There are surprises and then there are Surprises with a capital S. Apple trouncing earnings estimates this week fits in the first category. The results were stellar but hardly a shock; more of “wink wink” we did it again. Netflix handedly beating earnings estimates Monday was blind-siding surprise that was hard to see coming.
When Netflix reported late Monday, the expectation was much as it has been for recent quarters: competition from Blockbuster would be a drag on margins, price cuts would weigh on revenues and customer growth should fall into the moderate but not terribly impressive category. All signs have pointed to a pioneer settling in to a comfortable plateau as the next waves of technology, notably new forms of video distribution, slowly begin to eat into their market just as they did into the world of retail movie rental when they first arrived on the scene eight years ago with their subscription plans.
Instead, Netflix reported mostly solid results all around. With Blockbuster’s aggressive spending slowing down, and price wars apparently waning, Netflix was able to regain some ground.
The target for the quarter was 6.7 to 6.9m subscribers. Netflix came with 7.03, a 24% gain over the same period last year.
Earnings were in at 23cents share on revenue of $294m. It was a 23% gain over last year and well ahead of consensus expectations for earnings of 15cents.
On the down side, margins were down and revenues declined quarter to quarter sequentially (last quarter was $303.7m). It could be argued both are do to the combination of lower pricing plans and the costs of battling Blockbuster. The lower pricing, isn’t without benefits however. On the upside, lower customer fees likely contributed significantly to decreased churn and increases in new subscribers.
Blockbuster doesn’t report their earnings until November 1. Until they do, it’ll be difficult to gauge Netflix results. As has been noted in recent quarters, concerns about encroachment from digital delivery technologies (or alternate entertainment pastimes) remains a serious concern, even if they are something of a future issue. A broader industry picture will shed light on whether the entire sector advanced, or they improved at their competitor’s expense. Until then, the numbers are worthy of an asterisk but they’re a positive surprise all the same.
Founder and CEO Reed Hastings summed things up appropriately with a few comments in the earnings call. He said first, "We are much happier today than 90 days ago but we’re still not where we would like to be." He further noted "it took 10 years to get most content available on DVD and it may take that long again to get most content online."
Netflix is licensing more content every quarter and online viewing is also increasing quarter by quarter. The present state probably warrants a Neutral rating if gauged in formal analyst fashion, but the way the company seems to be weathering tough competition is impressive.
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