Poetic Portfolios

Now that Netflix (NASD: NFLX) has reported their 2007 results and given their outlook for 2008, I thought it would be a good idea to take a look at this company’s past performance and their 2008 outlook. After doing this, I will try to calculate several probable values for Netflix in a separate article.

Subscriber and Revenue History

Netflix reported total subscribers of almost 7.5 million and revenue of over $302 million in the fourth quarter of 2007. Both were at the upper end of their previously guided range. Below are some tables outlining the past several years of subscriber and revenue growth.

2005 Q1 Q2 Q3 Q4 Subscribers 3.018 3.196 3.592 4.179 Revenue $154.00 $164.50 $174.30 $195.00 QoQSubs 16% 6% 12% 16% YoYSubs 56% 53% 61% 60% QoQRev 7% 7% 6% 12% YoYRev 54% 37% 23% 36%
2006 Q1 Q2 Q3 Q4 Subscribers 4.866 5.169 5.662 6.316 Revenue $224.10 $239.40 $256.00 $277.20 QoQSubs 16% 6% 10% 12% YoYSubs 61% 62% 58% 51% QoQRev 15% 7% 7% 8% YoYRev 47% 47% 47% 42% Market/GP 59% 53% 61% 61%
2007 Q1 Q2 Q3 Q4 Subscribers 6.797 6.742 7.028 7.479 Revenue $305.30 $303.70 $294.00 $302.40 QoQSubs 8% -1% 4% 6% YoYSubs 40% 30% 24% 18% QoQRev 10% -1% -3% 3% YoYRev 36% 27% 15% 9% Market/GP 70% 65% 42% 51%

There are several items that I think are important in these tables. First, it is obvious that subscriber and revenue growth slowed dramatically in 2007. Just looking at the fourth quarter of the past three years, year-over-year subscriber growth went from 60% in 2005, to 51% in 2006, then dropped to 18% in 2007. Comparing year-over-year fourth quarter revenue growth, you can see it went from 34% in 2005, to 42% in 2006, then dropped to 9% in 2007. Competition from Blockbuster had a significant impact on subscriber and revenue growth in 2007. Still, Netflix managed to grow subscribers at a 18% rate in 2007 despite this competition.

Next, I began tracking Netflix’s marketing expenses as a percentage of gross profit. Marketing is an investment in future growth for Netflix, but as Netflix backs off their marketing there is a corresponding increase in their earnings and cash flow.

The last item that I want to note about these tables is that there is a certain amount of seasonality in their subscriber and revenue growth. I’m going to use certain assumptions to build a quarter by quarter look at Netflix’s 2008 guidance.

2008 Outlook

Netflix provided the following guidance in their most recent earnings report.

First Quarter 2008

• Ending Subscribers of 7.85 – 8.05 million
• Revenue of $323 – $328 million

Full Year 2008

• Ending Subscribers 8.4 – 8.9 million
• Revenue of $1.3 – $1.35 billion

Based on the seasonality of Netflix’s revenue and subscriber growth, I’ve constructed the following table.

2008	Q1	Q2	Q3	Q4
Subscribers	7.95	8.11	8.27	8.68
Revenue	$325.00	$331.50	$338.13	$355.04
QoQSubs	6%	2%	2%	5%
YoYSubs	17%	20%	18%	16%
QoQRev	7%	2%	2%	5%
YoYRev	6%	9%	15%	17%

If Netflix is able to meet their revenue and subscriber guidance in 2008, it will be a very good year for them. Year-over-year subscriber growth of 16% would be a nice number for the company. Revenue growth of 17% is not something to disregard. Let’s look at a chart of revenue and subscriber growth. This chart starts in the first quarter of 2005 and ends with the fourth quarter of 2008.

Conclusion

As I mentioned in a previous article and as demonstrated in the tables above, the transformational growth that Netflix reported in the past now seems to be over. Management is no longer discussing significant additional market penetration. Gone are the discussions of a “tipping point” following video store closings. Kiosk rentals and other ways of accessing media are filling just as much of the retail void as Netflix.

Despite all of this, Netflix may be on a path of steady growth for the next few years. If this is the case, shares of Netflix may be cheap and worth consideration. I will look at the valuation of Netflix in my next article.

Read Part II: A Valuation of Netflix 

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This entry was posted on Monday, January 28th, 2008 at 5:05 am and is filed under Holdings, Netflix. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.