Netflix ($NFLX) announced its second-quarter 2011 earnings results with earnings per share (EPS) of $1.26 and revenues of $789 million. This compares with EPS and revenues of $0.80 and $520 million in the year-ago quarter. Analysts were expecting an EPS of $1.11 and revenues of $791 million. NFLX shares responded by sinking nearly 10% in after-market trading.
The company ended the quarter with more than 25 million subscribers worldwide, up from 15% a year ago. Sequentially, Netflix added 1.8 million net new domestic subscribers in the second quarter 2011 vs. 3.3 million in the first quarter. On an international basis, NFLX added 160,000 net new subscribers in the second quarter.
Netflix's focus on streaming content continued to gain popularity; 75% of new subscribers signed up for streaming service. Netflix continues to take the savings from reduced DVD purchases and plow it into the streaming side, which helped boost domestic operating margins by 140 basis points quarter over quarter.
The company's 60% rate hike for DVD/streaming subscribers is a gamble. Management cited that it is "expected and unfortunate" that subscribers don't like the price change and admitted that some subscribers will cancel or downgrade plans. Even though the rate increase doesn't go into effect until September, these comments lead me to believe that users are already starting to cancel. However, the real effect will materialize in the third and fourth quarters of this year.
Third quarter guidance is set for 24.6 to 25.4 million U.S. subscribers and 1.1 to 1.45 million international subscribers. Part of the push into streaming is to fuel international growth since shipping DVDs abroad makes no sense.
Streaming is a natural, but major move for Netflix. Competition is fierce with Time Warner's ($TWX) HBO GO and other streaming services. Given the stock's price reaction today, it's possible that Netflix shares will remain range-bound until the company can illustrate its results over the next couple of quarters.
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