Netflix Beats, Guides Higher As Free Cash Flow Implodes
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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