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Netflix exceeds expectations… finds China solution

Netflix had an unexpectedly successful third quarter, adding 3.2 million members internationally as opposed to the forecast 2 million.

It also gained more than expected in the US (0.4 million v 0.3 million), with the over-performance driven primarily by stronger than expected acquisition due to excitement around Netflix original content.

In its latest set of results, the company says that the regulatory environment for foreign digital content services in China has become challenging. As a result, it now plans to licence content to existing online service providers in the country rather than operate its own service. This will be a near-tern solution, with licensing revenues expected to be modest. However, in the long-term it still hopes to launch its own service.

Without providing any further details, Netflix also says that following the localisation of its service in Poland and Turkey in September, it has seen “nice gains in viewing and retention” and plans to undertake localisation in other markets in the coming months and years.

Netflix forecasts 5.2 million global net adds in Q4, with 1.45 million being in the US and 3.75 million internationally. Its expectation for a moderate year-over-year decline in net adds reflects the completion of un-grandfathering.

Netflix also expects lower net adds in Q1 2017 compared to a year earlier due to its big international expansion at the beginning of 2016. After operating at breakeven, it should start generating global net profits from 2017 onwards.

On the content side, Netflix is now in its fourth year of original content strategy. In 2017, it intends to release over 1,000 hours of premium original programming, up from over 600 hours this year. Its expanded content budget in 2017 will amount to around $6 billion on a P&L basis.

Netflix’s global streaming revenues in Q3 amounted to $2.2 billion, of which 40% was generated abroad.

Operating income was $106 million, compared to its $64 million estimate, while net income was $52 million versus a forecast of $22 million.

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