Is Netflix the Next Research In Motion?: Greenberg

If you get away from any of the spin, and with blinders on just look at the numbers, you can’t help but wonder whether Netflix is headed down the same road as Blackberry maker Research In Motion.


The company’s shares tumbled on concerns over its guidance and other metrics.

But for the most astonishing part of the story, and why this looks like what I like to call a “walking up the down escalator” business model, just check out the numbers below.

The first is of Netflix. The second is RIMM . The similarities are remarkable.


For the Fiscal Period Ending 3 months Q1 Mar-31-2011 3 months Q2 Jun-30-2011 3 months Q3 Sep-30-2011 3 months Q4 Dec-31-2011 Press Release 3 months Q1 Mar-31-2012
Total Revenue 718.6 788.6 821.8 875.6 869.8
Gross Profit 280.4 298.6 285.2 300.4 245.9
EBIT 102.2 115.1 96.8 70.9 (1.9)
Operating Cash Flow 116.3 86.4 49.5 65.5 19.1
Net Income 60.2 68.2 62.5 35.2 (4.6)
Source: Capital IQ


For the Fiscal Period Ending 3 months FQ1/CQ2 May-28-2011 3 months FQ2/CQ3 Aug-27-2011 3 months FQ3/CQ4 Nov-26-2011 3 months FQ4/CQ1Mar-03-2012
Total Revenue 4,908.0 4,168.0 5,169.0 4,190.0
Gross Profit 2,156.0 1,625.0 1,411.0 1,401.0
EBIT 897.0 525.0 335.0 212.0
Operating Cash Flow 1,020.0 -49 891 1050
Net Income 695.0 329.0 265.0 (125.0)
Source: Capital IQ

And there’s something else: The company no longer discloses churn, instead preferring to point investors to net subscriber growth.

But that doesn’t mean investors that dig might not find other reasons to worry. Among them, Tom Doyle, an independent analyst who has no current position in Netflix (but who lost money shorting it way too early.)

I value Tom’s insights, often deep background, on a variety of companies.

On Netflix , he says:

What jumped out at me yesterday, was the company's discussion of the increased seasonality of its ‘net additions’ despite the seasonal patterns of ‘gross additions’ remaining fairly constant (at least in their projections). Mr. Hastings attributed the changing relationship to two factors; 1) the larger installed base and 2) the business model's increased churn versus prior year's performance.

For me, this was a HFS [holy-flying sailboats] — [he actually used a different term!] — moment: for the implications of this admission for the enterprise value are significant. Now the company has stopped disclosing churn, so the analysis cannot be exact, but the point is directionally it is really a big negative that no one seems to care about.

If you look over the company's history as a DVD distributor, monthly churn averaged around 4 percent per month (sounds manageable, but lay out the math and a 4 percent per month, half your subscribers are gone in a eighteen months!). During the past two quarters, after the Qwickster fiasco, churn spiked to the mid 6 percent range in Q311 and mid 5 percent range in Q411.

Now here's the point. If you look at the table' in the company's quarterly letter that illustrate the changing relationship between gross and net adds given the company's increased installed base, they are run assuming a 5 percent churn rate. Compared to the historical 4 percent monthly churn, the half-life of the average customer declines from 18 to 14 months at this higher level.

Were this company analyzed according to discipline of per subscriber valuations, the increase in churn indicated by management has a dramatically negative impact for the stock price.

Of course, it’s not analyzed that way, but if the overall trend of revenue, profit and cash flow continues, it may not matter.

P.S: If Netflix can turn itself around, the company will have a field day with the headline on this story.

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