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Here's How Netflix, Inc. Beat Its Own Q3 Targets

By Anders Bylund - Updated Oct 16, 2017 at 7:43PM

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The recent pricing increase didn't trigger a slowdown in subscriber growth, and the future is all about original content.

Digital video veteran Netflix (NFLX -1.96%) reported third-quarter results after the tolling of Monday's closing bell. The company exceeded most of its own guidance targets and set optimistic goals for the fourth quarter as well. Here's a closer look at Netflix's third quarter.

Q3 by the numbers

Metric

Q3 2017

Q3 2016

Change

Revenue

$2.99 billion

$2.29 billion

31%

Total subscribers (domestic)

52.8 million

47.5 million

12%

Total subscribers (international)

56.5 million

39.3 million

44%

GAAP net income

$130 million

$52 million

150%

Earnings per share (diluted)

$0.29

$0.12

142%

Data source: Netflix.

During the third quarter, Netflix added 850,000 net new domestic memberships and 4.4 million international customers for a global total of 5.3 million net new subscribers. The official guidance for this period called for 4.4 million global member additions, leading up to 2.97 billion in top-line revenue and earnings of $0.32 per diluted share.

The bottom line enjoyed a $5 million boost from a tax benefit related to stock-based compensation. It also absorbed a $39 million noncash charge due to currency exchange effects on the $1.4 billion euro-denominated debt package Netflix added in April. These competing effects work out to an $0.08 reduction of the company's earnings per share.

Behind the numbers

The management team, led by Netflix CEO Reed Hastings, laid all credit for the surprisingly large subscriber additions at the feet of high interest in Netflix original films and series. That's what allows Netflix to ride the crest of an even larger growth wave, as streaming media continues to grow into a large-scale industry around the world.

On the earnings-call webcast, Hastings said that his company doesn't like to think about the total addressable market in terms of broadband households.

"The way I think about it is 'number of people'," he said. "All the people on the planet will get the benefit of the internet over the next twenty years, and we hope that all of them will get to enjoy Netflix also."

A red Netflix logo on white base, with "See what's next" below in grey.

Image source: Netflix.

Looking ahead

The latest domestic price boost is rolling out to existing customers over the next few months and will make a small difference to fourth-quarter results. Management has not seen a mass exodus of disgruntled subscribers, expecting to see a healthy membership increase in the coming quarter as well.

In the fourth quarter, Netflix hopes to add 6.3 million new subscribers worldwide, including 1.25 million in the U.S. market. Sales should rise 32% year over year to $3.3 billion, driven by subscriber growth and modest price increases in several markets. Earnings should jump from $0.15 per share in the fourth quarter of 2016 to $0.41 per share in the upcoming report.

In the long run, Netflix plans to continue creating more original content to carve out and defend the company's place in the evolving media world. "Our future largely lies in exclusive original content that drives both excitement around Netflix and enormous viewing satisfaction for our global membership and its wide variety of tastes," said a prepared statement.

As for the competitive nature of the video marketplace, several executives said that it's a good thing for all content creators and publishers. That's how healthy industries grow into their breeches, and it's up to Netflix to maintain its leadership role by producing and distributing high-quality material.

"It's an exciting period and both media and technology companies see the same big opportunity as we do," the shareholder letter said. "We have a good head start but our job is to improve Netflix as rapidly as possible to please our members by earning their viewing time and to stay ahead of the competition in the decades to come."

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