Netflix Surges After Smashing Subscriber Expectations, Cash Burn Soars; $15BN In Streaming Obligations

Tyler Durden's picture

Netflix stock has surged after hours, soaring above its all time high price, and up nearly 10% after reporting Q2 numbers which while beating slightly on revenues ($2.79Bn, Exp. $2.77Bn), and missing  on EPS ($0.15, exp. $0.16), were far more remarkable for the subscriber numbers, which smashed expectations as follows:

  • Q2 total net streaming additions 5.2 million, Exp. 3.27 million
    • Q2 domestic net streaming additions 1.07 million, exp. 633K
    • Q2 international net streaming additions 4.14 million, exp. 2.63 million

The addition of 5.2 million subs in Q2 was the largest increase ever during the period, which has traditionally been the company's slowest time of year. That said, Netflix was quick to moderate the exuberance that these number would create and warned that "there was lumpiness in net adds, likely due to demand being pulled forward."

Netflix' outlook was also well above expecations and the company now expects Q3 net streaming adds of 4.4 over 400K more than the consensus estimate of 3.99 million. The company expects $2.97 billion in Q3 revenue, also above the consensus estimate of $2.88 billion, and net income of $143 million, above the est. $101.6 million.

The company now has 104 million subscribers worldwide, but the success has come at a steep price and as of March 31, NFLX's total content obligations were $15.3 billion, a number which has likely increased by about a billion dollars in the latest quarter.

Less impressive were the financials: here operating margin tumbled from 9.7% in Q1 to 4.6% in Q2 as a result of a $245 million sequential increase in cost of revenues.

Furthermore, the company is back to its record cash burning ways, reporting that in Q2 it burned a record for the quarter $608 million, just why of its worst cash burn quarter in history when it burned $639 million in Q4 of 2016.

The highlights from Netflix' letter:

In Q2 we underestimated the popularity of our strong slate of content which led to higher-than-expected acquisition across all major territories. As a result, global net adds totaled a Q2-record 5.2 million (vs. forecast of 3.2m) and increased 5% sequentially, bucking historical seasonal patterns. For the first six months of 2017, net adds are up 21% year-on-year to 10.2m. Our Q3 guidance assumes much of this momentum will continue but we are cognizant of the lessons of prior quarters when we over-forecasted and there was lumpiness in net adds, likely due to demand being pulled forward (into Q2 in this case)."

On the subscriber sides, Netflix had this to say:

Domestic net additions of 1.1m represented the highest level of Q2 net adds since the second quarter of 2011. For Q3’17, we project that we will add 0.75m US members, compared with 0.37m in Q3’16, which was impacted by un-grandfathering. Our international segment now accounts for 50.1% of our total membership base.

 

International revenue rose 57% year over year, excluding a -$23 million impact from foreign exchange, while international ASP grew 10% year over year on a F/X neutral basis. International contribution profit of -$13 million vs. -$69 million was better than our -$28 million forecast due primarily to higher-than-forecasted paid members.

 

We’re forecasting Q3’17 international net adds of 3.65 million. We are making good progress with our international expansion as improving profitability in our earlier international markets helps fund significant investment in our newer territories. As a result, we expect positive international contribution profit for the full year 2017 at current F/X exchange rates. This would mark the first ever annual contribution profit from our international segment.

On the collapse in margins:

For Q2, global streaming revenue was within 1% of our projection. As expected, operating margin dipped 516 basis points sequentially due to the timing of content releases, and came in at $128m on forecast of $120m. Through the first half of 2017, our operating margin was 7.1%, putting us on track for our full year target of 7%, which we plan on growing in 2018 and beyond. Q2 EPS was on target at $0.15, as a greater than expected tax benefit offset a -$64 million non-cash unrealized loss from our euro bond (which was recognized in our P&L in interest and other income/expense).

On its content portfolio:

Last week, the Television Academy nominated 27 Netflix original programs with 91 Emmy nominations, nearly double last year’s tally. With five of the 14 total nominated best series contenders (Stranger Things, The Crown, House of Cards, Master of None and Unbreakable Kimmy Schmidt), Netflix had the most nominated series of any network. We are proud that even as we have increased our volume of originals across several genres, we continue to grow the recognition for the quality of those shows, including brand new series like Stranger Things and The Crown, which will have second season premieres in 2017.

 

We understand that our approach to films - debuting movies on Netflix first - is counter to Hollywood’s century-old windowing tradition. But just as we changed and reinvented the TV business by putting consumers first and making access to content more convenient, we believe internet TV can similarly reinvigorate the film business (as distinct from the theatrical business). This year we will release 40 features that range from big budget popcorn films to grassroots independent cinema. 

On competition and usage:

The competition for entertainment time is always intense, but the silver lining is that the market is vast and diverse. YouTube is earning over a billion hours a day of consumers’ time with one type of  entertainment, while we are earning over a billion hours a week with our type of entertainment. Linear TV is still huge, piracy still substantial, and there are thousands of firms and approaches around the world earning some fraction of consumers’ entertainment time. The entertainment market is so broad that we’ve grown from zero to over 50m streaming households in the US over the last 10 years, and yet HBO continues to increase its US subscriptions. It seems our growth just expands the market. The largely exclusive nature of each service’s content means that we are not direct substitutes for each other, but rather complements.

 

... The internet may not have been great for the music business due to piracy, but, wow, it is incredible for growing the video entertainment business around the world.

Finally, on cash burn:

Q2’17 free cash amounted to -$608 million vs. -$254 million in the year ago quarter and -$423 million in Q1’17. We anticipate free cash flow of -$2.0 to -$2.5 billion for the full year 2017. With our content strategy paying off in strong member, revenue and profit growth, we think it’s wise to continue to invest. In continued success, we will deploy increased capital in content, particularly in owned originals, and, as we have said before, we expect to be FCF negative for many years. Since our FCF is driven by our content investment, particularly in self-produced originals, we wanted to provide some additional context on our content accounting at our investor relations website.

 

We continue to debt finance our capital needs as we believe this reduces our weighted average cost of capital, resulting in a more efficient capital structure. In May, we completed a 1.3 billion euro bond offering. In addition to a small natural hedge to our growing European revenues, we are pleased to have broadened our access to capital markets beyond the US high yield market. Our euro bond may add some volatility to our net income as each quarter we remeasure the liability on our balance sheet based on the quarter end euro-to-dollar exchange rate. As a reminder, quarter-to-quarter remeasurement changes in this liability are reflected as a non-cash unrealized gain (loss) below operating income in “interest and other income/expense” in our P&L (-$64 million impact on net income in Q2’17).

The afterhours response shows that investors are far less worried about the relentless, near record cash burn, and instead are are more impressed with the subscriber additions, as a result sending the stock nearly 9% higher.

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Squid Viscous's picture

even a cave man can get a free month of netflix!

 

troubadourcapital's picture

These tech stocks will crater, but not right now. Wait for the next bear market

jcaz's picture

The Amazon of movie watching.. "We'll never make much money, but we'll make it up in volume"......

Tesla?  Don't spook my TSLA puts, dude.

American Psycho's picture

it keeps them out of a high tax bracket.  lol

343 Guilty Spark's picture

This and then some. By adding such high amount of cost obligations and plans to increase it, they are protecting themselves from a buyout by the other studios unless it is on Netflix's terms.

In addition to that they are setting it up to where the can pay dividends and spend the rest to reduce tax obligations.

Smart but dangerous if their subs get too low.

Squid Viscous's picture

lol, i don't think paying dividends is in the plans

go back to JCC biz school idiot

rado_watching's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.jobproplan.com

meditate_vigorously's picture

TeeVee literally rots your brain and saps your morals and happiness. It doesn't matter how it is delivered, just say no.

Rainman's picture

The stock pop means a p/e dropping under 200, right ?

Squid Viscous's picture

no they missed earnings by a penny, so P/e is exploding higher,

but that's like, not important and stuff...

Quantum Bunk's picture

I love Natflix. It takes stupid fucking investors and subsidizes my TV watching experince with their money.

DavidC's picture

Is there EVER a US stock that doesn't beat in some way?

And, as ever, the results tell one what HAS happened, not WHAT is going to happen. Absolute farce.

DavidC

Ben A Drill's picture

People dumping cable by the droves. Myself included. Wi-fi, Amazon Fire stick, YouTube, NETFLIX, maybe Apple TV. Don't miss cable one bit. Do like saving $120.00 a month not having cable.

ejmoosa's picture

In order to get a lower price on my Internet and the higher speeds, Comcast made me take a cable box.  Not that I use it, but Comcast can claim I am still "connected".

Yet I am not.

Ben A Drill's picture

If you have that box at home it's probably costing you $10.00 a month in rental fees. Return the box ASAP. Connected or not your still paying for it.
I call bs on faster internet speeds. Your getting ripped off.
Use SpeedTest to check internet speed.
Also, I hope your not renting their cable modem, that will cost you another $10.00 a month rental fee. Buy your own!

That's $240.00 a year in savings between renting the cable box and renting the cable modem. Your welcome!

Noktirnal's picture

Comcast also has data caps on residential plans in some areas (mine is one). This will also lead to additional fees, especially if you stream and download a lot. My solution was to subscribe to thier business class internet, which offer faster speeds, better service/support, and no data cap. It costs $110/mo for 50Mbps download/10Mbps upload speed.

UncleChopChop's picture

1) cancel all your cable except for internet (like you really use the home phone?)

2) return the box and modem. Buy a used modem for $30 - which will be of better quality than the one they rented to you for $120 a year.

3) get a good HD digital antenna for $30-50.  (one time charge) if you live in a major metro, odds are they have free-to-air digital HD signals. this way, you won't miss the superbowl and your favorite episodes of dancing with the stars.

https://www.amazon.com/1byone-Amplified-Adjustable-Performance-Cable-Shi...

4) if you must, subscribe to netflix ($10/mont) and/or learn how to torrent with a VPN for all the shows/movies you want. (~$10 month)

 

SybilDefense's picture

I know right.  Mines $54 for cable and internet or $58 for internet alone.  Cockamaimey conflagration.

Ben A Drill's picture

I pay $44.99 dollars for Internet. Period! I own my cable modem and there is no tax on the internet. So $44.99 dollars a month is what I pay. Not a penny more. I have Time Warner, now called Spectrum.

scam_MERS's picture

Expect that bill to increase in the not so distant future, I'm paying $54.99 for the same thing on Spectrum. Unless you're on a promo, you won't have that price much longer.

Theeconomist's picture

The smaller channels pay comcast to be on it, just for the eyeballs for which they can charge advertisers.  It's cheaper for Comcast if you take their TV plan than if you don't.

meditate_vigorously's picture

Corruption from the local level all the way up to the federal level ensured local monopolies for all cable internet.

Why do we even need government, if all they protect is themselves?

Caciqué's picture

Another burn-baby-burn company only living b/c Central Banks empower it (indirectly) with billions. And in the end a monopoly.
Great, really great.
Well done.

NoWayJose's picture

The classic line fits - we are losing money with every subscriber but hope to make up for it with more volume!

Squid Viscous's picture

house of cards, season 8

Full Court Lugenpresse's picture

Honestly I liked Netflix a lot more when it was the scrappy underdog with the friendly red DVD mailers, cleaning Blockbuster Video's clock and freeing consumers from the scourge of late fees.

Now they are a grotesquely overvalued juggernaut using their near-monopolistic platform to shove shit like Dear White People down the public's throat while burning through mountains of cash courtesy of Janet Yellen's Eternally Low Rates Show.

I actually cancelled my account last year (nothing left to watch on it) and have no intention of going back. I mostly watch pirated stuff or else Youtube these days.

Temporalist's picture

I feel the same especially with completely biased garbage like "Nobody Speak: Trials of the Free Press" which had me laughing at the sheer hypocrisy of Gawker and the snowflake double standard of do unto others but not unto me.

Temporalist's picture

Just to add, there is a scene with someone sitting down at a computer. During that scene the narrator (from recollection) says "Fake News" and at that very moment Drudgereport flashes on the computer screen.

 

Drudge report is a news aggregator from sources like CNN, MSNBC, WSJ, NTY as well as all other available sources so to suggest that Drudge, not defending it just pointing out basics, is fake news when it actually reports on nothing shows not only their bias but their intended implication that anyone that doesn't agree with them is bad/fake.

 

Also they attack Peter Theil, also not defending, and try to paint him as a loon because he likes the idea of seasteading, mainly for the purpose of self-governing bodies, not because he wants to take over the world and silence media. While he may have a gripe against Gawker, one trashy website receiving retaliation for their own petty practices does not "silence the media" and anyone at any website can choose to post anything they want on any website for free on this thing called the Internettubes.

_triplesix_'s picture

Yep, when they went all-in on the pro-SJW/anti-all-things-conservative/fuck Trump bandwagon, I decided there was still a lifetime of books still on my to-read list that would be a better use of time.

Peak Finance's picture

LOVED 

the DVD / Blue Ray mailers, and the selection is vastly better.

HOWEVER I canceled becuase I swar to god every fucking DVD / Bluye ray was scratched / damaged in some way. I got to where I had to check and clean every single disk first, and sometimes use scratch repair. 

Then, I decided to no longer operate as Netflix free quality control and I canceled. 

ZERO custoemr care / customer service there now. It is really sad. 

Snot Boogie's picture

I cancelled when they split DVD and streaming services.  I did sign up once for a free trial when I couldn't get a certain program fast enough for free (not enough seeders), but cancelled well before it 'auto-renewed'.  A VPN costs a little less than a netflix account, but then you don't need access to any other streaming service nor buying/renting discs, and you don't have to worry about getting letters from your internet provider and/or copyright trolls.  Also, there's the possibility that it might provide some privacy from dragnet spying.  

lumen ex lumine's picture

Apologies for being a dumb Luddite, but how does VPN help out here

Full Court Lugenpresse's picture

VPN masks your IP address from the website or service you're using, helps keep your web browsing and downloading anonymous.

I recommend Private Internet Access (google will find it). $40/year, easy to use, and works like a charm.

Noktirnal's picture

VyprVPN is also good, and Netflix usually won't catch it. This open up even more content on Netflix that may only be available in other countries. With a lot of VPN providers, you can selet the country you would like your IP to show up in. Then you get content for that country. YouTube is the same way, making some content unavailable in the US. I'm not sure if Amazon Prime does this.

dark pools of soros's picture

What better way to show all the gains of ZH stackers than to resort to stealing cheap as hell Netflix

 

If you are a stacker I totally don't blame your dumb scared ass for having to steal some entertainment, and feel free to dumpster dive for your next meal

 

 

ScalarX's picture

No one is talking about stealing Ntflx. You cannot steal that which requires a subscription to view.

Posters are specifically saying that you can use vpn's to access Ntflx content that has been restricted regionally for political reasons.

SMFH

scam_MERS's picture

Firstone.tv for many US and international streaming stations (use an adblocker on their site), and putlocker or vumoo for free movies (and virtually everything that's on nflx). Also, use a friend's cable login for many other streaming channels with their app. Combine with an outside antenna for locals, and you have everything you need for zero cost/month. You don't even need a VPN unless you're planning to torrent. Not necessary for streaming stuff. Been cable-free for years now.

jamesmmu's picture

Do you guys remember DOT com bubble? Websites with higher traffic equals more values, later the whole market crashes. Cant imagine that we have another dot com bubble with finacial bubble at the same time, 2017= 2008 + 2000 crisis. and we still have nearly record low interest rate. wont end well.

yogibear's picture

NFLX  and Hastings can burn all the cash he wants. It doesn't matter. All perception folks. In fact Hastings should just fake and double the number to double the stock price. Reality and truth no longer matters. Fund managers are full of billions. Hastings should take some of it.

wains's picture

Maybe he did, here is the line from the earnings:

  • User growth (net adds): 5.2 million (1.07 million domestic, 4.14 million international) vs. 3.23 million total streaming (631,000 domestic, 2.59 million international) expected by a FactSet estimate.

"by a FactSet estimate".....

 

The estimate of the estimate....

Rick Cerone's picture

HULK SURGE

HULK SMASH

HULK BURN

Deep In Vocal Euphoria's picture

netflix surge.......zombie nation....food stamps poison in the food and water supply...

 

walking corpses....not a braincell left....ready to take it up the fucking ass.

gilhgvc's picture

THIS. I run a small meeting space and we rent it our for parties. Last night 40 plus adults in the room. They tripped a breaker.....NO ONE knew how to reset it. Breaker panel right in the room...technology goes and 80% of the population is dead inside a month

PleasedToMeatYou's picture

Hard to believe they are adding subscribers.  While Netflix is FAR better than broadcast TV, that's not saying much.  And, the service continues to deteriorate, led by the Flash-toy user interface of seriously impaired functionality.  And, they actually eliminated "My List" from the TV interface.  Doltish bean counters still can't make a profit. 

Cordeezy's picture

Good to know Amazon isn't killing them after all

Www.escapeamazon.com

silverer's picture

Amazon Prime watching requires installing Flashplayer if you want to watch on your desktop computer. I removed Flash years ago after reading their user agreement. I have found virtually every video on sites I come across now will play without Flash. And if Flashplayer's user agreement doesn't make you sick, then read Microsoft's user agreement for Skype.

I am Jobe's picture

Netflix zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz. Go rid of that and cable. Americans love to be dumb down fucks. Watching Netflix, talking about shows and crap. Fuck off faggot Americans

Squid Viscous's picture

agreed who watches that fucking shit, bunch of dykes in prison, and it's not even a porno?

and kevin spacey as POTUS? wtf?

get a fucking life... ameridumbs