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Netflix: OZ Contributes To Big Subscriber Growth But Profits Crash 63%

Netflix: OZ Contributes To Big Subscriber Growth But Profits Crash 63%

The strongest growth was in international markets, where subscribers jumped 2.37 million to 23.3 million, the company said. Analysts believe that at least one million of the 2.37 million came from the Australian market. 

The growth in subscription numbers beat the 1.94 million average of five analysts’ estimates compiled by Bloomberg News. Domestic US subscribers grew by 900,000 to a total of 42.3 million, beating estimates of 636,000.

International subscribers now account for 31 percent of Netflix’s streaming revenue, and the company said it’s profitable in several of the foreign territories where it first offered service. Those earnings have gone into further expansion, and Netflix has said it won’t be profitable overseas for at least another year or two.

Several analysts have projected Netflix will surpass 100 million subscribers by 2020. Netflix reached 5 million subscribers in Latin America last year. Digital TV Research Ltd. projects it will top 7 million there and 5 million in the U.K. by year end.

Netflix’s second-quarter results, reveal that profit fell 63% in the quarter as costs increased to buy and create content, and the strong U.S. dollar lowers the value of revenue generated outside the U.S.

Netflix’s free cash flow-already negative-widened to $229 million in the second quarter from $163 million in the first quarter, as the company continues to spend on original shows. Nevertheless, the service affirmed its commitment to the originals strategy, noting that nearly 90% of its subscribers have “engaged” with its original shows and movies.

The company projected that its spending on content would approach $5 billion in 2016, and nearly $1 billion in marketing. 

In October, Netflix will release its first original feature film, “Beasts of No Nation,” for streaming customers and in theaters. Adam Sandler’s “The Ridiculous Six” comes out in December.

The results highlight Netflix’s progress in building the first global Internet TV channel, as subscriber gains overshadowed concerns about expansion costs. The company, based in Los Gatos, California, reported a loss of $92 million from international streaming, less than the $101 million projected in April.

“Netflix is a subscriber momentum story,” said Paul Sweeney, a Bloomberg Intelligence analyst. “As long as the company continues to add subscribers domestically and internationally, the bulls will be happy. The second-quarter results and third-quarter outlook show continued sub growth momentum.

Netflix, which split 7-for-1 Wednesday, rose 10 percent to $107.99 in extended trading after results were announced. The shares fell 2.2 percent to $98.13 at the close in New York and have doubled this year, the best performance in the Standard & Poor’s 500 Index.

Global Expansion

Netflix expanded to New Zealand and Australia in March, and will offer its service in Japan, Spain and Italy later this year. 

The company has said it will mostly complete its worldwide rollout by the end of 2016, and reiterated Wednesday it’s weighing when to enter China, the world’s most populous country, by that date.

Netflix released several high-profile shows in the past few months: ”Daredevil,” its first program with Walt Disney Co.’s Marvel Studios, “Sense8,” created by the directors of “The Matrix,” and “Grace and Frankie,” starring Jane Fonda. The third season of “Orange Is the New Black,” which debuted in June, is the company’s most-watched show.
Second-quarter net income fell to $26.3 million, or 6 cents a share, from $71 million, or 16 cents, a year earlier. Analysts were projecting a post-split profit of 4 cents, the average of 32 estimates compiled by Bloomberg.

In his letter to investors, Chief Executive Officer Reed Hastings said the company remains “committed to running around break-even globally on a net income basis through 2016 and then to deliver material global profits in 2017 and beyond.”

Revenue for the quarter rose 23 percent to $1.64 billion, compared with analysts’ projections of $1.65 billion.

For the third quarter, Netflix projects it will add 3.55 million total new subscribers, for a total of 69.1 million. The company forecasts net income of $31 million, or 7 cents a share.

Analysts forecast 3.34 million new customers worldwide. They estimate profit of 5 cents a share for the third quarter on sales of $1.73 billion.