Earnings Preview: Netlifx (NASDAQ: NFLX) To Report Earnings Tomorrow - Fred Dunsel (01/24/12)

Netflix (NASDAQ: NFLX), the on-demand Internet streaming film and TV program service provider, will be announcing its fourth quarter earnings on 25 January (Wednesday). Last Friday, the company announced that its marketing chief, Leslie Kilgore, would step down and take up a nonexecutive spot on the board. In addition, it also appointed Vice President of Marketing Jessie Becker as the interim Chief Marketing Officer and Jonathan Friedland, formerly Senior Vice President of Walt Disney Company, as the Chief Communications Officer.

Netflix is currently trying to rebuild its image after a terrible 2011, when it lost about 800,000 subscribers in the United States in the third quarter, as a result of its plans for a 60% price increase in its most popular subscription plans and to split off its DVD rental business into a separate company. The ensuing uproar also cut the company’s stock price by more than 70% from its peak in July 2011. Given the above, the company quickly shelved both plans but the damage was already done. (Last week, a group of investors filed a class-action lawsuit against the company and several of its executives, alleging that they were misled about its earnings prospects before the company’s stock fell dramatically last year.)

As a reflection of the growing pessimism about the company’s performance in the last quarter, analysts have cut their average earnings estimates from 56 cents per share to 54 cents. (Within the past three months, the average estimate has fallen by 51% from $1.11) Analysts have also noted that the company is showing a flat, if not declining trend for its quarterly earnings. Its earnings per share for the first, second and third quarters of 2011 were $1.24, $1.43 and $1.33 respectively. Netflix’s growth potential in the U.S. is also being curtailed by increasing competition at home, which it hopes to address by carrying out an aggressive international expansion strategy. As Netflix only launched its service in the U.K. and Ireland recently, it is still too early to judge its subscriber growth there.

Given the above, Netflix’s earnings announcements this week will be closely watched by investors to see if the company has successfully contained the recent damage. While the stock has done well thus far this year, the fourth quarter financial report will determine if this trend continues in the coming months. (The stock has risen by more than 50% from last December to close at $100.24 last Friday.) According to analysts, the company’s content costs and subscriber growth are the two critical factors that will decide the company’s future growth potential.

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