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Netflix, Inc. (NFLX) Did Five Things Correctly, Are They Enough?

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Netflix, Inc. (NASDAQ:NFLX)When a high profile stock like Netflix, Inc. (NASDAQ:NFLX) reports earnings, you know that a lot of people are watching. Clearly the market liked what it saw with the stock price jumping 32% in just the last week or so. Going into this earnings report, there were five questions that I wanted Netflix to answer. The company seems to be doing everything right, but is the stock price justified?

What Do You Expect? A few years ago, if you wanted to stream video, Netflix, Inc. (NASDAQ:NFLX) was your only real option. Today, customers can sign up for Hulu Plus and watch television shows the day after they air. Amazon.com, Inc. (NASDAQ:AMZN)’s Prime offers streaming video and free two day shipping. Newer entrants like Coinstar, Inc. (NASDAQ:CSTR) and Verizon Communications Inc. (NYSE:VZ)’s Redbox Instant service are vying for customer attention.

The main difference between these companies is the way they approach the business. Hulu’s main purpose is to drive better viewership for shows on NBC, ABC, and Fox. Amazon.com, Inc. (NASDAQ:AMZN) wants streaming video customers, but is also interested in getting people to buy more from their online selection. Coinstar, Inc. (NASDAQ:CSTR) and Verizon Communications Inc. (NYSE:VZ)’s hope is to sign up customers who will benefit from Redbox’s kiosks and want to stream videos as well.

What Netflix, Inc. (NASDAQ:NFLX) seems to realize is, just buying streaming rights from other companies and trying to get subscribers isn’t good enough. The company basically said they will focus on exclusive content and their “willingness to pay for non-exclusive, bulk content deals (will) decline.” Amazon.com, Inc. (NASDAQ:AMZN) is taking a page from Netflix’s playbook by licensing exclusive content, and looking at original content as well. The question is, what do investors expect from Netflix, Inc. (NASDAQ:NFLX) going forward?

5 Very Important Expectations Going into Netflix’s current earnings, I had an outline of five issues I felt the company would need to address. First, the company’s domestic streaming needs to see continued growth in subscribers, but more importantly contribution profit must continue to increase. The company reported 16.67% year-over-year subscriber growth, but below the 26.4% growth rate last quarter. In similar manner, contribution profit increased 81.94% year-over-year, but this was less than the 109.62% increase last quarter.

The second thing I wanted to see was International streaming showing an increase in subscriptions, and also a lower contribution loss. Netflix, Inc. (NASDAQ:NFLX) delivered on this expectation, with 162% more subscribers year-over-year and a 25.24% improvement in contribution loss.

Third, Netflix needs to see domestic DVD subscriber losses continue to slow. The company also delivered on this expectation, with a 2.92% decline on a linked quarter basis. Considering that last year losses were 9.78%, and last quarter the company’s linked quarter losses were 4.96%, this is a marked improvement.

My fourth issue was, Netflix, Inc. (NASDAQ:NFLX) has shown 3 consecutive quarters of a downward trend in free cash flow. I wanted to see free cash flow turn positive, or at least I wanted to see an improvement. While the company did not generate positive free cash flow, they did break their string of consecutively worse results. The company reported negative $51 million in cash flow last quarter and negative $42 million in the current quarter. This result wasn’t great, but it’s a step in the right direction.

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