However, the company's seemingly bloated shares were puffed even higher after the report, as investors warmed up to everything else about Netflix's quarter.
Let's start with the couch potatoes. Netflix closed out September with 16.9 million subscribers, 52% ahead of where it was a year ago -- and 1.9 million members more than it had on its rolls just three months earlier.
Revenue, on the other hand, climbed just 31%. Once again, subscriber growth outpaced top-line performance. Are new members opting for cheaper plans? Are existing subscribers downgrading to the cheapest $8.99 unlimited plan, and milking its popular perk of unlimited online streaming to fill the void of fewer DVDs?
It's probably a combination of both -- but clearly this isn't fatal to the model. Two-thirds of Netflix's subscribers are now streaming from the company's growing digital library, and it's proving to be as sticky -- and as easy a sell -- as CEO Reed Hastings wanted it to be.
Monthly churn made it below 4%, to 3.8%. Subscriber acquisition costs have fallen to $19.81 from $26.86 for every gross addition over the past year.
Sure, it's not enough to save the quarter. Net income climbed just 26% to $38 million, so net margins slipped -- and that's after revenue slowed down, putting its hands on its hips after telling subscriber growth to go ahead without it.
However, Netflix's story has never been about the current quarter. Free cash flow is down. So what? It's the price that Netflix has to pay when it forks over $115.1 million to build up its digital library -- nearly double what it invested during the second quarter and a better than tenfold increase compared with last year's third quarter.
Netflix is running. We can't see the finish line, but it's not here.
Bring on the subs
Think about it. Netflix has added 5.8 million net new subscribers over the past year. Let's check out how subscriber services with larger audiences have fared during their four most recent quarters.
(NYSE: DTV)in the U.S. has gained 500,000 satellite television subscribers to 18.8 million.
Sirius XM Radio
(Nasdaq: SIRI)has tacked on 1.3 million accounts to service 19.9 million members.
(Nasdaq: CMCSA)video customers have shrunk by 700,000 to 23.2 million.
Let's play out this trend accordingly. Before the end of the year, Netflix will likely surpass DIRECTV's stateside accounts. It'll run past Sirius XM early next year. If Comcast continues to drive in reverse, Netflix may be coasting by the largest cable provider at some point next year.
Streaming out loud
The time to build up an army of couch potatoes is now, and Netflix knows it. Coinstar's
So now do you see the importance of landing 1.9 million net new accounts? Now can you appreciate a company raising its full-year subscriber guidance -- from no more than 18.5 million three months ago to a range of 19 million to 19.7 million -- while simply tightening its existing top- and bottom-line targets?
Three months ago, investors pounded the stock under similar circumstances. They were spooked by the implication of penny-pinching subscribers, and a company bent on cracking its billfold wide to build up a digital library that it gives away to departing accounts on unlimited plans.
They get Netflix now.
Netflix runs because it knows that this quarter will be a blur in retrospect. Mr. Market finally sees the bigger picture -- and traces of the distant finish line -- too.
What did you think about Netflix's quarter? Share your thoughts in the comments box below.