Wednesday, January 26, 2011

Netflix (NASDAQ: NFLX): Q4 Earnings Preview 2010

Netflix, Inc. (NASDAQ: NFLX) is scheduled to release its fourth-quarter earnings after the closing bell on Wednesday, January 26, 2011. Analysts, on average, expect the company to report earnings of 71 cents per share on revenue of $597.23 million. In the year ago period, the company reported earnings of 56 cents per share on revenue of $444.54 million.

Netflix, Inc. provides online movie rental subscription services in the United States. The Company’s subscribers can watch unlimited movies and television episodes streamed to their televisions and computers, and can receive DVDs delivered to their homes.

In the preceding third quarter, the Los Gatos, California-based company's net income was $38 million, or 70 cents a share, compared to $30.1 million, or 52 cents a share, in the year-earlier quarter. On an adjusted basis, the company earned 78 cents a share in the latest quarter. Revenue increased 31% to $553.2 million from $423.1 million in the same quarter last year. Analysts, on average, expected the company to report earnings of 72 cents per share on revenue of $550.95 million. 

At its last earnings call in October, the company boosted its fourth quarter and fiscal 2010 outlook. Netflix said that it expects fourth quarter earnings in the range of 59 cents to 74 cents per share or $32 million to $40 million, up from the previous forecast of 58 cents to 73 cents per share. Revenue is now anticipated to range between $586 million and $598 million, up from the prior estimate of $580 million to $596 million. Analysts currently expect the company to report fourth-quarter earnings of 71 cents per share on revenues of $592.83 million. For full year 2010, the company now anticipates earnings of $146 million to $154 million or $2.68 to $2.83 per share, up from the previous forecast of $141 million to $156 million or $2.58 to $2.86 per share. Revenue is now anticipated to be in a range of $2.15 billion to $2.16 billion. Netflix is committed to approximately 10% operating margins for the full year 2010. 

For fiscal 2011, Netflix expects to achieve 12.0% operating margin growth, based on strong demand from the North American market. Management expects to grow subscribers by over 50.0% year over year for fiscal 2011.

Netflix has been rapidly acquiring subscribers and steadily gaining market share at the expense of its competitors such as Blockbuster and Movie Gallery, both of which filed for bankruptcy this year (the former continues to operate as it tries to restructure, while the latter has been liquidated). In the third quarter, total subscribers of Netflix jumped 52% to 16.93 million from the year ago quarter, a 13% sequential growth. Netflix expects to end the fourth quarter with 19.0 million to 19.7 million subscribers, up nearly 60% from 2009. That translates to about 17% of the 115 million U.S. households. Some forecasts estimate that Netflix will boast 55 million subscribers by 2015.

Last month, Netflix reached a deal with Walt Disney Co. to stream television shows over the Internet. Netflix said it will stream hundreds of episodes from the ABC Television Network, Disney Channel and ABC Family. The company also cut a deal with FilmDistrict, a distribution, production and financing company, to stream first-run films over the Internet shortly after they are released on DVD. According to Netflix, it has added significantly to the streaming content available to its members. The company reached licensing deals this year with NBC Universal, Warner Bros., 20th Century Fox, EPIX, Relativity Media and Nu Image/Millennium Films to add first-run theatrical films, hit TV series and movie classics to the company's streaming offering.

Over the years, Netflix has shifted its business model from a traditional rental model to offering many subscription options at various price points and added streaming a few years ago. It was originally seen as a niche add-on for die-hard techies, but now streaming accounts for the majority of Neflix viewing. During the quarter in review, Netflix rolled out a streaming-only subscription option in the U.S. Netflix also announced a series of price increases to its monthly fees. 

The company is expanding beyond the United States and recently introduced its movie-streaming service to Canada. It may expand internationally beyond Canada as early as this year, former Chief Financial Officer Barry McCarthy said in December. Management plans to invest approximately $50.0 million for such an expansion in the second half of 2011.

In December 2010, regulators adopted new plans that seek to ensure consumers can access any Web site at prices and speeds they are used to. Under the rules, cable companies such as Comcast cannot block access or charge competing services, such as Netflix , which offers movies and TV shows via the Web, in addition to its Internet-based mail delivery service of physical DVDs. Also in December, S&P announced that NFLX will replace Office Depot in the S&P 500.

In terms of stock performance, Netflix shares have gained nearly 275 percent over the past year. Few industry watchers believe that Netflix's's high valuation is a potential risk factor. It is now being argued that with expectations running so high, the company risks disappointing investors and analysts. Investors have also been concerned by the departure of the company's chief financial officer and substantial insider selling in recent months. Shares of the company are currently trading at roughly 48 times consensus 2011 EPS estimates.

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