Analyst Note, Morningstar Equity Analysts, 15/10/2014:
While revenue and EPS beat expectations, Netflix’s third-quarter results were disappointing due to lower-than-expected streaming net adds with 0.98 million domestically and 2.04 million internationally, versus guidance of 1.33 million and 2.36 million, respectively. While the management blamed the net add shortfall on increased prices, we maintain our favorable view of management’s decision to slowly raise prices. Netflix remains committed to investing in marketing and proprietary content, both of which we believe will offer solid returns. Despite the subscriber misses, the firm continues to build a solid foundation, ending the reporting period with over 50 million global paid streaming subscribers.
Management addressed Time Warner’s announcement that HBO would be launching a standalone OTT offering in 2015. The company has apparently expected this move by HBO and believes that the markets in the US and worldwide are large enough for multiple offerings including pay-TV, Amazon Prime, and Hulu.
The company also issued fourth quarter guidance below current expectations. Management guided for a $95 million operating loss for the international segment during the next quarterly reporting period, primarily due to the launch of six European markets (Germany, France, Austria, Switzerland, Belgium, and Luxembourg) in September. Management expects 1.85 million domestic net customer additions in the third quarter, down sharply from a year earlier, and international subscriber growth of 2.15 million, up from 2.15 million, due largely to the additional 66 million addressable homes added via the market expansions in September.
Bull og Bears for Netflix:
Bulls Say
- The emergence of TV Everywhere from traditional pay TV distributors has been slow to roll out, giving Netflix an extended window to be the leading provider of Internet television in the U.S.
- Netflix's internal recommendation software and large subscriber base could give the company an edge when deciding which content to acquire in future years.
- The company's deep library of DVDs could serve as an effective differentiator in the streaming business. While Netflix's streaming content is limited, customers can rely on DVD mail rentals to access a more complete programming menu.
Bears Say
- Netflix relies on unlimited bandwidth for its streaming offering. Its subscribers reportedly generate a high percentage of all Internet traffic during peak periods. Broadband providers could move to a pay-for-use model that increases the cost for subscribers.
- We think Netflix is overpaying for some of its content, with Amazon and Hulu bidding up the price on library content in order to build their programming offering.
- Central and South America could turn out to be unprofitable, and any material level of profitability will take at least five years to achieve.
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