Analyst: Netflix Could Turn Q2 Profit23 Jul, 2012 By: Erik Gruenwedel
Netflix could return to fiscal prosperity when it reports second-quarter results after the market’s close July 24, an analyst said.
Los Gatos, Calif.-based Netflix had projected quarterly losses through the end of the year as it expands streaming operations (and capital expenditures) internationally, including a planned European venture beyond Ireland and the United Kingdom in the fourth quarter.
Michael Pachter, analyst with Wedbush Securities in Los Angeles, believes Netflix might report earnings from 3 cents per share, compared with the company’s projected loss from 10 cents per share.
“If it does not return to profitability in Q2, Netflix will likely guide to profitability in Q3 to restore investor faith in its ability to turn a profit, despite falling [revenue per subscriber] and more competition from Redbox, which recently closed the NCR [Blockbuster Express] kiosk acquisition and is expected to launch its Verizon joint venture in the second half of the year,” Pachter wrote in July 19 note.
The analyst, who maintains an “underperform” rating on Netflix shares, expects the streaming service to report revenue of more than $900 million based on a domestic streaming subscriber base from 23.6 million to 24.2 million, another 3.45 million to 4 million internationally, and 8.95 million to 9.35 million disc subscribers, which include higher-margin digital/physical hybrid subs.
That said, Pachter echoes Wall Street concerns Netflix won’t reach its year-end guidance of 7 million net new streaming subs based on the fact the service added 1.74 million domestic subs in Q1 and probably 790,000 in Q2. With Netflix dependent upon generating 65% of its projected sub growth in the second half of the year, Pachter says that over the past 10 years the service has generated no more than 60%.
He believes Netflix will end the year with about 6 million net adds.
Finally, Pachter contends Netflix CEO Reed Hastings’ bravado regarding 1 billion hours of content streamed by subscribers in June could be short-lived as content owners realize a lower-margin substitution effect licensing content to subscription VOD services versus multichannel video program distributors such as cable and satellite TV.
Specifically, Pachter said Netflix spends about 17 cents per hour in content streaming costs, compared with 54 cents per hour on content spent by cable and satellite TV operators. The analyst said Netflix spends about $300 million annually on disc rights and $225 million on content delivery network (CDN) fees.
“We think content owners ultimately value their content based upon the number of views, and as Netflix grows its subscriber base and overall viewing hours, it is inevitable content costs will continue to rise,” he wrote.