Netflix sees stronger-than-expected subscriber growth for second quarter

July 17, 2017 5:15 PM PT

Netflix brought in more subscribers than expected for the second quarter, signaling robust customer growth for the period that has traditionally been slow for the digital streaming giant.

The company counted close to 104 million subscribers worldwide for the period that ended in June, nearly 2% higher than it had forecast. For the quarter, Netflix added 5.2 million new subscribers worldwide.

The strong results sent shares of Netflix soaring more than 10% in after-hours trading Monday to $178.38. Shares closed Monday at $161.70, up 58 cents, or 0.36%.

For the quarter, Netflix reported earnings that fell slightly short of analyst estimates, while revenue exceeded expectations.

The Los Gatos, Calif., company posted earnings of 15 cents per share, versus the 16 cents a share expected by analysts polled by FactSet. Revenue for the period was $2.79 billion compared with the $2.76 billion estimated by analysts.

New and returning shows helped drive new subscriptions

Netflix attributed the higher-than-expected subscriber growth to its strong content slate, which included new seasons of popular series including “House of Cards,” “Orange Is the New Black” and “Master of None.” In addition, series such as “13 Reasons Why” and “Stranger Things” continued to draw fans.

During the quarter, the company also debuted its first original series from Spain, “Cable Girls,” which it said has attracted “significant” viewership in the U.S. and in Spanish-speaking countries worldwide.

Last week, Netflix scored 91 Emmy nominations, with big showings for “The Crown,” “Stranger Things” and “Unbreakable Kimmy Schmidt.”

The company also debuted two high-profile original movies during the quarter — “Okja,” which premiered in competition at the Cannes Film Festival in May, and “War Machine,” starring Brad Pitt.

But Netflix has recently canceled some high-profile shows, including “The Get Down” and “Sense8.”

“Series cancellations and limited writedowns are ongoing, highlighting spotty execution” in the company’s original programming divisions, wrote Michael Pachter, an analyst at Wedbush, in a recent report.

But, he added, “we do not expect significant writedowns for the cancellations.”

Ted Sarandos, chief content officer at Netflix, said in an investor call Monday, “If you're not failing, maybe you're not trying hard enough.” He said the company has renewed 93% of its shows.

Seo-Hyun Ahn in the Netflix movie "Okja." (Netflix)

International market looks strong

Netflix said it was expecting its international operations to turn an annual profit for the first time this year.

“We are making good progress with our international expansion,” the company said in a note to investors Monday, saying that improving profitability in earlier overseas markets is helping to fund expansion in new territories.

The company is looking more and more to overseas subscriber growth as the domestic market matures. For the quarter, Netflix added more than 4.1 million subscribers overseas, easily exceeding its forecast of 2.6 million additions.

The overseas market now accounts for more than half of Netflix’s total membership base. The company posted a loss of $13 million for its international operations for the second quarter but projects a swing to profitability next quarter.

Netflix shareholders are currently “much more focused on international trends,” wrote William V. Power, an analyst at Baird Equity Research, in a recent note.

Netflix has been investing in original content for its European and Latin American markets and will be focusing increasingly on Asia, including India, South Korea and Japan. But the company currently has no plans to enter China because of regulatory difficulties.

“With Asia, we have a lot more to learn,” said CEO Reed Hastings in Monday’s call. The company will be “spending more time there and investing more.”

Looking ahead to more original content

With its plan to spend $6 billion this year on content, Netflix is continuing to focus on original programming — both series and movies. As a result, the company said Monday that it expected to report negative free cash flow “for many years.”

The company has long-term debt of $4.84 billion, including a 1.3 billion euro bond offering in May.

New series scheduled to debut this quarter include “Ozark,” a dark drama starring Jason Bateman and Laura Linney; “Atypical,” a family comedy starring Jennifer Jason Leigh; and Marvel’s “The Defenders,” which brings together characters from the Marvel Comics superhero team.

“Death Note,” an original Netflix movie based on the Japanese manga, is set to premiere in August.

Sarandos said Monday that Netflix’s movies are intended to “attract subscribers and retain subscribers the way our series have.”