NETFLIX Q3 FY 2010 EARNINGS ANALYSIS
Netflix had an outstanding quarter, 3Q10, based on adding more subs than forecasted and being on the high end of top and bottom line guidance, see chart:
| 3Q10 Guidance vs. Actual | Low End | High End | Actual | % Beat of High End | |
| Subscribers* | 16,300 | 16,700 | 16,933 | 1.40% | |
| Revenue** | 546 | 554 | 553.2 | -0.14% | |
| GAAP Net Income** | 33 | 40 | 38 | -5.00% | |
| * In thousands | |||||
| ** In millions | |||||
Whenever a company meets or beats for the high side of all guidance and then raises guidance for the following quarter, the stock price has no choice but to move upward. I have touched on the current and near term catalysts for the company.
International Expansion:
Q3 was the host of expanding subscriber services to Canada (pop. 30MM). This is essential to accelerating growth in the company because as markets such as Canada expand, it will allow Netflix to combat USA market saturation. I say that the USA market is reaching a saturation point simply because my 74 year old mother is a Netflix subscriber and I wouldn’t call her an early adaptor. This should not imply that there is no-more room for growth in the USA (I will address this further below). The Canadian market is on track for profitability toward the end of 2011. This means that Netflix has the ability to make markets profitable within 5 quarters of launching new markets.
Netflix plans on spending $50MM in growth beyond North America starting in the second half of 2011. The location of the market hasn’t been announced, but I would assume Europe (pop. 830MM) or a subset of Europe, the United Kingdom (pop. 61MM), is the next target. Launching a market that is larger than Canada in 3Q11 would allow Netflix subscriber growth to continue similar, if not better, year over year performance.
Streaming Content:
Delivering Content through the internet offers a huge advantage over the standard mail delivery method. The current generation is that of instant gratification and they love having content available, anytime, all the time. This allows Netflix to satisfy the needs of today’s consumers and attract another type of customer.
Reed Hastings, CEO, Netflix said, “In terms of the economics of this evolution, our revenue in Q3 grew about 30% but our disc shipments only grew about 10%, which has allowed us to take up our streaming spend. We plan to continue to drive this trend with more streaming content spend, consistent with our operating margins goals”.
In short, Netflix will continue to invest in streaming and expand the content available, shifting away from DVD mail delivery methods. Hastings doesn’t see a reduction in mailing warehouses in the near future, but when Netflix reaches that point, there will be a huge savings because the current expense for mailing DVDs is approximately $600MM per quarter. I don’t believe this number includes the operating expenses; the $600MM is postage (I will need to double check that and update it later on).
Although Netflix hasn’t seen an increase in, “cutting the cord”, an age old analogy for landline users going to mobile phone use only, it is safe to assume that there will be a increase in “cutting the cord” (cable to Netflix) subscribers as Netflix expands its streaming content.
Multi-Platform Access to Content:
By making content more convenient and having a larger selection of content available via streaming are the factors that will make the USA subscribers grow. Below is a comment from Hastings’s 3Q10 statement:
“As the reputation of Netflix streaming gains strength among consumers, we become an essential application on every internet connected device. Apple launched their terrific $99 AppleTV, and Netflix is one of the few non-Apple applications included. Similarly, Google is launching their Google TV platform, built into a Sony TV, and Netflix is a key application on the platform. Google and Apple are driving their internet platforms to the TV, which, along with Microsoft, Nintendo, and Sony game consoles, Blu-ray players, Internet TVs, and Roku's, are making the enjoyment of internet video on the TV easier and easier”.
Hastings talks about eight different platforms that allow for content delivery. I am surprised he didn’t mention any wireless devices such as tablets or mobile phones. This is a huge sector for product marketing and will continue to grow. Android products should start offering Netflix in the future as well. We all know that Android is the fastest growing mobile device OS because it is not tied to a specific carrier, nor is it tied to a specific phone manufacturer. If I had to guess, I would assume this launch will be completed, just in time for the Christmas shopping season.
I firmly believe Apple TV and Google TV will have a similar effect as offering Netflix through gaming consoles, but the results will be BIGGER and BETTER. The ability to offer instant gratification to consumers will be the method of growth for Netflix in the USA market; Google TV, a Sony product will quickly become Netflix’s best friend.
Quote from http://tiny.cc/g2jyb describing Google TV:
“The TV’s sleek design is mind blowing. The shiny white and black panel on the back is really attracts the people. The TV itself displays in full 1080p HD with an Edge LED backlight. The customers have the choice of selecting the Sony Internet TVs range in sizes from 24 to 46 inches, and are priced from $599 to $1399”.
Conclusion:
Long story short, Netflix has several years of growth because of product expansion and a huge opportunity for international growth. I love the outlook for the company and I will continue to follow their success and blog about it. I could continue to discuss other areas that are growth drivers, but I’m sure you get the picture.
Netflix Q3 FY 2010 Earnings
Full disclosure, I do not own Netflix’s stock at this time as an individual investment, but I have owned the stock in the past and I plan on purchasing the stock again in the future. In addition, I am interested in working for the company, Beverly Hills, CA, location to be exact.
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