New-media companies target global growth

October 24, 2011

This week offers a window into the operations of two high-growth new-media companies.

Netflix Inc. is scheduled to post third-quarter results on Monday after the market close. This will be an important report for the video rental service, with investors seeking some reassurance that management has operations on track.

The past several months have proved tough for the Los Gatos, Calif.-based company, which delivers videos both online and by mail. A sudden set of hefty price increases didn't go over well with customers, forcing Netflix to reduce its target for U.S. subscribers in the third quarter. Then an announcement that management would split its DVD-by-mail service into a separate business angered customers and was quickly reversed.

Starting three years ago, the market swooned over the stock, attracted by its early move into delivering entertainment to the home. But sentiment swung dramatically this summer on fears of slower growth and rising costs for content, an awful lot of which is non-exclusive.

The shares have tumbled 62 per cent since July and Andy Hargreaves, an analyst with Pacific Crest Securities, says investors will be watching guidance for subscriber growth this quarter,

He says the company's aggressive move into video streaming should translate into strong global growth over the next five years. But he's maintaining a "hold" rating on the shares until he sees more clarity on content negotiations, subscriber growth and new competitive initiatives.

The market wants to know that Netflix has a long-term strategy to compete against better capitalized players who have created their own streaming services. For example, Wal-Mart Stores Inc.'s Vudu service streams movies and TV shows without requiring a membership fee. Apple has already proved itself as a leader in negotiating rights with content producers. And Microsoft is bulking up its streaming service for Xbox Live.

Analysts are looking for Netflix to report profit of $51.4-million (U.S.) on revenue of $811.6-million. This would represent strong growth, with profit up 35 per cent from a year earlier and sales up 47 per cent. But these figures also suggest gross margin slippage, from 37 per cent a year earlier to 34.9 per cent.

Another new-media giant, Amazon , is expected to report a third-quarter profit of $120.2-million on revenue of $10.9-billion when it releases results on Tuesday. That would represent 44.5-per-cent revenue growth along with a 48-per-cent decline in profit. Those figures would accentuate the second-quarter pattern, where sales surged 51 per cent and profit fell 8 per cent.

The consensus among analysts is for Amazon's gross margins to decline to 23.1 per cent from 23.5 per cent a year earlier.

The decline is unlikely to spook investors, who know that Amazon became the world's largest online retailer by investing in its future. The Seattle-based company has always favoured expanding revenue over profit margins. Costs this year include new server farms and distribution centres around the world and possible subsidies on certain Kindle devices.

At $199 a device, Amazon is thought to be selling its new Kindle Fire very close to cost, which has led some analysts to reduce their short-term forecasts for operating profit. But the company hopes the tablet will eventually drive profit higher. It aims to turn Kindle buyers into subscribers to its Amazon Prime service, which costs $79 a year in the U.S. and includes access to more than 12,000 streamed movies and TV shows.

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