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U.S. Netflix Subs Pass 43 Million

Netflix met analyst expectations for its earnings per share (EPS) targets but reported lower revenue and slower subscriber growth in the U.S. than expected for the third quarter of 2015.

Total global memberships hit 69.17 million, with U.S. memberships growing by 0.88 million to 43.18 million and international memberships hitting 25.99 million, up 2.74 million.

In Q3 2015, Netflix reported revenue of $1.581 billion, with EPS of $0.07.

The stock was trading down 12% at 4:12 p.m. ET in afterhours trading at $98.23 soon after the earnings report was issued at 4:04 p.m. ET. But it recovered after that and was down only 1.5% to $108.52 at 5:55 p.m. ET.

The slippage came after a very good year for investors, who have seen Netflix stock more than double in 2015, from about $49.85 to $109.73 on Oct. 13.

Analysts surveyed by FactSet had estimated $1.75 billion in revenue and earnings per share (EPS) of about $0.07 on a GAAP basis.

Management has been forecasting about 1.15 million net additional subs in the U.S. to 43.45 million and 2.4 million internationally for 25.65 million at the end of Q3.

The company had also forecast about $1.593 billion in revenue and $0.07 EPS.

During the video call with investors and in a letter to shareholders, Reed Hastings CEO, Netflix and David Wells, the company’s CFO blamed the slower than expected growth on higher than expected churn, which they primarily traced to the transition to chip-based credit cards in the U.S.

While that problem was likely to persist into Q4, they reiterated their confidence in their short and long-term growth potential in the U.S.

In the letter to shareholders, the two executives noted that they had over estimated U.S. subscriber gains and underestimated their international growth. “Our over-forecast in the U.S. for Q3 was due to slightly higher-than-expected involuntary churn [inability to collect), which we believe was driven in part by the ongoing transition to chip-based credit and debit cards.”

They stressed, however that “in terms of U.S. net additions through the first nine months of 2015, we are slightly ahead of prior year, and we expect to finish 2015 at about 2014 levels. This would mark the 4th consecutive year we’ve added about 6 million members in the U.S.”

During the investor call, they also noted that they were still confident that their longer-term potential was in the 60 million to 90 million sub range in the U.S.

In terms of pricing, they noted that they had raised prices in Europe without “negatively impacting growth.”

The strength of international markets was welcome news because there had been some worries about the rollout of the service into newer markets. In the letter to shareholders, Reed and Wells wrote that “our plan remains to run around break-even through 2016 and to deliver material profits thereafter” in international markets.

As expected the executives stressed the growing importance of their originals as a driver of future growth. Ted Sarandos, chief content officer, Netflix noted that they would be releasing more originals in Q4 than they had in the entire history of the company.

Overtime, this could shift spending on originals to as much as 50% of their budget. Currently however, they noted that their spending on content licensing was still growing, though not as fast as spending on originals.

The company also expects to return to debt markets in the next 12 to 18 months to help fund more originals.

With massive changes taking place in the TV business, Sarandos executives admitted there was “more caution” among the studios about licensing to them but stressed that for the most part it was “business as usual.”