Netflix Tops 66M Subs - Broadcasting & Cable

Netflix Tops 66M Subs

Subscriber growth was very strong in what is usually a slow quarter
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Netflix beat its earnings per share forecasts and posted much better than expected subscriber numbers in the second quarter of 2015, but turned in another quarter of negative cash flow as it continues to ramp up its international operations and spend heavily on new programming.

Netflix reported earnings of about 6 cents a share for the second quarter of 2015.

Management had forecast around 26 cents prior to the seven for one stock split.

Overall, paid members in the U.S. grew to 42.51 million and they hit 66.61 million worldwide

Revenue for the quarter totaled $1.6 million, higher than the $1.47 billion management had predicted but less than the $1.65 billion analysts had been forecasting.

Netflix management had predicted about 2.5 million net additional subs in Q2 and handily beat that forecast with 3.55 million net additional subscribers.

The subscriber growth result was notable because the second quarter is typically a slow one for Netflix. Last year in Q2 2014 it had only 1.7 million adds.

In the Q1 it had about 4.88 million adds.

Netflix had predicted only 600,000 net additions from the U.S. but actually added 900,000.

Netflix forecast that it would have 21.50 million paid members with 1.9 million net ads in Q2 outside the U.S.

In terms of programming costs, streaming content obligations grew to $10.1 billion, up from $7.7 billion a year ago.

In afterhours trading the stock was up 10% to $107.90 at 6:06 p.m. ET.

In a investor call to discuss the results Netflix executives covered a number of key areas:

Subscriber Growth

CEO Reed Hastings and CFO David Wells attributed better than expected subscriber growth to the strength of their content, particularly original series. “We had a very strong slate and it showed,” said Wells, who noted that they released a record amount of original content in Q2.

In terms of their long-term subscriber growth, Hastings said that they were still looking at adding 5 million to 6 million U.S. subs a year and that over a number of years they still expected to grow to 60 million to 90 million U.S. subscribers—a wide range the company has long used as its ultimate goal.

Pricing

Hastings said that they had no plans to raise U.S. prices in the third quarter of 2015 and that “we want to take it slow. Things are going well and we see no reason to be disruptive.”

Programming

While Q2 saw a record number of new originals being launched, chief content officer Ted Sarandos said that originals will continue to increase their share of the overall programming spend.

The company is predicting that its content spend will be about $5 billion on a P/L basis for 2016 or about $6 billion in cash.

Wells noted that while originals take a larger share of the programming budget, they are still increasing their spending on acquired spending.

Sarandos also described their programming strategy as a broad based. “We are launching shows for multiple demos and in multiple genres,” he said. “We are doing very mainstream comedy and very elevated cutting edge programming and kids programing. We’re not trying to be one thing.”

He also highlighted the success they’ve recently had with Spanish language programming. “We are getting incredible viewing….100s of thousands of hours on a single show,” Sarandos said.

International

The company stuck to its previously announced schedule of launching new services in Japan in Q3 and then Spain, Portugal and Italy in Q4, with the rest of the world following in 2016. Those 2016 launches would include China, though executives noted they were still working through an entry strategy.

“We hope to be in the entire rest of the world in 2016,” Hastings said. “In China we still have some things to figure out, but in the rest of the world we are confident we will open services.”

While international loses dipped in Q2, executives said that they expected losses to grow in the third and fourth quarters and that they wouldn’t peak until 2016. “We will continue to see those loses grow through the next year,” Wells said.

Hastings declined to put a number on their long-term hopes for international subs. “There is enormous potential…in the next couple of years we were have a clearer picture of how well we will do in markets [like Turkey or Indonesia] that are very different from the U.S.,” Hastings said.

Net Neutrality

Hastings said that they were now supporting the Charter acquisition of Time Warner Cable because Charter had agreed to not charge interconnect fees. “It would be great if [that condition] was also applied by the government to the AT&T/DirecTV” deal, Hasting added.

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