Netflix Q4 Earnings Outlook: Wall Street Analyst Expects In-Line Results

Netflix (NASDAQ:NFLX) will report Q4:11 (December) results after market close on Wednesday, January 25, and host a conference call at 3:00pm PT (http://ir.netflix.com).

Expecting in-line Q4 results. We expect Q4 results in-line with our estimates for revenue of $869 million and EPS of $0.61, compared with consensus for revenue of $858 million and EPS of $0.55, and guidance for revenue of $841 – 875 million and EPS $0.36 – 0.70.  We expect Q4 domestic streaming subs of 21.3 million (versus guidance of 20.0 – 21.5 million), domestic DVD subs of 11.15 million (10.3 – 11.3 million), and international subs of 1.8 million (1.6 – 2.0 million).

Netflix’s recent capital raise appears to be a result of the company’s deteriorating performance and liquidity. We estimate Netflix lost roughly 8 – 9 million DVD subs over 2H:11, with 2.63 – 3.63 million DVD subs expected to trade down or quit in Q4. Massive attrition of its most profitable subs, coupled with increased spending on content, likely forced Netflix to raise capital at less-than optimal terms. At Q3:11, streaming liabilities were ≈ 12x cash and ST investments.

We expect Netflix’s “growth at all costs” business model to negatively impact its shares. We expect a repeat of last quarter’s earnings, with solid results for Q4 overshadowed by guidance for losses well below consensus in Q1.

We expect Q1 guidance for losses of $0.62/share, compared to consensus estimates of $(0.29). We further expect consensus estimate revisions for 2012 to decline by at least $1.00/share, driving Netflix shares significantly lower.

In our view, investors have misplaced confidence in subscriber growth. While Netflix may increase subscribers in 2012, it is paying a steep price to do so, triggering overall losses for the year compared to over $4/share in 2011 profit. Investors should note that each hybrid customer who traded down to a singleservice plan requires a net subscriber addition to offset the foregone revenue.  This means that Netflix may grow subscribers without significantly growing revenue or generating incremental operating profit contribution. At the same time, we expect content costs to continue to rise materially, further pressuring margin and profits.

Maintaining our UNDERPERFORM rating and 12-month price target of $45. Our price target reflects 15x our FY: 13 EPS estimate of $3, a level of earnings we view as attainable once Netflix has lowered international spending and revised its pricing structure. Our multiple is in-line with the company’s long-term growth rate.

Michael Pachter is an analyst at Wedbush Morgan.

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