Netflix surged more than 20 percent after reporting its streaming service signed up 3,6m subscribers in the third quarter, vanquishing — for now — investor concerns about slowing growth at the world’s largest online TV network.
In the next year, the company will become more profitable, providing fuel for original shows like the sci-fi hit Stranger Things and the crime drama Narcos, CEO Reed Hastings told shareholders Monday after results were announced. Netflix, based in Los Gatos, California, plans to spend a net US$6bn on programming in 2017, an increase of 20%.
The growth in subscribers reassured investors who have made Netflix one of the hottest stocks in recent years, believing the company can spur the adoption of on-demand TV globally, as it did in the US, and become a dominant global online entertainment company.
Confidence in that trajectory was shaken three months ago when subscriber growth faltered. The company finished the third quarter with a better-than-projected 86,7m customers worldwide.
“We are closing in on 100m members, but I remind everyone at Netflix that Facebook and YouTube have a billion daily actives,” Hastings said on a call with analysts. “We are so small compared to those other Internet video firms, and we have a lot of catching up to do.”
Netflix soared in extended trading, rising as much as 22% to $121,28. If that gain holds on Tuesday, the company will erase a 13% loss for the year.
The company still faces hurdles, including subscriber growth that continues to slow. Netflix generates little or no profit and its programming budget is still burning through funds. With $1,3bn in cash at quarter’s end, Netflix said it plans to borrow via a debt sale in the coming weeks.
“For the balance of 2016, we will continue to operate around break even, and then start generating material global profits in 2017 and beyond, by marching up operating margins steadily for many years,” the company said in a statement on Monday.
In the third quarter, Netflix added 3,2m customers internationally and 370 000 in the US, beating analysts’ forecasts on both fronts. The company projected it will sign up 5,2m customers in the final three months of 2016, lifting the total to almost 92m.
Third quarter revenue rose 32% to $2,3bn, beating analysts’ estimates. Net income increased 75% to $51,5m from, or $0,12/share, also topping the $0,06 average of analysts’ estimates.
This quarter, Netflix forecasts US subscriber gains of almost 1,5m, compared with the 1m average of analysts’ estimates, and international additions of almost 3,8m, compared with a 3,1m estimate.
New customers embolden Netflix to spend even more money on programming as it races to sign up customers around the world. Most of its new spending will go to original programs like Stranger Things, as well as a growing number of original foreign-language series. Netflix will increase its output of original shows to a thousand hours next year from 600.
Such exclusive programming, which currently accounts for 10% to 20% of its content budget, could climb to 50% in the future, chief financial officer David Wells has said.
Stranger Things “is the kind of broad appeal, cross-demographic, and cross-border sensation that we hope will distinguish Netflix original content”, the company said. The show “is also notable as it is produced and owned by Netflix, which provides us with more attractive economics and greater business and creative control”.
With the US market older and more mature, Netflix is relying on international gains to fuel its growth in the years ahead, including the 130 new territories the company began serving in January.
Netflix doesn’t provide much detail on its performance in specific territories, though executives have singled out Brazil and Australia as two strong markets. Canada and the UK are two of Netflix’s largest overseas customer bases, according to analysts.
In the last quarter, the company began accepting local currency payments in Poland and Turkey and added local language user interfaces, subtitles and dubbing, as well as local content. Third quarter streaming revenue increased 65% to $853m.
China on hold
Future gains will have to come without China. Netflix said Monday the regulatory environment remains challenging and that its efforts in that country will be limited to licensing shows it owns to existing online service providers.
“We still have a long-term desire to serve the Chinese people directly, and hope to launch our service in China eventually,” the company said.
Netflix has no current plans to raise prices, though the company forecasts its average subscription price will rise by 12% this year as older, less expensive streaming plans are phased out. The change in pricing policies contributed to the slowdown in user growth in the second quarter, as some customers cancelled, and will restrain Netflix’s subscriber gains for the full year, the company said. — (c) 2016 Bloomberg LP
