After a second quarter that marked Netflix Inc.'s first drop in domestic streaming subscribers, investors and analysts have been focused on the impact of new streaming services on Netflix's growth prospects, and executives sought to assuage those concerns as it reported a third quarter slightly behind guidance.
The company added 6.8 million paid streaming video members globally during the third quarter, compared to a prior forecast of 7.00 million paid net additions. That included 500,000 net U.S. adds, or 300,000 below the company's guidance. International streaming net additions came to 6.3 million, compared with Netflix's earlier 6.20 million projection.
"It was the most accurate member forecast we've had in years," CEO Reed Hastings said on an Oct. 16 earnings webcast.
The company saw elevated churn, or movement of members out of the platform, continue in the quarter after a domestic price increase early in the year, driving slightly weaker-than-expected U.S. growth, CFO Spencer Neumann said on the webcast. The unexpected rate of churn helped drive the company to forecast full-year membership additions of 26.7 million, down from 28.6 million in the prior year.
Adding to the "prudent" full-year outlook is the rise in competition, Neumann said.
In the fourth quarter, Netflix will compete with new services such as The Walt Disney Co.'s Disney+ as well as Apple Inc.'s Apple TV+. AT&T Inc.'s WarnerMedia plans to launch its HBO Max streaming service in 2020.
"Fundamentally, there's not a big change here," Hastings said of the competition, pointing to the fact that Netflix has already been competing with various streaming platforms as well as broadcast and cable television.
"The launch of these new services will be noisy. 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," the company said in its same-day earnings release. It pointed to Canada, where membership growth there has been almost identical to the U.S., even though its biggest U.S. streaming competitor Hulu LLC does not operate in Canada.
Despite the third-quarter miss in U.S. memberships, partially offset by better-than-forecast international growth, SunTrust Robinson Humphrey equity analyst Matthew Thornton called the results "better than feared."
Fitch debt ratings analyst Patrice Cucinello said the results represented a "sigh of relief" after the second-quarter decline.
Increased competition across the television landscape is growing competition for talent and production resources. That has driven costs for a television show up about about 30% from a year ago, chief content officer Ted Sarandos estimated on the webcast. Despite growth in costs, the company maintained its full-year cash-flow deficit forecast of $3.5 billion.
Outside of membership growth, the company beat expectations on profitability. Netflix's third-quarter revenue totaled $5.25 billion, up 31.1% year over year from $4.00 billion and in line with consensus expectations. Net income came to $665 million, or $1.47 per share, up from $403 million, or 89 cents per share, in the third quarter of 2018.
The S&P Global Market Intelligence consensus EPS estimate for the third quarter was $1.05 both on a GAAP and normalized basis. Netflix said its EPS benefited from a $171 million noncash unrealized gain from foreign exchange remeasurement of its euro-denominated debt.
Netflix expects fourth-quarter revenue of about $5.44 billion, driving net income of $232 million, or 51 cents per share. The company projects it will add 7.60 million global paid net streaming subscribers in the fourth quarter. The consensus EPS estimate for the fourth quarter is 85 cents on a normalized and GAAP basis, according to S&P Global Market Intelligence.
Netflix stock was up more than 9% in after-market speculation following the earnings webcast.