Netflix reached a new milestone today, announcing that it now has 60 million subscribers. As it has been for the last several quarters, the company's international expansion was the biggest driver of its customer growth. The Los Gatos, California-based company passed 40 million domestic subscribers and 20 million from overseas, adding over two million new customers in each category.
Revenue grew to $1.57 billion compared with $1.27 billion for the same period a year ago. Profits shrank from $53 million for this period last year to just $23 million this quarter. But the stock soared in after-hours trading, up over 10 percent, a sign that investors are largely concerned with Netflix customer growth, not its bottom line. Analysts expect that while they are expensive to acquire, these new customers will allow for healthy profits in the future. "We believe that international subscribers have two to three times faster profit trajectories than in the US," Laura Martin, an analyst for Needham, said in a research note last week.
Analysts had predicted smaller domestic growth for Netflix, with many believing the US market is reaching a point of saturation. CEO Reed Hastings wrote in their shareholder letter that, "We think strong U.S. growth benefited from our ever-improving content, including the launch of the third season of ‘House of Cards’ and new shows ‘Unbreakable Kimmy Schmidt’ and ‘Bloodline’."
Netflix, by its own design, is now being weighed against HBO, which just rolled out its first offering that doesn't require a cable subscription. The two are similar in many ways, but when you dig into the financials, it's clear they have a very different cost structure. Last year they brought in nearly identical revenue: $5.5 billion for Netflix and $5.4 billion for HBO. Netflix, however, made just $266 million in annual profit, compared with HBO's $1.8 billion. There is also a big gap in the subscriber base: HBO ended last year with 138 million total subscribers, versus 57.4 million for Netflix.
Put another way, despite having roughly equal revenues, HBO has roughly double the subscriber base and seven times the profits of Netflix.
The flip side is that Netflix is growing much faster. It added 13 million new members in 2014 compared with HBO's 5 million. But even if it were to double its size to 120 million, at its current margins it wouldn't have nearly HBO's profits. Those margins would likely improve once Netflix stops spending so heavily on international growth, but comparing the two companies you can see why it took HBO so long to break with the golden goose of cable TV and offer a stand-alone streaming option.
UPDATE: Removed a chart.