We have updated our Netlfix Q3 net subscriber additions to account for end of month demand. Using Google Trends historical search data of every Netflix Original relative to its most popular show of all-time, 13 Reasons Why, we now estimate Netflix will add 5.15 million subscribers in Q3 2017 versus our previous estimate of 5.3 million subscribers. Prior to the T-Mobile announcement partnership announcement we had expected Q3 Netflix net subscriber additions to be 4 million, short of its Q3 guidance of 4.4 million net subscriber additions.
The following recaps the foundation of our proprietary multiple linear regression forecast model:
Systematically categorizing and weighting their most popular programming. Heavier weightings are given to returning shows and recent quarters. We have excluded kids shows and comedy specials.
Adjusting for saturation in the U.S. and International markets. At the end of Q2, U.S. subscribers are at 51.45 million versus a 60 to 90 million opportunity. The international market is thought to be at a slightly higher number and is materially earlier in its adoption curve with a 3.1 billion potential subscriber opportunity. We use an an adjusted normal curve to account for saturation.
Adjusting for seasonality – Winter months typically see higher net subscription adds both in the U.S. and Internationally.
Local language – Netflix has noted some local language content is making a big impact in certain countries. Given the lack of history, the impact is assumed to be linear.
EXHIBIT 1: Netflix Original Content Search Interest vs. Net Additions
Source: Google Trends, Netflix and Perspectec
Estimated Q3 Results
Our forecast model is very robust and statistically significant, with an adjusted r-squared of 0.99 and a small but material enough 17 degrees of freedom. The model estimates 5.15 million net subscriber additions for Q3 2017, putting the Global total subscribers at 109.1 million. This estimate is slightly short of our previous estimate of 5.3 million. We believe the difference could be partially attributable to incomplete Google Trends data for the last week of Q3.
Domestic contribution to total net additions is increasing– Out of the 5.15 million subscriber additions, we expect 1.94 million to be Domestic and the remaining 3.21 million to be International. The T-Mobile partnership is the catalyst pushing domestic growth to the highest level for a 3rd quarter since 2013.
Q3 growth is being driven by older content– Q1 and Q2 Originals such as 13 Reasons Why, House of Cards, and Orange is the New Black appear to be commanding higher search interest than new Q3 content. Narcos Season 3, which has historically been a crowd-puller, has managed to generate only half the interest it did for season 2 back in Q3 2016. Marvel’s The Defenders, a highly anticipated Q3 show where superheroes from Marvel’s previous Netflix Originals come together, has also failed to live up to its hype. However, it helped regenerate user interest in the source Originals- Daredevil, Luke Cage, Jessica Jones and Iron Fist, increasing the period’s total search interest.
Based on our estimates, we estimate Q3/17 revenues to be $2.98 billion, the gross and operating margin is 34.4% and 7.8% respectively. Based on these we expect EPS to be $0.29 versus a guidance of $0.32.
Q4 expected to continue the growth trend – We expect Netflix’s strong performance to continue through Q4. In addition to the positive impact of seasonality, Q4 has an attractive line-up including the highly anticipated Stranger Things Season 2 (October 27), Marvel’s The Punisher (November), the Will Smith- starrer movie Bright (December 22) and The OA season 2 (December). Also, the T-mobile partnership is expected to bring in 1.7 million subscribers. Based on these, we predict subscriber guidance between 7.6 and 8.4 million. Depending on the actual results for Q3, the announcement of new series for Q4 and the performance of such series, we shall be updating our subscriber estimate periodically.
Conclusion- Based on our forecast regression model, we estimate Q3’s net adds to be 5.15 million as opposed to management’s guidance of 4.4 million. We believe Netflix should be purchased prior to the Q3 report.
EXHIBIT 2: Q3 and Q4 Estimates
Source: Perspectec
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