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Netflix Subscriber Numbers Soar, Showing the Sky Is Not Falling

By Danny Vena - Oct 17, 2019 at 6:06AM

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After a rare miss last quarter, the streaming giant comes roaring back.

With all the competition coming to the streaming video marketplace, investors have been justifiably concerned about whether Netflix ( NFLX 1.77% ) could continue its strong growth. When the company released its Q2 financial results in July, shareholder concerns grew, as the tech giant suffered an uncharacteristic subscriber miss, adding just 2.7 million members, far below the 5 million it had forecast. The stock lost nearly a third of its value in the months that followed, though it was recently down about 20%.

Investors got the reassurances they needed when Netflix reported its third-quarter results after the market close on Wednesday, and the stock came roaring back, gaining nearly 10% in after-hours trading.

A teen girl with an intent look, while four other teens look on.

Sadie Sink, Noah Schnapp, Millie Bobby Brown, Finn Wolfhard, and Caleb McLaughlin in Stranger Things 3. Image source: Netflix.

Solid top- and bottom-line results

Netflix revenue grew to $5.245 billion, up 31% year over year, coming in just shy of the company's forecast and analysts' consensus estimates, which both topped out at $5.25 billion. Excluding the impact of foreign currency rate fluctuations, revenue would have grown an even more impressive 35%.

Netflix reported operating income of $980 million, more than double the $481 million it booked in the prior-year quarter. Profits came in far better than expected, with earnings per share of $1.47, which soared past the $1.04 that both analysts and the company were expecting.

International streaming revenue grew 40% year over year, while domestic sales jumped 25%, which were driven higher by subscriber gains and price increases implemented earlier this year.

The average revenue per user (ARPU) grew 9% year over year, or 12% on a foreign exchange neutral basis.

It's all about the subscribers

While the subscriber additions fell short of Netflix's robust forecast of 7 million, it was enough to allay investor concerns that the growth story was over. The company reported a Q3 record of 6.77 million net new subscribers, topping analysts' consensus estimates of 6.73 million, and up 11% year over year.

Even more importantly, U.S. subscriber growth returned. After the loss of 130,000 domestic subscribers last quarter, Netflix added 520,000 new U.S. subscribers and a whopping 6.26 million international subs.

This brought the company's total global subscriber base to 158.33 million, up 21% compared to the prior-year quarter.

Even in light of the impressive subscriber gains this quarter, Netflix is forecasting even greater gains for Q4, anticipating the addition of 7.6 million net new subscribers for the final three months of 2019.

A woman points a gun at an unseen foe as two men look on.

La Casa de Papel (aka Money Heist) became Netflix's most popular non-English-speaking show. Image source: Netflix.

A peek behind the ratings curtain

As it has in recent quarters, Netflix provided insight into some of the most successful original content released on its platform during the quarter. It should be no surprise that Stranger Things 3 was the most-watched season of the hit show, viewed by 64 million member households -- or nearly 40% of the company's global subscriber base -- in its first four weeks of availability. New limited series Unbelievable was also a member favorite, watched by 32 million households in its 28 days. The third season of La Casa de Papel (aka Money Heist) became the biggest non-English-language program in the company's history, viewed by 44 million households in the first four weeks following its debut.

Netflix original films also found increasing success with viewers. Tall Girl, Secret Obsession, and Otherhood were viewed by 41 million, 40 million, and 29 million households, respectively, in the first 28 days following their release.

The company has several high-profile movies scheduled to debut in the fourth quarter. Leading the pack is Martin Scorsese's The Irishman, starring Robert De Niro, Al Pacino, and Joe Pesci. Also on the docket is Marriage Story, with Scarlett Johansson and Adam Driver, and The Two Popes, starring Anthony Hopkins and Jonathan Pryce. Netflix said that all three films had emerged as early Oscar contenders.

Upcoming competition

Netflix addressed the upcoming competition, with soon-to-debut services from the likes of Disney and Apple, by pointing out that "we've been competing with streamers ... as well as linear TV for over a decade."

The company went on to say that while there might be some "modest headwinds" to its near-term growth, the longer term looks as bright as ever. Netflix also predicted that the big loser from the advent of these services would be traditional broadcast and cable TV, as consumers continue to migrate to streaming.

Reporting changes

Beginning with the company's Q4 earnings report in mid-January 2020, Netflix will begin reporting revenue and membership by regions, including U.S. and Canada (UCAN), Latin America (LATAM), Europe, the Middle East and Africa (EMEA), and Asia Pacific (APAC). The company will also stop reporting free trial members and the U.S. vs. international contribution margins beginning with the fourth quarter.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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