Netflix Surges as Overseas Growth Overshadows Small Profits

(Bloomberg) -- Netflix Inc. shares soared after the streaming-video provider scored a record second quarter, surpassing forecasts for subscriber growth and boosting its international audience past the domestic total for the first time.

Investors continue to forgive minuscule profit for growth in subscribers, which soared to almost 104 million in the period. The company’s stock price jumped as much as 9.7 percent to $177 Tuesday in New York, its biggest increase since October. Netflix shares have risen 78 percent in the past year.

The company’s second-quarter results, released Monday after the market closed, revealed how the streaming video giant has begun to reshape the TV business overseas just as it has at home.

Netflix’s blend of TV shows, movies and stand-up comedy has started to catch on in some of the biggest countries in the world, from Brazil to the U.K. The company will be in at least 20 percent of broadband households in five of its largest markets outside the U.S. by the end of the year, according to Instinet LLC.

“All throughout the West, in Latin America, North America and Europe, we’re doing very well,” Chief Executive Officer Reed Hastings said on a webcast. “We just need to continue to do what we’re doing.”

The streaming-video provider signed up 5.2 million subscribers in the second quarter, 2 million more than analysts had forecast. The company said 4.14 million of those new viewers came from outside the U.S., bringing the international total to more than 52 million. International operations will be profitable for the first time this year, Netflix said.

See also: How Netflix turned around in Brazil

The company will spend more than $6 billion on programming in 2017 to offer that global audience a little bit of everything. While most of the budget reflects shows licensed from big Hollywood studios, the company is releasing a dizzying array of new shows and movies of its own, including new series set in Spain, South Korea and Mexico during the quarter.

All that growth comes at a cost. Net income of $66 million, or 15 cents a share, fell short of the 16-cent average of analysts’ forecasts, even while up substantially from a year earlier. Operating margin shrank to 4.6 percent in the quarter, which the company attributed to higher content costs. Netflix raised $1 billion in the quarter to fund original programming, and said it won’t be cash flow positive for years to come.

Carefree Investors

But investors won’t care so long as the subscriber growth continues. The company projects it will add 4.4 million new subscribers in the current third quarter, compared with the 3.96 million average of analysts’ estimates. Netflix forecasts net income of 32 cents a share, on revenue of $2.97 billion. That compares with analysts’ estimates of 23 cents and revenue of $2.88 billion.

For the second quarter, Los Gatos, California-based Netflix signed up 1.07 million U.S. customers, easily beating the 633,000 average of analysts’ estimates compiled by Bloomberg. Total sales grew to $2.79 billion, compared with projections of $2.76 billion.

Having already surpassed 50 million customers in the U.S., Netflix has fixated on adding customers abroad, especially in Latin America and Europe. The company recently opened a customer-service center in Amsterdam that will employ at least 400 people by next year.

Netflix has promised international markets will be a source of new customers for years to come. Hastings wants 80 percent to 90 percent of the company’s audience to be outside the U.S. -- suggesting the company sees a global market of 450 million subscribers or more. Netflix stuck by its forecast for a 7 percent operating margin for the year.

Asia remains the biggest challenge, Netflix officials repeated Monday. Consumers have different tastes in TV shows and movies and are more likely to watch on mobile devices.

“We’ll invest more time and energy in Asia,” Ted Sarandos, the company’s chief content officer, said on the webcast. Netflix will also put more people on the ground than it has in other places.

First Steps

Netflix first moved overseas in late 2010, expanding to Canada, which remains the service’s largest international market, according to estimates by Anthony DiClemente, an analyst with Instinet. The U.K. and Brazil are Netflix’s two largest markets outside the U.S. and Canada, while Germany is next.

Some media companies and authorities have been less welcoming to Netflix than consumers. The Cannes Film Festival vowed not to show Netflix movies next year if the company doesn’t released them in French movie theaters. Local broadcasters have united to produce programs so they can compete for projects with the free-spending U.S. service.

Yet pay-TV operators and internet providers are more sanguine. Altice NV recently struck a deal to offer Netflix as an add-on to its internet service in France, Portugal, Israel and the Dominican Republic.

Competitive Threats

Netflix has long downplayed competitive threats, arguing there will be many winners in the shift to online TV. Yet it is spending money to create enough programming so that viewers have little reason to watch anything but Netflix. The company’s long-term commitment to programming totals $15.7 billion, up from $13.2 billion a year earlier.

In the second quarter, Netflix released more than 50 new programs, spanning 14 original series, 13 stand-up comedy specials, nine original films, seven original series for kids, six documentaries and two documentary series. The company doesn’t release viewership figures for any of its programs, though it has called out older shows “House of Cards” and “Orange Is the New Black” as hits in the past.

Some of the new shows failed. The company canceled “Girlboss” after the first season and a handful of other shows in the quarter. But enough have pleased consumers and critics. Netflix earned 91 Emmy nominations last week, the most in company history and second only to Time Warner Inc.’s HBO.

“The content engine on a global basis is performing better than people expected,” said John Janedis, an analyst with Jefferies. “Some of the social media buzz around ‘House of Cards’ and ‘Orange is the New Black’ was not as positive as prior seasons, but it didn’t impact the business.”

--With assistance from Gerry Smith

To contact the reporter on this story: Lucas Shaw in Los Angeles at lshaw31@bloomberg.net.

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Rob Golum, Mark Schoifet

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