Saturday, April 23, 2011

Netflix (NASDAQ: NFLX): Q1 Earnings Preview 2011

Netflix, Inc. (NASDAQ: NFLX) is scheduled to release its first-quarter earnings after the closing bell on Monday, April 25, 2011. Analysts, on average, expect the company to report earnings of $1.08 per share on revenue of $703.60 million. In the year ago period, the company reported earnings of 59 cents per share on revenue of $493.66 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. 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. 

In the preceding fourth quarter, the Los Gatos, California-based company's net income was $47.09 million, or 87 cents per share, compared to $30.91 million, or 56 cents per share, in the year-earlier quarter. Revenue increased 34.1% to $595.92 million from $444.54 million in the same quarter last year. Analysts, on average, expected the company to report earnings of 71 cents per share on revenue of $597.49 million. 

At its last earnings call in January, the company said that it expects to end the first quarter with 21.9 million to 22.8 million U.S. subscribers, and revenue of $684 million to $704 million. Net income is expected to be in the range of 90 cents to $1.13 a share. In the overseas markets, Netflix expects subscribers to increase to a range of 0.75 million to 0.9 million for the first quarter.For fiscal 2011, Netflix expects to achieve U.S. operating margin of 14.0%. US subscriber net additions are expected to grow in 2011. Netflix expects Canadian operations to have a positive operating margin by third quarter 2011. International expansion beyond Canada is however expected to incur an operating loss of $50.0 million in fiscal 2011.

Netflix has become the dominant player in home-video rentals, offering unlimited one-at-a-time DVD rentals by mail or instantly streamed movies via the Internet. 2010 was a great year for Netflix in terms of subscriber additions. For the whole year, the company added about 7.74 million subscribers amounting to a total 20 million at the year end, representing 63% growth over 2009. In the third quarter, the company added 5.65 million new subscribers, with net additions totaling 3.08 million. The company ended the period with 20.01 million subscribers, up 63.1 percent from 12.27 million in the previous year.Some forecasts estimate that Netflix will boast 55 million subscribers by 2015.

Netflix is in the process of doubling its spending on content to more than $1.1 billion. Netflix said recently that it will start streaming the hit TV series "Mad Men" in a multi-year deal with Lions Gate, the show's producer. The companies said that the show's first four seasons will be available beginning July 27. Last month, Netflix reported a new multi-year licensing agreement with Paramount Pictures, a division of Viacom Inc, adding hundreds of new movie titles, including the exclusive subscription television rights to all first-run films, for Canadian Netflix members to watch instantly on their computers and TVs. In February, Netflix entered into a two-year, non-exclusive licensing agreement with CBS Corp. (YSE: CBS) that will allow select TV shows from CBS's library, including episodes of "Medium" and "Flashpoint" as well as full seasons of classics such as "Frasier," and "Cheers," to be streamed instantly from Netflix.

In terms of stock performance, Netflix shares have gained nearly 181 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. Also, Netflix might face competition from Amazon (ANASDAQ: MZN) Prime video streaming service that was launched last quarter. Apart from the subscriber momentum, investors should look out as to where Netflix’s content acquisition costs are headed. Netflix’s expansion in future is likely to come at a higher cost compared to past. Shares of the company are currently trading at roughly 40 times consensus 2012 EPS estimates.

Full Disclosure: None.
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