Netflix reported its third quarter earnings today. The company took in a record best $2.15 billion in revenue, a jump of 36 percent over last year. It also added 3.6 million new subscribers, easily besting the 2.3 million it had projected. The company attributed its better-than-expected performance to the break-out success of its original content, specifically Stranger Things and the second season of Narcos. Its stock was up nearly 20 percent in after-hours trading.
"Our over-performance against forecast (86.7m total streaming members vs. forecast of 85.5m) was driven primarily by stronger than expected [customer] acquisition due to excitement around Netflix original content," the company wrote in its letter to investors. "Stranger Things is also notable as it is produced and owned by Netflix, which provides us with more attractive economics and greater business and creative control." On today's earnings call, Spotify said that while original content required more cash upfront, it more than paid off over time through licensing and syndication fees.
No plans for price increases
Netflix was one of the best performing stocks of 2015, powered in large part by its stellar subscriber growth. That momentum came to an end last quarter. The company had projected membership would grow by 2.5 million new subscribers, but second quarter earnings revealed slightly under 1.7 million new members signed up. Membership growth in the US, where 58 percent of the company's paid subscribers live, was particularly weak. This segment grew just 2 percent between June of 2015 and 2016, the lowest rate of subscriber additions in the United States since the company began reporting numbers in 2012. "We are growing, but not as fast as we would like or have been," the company said in its Q2 letter to investors.
In a letter to investors, Netflix said failure to reach its projected subscriber growth was due to older members leaving the service, or "churn." To combat subscriber saturation in its domestic market, Netflix has been aggressively pushing into new territories. The company announced expansion into 130 new countries, markets with hundreds of millions of customers that, until recently, had no way to sign up for Netflix. That may help it to bolster subscriber growth, but it won't boost the bottom line. Executives have warned international markets are not likely to become profitable for several years.
China is off the table for now
When it announced its global expansion, Netflix hinted that it was interested in bringing its service to China, the world's largest market of internet-connected consumers. But it put that dream to rest, at least for the time being, in today's investor letter, noting that "the regulatory environment for foreign digital content services in China has become challenging. We now plan to license content to existing online service providers in China rather than operate our own service in China in the near term."
Netflix is now available in 22 languages, less than half of what YouTube offers. This quarter it localized in Turkey and Poland, making its service available not just in those geographies, but also in local languages. On it's investor call, CEO Reed Hastings pointed out that while the service is now available in 130 new countries, making it available in a customer's native tongue drives a second wave of adoption in some of Netflix new territories.
Content has been one factor analysts point to when explaining why Netflix was losing customers to churn. The company has been focusing on producing original television content and its collection of popular movies has suffered as a result. The service has focused on creating original shows instead, and said today it plans to create 1,000 hours of original content in 2017, nearly doubling the 600 hours of new programming it made this year. The strong results it posted this quarter should dampen fears over this strategy, as the company managed to easily outperform expectations by attracting new customers to shows like Stranger Things, which was a cultural phenomenon over the summer. On today's investor call the executive team made multiple references to The Crown, which premiers next month, as the next tentpole program it has spent heavily on, and which it hopes will drive subscription growth in return.