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Does Netflix' $3.3 Billion Off-Balance Sheet Liability Make It A "House Of Cards"?

Tyler Durden's picture




 

While the mainstream media, seemingly comprising of accounting 101 rejects and completely unaware that "profit" is merely an ephemeral, intangible accounting concept, and that for true business model viability one has to look at actual cash generated (or in this case lost), has been praising the Netflix "beat" ever since its announcement, the reality is uglier.

On one hand, as reported, the incremental cost per subscriber on a true free cash flow basis is continuing to deteriorate, and while it is only a matter of time before the content providers decide to jack up content costs and crush the firm's margins. But far more disturbing is the ongoing attempt to push a massive amount of unfunded content liabilities and committments off the company's balance sheet. Because while NFLX discloses just $2.4 billion in total content liabilities (or 69% of total liabilities), it is the massive $3.3 billion in off-balance sheet liabilities, up half a billion in just one year, that is truly disturbing.  

This means that cash flow-negative NetFlix has a liability amounting to 76% of its total assets, which is off-balance sheet, which gets zero auditor scrutiny, and which as so often happens, will blow up in everyone's face just when it is least expected. 

Adding the on balance sheet component means a total content liability of $5.7 billion, up from $4.8 billion a year ago, and an amount that is a mindblowing 130% of all Netflix assets!

From the conference call transcript:

Q. Could the company please quantify its off balance sheet content liabilities, specifically interested in both the total amount of obligations outstanding as well as the amount currently outstanding that is not on the balance sheet?"

 

A. Sure, I'll answer this in total to, because that's usually how we get this question. We had $5.6 billion liability or $5.6 billion in commitments as of the end of December that moved to $5.7 billion in commitments as of the end of March, $2.4 billion being part of liabilities on the balance sheet, and $3.3 billion not on the balance sheet.

So with NFLX having just $1 billion in total cash and $3 billion in content library assets, which however are completely unmonetizable, not to mention going ever deeper into the red from a pure cash basis, just where will the company find the funds to satisfy this $5.7 billion and rising liability?

Q. Do you believe the company can fund its liabilities without an additional debt raise, or would you consider raising capital given the low rate environment?"

 

A. What we just did raise capital. So yes, we would consider it and I would say that we're fine on capital at this point.

In other words, even the company admits it will have to fund one unsustainable liability by issuing another: debt, or alternatively, issuing stock.

Said simpler: the second the firm loses access to the wallet of assorted greater fools, it's game over. Just like any other plain vanilla pyramid scheme.

Those still confused should watch the Bloomberg clip below:

 

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Mon, 04/22/2013 - 21:13 | 3486207 zorba THE GREEK
zorba THE GREEK's picture

Is Netflix a house of cards?

Netflix is as sound as the U.S.Government.

Holy crap! Sell! Sell! Sell!

Mon, 04/22/2013 - 21:21 | 3486229 prains
prains's picture

Is netflix code for the Various States of Detroitification?

Mon, 04/22/2013 - 21:34 | 3486270 Boris Alatovkrap
Boris Alatovkrap's picture

Netflix is fibrous apparatus for capture airborne phlegm.

Mon, 04/22/2013 - 21:36 | 3486274 Boris Alatovkrap
Boris Alatovkrap's picture

Ooops, sorry, Boris is think of Cleanflix.

Mon, 04/22/2013 - 21:38 | 3486278 Boris Alatovkrap
Boris Alatovkrap's picture

Oops, again, is "Kleanex". In Russia, just cover one nostril and blow with other. What was topic?

Mon, 04/22/2013 - 21:59 | 3486342 ihedgemyhedges
ihedgemyhedges's picture

Not to worry TD.  This is more than offset by the half a trillion GDP "intangibles" discovered by the government as you noted earlier today......

Mon, 04/22/2013 - 22:07 | 3486357 boogerbently
boogerbently's picture

PE of 602 !

Mon, 04/22/2013 - 21:36 | 3486276 WayBehind
WayBehind's picture

C'mon man! They just signed bunch of free customers so everything is just fine.

Tue, 04/23/2013 - 07:42 | 3487300 max2205
max2205's picture

I thouht off balance sheet bs ended with enron 

Mon, 04/22/2013 - 21:33 | 3486263 Burt Gummer
Burt Gummer's picture

Let me just say this straight up.

 

NETFLIX IS FUCKED!

 

http://www.youtube.com/watch?v=ZS2Z19yTuPI

Mon, 04/22/2013 - 21:48 | 3486305 LeisureSmith
LeisureSmith's picture

Still with that fucking harlem shake video i see. So let me just say this straight up.

FUCK YOU!

Tue, 04/23/2013 - 00:55 | 3486835 Burt Gummer
Burt Gummer's picture

Why you so jelly bro?

 

Just trying to stack digital fiatscos to exchange for precious metals.

 

What's wrong with that?

Mon, 04/22/2013 - 22:30 | 3486434 Dudeskis
Dudeskis's picture

Relax.  Netflix will revise their profits up $5billion from "intangibles" and destroy the street.

 

BUY BUY BUY!

Tue, 04/23/2013 - 08:26 | 3487421 pelican
pelican's picture

Funny this should be posted.  I cancelled my netflix yesterday.

 

Why you ask?  My queue disappeared and when I contacted customer service, that disappeared too.

 

My guess is that they are driving it off the cliff only to be shorted or have some Hedge fund collect on its death.

 

 

Tue, 04/23/2013 - 08:29 | 3487440 pelican
pelican's picture

As for the government being a house of cards, I recently moved to DC.  It is a giant fucking party and everyone is getting rich.  See you at the hunger games.

 

 

Mon, 04/22/2013 - 21:21 | 3486226 disabledvet
disabledvet's picture

again "there's no way in hell i'd ever trade in this thing." having said that...somebody is...and they're making a fortune. this is a VERY expensive game...much the same as trading in oil futures (10 million minimum.) sorry but i just don't understand that game...though i certainly respect the folks who play from both sides of aisle on this one. it does have a Volkswagon feel to it. Didn't that short selling billionaire jump in front of a freight train when the bill came due? "expensive indeed."

Mon, 04/22/2013 - 21:23 | 3486232 Whatta
Whatta's picture

damn...sure wish I'd a thrown down on those ATM 175 weekly calls ahead of close....4 bagger in minutes.

Mon, 04/22/2013 - 21:24 | 3486234 Seasmoke
Seasmoke's picture

Without a doubt , the best stock to short. But when ?????

Mon, 04/22/2013 - 21:26 | 3486244 SmokeThatHog
SmokeThatHog's picture

My shit has been pushed in on this turd before, but, I'm getting ready to get back in it, likely tomorrow.

 

Mon, 04/22/2013 - 21:22 | 3486235 ShortTheUS
ShortTheUS's picture

These guys make Enron's numbers look legit.

Tue, 04/23/2013 - 00:06 | 3486740 dunce
dunce's picture

That reminds me, Enron was the company that made "off balance sheet" a pornographic term.

Mon, 04/22/2013 - 21:23 | 3486237 hannah
hannah's picture

house of disks...lost in the mail.

Mon, 04/22/2013 - 21:38 | 3486280 Lux Fiat
Lux Fiat's picture

lost in [financial] translation

Mon, 04/22/2013 - 21:24 | 3486241 ziggy59
ziggy59's picture

So with this discovery, NFLX should go up another 20%, right?

Mon, 04/22/2013 - 21:26 | 3486246 stinkhammer
stinkhammer's picture

I'll trade it for what's behind door number two Monty!

Mon, 04/22/2013 - 21:26 | 3486248 fonzannoon
fonzannoon's picture

Which CNBC reporter rips off this article tomorrow?

I have Pissonme.

Mon, 04/22/2013 - 21:36 | 3486277 Lux Fiat
Lux Fiat's picture

Hope Kevin Spacey got paid upfront.  The new series is very enjoyable BTW - Spacey manages to improve on Ian Richardson's original droll performance - not an easy task. And no, I don't have any financial interest in NFLX.

Mon, 04/22/2013 - 21:42 | 3486293 otto skorzeny
otto skorzeny's picture

the sad part is that DC is way more disgusting of a cesspool than that show portrays.

Mon, 04/22/2013 - 23:05 | 3486579 Lux Fiat
Lux Fiat's picture

Lived in the 'burbs outside DC for a couple of decades. Miss Virginia Beach [miss the Outer Banks more], the Northern Neck, the Blue Ridge, and the Shenandoah valley in spring.  But I don't miss NoVA. 

Incredible as it may sound to folks who haven't lived there, the DC city gov't makes the Federal gov't look downright competent (or at least used to when I lived there - from what I hear, things haven't changed much).

Mon, 04/22/2013 - 21:38 | 3486279 monopoly
monopoly's picture

Amazing post Tyler and very scary.

But computers do not care about specifics. They just follow the flow, either way. THAT is the Market.

Mon, 04/22/2013 - 21:39 | 3486286 Rob Jones
Rob Jones's picture

How can you just exclude $3.4 billion from your balance sheet?! What is the nature of those liabilities?

Sounds like NFLX is dealing from the bottom of the deck.

Mon, 04/22/2013 - 21:47 | 3486296 fonzannoon
fonzannoon's picture

You mean since when was netflix a bank?

Mon, 04/22/2013 - 21:44 | 3486299 ziggy59
ziggy59's picture

They are trained by the best FED antics out there, im sure

Mon, 04/22/2013 - 21:48 | 3486309 yogibear
yogibear's picture

To all the CNBCers it's a screaming buy until it isn't and the huge sell orders come in.

It's piling on until the bots pull the orders and reverse , oh the carnage.

Mon, 04/22/2013 - 21:50 | 3486311 pragmatic hobo
pragmatic hobo's picture

seriously ... fundamentals have no relation to stock prices in this age of new normal.

Mon, 04/22/2013 - 22:12 | 3486373 Everybodys All ...
Everybodys All American's picture

It's going to be a great short but you are going to see it likely go higher before it fails. The chart shows an attempt to fill the gap from the fall of 2011 and it looks to me like its going to try to get into the $240 to $270 range. When it stops going higher very likely it will retest $50.

Tue, 04/23/2013 - 09:57 | 3487874 NEOSERF
NEOSERF's picture

That's more than likely right...no more negative catalysts for a while until a stock offering comes out or some huge hedge gets out of it.  Fundamentals really don't matter anymore, simply a black or red bet on any given stock on any given day.

Mon, 04/22/2013 - 22:56 | 3486532 rosiescenario
rosiescenario's picture

This stock is just another roach motel....the shorts go in, but they do not come back out....the algos know how to run a squeeze and it is always amazing how high a squeeze may lift a stock. Resorts International wasone of the more classic ones, long before the age of computerized trading. Who knows what can happen with HFT's driving things.

 

....ps, I am a reformed short seller from a former era when fundamentals actually had some effect on the priceof a stock.

Mon, 04/22/2013 - 23:10 | 3486586 NotApplicable
NotApplicable's picture

A.k.a. "Burnt Toast."

Mon, 04/22/2013 - 23:22 | 3486620 Little Boots
Little Boots's picture

netflix is simply just another middle man they own practically nothing other then the name and the streaming platform...remindds me of aol in a way....and yes i am long 2015 puts, tomorrow will be and ugly day but soon the cards wil fall

Tue, 04/23/2013 - 00:19 | 3486764 dunce
dunce's picture

Reminds me of airlines, they lease the planes, they do not own the gates, the pilots, stewarsds and maintenance are contracts, the ticket sales are a computer platform mostly, their offices are probably also leased. When they go bankrupt, where are the tangible assets?

Tue, 04/23/2013 - 09:05 | 3486844 Common_Cents22
Common_Cents22's picture

Netflix is having a Groupon soon, 50% off NFLX stock.  But I'm not going to step in front of this momo freight train.

Tue, 04/23/2013 - 01:50 | 3486914 FieldingMellish
FieldingMellish's picture

Waiting for the Goldman buy rec... LOLZ!

Tue, 04/23/2013 - 03:31 | 3487006 gezza65
gezza65's picture

Actually I think TD is being optimistic especially after reading their 2011 Annual Report.

Page 36

We have entered into certain streaming content license agreements that include an unspecified or a maximum number of titles that we may or may not receive in the future and/or that include pricing contingent upon certain variables, such as theatrical exhibition receipts for the title. As of the reporting date, it is unknown whether we will receive access to these titles or what the ultimate price per title will be.

Accordingly such amounts are not reflected in the above contractual obligations table. However, such amounts are expected to be significant and the expected timing of payment for these commitments could range from less than one year to more than five years.

In other words the liability could be even larger than the off balance sheet estimate we have kindly provided in the table above.

Holy shit we're flying blind here!

 

Tue, 04/23/2013 - 03:37 | 3487015 StychoKiller
StychoKiller's picture

Someday, someone should explain why large amounts of $$ can LEGALLY be placed off-balance sheet...

Tue, 04/23/2013 - 21:50 | 3491228 MoneyChasingReturns
MoneyChasingReturns's picture

This is because companies exist to act in a self interest. Accounting is only as a good as the auditor and rules. Most Companies, entities, soverign nations, with debts are insolvent except for accounting rules.

A financially healthy entity never uses debt. Same for individuals, those free from debt become wealthy while those in debt act like they are wealthy.

Tue, 04/23/2013 - 08:16 | 3487397 orangegeek
orangegeek's picture

Netflix is doing the "Ben and Barry" - paying debt with more debt.

 

Sounds bullish to me.  Where can I buy some netflix stock? 

 

I mean, what could go wrong?  LMFAO

Tue, 04/23/2013 - 21:35 | 3491177 MoneyChasingReturns
MoneyChasingReturns's picture

No reason Netflix should have ANY debts. The infrastructure should have been built with free cashflow from subscribers. The payments to the content providers should have been a percentage of recenue generated.

In Asia they have open source media centers that run on Apple TV boxes. Everyone shares downloaded content via portable hard drives. Simply because the content providers REFUSE to SELL thier shows overseas.

Netflix will default, they have massive debts and all the content providers will accept a settlement in court.

For an investor AAPL, NETFLIX and other bubble companies are a sure thing for turning real money into less real money,

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