This Monday night, it'll be time for an earnings report out of Los Gatos, Calif., from DVD-rental-by-mail pioneer Netflix (NASDAQ:NFLX). Did a rival service put a dent in this disc, or is it a mere smudge to be buffed out with a corner of your shirt? Let's see.

What analysts say:

  • Buy, sell, or waffle? Eighteen analyst firms cover Netflix today. Six of them have a buy rating on the stock, four offer sell recommendations, and the remaining eight hold the middle ground. In Motley Fool CAPS, this Motley Fool Stock Advisor recommendation is a modest two-star stock (out of five), based on market data and input from more than 4,000 players.
  • Revenue. Wall Street expects about $307 million, on average. That would be 28% more than the $239 million revenue of yesteryear, and within the official guidance range of $303 million to $309 million.
  • Earnings. Management expects between $0.18 and $0.24 per share, while the analyst consensus calls for $0.23 per share -- just about flat from last year's $0.24 per share.

What management says:
In a May interview with Fortune, CEO Reed Hastings explained why video-on-demand services are more of an opportunity than a threat for Netflix:

We named the company Netflix for a reason; we didn't name it DVDs-by-mail. The opportunity for Netflix online arrives when we can deliver content to the TV without any intermediary device. We're working to make this a reality in 2008, investing $40 million in instant viewing this year alone. And we just hired Anthony Wood, founder of ReplayTV, to head up our efforts.

Furthermore, Hastings said that the company might expand overseas in about two years, possibly restarting its nearly launched but ultimately abandoned British operation.

What management does:
Can you tell from these figures when Blockbuster (NYSE:BBI) launched its Total Access program? I'll give you a hint -- it's where Netflix's earnings growth hit a brick wall. However, that's an illusion created by a one-time tax gain six quarters ago. Looking at a uniform, normalized tax rate of 37.5% instead, the picture's very different.

More importantly, revenue is still increasing, even though subscriber growth has stalled. Gross margins are widening as Netflix continually works on becoming more efficient, and economies of scale are kicking in. Better yet, the resulting gross profit is promptly reinvested in future growth. R&D budgets are 50% higher today than last year, and capital expenditures are closing in on three times the year-ago numbers.

Margins

12/2005

3/2006

6/2006

9/2006

12/2006

3/2007

Gross

31.9%

33.4%

35.5%

36.7%

37.2%

37.6%

Operating

3.7%

5.2%

7.0%

7.3%

7.7%

7.7%

Net

6.2%

7.3%

8.0%

7.9%

4.9%

5.1%

FCF/Revenue

19.0%

19.4%

18.9%

20.3%

22.1%

21.0%

Growth (YOY)

12/2005

3/2006

6/2006

9/2006

12/2006

3/2007

Revenue

36.3%

36.4%

39.0%

45.4%

46.1%

43.0%

Earnings

94.6%

197.5%

211.7%

671.8%

16.8%

(1.3%)

Tax-adjusted earnings (see above)

(24.5%)

70.1%

151.5%

411.7%

388.7%

175.9%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Hastings clearly won't surrender to the Total Access onslaught, and for good reason. In its current form, TA is a very effective but very expensive customer magnet, and Blockbuster can ill afford to keep it going like that for very long. Netflix enjoys a much leaner capital structure, and the company has a few years' head start on its rival in the online rental race. The result is a highly efficient delivery machine that makes the most of all the customer input and movie ratings it's received over the years.

Yes, Netflix must take Blockbuster seriously, and it's been keeping abreast with the recent price cuts to that end. But this battle appears to have a foregone conclusion; all Netflix has to do is outlast its decrepit opponent. If and when Blockbuster gives up on the aggressive form of Total Access, the Hastings camp can expect a stream of new users who became addicted to the online model over at Blockbuster, but can't stomach a version with higher prices, fewer or no fringe benefits, or all of the above.

Oh, and don't worry about Amazon.com's (NASDAQ:AMZN) Unbox. It's playing to a somewhat different demographic than Netflix -- Hastings groups it together with Apple's (NASDAQ:AAPL) iTunes in a pay-per-download category, while Google's (NASDAQ:GOOG) YouTube leads the free, ad-supported segment. Netflix wants to dominate the flat-fee subscription niche. So, yeah, Amazon might or might not buy Netflix (I think it's unlikely), but it won't out-operate the online rental specialist.

Both Netflix and Amazon are Motley Fool Stock Advisor picks. Get your own total access to the newsletter with a free 30-day trial.

Fool contributor Anders Bylund is a Netflix and Google shareholder, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure comes with 3-D glasses and a bucket of popcorn.