Television series, documentary and movie streaming colossus, Netflix, reported third quarter results which beat analysts’ subscriber and earnings estimates. Global paid net subscriber additions came in at 4.4 million, topping forecasts for 3.84 million subs. The company ended the period with 214 million paid memberships, up from 209 million in the prior quarter, and from 195 million in the comparable year-ago quarter.
This is a result of the positive effects of a stronger content slate in the second half of the year, after lighter-than-normal scheduling in Q1 and Q2 due to Covid-related production delays last year.
Total revenue for Q3 2021 increased 16.3% year over year to $7.48 billion, in line with market expectations. Revenue growth was driven by a 9% increase in average paid streaming memberships and a 7% improvement in average revenue per membership (ARM). ARM was up quarter on quarter in all jurisdictions except for Europe where it remained flat. For the second consecutive quarter, the Asia-Pacific region was the largest contributor to membership growth.
The operating margin for Q3 expanded by three percentage points to 23.5% relative to the year-ago period. This was due to the timing of content spend, as well as lower than forecast marketing costs. As a result, earnings jumped 83.3% year-over-year to $3.19.
The co-CEO and founder, Reed Hastings, said the fourth quarter will be the strongest content offering yet and is forecasting paid net adds of 8.5 million. This means a bigger content expense for the quarter, as well as lower operating margins, of around 6.5%, due to the back-loaded release schedule.
Free cash flow (FCF), the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets, for the third quarter was -$106 million vs. $1.1 billion in Q3 2020. This was due to the high base in Q3 last year as result of the Covid-related production shutdowns. Year-to-date FCF is a positive $410 million and is expected to be breakeven for the year. Netflix then anticipates being FCF positive on an annual basis in 2022 and beyond.
The streaming giant also announced it would use new metrics for reporting viewership going forward. It will report hours viewed rather than the number of accounts that watched a specific show, to match how outside services measure viewership. And Netflix will also release title metrics more consistently outside of results reporting periods.
Netflix is a high-quality business which is dominating the streaming industry with its content spend. It just won the most Emmys ever for any single network or service in a single season of television, taking home 44 golden statues. At the same time, it is also evolving to capitalize on merchandising and gaming opportunities arising from the library of successful titles it rolls out. Netflix is also no longer in need of external financing to fund day-to-day operations. And despite returning $100 million to shareholders via share buybacks, Netflix still prioritizes reinvestment of cash back into the core business and to fund new growth opportunities. The share is up 25% this year and is trading on a hefty multiple of 59x earnings. We are holders of the stock for the long term in the Cratos BCI Worldwide Equity Fund.