Netflix said revenues for the third quarter lifted 31 percent year-on-year to USD 5.24 billion. The company added 517,000 paying customers in the US and 6.255 million international clients in the quarter. The US additions came in below management expectations of 800,000. The board attributed this to a slightly higher than normal churn after the price increase of last year. The second figure was slightly better than the expected 6.20 million.
The operating margin, at 18.7 percent, was clearly better than the expected 15.9 percent. This was due to timing as content and marketing spend shifted to the fourth quarter. The net profit amounted to USD 665 million, boosted by a windfall of USD 171 million due to a revaluation of the loan capital, against expectations of USD 470 million. Content investments in the quarter went to a record USD 3.74 billion. The company’s cash position meanwhile decreased by USD 568 million to USD 4.46 billion.
The growth in the number of streaming customers amounted to 6.77 million quarter-on-quarter and 22 percent year-on-year, while ARPU advanced by 9 percent excluding currency effects. The total number of streaming customers is now at 158 million. Content investments rose 18 percent and are up 24 percent when spread over the past four quarters.
The figures show Netflix's ability to leverage the content spending, with an 18 percent increase in investment resulting in 22 percent more subscribers and 31 percent higher revenues.
Breaking down the results
The company broke down its results into three categories:
- Streaming US: paying customers rose by 0.52 million to 60.6 million, while revenue lifted 25 percent to USD 2.41 billion. The ARPU can be calculated at USD 13.12, up 16 percent. The contribution margin went to 41.1 percent, from 35.5 percent the year before.
- International streaming: paying customers increased by 6.26 million to 94.6 million, with revenues up by 40 percent to USD 2.76 billion. The ARPU here went 4.9 percent higher to USD 9.73 while the contribution margin improved to 20.2 percent from 11.0 percent the year earlier.
- US DVD-by-mail: the company lost 136,000 customers to 2.28 million and revenues slipped 19 percent to USD 71.9 million. The ARPU was pretty much unchanged at USD 10.22. The contribution margin however was high at 61.3 percent because marketing is no longer performed here.
Starting in the next quarter, Netflix will report by region, instead of splitting its geographic distribution into only the US and international. The company will cover four regions: APAC (Asia Pacific), EMEA (Europe, Middle East, Africa), LATAM (Latin America) and UCAN (US, Canada). That said, the contribution margin and guidance for the number of paying customers will not be given per region, but worldwide.
Guidance: free cash flow to improve after 2019
The guidance is made up of the following:
- Subscriber growth for Q4: 600,000 in the US and 7.00 million outside.
- Revenues Q4: USD 2.46 billion in the US and USD 2.92 billion elsewhere.
- Contribution margin Q4: 31.6 percent in the US and 10.6 percent internationally.
- ARPU for Q4 is calculated at USD 13.46 in the US and USD 9.61 outside.
- Free cash flow: negative USD 3.5 billion for 2019. It will improve from 2020 on an annual basis as content investments get increasingly financed internally.
- Operating margin: 13 percent for 2019 and 16 percent for 2020.
- Content investments on a cash basis: USD 15 billion in 2019.
- In 2020, more than 130 seasons will be added to series produced locally (not in the US). The current total is 100, made in 17 countries.
With this guidance, the expected subscriber growth for this year will come out below that of 2018, while the expectation was that 2019 would yield more customers. Netflix mentions increasing competition and the slightly increased churn coming from recent price increases. In addition, there is uncertainty about the numbers of customers that will be generated based on new titles getting launched in Q4.
Upcoming new competition will cause a modest headwind for growth in the short term. However, in the long term "we expect we'll continue to grow nicely given the strength of our service and the large market opportunity".
Competition: room for everyone
With regard to competition, the board noted a number of points. First of all, the company’s attention will remains focused on building a broad portfolio, mainly consisting of originals. Secondly, the upcoming competitors, namely Apple TV+, Disney+, HBO Max and Peacock, are expected to compete less with each other and more with the market for linear television, which is many times larger. There is room for everyone to grow, Netflix said.
The shift from linear to on-demand will also accelerate. And: "While the new competitors have some great titles (especially catalogue titles), none have the variety, diversity and quality of new original programming that we are producing around the world".
