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Accounting Analysis (5)
⚫Netflix Provision for Income Taxes:
–Netflix has a history of losses for both tax and financial
reporting purposes. These losses produce net operating
loss carryforwards (NOLS) to offset against future profits.
never have to pay any taxes, because they assume they
will never have enough profit to offset their NOLs, and so
they report no tax expense.
Ratio Analysis (6)
⚫Subscription revenues are used in numerator, since
DVD library generates subscription revenues
⚫Rental library turnover ratio for Netflix =
Ratio Analysis (7)
⚫Major reasons for Netflix’ higher turnover ratio:
–Netflix turns its library more frequently than Blockbuster. The
key reason for this difference is that Netflix’ library is centrally
located at its 35 warehouses, while Blockbuster’s library is
through lower turns.
Ratio Analysis (8)
⚫Note use of subscription/rental revenues and costs
in these computations
⚫Gross margin on movie rentals for Netflix =
Ratio Analysis (9)
⚫Major reasons for Netflix’ lower gross
margins:
–Blockbuster’s gross margins are much higher. The key
reason is that Blockbuster has to charge a higher markup
to cover the higher costs of its more differentiated,
service-oriented approach. In particular, it needs to cover
⚫The following slide approximates the forecasting assumptions
made by a prominent sell-side analyst in reaching the $0.34 and
$1.13 EPS forecasts for 2005 and 2006 respectively.
⚫Notes:
–Use 5 year forecast horizon and valuation date of 3/1/2005. Valuation
parameters and forecasts beyond 2006 influence 2005 and 2006 EPS
–Analyst forecasts reduction in SG&A due to reclassification discussed
above
Forecasting Analysis (10 & 11)
Forecasting Analysis (10 & 11)
Forecast Horizon TERMINAL
Estimated Price/Share=$15.99 YEAR
Forecast Forecast Forecast Forecast Forecast Forecast
Fiscal Year End Date 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010
Forecasting Analysis (12)
⚫Churn is defined on page 12 of Netflix
10-K. It is basically a measure of the
proportion of existing customers that
