Netflix Sours After Earnings Results

Netflix Inc. (NASDAQ: NFLX) reported fiscal third quarter 2012 results after markets closed today. For the quarter, the video distribution company posted adjusted diluted earnings per share (EPS) of $0.13 on revenues of $905 million. In the same period a year ago, the company reported EPS of $1.16 on revenues of $822 million. Third-quarter results compare to the Thomson Reuters consensus estimates for EPS of $0.04 and $904.89 million in revenues.

In the company’s letter to shareholders, Netflix says U.S. streaming subscriber numbers grew to 25.1 million and the company expects to add 1.3 to 2 million new subscribers in the fourth quarter. Internationally, streaming subscriber numbers grew by 700,000 to 4.3 million, and projections for total subscribers at the end of the fourth quarter are 5.2 to 5.9 million.

Subscribers to the company’s DVD-by-mail service declined from 9.24 million in the second quarter to 8.61 million, a loss of 630,000. The company said more than two-thirds of DVD subscribers also subscribe to the streaming service.

For the fourth quarter, Netflix forecast EPS in a range from a loss of $0.23 to a gain of $0.04. The consensus estimate for the fourth quarter has called for an EPS loss of $0.08 on revenue of $942.37. The company also projected total revenue for the fourth quarter in the range of $919 million to $943 million.

Netflix’s costs remain high and free cash flow is currently negative. The company’s move into original programming requires more cash in advance than do the company’s licensing arrangements. This cash flow dilemma is hurting the shares today even though the company beat on both earnings and revenues. Add to this, the relatively small U.S. subscription additions and the modest international subscriber gains and a fourth quarter outlook that is at best marginal, and it adds up to some pretty harsh reaction in after-hours markets.

Netflix shares are down about 16.7% in after-hours trading at $56.88 in a 52-week range of $52.81 to $133.43. Thomson Reuters had a consensus analyst price target of around $74.50 before today’s report.

Paul Ausick