After months of uncertainty, Netflix (NFLX +0.53%) made its way back into investors' good graces: It easily topped earnings expectations and booked solid subscriber growth in the third quarter.
Revenue grew by 31% year over year, topping $5.24 billion, but it was profit that made headlines. Earnings per share for the quarter soared to $1.47, up 65% compared to the prior-year quarter, and easily surpassing the $1.04 expected by the company and analysts. At the same time, Netflix added 6.77 million net new subscribers, more than doubling the 2.7 million it added last quarter.
Some of the most important insights, however, were delivered during the company's earnings interview, and via commentary in the tech giant's shareholder letter. Here are three important takeaways from Netflix management.
Image source: Netflix.
1. On finding price sensitivity
One of Netflix's biggest revenue drivers in recent years has been its pricing power. The tech giant has raised prices four times in five years, leading some to wonder whether the monthly subscription price had finally gotten too expensive.
Netflix CEO Reed Hastings all but admitted this might be the case. Discussing the slowing growth in the U.S. the past two quarters, Hastings said:
That's really on the back of the price increase. There's a little more sensitivity; we're starting to see a little touch of that. What we have to do is really focus on the service quality [and] make us must-have.
He went on to say that Netflix prices are "incredibly low compared to cable," and that the company has plenty of room to grow as consumers increasingly abandon traditional broadcast and cable TV and adopt streaming.
2. A word on competition
Netflix management mentioned changes to the competitive landscape in the quarterly shareholder letter: "There may be some modest headwind to our near-term growth, and we have tried to factor that into our guidance."
Building on that statements, several Netflix execs addressed the coming wave of new streaming competitors, specifically mentioning Walt Disney's over-the-top service Disney+, HBO Max from AT&T's Warner Media, Apple's Apple TV+, and Peacock from Comcast's NBCUniversal.
Chief financial officer Spencer Neumann acknowledged that some Netflix subscribers would be interested in testing out the new platforms: "Inevitably there will be some curiosity and some trial of those new service offerings." Hastings went further, admitting: "Disney is going to be a great competitor. Apple is just beginning, but they will probably have some great shows too."
Still, a line in the shareholder letter shows the company is taking a longer view: "In the long-term, though, we expect we'll continue to grow nicely given the strength of our service and the large market opportunity."
Joe Pesci and Robert De Niro in a scene from Netflix original The Irishman. Image source: Netflix.
3. An increasing focus on blockbuster films
In the fourth quarter, Netflix will be debuting a number of high-profile films from some of Hollywood's most elite directors, and several of the streaming pioneer's upcoming movies are being cited as early contenders for the Academy Awards.
The headliner is Martin Scorsese's The Irishman, a big-budget period piece and gangster epic starring Robert De Niro, Al Pacino, and Joe Pesci, which is being called the legendary director's "best-reviewed movie ever." Marriage Story, a gripping divorce drama featuring Adam Driver, Scarlett Johansson, and Laura Dern, premiered at the Venice Film Festival to glowing reviews. Another awards frontrunner is The Two Popes, which showcases the talents of Anthony Hopkins and Jonathan Pryce.
The company isn't just relying on Oscar-bait to draw in subscribers; several other big releases highlight the diversity of its offerings. Dolemite is My Name marks the comedic return of Eddie Murphy; Michael Bay's action thriller 6 Underground stars Ryan Reynolds; and director Steven Soderbergh returns to the limelight with biographical comedy-drama The Laundromat, starring Meryl Streep and Gary Oldman.
The focus on films is a calculated bet for Netflix. The company has previously said movies are responsible for one-third of the viewing on its platform, so generating blockbuster content for movie fans is sure to pay big dividends.
