It's earnings season, and Netflix (Nasdaq: NFLX ) gets its turn onstage tomorrow afternoon.
Investors aren't holding out for much. Analysts see revenue climbing 10%, a rather modest year-over-year showing for the fallen dot-com darling. Things get even uglier as we travel down the income statement. Wall Street's banking on a profit of $0.04 a share, well off the $1.16 a share that it posted a year earlier -- which was coincidentally the same quarter in which shares of Netflix peaked at an all-time high above $300.
The past year has been brutal. Despite several attempts to bounce back in 2012, shares of Netflix begin the week off 6% year-to-date.
However, there are also plenty of things that can go right for the premium video service provider.
Let's go over a few of the things that CEO Reed Hastings could say tomorrow to give bulls another fighting chance.
1. "We won't be posting a loss in the fourth quarter."
One of the things holding Netflix back is that international expansion is eating into its profitable streaming and DVD businesses closer to home.
"We will move to a consolidated loss," Hastings warned three months ago, guiding investors to expect a small profit in the third quarter and a deficit in the fourth quarter.
What if it's not that bad? Netflix already impressed investors by returning to overall profitability sooner than expected after expanding into Ireland and the U.K. earlier this year. What if completing its Scandinavian push last week will help turn that projected deficit into a positive number this new quarter?
2. "DVD renters are holding up better than we projected."
Streaming is Nexflix's future. It isn't throwing a lot of marketing muscle behind its original disc-based service. It shows. Since peaking at 13.9 million disc-based subscribers at the end of last year's third quarter, Netflix closed out this year's second quarter with just 9.2 million customers receiving optical discs by mail.
Netflix is targeting that number to drop to just 8.35 million to 8.65 million customers for the quarter that it will be reporting on tomorrow.
Discs still matter to Netflix. Even though domestic streaming has three times as many subscribers and generates twice as much revenue as the company's DVD and Blu-ray service, disc customers are expected to generate a contribution profit of at least $120 million in its latest quarter. Domestic streaming is expected to clock in with no more than $95 million in contribution profit.
In other words, if the bleeding slows -- not stops, because that's unlikely to happen, but slows -- the impact could be material on its bottom line.
It can happen. There will come a point where legacy DVD customers just aren't interested in cutting the service loose. It happened to AOL (NYSE: AOL ) a couple of years ago, as there was eventually deceleration in the defections for access customers. Why can't this happen for Netflix? Most of AOL's access customers don't even have a reason to keep paying, but they do. At least Netflix offers a real service with tangible value. With Coinstar's (Nasdaq: CSTR ) Redbox boosting its rates last October, the value of DVD rentals is actually on the rise.
Leaving Microsoft to focus more on Netflix makes sense, but it's not as if Hastings is stepping down from the other boards that he's currently serving on. Surely there must be a bigger reason for his departure from Microsoft?
Is it the way that Microsoft is ramping up its own video offerings, or could it possibly be Netflix that is on the offensive? We can debate about the merits of a Netflix tablet, smartphone, or smart TV -- and they all would generally seem to be bad ideas unless someone else was bankrolling the initiative -- but there has to be a good reason for Hastings stepping down from a high-profile board appointment with the world's largest software company.
4. "We're considering pay-per-view streams for premium content."
I'm beating a dead horse, but I think nothing would have a more immediate positive impact on Netflix's share price as enhancing its streaming service by offering premium rentals of the newer movies and other programming that won't make it to Netflix's streaming catalog for years.
Netflix doesn't want to do it. The company doesn't want to confuse its customers. It wants to be known for a single tier of service at a low price point. However, a major thing that has kept the stock down -- and will continue to do so -- is that average revenue per user is declining to the $7.99 a month ceiling of its "all you can stream" buffet.
Netflix may argue that Amazon.com (Nasdaq: AMZN ) already does this, but it's not gaining a lot of traction. That's true, but Amazon lacks the reach -- in both sheer number of streaming customers and the appliances and the apps that make it seamless -- that Netflix has achieved over the years.
This will happen, inevitably. It makes too much sense. The current Netflix catalog gets knocked too often for what it lacks.
Hastings will thank me the day it does happen.
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