Netflix Beats, Guides Higher As Free Cash Flow Implodes

Tyler Durden's picture

One look at the headline numbers, and of course the short interest of Netflix, and one can see why the stock is being squeezed by nearly 30% after hours:

  • Q4 Revenue: $945 MM, Exp. $934 MM
  • Q4 EPS of $0.13, Exp. $(0.13)
  • Q4 domestic contribution margin 18.5%, up from 16.4% in Q3 and 10.9$ in Q4 2011
  • Total domestic subscribers 27.15 MM, paying subs: 25.47 MM
    • Forecasts 28.5MM-29.2MM domestic subscribers in Q1
  • Sees Q1 Revenues of $1.004 billion to $1.031 billion
  • Domestic DVD subs dropped from 8.61 to 8.22 while generating $254MM in revenue and $128MM in profit

In fact, all is either just a little bit better or much better if one looks at the projection set... until one looks at the actual Cash generated by the Business. Behold the Free Cash Flow as reported by the company... no, not AMZN, although it may well be its small cousin.

The company's Free cash flow commentary:

In Q4, the gap between free cash flow (negative $51 million) and net income (positive $8 million) widened as a result of payments for the original programs coming to Netflix in 2013. Significant uses of cash in the quarter (relative to net income) were cash payments for both originals and non-originals content (in excess of the P&L expense), cash payments for PP&E (related to the continued rollout of our Open Connect servers), and tax payments.

 

In the past, we have managed our content licensing agreements such that cash payments in any quarter do not exceed 110% of the P&L expense (in other words, if our P&L expense was $200 million in the quarter, our cash payments for content would not exceed $220 million in the quarter). As we shared on our last earnings call, our original programming will require more up-front cash payments than most other content licensing agreements, raising this ratio (of cash to P&L for content) to as high as 120% in certain quarters with material originals payments. The bulk of our remaining cash payments for our current originals will be in Q1, driving FCF materially more negative than Q4, and then FCF will improve substantially in subsequent quarters.

 

As highlighted previously, we have sufficient cash on hand to fund our current slate of originals and ongoing expenses, and to maintain an adequate reserve, before returning to positive FCF.

 

In addition, we are exploring taking advantage of the current low interest rate environment to refinance our $200 million in outstanding notes and raise additional cash through new debt financing. This would give us additional reserves as well as increased flexibility to fund future originals.

Of course, in a ZIRP environment nobody cares about cash flow, and everyone cares about projections, which are as follows:

And, of course, short interest:

 

 

and the squeeze took us to the 02/07/12 swing highs and beyond +40% now

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Dr. Engali's picture

Cash ? Who needs to make fucking cash when we can sell more stock to a  sucker...er I mean "value investor" like Tilson?

TruthInSunshine's picture

Netflix, turd that it is, will make up for declining profits, and even make up for increasing losses, on higher volume.

I heard a market whisper that The Bernank was going in whole hog on a NFLX bull call spread; it stated Bernank loved the smell of cash burn in the morning.

NotApplicable's picture

Let's see if I can follow the logic. Since having cash is to continually lose the purchasing power of it, it's better to have negative cash, since the flow of losses is reversed.

"New Normal," indeed!

camaro68ss's picture

All i see in bright red letters is BULLSHIT!

Netflex F***ing blows. The only movies they have are backlot productions and movies that are made in 1998 and older.

Buckaroo Banzai's picture

Federal Reserve sez: "Cash. Lose all you want! We'll print more."

camaro68ss's picture

Why would the bernake prop this POS up? They probably supply him with an unlimited amounts of gay porn right to his door step. 

Buckaroo Banzai's picture

Actually, to be specific, I heard that he prefers gay midget porn.

FL_Conservative's picture

Pay for it....and they will come.

King_of_simpletons's picture

My simple rule to investing for 2013 and beyond is: Buy when everyone is buying and sell when everybody is panicing. But there won't be any selling as the Federal Reserve has removed it from the market vocabulary. So only buying from now on.

Nihilarian's picture

The only thing they should be guiding higher is content liabilities.

SheepDog-One's picture

You have to be a certified IDIOT to be 'shorting' these FED market darling equities.

monopoly's picture

This is so surreal. They earn .13 cents, have no cash, are going to borrow more money to keep the doors open and the stock jumps $37.00 or 38%. Shades of that wonderful year....2000 anyone.

SilverIsKing's picture

Can one short this shit AH?

Zap Powerz's picture

Ok, so you effectively point out how upside down we are.  Things are clearly fucked up and temporarily defying the laws of economics, finance, physics and nature herself.

So, whats the over/under on when this all collapses and reality donkey punches us right in the face?

My bet:  I say less than 5 years.

TruthInSunshine's picture

Sooner, but I sometimes get in the gambling mood. I now see increasing velocity in the entropy, or stated alternatively, SHTF soon-ish as sovereigns now actually have diametrically opposed goals/needs like at no time in a loooong time.

Xibalba's picture

Guess that short NFLX/ long AAPL isn't gonna work out for someone.  

Kreditanstalt's picture

Why won't you DIE???  (Apologies, "V for Vendetta"...)

Should be a Dead-and-Buried business model, in a recession, in the 21st century...

WHO buys this outfit's "products"??  Who is prepared to pay out so much just to watch movies??   (Who has TIME to do that??)

Can never understand Amerikan Konsoomers...!

NotApplicable's picture

Sayeth the person that quotes a fuckin' movie?

LOL

Kreditanstalt's picture

Yes.  It's a PIRATE copy I bought in Bali.  Which should tell something to pay-for-movies types.  And which is why Netflix is such an incredible dinosaurish rip-off...

John_Coltrane's picture

Why would anyone ever pay for a DVD when one can check it out from the public library, make a perfect digital copy (not for profit, just for "time-shifting" purposes) using MacTheRipper (removing commercials etc, region limitations etc. any copy-guard etc) which can be saved to magnetic or optical media for future viewing or erased if disc space ever becomes an issue?    V is one of my favorites.

iDealMeat's picture

I do..  Well. at least my kids do..  Here's the napkin math.

DirectTV = $ 80ish / mo

Cable = $ 70 ish / mo

We canceled both a year ago because NetFlix is @ $ 8 bucks / mo.  With no commercials... It also has all the kid shows they'll ever want..  And some I'll watch..

Get it?

Kreditanstalt's picture

Forest.  Trees.

This IS 2013...You have Internet, don't you?  Anything essential is already available there...all the movies you'll ever need, mostly for FREE.  Cancel ALL TV...live a little...

iDealMeat's picture

FAIL.. 

NetFlix is part of the internet.. Without the ads..  Organized into to safe content for kids, TV Shows, Movies etc..

Frees up my iCrapple for my eventual stumble into some porn site..

secret_sam's picture

I'm with ya.  I admit my demand for teevee-style entertainment is rather anemic, but comparing the $8/month for Netflix to the cost of other options, or the TIME involved tracking down something I want online for "free," it's a pretty appealing option.

I think some commenters may just be sore because the stock doesn't do what they want it do.

Dr Benway's picture

If using piratebay is beyond you, I have some banking products to sell you.

The places where you get content for free are more comprehensive, supply a better product, in fact are superior in every way to paid content providers.

But I think it's an age thing. The only people I know who don't torrent are like 55+.

secret_sam's picture

It has nothing to do with my technical abilities.  I used to do it a lot.

I gave it up mostly 'cause I got tired of spending the time on it.  Selection is limited by seed frequency, which means it's the "latest and greatest" stuff that's readily available, and it's more movie-focused than tevee, lots of torrents are pre-release, so you end up with bars and such on the playback, you don't usually have CC options (which I like for a lot of esoteric reasons), and if you spend a lot of time doing OTHER online stuff, running torrents 24x7 impacts your bandwidth.

Having a convenient browsable list of stuff with viewer reviews and everything in the same place is worth a few bucks a month to ME, but I don't look down on the folks who have no respect for "intellectual property" or tell them they're stupid for making different decisions than I've made.

Just personal preferences, really.

Buckaroo Banzai's picture

Glad the math worked for you, but the RIGHT reason to cancel your Cable TV or Satellite TV is to stop tithing the Hollyweird/MSM Axis of Evil.

Anybody who still has their cable connected for anything other than straight internet service is PART OF THE PROBLEM.

Starve the BEAST!

SheepDog-One's picture

Americans in ONE QUARTER spent nearly $1 billion subscribing to NetFlix which is basically just TV series and crappy movies no one wants to watch? You've got to be shitting me here. Just doing a quick mental calculation at $9/month, that means Netflix is claiming 36 (million) NEW subs in that quarter? GTFO!

Dr. Engali's picture

In case you haven't figured it out by now Americans are fucking retarded.... But I know you already know that. They would pay for a bag full of shit and pig vomit if it was packaged and marketed properly.

TruthInSunshine's picture

 "In case you haven't figured it out by now Americans are fucking retarded...."

My biggest financial regret: Declining to invest in Kitten Mittens.

Dr. Engali's picture

I'm sure there is some large corp. that has a patent for that name someplace in their archives.

bigdumbnugly's picture

no, my fave stripper over at the Woozah beat them all to it.

freedogger's picture

Exactomundo. With (or even without if I want to add a bit of legal risk) a 7$ month VPN connection I can get any movie/tv show I want at better quality on any device I own. 

Mullvad for VPN

uTorrent for downloading

kat.ph for finding what I want to watch. 

I would gladly pay 20 bucks a month for this but no one offers anything close.

Transitory's picture

I so want to be a curmudgeon, but Kitten Mittons is full of win.

Toolshed's picture

I happily (almost) pay my $9 a month so I no longer have to endure mind numbing repetitive commercials. I have netflix streaming service and broadband service, which is still overpriced, at a total of $74 per month. I watch what I want when I want to watch it. I have peers who pay upwards of $200 per month for their various cable addictions. Madness is paying for cable programming and still having to watch fucking commercials!!

pods's picture

I always wonder about how the hell "cable" ended up being just as populated with commercials as network TV.

Granted cable is a bit different now, but the whole idea of buying the product was that you are paying to avoid the commercials.

Are there commercials on HBO and showtime?  (honest question, have not seen either in a decade)

For anything worth watching I usually just pay amazon to watch without commercials. NFLX always used to everything I didn't want to watch.

pods

hannah's picture

the big 3 networks dont show titties. want titties and sports....get cable/dish

Kreditanstalt's picture

My VHS player works fine.  I have 200+ movies, many Oscar-winning, from the last 30 years all on tape.  Tape is a bargain because, in the mad rush for The Latest technology, the herd overlooked COST.

25 cents to 50 cents each at thrift stores...and now I have a personal movie LIBRARY.

$9+ a month?  Suckers...

hannah's picture

the one negative with tape is resolution. dvd and hd content is just soo much better but then again i have hundreds of flv videos in crappy resolution.

secret_sam's picture

Heh.  That's nothing.  I'm still buying 8-tracks for all my music 'cause you can get a harbor drop for about $40.  Styx sounds better when the songs are broken up by the click-click of a track change, too.

You're not even sharp enough to have gone all-in on BETAMAX, you chump.

resaci's picture

BINGO! $9 -vs-  $90 (plus commercials)

FUCK COMMERCIALS!

FUCK GOVERNMENT!

FUCK THE BANKS!

FUCK CEO'S!

FUCK!

 

MiltonFriedmansNightmare's picture

So there cooking the books since they are TBTF by the assistant AG's definition and therefore not subject to prosecution, even if anyone cared to look....

I'm freaking shocked.

 

monopoly's picture

Agree, shorts just to not like life. lol.

pods's picture

I have to commend NFLX on one thing. When we cancelled their service it was really an easy and almost enjoyable process.

pods

Kreditanstalt's picture

Soon you Americans are going to be more concerned with paying for food, energy and debt and less worried about what shit's on TV...this business model has no future in a digital, free-content world...

SheepDog-One's picture

I dont believe its anything but a straight up lie! Besides, there's nothing ON NetFlix! I know, I checked it out at my folks house while they were out of town last weekend!