Netflix Q2 profit surges as it surpasses 50M subscribers

Netflix's rapid adoption both at home and abroad means another quarter with gangbusters profit growth, but the costs of its grandiose plans to get even bigger crimped it a bit.

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Joan E. Solsman
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"House of Cards" stars Kevin Spacey and Robin Wright with Netflix's head of content, Ted Sarandos, and CEO Reed Hastings. Getty Images

Netflix's profit surged again in the second quarter, more than doubling thanks to yet another quarter with more people than expected signing up for the online subscription video service. But costs of Netflix's move into more countries and television programming kept progress shy of Wall Street's hopes.

Netflix is in the midst of a transformation into an online television network -- and the world's biggest one at that. In order to rival the likes of HBO, the company is expanding abroad and dedicating attention to original programming. So far, the strategy has kept Netflix growing, and it reflects the opportunity available for an aggressive online player as technology morphs the definition of television.

"This is an enormous moment in history, as on-demand internet services are coming to the fore around the world," Chief Executive Reed Hastings said in a live interview on YouTube with two analysts to discuss the results.

However, Netflix's quest to rule the future of online TV around the global comes at a price. Monday, that cost showed up in its profit expectation for the third quarter. Netflix predicted 89 cents per share in earnings, while Wall Street analysts who track Netflix expected $1.06 on average.

Though Netflix's business, even abroad, has no problem with profitability, the company has previously warned it will funnel heaps of its domestic profits into aggressive international expansion, most immediately with the big European rollout this year. It reiterated that stance Monday.

It pointed out that even with the new European countries this year, the company still has about two-thirds of the world's global broadband households out of its reach. "It provides a great opportunity to build on our international success beyond 2014," the company said. Usually, that's code for: We'll keep investing a lot.

The company also projected Monday that it would add 1.33 million domestic members and 2.36 million international ones in the third quarter.

Netflix added 570,000 new domestic streaming customers in the second quarter, for a total of 36.2 million, above its April guidance for 520,000. Its international subscriber base expanded by 1.1 million members to 13.8 million, better than the 940,000 expected. The second quarter tends to be slow for Netflix because of seasonal viewing habits, but the quarter still brought the company to more than 50 million subscribers globally.

Rapid adoption abroad has made its international business an influential factor in how the company as a whole is performing, though the US remains its No. 1 market. The international business is poised to become even more of a factor: Netflix said Monday that European launches in September will increase the total number of homes it could reach to 180 million, or twice the number of current US broadband households.

Netflix had already said it would launch in Germany, France, Austria, Switzerland, Belgium, and Luxembourg -- now pegging the launch for September -- in an expansion from the UK, Ireland, Denmark, Finland, Norway, Sweden, and the Netherlands, where it already operates. The company also already blankets Latin America.

Netflix executives were characteristically nimble as they side-stepped questions about the future during the online video interview to discuss results. Hastings and Chief Content Officer Ted Sarandos demurred from providing: specifics about its future in China, a market of glaring size and growth; admissions that a possible gigantic merger between TV companies Time Warner and 21st Century Fox would affect Netflix at all; and details about how Netflix will release a coming late-night-style original talk show with Chelsea Handler, a format that traditionally demands programs be released soon after they're shot even though that would be a major departure from the Netflix norm.

In a brick-and-mortar turn for the online video service, the company said it would sell gift cards in physical stores this fall.

Shares were up 0.7 percent to $455 after hours on Monday as its outlook for profit in the current quarter was short of Wall Street views and second-quarter profit also came in a hair below expectations. The stock has risen 70 percent in the last year, hitting an all-time high earlier this month.

Overall, Netflix reported a profit of $71 million, or $1.15 a share, compared with $29.5 million, or 49 cents a share, a year earlier. Revenue increased 25 percent to $1.34 billion. Analysts on average expected per-share profit of $1.16, above Netflix's guidance for $1.12, and $1.34 billion in revenue.

Update, 3:15 p.m. PT: Adds details from executives' discussion and share price.