Netflix stock slammed by low guidance (1Q05 earnings)

| About: Netflix, Inc. (NFLX)

Netflix' stock (ticker: NFLX) fell about 8% in trading the morning after the company reported Q1 results that beat estimates but provided lower than consensus revenue guidance for Q2. Details:

Q1 Results
(all percentage changes and comparisons are year on year, unless stated otherwise)

  • Revenue was $154.1 million, up 54% and 7% sequentially. Consensus was $151.7 million.
  • GAAP net loss was $8.8 million and $0.17 per share, much lower than management guidance of $16-19 million. "The outperformance reflects higher revenue, better than-expected gross margin and lower-than-expected fulfillment and marketing expenses..."
  • Non-GAAP net loss (excludes stock-based compensation) was $4.5 million and $0.09. Consensus non-GAAP net loss was $0.21.
  • Gross margin was 38.4%, down from 43.6% (and 45.5% in the prior quarter). "...reflects  the first full quarterly impact of the price reduction implemented in November of 2004."   
  • Free cash flow was negative $8.9 million, compared to positive $9.0 million in the first quarter of 2004 and positive $5.4 million for the fourth quarter of 2004.      
  • Cash from operating activities was $29.4 million, compared to $33.8  million for the first quarter of 2004 and $32.5 million for the fourth quarter of 2004.
  • Subscriber acquisition cost was $37.89 per gross subscriber addition, versus $35.12 (and $36.18 in the prior quarter).
  • Churn was 5.0% versus  4.7% (and 4.4% in the prior quarter). Includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.
  • Total subscribers at quarter end were 3,018,000, up 56% (and 16% sequentially). 96% were paid, 4% on free trial.
  • Gross new subscribers added were 945,000, up 24% (and 21% sequentially).
  • Household penetration in the San Francisco Bay Area rose to 9.8%, up from 7.2% (and 9.0% in 4Q04).  Overall household penetration outside the Bay Area reached 2.6%, up from 1.7% (and 2.3% in 4Q04).

Q2 Guidance

  • Ending subscribers of 3.065 million to 3.265 million 
  • Revenue of $160 million to $165 million, versus consensus of $169.1 million.
  • GAAP net loss of $2.2 million to $7.2 million   

Full Year 2005  Guidance

  • Ending subscribers of 3.85 million to 4.15 million
  • Revenue of $660 million to $685 million, versus consensus of $704.7 million.
  • GAAP net loss of $5 million to $15 million

Quick comments:

  • The stock got slammed on the below-consensus revenue guidance for Q2 and the full year.
  • But that's not all that was bad: subscriber acquisition costs and churn were up. You would have thought that Netflix' price cuts would reduce both of them, but that didn't happen. The company blamed the increases on competition from Blockbuster.
  • For comparison: Q4 results are here.

NFLX chart below.