Netflix's Shareholder Letter: 5 Things Investors Need To Know

Shares of Netflix, Inc. NFLX are up about 12.5 percent after hours, after the company reported strong first quarter financial results.

In a letter sent to shareholders, CEO Reed Hastings and CFO David Wells highlight several major milestones the company achieved in the first quarter.

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Here are some of the highlights:

• Surpassed 40 million subscribers in the U.S.
• International subscribers surpassed 20 million.
• Internationally, they added a 2.6 million new members, surpassing guidance.
• In the U.S., there were 2.3 million new subscribers.

Expanding Content

The executives think strong U.S. growth benefited from Netflix’s "ever-improving content, including the launch of the third season of House of Cards and new shows Unbreakable Kimmy Schmidt and Bloodline."

International Growth

Streamed hours rose to 10 billion in the quarter. This proves that "consumers around the world are embracing the Internet TV revolution."

Starting in the second quarter, management intends to shift some of its U.S. marketing budget to international "to take advantage of the substantial available growth opportunities. This, in the short term, drives down international contribution profits and drives up US contribution profits." The company still targets 40 percent contribution margin in the U.S. by 2020.

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Internationally, "the strong dollar hurt financial results during the quarter, negatively affecting International segment revenue (lower by $48 million y/y using Q1 2014 forex rates) which carried through into a $15M negative forex impact on international contribution loss."

Regarding product, the company plans to roll out an improvement to its TV UI in the second half of the year. Over 2016, Netflix will "evolve from using HTTP to using Secure HTTP (HTTPS) while browsing and viewing content on our service."

Brush Off The Competition

The letter also looks into competition posed by new streaming service HBO Now. Hastings and Wells assure that, "Netflix and HBO are not substitutes for one another given differing content... both will continue to be successful in the marketplace, as illustrated by the fact that HBO has continued to grow globally and domestically as we [Netflix] have rapidly grown over the past 5 years."

Other Internet MVPD offerings "like the rumored Apple offering, Sony’s Playstation Vue and Dish’s Sling TV" pose more of a threat to "the current pay TV bundle than to Netflix which is lower cost, has exclusive and original content, and is not focused on live television."

Stock Split

Regarding the rumored stock split, the executives reiterate they are seeking shareholder approval for an increase in the company’s authorized shares. If approved, management expects to recommend to the Board a stock split to make the stock "more accessible."