Fin300 Final Team Project Term Paper
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GGU MBA Managerial Finance Final Project Term Paper

GGU MBA Managerial Finance Final Project Term Paper

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Fin300 Final Team Project Term Paper Document Transcript

  • 1. [Type the company name] A Term Paper Presented to Meet Partial Requirements for Managerial Finance 300 A Course Professor: Mr. William Sarsfield L JANS and Associates, LP: Alicia (Hui Man Chan), Jenny, Licia, Nina, & Scott Friday, December 30, 2011
  • 2. Table of ContentsI. Executive Summary ........................................................................................................................................................ 4 Consultant Bio: ................................................................................................................................................................. 4 Client’s Background: ........................................................................................................................................................ 4 Client’s Proposition and Request Objective: ................................................................................................................ 5 Consultant’s Final Analysis Report and Recommendation:....................................................................................... 5II. Fast Facts: Netflix Corporation and Targeted Companies ....................................................................................... 6III. Statistical DVD Rental and Streaming Market Data and Information for Consumer and Industry (As of July 2011) ................................................................................................................................................................................. 7 General News Current News Releases for Consumer and Industry: ....................................................................... 7 Netflix: Content and Pricing Model ................................................................................................................................ 8 Sandvine Networks Analytics Top-Ten Internet Traffic Analysis Chart for North America: Upstream % ....... 9 Sandvine Networks Analytics Top-Ten Internet Traffic Analysis Chart for North America: Downstream % 10 Sandvine Networks Analytics Top-Ten Internet Traffic Analysis Chart for North America: % Differential between Upstream and Downstream ...................................................................................................................... 10 Percentage of Subscriber Website Visitations Graph (From September 22 to September 29) ..................... 11 Per-Subscriber Usage Overlay Graph (From September 22 to September 29) .............................................. 11 Comcast: Content and Pricing Model.......................................................................................................................... 12 Redbox: Content and Pricing Model............................................................................................................................ 12 Blockbuster: Content and Pricing Model .................................................................................................................... 12 Hulu: Content and Pricing Model ................................................................................................................................. 13
  • 3. Amazon: Content and Pricing Model ........................................................................................................................... 13IV. Du Pont Model Functionality and Utilization Analysis ............................................................................................. 14V. Balance Sheet Comparative Analysis Charts and Graphs ..................................................................................... 14 Selected Financial Measurements and Corresponding Equation Matrix Sample, Based on Balance Sheet Data for Year-End 2010 ................................................................................................................................................ 14 Equation Matrix Sample: ............................................................................................................................................... 15 Balance Sheet Synopsis and Overview of a Few Key Performance Statistics: Firm vs. Industry ..................... 16VI. Financial Performance Ratios and Comparative Analysis Charts and Graphs ................................................... 19 Quick and Current Ratio Performance Comparative Analysis: Netflix vs. Comcast (2006-2010) ..................... 19 NOWC Performance Comparative Analysis: Netflix, Comcast, Redbox, and Blockbuster (2006-2010) ......... 20 TOC Performance Comparative Analysis: Netflix, Comcast, Redbox, and Blockbuster (2006-2010).............. 20 NOPAT Performance Comparative Analysis: Netflix, Comcast, Redbox, and Blockbuster (2006-2010) ........ 21 FCF Performance Comparative Analysis: Netflix, Comcast, Redbox, and Blockbuster (2006-2010) .............. 22 ROIC Performance Comparative Analysis: Netflix, Comcast, Redbox, and Blockbuster (2006-2010) ............ 22 M/B Ratio Performance Comparative Analysis: Netflix, Comcast, Redbox, and Blockbuster (2006-2010)..... 23VII. Consultant’s Closing Comments and Final Recommendation ............................................................................ 23 Opinions:.......................................................................................................................................................................... 23 Recommendations: ........................................................................................................................................................ 24VIII. Client’s Q & A Session .............................................................................................................................................. 24Source Citations, Appendages, and Miscellany ............................................................................................................ 25
  • 4. I. Executive SummaryConsultant Bio:L JANS & Associates, LLP is an accounting consultancy firm, specializing in corporate evaluation anddue diligence for auditing purposes in areas of mergers and acquisitions, LBOs and liquidations forFortune 500 companies worldwide. Established in 2001 by a 25-member team of experiencedaccounting professionals and MBA graduates from SMU Cox School of Business, Wharton School ofBusiness, Stern School of Business, and GGU Edward Ageno School of Business our firm now staffsover 1,500 CFA and CPA qualified consultants from those prestigious institutions in addition toseveral others, specializing in various industries such as engineering, commercial and investmentbanking and financial services, insurance, government, hospitality, law, manufacturing, medical andpharmaceutical, aerospace, commercial real estate, mining and agriculture, televised sports andentertainment, and news media.Our unique proprietary brand of products and services allows us to consistently and effectivelyexecute with the highest degree of integrity and efficiency under full compliance of local, state, andfederal regulations any number of our customers’ various complex and sophisticated financialevaluation needs, comprehensively and expediently. Since inception, we have managed to maintainan above-average Return on Capital Investment ratio for our clients’ acquisitions in their particularindustry, a statistical performance record that is factual and irrefutable.Client’s Background:Our client, Netflix, Inc., is a $2.2 billion (sales revenue) subscriber-based video tape and disc rentaland Internet video streaming business for the distribution of both TV and movie content and by whichis operated by 2,180 employees. Its services span worldwide and are organized and offered in two
  • 5. segments: U.S. territory and international region. Incorporated in 1997 and headquartered in LosGatos, California, the company is currently led by Chief Executive Officer Reed Hastings, a positionheld since September 1998 - but yet also serving as Chairman of the Board since the company’sfounding in 1997. The company is publically traded on NASDAQ under the symbol NFLX and iscurrently traded on the exchange at around $273 a share.Client’s Proposition and Request Objective:On May 16, 2011, L JANS & Associates (lead consultant) was approached by company executives ofthe Netflix Corporation (client) to make a formal inquiry and request proposal to provide evaluationanalysis services on Comcast, Inc. (primary targeted competitor) to supplement and facilitateresource allocation action plans for Netflix management team’s impending investment strategy for thefurtherance of market expansion into their existing online video content streaming business. Inaddition to the previous request, Netflix has also made a formal Merger and Acquisition proposalrequest to our firm to execute preliminary due diligence and financial analysis on the RedboxCorporation as a possible acquisition candidate. A third item presented to our firm by Netflix, to beincluded in the terms of the pending agreement, is to perform a non-comprehensive M & A prospectassessment and forecast analysis on the Blockbuster Corporation, pre- and post-Chapter 11 phases,to examine leverage probability ratios for possible acquisition transaction long-run.Consultant’s Final Analysis Report and Recommendation:On this date, August 1, 2011, L JANS & Associates has fully completed all services requested by ourclient, Netflix, Inc., in a written proposal submitted to us on May 16, 2011, and have formalized ourresults and final conclusions, and, based on our final assessment, offer the followingrecommendations in this auditing report.
  • 6. II. Fast Facts: Netflix Corporation and Targeted Companies Redbox Automated Retail, LLCCompanies (Wholly-owned subsidiary ofInvolved in Report Netflix, Inc. Comcast Corp Coinstar, Inc.) Blockbuster, Inc. 100 Winchester Circle One Comcast Center One Tower Lane Suite 1200Headquarters Los Gatos, CA 95032 Philadelphia, PA 19103-2838 Oakbrook Terrace, IL 60181 1201 Elm Street Dallas, TXAddress: United States USA United States 75270 USADate of August 1997 , DE, United December 2001 , PA, United October 1989 , DE, UnitedIncorporation: States States Founded in 2004 StatesNumber ofEmployees: 4,329 102,000 CoinStar: 2,585 48,000 Coinstar: Paul Davis, CEO:Chief Executive Reed Hastings, Chairman Redbox: Mr. Mitch Lowe,Officer: & CEO Brian President Bruce Lewis, SVP & CFOGross Revenue: $2.2 billion $38 billion Coinstar: $1.6 billion $3.5 billionExchange Listing: NASDAQ NASDAQ Coinstar: NASDAQ Delisted CMCSA-Class A Common Stock: CMCSK-Class ASymbol: NFLX Special Common Stock Coinstar: CSTR DelistedNumber ofOutstandingShares (as July 17,2011): 52,782,000 20,391,697 Coinstar: 31,355,000 219,000,000Number ofInstitutionsHolding Shares: 539 (Up) 217 773 Coinstar: 275 3Current 52 WeekHigh/Low: $297.35/$95.33 $27.16/$16.76 Coinstar: $67.56/$37.80 $0.28/$0.03 Coinstar has never paid cashMost Recent dividend on capital stock.Dividend Netflix has never paid a Coinstar is restricted to pay anyDistribution cash dividend on capital cash dividends under its currentAmount: stock. July 1, 2011 @ $0.113 credit facility. June 2, 2005 @ $0.02 Executed a 3-for-2 stock split on February 22, 2007; 2-for-1 split on May 6, 1999: 3-for-2Historical Stock Executed a 2-for-1 stock on February 3, 1994; 3-for-2Splits: split on February 12, 2004. split on October 25, 1989. Coinstar: None None Coinstar purchased 47% of Redbox in 2005: Later in 2009Notable M & A purchased the remaining 53%Historical Events: stake in Redbox. Publically held as a wholly-owned subsidiary of Coinstar, Inc.-Current Status: Public Public Parent Company Chapter 11 Coinstar sold their Entertainment business in September 2009, roughly nine months following theMiscellaneous purchase of the remaining stakeNotes: in Redbox in January 2009.
  • 7. III. Statistical DVD Rental and Streaming Market Data and Information for Consumer and Industry (As of July 2011)General News Current News Releases for Consumer and Industry:  According to Nielson Company, the average viewers spent four hours and thirty-nine minutes watching Internet video in January, up 45% from a year ago. According to Sandvine Network Analytics chart to the right, as of Year End 2010, it shows domestic data usage for subscribers using various packages during the year. In addition, average daily content downloading in North America for the entire year during 2010 over the Internet for fixed access devices was led by Real-Time Entertainment traffic at 45.7%, which includes such companies like Netflix, Comcast, Redbox, and Blockbuster, according to the Sandvine Network Analytics chart to the left.
  • 8. Internet Publishing and Broadcasting in the U.S. 90 45,000.00 84.8 80 40,000.00 70 71.3 35,000.00 60 30,000.00 50 47.3 25,000.00 Revenue $ million 40 20,000.00 Growth % 30 15,000.00 26.5 24.9 20 20.2 20.1 17.2 10,000.00 18.8 10 12.8 13.1 15.8 5,000.00 0 0 0.00 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011  In 2011, CEO of Netflix, Reed Hastings, has joined Facebook’s board of directors in a new slot, which is sometimes a precursor to an eventual initial public offering, or IPO.  Due to SEC regulatory requirement which stipulates that any firm involving 500 or more investors must disclose their financial statements, Facebook who is expected to surpass that figure must fully comply and disclose company’s financial statements  Broadband content provider, NBCU (NBC Universal), a subunit of Comcast Corporation, had been reported as formulating discussions with Netflix for a new distribution deal in 2011.  On April 26, 2011, a U.S. Bankruptcy Court judge approved a majority sale of Blockbuster’s assets to Dish Network for a reported $320 million.Netflix: Content and Pricing Model  Netflix maintains the largest library of online content than any other service provider company of its kind. The following graph on the ensuing page indicates annual revenue sales from 2006 to 2010:
  • 9. Total Annual Revenues 2,500,000,000 2,162,625,000 2,000,000,000 1,670,269,000 1,500,000,000 1,364,661,000 1,205,340,000 Total Annual Revenues 1,000,000,000 996,660,000 500,000,000 0 2006 2007 2008 2009 2010 According to Sandvine Network Analytics, Netflix ranked in the top ten in both upstream and downstream Internet traffic in North America’s fixed networks in 2010 (see charts below on the following page). Sandvine Networks Analytics Top-Ten Internet Traffic Analysis Chart for North America: Upstream % Upstream Percent of Traffic: Year-End 2010 Upstream Percent of Traffic 34.31% 11.18% 12.36% 2.28% 2.41% 2.46% 2.47% 2.99% 3.28% 4.34% 10. 9. 8. MGCP 7. 6. SSL 5. Skype 4. Netflix 3. Gnutella 2. HTTP 1. Facebook PPStream YouTube BitTorrent
  • 10. Sandvine Networks Analytics Top-Ten Internet Traffic Analysis Chart for North America:Downstream % Downstream Percent of Traffic: Year-End 2010 2. HTTP 22.70% 4. Netflix 20.61% 7. YouTube 9.85% 1. BitTorrent 8.39% 0. Flash Video 6.14% 0. RTMP 6.13% 0. iTunes 2.58% 10. Facebook 2.44% 3. Gnutella 2.12% 0. Xbox Live 1.61% Downstream Percent of TrafficSandvine Networks Analytics Top-Ten Internet Traffic Analysis Chart for North America:% Differential between Upstream and Downstream Netflix: Top-Ten Internet Traffic Performance Analysis: Year-End 2010 Percentage Difference in Ranking (Upstream vs. Downstream) ± 374.88% 298.79% 83.66% 0.00% 0.00% 0.00% 0.00% -0.81% -75.55% -81.04%
  • 11.  As of September 22, 2010, the company expanded its enterprise operations to Canada and is currently experiencing promising results in the early stages of market development and product and service integration. The following graphs indicate the percentage of subscribers who visited Netflix.Com and per-subscriber usage comparative analysis between Netflix and YouTube during a one-week span immediately following full deployment. Percentage of Subscriber Website Visitations Graph (From September 22 to September 29) Per-Subscriber Usage Overlay Graph (From September 22 to September 29)
  • 12.  Netflix will hike fees for online video streaming downloads and DVD’s by mail as high as 60%: Rates are scheduled to take effect on September 1.  New monthly fee rates will consist of a dual package of online video streaming and one DVD at $16, and increase from current rate of $10: Monthly online streaming only rate remains @ $8.  Blockbuster now offers thousands of movie rentals for 99¢ a day: New releases cost $2.99.  At the end of October 2010, Blockbuster had 1.2 million mail-order subscribers, compared to 23 million for Netflix at the time.Comcast: Content and Pricing Model  As a fractional part of their monthly cable subscription plan ($60 for a basic plan), Comcast new movie release fees run about $5 – usually offered the very same day of its DVD release, giving Comcast more recent movie streaming content than Netflix ; $2 for older ones.Redbox: Content and Pricing Model  Redbox’s kiosk each holds 200 newly-released rentals that are available no fewer than 30 days prior to the movie’s distribution via DVD, a contractual restriction similar to Netflix’s plan.  With over 27,000 bright-red kiosks stationed at various locations nationally in the U.S., mainly at grocery stores and drugstores, Redbox rent DVDs and Blu-Ray movies for $1 and $1.50 per night, respectively.Blockbuster: Content and Pricing Model  Blockbuster makes the claim that their movie downloads are available well in advance before they become available through Netflix.
  • 13.  Currently Blockbuster has 1,700 stores remaining.  Blockbuster does not offer a monthly plan, for which Netflix does.  In order to compete favorably with Coinstar’s Redbox, Dish Network’s Blockbuster move to a per-day pricing model that introduces $3 rates for just-released films, $2 for other newly released movies, and $1 for each additional day thereafter.  Blockbuster monthly mail-delivery rentals are pricier than Netflix: The company charges a monthly rate of $12 for one movie or game at a time and $17 for unlimited two-at-a-time rentals, compared to Netflix’s DVD-only monthly rental rate of $8 for one or $12 for two.Hulu: Content and Pricing Model  The Hulu company, owned by The Disney Company, News Corp, and Comcast, offers thousands of TV show episodes and movies via Hulu Plus @ $8 per month.Amazon: Content and Pricing Model  Amazon’s Instant Video.Com does not offer exclusive online monthly rates. It offers roughly 3,500 online movies and television show rentals at prices ranging from $1 to $5.  Amazon delivers about 6,000 movies and TV shows over the Internet, compared to 20,000 for Netflix.
  • 14. IV. Du Pont Model Functionality and Utilization Analysis Netflix versus Comcast Probability Performance Comparison Chart (2006-2010) 25 70 20 60 50 15 40 10 30 20 5 10 0 0 Netflix- Netflix- Netflix- Netflix- Netflix- Comcast Comcast Comcast Comcast Comcast 2010 2009 2008 2007 2006 -2010 -2009 -2008 -2007 -2006 ROE % (Net) 65.75 8.35 42.42 8.75 21.29 6.21 15.85 6.27 15.33 6.22 ROA % (Net) 19.36 3.14 17.86 3.22 13.09 2.24 10.66 2.31 10.08 2.37 Comments and Remarks: Netflix shares are held by 570 institutions - accounting for 87.05% of all shares held. Among the top 5-10 institutions holding Netflix shares are Vanguard Group, Inc., American Centuries Companies, Inc., State Street Corp, Blackrock Institutional trust Corp, & Bank of New York Mellon Corp. In 2010 the company’s stock price increased 219%. Although the company has stabilized its price point for several, since its inception, the recent decision to change that pricing model by restructuring the monthly subscription fee package and increasing its rate slightly roused investors and caused major concern, due to irrational expectations. However, the slight price increase is still relatively below industry standard. V. Balance Sheet Comparative Analysis Charts and GraphsSelected Financial Measurements and Corresponding Equation Matrix Sample, Based onBalance Sheet Data for Year-End 2010 Performance Measures Comparison Chart (%, unless Redbox Automated Retail, LLC noted otherwise), as of Year End (Wholly-owned subsidiary of 2010 Netflix, Inc. Comcast Corp Coinstar, Inc.) Blockbuster, Inc.NOWC (Net Operating WorkingCapital) 116,192,000 1,880,000,000 -125,461,000 198,800,000TOC (Total Net Operating Capital) 244,762,000 25,395,000,000 319,226,000 448,200,000NOPAT (Net Operating Profit AfterTax) 170,185,000 4,788,000,000 85,924,200 -213,120,000
  • 15. FCF (Free Cash Flow) 103,767,000 -463,000,000 92,174,200 -115,820,000ROIC (Return on InvestmentCapital) 70% 19% 26.92% -48%Market/Book (M/B) Ratio 50.20 1.15 9.54 -2.70Comments and Remarks: The two most notable balance sheet stats, or balance sheet-relatedstatistical numbers, are seen in the figures regarding return on invested capital (ROIC) andmarket/book (M/B) ratios, indicating a decisively clear financial positioning for the company and itsinvestors. These percentage and ratio figures strongly illustrate the company’s dedication andcommitment to its capital infrastructure and investors. Netflix has long been able to secureconfidence from its investors due to its predication of its original mission and standing to be investor-oriented and –friendly. Because the industry they service and offer products to is a niche market,there are few competitors who provide their brand of product and services to match or even exceedthe company’s revenue and profitability performance. The following are a few business activitieswhich has played a crucial role for the company’s historical growth and current accelerated success:  Product paradigm shift from DVDs to online movie and TV shows streaming  Content obtained from studios via fixed-fee licenses, revenue-sharing pacts, & direct purchases.  Added 8 million subscribers in 2010, bringing total to 20 million  In 2010, revenue catapulted up 29%: Net income up 39%Equation Matrix Sample:Netflix Liquidity Measures: Year2010 Net Operating Working Capital Operating Current Assets − Operating Current (2010) = Liabilities = 375,505 − 259,313 = 116,192 Conversion 116,192,000 Net Operating Working Capital Operating Current Assets − Operating Current (2009) = Liabilities = 171,553 − 124,862 = 46,691 Conversion 46,691,000Total Net Operating Capital (2010) Net Operating Working Capital + Net Operating Long-Term = Assets = 116,192 + 128,570
  • 16. = 244,762 Conversion 244,762,000Total Net Operating Capital (2009) Net Operating Working Capital + Net Operating Long-Term = Assets = 46,691 + 131,653 = 178,344 Conversion 178,344,000 NOPAT = Earnings Before Interest Taxes X (1 - Tax Rate) = 283,641 X 0.60 = 170,185 Conversion 170,185,000 New Investment in Operating Capital (Current Free Cash Flow (FCF) = (NOPAT + Depreciation) − Years Total Net Operating Capital - Previous = 306,764 − 202,997 Years Total Net Operating Capital) + Depreciation = 103,767 Conversion 103,767,000 Return on Investment Capital NOPAT ÷ Total Net Operating Capital (2010) = = 170,185 ÷ 244,762 = 70%Balance Sheet Synopsis and Overview of a Few Key Performance Statistics: Firm vs. Industry 2010 Financial Ratio Comparison: Company vs. Industry Profit Margin: Company Profit Margin: Industry 9.58 9.6 7.44 5.7 4.8 4.5 3.55 0 Netflix, Inc. Comcast Corp Redbox Automated Blockbuster, Inc. Retail, LLC (Wholly- owned subsidiary of Coinstar, Inc.) Comments and Remarks: Our original assessment of the leverage position of our two targeted acquisition candidates is highly illustrated in the chart above. First, because of the industry shift from a brick and mortar business model to an e-commerce, Redbox Automated Retail’s profit margin has been impacted severely and performed well below the industry standard in 2010. Secondly, the substantial discrepancy reported for Blockbuster, Inc. is, of course, prefaced by the company’s preliminary status of Chapter 11 bankruptcy. Nonetheless, in spite of the recent purchase of Blockbuster, Inc. by the Dish Network Corp, to aid
  • 17. Blockbuster’s current restructuring efforts, we, L JANS & Associates, remain optimistic thatBlockbuster, once removed from U.S. Chapter 11 bankruptcy, will still be a viable acquisitiontarget in the near future. The following few statistical graphs further support our originalacquisition recommendation proposal: 2010 Financial Ratio Comparison: Company vs. Industry Debt Ratio: Company Debt Ratio: Industry 120.4% 70.5% 63.4% 65.2% 51.9% 53.9% 51.9% 33.4% Netflix, Inc. Comcast Corp Redbox Automated Blockbuster, Inc. Retail, LLC (Wholly- owned subsidiary of Coinstar, Inc.)Comments and Remarks: The company’s noticeable above-industry standard debt ratio isdescribed as modest and reflects the company current migration and transformational activityof hybrid business model incorporating both legacy operational infrastructure (i.e., brick andmortar product and services) to a contemporary model strictly involving e-retail and e-commerce. The legacy operations are currently in phase one of the migration stage and fulland complete e-commerce migration efforts are expected to exceed 90% prominence inoperational activity. Although Redbox has a lower debt ratio spread, the company’s businessmodel is considered antiquated and stagnant and growth potential is highly restricted andlimited, as previously noted. This fact and future forecast of Redbox future financial leverageand positioning is a going concern, and we now would suggest a defocus of RedboxAutomated Retail as a primary, secondary, and tertiary acquisition targets and shift fullcommitment to Blockbuster as sole candidate.
  • 18. 2010 Financial Ratio Comparison: Company vs. Industry Current Ratio: Industry Current Ratio: Company Blockbuster, Inc. 1.4 1.13 Redbox Automated Retail, LLC (Wholly-owned 1.1 subsidiary of Coinstar, Inc.) 0.77 Comcast Corp 1.1 1.08 Netflix, Inc. 1.1 1.65Comments and Remarks: Ancillary and aligned with previous stated concerns, liquidity ratiosindicated above is strongly suggest that proposal recommendation is viable and on target. 2010 Financial Ratio Comparison: Company vs. Industry Total Asset Turnover: Company Total Asset Turnover: Industry 2.6 2.21 2.1 1 1.15 1 0.33 0.3 Netflix, Inc. Comcast Corp Redbox Automated Blockbuster, Inc. Retail, LLC (Wholly- owned subsidiary of Coinstar, Inc.)Comments and Remarks: The company’s 160% spread demonstrates management’sefficient utility and performance of current assets and cost-effectiveness.
  • 19. 2010 Financial Ratio Comparison: Company vs. Industry Return on Equity: Industry Return on Equity: Company 26.9 Blockbuster, Inc. 0 Redbox Automated Retail, LLC (Wholly-owned 11.4 subsidiary of Coinstar, Inc.) 11.92 7.2 Comcast Corp 8.35 14.06 Netflix, Inc. 65.75Comments and Remarks: Re-investitures of company earnings in product and servicesexpansion exclusively and entirely have exponentially raised share value for investors. VI. Financial Performance Ratios and Comparative Analysis Charts and GraphsQuick and Current Ratio Performance Comparative Analysis: Netflix vs. Comcast(2006-2010) Netflix versus Comcast Liquidity Performance Comparison Chart (2006-2010) 2.5 2.5 2 2 1.5 1.5 1 1 0.5 0.5 0 0 Netflix- Netflix- Netflix- Netflix- Netflix- Comcast- Comcast- Comcast- Comcast- Comcast- 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 Quick Ratio 0.88 0.96 1.38 0.34 1.34 0.32 1.78 0.34 1.99 0.59 Current Ratio 1.65 1.08 1.82 0.44 1.67 0.42 1.96 0.46 2.21 0.7Comments and Remarks: Five-year deal reached with Paramount, Liongates, and MGMworth nearly $1 billion to stream movies during 2010 has marginally contributed to a slightincrease in liabilities, thus reducing both liquidity ratios, indicated above. As a result of the
  • 20. deal, annual expenses related to new deal expected to increase to $200 million from $117million a year earlier. Acid Test Ratio slid ▼36.2% in 2010 from a year ago, because of theaddition to current liabilitiesNOWC Performance Comparative Analysis: Netflix, Comcast, Redbox, and Blockbuster(2006-2010) NOWC (Net Operating Working Capital) Blockbuster, Inc.Redbox Automated Retail, LLC (Wholly-owned… Comcast Corp Netflix, Inc. -500,000 0 500,000 1,000,000 1,500,000 2,000,000 Thousands NOWC (Net Operating Working Capital)Comments and Remarks: Rapid growth of E-Commerce compared to traditional brick-and-mortar facilities has impacted companies like Redbox, Inc. because of product design andlimited distribution channel.TOC Performance Comparative Analysis: Netflix, Comcast, Redbox, and Blockbuster(2006-2010) TOC (Total Net Operating Capital) TOC (Total Net Operating Capital) 25,395,000 244,762 319,226 448,200 Netflix, Inc. Comcast Corp Redbox Automated Retail, Blockbuster, Inc. LLC (Wholly-owned subsidiary of Coinstar, Inc.)
  • 21. Comments and Remarks: Blockbuster offers “Total Access” which enables customers to rentmovies online, reducing accrual cost liabilities associated with enhanced inventory control anddecreased wagesNOPAT Performance Comparative Analysis: Netflix, Comcast, Redbox, and Blockbuster(2006-2010) NOPAT (Net Operating Profit After Tax) 6,000,000 Thousands 5,000,000 4,788,000 4,000,000 3,000,000 NOPAT (Net 2,000,000 Operating Profit After Tax) 1,000,000 170,185 85,924 0 Netflix, Inc. Comcast Corp Redbox Blockbuster, Inc. -1,000,000 Automated -213,120 Retail, LLC (Wholly-owned subsidiary of Coinstar, Inc.)Comments and Remarks: Netflix reported positive net operating profit after taxes and freecash flow for 2010. Although business status is active, Blockbuster incurred negative outputfor both NOPAT and FCF (see following chart), as a direct result of preliminary stage ofChapter 11.
  • 22. FCF Performance Comparative Analysis: Netflix, Comcast, Redbox, and Blockbuster(2006-2010) 200,000,000 103,767,000 100,000,000 92,174,200 0 -100,000,000 Netflix, Inc. Comcast Corp -200,000,000 Redbox Blockbuster, Automated -300,000,000 Inc. -115,820,000 Retail, LLC -400,000,000 (Wholly-owned -500,000,000 subsidiary of -463,000,000 Coinstar, Inc.) FCF (Free Cash Flow)Comments and Remarks: Conversely, Comcast saw a significant negative total in FCF;nearly half was attributed to an aggregate of new acquisitions during 2010.ROIC Performance Comparative Analysis: Netflix, Comcast, Redbox, and Blockbuster(2006-2010) ROIC (Return on Investment Capital) 80% 60% 70% 40% 20% 26.92% 19% ROIC (Return on Investment Capital) 0% Netflix, Inc. Comcast Corp Redbox Blockbuster, -20% Automated Inc. Retail, LLC -40% (Wholly-owned -48% subsidiary of -60% Coinstar, Inc.)Comments and Remarks: In reiteration, the chart above indicates Netflix’ strongest anddecisive capital structure position compared to both competitor (s) and acquisition targets.
  • 23. M/B Ratio Performance Comparative Analysis: Netflix, Comcast, Redbox, and Blockbuster (2006-2010) Market/Book (M/B) Ratio Market/Book (M/B) Ratio 50.20 9.54 1.15 Netflix, Inc. Comcast Corp Redbox Automated Retail, Blockbuster, Inc. LLC (Wholly-owned -2.70 subsidiary of Coinstar, Inc.) Comments and Remarks: The pro-growth capital infrastructure has created very favorable returns for the organization’s investors, which is indicated by a 5 to 1 ratio from its closest competitor. This advantageous capital position will help the firm seize future financing opportunities, when needed, and also leverage marketing efforts for future M & A activity. VII. Consultant’s Closing Comments and Final RecommendationOpinions:  Liquidity and profitability positions are moderately conservative to proactive aggressive and comfortably aligned with corporate business model.  Current integration measures for existing by-mail subscription services to VOD long-run is plausible and should be accelerated.  Because online subscription service over the Internet is experiencing steady yet substantial growth well above industry average, existing short- and long-range migration strategic planning should maintain current course directive for global expansion.
  • 24. Recommendations:  The company’s new migration directive to boost its online presence, in conjunction with a waning DVD rental market, is not conducive to the functionality of a brick-and-mortar business model. Therefore, we recommend that management should not move forward with its acquisition plan of Redbox Automated Retail, LLC.  Because substantial increases in online product and marketability leverage is projected long- run, we highly suggest that all current considerations and long-range plans to acquire Blockbuster, Inc., upon a successful emergence from Chapter 11, should move beyond the exploratory phase to tactical, to specifically capitalize on Blockbuster’s elaborate and expansive distribution network VIII. Client’s Q & A Session
  • 25. Source Citations, Appendages, and MiscellanyLiterary Sources:Strategy + Business Magazine (Spring 2011, Issue 62- ). The Coming Wave of Social Apponomics. New York: Booz & CompanyTroy, L. Ph.D. (2010 Edition). Almanac of Business and Industry Financial Ratios. Chicago: CCH GroupWeb Sources:Charlie Rose.com (N/A). Guest Interviews: Reed Hastings, CEO of Netflix. Retrieved June 06, 2011, from http://www.charlierose.comBusinessweek.com (N/A). Investing. Retrieved June 06, 2011, from http://investing.businessweek.comSagepub.com (N/A). Sage Online Search. Retrieved June 06, 2011, from http://0- online.sagepub.com.library.ggu.eduReferenceUSA.com (N/A). Reference USA Search. Retrieved June 06, 2011, from http://0- www.referenceusa.com.library.ggu.edu