Why Netflix performs the Strongest Q3 earning?

$Netflix(NFLX)$ has surged nearly 14% after hours following its strong Q3 results where it returned to growth, beating consensus on subscribers, revenues and profits, after two quarters' miss. Besides, process of ads business is faster than expected.

Why Netflix Q3 performance beat that much?

The most important indicator for Netflix's share price is neither revenue or profit, but Numbers of subscribers.

Net subscribers increased 2.41 million in Q3, vs the market consensus 1.03 million.

By geo, North America increased by 104k vs consensus of -271k; EMEA (Europe, Middle East and Africa) increased 568k vs consensus of 12k; Latin America 312k vs market consensus 221k; while Asia-Pacific increase 1.43 million vs consensus1.26 million.

It is the first time North America get net positive growth since the year. Several hot dramas Monster: The Jeffrey Dahmer Story, Stranger Things S4, The Gray Man, have made great contributions. Interestingly, These horror elements shows fit tastes of North American and European audiences. As a result, North America and Europe together have nearly 900kmore subscribers than the market expected.

Asia-Pacific region has also adopted localization strategy. For example, Extraordinary Attorney Woo in Korea and Delhi Crime in India. Asia-Pacific has become the fastest growing region of Netflix users.

But monetization also counts.

Netflix's revenue this quarter was US $7.93 billion, up 5.9% year-on-year, beat the market consensus of US $7.85 billion, driven by a 5% increase in average paid memberships and a 1% rise in ARPU.

Among them, due to the price increase in North America, ARPU increased by 12% year-on-year to reach 16.37 US dollars; Latin America rose by 9% year-on-year and 16% in local currency; Asia-Pacific region-13% year-on-year, compared with-3% in local currency; While EMEA area is-7% year-on-year, it is 7% in local currency.

Currency has a great influence on Netflix's performance. EMEA's growth was totally offset by depreciation of correncies.

Asia-Pacific's decline is mainly due to the fact that the higher growth rate of India, which offers a lower price. With the increasingly close cooperation between Netflix and Bollywood, the growth rate of Netflix India market is still attractive.

Why Netflix speed up advertising business?

Netflix announced the launch of a new "basic package" with advertisements in the United States and 11 other markets a week before the financial report. The management is more confident that this will not have a great impact on the existing package users.

Last week, it was reported that hundreds of advertisers had joined Netflix, and almost ran out of advertising space in the early stage. This shows thatThe market demand for Netflix advertising is very strong. Netflix's partner$Microsoft(MSFT)$May also be the beneficiary of this cooperation.

At present, Netflix has not disclosed more information on advertising pricing, but it is certain that,Netflix's entry into advertising business has the greatest impact on traditional cablenet. $Comcast(CMCSA)$$AT&T Inc(T)$$Walt Disney(DIS)$

We believe that advertising will become the second growth curve of Netflix, at the same time, it can also produce synergy with existing subscription packages.And further solve the problem of shared accounts.

Netflix hopes to find a balance between shared accounts. To provide low-cost packages to price-sensitive users, while add some advertising business, on the other hand, they don't want affect the original users.

As for payment, there are two choices, "separate payment" or"payment on main account"

3. What challenges will Netflix shall face in the future?

For Q4 performance guidance, Netflix is both confident and conservative.

The company expects 4.5 million new subscriptions, beats market consensus of 3.93 million, but the revenue guidance is 7.8 billion US dollars, less than the market expectation of 8 billion US dollars.Two reasons, One is currency headwind, the other is the new subscription packge with lower prices.

The company said it would stop forecasting the increase of paying users, means investors should focus on cash realization instead of user growth.This will change the valuation metrics.

APRU was once used as an important index, it will be replaced by some advertising revenue in the future. Because the pricing method of advertising revenue is unclear and the profit rate is different, it is difficult to estimate the synergy effect with existing business.Therefore, it is currently in a vacuum period of valuation, and the range of stock price would be large.

Now two issues are worthy of attention:

1. Stabilization of high ARPU areas (North America, Europe, Japan and South Korea).

2. Meet with users' content preferences.(Competition with Disney+ etc.)

I'm afraid this is also an important reason why Netflix's financial report emphasizes that the viewing time this quarter exceeds Prime and Disney +. 

Market share of viewing time of users with more than 2 people in August

# Will you buy NFLX after its surging margin and sub?

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