In the second quarter of 2015, Netflix had total revenue of $1.64 billion, a 22.4% increase year-over-year. Net income, however, declined by 63% year-over-year to $26.3 million due to substantial investments in original content. Earnings per share (EPS) came in at $0.06, beating analyst expectations of $0.04. (Source: Netflix, July 15, 2015.)
Netflix’s stock price surged on the earnings report. On Thursday, shares of Netflix were trading at $113.85 apiece, 16.7% higher compared to Wednesday’s closing price, as of 12:30 p.m. E.T.
The big number is second quarter’s 3.3 million addition of new streaming customers, which beats the forecasted 2.5 million by a large amount. It is also a more than 94% increase compared to the 1.7 million new subscribers who joined in the same period last year.
A large part of the gain in new subscribers comes from overseas. Internationally, Netflix added 2.4 million new members, compared to the 900,000 added in the U.S. Note that the company did not expand to new markets in the second quarter, all additions come from existing markets.
The new addition of members solidified Netflix’s number one position in the video streaming business. The company now has more than 65 million subscribers, with over 42 million in the U.S. and 23 million internationally.
The remarkable growth in new streaming members shows investors that the company’s investments in original content have worked. In the second quarter alone, Netflix introduced original shows including Marvel’s Daredevil, Sense8, Dragons: Race to the Edge, Grace and Frankie, and Season 3 of Orange is the New Black.
However, the investments in original content also weighed on cash flow. In the second quarter of 2015, Netflix had negative cash flow of $229 million, a worse amount compared to first quarter’s negative $163 million.
For companies like Netflix, investors seem to be more focused on its growth rather than its current financial position. At its current price, Netflix’s price-to-earnings (P/E) ratio is as high as 206.
For the third quarter, the company expects continuing growth in new streaming members. In the U.S., Netflix projects a 1.15 million net addition of new members, while international additions are expected to be 2.4 million.
Global Expansion: China in 2016?
So far global expansion has turned out to be fruitful for Netflix, as shown by the massive addition of international subscribers. International revenue tells a similar story: despite currency headwinds, the second quarter’s international revenue improved 48% year-over-year.
The company plans to tap into additional markets in the remainder of this year. Japan is set to launch in the third quarter; with Spain, Italy, and Portugal in the fourth. Expansion is expected to continue in 2016 as well, with the main focus on China.
Indeed, China represents a huge opportunity. According to iResearch, an internet consulting firm based in Shanghai, the Chinese online video streaming market is expected to grow to 90.0 billion yuan ($14.5 billion) by 2018. (Source: IResearch, last accessed July 16, 2015.)
In May, Netflix was in talks with Chinese online media company Wasu Media Holding Co. Ltd. about entering China. Previously, Netflix had planned to enter the Chinese market without a local partner.
There are many challenges to tap into the country with 1.4 billion people. If Netflix enters China, it would have to comply with the country’s content regulations and censorship. How much and what type of Netflix’s popular shows will be allowed remains uncertain.
Competition is also fierce in China’s video streaming business. The biggest players in the Chinese internet industry all have their stake in it: Baidu, Inc. (NASDAQ/BIDU) has iQiYi; Alibaba Group Holding Limited (NYSE/BABA) has Youku Tudou; and Tencent Holdings Limited has Tencent Movies.
Yet despite the challenges in China, Netflix has a solid track record when it comes to global markets. Its launch in Australia and New Zealand in March turned out very successful. Its billions of dollars of spending on content have also started to generate returns. That’s why investors like the company.