Netflix is brushing itself off from its recent round of layoffs and leadership shuffles on the creative side in time to deliver its Q3 earnings report to shareholders.
The company’s revenue grew 12% year over year to $12.9 billion in Q3, which it maintains is in line with its forecast. Its ads business, however, is lagging slightly compared with expectations, causing Netflix to tweak its forecast for the rest of the year.
During the company’s earnings call, Netflix Co-CEO Greg Peters told investors that advertising revenue has grown over 80% this year. While that rate may sound promising, it falls short of Netflix’s lofty ambitions to double its ad revenue again this year. Which puts pressure on Netflix to have a strong Q4 report card.
Netflix is banking on ad measurement improvements to help prove its value to advertisers. It unveiled the Netflix Pixel in a blog post published mere hours before its earnings call Tuesday. It also announced a new buy-side integration with The Trade Desk.
But ads are just one of three levers contributing to the company’s overall growth. The other two levers are member growth and subscription price increases.
“All three revenue levers are working, and we expect to deliver strong revenue growth in 2027 with those same three levers,” said CFO Spencer Neumann.
But another important piece of the Netflix monetization puzzle is engagement, which Netflix is trying to improve, in part via its creative leadership shakeup.
“We’re not satisfied” with current engagement levels, Neumann said, which Netflix mainly measures via growth in viewing hours. But “we’re working on it,” he added.
Ads to the rescue
As Netflix revamps its content strategy with the goal of driving deeper engagement, its new ad platform features will play a large part in monetizing any engagement gains.
On the measurement front, the new Netflix Pixel joins the conversion API (CAPI) Netflix launched in March as part of the Netflix Ads Suite. The pixel helps standardize the way marketers measure business outcomes, such as conversions and brand lift. It also makes it possible for buyers to use that conversion data for audience targeting.
Plus, starting next month, The Trade Desk joins Amazon’s DSP and Yahoo DSP on the list of demand-side platforms that can deploy programmatic targeting across Netflix’s ad inventory.
Netflix’s main goal for these ad upgrades is minimizing the average revenue gap between ad-free and ad-supported memberships, Peters said. Netflix has seen that gap narrow throughout the year, he added, which is evidence of “unrealized near-term revenue growth.”
In plain English: As the revenue gap between these subscriber types narrows, Netflix considers it a sign that its ad upgrades from earlier this year are working to create more advertiser demand – and there’s an opportunity to keep building that demand with more ad improvements, including the new pixel.
“We’ve expanded [programmatic] demand sources, we’re adding more features and we’re making it easier for folks to transact with us,” Peters said. “All of those things drive competitiveness and increased [ad] fill rates.”
Are you still watching? (Please?)
But to capitalize on those ad platform improvements, Netflix needs more audience engagement.
At the beginning of the month, Co-CEO Ted Sarandos publicly acknowledged during a Bloomberg event that Netflix’s engagement is “not growing as fast as I want us to.” Its viewership inched up just 2% over the first half of this year.
Sarandos reiterated this point during Tuesday’s earnings call, and Peters gave some added perspective.
In the US, “our engagement is solid, but we know that we can do better,” he said, adding that Netflix ranks its regional engagement growth as “very good” when it could be “great.” Predictably, Peters said Netflix considers its slowdown in engagement growth as an opportunity rather than a headwind.
Despite the “modest” growth in viewing hours, Peters said, “the quality, quantity and variety of viewing remains healthy, and the best evidence that we’re delivering value is churn.” He noted Netflix’s global user retention has improved year over year and beat the company’s own forecast, despite its recent subscription price hikes.
But viewing hours and session duration are also significant metrics for streamers. To boost watch time, Netflix is, of course, focused on fleshing out its content slate.
It specifically has its sights set on “professionally produced” programming, including sports and other live events, in addition to more content licensing and distribution deals, said Sarandos.
When it comes to partnerships with third-party streaming platforms, Netflix cited the content deal with France’s TF1 inked over the summer. It also signed distribution deals with Disney and Brazil’s Globo network. Netflix is eyeing similar deals going forward.
Netflix is also expanding its live sports inventory with some high-profile events, including its coverage of the NFL’s first-ever Thanksgiving Eve matchup next month and the 2027 FIFA Women’s World Cup.
What’s less certain is whether the promise of future gains from these partnerships is landing with investors. Netflix’s share price dipped nearly 6% during after-hours trading on Tuesday.
