Pivotal Quarter For Netflix (NFLX)

Netflix, Inc. (NASDAQ: NFLX) is set to report earnings shortly.  Because of all of the recent attention to web movies out of Apple, competition increasing from Blockbuster, digital on-demand downloads, a slowing consumer looking for ways to trim monthly expenses, and more, this may be a very pivotal quarter for the online movie rental club.

First Call has estimates pegged at $0.14 EPS on $301.6+ million in revenues, and next quarter estimates are $0.15 EPS on $320.1+ million.  The company did offer guidance with its last earnings as follows:

• 7.3 to 7.5 million subscribers
• Revenues of $297 to $302 million
• GAAP EPS $0.09 to $0.16

Analysts have an average price target on Netflix between $25 and $26 so the targets are not screaming for massive upside.  Options are not easy to use for inference in the current environment, but it appears that as of today options traders are braced for a move of up to about $2.10 in either direction.  Its chart has been using $21.75 as support, although at one point today its shares fell as low as $21.00 when the market was looking bleak again.

Netflix has seen margins come in to 33.9% in Q3 2007, down from 28% year over year and down from 35.2% sequentially.  Last quarter it ended (Q3) with 7.028 million total subscribers, up from 5.662 million from Q3 2006 and up from 7.742 million at Q2 2007.  As of Q3, it counted 6.845 subscribers as paid subscribers.  Subscriber acquisition costs $37.91 last quarter, which was lower than $45.32 for the year over year metric and down from $44.02 sequentially. Its churn rate was 4.2%, flay year over year and down from 4.6% sequentially.

It seems that for every effort from outside competition, Netflix has been able to answer the challenge.  If it can prove that it is able to weather the storm of the rapidly cooling economy, then the standard response to each new challenge may end up being "WHATEVER!" each time it is challenged.  But if there has been any real erosion in those subscriber numbers then there is a long way to go for this to challenge its 52-week low of $15.62 (52-week high is $29.14).

Jon C. Ogg
January 23, 2008