Netflix reported positive first-quarter numbers, including revenues of $1.02 billion during the first three months of the year. The company also announced that it added 2 million domestic in the quarter, bringing the total number of subscribers to 29.2 million.
The results represent a positive response to Kevin Spacey-led political thriller House of Cards, which just happens to be the first major release in Netflix’s original programming slate this year. And they’re driving investors to jump on the stock in after-hours trading, driving shares up nearly 20 percent.
Netflix announced net additions of 2.03 million subscribers in the U.S. compared to 2.05 million in the fourth quarter — which historically is its strongest period of subscriber growth — and 1.74 million in last year’s first quarter. As a result, it said that it’s growing its subscriber base and revenues faster than its content spend in the streaming business. It reported that its domestic streaming contribution margin increased to 20.6 percent in the quarter, which was up 140 basis points from the previous quarter.
Analysts estimated that the company would report about $1 billion in revenue, as well as earnings of 18 cents a share. But the number everyone is looking at is Netflix’s subscriber number, which Wall Street forecast would be around 29 million streaming subscribers in the U.S.
Netflix is betting big on the release of exclusive shows like House of Cards as a way to differentiate its service from the syndicated content that it’s licensed from existing TV networks. It’s investing hundreds of millions of dollars in these series, and hoping that investment will be paid back with greater subscriber interest.
While Netflix had released its first original show, the Steve Van Zandt-led Norwegian mob comedy Lillyhammer last year, this quarter marks the introduction of House of Cards. That series debuted to strong reviews and a huge marketing push by Netflix, which was hoping to capitalize on the acting of Kevin Spacey, producer David Fincher, and the popularity of the original British miniseries of the same name.
So far, that strategy appears to be working, as House of Cards very quickly became Netflix’ most-watched program. More importantly, more subscribers than expected signed up for the service since the launch of the new series. In its analyst comments, Netflix noted:
“Some investors worried that the House of Cards fans would take advantage of our free trial, watch the show, and then cancel. However, there was very little free-trial gaming – less than 8,000 people did this – out of millions of free trials in the quarter.”
That’s a great response to House of Cards — but Netflix has even more exclusive content in its pipeline. Netflix just introduced Hemlock Grove, a 13-part horror series from Hostel director Eli Roth. Next month, there’s the return of offbeat comedy Arrested Development, which will be available only on Netflix. Later, Weeds creator Jenji Kohan’s new series Orange Is The New Black will also be released.
In addition to its domestic streaming numbers, Netflix reported 1 million new subscribers in its international business, growing that number to 7.1 million total. That compares to 1.8 million international subscribers added during the holiday quarter, and 1.2 million a year previous. While those numbers might seem low compared to previous quarters, Netflix said it benefitted from launches in new markets in earlier quarters. The company plans to continue its expansion overseas, with a new international market to be added in the second half of the year.
To no one’s surprise, Netflix DVD membership continued to decline, but just modestly. The total DVD subscriber base fell by about 250,000 users, to 8 million total. But contribution profit continued to hold strong at $113 million, despite higher usage in the quarter and a small USPS price increase.
Netflix reported that its first-quarter net income was $3 million, or 5 cents a share, but that included a $16 million loss on the extinguishment of debt related to refinancing of a loan from February. Without that, the company would have reported net income of $19 million, or 31 cents per share, well above guidance.
Going into the second quarter, Netflix is forecasting slower growth in streaming subscribers — most likely due to Q2 seasonality — to end the quarter with between 29.40 and 30.05 million subscribers. That will amount to about $665 million to $673 million in U.S. subscriber revenue and between $139 million and $149 million in contribution profit. All in all, it expects earnings between $14 million and $29 million during the second quarter, or 23 to 48 cents per share.