7 Reasons to Still Believe in Netflix

Netflix (NASDAQ: NFLX  ) initially slumped after posting quarterly results last night, but things aren't all that bad for the leading video service.

Let's go against the herd and point out the things that went right for Netflix in its latest report.

1. Netflix didn't miss its subscriber guidance or even land in the middle
Netflix closed out the quarter with 37.56 million global streaming subscribers, and that's actually well above the midpoint of its April guidance calling for 36.7 million to 37.95 million.

Even for those lamenting that domestic subscribers came in a little soft, the 29.81 million domestic Web-tethered accounts is also above the midpoint of its earlier range of 29.4 million to 30.05 million accounts.

2. The defection rate of DVD subs is improving on a year-over-year basis
There's no saving Netflix's DVD rental business, though CEO Reed Hastings once again confirmed that the company has no plans to shut it down.

On that front, Netflix closed out the period with 470,000 fewers DVD renters than it had three months earlier. That's worse than the 240,000 mail-based subs that it lost during the first three months of the year, but Netflix lost a whopping 850,000 DVD accounts during last year's second quarter.

Don't be surprised by the large drop. The trend is working against the platform, but it's compounded this time of year as folks put Netflix on hold for the summer.

Even Outerwall (NASDAQ: OUTR  ) -- the only company posting year-over-year growth in the DVD renting business -- is expected to post a sharp sequential decline in its Redbox business when it reports on Thursday. There is seasonality here.

3. There's less red overseas
Yes, Netflix is still losing money in its international business, but contribution deficit of $66 million during the quarter is actually Netflix's best quarter in that regard since late 2011.

Expanding into the Netherlands and a commitment to step up investments in international content will lead to the red ink growing sequentially in the current quarter, but it will still be better than any single quarterly showing from last year.

4. There's more black closer to home
Profitability more than quadrupled to $0.49 a share, well ahead of the $0.40 a share that analysts were forecasting.

Put another way, the last time that Netflix scored more than the $29 million in quarterly net income that it posted now was back in 2011.

Despite the perpetual defections on the DVD end and costly overseas expansion into new territories, Netflix's domestic streaming business is saving the day. Since Netflix began breaking out the contribution profit on its domestic streaming business, margins have improved every single quarter -- going from 10.9% at the end of 2011 to 22.5% today.

5. Turbo's slow start isn't the end of the world here
One of Netflix's big bets to replace the Nickelodeon content that went away in May is a huge deal with DreamWorks Animation (NASDAQ: DWA  ) for original content. The first installment will be December's launch of Turbo F.A.S.T., a Netflix exclusive based on the computer animation studio's movie that opened this past weekend.

Yes, Turbo was a box office dud. Like the signature snail itself, it got off to a slow start.

However, Netflix content chief Ted Sarandos pointed out during the call that box office receipts are factored into its rate card. In other words, Netflix will get price breaks on future theatrical releases if they do disappoint at the multiplex.

6. Amazon, Hulu, and Netflix can co-exist
Content prices for serialized dramas are heading higher with Amazon.com (NASDAQ: AMZN  ) committing to original content earlier this year and Hulu's studio owners throwing new money at the venture after backing out of sale talks.

This may seem to be a tough time for Netflix, but keep in mind that it already has plenty of multiyear deals in place at earlier rates.

Netflix also wanted to emphasize how differentiated the different streaming platforms have become. Of the 200 most watched titles on Netflix, Hulu has just 32 and Amazon Prime Instant is at 68. When your nearest competitor -- Amazon -- has just a third of your most magnetic content, there will be room for TV buffs to subscribe to multiple cheap streaming services.

7. Two's company but three's a business model
Netflix boasted that it has ordered second seasons for all of its original shows except for Arrested Development, yet it's also open to a second season of the cult fave if it can work something out that's favorable to all parties.

However, twice during last night's video earnings call, Hastings made comments about "three, four, or five seasons" of House of Cards. Nothing appears to be in the works. It seems unlikely that David Fincher and Kevin Spacey would sign on for that long. However, it's an important reminder that we're still in the early innings here.

It's hard to fathom Netflix being as sticky as Time Warner's (NYSE: TWX  ) HBO when it comes to original programming. There's a reason why folks are paying twice as much for HBO, and that's on top of their chunky cable or satellite television bills. However, as some of Netflix's more successful shows do get extended seasons, it will be that much harder to let it go.

If you just like one show on HBO, you'll subscribe for three months, nixing the premium movie channel the rest of the year. If you like several shows -- on HBO or Netflix -- you'll stick around because it's just easier that way.

Nothing but Netflix
The market didn't seem to like Netflix's numbers, but there's plenty to like if you know where to look. 

The television landscape is changing quickly, with new entrants like Netflix and Amazon.com disrupting traditional networks. The Motley Fool's new free report "Who Will Own the Future of Television?" details the risks and opportunities in TV. Click here to read the full report!


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