What happened
Shares of Netflix (NFLX 0.02%) are surging today, following Tuesday night's strong third-quarter report. The subscription-based video service operator's stock rose as much as 9.7% on Wednesday morning before backing down to a 4.2% gain as of 1:30 p.m. EDT. In the after-hours trading session immediately after the report, Netflix shares rose as much as 12.6%.
Image source: Netflix.
So what
Your average Wall Street analyst had been looking for earnings near $0.68 per share on sales in the neighborhood of $4 billion. Netflix delivered a near-perfect match to the revenue target but crushed the bottom-line estimates with earnings of $0.89 per share. Sales rose 34% year over year while earnings more than tripled.
More importantly, Netflix added 7 million net new subscribers during the third quarter, comfortably ahead of management's guidance target of roughly 5 million new accounts. The strong showing in this key metric was a refreshing change of pace from the second quarter, for which Netflix had reported gathering fewer new customers than projected.
Now what
The management team reminded investors that providing forecasts for subscriber additions isn't an exact science, and then took some steps to reduce the jitters around these closely watched figures. Specifically, the "total subscribers" metric adds noise to the guidance game by including subscribers taking free trials. So the company will phase out reporting of that data point, focusing instead on paying subscribers. That number will always be a little bit lower but should also be easier to predict, making Netflix's earnings reports a little bit less likely to trigger big swings in the share price.
If you want to take that logic one step further -- and get a better night's sleep in the days leading up to these market-moving reports -- you could simply look at the total number of paid memberships rather than the net additions in a single quarter. That perspective takes a lot of the drama out of Netflix's subscriber figures. For example, the company added 6.1 million net new paid subscribers in the third quarter -- 18% above management's guidance of 5.2 million. Or you could say that the total paid subscriber count grew 25% year over year to 130.4 million -- a mere 0.7% ahead of guidance.
Either way, Netflix beat its own guidance targets on 27 out of the 27 performance metrics for which management provides a next-quarter forecast. That's not too shabby.
