Netflix shares surge on strong third-quarter earnings and subscriber growth

Shares of Netflix Inc. soared in after-hours trading Monday as the video streaming service reported stronger-than-expected earnings and subscriber growth for the third quarter.

The stock was up $19.75, or nearly 20%, to $119.67 a share after the market closed.

Netflix posted robust subscriber growth for the quarter, adding 370,000 net memberships in the U.S. and 3.2 million internationally, for a total of about 3.6 million. The company said in July it expected to add 300,000 subscribers in the U.S. and 2 million subscribers internationally in the third quarter.

The Los Gatos, Calif., streaming service has 86.7 million subscribers worldwide.

Netflix reported third-quarter earnings of 12 cents a share, significantly beating estimates of six cents a share from analysts polled by FactSet Research Systems Inc. Revenue during the quarter climbed to $2.16 billion, from $1.58 billion in the same period last year.

The company attributed the strong results to a popular slate of original programming.

During the quarter, Netflix saw the debut of “Stranger Things,” the ‘80s-themed dramatic series about a missing boy that stars Winona Ryder. The show has been a popular and critical success and has been renewed for a second season. The second season of “Narcos” and the new Baz Luhrmann hip-hop series “The Get Down” also debuted during the period.

The company said Monday that it plans to release more than 1,000 hours of original premium content in 2017, up from 600 hours this year. But producing original material— as opposed to licensing existing shows — would add substantially to costs, which could hurt profitability.

Netflix is spending a royal fortune on “The Crown,” a new series about the young Elizabeth II that is scheduled to debut Nov. 4. The streaming service is rumored to have spent more than $100 million on the drama series, which was created by “The Queen” screenwriter Peter Morgan.

Producing original shows “requires more cash up front,” said Ted Sarandos, chief content officer of Netflix, during an investor call Monday. But he said it enables the company to produce shows at a higher quality and allows for more control over rights. “We find it’s a great trade-off for cash.”

The company forecasts spending $6 billion on content in 2017, up from $5 billion this year, putting it ahead of most major TV networks and cable channels.

Overall, licensed material as a percentage of Netflix’s offerings will shrink in the future, but the company doesn’t have a set formula, said Sarandos. “Our financial preference is to produce in our own studio,” he said.

While major Hollywood studios are rushing to embrace China, Netflix indicated Monday that it is taking a more measured approach, saying that it plans to license content to existing online service providers in China instead of operating its own service in the country.

“We still have a long-term desire to serve the Chinese people directly, and hope to launch our service in China eventually,” the company said in a letter to investors. It described the regulatory environment for foreign digital service providers as “challenging.”

In other countries, Netflix continues to pursue shows produced in local languages. “Dark,” its first German series, recently began production, while “Club de Cuervos” in Mexico and “Marseille” in France have both been renewed for second seasons.

“We’re having broad success around international,” said Reed Hastings, CEO of Netflix, on Monday’s call. But compared to sites like YouTube and Facebook, “we have a long way to go in that localization effort.”

Wall Street has been anxious about the pace at which Netflix has been able to add subscribers. On Monday, the company said that it is forecasting fourth-quarter additions of 5.2 million subscribers worldwide, down slightly from the same period last year.

When Netflix reported second-quarter results in mid-July, its stock tumbled about 13% the next day. The stock has recovered since then.

Meanwhile, several California cities including Pasadena are mulling whether to tax subscribers of Netflix, Hulu and other video streaming services using existing municipal utility tax codes that initially were designed for taxing cable-television users.

david.ng@latimes.com

james.peltz@latimes.com

For more business news, follow James F. Peltz on Twitter: @PeltzLATimes

UPDATES:

4:55 p.m.: This article was updated to include additional comments, analysis and information about after-hours stock trading.

1:45 p.m.: This article was updated with third-quarter financial results.

The article was originally published at 8:30 a.m.