Netflix Soars as Subscriber Growth Vanquishes Slowdown Fears
by Lucas Shaw
(Bloomberg) — Netflix Inc. surged as much as 20 percent after signing up 3.57 million streaming 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,” Chief Executive Officer Reed Hastings told shareholders Monday after results were announced. Netflix, based in Los Gatos, California, plans to spend a net $6 billion on programming in 2017, an increase of 20 percent.
“Netflix showed that the qualitative virtues often cited by bulls — secular growth of internet video, global scale, a commitment to quality content, and singular focus — could drive robust subscriber growth even in the face of well-documented headwinds,” Anthony DiClemente, an analyst at Nomura Securities, wrote in a note to clients Tuesday. He has a buy rating for the stock.
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 U.S., 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 86.7 million customers worldwide.
“We are closing in on 100 million members, but I remind everyone at Netflix that Facebook and YouTube have 1 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.”
Shares of Netflix soared the most in more than three years to $119.40, and were trading at $118.02 at 10:20 a.m. Those gains put the stock up 3.1 percent on the year, erasing a 13 percent loss so far for 2016.
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 $1.3 billion 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 Monday.
In the third quarter, Netflix added 3.2 million customers internationally and 370,000 in the U.S., beating analysts’ forecasts on both fronts. The company projected it will sign up 5.2 million customers in the final three months of 2016, lifting the total to almost 92 million.
Third-quarter revenue rose 32 percent to $2.29 billion, beating the $2.28 billion average of analysts’ estimates. Net income increased 75 percent to $51.5 million from, or 12 cents a share, also topping the 6-cent average of analysts’ estimates. This quarter, Netflix forecasts U.S. subscriber gains of 1.45 million, compared with the 1 million average of analysts’ estimates, and international additions of 3.75 million, compared with a 3.1 million 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 1,000 hours next year from 600.
Such exclusive programming, which currently accounts for 10 percent to 20 percent of its content budget, could climb to 50 percent 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 U.S. 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 U.K. 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 percent to $853 million.
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 12 percent 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 canceled, and will restrain Netflix’s subscriber gains for the full year, the company said.