Netflix (NFLX) is trading modestly lower today after it reported Q3 results. GAAP EPS came in at $0.29, which was a bit below prior guidance of approximately $0.32. Revenue rose 30.3% year/year to $2.98 bln, which was slightly better than prior guidance of $2.969 bln. The guidance for Q4 was quite good as NFLX expects EPS of $0.41 and revenue of $3.274 bln, both of which are above market expectations, especially EPS which was well above.
Net subscriber additions (streaming) in Q3 came in at +5.30 mln (+0.85 mln in US and +4.45 mln international), which was well above prior guidance of +4.40 mln and well above its prior year performance of +3.57 mln. In terms of guidance for net adds (streaming), the company expects Q4 to come in around +6.30 mln (+1.25 mln in US and +5.05 mln international). As you can see, most of NFLX's subscriber growth is coming from outside the US.
So why were Q3 net adds so much better than prior guidance? NFLX says it continued to benefit from a strong appetite for its original series and films, as well as the adoption of internet entertainment across the world. For Q4, NFLX is forecasting net adds of 6.30 mln, which is down from 7.05 mln in 4Q16, which was NFLX's all-time high for quarterly net adds. The decline sounds like it may be related to planned price increases in many markets for its HD and 4K video plans while keeping its 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.
In terms of content in Q3, NFLX launched several new series such as the gritty drama Ozark and comedy Friends from College by Nick Stoller as well as Marvel's The Defenders and returning seasons of fan favorites like Narcos and Fuller House. It's also making good strides on original films with the debut of Death Note (based on the popular Japanese IP), Naked (a romantic comedy featuring Marlon Wayans) and To the Bone (an intense drama starring Lily Collins).
In Q4, among other new offerings, Netflix is releasing the second Netflix original series from David Fincher (Mindhunter), new seasons of franchises Stranger Things and The Crown, its first Italian and German original shows (Suburra and Dark) and its most ambitious film yet, Bright, starring Will Smith and directed by David Ayer.
Of note, investment in Netflix originals is over a quarter of the company's 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, NFLX remains quite comfortable with its ability to please its members. Just as Netflix moved from second-run content to licensed originals and then to Netflix-produced originals, the company is progressing even further up the value chain to work directly with talented content creators.
In August, NFLX announced an overall deal with Shonda Rhimes, the creator of global smash hits like Grey's Anatomy, How to Get Away with Murder, Scandal, and others. Netflix also acquired Millarworld, the only M&A transaction in NFLX's 20 year history, the home of legendary comic book writer Mark Millar.
In terms of their competitive position, since 2013, Netflix says it has taken a long term view and it's in the early stages of a worldwide, multi-decade transition from linear TV to internet entertainment. Recently, it's been unfolding right before our eyes: Disney announced plans to launch direct-to-consumer services for ESPN and its other brands, cable network owners are licensing their channels to virtual MVPDs like Hulu, YouTube, Sling TV, and DirecTV Now, CBS' All Access is expanding internationally, Apple is reportedly planning on spending $1 billion on original content and Amazon is streaming NFL games while its Prime Video service has gone global. Facebook launched its Watch tab for original videos.
At the same time, linear TV networks like MTV, A&E and WGN are cutting down on scripted series. Last year, the number of original scripted series on linear TV (across broadcast, premium and basic cable) began to decrease as online services ramped up activity. NFLX believes it's an exciting period and both media and technology companies see the same big opportunity. Netflix has a good head start.
In sum, the stock is down modestly. The EPS miss was a bit disappointing but part of that was from a non-cash loss from F/X remeasurement on a Euro bond. It's also possible the conservatism in terms of net add guidance for Q4 may be having an impact. It seems NFLX is being cautious due to some price increases and the potential churn from that. However, NFLX tends to be overly cautious. They could easily report upside to that number. Overall, after the big Q2 beat in July, this was a more somber result overall but still quite good. All in all, the stock has been making a nice run in recent months, eclipsing $200 for the first time. The longer term trend seems to remain in place. NFLX sees a lot of growth ahead of it.