Netflix Undershoots U.S. Subscriber Adds for Q3, Beats Profit Forecast

Netflix fell slightly short of its U.S. subscriber forecast in the third quarter — and projected lower Q4 subscriber growth than Wall Street was expecting as competition looms from Apple and Disney.

Still, the company reported solid gains, announcing a Q3 record for paid subscriber additions and revenue, and handily topped analyst forecasts for profit.

The company added 6.7 million total streaming subscribers during the quarter, including 500,000 in the U.S. and 6.3 million internationally. Netflix previously projected global subscriber net adds for Q3 of 7 million (800,000 U.S. and 6.2 million internationally). As of the end of September 2019, Netflix had 158.3 million total paid subs, including 60.6 million in the U.S.

Netflix reported Q3 revenue of $5.25 billion, up 31% year over year and in line with Wall Street estimates, and earnings per share of $1.47 topping analyst forecasts of EPS of $1.04.

The company posted operating margin of 18.7%, beating its prior guidance, “due to timing of content and marketing spend, which will be more weighted to Q4’19,” the company said.

Investors breathed a sigh of relief on the earnings beat and subscriber adds — which may have been better than some feared — with the stock climbing as much as 10% in after-hours trading. The Q3 results certainly were a turnaround compared with the previous quarter, when Netflix fell significantly short of subscriber forecasts and lost U.S. customers (130,000) for the first time since 2011, when it split the DVD-by-mail and streaming services.

Netflix’s Q3 subscriber growth was aided by a relatively strong slate of content releases including “Stranger Things” season 3 — which the company said was the most-watched season to date with 64 million member households viewing it in its first four weeks — and the seventh and final season of “Orange Is the New Black.” The company claimed its third-quarter subscriber forecasts were its most accurate in the recent past.

For Q4, Netflix is forecasting 7.6 million global paid net adds, with 600,000 in the U.S. and 7.0 million for the international segment. Analysts had been pegging Netflix to add as many as 9.3 million net new paid subscribers (2 million U.S., 7.3 million overseas).

Netflix blamed its U.S. price increase earlier this year for the slower domestic sub growth in 2019 to date. It has netted 2.1 million in the first nine months of the year vs. 4.1 million in the same period in 2018. Subscriber “retention has not yet fully returned on a sustained basis to pre-price-change levels,” Netflix noted in the letter to shareholders. The company hiked its standard plan from $10.99 to $12.99 per month, a change that rolled out primarily in Q2.

But Netflix also pointed out that the price hike has pumped up revenue, with average revenue per customer increasing 16.5% year over year in Q3. Overall, average revenue per customer was up 9% (and up 12% excluding impact of foreign currency exchange rates).

In recent months, Netflix investors have fretted about looming competition from major new competitors in the streaming space. Next month will see the debut of Disney Plus ($6.99 monthly) and Apple TV Plus ($4.99 per month) — both of which undercut Netflix’s pricing, but will have far smaller content offerings out of the gate. Set to launch in early 2020 are WarnerMedia’s HBO Max and NBCU’s Peacock.

“The launch of these new services will be noisy,” Netflix said in its Q3 shareholder letter. “There may be some modest headwind to our near-term growth, and we have tried to factor that into our guidance. In the long term, though, we expect we’ll continue to grow nicely given the strength of our service and the large market opportunity.”

The company added, “Many are focused on the ‘streaming wars,’ but we’ve been competing with streamers (Amazon, YouTube, Hulu) as well as linear TV for over a decade.”

Original content releasing in the year-end quarter — historically Netflix’s strongest period of subscriber gains — includes Martin Scorsese’s critically lauded film “The Irishman” starring Robert De Niro and Al Pacino; season 3 of “The Crown”; “El Camino: A Breaking Bad Movie” with Aaron Paul; season 2 of comedy series “The Kominsky Method”; and live-action fantasy series “The Witcher.”

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