Netflix Surges on Earnings Beat, 40M Subscribers

NEW YORK (TheStreet) -- Netflix (NFLX) shares surged 9% to $386.96 following third-quarter earnings that blew past Wall Street estimates and topped 40 million total subscribers.

The Los Gatos, Calif.-based company reported earnings of 52 cents a share on $1.106 billion in revenue, as the company surpassed 31.1 million domestic streaming subscribers, 29.9 million of whom are paying subscribers. The company added 1.3 million domestic subscribers during the quarter, up 11% year over year.

Streaming margins for the quarter were 23.7%, up from 22.5% in the second quarter.

Analysts surveyed by Thomson Reuters expected Netflix to report earnings of 49 cents a share on $1.1 billion in revenue.

Netflix added 1.4 million international subscribers, led by the company's expansion to the Nordics and the Netherlands. "In addition, there was a surge in low quality free trials in September in Latin America that temporarily boosted the total member number," the company noted in a letter to shareholders.

Netflix now has 9.4 million international streaming subscribers.

"Domestic net additions of 1.3 million were 11% higher than prior year Q3 due to the growing strength of our content offering, aided by the great press coverage and social buzz generated by Orange is the New Black and our Emmy nominations, and the softer comp in Q3 2012 from the impact of the summer Olympics," CEO Reed Hastings said in the shareholder letter. "We expect Q4 net additions to be approximately equal to Q4 of the prior year and to expand our contribution margin about 400 basis points year over year to about 23%, assuming the midpoint of our guidance. This means that sequentially our target contribution margin is slightly down Q3 to Q4. As a reminder, we shifted our contribution margin target a few months ago from "100 basis points of quarterly sequential improvement" to "400 basis points Q over prior year Q" so we are right on target with our articulated margin growth strategy. Our $7.99 price is working very well for us for both membership growth and contribution margin growth."

For the fourth quarter, Netflix is expecting to add 2.01 million members, and expects to earn 60 cents a share. It expects to have anywhere between 32.7 million and 33.5 million domestic streaming subscribers at the end of the quarter.

The company also noted that it expects to double its investment in original content next year.  "In 2014, we expect to double our investment in original content (though still representing less than 10%  of our overall global content expense)," the company wrote in the letter. "Coming to Netflix next year will be second seasons of House of Cards, Orange is the New Black, Derek and Hemlock Grove as well as the just announced project from Todd and Glenn Kessler and Daniel Zelman, the Emmy and Golden Globe nominated creators of  Damages.  We'll also roll out a number of new animated series from DreamWorks Animation. Expect more news on additional new original projects in the months to come."

The company expects to generate between 47 cents and 73 cents a share in earnings, with revenue expected to be between $941 million and $965 million. It also expects streaming margins to be 23.2%, just slightly below the third quarter.

Netflix will hold a conference call at 5 P.M. EDT to discuss the results.

Shares of Netflix closed the regular session higher, gaining 6.4% to finish at $354.99.

--Written by Chris Ciaccia in New York

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