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Entertainment Media/Telecom

Netflix Shares Soar on International Subscriber Growth

Netflix added 7.4 million subscribers during the first quarter of 2018, more than 1 million more than expected, which sent its stock surging nearly 7% in after-hours trading. About 5.5 million of those additional subscribers were from international markets. More importantly, Netflix’s contribution margin (essentially gross margin adjusted for marketing costs) on that international business nearly doubled from 8.7% to 15.3% quarter-over-quarter, as those overseas subscribers are starting to pay for the cost of reaching them in a much more significant way. To compare, the contribution margin on Netflix’s U.S. subscribers is 38.3%.

Netflix also reported negative free cash flow of $287 million—the amount of cash it is burning. That was the smallest amount of cash burn since the second quarter of 2016. But Netflix doesn’t expect to turn cash flow positive anytime soon. The company repeated previous statements that it expects to report negative free cash flow for several years as it expands its content budget to aggressively court subscribers. That means it will primarily tap the debt markets to fund its growth. It seems like a risky bet, but Wall Street evidently can’t get enough. Netflix shares are up more than 60% in 2018.

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