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Netflix adds 3 million new streaming subscribers, expands profit margins

Netflix adds 3 million new streaming subscribers, expands profit margins

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The web video rental service bet big on original content and delivered a quarter that surpassed analysts' expectations

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House of Cards3
House of Cards3

Netflix, the web's top video rental service, reported first quarter earnings that certainly impressed Wall Street. The company reported a net profit of $2.6 million — or 5 cents a share — and finally had its first billion-dollar quarter, bringing in $1.02 billion.

Excluding one-time charges, Netflix reported profits of 31 cents a share, which easily outpaced analysts' expectations of 18 cents a share. Its profits also rose to $131 million and its margins crept above 20 percent. Typically, the most important statistic for the company is the number of subscribers it adds. The past quarter was even more important as Netflix investors searched for signs to determine how much value was generated by House of Cards, the political drama series starring actor Kevin Spacey, and cost Netflix $100 million. Netflix didn't beat its all-time record, set last quarter, but the company had reason to be very happy as it added 2 million new US streaming subscribers and 1 million new international streaming customers. In the United States, Netflix now has 29 million streaming customers.

"The global viewing and high level of engagement with the show increased our confidence in our ability to pick shows."

"The global viewing and high level of engagement with the show increased our confidence in our ability to pick shows Netflix members will embrace," Netflix said in a statement, "and to pick partners skilled at delivering a great series. The high level of viewer satisfaction implies we are able to target the right audience without the benefit of existing broadcast or cable viewing data, and the strong viewing across all our markets gives us faith in our ability to create global content brands in a cost-effective, efficient way."

Netflix's investment in original shows appears to be paying off with another new show, Hemlock Grove, as well. "Hemlock Grove was viewed by more members globally in its first weekend than was House of Cards and has been a particular hit among young adults," said Netflix.

"We continued to grow members and revenue faster than content spending."

"Long term," Netflix said, "we believe the value of our original series in driving acquisition and retention improvements will be borne out as we add more seasons of already popular shows like House of Cards and further series. Harry Potter was not a phenomenon in Book One, compared to later books in the series."

Netflix's stock closed trading today at $174.37, up $11, or 7 percent. In after-hours trading, Netflix shares skyrocketed $33, or 19 percent, and were still climbing as of this writing.

Netflix's overall message to investors is that concerns about the cost of original content and that competitors would snatch away subscribers were overblown. "During the quarter," the company said, "we continued to grow members and revenue faster than content spending and our domestic streaming contribution margin increased 20 percent."

Some investors worried about Netflix's decision to release all the episodes of House of Cards and other serial shows at one time rather than once every week like traditional broadcasters. The concern was that people would game the system by joining, watching the shows, and canceling. That's not happening, Netflix said. Out of the millions of free trials during the quarter, management said only 8,000 joined the service and then cancelled. For those who predicted that Amazon would spend big on top-tier content and close the gap with Netflix's library, Netflix wrote: "Last quarter we shared with you that of our 'Top 200' titles, Amazon's Prime Instant Video had only 73. This quarter it was 74."

The company also announced an interesting new $11.99 price tier that will let families watch more content simultaneously. In addition, Netflix said it plans to roll out a "profiles" feature that will enable families to create separate profiles for each member. Neil Hunt, Netflix's chief product officer, first disclosed the plan to The Verge last month. In a conference call with analysts, Hastings said he expects only about 1 percent of streaming users will take advantage of the feature.

Some other tidbits from Hastings call with analysts: Hastings said that House of Cards didn't cause a huge spike in traffic but that it is responsible for a "gentile impact" on subscriber growth, and doesn't expect anything different from Arrested Development, the former NBC show that was dropped by the network but is being brought back by Netflix. He said that Amazon, Hulu and other competitors are bidding up the prices of films and TV shows, which he said is good for creators and hasn't hurt Netflix. Finally, Hastings said managers there believe the size of Netflix's potential market is 2 to 3 times the size of HBO's, which means 60 to 90 million subscribers. To justify that number, Hastings cited Netflix's far less expensive monthly price, the wide adoption of internet viewing, and the rise of mobile. As for the price of Netflix streaming, Hastings said he has no plans to alter the $7.99 monthly fee.

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