Netflix Reports Mixed Q3 Earnings, Slower User Growth

Shares of Netflix Inc NFLX traded lower after the streaming video company reported third-quarter results.

The Results: Netflix said it earned $1.74 per share on revenue of $6.44 billion. The results were mixed compared to the Street's estimate of $2.13 per share on revenue of $6.38 billion.

Revenue was higher by 22.7% year-over-year as the company recorded 2.2 million paid net subscribers versus 6.8 million net additions in the same quarter last year. Management noted a slowdown in subscriber growth is due to a pull-forward effect in the past few months.

For the first nine months of 2020, the company added 28.1 million paid members versus 27.8 million additions for all of 2019.

Streaming average revenue per user (ARPU) was down 1.6% year-over-year but would have been higher by 1% on a currency-neutral basis.

Operating margin of 20% was up 170 basis points year-over-year.

Related Link: Here's How Much Investing $1,000 In Netflix When Blockbuster Went Bankrupt Would Be Worth Today

Outlook: Netflix expects to add 6 million net subscribers versus 8.8 million in the same quarter last year. If achieved, the company would see a record-high 34 million paid net adds in 2020.

Management expects 2021 growth to "revert back to levels similar to pre-COVID." Paid net adds "are likely to be down" in the first half of 2021 as it is up against a "big spike" in paid net adds in 2020.

"We continue to view quarter-to-quarter fluctuations in paid net adds as not that meaningful in the context of the long run adoption of internet entertainment, which we believe is still early and should provide us with many years of strong future growth as we continue to improve our service," the company said.

Capital Structure Update: Net cash generated by operating activities in the reported quarter improved from negative $502 million last year to positive $1.3 billion.

Free cash flow was positive for the third consecutive quarter at $1.1 billion. Year-to-date free cash flow is up from negative $1.6 billion last year to positive $2.2 billion.

Fourth-quarter free cash flow is expected to be "slightly negative" and the company is forecasted free cash flow for 2020 to be around $2 billion. This compares favorably to management's prior expectations of break-even.

Management guided its free cash flow for 2021 to be between negative $1 billion and break-even.

The company has no immediate plans to raise additional capital this year after ending the quarter with $8.4 billion in cash on the balance sheet.

Content Update: Management is making "good and careful progress" in a return to production. The company restarted production on season four of "Stranger Things," an action movie "Red Notice," and "The Witcher" season two.

Netflix also completed principal photography on more than 50 productions and is "optimistic" it can complete the shooting of another 150 productions before 2021.

The stock was down 5% to $498 in after-hours trading. Shares are up 62% in 2020