Netflix (NFLX - Get Report) has long been a polarizing company, and few things have been more polarizing about it than the many billions the streaming giant has chosen to invest in original programming to differentiate its services. On Monday afternoon, the company did a lot to validate those bulls who have defended its heavy-spending ways.
In its third-quarter report, Netflix disclosed its streaming subscriber base grew by 3.57 million sequentially to 86.7 million (83.28 million paid, the rest on free trials), easily topping guidance for 2.3 million net subscriber adds. U.S. subscribers grew by 370,000 (above guidance of 300,000) to 47.5 million; international subscribers grew by 3.2 million (above guidance of 2 million) to 39.25 million. On an annual basis, the subscriber base grew by 25%.
In addition, Netflix guided for 5.2 million net adds in the fourth quarter -- 1.45 million in the U.S., 3.75 million elsewhere. That's down a bit from the 5.59 million achieved in last year's strong fourth quarter, but still better than expected and good for 23% annual growth.
Shares spiked after-hours and are up 17.4% in pre-market trading Tuesday to about $117 thanks to the numbers, hitting their highest levels since last December. It's all quite the change of pace from July, when Netflix plunged due to disappointing second-quarter subscriber adds and third-quarter guidance.
For those curious, Netflix also reported revenue of $2.29 billion (up 32% annually) and EPS of 12 cents, topping consensus analyst estimates of $2.28 billion and 6 cents. And fourth-quarter EPS guidance of 13 cents is above a 7-cent consensus. But it's the subscriber figures that are once more taking center stage.
The diminishing impact of the price hikes Netflix imposed earlier this year on existing users boosted subscriber growth, as did continued momentum for the international launches seen in January -- Netflix expanded into 130 new markets that month, including India, Russia, Turkey and Vietnam. But Netflix specifically singled out "the [subscriber] acquisition impact of our originals" as being responsible for its better-than-expected international growth, which drove most of the third-quarter subscriber beat.
The company added season two of Narcos, which debuted on Sept. 2, had "a positive impact on member acquisition across all of our markets." Looking at U.S. growth in particular, the strong reception seen for Stranger Things, which arrived on July 15, may have helped out. The Crown, a drama about Queen Elizabeth II that CEO Reed Hastings proclaims to be some of the most impressive programming he's seen, debuts on Nov. 4.
These content investments certainly don't come cheap. On a profit-and-loss (income statement) basis, Netflix has a $5 billion 2016 original content, and has set a $6 billion budget for 2017. The company's streaming content obligations have risen to $14.4 billion from $10.9 billion at the end of 2015, and the streaming content liabilities on its balance sheet -- whether for original or third-party material -- have risen to $6.5 billion from $4.8 billion.
Also: While EPS was positive, Netflix posted third-quarter free cash flow of -$506 million, worse than the -$252 million posted a year ago. This is partly the result of Netflix directly handling production of more of its original content, something that results in higher up-front cash payments but gives it stronger content rights, and which it insists lowers costs over the long run.
All of this spending will help Netflix release 1,000-plus hours of original content in 2017, up from 600-plus in 2016. A growing portion of this content involves material specifically meant for foreign audiences, such as Mexican series Club de Cuervos and French series Marseille.
The spending has put studios and cable networks on edge over Netflix's massive clout and impact on content prices, and raises the spectre of an industry backlash. And Netflix's decision to prioritize spending on original material and a small number of hit third-party shows and movies has diminished the size of its total library.
But right now, it's hard to second-guess the decision-making of Hastings & Co. Consumers have signaled their approval of Netflix's content strategy with their wallets, and that's leading investors to do the same.
Netflix's earnings were previously covered through a live blog featuring TheStreet's Eric Jhonsa and Leon Lazaroff.