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Netflix Plunges Despite Margin Expansion

NEW YORK (TheStreet) -- Netflix (NFLX) shares fell 5.75% to $246.66 in after-hours trading after the online entertainment company reported earnings that beat Wall Street estimates, but subscriber numbers that fell short.

The Los Gatos, Calif.-based Netflix reported earnings of 49 cents per share on $1.069 billion in revenue. Analysts surveyed by Thomson Reuters expected Netflix to earn 40 cents per share on $1.07 billion in revenue for the second quarter.

The company added 630,000 domestic streaming subscribers, and 610,000 international streaming subscribers, bringing the company's total to 29.84 million domestic streaming subscribers. It had margins of 22.5% during the quarter, a gain of 190 basis points sequentially. Expectations on Wall Street called for 700,000 domestic streaming subscribers to be added.

"We generally expect net additions in Q2 to be lower than prior year Q2 due to increased net add seasonality as we grow," CEO Reed Hastings wrote in a letter to shareholders. "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."

The company noted that its margins are growing faster than the company's targets, having gone up 610 basis points since the second quarter of 2012, compared to expectations of 400 basis points. "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," the company said in the letter.

The company said it would slightly modify its target of an average of 100 basis points per quarter to 400 basis points per year.

The company gave third-quarter guidance that was weaker-than-anticipated. It expects to earn 30 cents to 56 cents per share in the third quarter, on a revenue range between $959 million and $993 million. Estimates call for Netflix to earn 43 cents per share in the quarter.

The company said it expects another 130 basis points in margin expansion in the third quarter, "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." It expects margins to be 23.8% for the quarter.

Shares of Netflix closed the regular session lower, falling 1.08% to $261.71.

--Written by Chris Ciaccia in New York

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