Netflix is on track to exceed $11 billion in revenue this year, according to the streaming giant’s Q3 earning report, which was just released. A statement from the company claims it’s “growing nicely across the world” and that “internet entertainment is delighting consumers”.
Despite a recent price hike in subscription rates, Netflix has over 109 million subscribers and remains at the helm of streaming sites. According to eMarketer, which estimates roughly 2.5 viewers for each paid Netflix subscription, there are an approximate 128 million current users in the U.S., representing a 6.6% jump from last year.
Netflix added 5.3 million new subscribers globally (up 49% year-over-year) this quarter, beating its own projections of 4.4 million new subscribers. The company states that it under-forecasted both U.S. and international acquisition. In addition, year-to-date net adds of 15.5 million are up 29% versus last year. “We continued to benefit from a strong appetite for our original series and films, as well as the adoption of internet entertainment across the world,” the report read in part.
“Netflix hasn’t added as many subscribers in Q3 ever before, so the quarter can be considered a record-breaking one,” said Ville Salminen, owner of streaming news site Cordcutting.com and Netflix tracking site Allflicks. “Of course, we don’t know what kind of an impact Netflix’s recently announced price increase will have on current and potential subscribers. Personally, I’m not too worried. The market isn’t, for sure, since Netflix’s stock has never been higher.”
Eyebrows raised when Netflix upped the cost of its subscriptions last week, but the move didn’t backfire as the company’s shares hit an all-time high on Friday, briefly surpassing $200 for the first time ever. In fact, Netflix is up 60% this year compared with Disney’s 7% decline, Time Warner’s 5% gain, CBS’s 11% drop and the S&P 500’s 14% return.
Netflix bumped up subscription costs on two if its three streaming video plans in the U.S. and kept its basic plan, which allows standard-definition video streaming on one device at a time, at $7.99 a month. The price on its mid-range plan, which allows high-definition video streaming on two devices at a time, went up 10% to $10.99 a month from $9.99. Its top-tier plan, which allows for ultra-high-definition video streaming on up to four screens at the same time, was bumped up 17%, from $11.99 to $13.99 a month.
The up in price will, in part, help fund the company’s massive original content budget of $6 billion this year, up from $5 billion in 2016, and expected growth to $7-8 billion next year. Netflix stands strong behind its goal to self-develop, produce and own outright as many high-quality original shows and movies as possible in lieu of licensing content from networks and studios. The streamer’s formula of putting a lot of money upfront for its own content, then seeing a high return on investment over many years has worked.
Per eMarketer, the streaming behemoth will capture 66.2% of U.S. OTT video users. To put this into perspective, Amazon will have 85.3 million viewers this year, or 44.1% of OTT users.
“We see Netflix continuing to lead the way among digital streaming services and we’re holding to our forecast for growth in the connected TV sector,” said Principal Analyst, Video at eMarketer, Paul Verna. “These trends bode well for Netflix, but the company will face increasingly strong competition from established rivals such as Amazon and Hulu, and from new initiatives from the likes of Apple and Facebook. Those competitors are more broadly diversified than Netflix, which relies almost exclusively on content subscriptions. That means the only lever Netflix can pull is price increases, and with its most recent hike this month, it will not have much margin to squeeze additional revenue out of its users.”
According to eMarketer, this year a total of 222.7 million people in the U.S. will watch digital video content on any device, up 3.2% over 2016. Adults in the U.S. will spend an average 76 minutes per day watching digital video this year, which is up 9.3% over last year. And, for comparison, U.S. adults will spend an average of three hours and 58 minutes a day watching traditional television this year, which reflects a 3.1% drop from last year.
Price hikes tend to unnerve investors and Wall Street, but as a leader in the world of streaming, it’s obvious that Netflix’s price increase was strategically announced before the release of the second season of Stranger Things and other popular offerings.
“The company has surely learned from last year’s very unpopular price increase. Even with the price increase, Netflix’s value proposition is unrivaled in comparison to other streaming services, and especially so for TV show lovers. Netflix is raising the price of its most popular plan by 10%, but the number of TV shows has already risen by 25% from last year,” explained Salminen. Original content, he added, is the best way to attract and retain subscribers. “This is understandable since Netflix’s original content is exclusive to the service and can’t be watched elsewhere. If you want to watch the second season of Stranger Things, you must subscribe to Netflix.”
Netflix has continued for years to up the number of TV shows offered. In October 2015, Netflix offered an approximate 1,100 TV shows in the U.S. and a year later the number was around 1,200. Currently, it’s around 1,500 according to Salminen’s research.
In Q3, the streamer cites a 33% global streaming revenue rise year-over-year, driven by a 24% increase in average paid memberships and 7% growth in ASP. The company’s operating income nearly doubled year-over-year to $209 million with its Q3 global operating margin of 7% putting the streamer right on track to achieve its full year target of 7%.
Netflix also saw a pre-tax $51 million non-cash loss from F/X re-measurement on its Euro bond, or $39 million after tax based on a 24% tax rate, and a higher than expected excess tax benefit from stock based compensation that benefited its tax rate by $5 million versus its forecast.
The foreign currency impact was up $13 million and Q3 international revenue grew 54% year-over-year, excluding currency and the international contribution profit margin of 4.7% exceeded the 2.3% guidance, also due to the timing of content deals.
Forecasts for Q4 include global net adds of 6.3 million (1.25 million stateside and more than 5 million internationally) versus 7 million last year, which was the streamer’s 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. 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.”
Netflix has been focused on a growing global operating margin as its primary profitability metric since hitting its 2020 U.S. contribution margin goal of 40% this past Q1. “This allows us to avoid near-term optimization for specific domestic or international contribution margin targets which could impede our long-term growth.”
The company anticipates this year’s fourth quarter to have a 34.4% U.S. contribution margin, which is a decline both year-on-year and sequentially, as it boosts its marketing investment against a growing content slate. “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. In our international segment, we are on track to generate positive contribution profit for the full year.”
As Netflix moves into 2018, the streamer aims to achieve steady improvement in international profitability and a growing operating margin as its success in many large markets helps fund investments throughout Asia and the rest of the world.