7 Million New Subscribers Helped Netflix Beat Its Own Financial Targets

Anders Bylund, The Motley Fool

Updated Tue, Oct 16, 2018, 7:31 PM

Netflix's third-quarter results: The raw numbers

Metric	Q3 2018	Q3 2017	Year-Over-Year Change
Revenue	$4.00 billion	$2.99 billion	34%
Net income	$403 million	$130 million	210%
GAAP earnings per share (diluted)	$0.89	$0.29	207%
Free cash flow	($859 million)	($465 million)	N/A
Total streaming subscriber additions	6.96 million	5.30 million	31%

Data source: Netflix.

A wide-eyed young couple shoveling popcorn into their faces in front of the TV.

Image source: Getty Images.

What happened with Netflix this quarter?

Netflix provided guidance targets on 27 different business metrics for this quarter. The company exceeded these estimates in all 27 cases, from subscriber growth and revenue to domestic operating profit and international profit margin.
Bottom-line earnings had been projected to land near $0.65 per share but came in at $0.89. This figure included a $0.10-per-share benefit from unexpected tax and currency effects. The rest of the surprise rested on rapid subscriber growth.
Netflix now serves 58.5 million domestic subscribers and 78.6 million customers overseas, for a grand total of 137.1 million. That's up from 52.8 million, 56.5 million, and 109.3 million, respectively, in the year-ago period.
The average Netflix subscriber paid an even $10.00 per month for the service in the third quarter, an 8% year-over-year boost.

What management had to say

Subscriber additions will remain essential to the Netflix story for many years to come, but the company is changing its reporting of these figures. Arguing that the number of paid subscribers offers a more predictable view of the business than the total figure -- which also includes users still enjoying a free trial promotion -- Netflix will shift its reporting focus toward that metric.

Two charts showing year-to-date subscriber growth for Netflix over several years. The graph for paid subscribers, on the right, presents smoother trend lines than the total subscriber chart on the right.

Image source: Netflix.

"Because growth in paid memberships is more steady, our forecast for paid net adds has been historically more accurate than our total net adds forecast," the management team wrote in the letter to shareholders. "For example in Q2 '18, our paid net adds forecast was off by 11% compared to a 17% variance for total net adds forecast. ... As a result, starting with our earnings report in January 2019, we'll only guide to paid memberships; a year after that, in 2020, we'll cease reporting on end-of-quarter free trial count."

At that point, the charts and reported numbers will focus solely on the paid subscriber figures. It's not a huge difference, but the paid-up trends are drawn with a noticeably steadier hand.