Netflix Recovers From Rocky Second Quarter, Adds 6.8 Million Subscribers

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Netflix CEO Reed Hastings

The streamer now has 158 million subscribers worldwide.

Stranger Things helped propel Netflix to a strong summer, but there could be headwinds for the company going forward. 

The streaming giant, which now has 158 million total subscribers, on Wednesday reported that it added nearly 6.8 million members during the third quarter, 520,000 in the U.S. and 6.3 million abroad. That's just slightly less than the 7 million subscribers that Netflix earlier forecast it would add during the three months from July to September. Wall Street was also looking for about 7 million total subscriber additions, 800,000 subscriber additions in the U.S. and 6 million internationally. Though the U.S. is becoming a softer market for the streamer as it reaches market saturation, the news was received positively and sent shares up Wednesday, where they peaked at around 10 percent.

"As we’ve improved the variety, diversity and quality of our content slate, member engagement has grown, revenue has increased, and we’re able to further fund our content investment," reads Netflix's quarterly letter to shareholders.

The disclosure marked a recovery for Reed Hastings-led company after a second quarter in which it lost 130,000 subscribers in the U.S. and missed its 5 million target by 2.3 million. At the time, Netflix blamed the soft quarter on both a recent price increase and on its content slate, which lacked a Stranger Things-sized debut, and the news caused its stock to plunge more than 10 percent. Shares have been trading down around 20 percent since July's financial disclosure. 

Though the third quarter was significantly better for Netflix than its previous quarter, the company signaled that there could be toilsome times ahead. The U.S., in particular, is becoming a challenging market for Netflix and the company added fewer subscribers there during the quarter than previously forecast. "Since our U.S. 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 U.S. membership growth," the company wrote in the letter. Netflix is forecasting adding 7.6 million new subscribers during the fourth quarter (during which a new season of The Crown will premiere, as will the films The Irishman and The Two Popes), meaning it expects 26.7 million total additions, down from 28.6 million adds in 2018. 

Going forward, Netflix will start reporting membership guidance for its global audience instead of breaking it into U.S. and international reporting segments. "As we self-produce and license more original content that has global rights, we are finding U.S. vs. international segment contribution margin reporting is becoming less useful internally," the company said. 

Netflix is preparing to face a deluge of competition as new video streaming services from Disney (Disney+), AT&T (HBO Max), Comcast (Peacock) and Apple (TV+) hit the market over the next six months. As the streaming wars heat up, many entertainment companies have announced plans to pull their hit shows and movies from Netflix. That means that the company will need to continue to offer up a strong slate of originals that will keep customers from leaving the service. 

Addressing the competition, the company said, "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 upcoming arrival of services like Disney+, Apple TV+, HBO Max, and Peacock is increased competition, but we are all small compared to linear TV. While the new competitors have some great titles (especially catalog titles), none have the variety, diversity and quality of new original programming that we are producing around the world." Netflix also acknowledged that "the launch of these new services will be noisy" and could mean "some modest headwind" to its near-term growth but said that over time "we expect we'll continue to grow nicely." 

The streamer also reported third-quarter revenue of $5.2 billion, up 31 percent year-over-year, and earnings of $1.47 per share. Analysts were expecting revenue of $5.25 billion and earnings of $1.05 per share. 

During a pre-taped Q&A for investors, Hastings and content chief Ted Sarandos talked up Netflix's fourth quarter, specifically several high-profile films that are dropping in time for awards season. Per Hastings, those films could be drivers of new sign-ups and help Netflix compete against the influx of new competition. "We haven't that many big movies in the past," he explained. "Movies are very valuable. People are used to paying a lot for that." Sarandos later added, "These are big, theatrically ambitious type films that you'll be able to watch on Netflix."

Netflix will spend about $15 billion on content this year, the company disclosed Wednesday, even as it expects to burn $3.5 billion in cash. Due to rising competition, the streamer has seen the cost of content rise. According to Sarandos, a competitive project could cost 30 percent more this year compared with last year. "In any environment, when you've injected a few new buyers, you're going to catch that dynamic on a highly competitive show,"  he said.

Netflix shares closed the day flat at around $286.