What to Look For in Tuesday's Netflix Report


Tuesday night is ripe for a comfy chair and a fresh bag of popcorn. Netflix (NAS: NFLX) reports second-quarter results after the closing bell, and I expect fireworks worthy of any big-budget Hollywood blockbuster. But maybe not where you'd expect to see them.

The traditional view
Many media outlets will focus on traditional numbers like revenue and earnings. On those metrics, Netflix is expected to show about 13% year-over-year sales gains with total revenue landing at $890 million while bottom-line earnings per share should plunge from $1.26 to $0.05.

Management guides sales to $884 million plus or minus about $10 million. The bottom line should land within roughly $0.10 per share of breakeven.

But none of that really matters. Netflix can largely control earnings by managing its advertising spending and deal activity. Whenever there's too much cash sloshing around on the bottom line, CEO Reed Hastings likes to pour it into another streaming license deal or two. In short, this company is simply not set up to generate earnings right now. Netflix is all about growth, and that's where you should fix your Foolish gaze.

The two numbers of real interest are the subscriber counts for domestic and international streaming services. In the American market, Netflix expects at least 23.6 million subscribers by the end of the quarter and maybe as many as 24.2 million. At the midpoint, that would be a modest 2% gain over the first quarter. That projection scared many Netflix investors sightless three months ago, because 500,000 new customers would be a drastic drop from the 1.8 million net new accounts scored a year ago.

The international story is easier to digest. With 3.45 million to 4 million total non-U.S. subscribers, the division would grow by 21% in just three months. The company is clearly getting traction in South America and the U.K.

Swing low, sweet subscriber counts
But let's go back to that scary domestic subscriber count. Management took pains to explain how the company's relatively high subscriber churn combined with seasonal effects on a growing subscriber base all adds up to pretty weak results in the summer.

Taken in isolation, the soft summer subscribers can be taken as a sign that Amazon.com and Hulu are killing Netflix in America. And if that's your takeaway, it really doesn't matter how quickly Netflix is growing abroad because the company will die without the financial underpinnings of its hometown success.

If you tuned out on that piece of bad news, you also missed the explanation of how the exact same mathematics also lead to dramatic gains in the third and fourth quarters, with particular emphasis on the holidays.

Expect Hastings to reinforce that message in this week's report. Netflix has a tendency to underestimate its own growth prospects, often beating its own subscriber guidance and sometimes adjusting long-term business plans to reflect unexpected high-octane growth. The same investors who ran for the hills three months ago will jump back on the bandwagon when third-quarter guidance reveals the growth engines humming at full power again. I'm looking for about 3 million new domestic customers in the fall, up from 1.9 million combined DVD and streaming gains in 2010. (Comparing a healthy year like 2012 with the Qwikster-tainted debacle of 2011 doesn't make much sense.)

Where to point your hawkeye on Tuesday
So keep your eye firmly on subscriber guidance, because that's where the real money is. This is the reason Netflix is investing billions in streaming content licenses, and that's money badly spent unless all that spending results in strong subscriber growth.

Note that I don't care much for the DVD segment, which Netflix has basically given away to Coinstar's (NAS: CSTR) Redbox division for better or worse. That operation has peaked and is not part of the growth story going forward. Netflix doesn't even offer DVD services outside the U.S., after all, and the big growth opportunity is international.

One minor point to consider is the impact of the brand-new content delivery network Netflix is building. The company is weaning itself off third-party network delivery services from Level 3 Communications (NAS: LVLT) , Limelight Networks (NAS: LLNW) , and Akamai Technologies (NAS: AKAM) in favor of its own media-caching servers planted in strategic network nodes. I want to know how quickly these boxes are rolling out to local service providers, and how long it should take to recoup the hardware investment in the form of lower bandwidth bills. This is a multi-year project, so I don't expect huge, concrete numbers quite yet, but some directional guidance would be nice.

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The article What to Look For in Tuesday's Netflix Report originally appeared on Fool.com.

Fool contributorAnders Bylundowns shares in Netflix and has also constructed a bull call spread on that stock, but he 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, Facebook and Netflix.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com and Netflix. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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