Netflix misses subscriber addition target in Q3, despite Asian growth

After benefiting from a surge in subscriber additions during the first half of the year due to the Covid-19 pandemic, video streaming service Netflix has seen its user addition numbers and average spend cool in the third quarter of this financial year. Instead, the company failed to meet its own user metric forecasts (2.2 million net memberships in Q3, compared to 2.5 million guidance; the firm added 6.8 million in the corresponding period last year) for the quarter, even as production of several of its key shows slowly returned to the floor. 

Asia-Pacific was the largest contributor overall to Netflix's paid membership this quarter and the region's revenue grew 66% year on year. According to a letter to investors, the firm achieved "double digit penetration of broadband homes in both South Korea and Japan," the note stated."While this is encouraging, we still have much work to do and we're working hard to replicate this success in India and other countries." However, Netflix's net subscriber additions slowed quarter on quarter and year on year in the region. 

Overall, for the third quarter, Netflix reported revenue of $6.4 billion compared to $5.24 billion for the corresponding period last year. Operating income was up from $980 million to $1.3 billion. While the subscriber additions were tepid this quarter, the company indicated that it expects to close the year with record-breaking numbers.

"For Q1‘20, we forecast 6.0 million paid net adds vs 8.8 million in Q1‘19," the note to investors added. "We believe our record first half paid net additions would result in slower growth in the back half of this year. If we achieve our forecast, it will put us at a record 34 million paid net adds for 2020, well above our prior annual high of 28.6 million in 2018."

Netfix is doubling down on its commitment to grow its business in fast-growing markets such as India. The investor letter noted that the firm has, for example, launched a Hindi interface in India, even as it has sewn up deals with the country's most high-profile operator Jio. In Q3, the video streamer launched a bundle with their mobile and fibre broadband plans and will integrate with two of Jio’s set top boxes.

Despite the slowdown in subscriber additions, the third quarter saw a sharp uptick in content creation. "Since the almost-global shutdown of production back in mid-March, we have already completed principal photography on 50+ productions and, while the course and impact of C-19 remains unpredictable, we’re optimistic we will complete shooting on over 150 other productions by year-end," the letter contended. 

As Netflix seeks new audiences, it is investing heavily in local content. For example, in the past quarter, season one of the Mexican telenovela Oscuro Deseo (Dark Desire) was its biggest local language original globally this quarter. Korean dramas continue to travel well throughout APAC and beyond, while anime is another category of content with fans all over the world. In Asia, the non-fiction series Indian Matchmaking, which was watched by a quarter of Netflix's members in India and millions of members outside of India in its first four weeks. 

In the past quarter, Netflix debuted new seasons of The Umbrella Academy and Lucifer and 43 million and 38 million member households chose to watch these titles in the first 28 days respectively. In mid-September, Ryan Murphy’s Ratched, a thriller based on the character from One Flew Over the Cuckoo’s Nest was watched by 48 million households, The streamer's top two documentary feature films (The Family Next Door and The Social Dilemma)  were released in Q3 .