Netflix hits another major milestone, stock heads for records

 marketwatch.com  7/18/2017 12:22:37 AM 

Netflix Inc. investors have bemoaned the cost of hefty spending on its international expansion, but that focus paid off for the streaming company Monday.

Netflix NFLX, +0.36%  reported better-than-expected subscriber growth in its second quarter on Monday, and announced that it now has more subscribers outside the U.S. than within after adding 1.1 million domestic subscribers and 4.1 million international customers. Netflix also forecast that its international segment would show a profit in the third quarter and for the full year at current exchange rates, which would be a first for the company.

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This is big news for Netflix, which has shown a loss for its international operations every quarter but one — the first quarter of 2017 — since it began streaming internationally in Canada in September 2010. In the second quarter, Netflix also reported a slightly narrower loss than expected for its international operations in the second quarter, $13 million compared with the $28 million loss it expected.

“We are making good progress with our international expansion as improving profitability in our earlier international markets helps fund significant investment in our newer territories,” Netflix CEO Reed Hastings and the executive team said in their quarterly letter to shareholders.

Overall, the company beat revenue expectations thanks to its big subscriber growth, and its stock soared more than 10% in after-hours trading to levels that would easily be records. Even before the post-earnings bump, Netflix shares had increased more than 30% so far this year, while the S&P 500 index SPX, -0.01%  has moved less than 10% higher so far in 2017.

Whether profits in the international business will be sustainable is still a big question, though, as Netflix is likely to ramp up spending on foreign content just as it has in the U.S. market. The company has created local original series for different countries or languages, such as “Ingobernable,” a sort of “House of Cards” meets “Narcos” based in Mexico. Every new show means more production costs for Netflix, though the accounting can be tricky as its new “content reporting” overview shows.

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The surprise, even for Netflix, is that the shows it produces and acquires for specific regions can find audiences in other countries. Netflix noted that “Ingobernable” has been watched by millions of subscribers outside Mexico, and Instinet analyst Anthony DiClemente predicted before the earnings report that the show had helped drive an acceleration of Netflix app downloads in large Latin American countries, where growth had been declining.

Investors have shown a willingness to support increased content spending as long as it results in a continued, pardon the pun, stream of new users. Monday’s results are unlikely to change that trend, as the rising stock price shows they are clearly overjoyed in multiple languages.

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