Earnings Preview For Netflix 3Q

Oct.24.11 | About: Netflix, Inc. (NFLX)

By Brendan Gilmartin

Overview

Netflix (NASDAQ:NFLX) is scheduled to report 3Q2011 earnings after the close of trading on Monday, October 24. A conference call will follow the press release at 6:00 p.m. EST. This will be the most closely-watched earnings release for Netflix, with the shares losing nearly 2/3 of their value since mid-July, following a series of management missteps and reduced U.S. subscriber forecasts in reaction to a price increase in July.

Outliers & Strategy

  • Netflix is expected to earn $0.94 per share in the 3Q period (range is $0.70 – $1.25). Revenues are seen rising 46.5% to $810.53 million (Source: Yahoo Finance). The company issued the following outlook:
    • 3Q 2011 Earnings Per Share (EPS): $0.72 – $1.07.
    • 3Q 2011 Revenues: $799.5 mln – $828.5 mln.
  • Key measures:
    • Earnings Per Share (EPS), Revenues, Gross Margins, Net Subscriber Additions.
  • The following is a timeline of the recent missteps at Netflix, triggering the sharp pullback in the share price:
    • 10/10: Netflix said it will not rename its DVD-by-mail service and that its U.S. members will continue to go to the Netflix website for both unlimited streaming and unlimited DVDs. CEO Reed Hastings admitted the move to Qwikster was in haste and turned off customers that valued Netflix services for its simplicity.
    • 09/18: Netflix said in a blog post that its DVD-by-mail service would operate as Qwikster.com.
    • 09/15: Netflix warned the Street, saying it now expects the following:
      • 9.8 million streaming-only customers (prior guidance was 10.0 million).
      • 2.2 million DVD-only customers (prior guidance was 3.0 million). This was due to the price hike announced 7/12.
    • 09/01: Starz Entertainment terminated contract renewal talks with Netflix.
    • 07/25: Netflix reported a solid 2Q, but warned that EPS for the 3Q period ($0.72 to $1.07) would fall shy of consensus.
    • 07/12: Netflix announced it is separating its unlimited streaming and unlimited DVD plans in the U.S. The plan included a price hike for DVD-only customers.

Recent News

  • 10/19: Wedbush maintained a Neutral rating and $10 price target on Netflix, due in part to margin pressure from lost customers and the marketing costs needed to lure them back. Benzinga.com
  • 10/13: CBS Corporation and Warner Bros. Television Group announced a licensing agreement with Netflix.
  • 10/10: Goldman Sachs maintained a Buy rating on Netflix, following its decision to abandon plans to separate the DVD-only customers from streaming. Benzinga.com

Technical Review

Netflix has lost about 2/3s of its value since the all-time highs in July 2011, breaking a long-term uptrend going back to July 2010. From here, there is soft support near $110, followed by the 52-week low at $103.13. Nearly every momentum oscillator, including the RSI Index (30.41/readings of 30 or below generally reflect an oversold market) and MACD are reflecting oversold condition, suggesting a bounce may be in store. (Chart courtesy of StockCharts.com)

Summary

Netflix shares have come under heavy pressure following a series of missteps, highlighted by unwelcome service price hikes resulting in decreased subscribers, along with expired content agreements, and questions over management’s initial decision to separate the DVD and streaming businesses on separate platforms. But with the shares having declined over 60% from the July peak and fetching a mere 18x forward earnings with a PEG ratio of less than 1.0, Netflix shares look poised for a bounce if earnings do not disappoint.

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