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Netflix U.S. Subs Top 31 Million

Management predicting over 33 million by end of year 10/21/2013 04:19:12 PM Eastern

Netflix reported better than expected earnings of 52 cents per share and generally met Wall Street's expectations for other key metrics in the third quart of 2013 with revenue of about $1.1 billion and 1.3 million new U.S. members for a total of 31.09 million domestic members.

International member rose 1.4 million to over 9.19 million.

In the third quarter the company was expected have revenue of about $1.1 billion and earn about 48 to 49 cents a share according to the Wall Street Journal and USA Today.

The stock price rose significantly after the earnings announcement to $390 at 4:16 p.m. ET.

Analysts were paying particularly close attention to subscriber numbers, given the stocks dramatic run up this year from around $92 to over $354 a few minutes before the earnings were released.

Other closely watched issues included growing competition in the over-the-top streaming video space, programming costs and potential alliances with cable operators.

In their quarterly letter to shareholders, management noted that "in 2014, we expect to double our investment in original content" though that would still represent less than 10% of their total programing costs.

Regarding recent roll-outs of Netflix on cable systems in Europe, the shareholder letter downplayed some of the hype around the service's move into the pay TV arena. "Cable operators like Virgin Media believe that by enabling their subscribers to do more with their cableset-top and remote, they can increase satisfaction, relative to their subscribers using a separate Internet set-top box or smart TV to enjoy Netflix," wrote Reed Hastings, the company's CEO and CFO David Wells. "We are open to more of these integrations with cable set-tops around the world, but given the fragmented technology footprints, we think it will be many years before cable set-top boxes match Internet set-top boxes for Netflix streaming volume."

In the call Hastings said that Netflix had hit 5 billion hours of streaming in the 3rd quarter, up from about 4 billion in the first quarter of this year.

As usual, the company declined, however, to provide data on usage of specific shows or devices except to say that streaming of their content over cellular networks to mobile devices remained “fairly small.”

In contrast, streaming over Wi-Fi networks to smartphones and tablets is “quite large,” Hastings said.

Hastings also said that the promotion with Chromecast did not have a “material” impact on the better than expected sub growth for the third quarter and that many of the people who took advantage of the offer were existing subs.

In terms of increasing their investments in original programming, company executives seemed to indicate they were willing to take it higher over time. “HBO spends about 40% on originals” so there “is a big gap between where they are and where we could be,” Hastings said.

In terms of alliances with cable operators Hastings admitted that in the past some of their programming agreements might have prohibited making their service available via set-top boxes but that these problems were “generally a thing of the past.”

“We could be on the Comcast X1 box,” he said, adding that “we are hopeful to be on Comcast and others.”

Hastings also generally dismissed talk of cord-cutting as helping Netflix, noting that “I see zero evidence of cord cutting.”

Pointing out that the overall number of pay TV subscribers has not declined, he added that “our market has not been the cord cutter. We have gone from 0 to 31 million and there has been no decline” in multichannel subscribers.

“We see ourselves as a complementary service not a replacement,” he said.

In afterhours trading Netflix stock was up significantly from around $354 prior to the earnings announcement to around $392.00 at 6:20 p.m. ET.

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