Netflix Inc. blew through its forecast for subscriber additions in the September quarter, reassuring investors who were skittish about the streaming giant's growth trajectory and sending its shares soaring 20% in after-hours trading.
The better-than-expected performance came mainly in international markets, where the company has completed a massive, near-global expansion this year. Netflix is making a big bet that the same mix of edgy original content and library programming that has taken the U.S. media world by storm will translate overseas.
The company added 3.2 million international subscribers in the quarter, compared with its guidance of 2 million.
In the U.S., Netflix added 370,000 subscribers in the period. That is more than 20% ahead of its forecast of 300,000, though sharply below the year-ago quarter's 880,000 additions, reflecting how the U.S. streaming market is maturing as more consumers sign up for Netflix, Amazon.com, Hulu and other services.
Wall Street's reaction shows that the company's global rollout across many territories at once is creating a foggy business outlook—for itself and investors—and leading to a volatile expectations game.
The September quarter's performance was better than the year-ago quarter's 2.74 million international subscriber additions, but in the intervening time Netflix has launched in more than 130 countries, elevating its growth potential substantially.
Last quarter, when Netflix missed its internal estimates for subscriber growth, Netflix Chief Executive Reed Hastings apologized on the call to investors for the volatility of Netflix's stock, which sank 13% after the results. On Monday, as Netflix shares soared, Mr. Hastings smiled and said: "We can all see it's time for me to apologize for the volatility again."
Shares surged nearly 20% to $ 119.35 in after-hours trading. Before that, the stock had fallen 13% this year as the streaming video giant has struggled to keep up with investors' growth expectations.
"This is a weird year," said MoffettNathanson analyst Michael Nathanson. "In some ways, we're being swung around by our inability to forecast what's a brand new market, which is the rest of the world."
Despite the subscriber beat this quarter, he said "we're in the camp that we think international is not all it's cracked up to be," due to the uneven nature of internet service and regulatory environment around the world.
Longtime Netflix investor Zevenbergen Capital Investments takes the opposite view. It has taken advantage of recent dips in Netflix's shares to buy, and says it's in the stock for the "long term."
"We realize this is a long process," said Joe Dennison, Zevenbergen portfolio manager, referring to the global expansion. "If you look at the bigger picture, this is the direction the world is moving and they are really the only global player."
Netflix's report of 3.57 million new streaming subscribers globally, which brings its total customer base to about 83 million paid users, comes a quarter after it reported its weakest subscriber expansion in three years. Growing the customer base is crucial for the company to offset its growing content costs, as it seeks to offer evermore shows and movies to appeal to customers all over the world.
In a letter to shareholders, Netflix said the impact of its original show premieres was "greater than anticipated" in international markets, propelling strong subscriber numbers. The company called out "Narcos," the Latin American drug drama, as a show that had "positive impact" on subscriber acquisition across all of its markets. "We're having broad success around international," Mr. Hastings said on a video call with analysts. "We're continuing to make those investments" but "we've got a lot of room to go to improve the service."
Turning a profit off the global expansion is the next challenge. Netflix said it expects to lose more money from its international operations next quarter as it continues to invest in original content, targeting more than 1,000 hours of original programming next year, a roughly two-thirds increase.
The company expects content spending in 2017 to increase to $ 6 billion from $ 5 billion this year, and it plans to take on more debt in the coming weeks.
Best known for dark dramas and comedies such as "House of Cards" and "Orange is the New Black," Netflix is branching out into different genres including reality shows. On the call, Netflix Chief Content Officer Ted Sarandos said the recent hire of a well-regarded former NBCUniversal executive, Bela Bajaria, was done in part to focus on getting a "good, steady flow of high-quality unscripted programming."
Overall, for the third quarter, Netflix reported profit of $ 51.5 million, or 12 cents a share, up from $ 29.4 million, or 7 cents a share, a year ago. Revenue rose to $ 2.29 billion from $ 1.74 billion in the year-ago quarter.
Netflix reiterated that it expects to start delivering material global profit next year.
In the letter to shareholders, Netflix said it is going to explore opportunities to license its shows to other online players in China, a way to build Netflix's brand. Mr. Hastings recently said "it doesn't look good" for Netflix's prospects of entering China as a stand-alone streaming service in the near term.
The video company said the revenue contribution from China licensing will be "modest." In the long term, it still hopes to "serve the Chinese people directly, and hope to launch our service in China eventually."
Netflix has also been customizing its user interface in markets such as Poland and Turkey, accepting payments in local currencies and offering local-language options for navigating its apps and for streaming its content. Netflix said it has seen "nice gains" in viewing and retention as a result and is going to expand the initiative in other countries.
In the U.S., there has been a growth slowdown. But Mr. Hastings said he still thinks Netflix can reach 60 million to 90 million subscribers in the U.S., up from 48 million today. He called out the coming royal drama "The Crown," one of the most expensive shows Netflix has ever made, and said "when you watch that show, it's going to seem quite achievable."
Netflix expects to add 5.2 million subscribers in the fourth quarter, compared with the 5.59 million it added in the year-ago quarter. Netflix attributed the expected year-over-year decline in new subscribers to the uptick in service cancellations by consumers who were temporarily locked into lower-priced packages but now face price increases.
That process would be over in the fourth quarter, the company said. Service cancellations have been more pronounced in the U.S., where more than half of its customers had been "grandfathered" at the lower prices.
Mr. Hastings said he's constantly reminding his employees that even though Netflix is closing in on 100 million world-wide subscribers, Facebook and YouTube have more than a billion daily active users. "We are just so small compared with those other internet video firms," he said. "I think you have to think big about the future."
Write to Shalini Ramachandran at shalini.ramachandran@wsj.com and Maria Armental at maria.armental@wsj.com
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