Netflix Quarterly Earnings Analysis: By The Numbers

Watching a movie via Netflix online streaming on a laptop computer, UK
Ian Dagnall/Alamy
Netflix (NFLX) just reported its preliminary financial results for the quarter that ended Sept. 30, based upon which we provide a unique earnings-release-based analysis of its performance. Our analysis focuses on the company's performance for the same quarterly period on a year-on-year basis (unless stated otherwise).

NFLX-US is one of the first companies amongst its peer group to announce earnings for this period.

Here are the highlights:
  • Summary numbers: Revenues of $1,409.43 million, net earnings of $59.30 million and EPS of $0.96. Performance focus on earnings: same period year-on-year change in earnings of 86.33% better than change in revenues of 27.44%
  • Gross margins now 83.28% from 81.14% compared to the same period last year, EBITDA margins now 58.83% from 57.82%
  • Potential weakening of the balance sheet? Year-on-year change in Operating Cash Flow of -207.92% trailed its change in earnings
  • Earnings growth from operating margin improvements as well as from unusual items
Netflix, Inc.448.59Movies/EntertainmentUSD 299.5 - USD 489.287USD 27025.9 Mil.October 16, 2014NFLX-USUSDUSD2013-12-31 00:00:00N/A2014-09-30 00:00:00

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):

2013-09-302013-12-312014-03-312014-06-302014-09-30
Revenues1106.001175.231270.091340.411409.43
Revenue Growth (Qtr YOY)22.2024.3324.0425.3527.44
Earnings31.8248.4253.1271.0259.30
Earnings Growth (Qtr YOY)314.62513.161875.27140.9886.33
Net Margin2.884.124.185.304.21
EPS0.520.790.861.150.96
Return on Equity11.0215.2615.1118.4014.23
Return on Assets2.713.763.714.593.62
Revenue Growth Versus Earnings Growth

Companies sometimes focus on growing their top-line (Sales or Revenues) more than their bottom-line i.e. Earnings or Net Income. Investors should look at revenue growth to understand a company's ability to grow its market share, and earnings growth to look at the company's ability to generate returns.

Comparing revenue growth to earnings growth helps understand a couple of items: (1) A company's focus on gaining market share vs. generating profits and (2) How additive or dilutive the revenue performance has been to earnings.


NFLX-US's year-on-year change in top line compared to the same period last year of 27.44% trailed its change in earnings which was 86.33%. The company's performance this period suggests some efforts to help the bottom-line earnings. It remains to be seen how the rest of the peer group results turn out and if NFLX-US's performance suggests any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by 5.15% and earnings by -16.51% compared to the immediate last quarter.
Earnings Growth Analysis

The company's earnings growth has been influenced by the following factors: (1) Year-on-year improvements in gross margins from 81.14% to 83.28% and (2) better cost controls. As a result, operating margins (EBITDA margins) improved from 57.82% to 58.83% year-on-year. In addition, gross margins were 81.65% and EBITDA margins 59.57% in the immediate last quarter.

Gross Margin Trend

Companies sometimes trade off for improvements in revenues and margins by extending friendlier terms to customers and vendors. One quick way to check against such activity is to compare the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is quite possible that the company's performance is a result of truly delivering in the marketplace and not simply a prop up using the balance sheet.

The company's improvement in gross margins have come at the expense of a deterioration in working capital management, suggesting that the improvements in gross margins are likely trade-offs with the balance sheet and not strictly from operating decisions. Its working capital days have gone up to 84.20 from last year's levels of 74.63 days.
Operating Cash Flow Growth Versus Earnings Growth

Companies often post earnings numbers that are influenced by non-cash activities. One way to gauge the quality of the declared earnings number is to judge the deviation in the growth in earnings from the growth in operating cash flows. In general, an earnings growth rate that is higher compared to the operating cash flow growth implies a higher proportion of non-operating and even one-time activities - such activities are typically not sustainable over long periods.


NFLX-US's year-on-year change in Operating Cash Flow of -207.92% trailed its change in earnings suggesting some potential weakening of the balance sheet.
Unusual Items

The company's earnings growth has also been influenced by the following factors: (1) Improvements in EBIT margins from 5.16% to 7.83% and (2) unusual items. The company's pretax margins are now 6.92% compared to 4.47% for the same period last year.
EPS Growth Versus Earnings Growth

NFLX-US's year-on-year change in Earnings per Share (EPS) of 84.62% is less than its change in earnings of 86.33%.

Supporting Data

The table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:

2013-09-302013-12-312014-03-312014-06-302014-09-30
Revenues1106.001175.231270.091340.411409.43
Revenue Growth (Qtr YOY)22.2024.3324.0425.3527.44
Earnings31.8248.4253.1271.0259.30
Earnings Growth (Qtr YOY)314.62513.161875.27140.9886.33
Operating Cash Flow34.6941.4536.3656.02-37.44
Operating Cash Flow Growth (Qtr YOY)261.90-189.445.2095.23-268.10
Gross Margin81.1482.2581.1181.6583.28
EBITDA Margin57.8258.3357.2359.5758.83
Net Margin2.884.124.185.304.21
Working Capital Days74.6370.4179.8190.1784.20
EPS0.520.790.861.150.96
EPS Growth (Qtr YOY)300.00507.691620.00134.6984.62
Return on Equity11.0215.2615.1118.4014.23
Return on Assets2.713.763.714.593.62

Company Profile


Netflix, Inc. operates as an Internet subscription service company, which provides subscription service streaming movies and TV episodes over the Internet and sending DVDs by mail. The company operates its business through three operating segments: Domestic streaming, International streaming and Domestic DVD. Netflix obtains content from various studios and other content providers through fixed-fee licenses, revenue sharing agreements and direct purchases. It markets its service through various channels, including online advertising, broad-based media, such as television and radio, as well as various partnerships. The company was founded by Marc Randolph and Wilmot Reed Hastings Jr., on August 29, 1997 and is headquartered in Los Gatos, California.

CapitalCube does not own any shares in the stocks mentioned and instead focuses on providing unique fundamental research and analysis on approximately 50,000 stocks and ETFs globally. Try any of our analysis, screener or portfolio premium services free for 7 days. To get a quick preview of our services, check out our free quick summary analysis of NFLX.

Netflix, Inc.448.59Movies/EntertainmentUSD 299.5 - USD 489.287USD 27025.9 Mil.October 16, 2014NFLX-USUSDUSD2013-12-31 00:00:00N/A2014-09-30 00:00:00
Read Full Story

Markets

DJIA 21,082.95 70.53 0.34%
NASDAQ 6,205.26 42.23 0.69%
S&P 500 2,415.07 10.68 0.44%
NIKKEI 225 19,686.84 -126.29 -0.64%
HANG SENG 25,639.27 8.49 0.03%
DAX 12,542.65 -79.07 -0.63%
USD (per EUR) 1.12 0.00 -0.13%
USD (per CHF) 0.97 0.00 -0.03%
JPY (per USD) 111.03 -0.70 -0.62%
GBP (per USD) 1.28 -0.01 -0.66%

Can't get enough business news?

Sign up for Finance Report by AOL and get everything from retailer news to the latest IPOs delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.