Netflix’s Subscriptions Soar on Original Programming

Revenue jumped 31.2% to $2.29 billion as compared to $1.73 billion in the year-ago period.

n1Netflix Inc. (NASDAQ: NFLX), a U.S.-based provider of on-demand internet streaming media, announced its Q3 FY16 financial results on October 17th, 2016.

Headquartered in Los Gatos, California, Netflix engages in the internet delivery of TV shows and movies on various internet-connected screens, such as TVs, digital video players, TV set-top boxes, and mobile devices. The Company operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. The firm provides its members subscription-based offerings to receive TV shows and movies streaming content, including original series, documentaries, and feature films through a host of internet-connected screens. The company also provides DVDs-by-mail membership services. Read more about Netflix’s financial results below.

Q3 FY16 financial highlights

Netflix’s Q3 FY16 revenue jumped 31.2% to $2.29 billion as compared to $1.73 billion in the year-ago period. The Company’s global streaming revenue jumped 36% Y-o-Y to $2.15 billion, of which 40% was generated abroad, helped by original shows including Stranger Things and the second season of Narcos. On a constant currency basis, this represents a 39% Y-o-Y revenue growth and a 400-basis-point jump from the last two quarters. Netflix added over 50% more subscribers than expected despite a price hike.

n2It may be recalled that Netflix faced customer backlash after raising prices in 3Q FY11, when it lost 800,000 U.S. subscribers after splitting its streaming and DVD services, thereby effectively doubling the cost for some customers. Similarly, in Q2 FY16, Netflix faced higher churns and mass cancellations for its services when it raised prices $1 or $2 a month for new customers, and imposed the increase on existing customers. The Company charges $7.99 to $11.99 a month in the U.S. The higher prices would add $470 million in incremental annual revenue for Netflix.

Netflix has been facing a slowdown in subscription growth in the U.S. as the market matures and a planned U.S. price hike raised concerns it would not hit its targets. On top of that, it has faced competition from live sports coverage of the Olympics and streaming services such as Amazon.com Inc. (NASDAQ: AMZN), Hulu, Sony Pictures, Sling TV, Crackle, and Mindshare.

However, propelled by higher subscriptions, Netflix’s Q3 FY16 operating income jumped to $106 million from $73.6 in the year-ago period. As a result, Netflix reported profit of $51.5 million, or $0.12 per share, up from $29.4 million, or $0.07 per share, in the year ago period.

Growth driven by original content

n3Netflix has successfully added more original content, and has worked to add many local-language offerings abroad, while dealing with piracy regulations, and broadband connectivity issues. The Company has been successful in finding audiences for diverse content, including subtitled and dubbed content, seeing international titles in Mexico and France take off elsewhere.

Upcoming American-British television series “The Crown,” is another show that is expected to be a hit among the audience and is scheduled to debut on November 4th, 2016. Netflix spent an estimated $100 million on the drama series, which was created by “The Queen” screenwriter Peter Morgan.

Subscriber growth surpasses expectations

n4During Q3 FY16, Netflix posted robust subscriber growth, adding about 3.20 million subscribers internationally and gained 370,000 net memberships in the U.S., bringing the total to 3.57 million, beating expectations of 2.3 million. In Q2 FY16, it added 1.7 million subscribers, below its own expectations of 2.5 million. It now has a total of 86.7 million subscribers across 130 countries.

By the end of Q3 FY16, Netflix had un-grandfathered 75% of the members that are being un-grandfathered in FY16. Average selling price (ASP) grew over 10% Y-o-Y in both the U.S. and international segments (excluding a $35 million foreign exchange impact).

Other highlights

Expansion into China: Netflix has expanded into more than 130 markets worldwide, including most major countries, except China. For now, Netflix said that it was shelving plans to launch a service in China, opting instead to license its shows to existing online service providers in China. The Company said it still hopes to launch service in China in the future.

Global partnerships: During Q3 FY16, Netflix announced a global pact with 20th Century Fox Studios to license ‘The People vs. O.J. Simpson: American Crime Story’ and ‘Queen of the South’. The Company also announced an agreement with The Walt Disney Co. (NYSE: DIS) to license Quantico and American Crime in the U.S. and Canada.

Comcast Corp. (NASDAQ: CMCSA) has agreed to offer Netflix on its X1 set-top boxes, which could help it attract more subscribers in the U.S. Moreover, the Netflix app will be available across Liberty Global’s footprint beginning in the Netherlands later in 2016 and the service will be expanded to other countries in 2017.

Content spending: Netflix plans to keep channeling funds to build original and licensed TV shows and movies. Content spending will be increased to $6 billion in FY17, a $1 billion increase from FY16.

Guidance

Looking forward, Netflix expects to add 1.45 million subscribers in the U.S. and 3.75 million internationally in Q4 FY16. For financial guidance, Netflix expects earnings of $0.13 per share, which is above $0.07 expected by analysts.

In FY17, Netflix intends to release over 1,000 hours of premium original programming, up from over 600 hours in FY16, while expanding its content budget to about $6 billion. Hence, the continuing cost of developing new shows would undermine plans to deliver material profits in FY17. Also in 2017, Netflix will be the exclusive home of the new “Star Trek” series from CBS outside the U.S. and Canada, with new episodes to be aired in 188 countries within 24 hours of their North American premiere.

Stock Performance

n5Netflix’s stock stood at $121.87, gaining 2.59%, at the close on Wednesday, October 19th, 2016, having vacillated between an intraday high of $122.45 and a low of $118.00 during the session. The stock’s trading volume was at 21,924,943 for the day. The Company’s market cap was at $51.61 billion as of Wednesday’s close.

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