Netflix (NFLX) said its operating margins have more room to run as the streamer leans on initiatives like its crackdown on password sharing, cheaper ad-supported tier, and newly announced price hikes.
"We don't think we're anywhere near a margin ceiling. We've got a long runway of margin growth," Netflix CFO Spencer Neumann said on the company's third-quarter earnings call on Wednesday.
Operating margin, a key profitability metric, hit 22.4% in the quarter, slightly ahead of Netflix's own projection of 22.2%. The company said it expects full-year operating margin to hit 20% — the high end of its previous forecast of 18% to 20%.
The update is an encouraging sign for investors who have been hyper-focused on the company's margin outlook after Neumann doubled down last month on full-year margins falling in the range of 18% to 20%. Consensus estimates are just below 20% for full-year 2023.
Neumann added the company's full-year operating margin should improve to roughly 22% to 23% next year, assuming no material swings in foreign exchange.
Netflix did not provide a longer-term projection, although management has hinted the company has the potential to eventually secure margins similar to other media networks, which historically have been in the range between 40% to 50%.
"We have a very scalable business model," Neumann said. "It's a global network at scale that has, in many ways, not been seen with legacy entertainment networks. So we think we've got a long way to go."
The executive noted the platform will continue to take a "disciplined approach" when it comes to balancing margin improvement with investments for future growth.
He explained there are many areas Netflix can continue to invest in such as existing content categories both domestically and overseas, in addition to building out its advertising capabilities, live programming, and new content categories like gaming.
Consumers, however, will begin to more heavily bear the cost of those investments after Netflix said it will once again hike prices in 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. That's up from the prior $9.99 and $19.99 price points. Netflix’s $6.99 ad-supported plan and $15.49 Standard plan will stay the same price.
Management said the price hikes will help improve average revenue per membership, or ARM, which decreased 1% year over year in the quarter, along with other metrics like operating margins.
"While we mostly paused price increases as we rolled out paid sharing, our overall approach remains the same — a range of prices and plans to meet a wide range of needs, and as we deliver more value to our members, we occasionally ask them to pay a bit more," the company said in its shareholder letter.
"Our starting price is extremely competitive with other streamers and at $6.99 per month in the US, for example, it’s much less than the average price of a single movie ticket," the letter continued.
Netflix reported a surge in third quarter subscriber additions of nearly 9 million as the company beat earnings expectations on both the top and bottom lines. The stock surged in after-hours trading as a result, climbing more than 12%.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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