Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
Specifically, quarterly revenue rose 23.9% year over year to $1.57 billion, and translated to adjusted net income -- which accounts for a $33.7 million negative impact from foreign exchange and a $9.4 million positive impact from resulting income tax effects -- of $48 million, or $0.77 per diluted share. Analysts, on average, were looking for roughly the same revenue to result in adjusted earnings of $0.69 per share.
Why it's happening: Netflix added a record 4.9 million new members globally during the quarter, well above both its forecast of 4.1 million and the 4.0 million members it added in the year-ago quarter. That included 2.3 million in the U.S., which also is significantly higher than its guidance for 1.8 million, thanks to both acquiring and retaining more members than expected. Netflix also added 2.6 million subscribers internationally, compared to guidance for 2.25 million and driven by "stronger growth than expected across a number of markets."
If that wasn't enough, Netflix also enjoyed lower-than-forecast content spending, helping drive a U.S. contribution margin of 31.7% versus its estimate of 30.1%. Netflix continues to target 40% U.S. contribution margin by 2020.
"Our original content strategy is playing out as we hoped," said Netflix CEO Reed Hastings, "driving lots of viewing in an economic way for Netflix while bolstering the positive perception of our brand and service around the world."
Finally, in the current quarter Netflix plans to shift some of its U.S. marketing budget to international to "take advantage of the substantial available growth opportunities" there. As a result, it currently expects net subscriber additions of 0.6 million in the U.S., and 1.9 million internationally. Later this year, Netflix will also launch in additional markets, starting with Japan.
Apart from what should be temporary foreign exchange headwinds, this was an overwhelmingly positive report that shows Netflix's strategy is proving more effective than ever. As it continues to translate that success to new markets across the globe, I still think patient shareholders should only continue to reap the rewards.