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Netflix returns to subscriber growth in ‘make or break’ quarter

“Stranger Things 3" cast members
“Stranger Things” stars Noah Schnapp, left, Finn Wolfhard, Millie Bobby Brown, Sadie Sink and Caleb McLaughlin.
(Netflix)

Streaming behemoth Netflix on Wednesday said it grew its subscribers by 6.8 million in the third quarter, allaying analyst concerns that it was experiencing a slowdown in growth as new rivals enter the market.

The Los Gatos, Calif., company said it had 158.3 million global subscribers, less than analyst projections of 162.5 million subscribers. But the results were an improvement from Netflix’s last quarter, when the streaming service reported a loss of 126,000 subscribers in the U.S., its most notable decline since 2011 in its biggest market.

Most of the subscriber growth was driven by gains in international markets such as Spain and the popularity of its sci-fi series “Stranger Things,” which was viewed by 64 million households in the first four weeks of its third season.

“Netflix’s subscriber growth got back on track in Q3,” Neil Begley, a senior vice president at Moody’s, said in a statement.

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The company’s third-quarter revenue grew 31% to $5.2 billion, close to analyst expectations. Net income was $665.2 million, up from $402.8 million a year ago and well above analyst projections of $471 million.

Investors cheered the results. Shares rose as much as 9% in after-hours trading. Shares closed Wednesday at $286.28, up nearly 1%.

Bank of America Merrill Lynch analysts said in a note previewing the third-quarter earnings that the results would be a “make or break quarter for confidence in Netflix’s structural growth.”

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“The real test for Netflix is to show that its explosive growth, when it comes to adding more subscribers, is continuing,” Haris Anwar, a senior analyst with Investing.com, said in a statement. “This is especially critical at a time when a number of deep-pocketed rivals — including Apple, AT&T and Disney — are launching their own services.”

Some analysts were concerned the decline in U.S. subscribers in the previous quarter would make it difficult for Netflix to raise prices, seen as key to making the company’s large spending on content sustainable.

Netflix said it has a budget to spend roughly $15 billion in cash this year on content. The amount of money is expected to grow to $35 billion in 2025, according to Pivotal Research Group. Meanwhile, the company’s long-term debt, which is fueling its content spending, has grown to $12.4 billion, compared with $8.3 billion a year ago.

Earlier this year, Netflix raised the cost of its subscription plans for U.S. customers, a factor the company cited in its second-quarter subscriber decline. Netflix’s most popular plan, a standard subscription, went up $2, to $12.99 a month. A basic monthly subscription rose $1, to $8.99.

Meanwhile, new competitors including Disney and Apple are launching their services next month at a fraction of the cost. Disney’s streaming service, Disney+, will start at $6.99 a month, while Apple TV+, which launches with nine original programs, will cost $4.99 a month.

Netflix executives believe that the company’s focus on providing the best streaming experience for customers helps set it apart from the competition. In the third quarter, Netflix released the third season of “Stranger Things” and the last season of “Orange Is the New Black,” which analysts anticipated would help boost the number of subscribers.

Aside from hit shows such as “Stranger Things,” non-English-language series are also performing well, with the third season of “La Casa de Papel,” a Spanish crime drama, drawing 44 million households in its first four weeks. The company says it has released 100 seasons of original local-language scripted series and plans to do more. Netflix also rolled out a new lower-cost plan in India for mobile devices.

The company has deals with top Hollywood talent such as Ryan Murphy, Shonda Rhimes and “Game of Thrones” showrunners D.B. Weiss and David Benioff.

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In a call with analysts, Netflix Chief Content Officer Ted Sarandos also touted the value of Netflix’s expanding feature film business. The company has worked with big-name Hollywood directors including Martin Scorsese, whose much-anticipated gangster film, “The Irishman,” premieres in November. It’s one of eight Netflix movies that will roll out later this year.

“These are the most iconic directors of our time, making their next film at Netflix,” Sarandos said.

In a recent interview with The Times, Sarandos said Netflix will continue “doing what we’ve been doing, which is make the best possible content and deliver it seamlessly.... The bigger you are, the more distractions you have to your core business, the more likely you can’t move as quickly as we’ve been able to through our history.”

Still, the company said it expects its growth in subscribers to slow down year over year. For 2019, Netflix expects it will add 26.7 million subscribers (compared with the 28.6 million it added in 2018).

The company says its forecast reflects “less precision in our ability to forecast the impact” of a fourth-quarter content slate, including large movie launches, the effect of its earlier price changes and the new competition.

“The launch of these new services will be noisy,” Netflix said in a letter to its shareholders. “There may be some modest headwind to our near-term growth, and we have tried to factor that into our guidance. In the long-term, though, we expect we’ll continue to grow nicely given the strength of our service and the large market opportunity.”


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