Image source: Netflix.
It's no wonder shares of streaming video company Netflix (NFLX -9.09%) soared about 20% in after-hours trading on Monday after reporting third-quarter results. Expectation-crushing performance and an optimistic outlook for continued growth were impossible to overlook. Here's a rundown of some of the most intriguing takeaways from Netflix's third-quarter shareholder letter.
Subscriber growth
Helping to moderate any concerns about slowing subscriber growth earlier this year, the company reported higher-than-expected net member additions in Q3. Netflix added 3.57 million subscribers in its third quarter, well over its July forecast for just 2.3 million subscribers.
While Netflix's U.S. member additions were ahead of the company's forecast for the quarter, the biggest outperformance came from its international segment, where it added 3.3 million members.
|
Region |
Management Forecast for Net Member Additions |
Actual Net Member Additions |
|---|---|---|
|
U.S. |
0.3 million |
0.4 million |
|
International |
2.0 million |
3.2 million |
After adding about 3.6 million members during the quarter, Netflix total streaming members now amount to nearly 87 million.
"Our over-performance against forecast (86.7m total streaming members vs. forecast of 85.5m) was driven primarily by stronger than expected acquisition due to excitement around Netflix original content," Netflix said in its third-quarter shareholder letter.
Netflix specifically mentioned the second season of Narcos as original content that "had a positive impact on member acquisition across all of our markets."
The company also projected higher-than-expected subscriber growth in Q4, forecasting 5.2 million net member ads, ahead of analyst expectations by FactSet for 4.6 million members.
Localizing international markets
Netflix management has emphasized throughout that year that while it had expanded to 130 new countries in January, it hadn't yet put much effort into localizing its services for these markets. After localization was underway, the company would "be able to see more opportunity," CEO Reed Hastings said during the first-quarter earnings call.
Now Netflix is beginning to localize some of these markets, noting in its third-quarter shareholder letter that it has localized Netflix in Poland and Turkey.
We began accepting payment in local currency and added a local language user interface, subtitles and dubbing as well as some local content. We have seen nice gains in viewing and retention and we'll undertake other localization efforts in the coming months and years.
These "nice gains" in viewing and retention -- two important metrics for Netflix's business over the long haul -- preview a promising future for how well the service may perform in new markets as it is localized.
Image source: Netflix.
Improving profitability
As Netflix approaches the end of its un-grandfathering process of hiking its prices for some members paying lower rates, it is benefiting handsomely. With its average selling subscription prices up 10% year over year in the U.S. and international segments in Q3, Netflix's U.S. contribution profit soared 38% year over year.
Strong growth in U.S. contribution profit helped Netflix report earnings per share of $0.12 -- double analyst expectations for the quarter and up from $0.07 in the year-ago quarter.
A review of the company's third-quarter results shows good reason for investor optimism, proving worries about the company's price increase and its international markets were likely overly exaggerated.
