Netflix (NASDAQ: NFLX) had a monster third quarter. The streaming giant bounced back from its disappointing second quarter (in which it still added 5.45 million paying subscribers) to exceed its Q3 projections by adding 6.15 million new subscribers.
The company also delivered earnings per share of $0.89, up from $0.29 during the year-ago period. It was a strong quarter led by international growth, where the streaming leader added over 5 million customers.
In reality, both Q2 and Q3 were strong quarters. It's really a question of whether the company meets the expectations for subscriber growth it sets with its own forecasts, which it did this quarter and didn't in the previous one.
Netflix has built its business on original content. Image source: Netflix.
Forecasting is not exact
CEO Reed Hastings addressed the Q2 and Q3 numbers during Netflix's earnings call. He made it clear that while all reasonable efforts are made to get the number right, there's no way to be exact on a quarter-by-quarter basis.
"I think we're getting a little better on the forecasting, particularly the evolution to paid net adds. So, if you look at that paid net add growth that we showed, you can see how remarkably steady," he said. "I'm afraid the Q2–Q3 story is probably mostly an issue of forecasting, as opposed to anything changing in the business."
New ways to get customers
Netflix has been working with a variety of partners to find new ways to reach existing and potential customers. This encompasses everything from partnering with cable companies to be available through cable boxes to integrating with various set-top boxes. Chief Product Officer Greg Peters explained a new effort the company is focusing on.
"This latest round we're seeing now is bundling, where whether we're bundling with an internet service provider, or a mobile operator, or a pay TV operator," he said. "We can make it even easier for people to find Netflix and try the service out."
That, he explains, allows the company to reach customers who might otherwise have been averse to joining the service. "What we're seeing here is that this allows us to access a set of subscribers, a consumer demographic which might be less technology early adopter than the folks that are signing up with us directly," he explained.
How does Netflix feel about pricing?
The streaming giant has carefully raised prices a handful of times. Prices rose in the U.S. at the end of 2017, and more modest increases could eventually come. Peters explained the company's feelings about how it decides to raise prices.
"I think what we're seeing is reinforcing the core theory that we have, which is our job is to focus on, invest in providing our members incredible experiences, more great content, great product experiences," he said. "When we do that and we do it well, we earn the right to increase price a bit, and then we take that new revenue, invest it back into the model, and that sort of continuous positive cycle we get to keep going. We foresee that will keep going for many years in the future."
Ignore the short term
It's silly to judge Netflix based on how it performs in any single quarter. The company has made massive investments in content and international expansion. If it reaches its subscriber goals over the long term, that's more relevant than how any one quarter breaks down.
Netflix has shown incredible year-over-year growth, and there's no sign it's slowing down any time soon. The company clearly has a business model that works -- something it has proven in dozens of countries. Now it simply needs to keep doing what it's doing, and that should work for a long time to come.
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