Netflix (NFLX 1.74%) continued to grow at a rapid clip, beating expectations for member and earnings-per-share growth in the third quarter. Earnings per share for the quarter were $0.89, up from $0.29 in the year-ago quarter and crushing a consensus analyst estimate for $0.68. In addition, total paid members soared 25% year over year.
As investors digest the key takeaways from Netflix's third quarter, it's worth taking the time to hear some of management's commentary on the period's results. Here are a few key quotes from management in the company's third-quarter earnings call and shareholder letter.
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What's up with Netflix's member growth forecasts?
For both Netflix's second and third quarter of 2018, the company's net member additions were the headline figures. Of course, Netflix's member growth made headlines for different reasons in each period; in Q2, net member additions were worse than expected while they came in much higher than forecast in Q3.
What's going on?
Netflix CEO Reed Hastings says investors shouldn't read into it too much. "I'm afraid the Q2-Q3 story is probably mostly an issue of forecasting, as opposed to anything changing in the business," Hastings said during Netflix's third-quarter earnings call when he was asked about the company's recent member growth trends.
To help remedy the degree of variance in actual member growth versus management's guidance, Netflix is going to begin only providing guidance for its paid members, instead of forecasting both paid members and total members (paid members and free trial members combined), beginning with its earnings report in January of next year.
"Paid net adds are more steady, as total net additions can be skewed by free trials of varying quality," Netflix explained in its third-quarter shareholder letter. "This skew adds noise to our membership forecasts in a way that isn't material to revenue or the business. In comparison, paid net adds are a more reliable indicator of revenue growth."
Is competition a concern?
Competition in streaming TV is rising up from all sides as seemingly every tech and media giant wants a piece of the fast-growing connected TV market. Investors, therefore, may wonder whether Netflix is beginning to see the impact of rising competition on its business.
According to Hastings, Netflix isn't focusing on competition yet:
What affects us is can we produce the best content the world's ever seen? Can we get people excited about that content? Can we serve it up in ways that make it really fun and easy? Again, focusing on our fundamentals. Someday, there will have to be competition for wallet share. We're not naive about that, but it seems very far off from everything we've seen.
Investors, too, shouldn't be naive about competition just because management sees a rising tide lifting all boats. But it's true that Netflix isn't having any trouble growing its business. The company added seven million net members in Q3 -- a third-quarter record. And paid memberships are up from 104 million in the year-ago quarter to over 130 million.
