Netflix Q3 earnings exceed estimates, despite disappointing US subscriber growth

Netflix’s Q3 financial report has given the company’s stock a boost in after-hours trading, with profits significantly exceeding analyst expectations.

The streaming giant reported revenue of $5.24 billion revenue, up 31% year-over-year and more-or-less in line with predictions of $5.25 billion. More impressively, it reported GAAP earnings of $1.47 per share, compared to analyst estimates of $1.05 per share.

Subscriber growth, meanwhile, was a mixed bag. Netflix reported 500,000 paid net additions of in the United States, falling far short of its forecast of 800,000. Conversely, international growth exceeded expectations, with 6.3 million net adds compared to a forecast of 6.2 million.

U.S. subscriber growth looks particularly weak when you compare it to 2018 — Netflix has only seen 2.1 million net additions domestically in the first nine months of 2019, compared to 4.1 million in the same period of 2018. Netflix’s investor letter seems to blame this on price hikes earlier this year.

“Since our US price increase earlier this year, retention has not yet fully returned on a sustained basis to pre-price-change levels, which has led to slower US membership growth,” the company says. “On a member base of more than 60m, very small movements in churn can have a meaningful impact on paid net adds.”

The company also noted that its average revenue per user is up 16.5% year-over-year in the US. (I assume it can thank to those same price hikes.)

Overall, Netflix said it now has more than 158 million members. It’s projecting 26.7 million net adds for the entirety of 2019, down from 28.6 million net adds last year.

“While we had previously expected 2019 paid net adds to be up year over year, our current forecast reflects several factors including less precision in our ability to forecast the impact of our Q4 content slate, which consists of several new big IP launches (as opposed to returning seasons), the minor elevated churn in response to some price changes, and new forthcoming competition,” Netflix says.

Netflix’s stock is up 7.6% in after-hours trading (as of 4:39pm Eastern).

However, those subscriber numbers are certainly going to provide more fuel to skeptics. For example, eMarketer analyst Eric Haggstrom said in a statement that “the fact that Netflix has shown disappointing growth without the new competition present, is a negative omen for Netflix in 2020 and beyond.”

The investor letter includes an extended discussion of that competition, acknowledging the upcoming launch of Disney+ and Apple+ next month, and HBO Max and Peacock next year.

“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,” the letter says.

It goes on to acknowledge that these upcoming launches will be “noisy” and could create “some modest headwind in our near-term growth,” but it argues that there are still opportunities for long-term growth.

“In our view, the likely outcome from the launch of these new services will be to accelerate the shift from linear TV to on demand consumption of entertainment,” Netflix says. “Just like the evolution from broadcast TV to cable, these once-in-a-generation changes are very large and open up big, new opportunities for many players. For example, for the first few decades of cable, networks like TBS, USA, ESPN, MTV and Discovery didn’t take much audience share from each other, but instead, they collectively took audience share from broadcast viewing.”

The letter also continues Netflix’s practice of release select viewership numbers about new programs. (Obligatory caveat: These shouldn’t be compared directly to third party numbers like Nielsen ratings.)

For example, it says the third season of “Stranger Things” is its most-watched season to-date, viewed by 64 million member households in its first four weeks of release, while “Unbelievable” was watched by 32 million households. On the movie side, “Tall Girl” was watched by 41 million households.

“Our goal is to have the quality of our slate rival the ambition of its scope,” Netflix says. “An example is ​’Orange is the New Black​,’ which wrapped its final new season in Q3. The show was celebrated by fans and the media for the groundbreaking role it played for Netflix and the culture at large; Time Magazine said “…’Orange is the New Black’ is the most important TV show of the decade.”​