Netflix surpasses subscription goals as ad-supported memberships increase

By Lisa Richwine, Dawn Chmielewski, Harshita Mary Varghese

LOS ANGELES (Reuters) -Netflix picked up 5.1 million streaming subscribers in the third quarter, topping Wall Street estimates by more than 1 million, and said it expected higher customer growth around the holidays when Korean drama “Squid Game” returns.

Shares of Netflix (NASDAQ:) rose 4.8% in after-hours trading on Thursday following the earnings report. The shares have gained about 47% so far this year.

As the pace of subscriber addition slows, Netflix has been trying to shift investor attention away from sign-ups to metrics including revenue growth and profit margins. It will stop reporting subscriber data from next year, and is touting growth in its ad-supported plans.

The streaming giant said on Thursday its ad-supported service accounted for more than 50% of signups in the third quarter in countries where it was available.

Wall Street had expected Netflix to bring in 4 million subscribers from July through September, according to analysts’ estimates compiled by LSEG. New programming during the period included murder mystery “The Perfect Couple” and romantic comedy “Nobody Wants This.”

Netflix earned $5.40 per share in the quarter, above the consensus forecast of $5.12. Operating margin hit 30% in the quarter, compared with 22% a year earlier.

Revenue rose to $9.825 billion, just ahead of the $9.769 billion consensus forecast.

“On the surface, Netflix is trending in all the right directions,” said Forrester analyst Mike Proulx. “Financially, revenue and operating margins continue to increase and expenses are down.”

But while the customer additions outpaced forecasts, they were below the 8.76 million that Netflix picked up in the year-ago quarter.

“A steep decline in net new subscribers is what’s concerning. While there’s room for net subscriber growth internationally, in the U.S. things are getting tapped out,” Proulx said.

Netflix projected its customer additions for the last three months of the year – traditionally a strong period around the holidays – would outpace the September quarter, though it did not provide a number. The second season of Korean drama “Squid Game” is scheduled for release in late December.

“We’re feeling really good about the business,” Co-CEO Ted Sarandos said in a post-earnings video. “We had a plan to re-accelerate the business, and we delivered on that plan.”

‘CRAWL, WALK, RUN’

The company said its programming volume had picked up following disruptions from last year’s Hollywood strikes. Engagement, the time spent watching Netflix, averaged two hours per day per member.

While Netflix has reported subscriber gains in its ad-supported tier, it does not expect advertising to become a primary growth driver until 2026.

“They consistently remind us of crawl, walk, run and I think, yeah, it’s still definitely the beginning,” said Magalie Grossheim, senior equity research analyst at M Science. “In our data, we continue to see that the selection rate for the ad-supported plan is accelerating in a lot of the mature markets.”

Part of the plan centers around live events including sports, a big draw for advertisers. In November, Netflix will stream a fight between YouTube star Jake Paul and Mike Tyson, followed by two National Football League games on Christmas Day.

The company also plans to increase prices in Spain and Italy on Friday. Earlier this month, it raised prices in a few European markets and in Japan.

Sarandos has rejected the idea of adding Netflix to a discounted bundle with other streaming services such as Walt Disney (NYSE:) and Warner Bros Discovery (NASDAQ:).

“What we’re focused on is adding more and more value to this package,” Sarandos said on Thursday, calling this a “comfortable model” for traditional media companies.