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Analysts Bullish, Cautious on Pending Netflix Q2 Results

21 Jul, 2009 By: Erik Gruenwedel

Netflix doesn’t report second quarter (ended June 30) financial results until July 23, but that didn’t stop analysts from heaping additional praise (and some concern) on the perennial Wall Street darling.

Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, July 21 said the Los Gatos, Calif.-based online DVD rental pioneer would realize quarterly revenue of $413 million, up nearly $4 million from previous guidance.

Pachter said 500,000 Xbox Live members (who are current or new Netflix subscribers) accessed the Watch Instantly streaming service in the quarter. He said the service ended the quarter with 10.55 million subscribers and would end the year with subs from 11.2 million to 11.8 million.

“We think that these activations will help subscriber growth, lower subscriber acquisition costs (SAC), limit churn (subs that don’t renew), and drive gross margins higher as a greater number of subscribers begin to substitute streaming for physical DVD rental,” Pachter said in a note.

Separately, Stifel Nicolous & Co. analyst George Askew said, in a note, that he believed Netflix added about 200,000 subscribers in the quarter. Netflix officially projected subscriber increases from 100,000 to 300,000.

Pachter said Microsoft would provide direct access to Netflix streaming on a revamped Xbox Live dashboard, which he said would accelerate streaming “activations over the last two quarters.”

The analyst said Netflix had expressed its intention to offset higher earnings from increased subscribers and lower cost-of-goods-sold (DVDs acquired) with spending on streaming.

“We expect the amount on streaming to inch up throughout the year,” Pachter said. The analyst previously said Netflix would spend $100 million on streaming license agreements in 2009.

Microsoft Corp. earlier this year made available for free about 16,000 movies and episodic television programs from Netflix’s streaming service for PC users operating the Windows Media Center platform, Windows Vista Home Premium or Ultimate.

Netflix also streams content to the TV via a number of Web-enabled devices, including select LG and Samsung Blu-ray players, TiVo, the Roku set-top box and networked Sony Bravia HDTVs.

Founder and CEO Reed Hastings is a member of Microsoft’s board of directors, an association that prompted renewed scuttlebutt the software behemoth would acquire Netflix, in addition to separate speculation Amazon would make an offer.

Regardless of the rumors, which Stacey Widlitz, analyst with Pali Capital, largely dismissed, of greater concern is the rising emergence of rental kiosks, spearheaded by Redbox (whose president is a former Netflix executive), according to Widlitz.

Citing the distribution between Sony Pictures Home Entertainment and Redbox, and unconfirmed reports of separate deals with Lionsgate and Walt Disney Studios Home Entertainment, Widlitz said increased availability of titles (a perennial problems for kiosks) could siphon away casual Netflix subscribers.

Indeed, CEO Hastings, in last quarter’s call, said kiosks could become Netflix’s biggest liability by the end of the year — a reality analyst Widlitz said is looming.

“We believe that the most likely customers to churn off of Netflix for Redbox are the more infrequent users, for whom $1 per day is more economically viable,” Widlitz wrote in a note. “These are Netflix’s highest margin customers.”

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