Netflix Achieves Record High Earnings, Supports Wall Street

Netflix Inc hooked 7 million new streaming subscribers from July to September, a third more than Wall Street had expected, guaranteeing investors who had worried that the company was facing sluggishness in its fast-paced growth.

The record number of additions in the third quarter brought Netflix’s customer base to 137 million worldwide, confirming its ranks as by far the world’s largest online subscription video service.

Netflix shares have already been up about 78 percent so far in this year. It now soared 14 percent to $394.25 during after-hours trading, and boosted other high-tech stocks.

The leap in subscribers marked a sharp turnaround from three months ago, when investors sent Netflix shares tumbling 14 percent after it failed to reach Wall Street’s subscriber growth targets.

“The question at the end of Q2 was whether that miss was an aberration or signs of a longer-term slowdown in the business,” said Forrester Research analyst Jim Nail. “The answer: an aberration, likely the results of a somewhat low volume of new content last quarter.”

Netflix results sent shares of Alphabet Inc, Facebook Inc, and Amazon.com Inc up about 1 percent higher in extended trade. The four compose the so-called FAANG group of high-growth companies that in recent months has lost some of its steam after market-leading gains in recent years.

Netflix is currently investing more than $8 billion in entertainment programming this year to lure new customers around the world. In the third quarter, it released its largest slate of original TV shows and movies to date, including new seasons of hits such as “Bo?Jack Horseman” and “Orange is the New Black.”

This paid off when it comes to gaining new subscribers. Wall Street analyst had expected Netflix to add about 5.2 million streaming customers in the quarter.

The company topped forecasts in both the United States and international markets. Netflix said that it signed up roughly 1.1 million subscribers in the United States, above analysts’ estimate of 674,000, according to Refinitiv. Its international business gained almost 5.9 million subscribers, compared with the average analyst estimate of 4.5 million.

In a letter to shareholders, Netflix said that it saw “strong growth broadly across all our markets including Asia.”

Executives said that audiences welcomed shows tailored specific markets, such as “Sacred Games” in India, which the company saw as key to its expansion.

“We feel like we have a long, long runway ahead of us in India,” said Greg Peters, who is the chief product officer, during a post-earnings video interview.

For the present quarter, Netflix predicts that it will gain 1.8 million customers in the United States and 7.6 million in international markets.

“We want to assure investors that we have the same high confidence in the underlying economics as our cash investments in the past,” said Netflix.

During the September quarter, Netflix added about 676 hours of original programming in the United States, a 135 percent increase from a year earlier, according to Cowen and Co analyst.

Netflix has been borrowing heavily to fund such rapid growth in TV shows and movies. It has given a net $7.5 billion of bonds in less than three years, although that could carry a cost in a changing economic environment.

“Rising interest rates could make Netflix increasingly vulnerable to higher cost of capital,” said CFRA research analyst Tuna Amobi.

In the same manner, Netflix is also facing competition from deep-pocketed companies such as Amazon and new streaming services from Walt Disney Co and AT&T Inc that are expected late in the coming year.

Netflix said that it expects operating margin at the lower end of the 10 percent to 11 percent range for the full year 2018. It cut its projection of negative cash flow to nearer to $3 billion. The company had previously predicted $3 billion to negative $4 billion.

Neil Begley, who is a senior analyst at Moody’s Investors Service, estimated that Netflix may spend closer to $9 billion on content this year. However, he also said that keeping negative free cash flow to about $3 billion would not change the company’s capital needs.

“It’s probably still be the case that they’re going to stick to raising debt twice a year,” he added.

Netflix net income increased to $402.8 million, or 89 cents per share, in the third quarter that ended on September 30, higher from $129.6 million, or 29 cents per share, a year earlier. That topped analysts’ average estimate of 68 cents, according to Refinitiv.

Total revenue climbed to $4 billion, in line with analysts’ expectations, from $2.98 billion a year earlier.

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