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Strong subscriber growth boosts Netflix revenue in Q2 but profit declines

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MUMBAI: Movie streaming service provider Netflix has added as many as 2.5 million new subscribers in Q2 2015, taking its total subscribers worldwide to a whopping 65.6 million and counting.

However, while the company’s Q2 revenue saw a boost at $1.5 billion as compared to $1.223 billion last year, its profit showed a decline by almost 63 per cent. The company earned $26.3 million (6 cents per share), in the second quarter, which was down from $71 million (16 cents per share) during the corresponding period last year.

Of the 65.6 million subscribers, 42 million are in the US, whereas the remaining 23 million were from international markets. By the end of the third quarter, Netflix predicts that its subscriber number would touch 69 million. The company has ambitious growth plans and plans to make its service available throughout the world by the end of 2016.

Q2 results and Q3 forecast:

Netflix’s higher than anticipated level of acquisition was fuelled by the growing strength of its 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.

US revenue growth was also driven by a five per cent year over year increase in ASP due to uptake in its HD 2-stream plan. The company will continue to target a 40 per cent US contribution margin by 2020, even though it is running ahead of plan given stronger than expected top line performance and lower content and other streaming costs. Netflix forecasts Q3 US net adds of 1.15 million, which is slightly higher than the year ago period.

“Our international segment is growing at a rapid pace. We did not add additional markets in Q2 but saw continued improvement across existing markets, including a full quarter of additions from our successful 24 March, 2015 launch in Australia/New Zealand. We project Q3 international net adds of 2.4 million,” Netflix CEO Reed Hastings said.

International revenue grew 48 per cent year over year, despite an -$83 million impact from currency (+five per cent ASP growth x-F/X). “As we expected, international losses increased sequentially with a full quarter of operating costs in AU/NZ. We expect this trend to continue in the second half as we launch additional markets (Japan in Q3 and Spain, Italy and Portugal in Q4) and prepare for further global expansion in 2016, including China as we continue to explore options there,” Hastings added.

EPS for Q2 amounted to $0.06 after adjustment for our 7-for-1 stock split (EPS would have been $0.42 using pre-split share count). Netflix said it remained committed to running around break-even globally on a net income basis through 2016, and to then deliver material global profits in 2017 and beyond.

Content:

Netflix is making progress shifting to exclusive content and expanding its original content, which differentiates its service, drives enjoyment for existing members and helps motivate consumers to join in.

In Q2, Netflix launched its largest number of original series to date. On 10 April, Marvel’s Daredevil debuted to strong audience engagement, particularly for a new show. Grace and Frankie, the bittersweet comedy starring Lily Tomlin and Jane Fonda, which launched on 8 May, also has found a broad and appreciative audience around the world. Both series have already begun their second season of production.

The company’s global expansion extends to its content strategy as well. Sense8, the mind-bending cinematic thriller from the Wachowski siblings and J. Michael Straczynski that debuted 5 June, is an ambitious, truly international show with talent behind and in front of the camera from multiple countries. Similarly, on 7 August, Netflix will launch in all territories its first non-English language original, Club de Cuervos, a family comedy set in the world of futbol from Mexican filmmaker GazAlazraki, and on 28 August, Narcos, a gripping account of the roots of the cocaine trade, shot in Colombia and starring the great Brazilian star Wagner Moura as Pablo Escobar.

The original documentary Chef’s Table and its latest DreamWorks Animation series Dragons: Race to the Edge are among its most viewed new originals to date.

Netflix closed the quarter with season 3 of Orange is the New Black, which went live on 11 June and set off a social media shockwave around the world. On the following Sunday, Netflix members globally watched a record number of hours in a single day, led by Orange, despite the season finale of HBO’s Game of Thrones and game five of the NBA finals also falling on that Sunday.

“Global enthusiasm for the third season of Orange underlines our ability to create franchise properties that bring new members to Netflix as well as delighting current ones. Nearly ninety percent of Netflix members have engaged with Netflix original content, another indicator that we are on the right path,” Hastings said.

“We anticipate that as our global content spend approaches $5 billion in 2016 on a P&L basis (over $6 billion cash), we will devote more investment to originals both in absolute dollars and percentage terms. This includes not only series, documentaries and stand-up but also original feature films,” Hastings added.

Netflix is moving into the original film business in order to have new, high-quality movies that can be found only on its platform. “As with series, we’ve chosen to take a portfolio approach covering a wide variety of genres and based around creators with great track records and stories they are passionate about. The first of our films, Beasts of No Nation, a gripping war drama from the award-winning director Cary Fukunaga and starring award-winning Idris Elba will be available to all Netflix members and in select theaters in October. In June, we announced War Machine, a provocative satirical comedy starring Brad Pitt, which will be exclusively available to Netflix members and in select theaters next year,” Hastings said.

Strong Net Neutrality:

“Charter Communications made net neutrality history by committing to open and free interconnection across the Charter/TWC network, if their pending merger is approved. This move ensures that all online video providers can aggressively compete for consumers' favour, without selective and increasing fees paid to ISPs. Charter's interconnection policy is the right way to scale the Internet. It means consumer will receive the fast connection speeds they expect. The Charter/TWC transaction, with this condition, would deliver significant public interest benefits to broadband consumers, and we urge its timely approval,” said Hastings.

DVD:

The company’s DVD-by-mail business in the US continues to serve 5.3 million members and provided $77.9 million in contribution profit in Q2. 

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