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Ricklogic

From the annual report: Lawsuit was filed against Netflix by an individual - it's similar to one of the suits filed by Blockbuster. The WSJ has covered it:

WSJ.com
Netflix Faces Putative Class-Action Suit Over Online Patents
DOW JONES NEWSWIRES
March 1, 2007 1:26 p.m.
DOW JONES NEWSWIRES

Netflix Inc. (NFLX) disclosed in a regulatory filing that it faces a purported class-action lawsuit filed on behalf of consumers allegedly harmed by Netflix's patents on online video rentals.

The lawsuit alleges that Netflix deceived the U.S. Patent and Trademark Office in filing patents on online video rentals, and alleges that Netflix's customers paid artificially inflated subscription prices because the company's patents deterred potential competitors from offering video rental services online.

The lawsuit is the newest twist in an ongoing legal battle over online video rental patent rights between Netflix and Blockbuster Inc. (BBI), which started when Netflix sought to enforce its patents against Blockbuster in April of last year.
Blockbuster countersued Netflix in June, and made allegations similar to those made in the recent lawsuit - that Netflix's patents were obtained through deceptive practices and harm consumers.

The purported class-action lawsuit was filed by an individual in a California federal court, and seeks injunctive relief, restitution and unspecified damages.

Netflix of Los Gatos, Calif., disclosed the lawsuit in its annual report filed with the Securities and Exchange Commission late Wednesday.

Shares of Netflix traded recently at $22.75 each, up 22 cents.

-Ed Welsch, Dow Jones Newswires; 202-862-1356; edward.welsch@dowjones.com
Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

http://online.wsj.com/article/BT_CO_20070301_713629.html

Edward R Murrow

No one can deny that these are good results. Although reading through the 10K, the following attracted my attention:

"The decline in the average monthly revenue per paying subscriber was a result of the continued popularity of our lower cost subscription plans. We expect the average revenue per paying subscriber to continue to decline as we promote our lower priced subscription plans"

Is Netflix keeping churn in check by encouraging people to downgrade their Netflix acccounts rather than quit? Who knows. Personally, I did go from the 3-out Netflix program to the 1-out and increased my BBOTA account from 3-out to 4-out program. That's seems to give me the best value. A mass quantity of movies from BBOTA and availability to the eclectic collection that Netflix has.

type-cast

I think it would be better to get a 1-out or 2-out out from BB, and 3-out from NFLX. Why? Netflix has more shipping centers and faster delivery, better availability and a superior website. You will run out of things at BB if you aren't big on the new releases. Both the services have unique titles, but Netflix has more chance of sending them in order.

Edward R Murrow

I'm a heavy Total Access user so my 4 out program is actually 8 out. I exchange my 4 DVD's from BBO for 4 discs out of the store. While I still have those 4 discs from the store, the next set of 4 DVD's arrive in the mail from BBO. This technique may not be for everyone, but it's working well for me.

leonardodicrapio

I would be surprised if Netflix doesn't have higher gross margins on some (or all) of their lower cost subscription plans. Their "discounted" $4.99 plan (1 disc out -- 2 per month) is pretty much guaranteed to have a 40%+ gross margin (I am basing that on an assumption that 12 discs @ $1.50 each is Netflix's cost on a $17.99 plan). $2+ gross profit / $5 X 100% = 40%+.

leonardodicrapio

" The increase in gross margin in 2006 as compared to 2005 was primarily due to a decrease in revenue sharing cost per paid shipment, which includes a decline in the percentage of DVDs subject to revenue sharing agreements mailed to paying subscribers, as well as an increase in revenue per paid shipment as a result of a decline in overall usage and the continued popularity of our lower-priced plans."

Ricklogic

"decline in overall usage and the continued popularity of our lower-priced plans"

So, this sounds like a good development to you? This is your brain on Netflix.

"decrease in revenue sharing cost per paid shipment, which includes a decline in the percentage of DVDs subject to revenue sharing agreements mailed to paying subscribers"

Users are digging deeper to find movies in the bargain bin, those that are so old and cheap that Netflix simply buys them rather than do revenue sharing.

What happens when it gets too hard to find anymore interesting movies to watch?

prozac


I just recently upped to the 3-out NF plan and there is plenty I'm catching up on.

leonardodicrapio

"Users are digging deeper to find movies in the bargain bin, those that are so old and cheap that Netflix simply buys them rather than do revenue sharing.

What happens when it gets too hard to find anymore interesting movies to watch?"

Rickillogical,

Netflix has over 70,000 movies, which is approximately 5,000 more movies than Blockbuster Online.

If you watched 3 movies a day it would take you over 60 years to watch all the movies Netflix carries. And at that point Netflix will probably have over 100,000 movies, which would take you an additional 30 years to watch (at a clip of 3 movies a day).

The 5,000 extra movies that Netflix has versus Blockbuster Online would take approximately 5 years to watch (at the rate of 3 per day).

Thanks for making my point for me.

Ricklogic

It's titles, not movies. Don't forget the documentaries, how-to videos, exercise videos, TV shows, etc. I think that there are actually about 12 movies. Are you saying that you enjoy close to 100% of all the movies, cartoons, TV shows, yoga videos, etc ever made? If not 100%, 80%? How many actual movies are there that you would deem good movies or better? 1,000? 5,000?

leonardodicrapio

Rickillogical,

If you think there are only 1,000 good movies, then you should rent them with your 40 movies per month from Blockbuster online, cancel your account after two years, and throw your television in the trash can because there is nothing good left to watch.

Ricklogic

Dresdner Advises Aggressive `Underweight' in Stocks (Update2)

By Alexis Xydias

March 2 (Bloomberg) -- Investors should reduce stock holdings and buy government bonds because the current market sell-off is not over, said Dresdner Kleinwort, the top-ranked strategy team in the world.

''''''''''''''''''''''''''''''
Guess what happens to stocks that have P/E's of 30 when the market goes into a serious correction?

leonardodicrapio

What happens to stocks that have negative P/E's like Blockbuster?

Edward R Murrow

"What happens to stocks that have negative P/E's like Blockbuster?"

You must have accidentally mis-posted since a quick check of Yahoo Finance shows a P/E of 23.84 for BBI and a P/E of 31.60 for NFLX.

Correct me if I'm wrong, but I believe that P/E is like golf: lower is better.

leonardodicrapio

if you looked at their annual report you would realize they had a $75 Million tax benefit due to a favorable audit. That is money they will not be getting this year. I don't consider them to be a profitable because they managed to get a one-time tax benefit. that will not help them any going forward.

Edward R Murrow

Hmm, let me see. Believe Leo when he says that BBI wasn't profitable or believe the metrics that I see on Yahoo Finance, Morningstar, MSN Finance, etc. Tough decision. Hmm... Sorry Leo, I'm just going to have to go with the financial professionals and analysts who follow Blockbuster.

By the way, Blockbuster was upgraded today. I'll leave it as an exercise for the reader to figure out who did the upgrade and what the upgrade was.

Edward R Murrow

"I would be surprised if Netflix doesn't have higher gross margins on some (or all) of their lower cost subscription plans"

So Leo: a reduction in monthly subscriber revenue is a good thing as long as gross margins are higher?

You also seem to have a deep understanding of the Netflix cost structure. Is there a URL somewhere that shows these Netflix formulas and cost structures?

Firstlawofnature

Edward,

Some posters may have a deeper understanding of things not b/c they found a link spelling it all out but b/c they’ve put in the time and work to be informed. Being informed is no guarantee of success in making predications but don’t assume everyone here is a casual observer of flix.

As far as margins go do the following…calc the cost per netflix slot or monthly price divided by # of DVDs allowed out. 8 out for $47.99, 7 out for $41.99, down to 3 out for $17.99 and 1 out for $9.99. If you do this you might note that it costs more per slot for the low priced plans vs the higher plans or said another way, flix discounts for better customers. At a constant rate of use for each slot (yes an assumption) the lower priced plans carry a higher gross margin offsetting, to some extent, the erosion in ASP.

leonardodicrapio

From MSN Money (Central):
P/E -- 22.70
Forward P/E -- 110.40

http://moneycentral.msn.com/detail/stock_quote?Symbol=BBI

And I posted this earlier, but I am re-posting it here.

http://biz.yahoo.com/prnews/070227/datu014.html?.v=78

"For the full-year 2006, net income totaled $54.7 million, or $0.23 per diluted share, as compared with a net loss of $588.1 million, or $3.20 per common share, for 2005. Excluding the favorable resolution of multi-year tax audits, store closure and severance costs as well as certain other items, as shown on page 5 of the financial tables, adjusted net income for the full-year 2006 totaled $6.3 million, or $0.03 loss per common share, compared with an adjusted net loss of $73.6 million, or $0.40 per common share, in 2005."

leonardodicrapio

Blockbuster was upgraded today from Sell to Hold. Hardly a ringing endorsement.

leonardodicrapio

"So Leo: a reduction in monthly subscriber revenue is a good thing as long as gross margins are higher?"

Average monthly subscriber revenue went down, and gross margins were higher.

The number of subscribers went up, and total monthly subcriber revenue went up.

Total Revenues and Gross Margins both went up. That is a good thing for Netflix.

leonardodicrapio

Analyst estimates for BLOCKBUSTER INC - Yahoo! Finance

Earnings Estimate for Current Year (ending) Dec 07: 0.10 (dollars per share)

Year Ago EPS (for Past Year ending Dec 06): -0.07 (dollars per share)


leonardodicrapio

http://finance.yahoo.com/q/ae?s=BBI

gir

Interesting. Look at the Yahoo Finance revenue estimates for 2008 versus 2007 for BBI and NTFL (or just look at the estimated 2008 sales growth).

And if I'm reading it right, the current year estimates are on a downward trend for BBI (20¢ 60 days ago to 10¢ today), while NetFlix is about flat (80¢ to 79¢), but the BBI trend for next year is up (22¢ to 36¢) while NetFlix is down ($1.20 to $1.06).

Like I said - interesting, but ultimately meaningless. If analysts could really predict the market, we'd all be rich.

leonardodicrapio

mean estimate for BBI's EPS for the 1st quarter of '07 is -0.14 (dollars per share). that is down from estimate for 1Q07 EPS of 0.03 (dollars per share) from 7 days ago.

that is a mean estimate of a $26 million loss for BBI in 1Q07. the range on the analysts' estimates for 1Q07 EPS go from break-even (0.00 dollars per share) to -0.34 dollars per share (a $63 million loss).

type-cast

"If you watched 3 movies a day it would take you over 60 years to watch all the movies Netflix carries. And at that point Netflix will probably have over 100,000 movies..."

From past experience, I would say that 5% of the total would actually be ones I wanted to see. Each additional title has less marginal value. There are things called standards and priorities. Try creating arguments that take those concepts into account.

"The 5,000 extra movies that Netflix has versus Blockbuster Online would take approximately 5 years to watch (at the rate of 3 per day)."

What if you don't want to watch any of them? Your numbers are complete garbage, because I don't want to watch every movie, show, anime cartoon, or exercise video that has has ever been made. Get numbers that mean some thing. Oh, and stop being such a loser, referencing Ricklogic as "RickIllogic." Grow up.

Thank you, please.

Edward R Murrow

Whoa, looks like a nerve got hit somewhere down the line with all these posts of negatory BBI financial metrics.

I thought we were talking about P/E and Leo was saying that Blockbuster's P/E was negative. So if we're going to use Yahoo Finance, this URL is showing a P/E of 23.62 http://finance.yahoo.com/q/bc?s=BBI

Leo, it's ok to step up, be a man and admit you made a mistake. I make mistakes all the time and when I do, I freely and honestly admit them. It's actually good for the soul.

leonardodicrapio

I stand by my comments. Blockbuster has a negative P/E ratio. Do a little more extensive research of your own (beyond merely typing BBI at the Yahoo! Finance page and getting the Summary for Blockbuster). Click on Analyst Estimates -- those numbers are not nearly as deceiving. I've given you enough information to give you a good start.

Blockbuster Inc.: Earnings Estimates - from MSN Money
Year Ago EPS (for Past Year ending Dec 06): -0.03 (dollars per share)
http://moneycentral.msn.com/investor/invsub/analyst/earnest.asp?Symbol=BBI

Analyst estimates for BLOCKBUSTER INC - Yahoo! Finance
Year Ago EPS (for Past Year ending Dec 06): -0.07 (dollars per share)
http://finance.yahoo.com/q/ae?s=BBI

The $0.23 net income per common share ( Net income (loss) applicable to common stockholders $43.4 Million) is misleading because of the $76.4 Million tax benefit. Blockbuster's ongoing operations were not profitable (Blockbuster will probably not have tens of millions of dollars of tax benefits in 2007).

From Blockbuster's 10K
Benefit (Provision) for Income Taxes. We recognized a benefit for income taxes of $76.4 million during 2006 mainly related to a benefit from the resolution of multi-year income tax audits. (top of page 52 -- or do a CTRL-F Find search for $76.4)
http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?dcn=0001193125-07-044360&Type=HTML

"For the full-year 2006, net income totaled $54.7 million, or $0.23 per diluted share, as compared with a net loss of $588.1 million, or $3.20 per common share, for 2005. Excluding the favorable resolution of multi-year tax audits, store closure and severance costs as well as certain other items, as shown on page 5 of the financial tables, adjusted net income for the full-year 2006 totaled $6.3 million, or $0.03 loss per common share, compared with an adjusted net loss of $73.6 million, or $0.40 per common share, in 2005."
http://biz.yahoo.com/prnews/070227/datu014.html?.v=78

Edward R Murrow

Here's another reference for your edification:
http://moneycentral.msn.com/detail/stock_quote?Symbol=bbi

MSN Money Central is reporting P/E of 21.70. All my math classes here at college state that when a number has a '-' in front of it, then it represents a negative number. The absence of a '-' represents a positive number. Is there like a New Math for Netflix Fans that I haven't heard about?

The thing about "excluding favorable resolution of multi-year tax audits causing a $0.03 loss per common share" is a red herring. Of course BBI will take advantage of the favorable resolution of these audits on their financials; BBI management hasn't been too sharp in the past, but they've finally found their 'A' game and they're just pounding away on Netflix with Total Access.

Let's all make sure that we don't let the facts from Yahoo and MSN Finance slow us down from grinding the Netflix axe.

type-cast

Don't bother Leo with facts, Edward. He made up his mind already. His credibility is less than hueristix who can't even tell us apart. (He said I "obviously" work for or invest in "Com-Cast." You're the one who praises their on-demand services. I don't even have cable. It's funny watching people like Leo work. If he can't win the argument, he will resort to ad-hominems like "Rickillogical." Amazingly, he has yet to come up with an insult against you. Come on, Leo. Making fun of a user name will surely increase your credibility in the debate. How bout "Edward R Moron"? ha ha ha!

leonardodicrapio

Edward,

I'm sorry you think that Blockbuster sells at a discounted P/E to Netflix, but it doesn't. Citing that it does would be at best misleading.

Why don't you just call one of three brokerages (Citigroup, JP Morgan, Bear Stearns) that follow Blockbuster and tell them you think Blockbuster sells at a discounted P/E ratio compared to Netflix?

leonardodicrapio

page 48 of blockbuster 2005 10K:

2005
$588 Million Loss
$65 Million Provision for Income Taxes

2004
$1.248 Billion Loss
$37.3 Million Benefit from Income Taxes

2003
$974 Million Loss
$106.5 Million Provision for Income Taxes

So Blockbuster loses money (over $2.5 Billion) for three straight years, but they pay over $100 Million in Income Taxes.

So in 2006, Blockbuster gets a $75 Million tax benefit from a favorable audit. They report $50 Million in Net Income, which includes that $75 Million tax benefit from taxes that were overpayed in years past. That's not real profit, otherwise they would be paying tax on it.

http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?dcn=0001193125-06-055023&Type=HTML

Firstlawofnature

The 'facts' from yahoo and MSN?????

Amateur hour here. Arguements backed by unwashed #'s from generic web sites are a joke. Fact of the matter is BBI has little in terms of net income. The company has had a significant erosion in earnings power over time while Netflix went from an idea to a money maker. This is fact.

TA may be the answer for BBI but you may be missing the picture if you are focused on simple stats like how many subs BBI can nab.

Ricklogic

Sometime after the 4th Quarter report came out, Tony Wible from Citi reiterated his buy rating on Netflix with a target of $30.00 (down from a previous target of $33.50)

He loosely refers to Netflix ‘scaling’ their business. Sell-siders favor the loose approach so that you can’t nail them to a tree later when things go awry.

Where does this scaling occur???

The basic Netflix model is buy DVD’s, mail DVD’s, receive DVD’s, and advertise.

Following are the major items from the income statement, year ended 12/31/06, and my personal opinion of where scaling might occur.

Revenue was just short of $1 billion.

Cost of revenues:
Subscription: $532,621,000
• Postage $300,000,000 (1)
• Rev share/purchase $230,000,000 (?)
• Scaling? - No, lowest price per mailing each DVD has already been realized.

Fulfillment expenses: $94,364,000
• Distribution Centers
• Scaling? - No, warehouse workers open, inspect and stuff every DVD. IT IS MANUAL.

Operating expenses:
Technology and development: $48,379,000
• Neil Hunt, CTO, some PhD's.
• Work on web site and download technology.
• Scaling? - No

Marketing: $225,524,000
• Leslie Kilgore
• Internet advertising $200,000,000 (2)
• Scaling? – Not really. Netflix advertises at the highest level possible to maintain growth – Large numbers of members quit every quarter as with other subscription models. The price per ad impression can go up or down depending on factors outside of Netflix’s control.

General and administrative: $36,155,000
• Reed Hastings, Barry McCarthy, Directors.
• Corporate expenses, Home Office maintenance
• Scaling? - No

(1)
Neil Hunt: “In aggregate, we're looking at a $300 million postal bill…”
From interview with Bambi Francisco.
http://blogs.marketwatch.com/bambi/2007/01/netflixs_chief_.html

(2)
My estimate based on several months of data from Nielsen/AdRelevence.

[Ted Sarandos "has $100 million budget.” I picked this up in some article. I don’t know how it fits but it was perhaps tied into ‘Red Envelop’ and Netflix’s purchases of movies at festivals, etc.]

leonardodicrapio

"Sometime after the 4th Quarter report came out, Tony Wible from Citi reiterated his buy rating on Netflix with a target of $30.00 (down from a previous target of $33.50)."

Tony Wible from Citigroup downgraded Blockbuster from Buy to Hold on December 6th, 2006.

Ricklogic

I saw Wible's target of 30 just recently in a Citi report. Below are the actions that www.newratings.com shows since November but no mention of Wible/Citi. You're sure about the hold from Citi?

01/30/07 Netflix downgraded to "sell" Roth Capital
01/26/07 Netflix "buy," target price reduced Cantor Fitzgerald
01/12/07 Netflix downgraded to "neutral" J.P. Morgan Securities
12/16/06 Netflix initiated with "neutral" First Albany
12/14/06 Netflix initiated with "sell" Banc of America
12/11/06 Netflix "buy" Cantor Fitzgerald
11/28/06 Netflix initiated with "buy" Cantor Fitzgerald

In any case, Wible is throwing around the term scale without supporting it.

Ricklogic

Crap, I need to straighten out a generalization that I made. Clearly a sizeable number of sell-side analysts and journalists are great people and show great care, smarts, and writing ability. When I am critical about sell siders and journalists I am talking only about the ones who have sold their soul or, at a minimum, ceased caring and having pride in their professions.

leonardodicrapio

"You're sure about the hold from Citi?"

Yes, see link below. Tony Wible covers NFLX and BBI -- at least he is the analyst asking all the questions for Citigroup at both of the conference calls to cover the annual results.

http://finance.yahoo.com/q/ao?s=BBI

And in an article from February 7th, 2007:

"In a note to investors Tuesday, Citigroup analyst Tony Wible wrote that he expects Netflix to successfully defend against challenges from Blockbuster Inc., which launched a hybrid in-store/online rental service last year.

Wible believes Blockbuster's success with Total Access came at the expense of its in-store customer base, not Netflix's market share. Blockbuster's stock fell 2 cents to $6.86 on the New York Stock Exchange."

http://townhall.com/News/NewsArticle.aspx?ContentGuid=bafedacc-68ca-4df6-9bbf-7dda21a599e9

Ricklogic

I appreciate it. I was actually only thinking about Netflix and missed, while taking pictures of Pluto, that you were actually commenting on BB. Other than believing that Total Access is a good program I don't think too much about BB. I am not overly fond of BB, I simply strongly dislike Netflix management. So, it seems good to me if BB can cause Netflix trouble until download and VOD really get their footing. The studios care a lot more about download and VOD than they do about physical DVD rental. They love DVD sales but even there download and VOD are eventually better if they can figure out how to iron out the bugs. Way less overhead, way more profit and control for the studios.

leonardodicrapio

"They love DVD sales but even there download and VOD are eventually better if they can figure out how to iron out the bugs. Way less overhead, way more profit and control for the studios."

I'd tend to disagree that the studios care more about download than DVD rentals. But I believe some of their reluctance is a result of Wal-Mart being the largest seller of DVD's (who is none too happy with movies being sold on ITunes -- although doesn't Wal-Mart sell movies online now, too?).

ITunes has only lined up Disney and Lionsgate to sell movies on ITunes. And I believe Steve Jobs (due to Pixar's sale to Disney) sits on the board of directors and is the largest shareholder of Disney, so Apple had an inside track there.

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