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Netflix Beats Q3 Earnings Forecast, Shares Soar on International Sub Growth

Netflix shares popped by as much as 20% in after-hours trading Monday, after the streamer posted better-than-expected earnings for the third quarter of 2016 and reeled in 900,000 more international customers than previously forecast.

The company reported total revenue of $2.29 billion and earnings of 12 cents per share. Wall Street analysts had expected Netflix to post revenue of $2.28 billion and EPS of 6 cents.

Netflix said it added 3.57 million new streaming subscribers, including 3.2 million overseas and 370,000 in the U.S. When it released second-quarter earnings, Netflix had forecast adding 2.6 million streaming subs overall — 300,000 in the U.S. and 2.3 million internationally.

The company’s global streaming revenue for the third quarter totaled $2.2 billion, of which 40% was generated outside the U.S. Operating income was $106 million (versus Netflix’s prior $64 million estimate) while net income was $51.5 million (vs. forecast of $22 million).

According to the company, the stronger-than-expected subscriber acquisition for Q3 was driven by “excitement around Netflix original content.” And Netflix is continuing to double down on originals: In 2017, the company said, it plans to release over 1,000 hours of premium original programming, up from about 600
hours this year.

“The Internet allows us to reach audiences all over the world and, with a growing base of over 86 million members, there’s a large appetite for entertainment and a diversity of tastes to satisfy,” Netflix said Monday in its quarterly letter to investors.

Among its originals, Netflix called supernatural thriller “Stranger Things,” which launched July 15, “the blockbuster of the summer” and noted that the series is produced and owned by Netflix. One big benefit of owning the content is that “it doesn’t come with the studio markup,” Netflix chief content officer Ted Sarandos said on the earnings call.

The company also cited drug-cartel drama “Narcos,” which returned for season 2 in September, saying it had “a positive impact on member acquisition across all of our markets.” In August, Netflix debuted the first half of Baz Luhrmann’s “The Get Down” series about the origins of hip-hop in 1970s New York — its most expensive series ever — but according to third-party research the initial viewer response did not come close to other originals.

Netflix said its content budget for 2017 will be about $6 billion on a profit-and-loss basis, a ballpark figure it has cited before. At an investor conference last month, CFO David Wells said Netflix was shifting its content spending with the aim of having 50% of the TV shows and movies on its streaming service be original productions over the next few years.

As for the ongoing move to shift older U.S. members to the standard $9.99 per month two-stream plan — which hurt domestic sub growth in Q2 — the company said that by the end of Q3 it had “un-grandfathered” 75% of the members affected by the price change in 2016. “(T)he impact has been consistent with our expectations,” Netflix said.

For the fourth quarter, Netflix said, the price increase for older customers will continue to have a “moderate” effect on U.S. subscriber growth. Netflix is forecasting 5.2 million global net adds for Q4, including 1.45 million in the U.S. and 3.75 million internationally. CEO Reed Hastings said on the call that Netflix has no new price increases planned, with the exception of a legally mandated inflation adjustment in Brazil.

Average revenue per subscriber for the third quarter grew over 10% year-over-year in both the U.S. and international segments (excluding the impact of foreign-currency exchange rates). “With more revenue, we can reinvest to further improve Netflix to attract new members from around the world, while continuing to delight our existing customers,” the company said.

Also Monday, Netflix disclosed that — for the time being — it is no longer looking to launch its own branded service in China, citing regulatory challenges.

Regarding competition, Netflix said it is presuming that Amazon Prime Video “will become as global as YouTube and Netflix this fall,” with the Nov. 18 launch of auto series “The Grand Tour,” hosted by former “Top Gear” trio Jeremy Clarkson, Richard Hammond and James May. Broadly speaking, Netflix sees competition for “consumer screen time” across a spectrum of TV and internet players. “We’re closing in on 100 million members, but I remind everyone at Netflix that Facebook and YouTube have 1 billion daily actives,” Hastings said on the company’s call Monday.

Netflix’s streaming content obligations as of the end of September were $14.4 billion — up $1 billion from the prior quarter — an increase it said reflects the addition of both new original and non-original content as well as expanded rights for new territories.

The company plans to raise additional debt in the next few weeks. As of Sept. 30, Netflix had $2.37 billion in long-term debt. “With a debt-to-total-capitalization ratio of about 5%, we remain underleveraged compared both to similar firms and to our view of an efficient capital structure,” Netflix said in the shareholder letter. It ended the quarter with $1.3 billion in cash and equivalents (down from $2.3 billion at the end of 2015).

On the call with investors, Hastings said the company has no plans to crack down on password sharing activity in any new way, because so much of that is legitimate account sharing among members of the same household. “Password sharing is something you have to learn to live with,” he said.

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