Net Working Capital Contributes $135 Million Of Netflix'$79.3 Million In Adjusted Free Cash Flow, Sub Acquisition Costs Surge By 33%

Tyler Durden's picture

Some highlights from the just released Netflix earnings presentation:

  • Guidance for Q2:
    • Domestic subscribers: 24.0 - 24.8 million
    • Domestic revenues: $762-$778 million
    • Operating income: $100-$116 million
    • Internation subs: 900K to 1.050MM
    • Revenue: $16-$20MM
    • Operating loss: ($14) MM to ($10) MM
    • Global net income $50-62 mm
    • EPS: $0.93 - $1.15 
  • Other guidance:
    • Domestic operating margin of approximately 14%
    • International operating losses of approximately $50-70m in 2H 2011
  • "Free Cash Flow" of $79.3 million in Q1 net of $38.4 million in acquisition of DVD content library and purchases of PP&E.
    • Change in net working capital is a contributor of a ridiculous $134.9 million in cash! Ex- NWC changes the company would have burned about $55 million in cash.
  • Domestic churn increases both sequentially and Y/Y: from 3.8% in Q1 2010, and 3.7% in Q4 2010, to 3.9% in Q1, 2011.
  • And the kicker: subscriber acquisition costs surge from $10.87 to $14.38 sequentially. Oops
  • The company also adds this warning: Looking forward, our prior period comps for net adds are going to get tougher, and while we expect our net adds the rest of this year to continue to exceed those of the prior year, it won’t be at a pace of nearly 2X like in Q1. With net adds forecast to grow every quarter on a Y/Y basis, we remain in the first half of the S curve of adoption. As always, we will remain focused on improving our service, keeping Netflix in the first half of the curve, and thereby increasing Y/Y net adds, as long as possible.

For now, stock not too happy with the news:

Full report can be found here. Good luck asking live questions on the Q&A.



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disfiguredskating's picture

Apple will be a competitor soon.  They are building a cloud computing facility to store people's content. 


AMZN / WMT also to compete. 


NFLX has overrated management and is spending by the boatload.  If your margins get squeezed it doesn't matter if you are the "industry leader".  If you run your company into the ground (see: GM, Enron, AIG) it still goes bankrupt or performs poorly.

Hephasteus's picture

Cloud computer model.

Build cloud. Get 2 retarded customers.

Screw up on those 2 retarded customers.

Lose 2 retarded customers.

Burn cloud down in an "accidental" fire.

Collect insurance.

disabledvet's picture

over rated managment?  really?  you turn a "mail order DVD bizness" into a billion dollar empire.  so what if they fail?  of course "success is defined via a stock price...

Robslob's picture

You can't "eat" Netflix...

ghostfaceinvestah's picture

Please GOD let Groupon go public before the market collapses so I can short it.

Id fight Gandhi's picture

Did you add zip cars to the list? What's your wish to short list look like?

ghostfaceinvestah's picture

Any of the online realty companies would be nice too - Zillow, Redfin, Trulia - I think they are all looking to IPO, I would short each and every one.

slaughterer's picture

Finally, NFLX is fed to the bears.

mule65's picture

Don't try picking up pennies in front of a steamroller.

SheepDog-One's picture

All the american couch potatoes that are gonna get Netflix already got it.

Cdad's picture

And couch potatoes in the northern climbs are currently cancelling their subscriptions because they can finally go outside without freezing their asses off.

benevolous's picture

25 million subscribers against 115 million households? Seems like there are more couches to get.

d00daa's picture

If you don't already own NFLX, you should buy it.  Now.

d00daa's picture

C'mon, why the junk?  You can't stop a stock like NFLX, you can only hope to contain it.

A ridiculously high barrier to entry industry and absolute truths like unlimited, low cost backbone availability for video streaming content forever and ever, amongst at least a dozen other positives, guarantee NFLX smooth sailing ahead.  BTFD.

Cvillian's picture

"A high barrier to entry industry". Riiiiight. 

The principal difference between NFLX and oh....AAPL, GOOG, AMZN, WMT and a dozen others, is that NFLX is the only one cutting checks (that their BS can't support long term by the way) to the major studios for content.

The physical domain (DVDs via mail) is not the same game as the digital domain.



SheepDog-One's picture

Nah, besides Netflix pretty much sucks. I watched it for the first month, watched what I wanted and it sits like a Rubik's cube on the shelf. Cancelling it this month.

thames222's picture

Nah, maybe you just haven't found what you like yet.  The hard part is finding the stuff that's not listed on their customized queues, you have to search for the good stuff.

Dr. Kenneth Noisewater's picture

Say what you will about the viability of its biz model or finances, but there is a shitton of good stuff on streaming..  Lots of MST3k, Sherlock Holmes, documentaries, etc..  I have disconnected my Tivos and have been going off bittorrent and netflix for the last month, no complaints..

Tom Servo's picture

MST 3k - been there, done that  :)

Dr. Kenneth Noisewater's picture

Say what you will about the viability of its biz model or finances, but there is a shitton of good stuff on streaming..  Lots of MST3k, Sherlock Holmes, documentaries, etc..  I have disconnected my Tivos and have been going off bittorrent and netflix for the last month, no complaints..

dwdollar's picture

It's still better than the 250 channels of nothing called cable.  I tried watching cable TV on Easter.  Big mistake.

Cdad's picture

Long way to fall here.  Options suggested an 8% move on the report.  From there, the momo stock that Wall Street apparently had no idea how to price enters the plunging and screaming phase...because everyone is surprised by the rising cost of content, of course.


SheepDog-One's picture

Yes Hollywood crap is 'supply and demand' to the max. 300 channels of shit, all you want! Plunging and screaming phase....WTF even the COMMUNISTS supplied their peasants with free vodka rations, all they could drink. 

Dr. Porkchop's picture

I don't know about the USA, but Canadian internet providers, with a few exceptions, cap monthly data. This is why I don't use netflix, and I doubt it has much future in this market.

Id fight Gandhi's picture

Someone please put this momo out.

Robslob's picture

I doubt "the market" in general has much of a future in the market for that matter...

SheepDog-One's picture

As Josie Wales used to say, 'Dyin aint much of a livin, son'

RobotTrader's picture

No worries.  The mo-mo monkeys will simply dump NFLX and pile into SLV or TZOO.

Cdad's picture


I think Robo was simply expressing one of his random thoughts, whereas he usually expresses his past tense thoughts.  Must be the source of your confusion. post up that 12 month chart of Netflix please, Robo.  It will help people see just how much downside there is on these absolutely ridonculously price shares.

plocequ1's picture

Live streaming Johnny Wadd... That should boost the share price

Commander Cody's picture

Dry humping old whores is the name of the game.  I'd join in but I blew my wad on PMs and its been a bitch to clean them off.

Id fight Gandhi's picture

I'd never touch slv. But it's nowehere near it's inflation adjusted high in silver so sure, run it.

Logans_Run's picture

Having twice been a senior executive in a direct marketing company I could have told them that their acquisition cost per subscriber would skyrocket at some point. It would be interesting to see where the intersection of their cost of subscriber vs. live-time revenue per subscriber cost bisects. Sooner or later it makes no sense to pursue that incremental one subscriber. Too boot what happens with their business model when their distribution providers start backcharging for the bandwidth that they use?

Id fight Gandhi's picture

Content cost have to put a hurtin to them. Studios aren't going to give sweetheart deals as they lose money on DVDs and $4 stream rentals.

ZeroPower's picture

Re NWC, so what. NFLX prob paid of some debts (haven't sifted through the 10Q myself) and thus sits with a nice positive NWC this quarter. Also, if they state theyre still in the 1st part of the S curve, the real growth is yet to arrive, so they can afford the increasing sub acquisition cost.

Dont get my wrong, crazy valuations aside, here the street is just looking for too much and hence the hammering a/h.

Sudden Debt's picture

All I know is that whenever companies expand to fast like netflix, they have to much hardware in the books that will be written off over 5 years.

And second thing is: I have a different digital tv distributor but I need to at least once a year change in my receiver to get a new one. Last week we had a power breakdown for a few hours and the entire system was fried. I got a new system for free, but for them that must always cost enough. And it's pretty common the hardware breaks down.

These costs are always hidden in the books as future investments but just keep adding up untill the entire system needs a overhaul and maintenance cost exceed revenue.


Archimedes's picture

Didn't they just agree to pay Spacey 300 Million dollars for 6 episodes of something? Geez...

UncleFurker's picture


Stick a fork in THAT PUPPY.


curmudgery's picture

Netflix lost us because they 1) are so slow getting new releases 2) have poor selection in categories we like.  They aren't making any interesting offers to get us back.  Biggest problem as I see it is their service runs on Amazon's platform. We've been getting instant video from amazon, and across the board the performance is noticeably better.  Gee, wonder why?  Amazon has the potential to take a lot of NFLX business.  We'll see.  Rosy rosy days priced into NFLX.  Kinda reminds me of Blockbuster at their peak.  Come on, these are not legacy industries, they are point-in-time businesses subject to strong competitive pressures..  

Seasmoke's picture

love signing up for a free month and then cancelling......rinse and repeat


tomster0126's picture

Instant Netflix is taking off and gaining a lot of loyal customers, it'll be interesting to see how their revenue fluctuates based on their evolution of gaming consoles.

Widowmaker's picture

This is a buying opportunity for NFLX long.

1.2M per month is 40,000 per day - the only thing I see is a lot of shit-eaters all aboard the short bus.

You idiots with a hard on for NFLX demise need to find some big-girl panties that fit.

ncdirtdigger's picture

Does it come with popcorn?

DrFever's picture

Netflix is not holding a conference call but a scripted "event" with pre-screened questions via email with prepared results...NO FOLLOW UP.......

HOW ironic that their two first programs are House of Cards and Mad Men.

Company buy back now explains the short squeezes.  Dilution a factor as CEO sells stock and exercises options to do so.  They have topped.  Their garbage can't compete with the studios intent on getting the most money for their products.

Here's your "BIG SHORT" folks.

monopoly's picture

You guys argue about NFLX, I am neither long or short, and have no interest int is broken casino that allows smoking.  Just some miners, physical and cash. Very nice feeling.

When the real dump starts, then my bear comes out of hibernation, not before. Confetti anyone?

Yen Cross's picture

What the heck kind of chart is that? At least throw me a bone. VIA a Trendline or two? All Kidding aside, that trade is a great teaching lesson!

disfiguredskating's picture

When the economy tanks people will ditch this or ditch cable / dish.