By Joe Flint and Micah Maidenberg 

Netflix Inc. said subscriber growth slowed in the third quarter, highlighting the fresh challenges the company faces from competitors ramping up their own streaming services as the coronavirus pandemic continues to disrupt the entertainment industry.

Netflix on Tuesday reported that it added 2.2 million subscribers in the quarter on a net basis, short of its forecast in July of 2.5 million new subscriptions for the period. The slowdown comes after two quarters of much-larger-than-expected growth, during which the streaming service added nearly 26 million net subscribers -- almost as many as for the entirety of 2019.

"As we expected, growth has slowed," the company said in a letter to shareholders.

Netflix shares fell 6.4% in after-hours trading.

Profit rose to $790 million, or $1.74 a share, from $665 million, or $1.47 a share, the year earlier. Analysts had expected $2.13 a share, according to FactSet.

The streaming giant's ability to reel in subscribers during the first half of the year marked it as one of the companies that benefited from the pandemic. Consumers moved to purchase Netflix subscriptions as Covid-19 initially spread and officials locked down economies, resulting in millions of people spending more time at home. The suspension of professional sports leagues, cancellation of events like concerts and closure of movie theaters earlier this year reduced competition.

Executives at the Los Gatos, Calif.-based company previously warned that growth had been pulled forward amid the pandemic and said they expected subscription increases to lessen during the second half of 2020. Meanwhile, sports have resumed, more people have been traveling and cinemas have reopened.

Netflix shares fell 5.4% in after-hours trading.

The company faces heightened competition from other media companies that have also started streaming television shows, movies and other content. Earlier this month, Walt Disney Co. said it would reorganize operations to focus on streaming initiatives, which include Disney+. AT&T Inc.'s WarnerMedia is in the midst of a similar restructuring to focus on the new HBO Max streaming platform and Comcast Corp.'s NBCUniversal is realigning its entertainment operations to give priority to its new Peacock streaming service.

Netflix is in the midst of setting up a new leadership team on its television content side. Cindy Holland, the original programming executive who played a key role in developing many of the streamer's most successful shows including "Orange is the New Black" and "Stranger Things," left last month after Bela Bajaria, who oversaw international and unscripted programming was promoted to head of global television.

Similar to previous quarters, Netflix reported stronger gains in many markets overseas than in the U.S. and Canada. For the latest quarter, it said it added one million subscribers in Asia, 760,000 in the region including Europe and the Middle East and 260,000 in Latin America.

In North America, the company gained 180,000 additional subscribers for the third quarter, down compared with the gain of more than 2.9 million in the second quarter.

The company reported revenue of $6.44 billion, up from $5.25 billion a year earlier. Analysts forecast $6.39 billion in revenue for the latest quarter.

For the fourth quarter, Netflix expects to add six million subscribers, down 31% from the 8.8 million it added in the same period last year. It also anticipates the first six months of 2021 to be down. The continued precariousness surrounding the coronavirus makes any projection uncertain, the company said. It is hoping that in later 2021 its growth will return to pre-pandemic levels.

Even with the pandemic, Netflix is still forecasting that it will pass 200 million subscribers world-wide this year.

Netflix has indicated it is in no danger of running out of content despite the complications that Covid-19 has created when it comes to producing shows, forcing many to make adjustments. In an interview last month, Chairman and Co-Chief Executive Reed Hastings said the company would have more original content in 2021 than it has this year.

In its letter to shareholders, the company said it is "confident that we'll have an exciting range of programming for our members, particularly relative to other entertainment service options."

Because Netflix makes much of its programming far in advance of when it is released, it has a large backlog of content. Newer streaming rivals are starting from scratch and don't have the full cupboards of original content that Netflix does.

Netflix has developed a quick trigger finger when it comes to canceling shows. Just this week it grounded "Away," an ambitious drama set in outer space starring Oscar winner Hilary Swank, after one season. The drama "Teenage Bountyhunters," which premiered just a few months ago, has also been canceled.

The company continues to spend heavily on films. Releases planned for the fourth quarter include "Hillbilly Elegy," based on J.D. Vance's bestselling memoir and starring Amy Adams and Glenn Close, with Ron Howard directing. The company also plans to release "Prom" from Ryan Murphy, starring Meryl Streep, Nicole Kidman and Kerry Washington.

Netflix also appeared to be unscathed by the controversy over the movie "Cuties," a film about preteen French girls growing up too fast in the age of social media. The movie was criticized in part for a marketing campaign that showcased the young female characters in provocative poses. Netflix acknowledged the promotional efforts behind the movie distorted the message of the film.

Write to Joe Flint at joe.flint@wsj.com and Micah Maidenberg at micah.maidenberg@wsj.com

 

(END) Dow Jones Newswires

October 20, 2020 18:16 ET (22:16 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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