After a rather weak second quarter earlier this summer, Netflix (Nasdaq: NFLX) restored faith amongst investors by delivering stellar third quarter results. The stock market is pleased with the performance as its stock soared 17% in the after-hours trading session.
Netflix’s Q3 revenues grew 34% over the year to $4 billion, marginally ahead of the Street’s forecast of $3.986 billion. Net income rose to $403 million, or $0.89 a share, up from $0.29 a share recorded a year ago, and significantly ahead of the consensus of $0.68.
For Netflix, it has always been about the subscriber base. For the quarter, Netflix added 6.96 million subscribers, compared with the market’s forecast of 5.32 million subscribers. Of these, Netflix added 1.09 million subscribers in the US and 5.87 million subscribers globally, compared with the analyst estimates of 674,000 in the US and 4.46 million globally. The subscriber base was also significantly higher than the company forecast of 650,000 adds in the US and 4.35 million in international markets. Netflix attributed the subscriber growth to its increased adoption in the Asian markets. Netflix believes that the Asian markets will, one day, account for 80-90% of its customer base.
For the current quarter, Netflix expects revenues of $4.2 billion, short of the market’s forecast of $4.13 billion for the quarter with an adjusted EPS of $0.23 and a subscriber addition of 9.4 million. The market was looking for an EPS of $0.50 and 7.7 million subscriber adds.
Netflix’s Content Growth
The increasing subscriber base, both in the US and the rest of the world, is attributed to the significant content library that Netflix has built. During the September quarter, it added about 676 hours of original programming in the US, a 135% increase over the year. The quality of the content is impressive given that the company had several Emmy award victories recently. This was the first time that Netflix tied with HBO in terms of the number of Emmy wins. Netflix even boasted about the number of fans that it is helping build for its movies and TV stars, citing as many as 10 million Instagram followers. It claims that this mass appeal is helping it attract talent.
Netflix also needs content to keep competitors away. In 2019, both Disney and AT&T will release their video streaming services that will offer significant competition to Netflix.
But this content continues to be a double-edged sword for the company. While it is helping attract users, it is also costing Netflix significantly. In less than three years, Netflix has issued net $7.5 billion of bonds to fund the content. It delivered a negative free cash flow of $859 million in the quarter compared with negative $465 million a year ago. Analysts also worry about rising marketing costs that will need to grow to drive subscriber growth.
Netflix’s India Growth
While Netflix did not divulge the detailed usage statistics by region, it is no secret that Asia is a big market for Netflix. Earlier this year, when CEO Reed Hastings visited India, he said that Netflix had just over half a million subscribers from the country and believes that the next 100 million subscribers for Netflix will be coming from India. Netflix is catering to this audience by launching regional content such as the hit series Sacred Games. It is also looking to add more content in regional Indian languages besides Hindi and English. Additionally, Netflix is working on cheaper pricing models that will help bring more subscribers to the service from countries like India.
Netflix’s stock is trading at $333.13 with a market capitalization of $150.8 billion. In the afterhours trading session, the stock climbed up to $405. It had touched a life high of $423.21 in June this year. It is still a significant high from the 52-week low of $178.38 that it was trading at in November last year.