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Netflix Q1 Earnings Crush Estimates As Subscribers Jump

Netflix (NFLX) investors gave the streaming video service rave reviews for its first-quarter results late Monday, driving shares up 24% in after-hours trading.

The Los Gatos, Calif.-based company earned 31 cents a share excluding items, vs. analyst expectations for 19 cents. In Q1 2012, Netflix lost 8 cents a share.

Revenue rose 18% to $1.024 billion, edging past the Street's forecast for $1.017 billion.

Netflix added over 3 million streaming subscribers in Q1, bringing its total to more than 36 million worldwide. U.S. streaming customers rose by 2.03 million to 27.91 million paid members. In international markets, Netflix added 1.02 million subscribers to 6.33 million.

Netflix shares rose 24% in late trading to 216.46, which would be their best level since late 2011. During the regular session, the stock rose nearly 7%.

The U.S. streaming business was helped by the launch of Netflix's first original series, "House of Cards." It premiered all 13 episodes of the political drama's first season on Feb. 1.

"The global viewing and high level of engagement with the show increased our confidence in our ability to pick shows Netflix members will embrace and to pick partners skilled at delivering a great series," CEO Reed Hastings and CFO David Wells said in a letter to investors. "The high level of viewer satisfaction implies we are able to target the right audience without the benefit of existing broadcast or cable viewing data and the strong viewing across all our markets gives us faith in our ability to create global content brands in a cost-effective, efficient way.

Netflix launched its second original show, horror thriller "Hemlock Grove," on April 19 and is set to debut the fourth season of cult comedy "Arrested Development" on May 26.

Netflix experienced a negative free cash flow of $42 million, vs. a positive $3 million in net income a year earlier. Netflix cited payments for original shows and other content.

For Q2, Netflix expects to earn 36 cents a share, based on the midpoint of guidance. Wall Street had targeted 30 cents.

Netflix expects to end Q2 with 28.55 million paid domestic streaming customers and 6.95 million paid international users.

It lost 240,000 customers for its legacy, U.S.-only DVD-by-mail business in Q1. That business has fallen 21% to 7.98 million members over the past year.

Streaming Margins Soar

"The biggest upside surprise was on the contribution margin for the streaming business," said Morningstar analyst Michael Corty. "They continue to grow the margin in that streaming business. Netflix, at least currently, is doing a great job of having just enough content to retain and add new subscribers.

Netflix's profit margin was 20.6% for its domestic streaming business in Q1, up from 14.3% a year earlier. Its international streaming business posted a loss, as Netflix continues to invest in content and market the service.

Netflix shares are overvalued, Corty says. "There's a lot of optimism built into that price. The stock's had a great run, no doubt about it.

Netflix benefits from having the most extensive streaming video collection vs. rivals like Amazon.com (AMZN), Hulu, Time Warner's (TWX) HBO Go and others, Corty says. Cable companies with their TV Everywhere initiatives will eventually pose a threat to Netflix, but they are still getting their services together, he says.