The Wayback Machine - https://web.archive.org/web/20131025174349/http://www.nytimes.com/2013/10/22/business/media/netflix-hits-subscriber-milestone-as-shares-soar.html
Edition: U.S. / Global

Business Day Media & Advertising

Netflix Hits Milestone and Raises Its Sights

Barbara Nitke for Netflix

The Netflix series "Orange Is the New Black" will "end the year as our most-watched original series ever," the company's chief executive, Reed Hastings, said on Monday.

Content is the new black.

Netflix

A scene from the Netflix comedy show “Derek” with Ricky Gervais, left, Karl Pilkington, and Kerry Godliman, right.

At least that is the message from the latest results of Netflix, which on Monday announced a new subscriber milestone — 40 million worldwide — on the strength of exclusive TV shows like “Orange Is the New Black.”

But with each record, Netflix faces the same, pressing question: Can it go on adding subscribers by the millions to keep shareholders happy?

On Monday, they were clearly happy about Netflix’s third-quarter results. The company’s stock, which had almost tripled this year, rose more than 11 percent in after-hours trading to around $394, beating its previous 2011 high. The shares had ended at $354.99, up $21.49, or 6.44 percent, in regular trading.

But the Netflix chief executive, Reed Hastings, and chief financial officer, David B. Wells, sought to temper enthusiasm about the stock in their quarterly letter to shareholders. “Some of the euphoria today feels like 2003,” they wrote, referring to the year when Netflix’s stock price quintupled before sliding back to single-digit levels.

“We do our best to ignore the volatility in our stock,” they wrote.

Instead, Netflix executives tried to steer investors toward a measurement they contend is even more important — the growing number of streaming subscribers to the service, which has surpassed the 30 million mark domestically for the first time.

The company said it added 1.3 million streaming subscribers in the United States in the third quarter, pushing its subscriber total to the high end of its own projections.

In international markets, where it is less established, Netflix added more than 1.4 million subscribers for a total of 9.2 million.

Those subscribers have allowed the company to spend enormous sums of money on content with a little profit left over.

In the third quarter, Netflix reported revenue of $1.11 billion, up from $905 million in the period a year earlier. Net income jumped to $31.8 million, or 52 cents a share, from $7.7 million, or 13 cents a share, in the period a year earlier.

In an analysts’ interview on Monday afternoon, Mr. Hastings and the Netflix chief content officer, Ted Sarandos, said the company continued to improve its programming, its personalization technology and its marketing to draw new households to the service.

They also acknowledged that the company was in talks with some cable operators about making Netflix accessible through set-top boxes, but they said that this sort of integration would take years to achieve.

Three months ago, Netflix projected that it would end the third quarter with 30.5 million to 31.3 million streaming subscribers in the United States. On Monday, it said the total was 31.1 million, and released a projection for the fourth quarter of 32.7 million to 33.5 million.

The company also said it expected to cross the 10 million mark internationally sometime in the fourth quarter.

Netflix has previously predicted that someday (it hasn’t said when) it could have 60 million to 90 million members in the United States, and even more overseas.

In his letter on Monday, Mr. Hastings, who frequently singles out HBO as Netflix’s chief competitor, hinted at a specific number he’s aiming for: “We have done well, but we have a long way to go to match HBO’s 114 million global member count or their well-deserved Emmy Award leadership.”

Or, HBO might well add, its annual income of $1.6 billion. But HBO has had a serious head start.

One of Netflix’s first original series, “House of Cards,” picked up a Primetime Emmy Award for directing last month, but lost in most of the other categories it was nominated in.

Confirming what analysts expected would happen, Mr. Sarandos said that Netflix saw a “measurable bump” in viewership of “House of Cards” around the time of the Emmys.

Now, the hit show “Orange Is the New Black,” appears to be overtaking “House of Cards.”

“Orange,” which stars Taylor Schilling as an inmate in a women’s prison, had its debut at the beginning of the third quarter.

On Monday, Mr. Hastings — without sharing any specific ratings figures as Netflix has steadfastly refused to do — told shareholders that “Orange” would “end the year as our most-watched original series ever.”

The shareholder’s letter barely mentioned another series that Netflix introduced in America in the third quarter, a half-hour series by Ricky Gervais called “Derek,” which had its debut in Britain last year.

That show has received little of the critical acclaim that accompanied “Orange,” and without ratings, it is very hard to tell whether it has succeeded or failed.

As important as original series are — they have, as Mr. Sarandos said Monday, a “particular halo effect on the brand” — the typical Netflix subscriber still spends a lot more time streaming repeats of TV shows that had their debuts elsewhere.

Of every dollar the company expects to spend on programming next year, more than 90 cents will go toward the library of acquired series and movies and the remainder will go toward original series.

Furthering the point, during the analysts’ interview on Monday, Mr. Hastings would not wager a guess about how many new subscribers signed up in the third quarter thanks to “Orange” or “Derek.”

Michael Pachter, a Wedbush Securities analyst who is known for his skepticism of Netflix, asserted that the company remains significantly overvalued. He cited the fact that its free cash flow of $7 million was lower than its profits in the quarter, reflecting the future costs it will incur for content.

That said, “the subscriber guidance number is probably the only one that anyone cares about,” Mr. Pachter said Monday. “They’re guiding to similar growth year-over-year, which is a great result if it happens.”

This article has been revised to reflect the following correction:

Correction: October 25, 2013

An article on Tuesday about third-quarter earnings and subscriber numbers for the streaming service Netflix referred imprecisely to its comedy series “Derek.” While Netflix introduced the show in the United States after buying the rights to it, the show is not “original” to Netflix; it had its debut in Britain last year.