Netflix Earnings: Numbers in Line with Goals

Streaming movies online can be expensive but not so much so that Netflix (NFLX) has any reason to worry. The mail-order-DVD pioneer came out Friday with better than expected Q2 earnings and up-adjusted guidance for 2008.

By the numbers, overall, Q2 net income rose 3.8% to 26.6m (42 cents a share), up from $25.6m or 37 cents a share for the same period a year ago. Total sales were up 11% to $337.6m. Netflix had previously forecast revenue in the range of $334m to $339m. Excluding special items, profit was 45 cents a share, ahead of Reuters analyst estimates by about 4 cents.

During the earnings call, CEO Reed Hastings said the goal “is to materially increase subscribers and earnings per share every year as we expand into streaming and this quarter we continue to make excellent progress toward that goal.”  The numbers seem to support that.

In the call, Netflix also addressed questions regarding the migration toward streaming services and potential competition. Among other things, Netflix said the company doesn’t view itself (and its streaming service) as a competitor to Amazon’s (AMZN) new offerings. The basis of that proclamation seems to be that Netflix is, and will remain, purely subscription based whereas the other services are Pay Per View. The belief is that the market will support both, and also free ad-supported services like Hulu.

There is probably some truth in that but at the same time, some may view it as largely semantic. Even though the payment processes differ, all of the companies in the on-demand video space are still competing for the attention of the same audiences. It’s true, customers may use more than one service. They might also migrate across the different options. But that segmentation of the market (pay per view favoring customers, those who prefer subscriptions, etc.) has to have some limiting effect on each service’s total market opportunity; even if there is more than enough to go around.

Other Netflix results by the numbers:
•Gross Margins were 31.8%, down from 35.2% a year ago but flat sequentially when compared to the first quarter.

•Subscribers increased by 168k on the quarter to 8.41m. Customer Acquisition Costs dropped to $28.95 per gross subscriber. That was the lowest (best) result in Netflix life as a public company. Netflix paid $44.02 a year ago and $29.50 in Q1.

•Cost of fulfillment/delivery was up from $29.85 to $36.3m compared to last year.  Marketing costs, however, were down $5.25 m to $40m.

•Churn, or the rate of customer turnover, was 4.2%, an improvement from 4.6% a year ago but off compared to the first quarter's rate of 3.9%.

•Netflix is projecting Q3 earnings of 26 cents a share to 34 cents a share on revenue of $343 to $348m. Subscribers are projected to range from 8.67m to 8.87m. For Q4 they project earnings of 29 cents a share to 37 cents a share on revenue of $357 to $367m.

Comments

[Scot's Slant:]

Scotty here. It was a few years ago when a know nothing stock analyst said Blockbuster would bury Netflix -- it didn't happen. But still, the question remains: Is buying a few hundred shares of Netflix a good buy at current market price, and further, is this a good stock to hold for future earnings (dividends)?

Scot's Slant

2008 Jul 27 02:10 PM