Netflix is having a good year, as its massive investment into original content is paying off well.
The company has been producing many original programs, such as “Stranger Things,” “Narcos” and “The Crown.” For the coming year, the company says it plans to spend as much as $8 billion on content.
In a letter to shareholders Netflix said “long-term trends are clear” that “the future largely lies in exclusive original content” and less on licensing programs from other content suppliers in Hollywood. In response to more competition Netflix has increasingly focused on signing creative talent and owning its own production and intellectual property.
As a step toward this, Netflix recently signed Shonda Rhimes, the creator of ABC hits like “Grey’s Anatomy” and “Scandal,” to a multi-year exclusive agreement to develop shows for the streaming service. Earlier this year in August, Netflix also announced its first acquisition when it bought comic book publisher Millarworld to gain access to production and intellectual property, such as “Old Man Logan.”
Here is an excerpt from the letter that Netflix wrote shareholders:
Global streaming revenue in Q3 rose 33 percent year over year, driven by a 24 percent increase in average paid memberships and 7 percent growth in ASP. Operating income nearly doubled year over year to $209 million, with our Q3 global operating margin of 7.0 percent putting us right on track to achieve our full-year target of 7 percent. EPS of $0.29 included a pre-tax $51 million non-cash loss from F/X re-measurement on our Euro bond (or $39 million after tax, based on a 24 percent tax rate).
Higher than expected excess tax benefit from stock-based compensation benefited our tax rate by $5 million vs. our forecast. As a reminder, the quarterly guidance we provide is our actual internal forecast at the time we report. We added a Q3-record 5.3 million memberships globally (up 49 percent year over year) as we continued to benefit from strong appetite for our original series and films, as well as the adoption of internet entertainment across the world. Relative to our guidance of 4.4 million net adds, we under-forecasted both U.S. and international acquisition. Year-to-date net adds of 15.5 million are up 29 percent versus last year.
Domestic contribution margin in Q3 of 35.8 percent vs. 36.4 percent last year was below our forecast of 37.1 percent, due primarily to the earlier-than-anticipated close of certain content deals. The foreign currency impact in the quarter was +$13 million, and Q3 international revenue grew 54 percent year over year, excluding currency. F/X-neutral ASP increased 7.4 percent year over year. International contribution profit margin of 4.7 percent exceeded our 2.3 percent guidance, also due to the timing of content deals. For Q, we forecast global net adds of 6.30m (1.25m in the U.S. and 5.05m internationally) vs. 7.05m in the year ago quarter (which was our all-time high for quarterly net adds).
We recently announced price adjustments in many markets to our HD and 4K video plans while keeping our SD plan mostly unchanged (still $7.99 in the U.S., for instance). Existing members will be notified, and their prices will be adjusted on a rolling basis over the next few months. Increased revenue over time will help us grow our content offering and continue our global operating margin growth. We’ve been focused on growing global operating margin as our primary profitability metric since hitting our 2020 U.S. contribution margin goal of 40 percent this past Q1. This allows us to avoid near-term optimization for specific domestic or international contribution margin targets, which could impede our long-term growth.
For instance, we anticipate our Q4’17 U.S. contribution margin will be 34.4 percent (a decline both year on year and sequentially) as we boost our marketing investment against a growing content slate. We spend disproportionately in the U.S. to generate media and influencer awareness for our programming, which we believe, in turn, is an effective way to facilitate word of mouth globally. In our international segment we are on track to generate positive contribution profit for the full year. As we move into 2018, we aim to achieve steady improvement in international profitability and a growing operating margin as our success in many large markets helps fund investments throughout Asia and the rest of the world.
In the last quarter Netflix added 4.45 million international subscribers, while the company forecast about 3.65 million. It added 850,000 U.S. subscribers, compared with its target of 750,000.