Earnings Preview: Netflix (NFLX)

Netflix Inc.(NFLX) is scheduled to release its first quarter 2011 results on April 25, 2011, after the market closes. We do not see any major variations in analysts’ estimates in the run-up to the earnings report.

Prior Quarter Recap

Netflix reported strong fourth quarter 2010 earnings of 87 cents per share that handily beat the Zacks Consensus Estimate of 71 cents and increased 55.4% year over year and 24.3% sequentially.

Revenues in the reported quarter climbed 34.1% year over year and 7.7% sequentially to $595.9 million. Revenues narrowly missed the Zacks Consensus Estimate of $598.0 million. In fiscal 2010, revenues increased 29.5% year over year to $2.16 billion.

For further details, please refer to: Strong 4Q for Netflix

Current Quarter Expectations

Netflix expects U.S. subscribers to grow in the range of 21.9 million to 22.8 million for the first quarter of 2011. Revenue is expected in the range of $684.0 million to $704.0 million in the first quarter. The current Zacks Consensus Estimate is pegged at $703.0 million, at the high end of the guided range.

Operating income is expected in the $98.0 million to $116.0 million range.

In the overseas markets, Netflix expects subscribers to range from 0.75 million to 0.9 million in the first quarter. Revenue is expected in the range of $10.0 million to $13.0 million, with operating loss in the range of $10.0 million to $14.0 million.

Disc shipments are expected to decline in the coming quarters, as Netflix continues to focus on streaming.

For the first quarter of 2011, Netflix expects net income in the range of $49.0 million to $62.0 million. Earnings per share are expected in the range of 90 cents to $1.13 for the first quarter. Currently, the Zacks Consensus Estimate for the first quarter is a profit of $1.07 per share and is in line with management’s expectation.

Netflix expects the effective tax rate to increase in the first quarter of 2011 to 39% and range between 39% and 41% going forward.

For fiscal 2011, Netflix expects to achieve U.S. operating margin of 14.0%. U.S. subscriber net additions are expected to grow in 2011. Netflix expects Canadian operations to achieve a positive operating margin by the third quarter of 2011. International expansion beyond Canada is, however, expected to result in an operating loss of $50.0 million in fiscal 2011.

Estimate Revision Trend

For the current quarter, out of the twenty six analysts covering the stock, only one raised estimates in the last thirty days. There was no movement in the opposite direction.

For fiscal 2011, there was just one upward revision in the last thirty days; however, the EPS estimate for fiscal 2011 increased by a penny from $4.42 to $4.43.


We note that Netflix Inc. has consistently exceeded estimates in three quarters while failing only once in the trailing four quarters. The average surprise in the preceding four quarters is a positive 10.83% and another positive earnings surprise is expected from the company.

We believe that Netflix’s migration from the mail-order DVD rental business to a content-rich online movie streaming company will prove to be a positive for the company, since online streaming does not require handling and mailing charges and therefore, no related costs.

The success of the strategy is also borne out by Netflix’s 20.2 million-strong subscriber base. A focus on content additions would provide a competitive edge to Netflix. We believe that partnerships with big Hollywood production houses such as Paramount Pictures, Twentieth Century Fox and Lions Gate agreement will enhance Netflix’s competitive edge and strengthen its position in the emerging market of online video streaming.

However, Netflix has been troubled with streaming delays from various pay channel providers, which is somewhat worrisome and the capping on bandwidth in Canada, that could hamper quality, is a real concern going forward.

Moreover, competition is clearly heating up, with larger players beginning to show interest in this emerging market of online video streaming.

Netflix continues to face tough competition from Amazon.com Inc. (AMZN), Apple Inc. (AAPL) and Google Inc. (GOOG), as well as from cable operators.

Additionally, Movie gallery Inc. and Red Box, the kiosk company owned by Coinstar Inc. (CSTR) are also increasing competition for Netflix.

Thus we have a Neutral recommendation on Netflix shares in the long term (3-6 months).

We currently have a Zacks #2 Rank for Netflix Inc., which translates into a Buy rating on the short term aided by the expectation of another earnings beat.

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