We recently reiterated our Neutral recommendation on
) following the company's better-than-expected second quarter
In its second quarter, Netflix reported earnings of 11 cents
that bettered the Zacks Consensus Estimate of 4 cents. The company
reported a top-line expansion of 12.8% on a year-over-year basis to
$889.2 million, which was just ahead of the Zacks Consensus
Estimate of $889.0 million.
Netflix's huge subscriber base is the primary factor that has
helped the company to generate incremental revenues. Netflix ended
the second quarter with 30.1 million unique subscribers, adding
4.56 million unique subscribers over the last 12 months.
Moreover, this increase in subscriber base can be attributed to the
dynamic programs and shows that are being streamed by Netflix.
Netflix has been entering into licensing agreements with
several big Hollywood production houses to bolster its streaming
Moreover, Netflix has been expanding its international
operations beyond Canada, Latin America and the Caribbean. The
company has already started its streaming services in the U.K. and
Ireland. Additionally, Netflix plans to expand its streaming
services to the four Nordic countries of Norway, Denmark, Sweden
and Finland by the end of 2012.
However, the international expansions are escalating costs in
the form of technology investments (51.1% increase year over year
in the first six months of fiscal 2012) and marketing expenses
(27.5% increase year over year in the first six months of fiscal
2012). Moreover, operating expense as a percentage of revenue
expanded 310 basis points in the first half of fiscal 2012.
Another major near-term challenge for the company is cost
escalation in the form of license and renewal fees. Additionally,
the company's DVD business is continuously losing subscribers. The
company's international operation has still not managed to generate
profit. In the second quarter, international streaming operations
reported a loss of $89 million, which was significantly higher than
the $9 million loss reported in the previous-year quarter. However,
the company can get some relief from the fact that total
international streaming subscriptions has increased on a
year-over-year basis as well as sequentially.
Moreover, the company faces competition from bellwethers, such
Verizon Communications Inc.
), which will remain an overhang on the stock going forward.
Currently, Netflix has a Zacks #3 Rank, which implies a Hold
rating in the short term.
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