Netflix Far Exceeds Forecast with Subscription Revenue of $2 Billion

Q3 results fuel a stock surge in after-hours trading.

Subscription News: Netflix Far Exceeds Forecast with Subscription Revenue of $2 Billion

Source: Netflix

On Monday, Netflix (NASDAQ: NFLX) reported record subscription revenue of $2 billion, representing a 36 percent increase over the same period last year. This is the first time Netflix has exceeded the $2 billion revenue mark. In a letter to shareholders, Netflix attributed the increase to its strong content which includes the popular Netflix original series Stranger Things and the second season of Narcos.

“We kicked off Q3 with the release of Stranger Things on July 15 to both critical and audience acclaim,” said Netflix in a letter to shareholders. “The nostalgic, supernatural thriller proved to be the blockbuster of the summer and is the kind of broad appeal, cross demographic, and cross border sensation that we hope will distinguish Netflix original content.”

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Subscription News: Netflix Far Exceeds Forecast with Subscription Revenue of $2 Billion

Source: Netflix

“We are now in the fourth year of our original content strategy and are pleased with our progress. In 2017, we intend to release over 1,000 hours of premium original programming, up from over 600 hours this year. The Internet allows us to reach audiences all over the world and, with a growing base of over 86 million members, there’s a large appetite for entertainment and a diversity of tastes to satisfy,” Netflix said.

In addition to its original content, Netflix credited its “Internet-centric, on-demand, subscription-only business model” for supporting programs for mass and niche audiences. Its algorithms allow Netflix to promote content of specific interest to certain users.

Netflix reports the following membership, revenue and net income totals for the third quarter:

Total Streaming

Q3 2016

Q3 2015

Revenue

$2.2 billion

$1.6 billion

Paid Memberships

83.3 million

66.0 million

Total Memberships

86.7 million

69.2 million

Net Additions to Membership

3.6 million

3.6 million

Net Income

$52 million

$29 million

Net income of $52 million is significant, because Netflix forecast only $22 million. The network’s addition of new members was also higher than anticipated – 86.7 million total streaming members versus the forecast of 85.5 million. Netflix said it strives for accuracy, but underestimated growth in the third quarter based on lackluster results in Q2.

This year Netflix instituted a $2 price hike per month per member, 75 percent of whom were impacted during Q3, and it reports that the impact is consistent with expectations.

“With more revenue, we can reinvest to further improve Netflix to attract new members from around the world, while continuing to delight our existing customers,” said Netflix in its letter to shareholders.

For the fourth quarter, Netflix forecasts 5.2 million global net additions to its membership base with 1.45 coming from the U.S. and 3.75 from abroad. Netflix said competition continues to increase with other streaming video on-demand services as well as gaming. It is expecting Amazon Prime Video to continue to grow as a global competitor, but Netflix is prepared to hold steady.

“Our challenge is to continue to improve our service and content so that we better meet consumer desires,” Netflix said. “Total screen time is quite large and growing as technology and content improve globally.”

So how did investors react? Judging by the jump in stock price in after-hours trading Monday, it looks like Netflix exceeded all expectations, including their own. According to the Wall Street Journal, stock prices surged close to 20 percent. As of 6:10 p.m. Eastern on Tuesday, Netflix stock was $118.79 per share, a significant jump from where it finished this time last year – $101.69 on October 19, 2015.

Subscription News: Netflix Far Exceeds Forecast with Subscription Revenue of $2 Billion

Source: Google Finance – Yahoo Finance – MSN Money

Insider Take:

This is exciting news from a number of perspectives. First, Netflix has shown that a subscription-only business model can be successful. They are becoming the gold standard among streaming video on-demand services – a high-quality streaming video product, an affordable price point with options for customers who want more screens or better quality, good customer service and original content.

Second, it shows that, even when price hikes are necessary, there are ways to retain and attract subscribers. After suffering from a lousy second quarter, Netflix capitalized on its global growth, new international markets and amazing new content to overcome the anticipated churn that might come from subscribers not willing to absorb a $2 per month price hike.

Third, reading the shareholder letter, it seems that Netflix is not only realistic about expectations, but it seems to know what is working and what it can strength. It has a solid growth strategy to take it into the fourth quarter and beyond. We’re excited to see what’s next!