UPDATED with executive comments: The Netflix juggernaut shows few signs of slowing. After the close of trading today, the company reported a 49% year-over-year increase in global subscribers in the third quarter.
The global tally now stands at 104 million. In the quarter, Netflix added 850,000 new customers in the U.S., to hit 52.77 million overall, and internationally it signed up 4.45 million for a total of 56.48 million.
The news sent company shares through the ceiling again. During the regular trading day, the stock hit another record high, rising $3.19 (or 1.6%) to reach $202.59. For the quarter ended September 30, total revenue gained 30.3% to just shy of $3 billion and executives expressed confidence in surpassing $11 billion in revenue for the full year. Net income for the quarter rose sharply over the year-ago period, hitting $130 million, or 29 cents a share, compared with $52 million, or 12 cents.
“We are growing nicely across the world,” the company said in a letter to shareholders accompanying the results. “Internet entertainment is delighting consumers, and we are staying at the forefront of this once-in-a-generation opportunity.”
In a video conference discussing the results with UBS analyst Doug Mitchelson (the company rotates a single moderator of the Q&A, a variation from the traditional open Q&A of most earnings calls), executives explained the recent decision to increase the middle and top subscription tiers by $1 and $2, respectively, starting in the U.S. next month.
“There is no connection between the plan to grow the business and pricing,” said CFO David Wells. “‘Price is all relative to value,” added CEO Reed Hastings. Premium shows like David Fincher’s Mindhunter, which are widely available in 4K, justify the increase. At the same time, Wells added, “We’re in no hurry.”
Spending on content for 2018 will land in between $7 billion-$8 billion on a P&L basis, executives said, up a tick from chief content officer Ted Sarandos’ recent projection of $7 billion. The goal of all of that spending by Netflix and other tech behemoths (which rival John Landgraf of FX Networks recently said made competing for shows feel like “getting shot in the face with money”) is to produce a “steady drumbeat of the new show you can’t live without,” Sarandos said.
In a rapid-fire Q&A that kept Mitchelson gamely batting the ball back across the net, execs also weighed in on Disney’s coming OTT shift and withdrawal from Netflix; Amazon’s recent struggles; and whether the company would take a look at the troubled assets of The Weinstein Company.
On the last topic, Sarandos said, “There’s a lot of smoke to clear.” He added that current output deals with TWC for film as well as second windows on select TV titles “are not material.” Hastings emphatically put in, “It’s extremely unlikely for us to be a bidder.”
Regarding Disney’s planned retreat, Hastings noted the first-window movie and TV deals only extend to three international territories. Sarandos was sanguine about it, saluting all companies “trying to make over-the-top exciting.” Likening the situation to episodic suppliers and networks, who both compete and transact content deals, he shrugged, “We’re ready for them when they’re ready to partner.” Asked about reports that Amazon’s Jeff Bezos has sounded internal alarms about Amazon Studios, even before allegations of sexual abuse sidelined Roy Price, saying he wanted to find the next Game of Thrones, Hastings joked, “So is [HBO chief] Richard Plepler!” Chuckled Sarandos, “So is Sarandos.”
As much as the war chest and shock-and-awe levels of financial resources help his sales pitch to talent, Sarandos said moves like persuading Shonda Rhimes to leave her longtime home at Disney/ABC for an overall deal at Netflix were not purely about money. With a focus on providing freedom and lack of boundaries for creators, “We have been working to create a place where Shonda … can get outside the box a little bit,” Sarandos said. “That had a lot more to do with our attractiveness than our ability to outbid ABC.”
Execs project new subscription levels in the traditional peak season of the fourth quarter won’t quite match the record levels of 7 million-plus new customers in the fourth quarter of 2016, the company warned. Also, they advised of some impact of heavy marketing spending to promote the company’s expanding treasure chest of content in the U.S. “We spend disproportionately in the U.S. to generate media and influencer awareness for our programming which we believe, in turn, is an effective way to facilitate word of mouth globally,” the letter to shareholders said.
Wells expanded on the notion of how Netflix, now 20 years old, expects to handle adulthood as a company. “It’s hard,” he said, alluding to the task of measuring growth and scale and judging when and how much to invest. “As we continue to grow, the large background force is the incremental adoption of internet entertainment.” Because other options exist, some of the quarterly results represent “the flattest growth that we’ve seen.” But a lot of that is due to the company’s commitment to reinvesting in content at unprecedented levels.
Instability in the distribution landscape, as viewers cut or shave the cord and traditional players roll out skinny packages and networks explore stand-alone offerings has only benefited Netflix, the company argued. “Ironically, as linear networks move outside of the traditional bundle and into direct-to-consumer applications, we are working more closely than ever with MVPDs/ISPs and other distributors” to drive subscriptions, the company said.
In a characteristically cheeky flourish, the end of the video presentation saw three of the top execs don “ugly” holiday sweaters, plugging a co-promotion with Target in advance of the October 27 launch of Season 2 of Stranger Things. “We’re learning how to do merchandising,” Hastings explained with a sly smile.
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