Netflix Shocks the Street, Not the Fool: Fool by Numbers

On Oct. 22, movies-by-mail pioneer Netflix (Nasdaq: NFLX  ) released third-quarter earnings for the period ended Sept. 30, 2007.

• To go beyond the numbers, read the earnings take from Fool Rick Munarriz to see why there are 7 million reasons to like Netflix.
• When the competition ends a very effective marketing campaign that it can't afford ... Netflix picks up growth right where it left off. We saw that one coming.
• Few balance sheets are as easy to read as this one. Netflix records all sales as cash, so there are no accounts receivable, and the company is debt-free. It's as close to cash accounting as a company with $1.1 billion in annual sales can get.
• Netflix grew its subscriber count by 4.2% sequentially over last quarter after reporting its first-ever sequential drop in the second quarter. The monthly churn rate pulled back 0.4 percentage points to 4.2%, and the company spent $38 in marketing for each new subscriber -- down from $44 last quarter and $45 a year ago.

(Figures in millions, except per-share data)

Income Statement Highlights

	Q3 2007	Q3 2006	Change
Sales	$294.0	$256.0	14.9%
Net Profit	$15.7	$12.8	23.1%
EPS	$0.23	$0.18	27.8%
Diluted Shares	68.1	70.3	(3.2%)

Get back to basics with the income statement.

Margin Checkup

	Q3 2007	Q3 2006	Change*
Gross	33.9%	38%	(4.1)
Operating	7.3%	6.7%	0.7
Net	5.4%	5%	0.4

*Expressed in percentage points.

Margins are the earnings engine.

Balance Sheet Highlights

Assets	Q3 2007	Q3 2006	Change
Cash + ST Invest.	$386.2	$368.7	4.7%

Liabilities	Q3 2007	Q3 2006	Change
Accounts Payable	$89.5	$82.0	9.1%
Long-Term Debt	$0.0	$0.0	N/A

The balance sheet reflects the company's health.

Cash Flow Highlights

	Q3 2007	Q3 2006	Change
Cash From Ops.	$77.6	$61.5	26.2%
Capital Expenditures	$7.4	$5.2	41.7%
Free Cash Flow	$70.2	$56.2	24.8%
Owner Earnings	$27.6	$14.3	92.9%

Free cash flow is a Fool's best friend.

Competitive Context

	Market Cap	Trailing	CAPS Rating	Bull Ratio
Netflix	$1,617	21.3	**	79%
Blockbuster (:BBI)	$1,019	N/A	*	47%
Amazon.com (NASDAQ:AMZN)	$37,433	124.7	**	55%
Apple (NASDAQ:AAPL)	$150,883	43.2	***	88%
Movie Gallery (NASDAQ:MOVI)	$6.6	N/A	*	8%

Using the latest reported numbers from Capital IQ.

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• Quick Take: Netflix's Whatchamacallit