Earnings Preview: Netflix Inc.

Netflix Inc. ( NFLX - Analyst Report ) is scheduled to announce its fiscal second quarter 2012 results after the closing bell on July 24, 2012. In the run up to the earnings release we do not notice any significant estimate revision by the analysts. We note that Netflix has outperformed the Zacks Consensus Estimate in the preceding four quarters by a positive 34.95%. We expect this trend to continue in the current quarter.

Previous Quarter Highlights

Netflix reported first quarter 2012 loss per share of 8 cents, which not only outpaced the Zacks Consensus Estimate of a loss of 28 cents, but was also significantly above management’s guided range of a loss of 49 cents to a loss of 16 cents per share. However, when compared on a year-over-year basis, Netflix’s loss per share had plummeted from earnings per share (EPS) of $1.11.

Total revenue increased 21.0% year over year to $869.8 million, ahead of the Zacks Consensus Estimate of $867.0 million. The year-on-year revenue growth was primarily boosted by newer additions in the total subscriber base.

For further details please read: Netflix Surpasses Estimates

Estimate Revision Trend

In the last 30 days, one out of the 27 analysts covering the stock revised their estimates downward, while no upward revision was noticed. However, the Zacks Consensus Estimate for the second quarter 2012 remained at 4 cents, within management’s the guided range of (10 cents) to 14 cents.

For the second quarter, the revenue estimate as per the Zacks Consensus is $889.0 million, which lies within management’s guided range of $873.0 million to $895.0 million.

Analysts expect the company to report decent quarter driven by higher subscription growth. The company has been adding content for its streaming business to make its offering more diverse. However, the new licensing agreements would put pressure on the company’s cash flow. Moreover, investments made to expand into the international regions might contract margins.

Recommendation

We believe Netflix’s offering of new and exclusive contents is the biggest USP compared to some of its closest peers. Apart from recent movies and documentaries, Netflix is also boosting its original content portfolio to entice new subscribers in the US and international markets.

However, higher capital expenditure due to international expansion will hurt earnings growth in the near term, in our view. Moreover, when compared to some of its cable and communications peers that have diversified revenue and cash flow streams, Netflix relies solely on streaming for future growth, as its DVD rental business continues to lose subscribers. We believe that the streaming market is getting overcrowded with bellwethers such as Amazon.com Inc. ( AMZN - Analyst Report ) and Verizon Communications ( VZ - Analyst Report ) . This may hurt Netflix’s margins going forward. We provide a word of caution to investors in this respect.

We have a Neutral recommendation on Netflix over the long term. Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating in the short term.