Netflix (NFLX) continues to hit the ball out of the park.
In case you haven’t been paying attention, this is now a very profitable $2+ billion company, one that is beginning to revolutionise the movie and TV business.
Will any cable or entertainment company have the balls to step and make a bid? (See 15 other top tech takeover candidates here >)
Below, some Wall Street folks weigh in on the Q3 results.
JP Morgan’s Imran Khan:
Management’s prepared remarks can be found at http://ir.netflix.com. Our key takeaways, prior to the 6:00 PM conference call:
- 16.9M subscribers. Netflix beat our subs estimate of 16.6M. Approximately 6% of subscribers were in their trial period, compared to 3% at the end of last quarter. Guidance had been 16.3M-16.7M.
- Very strong subscriber guidance. 4Q subscriber guidance is 19.0M-19.7M vs. our estimate of 18.2M and up significantly from previous guidance of 17.7M-18.5M. 4Q’10 revenue guidance is $586M-$598M, vs our $594M estimate. GAAP net income outlook of $32M-$40M is unchanged.
- Churn is 3.8%. This ~20 bp sequential decline is consistent with sequential declines in four of the last five years. We had expected churn to remain flat at 4.0% in 3Q.
- Operating margin of 12.6%. The result was in line with our forecast of 12.8%.
- Revenue of $553M. We had modelled $550M and the top end of guidance was $554M. The ARPU was $12.12, slightly above our $11.95 estimate and down 9% Y/Y.
Edward Williams, BMO:
Netflix (NFLX): Subscriber Growth Ahead of Expectations; Raising Estimates and TargetRating: Market Perform
- Event: Netflix reported 3Q10 revenue and EPS of $553 million and $0.70, respectively, versus $423 million and $0.52 a year ago. Our estimates for the quarter were $550 million and $0.68, respectively, while consensus estimates were $551 million and $0.71. Churn was 3.8%, in line with our estimate and versus 4.4% a year ago. Subscriber growth was ahead of our expectations.
- Impact: Netflix had a strong quarter as it continues to execute and benefit from strong consumer demand for its service, in particular streaming. The company grew subscribers by 88% versus our expectation of 42% growth, while gross margins were also ahead of expectations, though partially offset by higher marketing costs and G&A relative to our expectations.
- Forecasts: We are raising our 2010 and 2011 estimates to account for the strength in the quarter, greater visibility for the current year, and prospects going forward.
- Valuation: NFLX shares trade at approximately 55 times our 2010 EPS estimate, 40 times our 2011 EPS estimate, and 30 times our 2012 EPS estimate.
- Recommendation: In our view, Netflix has a solid business model that continues to resonate well with consumers. We believe the increasing appeal of Watch Instantly should continue to drive strong operating results for the foreseeable future. That said, we believe the shares fairly reflect these factors and also an expectation of flawless execution. We continue to rate shares of NFLX MARKET PERFORM.
Douglas Anmuth, Barclays
Netflix Inc.: Netflix Living Up To Its Name
Netflix’s 3Q results were strong with 52% Y/Y sub growth driven by streaming. Ending subs of 16.9M beat our 16.6M and the 16.7M high end of guidance. GAAP EPS of $0.70 beat our $0.66, but was actually a penny below consensus of $0.71. Netflix also raised 4Q sub guidance by 7% at the mid-point, but left 4Q profitability essentially unchanged.
What We Liked: 1) SAC of $19.81 and churn of 3.8% were both record lows-SAC declined 26% Y/Y and 19% Q/Q as Netflix shifted marketing dollars toward content and benefited from strong secular trends; 2) streaming time now surpasses that of DVDs overall and that holds for more than half of all subs; 3) 4Q sub guidance of 19.0M-19.7M was well above expectations; and 4) Netflix is off to a good start in Canada and may well enter other geographies in 2011.
What Concerned Us: 1) Netflix appears to be capping operating margins at ~12% for N. America as content spending ramps-lower marketing spending and higher content costs should help build a more defensive model over time, but gross margins will likely be pressured in the near-term; and 2) free trial subs were 6.3% of total subs at the end of 3Q, more than double the level of recent quarters-this suggests good traction in Canada (potentially a few hundred thousand subs) but free subs naturally have less favourable economics and they likely carry higher churn.
Our 4Q10 and 2011 subs/revenue/GAAP EPS are now 19.58M/$595M/$0.66 and 27.93M/$2.92B/$4.10. Netflix continues to execute its transition to streaming extremely well, and we are impressed with 50%+ subscriber growth. But we continue to believe near-term earnings upside will be curbed by higher content costs. Our new price target is $140 based on 32x 2011E PF EPS of $4.36. Our previous target was $128 based on 30x our previous 2011 PF EPS of $4.26.
See Also: 15 Top Tech Takeover Candidates
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