Netflix Streaming Subs Hit 57.4 Million

Netflix reported better than expected earnings and subscriber growth for the fourth quarter of 2014, which boosted share prices significantly.

The company reported earnings per share of $1.35 or $0.72 a share when adjusted for one time events.

That was notably better than the 45 cents per share expected by analysts polled by FactSet, according to the Wall Street Journal.

The stock was initially trading up nearly 12.5% at $390.38 in afterhours trading at 4:27 p.m. ET.

The company also beat subscriber expectations. Total streaming subscribers reached 57.4 million, up from 53.1 million in the earlier quarter. About 54.5 million of those were paid.

U.S. streaming subs hit 39.1 million, up from 37.2 million. About 37.7 million were paid.

International members grew to 18.3 million, up from 15.8 million in the third quarter. That means that international subscriber growth now exceeds U.S. growth.

The international numbers are important because Netflix is rapidly expanding its international operations and has been running up loses in those new territories.

“Progress has been so strong that we now believe we can complete our global expansion over the next two years, while staying profitable, which is earlier than we expected,” Netflix CEO Reed Hastings and CFO David Wells noted in a letter to shareholders.

The return to faster growth was notable because sluggish increases in subscriber numbers had hurt the company’s stock after the third quarter earnings report.

Hastings and Wells reported that U.S. and international subscriber growth exceeded the company’s forecast but that “US net adds are down compared to one year ago (1.9 million this Q4 versus 2.3 million for Q4 2013).”

They argued, however that this was not related to their price increase as “we’ve found our growth in net adds is strongest in the lower income areas of the US, which would not be the case if there was material price sensitivity.”

The company frequently outperforms expectations, with reporting that they had topped expectations in 15 of 22 earnings reports.

Growth Prospects

Despite the fact that the earnings results showed slower subscriber growth in 2014 compared to 2013, management continued to express confidence that they could reach their long term goals. “We are at 39 million in the U.S. and are adding 5 million a year,” Hastings said, adding that “the trajectory is great” given the fact that internet TV will be “in every home in 10 years.”

The company, however, once again declined to provide detailed viewer metrics except to say that average viewing time was increasing.

Title II Regulation of the Internet

During the Q&A around the earnings results, Hastings praised the growing interest in using parts of Title II to regulate the internet. The move to view “the Internet as a utility with open access would over time insulate us” from having to pay fees to cable operators and telcos to ensure high quality delivery of their content Hastings said.

He doubted, however, that the adoption of Title II would invalidate the existing contracts they have with ISPs which require them to pay fees.

Wells added that “the expense of streaming delivery continues to be quite modest."

Programming Costs

Netflix management noted that streaming programming obligations have now risen to $9.5 billion. But Wells stressed that the ratio of subscribers to programming obligations “continues to trade in a fairly narrow range."

Netflix chief content officer Ted Sarandos also noted that they were working to get rights to programming earlier in the process, often investing before a show went on air, and that they were increasingly looking for global rights to help fuel their international expansion.

Sarandos cited Gotham and Better Call Saul as examples of their success with making early investments to get rights.

Even though such worldwide deals are difficult, given that the studios have existing output or volume deals with broadcasters and pay TV providers around the world, he argued that “the studios are looking to streamline operations and looking to sell more efficiently.”

He also claimed they would pay less for product if they weren’t able to secure global rights.

International Expansion

During the call, the company noted that the first wave of countries in its international expansion were now profitable and the success of the global expansion had prompted them to speed up their launch strategy so that they could finish their international expansion within 2 years.

That expansion is also fueling a drive to buy global rights to high profile content and to ramp their original programming.

Original Programming.

In the letter to shareholders, the company noted that they would be “launching 320 hours of original series (new and returning), films, documentaries and stand-up comedy specials, triple the amount of original programming Netflix released in 2014. In Q1, we are premiering Season Three of House of Cards, the new Tina Fey and Robert Carlock comedy The Unbreakable Kimmy Schmidt starring Ellie Kemper and Bloodline, an intense family thriller from the creators of Damages that stars Kyle Chandler, Ben Mendelsohn, Linda Cardellini, Norbert Leo Butz, Sissy Spacek and Sam Shepard.”

They also announced that they would be making The Interview available to subs in the U.S and Canada on Jan. 24.

Sarandos dismissed comments that the poor critical reaction to Marco Polo would hurt their overall effort to produce more originals or in any way tarnish the Netflix brand.

“The volume of viewing has been phenomenal and the completion rates are comparable to our other tent poles,” he said, which convinced them to renew the show for a second season.

In terms of the impact on subscriber counts, Wells stated that the new season for House of Cards might bring in an additional 100,000 to 150,000 but would not be the main driver of growth in the first quarter.

Competition From HBO

Hastings said he doubted that HBO could price its upcoming over-the-top service as low as Netflix without “seriously disrupting” the pay TV ecosystem, which HBO has said it doesn’t want to do.

He also stressed that “it wasn’t a zero sum game” and that many people would be subscribing to both services, such as many consumers subscribe to both HBO and Showtime.