Netflix Earnings Preview: More Smoke and Mirrors Ahead?

| About: Netflix, Inc. (NFLX)

Netflix (NASDAQ:NFLX) reports earnings after the bell on Monday, April 25th. It's not so much what the company reports in its actual report that interests me; rather, I will pay attention to the pitch and catch between CFO David Wells, CEO Reed Hastings, and whoever steps in for departed VP of Investor Relations Deborah Crawford. If Netflix does the right thing by its current and prospective shareholders, it will scrap the dog and pony show of its "live" conference call before the SEC outlaws what amounts to one big lie of omission altogether. It does not look like Netflix will change course this time around.

I rely on a subscription for much of my information. My feed lists two relatively straightforward pieces of information.

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Note the mention -- "Live Phone N/A" -- in the relatively straightforward earnings conference call listing. The thing with Netflix is that nothing is really relatively straightforward. Not the Thomson's estimate of $1.07 EPS or the estimates from Wedbush Morgan that crossed Briefing on April 18:

The last portion of the note from Wedbush shows that I am hardly the only one tiring of Netflix's disingenuous earnings reports. As Wedbush notes, Netflix will most likely not offer 2011 guidance because it prefers to keep hidden the impact content acquisition costs will have on its bottom line. It's much easier to go vague, noting that the money you saved on Forever Stamps can now go towards $1 million per episode outlays for random cable shows like Mad Men.

As for what to expect from the earnings call -- just what Wedbush predicts. Netflix will meet expectations and probably report strong subscriber growth. Investors will likely pay closest attention to the subscriber number, as it is one of the numbers the company processes through its smoke and mirrors facade.

According to its most recent annual report, Netflix increased its number of paying subscribers by 41.3 percent between 2009 and 2010, ending the most recent year with 14,786,000 paying customers. The company's average revenue per user (ARPU) dropped, however, from $13.30 to $12.19. When you include free subscribers in the mix, Netflix topped the 20 million mark in 2010. Some analysts expect the company to blow out earnings and set the stage for a year that sees Netflix pass Home Box Office in terms of number of subscribers.

It's "analysis" like this that needs to be taken out and shot. On the other hand, send a golf clap Wedbush Morgan's way. It's difficult not to think that the institutions that prop up NFLX are not up to something. How in the world could an industry with the reputation of being so tough and cutthroat be so uncritical of a company with so many question marks?

How can firms and their analysts sit back and allow Netflix to vet their questions, tailor responses, and not allow the sometimes difficult and on-the-fly follow-ups that make CEOs and CFOs actually think on their feet. How can some analysts allow NFLX to effectively use them like a cheap (throw rug?) to feign the notion of a legitimate conference call.

*See Netflix earnings call transcript.

The numbers Netflix reports are all fine and good. As long as analysts continue to accept half of the story, momentum will probably continue to rule the shares. When investors (or the SEC) force Netflix to come a bit cleaner with the way it reports its liabilities or go beyond the type of vagueness (see below) that populates its filings, reality could set in.

I maintain my short position in NFLX. I believe a near-term subscriber miss, increased operating expenses associated with international expansion and content acquisition that actually get reported, and concerns over exponentially increasing competition could send the stock lower. Further on up the road, NFLX faces pressure when investors finally force the company to respond to live questions and define words such as "significant" in relation to costs that have yet to hit the books.

Disclosure: I am short NFLX.

Additional disclosure: Author is short NFLX via a long position in NFLX put options.