17 Oct

Netflix Subscriber Growth Rose: Will the Stock Rebound?

WRITTEN BY Namrata Sen Chanda

Netflix (NFLX) released its third-quarter results after the market closed on Wednesday. The company bounced back with international subscriber growth that beat the expectations. Netflix also posted double-digit growth in its revenues and profit for the quarter. Market watchers were eagerly waiting for the company’s third-quarter results. Investors want to know how the company is placed as severe competition kicks in. Here’s a look at some of the highlights of the company’s third-quarter results.

Netflix’s international subscriber growth 

Netflix’s added 6.8 million new subscribers in the third quarter. The numbers were better than analysts’ forecast of 6.7 million, according to IBES data from Refinitiv.

In the US, the company added 520,000 paid customers, which missed its estimate of 800,000 new members. Netflix’s international subscriber base grew by 6.26 million members, which was slightly more than its prediction of 6.2 million. Overall, the company has a total subscriber base of 158.33 million compared to 151.56 million in the previous quarter.

On Monday, we discussed how analysts are wary about Netflix’s subscriber growth in the third quarter. There was widespread speculation that the company might miss its guidance. While the company did fall short of its estimates, it posted better-than-expected international subscriber additions. The additions were an encouraging sign for Netflix. The company depends heavily on foreign markets for its growth.

Netflix attributed the subscriber base growth to the success of Stranger Things 3. The company said that nearly 64 million accounts viewed the show in the first four weeks after the release.

The growth numbers for US subscribers in the third quarter is slightly concerning. Netflix stated that the impact of the previous price hike continued to weigh on US markets.

Strong revenues and earnings

Netflix posted 65% YoY (year-over-year) growth in its profits, which came in at $665.2 million. The company’s EPS of $1.47 beat management’s guidance and analysts’ expectations.

The third-quarter revenues rose 31% annually to $5.245 million—slightly lower than analysts’ estimates of $5.248 billion. The international market led Netflix’s revenue growth. The segment posted a 40% annual increase in its revenues, while the revenues from US markets rose 24.5% YoY (year-over-year).

Netflix on streaming wars

Netflix has been in a state of denial about fierce competition. However, the company sees the reality now. Netflix said, “The launch of these new services will be noisy.” The company also said, “There may be some modest headwind to our near-term growth, and we have tried to factor that into our guidance.”

CEO Reed Hastings has a different take on streaming wars. He “welcomed” the competition and said that it’s a blessing for the company as it will pace up cord-cutting. Netflix doesn’t seem concerned about rivals like Apple TV+ or Disney +. The company is happy that so many players will collectively take the audience away from traditional Pay-TV.

The company reiterated that it has a competitive edge over its rivals. Netflix acknowledged that competitors do have some great titles. However, the company emphasized that none of them have the variety, diversity, and quality of the new original programming that it produces globally.

Fourth-quarter outlook

For the fourth quarter, Netflix expects its consolidated revenues to increase 30% annually. The company said that it’s on track to achieve fiscal 2019 operating margins of 13% and expand by another 300 basis points in 2020.

In the fourth quarter, Netflix expects 7.6 million new subscribers with 600,000 in the US and 7 million in foreign markets. Notably, the company has chosen to be slightly conservative about the US subscriber growth estimate this time. Netflix’s guidance is below the consensus expectations of 9.443 million new streaming members, according to Thomson Reuters.

Netflix announced that it will start disclosing revenues and membership by region in the next earnings report. The disclosure is a welcome move. Investors will get a clear picture of the company’s geographic revenue contribution.

Competitive scenario indicates near-term headwinds

The subscriber growth fiasco in the second quarter was a nightmare. Now, Netflix can put the issue behind itself. Although the subscriber growth in the third quarter missed the company’s guidance, there isn’t much to worry about. We know that the US market is saturated. Netflix might not have enough room for growth. In 2017, Internet analyst Anthony DiClemente said, “Netflix’s subscriber growth in the United States is nearly saturated, but the streaming company has great potential for international growth.” In the Global Entertainment & Media Outlook 2019–2023, PWC said, “Netflix appears to be nearing its peak subscriber point in the US.”

At this juncture, the international growth story means more to Netflix. The company seems to be on-track. In the fourth quarter, Netflix is ready with season 3 of The Crown and Martin Scorsese film, The Irishman.

However, all eyes are on the cut-throat competition that the company will face starting on November 1. Netflix’s ability to hold on to its market position will define its future.

Netflix stock rose 9.2% in extended trading on Wednesday after its third-quarter earnings. The results were a mixed bag. The company had better-than-expected profits and international subscriber additions. At the same time, there was a miss on the US subscriber growth and revenues.

We’ll have to see how investors react to the results as the markets open.

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