Are Netflix Earnings a 'House of Cards'?

Updated from 11:29 a.m. to include thoughts from Piper Jaffray analyst and remarks TV Everywhere in the twelfth paragraph.

NEW YORK (TheStreet) -- Netflix (NFLX) reports first-quarter earnings after the close of trading on Monday, and with the recent trouncing in the stock investors will be looking to see whether CEO Reed Hastings top-ticked his own company or if there is more fuel to this fire.

Shares of Netflix have dropped sharply since the start of 2014, as high-momentum tech stocks have taken the brunt of selling. Netflix has dropped 6.1% year to date compared with a 1.94% decline in the Nasdaq. In Netflix's third-quarter earnings letter, Hastings warned of "euphoria" in the stock.

"In calendar year 2003, we were the highest performing stock on Nasdaq," Hastings wrote in the letter. "We had solid results compounded by momentum-investor-fueled euphoria. Some of the euphoria today feels like 2003."

Since that time, the stock hit a high of $458 on March 6, only to come crashing down along with nearly every other high-growth, high-momentum technology stock. It appears though that the underlying business for Netflix is as strong as it's ever been, with the company surpassing 33 million domestic streaming subscribers in the fourth quarter.

In the fourth-quarter letter to shareholders, Hastings said he expects Los Gatos, Calif.-based Netflix to have net additions of 2.25 million subscribers, which would bring the total to around 36 million streaming subscribers.

"Running equal to, or slightly above, prior year net additions is a great outcome because it implies that at 33 million domestic members we're still in the middle section of the S curve of consumer adoption, with years of member growth ahead of us," Hastings penned in the letter.

Analysts surveyed by Thomson Reuters are expecting the company to earn 83 cents a share on $1.266 billion in revenue for the first quarter.

The biggest issue during the quarter, aside from the company's continued momentum in streaming and its international business, is the company's relationships with broadband providers, most notably Comcast (CMCSA), AT&T (T), Verizon (VZ) and others. In late February, Netflix and Comcast announced a deal that gives Netflix direct access to Comcast's broadband network. At the time (not that February is all that long ago), this was seen as a landmark deal between a content company and a broadband provider, with the deal potentially changing the way content is delivered to homes in the future.

It's unclear what kind of change the deal will have to Netflix's cash position, given terms of the deal weren't disclosed. But Wall Street did not seem overly concerned, at least in the long run.

"The Netflix-Comcast paid-peering deal, while likely creating headwinds to margin leverage near-term, removes a major structural concern. No terms were disclosed, but we believe that this agreement is likely to precipitate others in the U.S. and internationally," Cantor Fitzgerald analyst Youssef Squali wrote in a note following the February announcement.

BTIG analyst Rich Greenfield, who moderated the Netflix earnings call along with JPMorgan analyst Doug Anmuth, believed that the deal between Netflix and Comcast would help Netflix in the future, getting the company's service on Comcast's X1 set-top boxes.

"We believe Netflix agreeing to a paid peering relationship with Comcast was tied to Netflix being integrated into Comcast's X1 set-top boxes later this year," Greenfield wrote in a blog post. "Time will tell if we are right, but we simply do not believe this is as simple as Comcast won and Netflix lost."

In the latest NPD Connected Intelligence Connected TV User Experience Report, 75% of those with connected TVs want video apps, so it's a good possibility a deal with Comcast could lead to Netflix being included in the future. "The importance of having core video aggregation apps such as Netflix and YouTube, has a lot to do with the convenience that allows consumers to easily access a multitude of programming options in one place," said John Buffone, executive director, Connected Intelligence, via an emailed statement.  "The next wave of TV app user, however, is looking for a different experience than earlier adopters and is placing greater emphasis on TV Everywhere apps from their favorite networks."

Anmuth agreed, noting that by giving Netflix users more direct access it's a "positive for the Netflix user experience," not to mention Netflix "likely anticipated some degree of higher costs related to network agreements in its 2014 guidance."

With all the attention being paid to net neutrality, and the company's continued advancements in streaming, analysts are largely positive going into the first-quarter report. Some are expecting to hear more about original content, particularly as it relates to House of Cards, whose second season was released during the quarter. Here's what a few of them had to say.

Cantor Fitzgerald analyst Youssef Squali (Hold, $405 PT)

"We expect Netflix to report one of its strongest quarters ever today after the close, with domestic streaming net adds of 2.3M and international net adds of 1.6M (Cantor ests.). In addition to subscriber and margin guidance, we expect drivers of the stock short term to include commentary on the changing competitive landscape and its potential impact on strategy, details for the upcoming European launch, and any incremental data points from original series (including House of Cards season 2)."

Pacific Crest Securities analyst Evan Wilson (Outperform, $500 PT)

"Netflix's scale, data, brand and technology platform provide competitive advantages of which it is just beginning to take advantage globally. We expect its international expansion to accelerate meaningfully over the next 18 months, which is likely to drive an inflection in international growth and could prompt substantial upside to our international subscriber and revenue estimates through 2016. Further, international margins appear to be progressing faster than in the United States on a country-by-country basis, which suggests international
profitability could match or exceed U.S. profitability over time."

BMO Capital Markets analyst Edward Williams (Market Perform, $370 PT)

"We expect Netflix to post strong subscriber net adds boosted by the return of House of Cards for its second season. For 1Q14, we model revenue and EPS of $1,266 million and $0.79, respectively (versus consensus of $1,266 million and $0.83). We estimate gross margins of 31.2% and op margins of 7.3%. We expect the company added approximately 2.6 million streaming subs in the US and 1.9 million streaming subs abroad during the quarter. While we believe the major European expansion planned for late 2014 will be in Germany and/or France, we do not expect any additional color on the upcoming launch(es) until 2H14."

Wedbush Securities analyst Michael Pachter (Underperform, $175 PT)

"Our estimates are for revenue of $1.273 billion, vs. consensus of $1.266 billion (no guidance), and EPS of $0.82, in line with consensus, and guidance of $0.78. We modeled domestic streaming subscriber net adds of 2.25 million, in line with guidance, but our bias is that our estimate may be too low based upon a high sign-up rate for season two of House of Cards, which debuted on February 14, and low Q1 advertising spending."

JPMorgan analyst Doug Anmuth (Overweight, $500 PT)

"We expect Netflix to report strong 1Q results with US streaming subs the primary focus. We are modeling 1Q14 US streaming subs of 35.7M (2.31M net adds) vs. guidance of 35.67M subs (2.25M net adds). Our 2.31M projected net adds are 14% higher than in 1Q13, and compare to 4Q13 net adds growth of 13.8% Y/Y. We believe the company should benefit from the launch and awareness around season 2 of House of Cards and continued improvements in content, as well as positive seasonality driven by more Internet-connected devices and colder weather. Netflix currently trades at 18.6x 2015E EBITDA and 3.5x 2014E revenue."

Piper Jaffray analyst Michael Olson (Neutral)

"Expect in-line Q1 sub adds, with slight EPS upside potential as the company continues to expand op margins, but focus shifting to LT (next 2-3 years) earnings potential; depending on level of intl & new content spend and pricing."

-- Written by Chris Ciaccia in New York

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