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Netflix Tops 57 Million Subscribers in Q4 as U.S. Growth Slows

Netflix ended 2014 with 57.4 million subscribers worldwide — packing on 1.9 million in the U.S. and 2.43 million internationally during the fourth quarter, topping expectations for overseas growth — as it posted earnings that beat Wall Street estimates.

The No. 1 subscription video-on-demand provider reported quarterly revenue of $1.48 billion, up 26% year over year, with net income of $83.4 million (including a $37.9 million tax benefit). Excluding the tax benefit, Netflix posted EPS of 72 cents; analysts had expected profit of 45 cents per share, according to a survey by Thomson Reuters. Netflix shares were up more than 13% in after-hours trading, to $395.15 per share, on the results.

Still, while Netflix topped internal forecasts — adding 4.33 million in Q4 vs. its projected 4 million — and had a surge in international signups, its growth in the U.S. has decelerated. In the fourth quarter of 2013, the company added 2.33 million domestic streaming subs. As of the end of 2014, Netflix had 39.11 million U.S. streaming subs and 18.28 million internationally.

In the third quarter of 2014, Netflix missed subscriber-addition expectations, which prompted its stock to drop as much as 26%. That may have led company brass to issue a more conservative outlook. In October, Netflix said it anticipated adding 1.85 million subs in the U.S. and 2.15 million abroad for the last three months of 2014.

While Netflix previously attributed the lower-than-expected Q3 sub results to its May 2014 price change for new customers, the company says it now believes that’s not actually what threw off its forecasts. “We’ve found our growth in net adds is strongest in the lower-income areas of the U.S., which would not be the case if there was material price sensitivity,” Netflix CEO Reed Hastings and CFO David Wells wrote in a letter to shareholders.

For 2015, Netflix has a slew of originals lined up in its queue, including the third seasons of “House of Cards” and “Orange Is the New Black,” its best-known shows. The company continues to bank on originals and exclusive licensed programming to keep existing subscribers happy and to sign up new ones. On Tuesday, Netflix announced it had secured exclusive SVOD rights to Sony’s “The Interview” for the U.S. and Canada.

All told, the company this year will launch 320 hours of original series — both new and returning — as well as films, documentaries and stand-up comedy specials. That’s three times the amount of original programming Netflix released in 2014, according to Hastings and Wells.

“Our originals cost us less money, relative to our viewing metrics, than most of our licensed content, much of which is well known and created by the top studios,” the execs said.

On a call with investors discussing the Q4 results, Hastings said that the median number of hours viewed on Netflix continues to climb. “That’s the main thing we track internally,” he said, because it correlates with retention. Hastings declined to disclose what that figure is currently.

Netflix expects to add 4.05 million subscribers in the first quarter of 2015, including 1.8 million in the U.S. and 2.25 million internationally, to stand at 61.4 million global members at the end of the period.

In late Q1, Netflix expects to launch service in Australia and New Zealand. And it’s exploring other territories beyond the 50 countries where it already offers service — including China — with the potential to reach as many as 200 countries within the next two years, while staying profitable.

“For China, we are still exploring options — all of them modest,” Hastings and Wells wrote. “We’ll learn a great deal if we can successfully operate a small service in China centered on our original and other globally licensed content. That is our preference, for the next few years, if we are able to acquire the necessary permissions.” On the call, Hastings added that in China, Netflix needs to get a license to offer service and “it’s not 100% clear we’re going to be able to do that.”

Worldwide, the execs said, piracy “continues to be one of our biggest competitors,” pointing a dramatic rise in the use of piracy app Popcorn Time in the Netherlands relative to the growth of Netflix and HBO.

Streaming content obligations at the end of 2014 totaled $9.5 billion on Netflix’s balance sheet, up from $7.3 billion at the end of 2013. The company disclosed plans to raise at least $1 billion in additional long-term debt, given that “we are investing faster in content” as well as current favorable interest rates.

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