Netflix profit rockets higher, but user gains take slower ride

The biggest streaming service on the Internet reports a nearly five-fold surge in profit, but the pace that it added U.S. streaming subscribers slowed.

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Joan E. Solsman was CNET's senior media reporter, covering the intersection of entertainment and technology. She's reported from locations spanning from Disneyland to Serbian refugee camps, and she previously wrote for Dow Jones Newswires and The Wall Street Journal. She bikes to get almost everywhere and has been doored only once.
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Joan E. Solsman
4 min read

Netflix's second-quarter profit surged as the Internet's biggest video-streaming site continued to gain subscribers with an original content strategy that last week reeled in Emmy nominations.

But shares in the company were down about 6.3 percent to $245.35 after hours, as its nearly five-fold increase in earnings had more to do with reining in costs than blowing away expectations on subscriber growth.

The stock has been a market darling this year, rising more than any other in the S&P 500, making it ripe for a pull back.

"The world is moving from linear TV to Internet TV and Netflix is leading that evolution," Chief Executive Reed Hastings said in a letter to shareholders that was also signed by Financial Chief David Wells.

The letter noted that "Arrested Development" produced a "small but noticeable bump in membership." He also said Netflix would be broadening its original strategy beyond series to broadly appealing feature documentaries and stand-up comedy specials.

Netflix added 630,000 new U.S. streaming customers in the second quarter, for a total of 29.81 million. In April, it had predicted 29.4 million to 30.05 million. While within the bounds of its expectations, watchers had been excited for a beat following the hype around the recent original series. In the previous three periods, U.S. subscriber additions never dropped below a million, and in two of the quarters, they surpassed 2 million.

Netflix released its first high-profile original series "House of Cards" in the first quarter. It received widespread critical and popular acclaim, and the company credited the series for a jump in subscriptions early in the year. Following that, two more Netflix originals were released during the second quarter: "Arrested Development" and "Hemlock Grove". Though neither was a clear home run in the vein of "House of Cards," Netflix has ordered up a second season of "Hemlock Grove" and said it was very pleased with the response to "Arrested Development."

Monday, the company continued to say it would be happy to order up a fifth season of "Arrested Development," which was famously difficult to make for the revived fourth season on the platform.

Last week, Netflix originals scored major credibility with "House of Cards" garnering three Emmy nominations in big categories, including outstanding drama series, and the streaming site's homemade revival of "Arrested Development" receiving one. It marked the first time programming that premiered on a purely digital platform earned marquee Emmy nominations. Including lower-profile categories, the online streaming site had 14 nominations spread across three of its originals.

The Emmy nominations vouch for the quality of Netflix's originals and will enhance its standing for booking big-name talent to participate in future endeavors. But the economic boost from Emmys is shadowy at best, especially for a platform and delivery model -- all episodes all at once -- as unusual as Netflix's.

While Netflix is top of the online streaming heap, the pile of competitors is getting bigger. The company has been in a content-licensing arms race with Amazon lately, and Amazon will be debuting its own originals.

In his letter, Hastings noted that while Netflix's content, tech capabilities, and user experiences are all getting better, "competitors for consumer attention are also all improving, and the risk of U.S. market saturation only grows as we do."

Looking ahead, it expect more subscriber growth in the current period. It projected 30.5 million to 31.3 million for the third quarter.

Hastings has said he envisions Netflix reaching 60 million to 90 million U.S. customers, lapping the likes of HBO multiple times. The company surpassed HBO's domestic subscriber base for the first time earlier this year, according to estimates by SNL Kagan.

Overall, Netflix reported a profit of $29.5 million, or 49 cents a share, compared with $6.2 million, or 11 cents a share, a year earlier. Revenue climbed 20 percent to $1.07 billion.

The 49-cents-per-share result was better than Wall Street analysts were expecting on the whole, while revenue was generally in line with expectations.

It had a total of 7.75 million subscribers in its international business, a 610,000 increase from the prior quarter. It's April prediction was for 7.3 million to 7.9 million.

The DVD-by-mail business continued to atrophy, as original content and -- more broadly -- online streaming take the front seat of Netflix strategy.

Online streaming has become such a focus at Netflix, a video stream supplanting the traditional post-earnings conference call with analysts. Netflix instead will hold a live video discussion moderated by industry analyst Rich Greenfield of BTIG Research and anchor Julia Boorstin of CNBC, who will pitch questions at Hastings they've collected from submissions by email and Twitter. It will start streaming on Netflix's investor relations' web site at 3 p.m. PT.