped another 2% on Thursday after closing down 5% the previous day following comments from CFO Spencer Neumann at Bank of America's Media, Communications, and Entertainment Conference on Wednesday.

Neumann touched on multiple facets of the business but disappointed investors with his comments on operating margins. The executive said he anticipates full-year operating margins, which peaked at 21%, to be in the range of 18% to 20% — in line with company expectations, although current consensus estimates are just below 20% for full-year 2023.

Neumann went on to explain he expects margins to "tick up again going forward" as the company leans on multiple revenue initiatives, such as the crackdown on password sharing and ad-supported offering.

But he warned both of those initiatives, especially the advertising business, will take time to mature.

"We're still in the crawl of the crawl-walk-run stage, so it is not easy to build an ad business from scratch. We got a lot of work to do," he said.

He added that "as you've seen in our guidance, what we've done so far is not material to the overall revenue of the business. It's something we're building into and we have to get better across the board."

Neumann said the company needs to "scale the reach" of its ad tier, explaining, "Advertisers want a scaled solution. So that is the No. 1 priority. And then No. 2 is to better monetize that reach."

Still, the executive said he's bullish over the long term, revealing the company met its ad expectations at its first Upfronts and that the rate of new subscribers signing up for the ad tier is "healthy," although he wouldn't provide a specific number.

Those who spin off from previous accounts and sign up for their own plans as a result of the password crackdown, however, are leaning more towards premium tiers, he revealed.

"The ad tier is a healthy mix in general across our plans, but it's the minority because we have multiple plans. It skews a little bit more towards ad-free in these spin-offs," he said.

Neumann also weighed in on the ongoing Hollywood strikes as talks once again stall after the writers guild rejected the studios' latest offer.

"It’s not good for the business," he told moderator and analyst Jessica Reif Ehrlich. "At the end of the day, to move the business forward and to have great storytelling and fresh stories for our members, it really is about partnership with those writers, with those producers, with those directors, with those actors."

"We need that partnership to be healthy. We need to get back to work. That's what we're focused on," he added.

Based on Neumann's comments, Pivotal Research analyst Jeffrey Wlodarczak lowered his fourth quarter average revenue-per-user (ARPU) growth expectations to 2% from 4%, in addition to reducing his Q4 revenue forecast to $8.73 billion — down from the prior $8.89 billion.

Wlodarczak said this reduction reflects "more of an initial subscriber benefit rather than an ARPU benefit from their move to monetize 100M+ households formally not paying for the service [by sharing accounts]." He also raised his free cash flow estimate by $500 million to $6 billion amid the strikes.

The analyst maintained his Buy rating on the stock and $600 price target — the highest on the Street.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected].

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