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Netflix Nearly Doubles Subscriber Additions In Q2

By Tim Beyers - Jul 15, 2015 at 4:01PM

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Original series draw in viewers as the streaming company adds 3.3 million net subscribers in the second quarter, a new record.

Netflix enjoyed strong buzz for the first season of Marvel's Daredevil. Season 2 will introduce Jon Bernthal as The Punisher. Credit: Marvel Entertainment.

Shares of Netflix (NFLX 2.72%) were up over 10% as of 4:30 p.m. ET Wednesday, as investors cheered 3.3 million net subscriber additions in the second quarter, a new record and far above estimates. Here's a closer look at the Q2 totals versus Wall Street's projections:

NFLXRevenueYOY GrowthEPSYOY Growth
Consensus estimate  $1,647.73 million  22.9%  $0.04  (75%)
Q4 actual  $1,644.69 million  22.7%  $0.06  (62.5%)
DIFFERENCE  ($3.04 million)  (0.2%)  $0.02  12.25%

Sources: S&P Capital IQ and Netflix investor letter.

Writing in his quarterly letter to investors, CEO Reed Hastings said of the results:

We gained 0.9 million members in the U.S. and added 2.4 million members internationally in Q2. We believe the higher than anticipated level of acquisition was fueled by the growing strength of our original programming slate, which in Q2 included the first seasons of Marvel's Daredevil, Sense8, Dragons: Race to the Edge, and Grace and Frankie as well as season 3 of Orange is the New Black. U.S. revenue growth was also driven by a 5% year-over-year increase in ASP due to uptake in our HD 2-stream plan. 

What went right: Subscriber additions blew away targets. Netflix had guided to just 2.5 million net additions, with 600,000 of those coming in the U.S. The resulting 32% beat -- or 50% beat, if you look only at the U.S. -- indicates that members want more original series. In his letter, Hastings said that "nearly 90%" of Netflix members had "engaged" with one or more originals. 

What went wrong: Contribution margins from international streaming fell again in Q2 (to -20.2%) after improving in Q1 (to -15.6% from -20.3% in last year's Q4). Further lumpiness seems likely, with a range of new investments in overseas territories still to be made.

What's next: Looking ahead, Netflix forecasts $81 million in third-quarter operating income, $31 million in net income, and $0.07 of per-share earnings. Total streaming revenue is expected to increase 30.3%, with paid memberships rising to 66.61 million from 62.71 million presently.

Analysts tracked by S&P Capital IQ have the company generating $1,731.54 million in revenue and $0.06 a share in profit after accounting for stock-based compensation and other noncash items. That compares with $1,409.43 million and $0.14 a share in last year's Q3.

Longer term, analysts have Netflix growing earnings by an average of 35.25% annually over the next three to five years. 

In the meantime, investors should pay close attention to international subscriber growth and operating income. Plans call for launching the service in Japan in the third quarter and then Spain, Italy, and Portugal in Q4. China is expected to join the list in 2016.

Tim Beyers is still watching the current season of OITNB. No spoilers! He's also a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission and owned shares of Netflix at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool.

The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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