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Netflix Adds 5.3 Million Subs in Q3, Beating Forecasts

Netflix kept the streaming train going full-tilt in the third quarter of 2017, adding more subscribers in both the U.S. and abroad than expected.

The company gained 850,000 streaming subs in the U.S. and 4.45 million overseas in the period. Analysts had estimated Netflix to add 784,000 net subscribers in the U.S. and 3.62 million internationally for Q3.

“We added a Q3-record 5.3 million memberships globally (up 49% year-over-year) as we continued to benefit from strong appetite for our original series and films, as well as the adoption of internet entertainment across the world,” the company said in announcing the results, noting that it had under-forecast both U.S. and international subscriber growth.

Shares of Netflix popped to record highs in after-hours trading, up as much as 2.7%, after closing up 1.6% to $202.68 per share before reporting Q3 results.

Netflix also indicated that its content spending may be even higher next year than previously projected. The company had said it was targeting programming expenditures of $7 billion in 2018; on Monday, Netflix said it will spend between $7 billion and $8 billion on content (on a profit-and-loss basis) next year. For 2017, original content will represent more than 25% of total programming spending, and that “will continue to grow,” Netflix said.

“Our future largely lies in exclusive original content that drives both excitement around Netflix and enormous viewing satisfaction for our global membership and its wide variety of tastes,” the company said in its quarterly letter to shareholders.

Netflix posted revenue of $2.98 billion and earnings per share of 29 cents for the three months ended Sept. 30. Wall Street had expected Netflix to report Q3 revenue of $2.97 billion and EPS of 32 cents.

Note that the results do not include the effects of Netflix’s price increases in the U.S. and other territories, which took effect for new subs in early October and will roll out to existing members through the fourth quarter.

Even with the price hikes, Netflix forecast adding 1.25 million U.S. streaming customers in the fourth quarter, and 5.05 million internationally. Wall Street analysts had been projecting 1.6 million domestic sub adds in Q4, and 4.6 million international sub adds.

Netflix “may well be conservative” with its Q4 streaming-subscriber forecast for the U.S., given the pending price increases, RBC Capital Markets analyst Mark Mahaney wrote in a research note prior to Netflix releasing the Q3 results.

In August, Disney announced it was not renewing the movie-output deal with Netflix for first-run Disney and Pixar titles in the U.S. — to launch its own Netflix-style streaming service starting with 2019 releases. Disney chief Bob Iger said last month the company would also not license Marvel or Lucasfilm movies either. Disney’s move initially rattled investors, but Netflix stock since climbed to all-time highs.

Netflix continues to operate with negative cash flow: Free cash flow in Q3 was -$465 million (vs. -$506 million in the year-earlier period). The company expects free cash flow to be between -$2.0 billion and -$2.5 billion for the full year 2017. The negative free cash flow — despite growing operating income — stems from the fact that it pays for titles before consumers watch the content, and the asset is amortized by estimated viewing over time, according to the company.

Netflix reiterated that it’s looking to raise more debt to fuel the content-buying binge: “We anticipate financing our capital needs in the debt market as our after-tax cost of debt is lower than our cost of equity,” the company said in the letter to shareholders.

The company’s subscriber numbers in the U.S. were likely helped through its new partnership with T-Mobile, under which Netflix is bundled with the wireless carrier’s T-Mobile One unlimited family plan for no extra cost (for T-Mobile customers with at least two lines).

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