Netflix Subscriber Growth Surges -- WSJ

This article is being republished as part of our daily reproduction of articles that also appeared in the U.S. print edition of The Wall Street Journal (October 17, 2017).

Netflix Inc.'s wagers on original programming and international expansion are paying off as the streaming service again posted strong subscriber growth amid an increasingly competitive streaming video market.

The Los Gatos, Calif., company ended its third quarter with 104 million paid streaming subscribers globally. It added 5.3 million streaming users in total, outpacing the 4.4 million net additions it had projected.

Netflix has been pouring money into original programs such as "Stranger Things" and "The Crown" to fend off competition from other streaming services and continue to attract new subscribers around the world. The company now says it plans to spend as much as $8 billion on content next year -- up from an earlier estimate of $7 billion -- far outstripping the investments expected from rivals Hulu, Inc. and HBO.

Revenue increased 30% to $2.99 billion in the third quarter, slightly topping analysts' estimates, and the company's operating margin expanded.

Shares in Netflix rose nearly 1.3% in after-hours trading Monday. The stock has gained 64% this year though Monday, giving the company a market value of about $87.5 billion.

The company said it now has $17 billion in streaming-content obligations, a measure of current and future costs for content acquisition, licensing and production, an increase from $14.4 billion in the same quarter last year.

Competition for viewers' attention has been getting more fierce. Some content owners, such as Walt Disney Co., are planning to offer their own streaming services, pulling some content from Netflix. Amazon, meanwhile, is boosting its own spending to lure talent and create original shows. Hulu took home best drama at this year's Emmy Awards for "The Handmaid's Tale" -- becoming the first streaming service to win the coveted prize. New competitors are on the horizon, with Apple looking to spend roughly $1 billion to procure and produce original content over the next year.

In a letter to shareholders, Netflix said the "long-term trends are clear" that the company's "future largely lies in exclusive original content," and less on licensing programs from other content suppliers in Hollywood. Netflix said more than one-quarter of its content spending will go toward original content this year, an amount that could eventually reach more than 50%.

"It's an exciting period, and both media and technology companies see the same big opportunity as we do," Netflix said in the letter. "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."

In response to more competition, Netflix has increasingly focused on signing creative talent and owning its own production and intellectual property.

"You can't just be a middle man between the viewer and the network," said Jonathan Hadad, a research analyst at IBISWorld. "You have to be the network."

Netflix recently signed Shonda Rhimes, the creator of ABC hits including "Grey's Anatomy" and "Scandal," to a multiyear exclusive agreement to develop shows for the streaming service.

"It gets very competitive for the handful of superstars, but overall player personnel costs are pretty predictable," Netflix Chief Content Officer Ted Sarandos said on a video chat with an analyst, using a sports metaphor to refer to how Netflix is able to manage content costs. The company also said that in recent years revenue has grown faster than its content budget.

Netflix in August announced its first acquisition, buying comic-book publisher Millarworld to gain access to production and intellectual property such as "Old Man Logan." On Monday, the company said it would look at deals through a creative and content lens and not as a way to diversify its business.

Netflix has been aggressively pursuing global expansion as its core U.S. market matures and as it works to offset growing content costs and original programming investments.

The company added 4.45 million international subscribers in the quarter, compared with its forecast of 3.65 million. It added 850,000 U.S. subscribers, compared with its target of 750,000.

Netflix's faster-than-expected growth is notable as traditional pay-television distributors feel the impact of cord-cutting and customers downgrading to less-costly packages of channels. Concerns ramped up in recent weeks when AT&T Inc. warned that it lost an estimated 390,000 traditional TV customers in the latest quarter -- more than offsetting nearly 300,000 new accounts for its DirecTV Now streaming service. Comcast Corp. has also said it expects to lose subscribers in the third quarter, in part because of customers ditching cable for online substitutes.

Meanwhile, Netflix has increased its promotional activity. In September, T-Mobile US Inc. started offering new and existing family-plan subscribers free access to Netflix. The company also said it plans to increase its marketing spending in the current quarter, which will cut into margins.

The high-octane business model puts pressure on Netflix to continue to add subscribers, and periodically raise its prices -- especially if the streaming giant hopes to increase what until now have been relatively narrow profit margins.

The company's operating margin came in at 7%, compared with its estimate of 6.9%. The fourth quarter is on track for 7.3%, the company said.

Netflix has indicated to Wall Street it would like to be judged more on its revenue and global operating-profit margins than metrics such as subscriber additions. But subscriber growth has continued to remain a focus for investors.

Earlier this month, the company said it would raise prices for its U.S. streaming-video customers, betting that subscribers will tolerate higher monthly fees and help fuel the company's big investments in TV shows and movies. Because the price increase was announced after the quarter ended, the impact won't be reflected in results until the fourth quarter.

With the increased prices, the company expects to gain 1.3 million subscribers in the U.S. in the fourth quarter, down from the 1.9 million added in that quarter last year. Abroad, it expects to add 5.1 million.

Netflix posted a third-quarter profit of $130 million, or 29 cents a share, compared with a profit of $52 million, or 12 cents a share, in the same quarter last year.

Analysts surveyed by Thomson Reuters had projected earnings of 32 cents a share on $2.97 billion in revenue.

Write to Austen Hufford at

(END) Dow Jones Newswires

October 17, 2017 02:47 ET (06:47 GMT)