After producing torrid growth all year, Netflix (NFLX 0.50%) took a breather last quarter when the company added just 5.15 million new subscribers, a far cry from the 6.2 million management had forecast. In its letter to shareholders, the company said, "The quarterly guidance we provide is our actual internal forecast at the time we report, and we strive for accuracy, meaning in some quarters we will be high and other quarters low relative to our guidance."
That still left investors and many on Wall Street to speculate, wondering whether the quarterly miss was a one-time event or the beginning of a long-term trend. When Netflix reported earnings after the market close on Tuesday, it reported subscriber numbers much higher than anticipated, proving once again that the company's growth story is on track.
The Haunting of Hill House exclusively on Netflix. Image source: Netflix.
A new Q3 record
|
Metric |
Q3 2018 |
Q3 2017 |
Year-Over Year Change |
|---|---|---|---|
|
Revenue |
$3.999 billion |
$2.985 billion |
34.1% |
|
Net income |
$403 million |
$130 million |
210% |
|
Diluted earnings per diluted share |
$0.89 |
$0.29 |
207% |
Data source: Netflix third-quarter 2018 financial release.
Netflix's revenue of $3.999 billion edged past its forecast of $3.988 billion and was in line with analysts' consensus estimates of $4 billion. Profitability came in better than expected, as earnings per share of $0.89 soared past the $0.68 that both analysts and the company were expecting.
International streaming revenue grew 48% year over year, while domestic sales jumped 25% -- an impressive feat, given the maturity and growing saturation of the U.S. market.
In its quarterly letter to shareholders, Netflix said its "broad slate of original programming helped drive a solid quarter of growth" and added, "We're thrilled to be growing internet entertainment across the globe."
It's all about the subscribers
As in quarters past, investors were primarily concerned with subscriber growth, particularly in light of Netflix's rare miss last quarter. The company appears to have put those concerns to rest. Netflix added 6.96 million new subscribers, blasting past its forecast of just 5 million. The company gained 1.09 million domestic customers, compared with 650,000 forecast. Internationally, Netflix added 5.87 million subscribers, versus the 4.35 million it had anticipated.
Net new customer additions jumped 31% from the 5.3 million in the prior-year quarter. The company's total subscribers now number 137.1 million, a 25.5% increase over the same quarter last year.
Even more ambitious growth next quarter
Given the wide swings in the company's stock price, Netflix's management is still not holding back on its forecast for new subscriber growth. For the upcoming fourth quarter, the company is guiding for 9.4 million new subscribers -- which would represent a quarterly record for new customers. Net new international subscribers are expected to top 7.6 million, while the company is anticipating domestic new subs of 1.8 million.
Netflix is guiding for revenue of $4.199 billion, a 27.8% year-over-year increase, marking the first time quarterly sales are expected to top $4 billion. The company is forecasting that operating margin will decline to 5%, down from 7.5% in the prior-year quarter.
Operating margin has been higher than anticipated over several quarters, and even with the expected decline, the company is still guiding for full-year operating margin to exceed 10%, a forecast it made back in the fourth quarter of 2017. The company said the decline is due to timing of original-content spending and a higher mix of original films in the fourth quarter. That will hit the bottom line, as Netflix is forecasting fourth-quarter earnings per share of $0.23, a 29% year-over-year decline.
Simone Missick and Mike Colter as Misty Knight and Luke Cage in Marvel's Luke Cage only on Netflix. Image source: Netflix.
What it means to investors
One thing stands out about the quarter: Even as Netflix stock fell precipitously last quarter, the result of missing its estimates by more than 1 million subscribers, the company has come roaring back this quarter, adding 2 million more than expected. These performances show that the company's subscriber forecasts are more art than science.
As I said in a recent preview: "Netflix has had an uncanny ability to under-promise and over-deliver, and it has very rarely missed its own forecast. I don't believe it will happen again this quarter."
