Netflix added far more users than expected in the first quarter and posted quarterly earnings in line with expectations and revenue slightly above estimates.
The user growth sets the company up for a sunny outlook in the second quarter: The company's earnings guidance also came in well above Wall Street's forecast. Shares rose more than 5 percent after hours.
How Netflix did in Q1
— Earnings per share (EPS): 64 cents adjusted vs. 64 cents expected by a Thomson Reuters consensus estimate
— Revenue: $3.7 billion vs. $3.69 billion expected by a Thomson Reuters consensus estimate
— Total streaming net adds: 7.41 million vs. 6.5 million expected by a StreetAccount consensus estimate
— Domestic streaming net adds: 1.96 million vs. 1.48 million expected by a StreetAccount estimate
— International streaming net adds: 5.46 million vs. 5.02 million expected by a StreetAccount estimate
— Free cash flow was negative $287 million.
In January, Netflix said it expected $3.69 billion in revenue in the quarter and EPS of 63 cents, adding 6.35 million new customers in its streaming business.
A year ago, Netflix reported diluted adjusted EPS of 40 cents per share on revenue of $2.64 billion.
Guidance for Q2
— Forward guidance on Q2 EPS: 79 cents per share vs. 65 cents per share expected by a Thomson Reuters consensus estimate
— Forward guidance on Q2 revenue: $3.9 billion vs. $3.89 billion expected by a Thomson Reuters consensus estimate
— Forward guidance on net adds: 6.2 million vs. 5.24 million (974,000 domestic and 4.27 million international) expected by StreetAccount
Stepping up to challenges from Disney and Amazon
Netflix has relied on international growth and heavy investments in original content to drive subscriptions — and Monday's results provided an update on their effectiveness.
Netflix's addition of more than 7.4 million international subscribers set a new record, marking growth of 50 percent from a year ago.
Chief content officer Ted Sarandos said Netflix has shot original content in 17 countries as it focuses more on local programming, and that many of Netflix's foreign-language shows would be considered "big hits" on American cable channels, thanks to artful subtitling. CEO Reed Hastings added that Netflix has also seen success on its international mobile app offerings. But Hastings also said that the company hadn't changed its view on expanding in China, and will continue to license content.
The company also said it expects to have $7.5 billion to $8 billion of content expenses this year, in line with previous estimates. Netflix had said it expects to grow to 60 million to 90 million members in the U.S. over time and that it would spend $8 billion on content and $2 billion on marketing this year.
The company highlighted Spanish-language hit "La Casa de Papel," unscripted series "Queer Eye," and beloved franchises such as "Marvel's Jessica Jones," "Grace and Frankie," "Santa Clarita Diet" and "A Series of Unfortunate Events." Netflix also credited new talent, such as Shonda Rhimes and Jenji Kohan, for their "proven track record of success" and for allowing Netflix to cut back "reliance on third-party studios."
"We're investing in more marketing of new original titles to create more density of viewing and
conversation around each title," the company said in a statement.
The marketing spending comes after Netflix was barred from competing at the Cannes film festival due to a rule change — a setback the company called unfortunate.
One thing that's not on the spending slate, Sarandos said, is news programming.
"Our move into news has been misreported over and over again. We're not looking to expand into news beyond the work that we're doing in long-form and short-form documentary," Sarandos said. "Topical interview shows, absolutely, but keep in mind, those are entertainment."
Netflix faces increasing competition from Amazon and Disney, which have their own offerings, as well as traditional media companies and technology companies such as Apple. Hastings said the company still has a long way to go to compete with the likes of YouTube, and noted that Netflix's ability to raise prices depends on providing more value than competitors.
"If we get lazy or slow, we'll be run over just like anybody else," Hastings said.
At the same time, Netflix is expanding into cable bundles and recently announced a new offering with Comcast, in addition to bundles with Sky, T-Mobile and Altice.
Netflix said on Monday the bundles allow the company to upsell existing subscribers. Executives said on a conference call that the "new wave" of operator partnerships was a consistent shift across all geographic markets.
"We remain primarily a direct-to-consumer business, but we see our bundling initiative as an attractive supplemental channel," the company said.
On Monday, Netflix also announced the addition of Susan Rice, a former national security advisor and U.S. ambassador to the United Nations, to the board of directors.
— CNBC's Julia Boorstin contributed to this report.