Netflix turned in much stronger results for the third quarter of 2018 than investors anticipated, sending its stock climbing in after-hours trading.
During Q3, the streaming giant netted 1.09 million new streaming subs in the U.S. and 5.87 million internationally. That’s compared with Netflix’s forecast of 650,000 domestic net adds and 4.35 million overseas for the September quarter — a more conservative outlook than analysts’ previous estimates.
The better-than-expected Q3 results come after Netflix widely missed second-quarter expectations for subscriber growth, which CEO Reed Hastings chalked up to periodic “lumpiness” in the business.
Netflix said the total net additions for the quarter of 7.0 million streaming subs — a new Q3 record for Netflix — were the result of greater-than-expected customer acquisition globally, “with strong growth
broadly across all our markets including Asia,” the company said in its quarterly investor letter.
The company reported Q3 revenue of $4.0 billion, up 36% year over year, earnings of 89 cents per share. Wall Street’s Q3 consensus estimates for Netflix had pegged EPS at 68 cents on revenue of $4.0 billion.
Related
Netflix shares soared as much as 14% in after-hours trading Tuesday. Ahead of the earnings report, the stock closed up 4% for the day, to $346.40 per share.
The company, which is expected to spend some $13 billion on content on a gross basis in 2018, continues to operate at negative free cash flow. Neflix’s free cash flow in Q3 was -$859 million (compared with -$465 million in the year-earlier quarter). For the full year, the company expects free cash flow will be closer to -$3 billion than to -$4 billion, and that negative free cash flow in 2019 will be roughly flat with this year.
“We recognize we are making huge cash investments in content, and we want to assure our investors that we have the same high confidence in the underlying economics as our cash investments in the past,” Netflix said in its letter to shareholders. “These investments we see as very likely to help us to keep our revenue and operating profits growing for a very long time ahead.”
On the originals front, Netflix touted the performance of its “Summer of Love” romantic-comedy films. More than 80 million of its subscribers — representing at least 58% of its 137.1 million total worldwide streaming users as of the end of September — watched one of its “Summer of Love” rom-coms over the past few months, and the company said “To All the Boys I’ve Loved Before” was one of its most-viewed original films to date.
For Q4, Netflix is forecasting paid net additions of 7.6 million — and total net additions of 9.4 million — up 15% and 13%, respectively, from the year-earlier period.
In addition, for the fourth quarter of 2018, Netflix said it expects to reclassify “certain personnel costs” from G&A (general and administrative) to content and marketing, and from technology & development to “other cost of revenues.” That to reflect “the ongoing evolution of our business to include self-production of content,” Netflix said, noting that the reclassification would have no impact on total operating expenses, operating profit or operating margin and is intended to provide a clearer picture of marketing and content expenses.