- Netflix is scheduled to report Q3 2014 earnings after market close on Oct 15th.
- International expansion into major European markets will drive subscriber growth.
- We expect the company to report a solid topline growth, driven by international subscriber growth.
Netflix (NASDAQ:NFLX) is scheduled to report its Q3 2014 results after the closing bell on October 15. We expect the company to deliver solid topline growth, fuelled by expansion into six new European markets. However, margin contractions due to expansion costs will hinder earnings growth on a QoQ basis.
Netflix stock had rallied 312% in 2013, raising questions in investors’ minds if the stock had run up too far. However, the stock has continued to deliver solid returns in 2014 as well, up 23% in the year to date in comparison to a 2.9% gain in NASDAQ composite and a 3.52% uptick in the S&P 500. The rally in the stock has been followed up by solid financial performance, driven by subscriber growth as well as profit margin expansions. Will Netflix deliver another solid performance in Q3 2014? Here is a quick take on what to expect in the quarterly results.
The two levers of topline growth at Netflix are subscription price and Subscriber growth. As noted in our Netflix Q2 2014 earnings preview, Netflix had hiked subscription prices in Q2. This had been followed by entry into new markets in Q3 which will drive the international subscriber growth rate. The full impact of the price hikes in Q2 2014 will be seen in the Netflix revenue growth in Q3 2014. Also, price hikes drip down to the bottomline, which will lead to a stable bottomline performance, in spite of the latest expansion drive undertaken by the company.
European expansion to continue subscriber growth
The international subscriber growth has consistently outpaced the domestic growth rate as Netflix been expanding the geographic presence of its streaming service. This will continue to remain unchanged in Q3 2014, backed by the latest move into six new European markets.
The company has guided to end Q3 2014 with 37.58 million domestic subscribers and 16.16 million international subscribers, with an expected growth of 21% and 76%, respectively.
Revenue and earnings guidance
The Netflix management has guided to Q3 2014 streaming revenue of $1.224 billion, implying a YoY revenue growth of 38%, and earnings per share (EPS) of 89 cent, implying a 70.5% YoY earnings growth.
Analyst consensus estimates
The currents analyst consensus estimates are summarized in the table below.
Revenue (in millions)
|Wall street consensus||
Using the expected growth in subscribers and the current average prices of Netflix, we estimate Netflix Q3 2013 overall revenue of $1.41 billion, which implies a 27.5% YoY growth. We estimate the company to report EPS of $1.03, implying a 97% YoY earnings growth.
Netflix has a solid earnings history, delivering an earnings surprise in each of the last 8 quarters.
Source: Chart constructed by author based on information at Estimize.com
Netflix has delivered an average earnings surprise of 41% over the last 8 quarters, and with the management’s assurance that the contribution margin in the domestic markets will continue to see 400 basis point improvements into 2015, the company looks set to beat the street in Q3 2014 as well.
Netflix Free cash flow and current Valuations
Though Netflix fundamentals have consistently improved with every passing quarter, a risk has been the company’s huge difference in free cash flow and Net Income. This has been significantly driven by large spends on the DVD content library, in spite of lower revenues from the service.
Another long standing risk highlighted time and again has been Netflix' valuation levels.
With a last twelve month (LTM) PE ratio of 139 and a LTM price to sales ratio of 5.6, the company continues to trade at extreme valuations which imply inherent risk to buy at current price levels. Any miss on operating metrics and earnings performance could expose an investor to significant downside risks.
In conclusion, Netflix looks poised to report yet another quarter of solid topline growth and earnings growth on a YoY basis even though there could be a slight dip on a QoQ basis, which is to be expected due to the latest expansion drive. The company trumped its subscriber number guidance in each of the last 5 quarters, and it will be no surprise if the company repeats the same. An earnings and revenue beat is what we expect.