Netflix just released its Q2 earnings report.
In a letter to shareholders, CEO Reed Hastings and CFO David Wells say Netflix has grown to nearly 30 million domestic members and 8 million international members, and that Q2 streaming revenue was up 26% domestically and 155% internationally, year-over-year.
Netflix says that of about $3 billion in content library net book value, currently about 5% is for originals.
Here’s an overview of the results and guidance:
More from the letter:
As the table above shows, we are generating steady growth in members, revenue, and contribution profit. Our content mix, streaming and user experiences are all getting better and devices and bandwidth are improving. Countering this, competitors for consumer attention are also all improving, and the risk of U.S. market saturation only grows as we do. Given these competing forces, we are very happy this year to be tracking slightly ahead of prior year in terms of net additions.
We generally expect net additions in Q2 to be lower than prior year Q2 due to increased net-add seasonality as we grow. This Q2, however, was an exception, we believe due to the launch of Arrested Development. This show already had a strong brand and fan base, generating a small but noticeable bump in membership when we released it. Other great shows don’t have that noticeable effect in their first season because they are less established. Our contribution margin has now grown faster than our target for several quarters (up 610 basis points from Q2 2012 on a target of 400). In addition to growing members at a faster rate than expected, our outperformance is due to timing shifts on content deals and to a lesser degree just spending less on content than expected. We are growing domestic content spend significantly and plan to continue to do so. We’ve generally talked about how we’re focused on 100 bps of sequential quarterly expansion, and how the lumpiness of content deals can make the q/q pattern somewhat irregular. Going forward, we’ll slightly modify the articulation of our target from “an average of 100 bps per quarter” to “400 bps per year.”
In Q3, our guidance midpoint implies 130 bps of further margin expansion as we continue to run above our target. For Q4, we anticipate stepping up content spending even more, getting us closer to our 400 bps per year target. We’ll keep targeting about 400 basis points of annual improvement into 2014 if we keep growing net additions at 2012/2013 levels.
In the quarter, we allowed our broad content deal with MTV Networks to expire. As we have said in the past, it is our preference to license specific shows that our members love in an exclusive manner. While the shows from Nickelodeon and Comedy Central came off our service, we introduced several new shows from Disney Jr., The Cartoon Network and the HUB for kids, and great comedies like “The New Girl” from Fox on July 1. Viewing and retention remain strong. TV Everywhere continues to steadily improve, with, for example, the HBO Go app now available on AppleTV.
Hulu and Amazon Prime Instant Video continue to license some exclusive content and develop their own Originals. We have House of Cards and many others; Hulu has Battleground; and Amazon Prime Instant Video will have Alpha House; all are quite good and quite different. All three services are becoming more distinct from one another, like HBO, Showtime and Starz are distinct from one another on linear TV. Of our “top 200” titles, Hulu is now at 36 titles and Amazon Prime Instant Video is at 68. Now that Hulu has more money to spend, content prices may rise further, but we have many multi-year deals in place to mitigate this. Hulu and Amazon appear to have about the same amount of viewing, and Hulu
recently reported 4 million paying members.
As the company notes, it managed to match its net additions in membership in international markets from a year ago when its numbers were boosted by a UK/Ireland launch, despite not launching in any new territories.
At 6PM Eastern, Netflix will webcast a live video discussion with Hastings and Wells, in lieu of a regular earnings call. This will be moderated by BTIG Research’s Rich Greenfield and CNBC’s Julia Boorstin, who will field questions submitted by email and social media.
You can watch here:
