Netflix added a Q3-record 5.3 million memberships globally (up 49 per cent year-over-year) as it continued to benefit from strong appetite for its original series and films, as well as the adoption of Internet entertainment across the world.In a Letter to Shareholders, the streaming giant said that relative to its guidance of 4.4 million net adds, it under-forecast both US and international acquisition. Year to date net adds of 15.5 million are up 29 per cent versus last year.
“We are growing nicely across the world and are on track to exceed $11 billion [€9.35bn] in revenue in 2017,” said the company. “Internet entertainment is delighting consumers, and we are staying at the forefront of this once-in-a-generation opportunity.”
Global streaming revenue in Q3 rose 33 per cent year over year, driven by a 24 per cent increase in average paid memberships and 7 per cent growth in ASP. Operating income nearly doubled year-over-year to $209 million with its Q3 global operating margin of 7.0 per cent putting it right on track to achieve its full year target of 7 per cent.
Domestic contribution margin in Q3 of 35.8 per cent vs. 36.4 per cent last year was below its forecast of 37.1 per cent primarily as a result of the earlier-than-anticipated close of certain content deals.
For Q4, it forecasts global net adds of 6.30 million (1.25m in the US and 5.05m internationally) vs. 7.05 million in the year ago quarter (which was its all-time high for quarterly net adds). “We recently announced price adjustments in many markets to our HD and 4K video plans while keeping our SD plan mostly unchanged (still $7.99 in the US, for instance). Existing members will be notified and their prices will be adjusted on a rolling basis over the next few months. Increased revenue over time will help us grow our content offering and continue our global operating margin growth,” says Netflix.
Netflix says it spends “disproportionately” in the US to generate media and influencer awareness for its programming which it believes, in turn, is an effective way to facilitate word of mouth globally.
In terms of content, Netflix notes that five years ago, it embarked on its original programming strategy and declares itself “very pleased” with its progress in transforming Netflix from a service with not just second-run content but also must-see new releases, such as Stranger Things, Orange is the New Black, House of Cards, Fuller House, Making a Murderer, Narcos, The Crown and 13 Reasons Why.
It says that although it has multi-year deals in place preventing any sudden reduction in content licensing, the long-term trends are clear. “Our future largely lies in exclusive original content that drives both excitement around Netflix and enormous viewing satisfaction for our global membership and its wide variety of tastes. Our investment in Netflix originals is over a quarter of our total P&L content budget in 2017 and will continue to grow. With $17 billion in content commitments over the next several years and a growing library of owned content ($2.5 billion net book value at the end of the quarter), we remain quite comfortable with our ability to please our members around the world. We’ll spend $7-8 billion on content (on a P&L basis) in 2018,” it reveals.
In terms of increasing competition in the sector, Netflix says it is “an exciting period and both media and technology companies see the same big opportunity as we do. We have a good head start but our job is to improve Netflix as rapidly as possible to please our members by earning their viewing time and to stay ahead of the competition in the decades to come”.
Shares closed at a record high of $202.68, having peaked at $202.83.
Commenting on the results, Paolo Pescatore, Vice President, Multiplay and Media, CCS Insight, said that overall, this was another good quarter for the company. “In particular subscriber growth stood out once again which exceeded the previous quarter and for the same period last year. The challenge will be in the next quarter where it might see an impact due to the recent price rises. We reiterate our view that the company can achieve far greater growth in international markets. However, to maintain and, in some cases, exceed growth, Netflix will be forced to raise its spending on content and marketing.”
“These latest set of results support our opinion that it needs to continue acquiring customers quickly, in order to balance its rising costs. With many local providers and operators are strengthening their video services, the competitive environment continues to intensify, and Netflix will face stiffer competition as rivals launch live TV services and move into sports rights, especially in the US. We expect billions to be spent over the next few years as online giants move keenly into the market for video services. It’s a great time to be a content and media owner, as the value firmly lies in great storytelling.”
“Netflix has done a remarkable job of not only investing in original programming on a global scale, but also catering for local taste and is no doubt setting the benchmark for other video services. It is quickly becoming an indispensable part of any content owner’s distribution strategy.”
Gert Rieder, CEO at Falcon Media House, said that although Netflix revenues may still be dwarfed by other dotcom rivals, it has only just scratched the surface when it comes to exploiting the revenue opportunities that it holds.
“Where Netflix has done well to date is to focus on delivering a tailored user experience. One that makes new content easily available for viewers to enjoy. It has invested significant time in understanding what individual consumers want and perfected the art of delivering content that matches viewers’ mood and lifestyle.”
“As the biggest dedicated subscription video streaming service on the market, Netflix often serves as the industry benchmark for delivering over-the-top services. However, in order to stay ahead, Netflix will need to look at how it can further improve the streaming experience across new channels, particularly with regards to delivering quality services in areas with harsh or constrained delivery infrastructure.”
“Even with omnipresent networks and constant connectivity, limited bandwidth causes delays and interference with the stream when consumers are on the move or switch device. As it focuses on international expansion where network connections, bandwidth speed and device preference all vary widely then it will be imperative to make smarter use of existing networks.”
“If it can adapt the routing of video traffic to avoid network congestion and support the capabilities of a target device to offer a superior viewing experience, Netflix will keep its hold on the market and not only continue defending its dominance in saturated markets, but be the leader in new markets as well.”