M+E Connections

The ongoing growth of internet TV around the world, combined with a strong slate of original content, were the keys to the strong results that Netflix achieved in the second quarter (ended June 30) and the continued momentum it expects for the third quarter, according to CFO David Wells.

Netflix shares were up 13.2% at $183.06 in late morning trading July 18, after the company said it added a whopping 5.2 million new streaming subscribers globally in the quarter, boosting total memberships to 104 million (99 million of them paying) from 99 million at the end of the first quarter. That was more than it expected and most of it came from outside the U.S., Netflix pointed out in its quarterly letter to shareholders July 17.

The company added more than 4 million streaming subscribers outside the U.S., increasing to 52 million from 48 million. Growth was much slower in the U.S., where streaming subscriptions grew to 52 million from 51 million. Revenue grew 32.3% from a year earlier, to $2.8 billion, while profit increased to $66 million (15 cents a share) from $41 million (9 cents).

Netflix expects to add 3.65 million non-U.S. subscribers in Q3. The company is “making good progress with our international expansion as improving profitability in our earlier international markets helps fund significant investment in our newer territories,” it said in the letter, noting the Q3 result would “mark the first ever annual contribution profit from our international segment.”

“We still think the major driver is adoption of Internet television,” Wells said the same day, on the company’s quarterly earnings webcast. But he added: “On top of that, we’re increasingly growing throughout the world, so we’re getting more word of mouth on our newer territories and we’re seeing great content slates have an effect,” and “we had a really strong content slate” in Q2.

Netflix is “really seeing that around the world — whether it’s Brazil or Argentina or Japan, Singapore or Germany — internet TV is really catching on for us” and rivals including YouTube, Netflix CEO Reed Hastings said on the webcast.

The company is “doing very well” in Latin America, North America and Europe, and has “just got to continue what we’re doing,” including more local productions, Hastings said, noting it has “some amazing new shows we’re producing in Europe and in Latin America.”

Netflix “saw some great success” during Q2 with the film “Okja,” directed by South Korean filmmaker Bong Joon Ho, Hasting said. But he said: “With Asia, we’ve got a lot more to learn. We’re really expanding a lot in India, Japan. We’re figuring it out market by market. But Asia is very unique and very large. So, we see a huge opportunity for us over the next couple of years, all of us spending more time there and investing more.”

“Okja” helped Netflix attract new subscribers, chief content officer Ted Sarandos said. But he conceded that, “relative to the rest of the world, we’ve got a lot of work to do” in Asia. He added: “As we look to Asia, we have to get better and better matching” content to the tastes of viewers, and “those tastes are not as easily aligned with Western tastes.” Therefore, Netflix will “invest more time and energy in Asia putting some people on the ground in Asia that we haven’t historically,” he said.

On the mobile front, meanwhile, Netflix has “had great success” in developed markets including the U.S., Europe, Latin America and now Asia, Hastings said. He added that the company is “continuing to get better and better at encoding efficiently our films and TV series so that it takes less and less network bandwidth and we’re rising in popularity around the world, and that’s paralleling the improvements that YouTube and others are doing to make video a natural part of mobile phones.” It’s “just a continued evolution,” he said.