Netflix Q2 2014 Earnings Preview

• Netflix, the largest streaming service provider, is scheduled to report its Q2 2014 earnings after market close today.
• The subscriber growth will be driven by a greater variety and uniqueness of content boosted by releases of in-house content and new content partnerships during the quarter.
• We expect the company to report a strong growth in earnings as well as topline, driven by subscriber growth and price increases during the quarter.

Netflix Q2 2014 earnings review

Netflix (NASDAQ:NFLX) is scheduled to report its Q2 2014 results after the closing bell on July 21. Here is a quick take on what to expect in the quarterly results. Netflix stock is back in the green, having been down 10% heading into the Q1 2014 earnings call. The stock price has gained 21% in the year to date following what was a solid Q1 2014 earnings report. The stock has gained close to 30% since announcing its Q1 2014 earnings report. So will Q2 2014 earnings report lead to yet another burst in Netflix stock price? Here is a quick take on what to expect in the quarterly results.

Subscriber growth and subscription prices are the key revenue drivers at Netflix. In addition price increases also have a drop down effect to the bottomline, leading to earnings growth outpacing topline growth.

Subscriber growth to remain strong

Netflix has continued to deliver strong subscriber growth over the last few quarters, which has been a key driver of topline. The international subscriber growth has outpaced the domestic growth rate as Netflix has looked at geographic expansion of its streaming service. The chart below clearly illustrates the rapid growth of international subscriber operations as compared to that of domestic operations.

Netflix subscriber growth chart

 Netflix domestic and international subscriber growth rate

The company had projected to end Q2 2014 with 36.19 million domestic subscribers and 13.62 million international subscribers, implying a growth rate of 21.4% and 75.7% respectively. The subscriber growth is expected to be strong driven by a greater variety and uniqueness of content boosted by releases of in-house content and new content partnerships through the quarter.

Subscription prices hike to drive Netflix profit margin expansion

The company had also announced a price hike in May 2014, hiking prices for new US subscribers by $1 per month while grandfathering its installed base of US customers for 2 years up to 2016 at the old rates. The price increase can potentially lead to incremental annual revenues of close to 200 million at the current international and incremental domestic user base of the company.

The price increase can also lead to a steep rise in earnings due to a greater drip down to the bottom line. The result could be an expansion in the operating and net income margins. However, the expansion can be limited due to the expansion plans of the company to come into effect in the second half of 2014.
Revenue and earnings guidance

Netflix has guided to Q2 2014 streaming revenues of $1.14 billion. Including the DVD segment revenues we estimate the total revenues at $1.36 billion. Moving on to earnings, the company has guided to an EPS of $1.12, which is in line with our estimate, a result of profit margin expansions in Q2 2014.

An earnings beat is on the cards

In conclusion, Netflix is all set to report a strong quarter if it delivers its guidance on the number of subscribers. The company has a strong record of beating its subscriber guidance over the last four quarters. The introduction of several new episodes of original content and new content partnerships continue to drive subscribers to Netflix. The unique content is expected to counter the potential churn rate on account of the recent price increase. In view of the above events, we see a strong report coming our way after market close on July 21. An earnings and revenue beat is clearly on the cards. However, Investors will also be keen watching the subscriber growth number and the guidance with regard to the same.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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