Why I Care About Earnings in Tonight's Netflix Report

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We Netflix (NAS: NFLX) investors saw our shares jumping through the ceiling three months ago as the beleaguered digital video guru reported a return to subscriber growth. The stock was left bruised and battered (smells like tempura) in 2011, and shareholders could certainly use a fresh shot of confidence.

Since then, shares have meandered and lost about 9% of their earnings-powered value. Will tonight's first-quarter report prove the doubters right?

The average analyst expects Netflix to post a $0.27 loss per share on sales of about $869 million. The revenue target is above the midpoint of management's own guidance range from $842 million-$877 million. On the bottom line, Netflix expects global losses in a range between $0.16 and $0.49 per share. We should see "modest quarterly losses" until the heavy investment in streaming services across South America and the British Isles starts to pay off.


Keep in mind that Netflix typically underestimates its own streaming subscriber growth and that every unexpected streaming subscriber is basically found money. Other than the variable advertising and marketing budgets, Netflix set its operating costs for the quarter long ago by nailing down firm content license deals, and the actual service costs almost nothing to run.

Against that backdrop, I wouldn't be surprised at all if those expected quarterly losses never show up in the first place. But nobody ever got fired or sued for publishing a conservative estimate, right?

The only reason to worry about earnings at all is the commitment to turn profitable before exploring further international expansion. Sitting on your hands is a bad idea when Amazon.com (NAS: AMZN) is buying and nurturing digital video specialists abroad. Cable and satellite companies in Europe and Asia could also put a crimp in Netflix's plans for rapid global domination by establishing their own low-cost subscription services first. So yeah, I'd like to see a profit sooner rather than later, if only to release CEO Reed Hastings from that unfortunate promise.

Other than that, the real meat lies in subscriber counts and the rapid shift from DVD mailers to online video streams. It won't be long until the DVD revenues drop too low to stay profitable against their very large overhead costs. I wouldn't mind at all if Coinstar (NAS: CSTR) wanted to buy that division to bundle it with its ubiquitous Redbox kiosks. The envelope color already fits, so to speak, and Netflix could use the cash infusion to restart the international expansion even sooner -- and with a bigger budget.

Netflix is an American icon that's set to become a global giant. Our home-grown business heroes love to dominate emerging markets -- will Netflix be the next worldwide empire starting in the U.S. of A?

At the time this article was published Fool contributorAnders Bylundowns shares in Netflix but holds no other position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool owns shares of Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Coinstar, Netflix, and Amazon.com. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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