Some Notes On NFLX's Q4 Results

Tyler Durden's picture

While the stock of NFLX is soaring in the after-hours session on what is perceived to be a big blow out of consensus, and yet another massive if brief short squeeze, we have had a chance to take a look at the actual excel support behind the data, completely free of contextual spin as per the investor letter. Here are some of our findings.

  • Netflix generated $33.9MM in "Free Cash Flow". Of this $25.6MM was from change in Net Working Capital; this compares to ($7.6MM) drain from NWC in Q3.
  • Of Netflix' $186.6MM in Free Cash Flow in 2011, $110MM was from Net Working Capital
  • Net Working Capital as a source of Netflix "cash flow" has grown from 23.3% in 2009, to 45.4% in 2010 to 59% in 2011
    • NWC has "generated" $22.6MM in cash in 2009; $59.5MM in 2010; and $110MM in 2011;
    • How is it that NWC has been a constant source of cash for year after year after year? What happens when this balance sheet drainage reverse itself and the company is forced to fund working capital?
  • The company ended Q4 and 2011 with $508MM in cash compared to $159MM in Q3, and $194MM a year prior; this was courtesy of a $200MM equity raise and $198MM in debt issuance to a "related party"
  • Netflix Q4 Operating Margin was 8.1%, based on $70.8MM in EBIT and $875MM in revenue; this is the lowest Operating Margin since before 2009 (we dont' know what quarterly margin was prior to 2009); Q4 EBIT of $70.8MM dropped by $26Mm from Q3's $96.8MM
  • Domestic streaming paid subscriptions (the bulk of the Company's revenue at$476MM, and $52MM contribution profit) decrease by 1.7% sequentially, Free Subscriptions soared by 62%
  • Domestic DVD subscriptions, which generated $370MM in revenue
    and the bulk of the company's $193MM in contribution profit in Q4, plunged by 20% sequentially; 
  • Consolidated free subscribers rose by 35.6% from 1,437K to 1,948K

So what was the bull case again, especially with this news in mind.

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junkyardjack's picture

Bullish case is that someone buys them and puts them out of their misery

B-rock's picture

It just isn't our day...

GenX Investor's picture

They can just borrow more at the fed window and keep chruning their working capital to infinity.  They should sustain for another 1000 years at this level.

taniquetil's picture

The same as the bullish case for Zynga and Groupon, probably

emsolý's picture

Bullish case is that their real estate sits on a previously undiscovered gold mine.

TruthInSunshine's picture

The bullish case is that someone does a LBO on their ass, takes their debt up to 250x book value, has the executive corps pay themselves serious $$$ for a few years, before filing for BK.

Maybe NFLX will end up in Maiden Lane XXXXVIII.

FrankDrakman's picture

before filing for BK

How will Angry Whoppers help?

prains's picture

wife and kids have been bugging me for months to get Netflix,I can hold out longer than ben can print money...........bitchez

Ghostintheshell's picture


Ghostintheshell's picture

quote of the day: "I dont even have nflx up on my screen!"

Ghostintheshell's picture

quote of the day: "I dont even have nflx up on my screen!"

Don Birnam's picture

Yes, I also enjoyed, "We trimmed our position going into earnings as a form of risk management."

Right, Whit. Nothing like an "overweight" position in a keen-edged falling piece of cutlery.

unky's picture

Now that MEGAUPLOAD has been busted the sales will go through the roof!

PS: FILESERVE and FILESONIC closed, closed for US-users!

Rainman's picture

That ol corrupt fucker Chris Dodd really gotterdone , huh ?

Waterfallsparkles's picture

Plus, Whitney Tilson is long.

gmak's picture

I see a couple of other barriers to performance .


1. Those pesky copyright issues

2. Inconsistent offerings from country to country. It is ill-advised to project take-up in the USA to any other area of the world.

3. If Netflix borrows short term, it goes into working capital on the negative side. If they spend all the money (cash-burn anyone?), then Net working capital declines leading to the magical "free cash flow" boost. So long as they keep borrowing short term and rolling it over, this cornucopia of cash continues. But in the end, it's only borrowing short (say a revolver) where interest-only payments are the order of the day.  "hello, Netflix? We're calling your line. Europe isn't paying their bills to us and we really need the cash")

gmak's picture

To be fair, free subscriptions are for a month only, right?

Waterfallsparkles's picture

I think they split off streaming from DVD's is so they could Bankrupt the streaming if the costs get too high.

That way they can still keep the DVD business while Bankrupting the Streaming part of the Business if they cannot pay for all of the Streaming costs incurred trying to get customers.

akak's picture

I hope RobotLemming doesn't see this --- it might just ruin his day.

Just as it will eventually ruin his (putative) portfolio.

slaughterer's picture

Has RobotTrader been banned?    

akak's picture

Not that I know of, and I would highly doubt it anyway.

Maybe he just finally gave up his shallow and egregiously nonsensical trolling?

walküre's picture

Rearview-Traders Mom caught him streaming porn sites. He's banned from the internet at home.

ebworthen's picture

The bigger trend is people dumping the $60-$100 a month cable crap and just using the Internet.

Then, realizing that for $8 a month they can use the same connection to get streaming movies and shows to their iPad, laptop, desktop, Wii, XBOX, etc.

I signed up for streaming Netflix since last quarter and am enjoying the value.  My Daughter watches cartoons and shows on her Nintendo DS3.  The Wii interface works great.

Pretty good deal compared to the 98 channels of crap on cable T.V., at least 1/3 of which were in Spanish.  Goodbye cable t.v.!

Whether or not the Netflix model does better from here or is eclipsed by a competitor I have no idea but online a la carte viewing appears to be the trend.

adr's picture

Netflix's streaming service is worthless because they feature almost nothing worth watching. But if you pay $8 a month for it you'll find something to watch to justify the expense.

Eventually you will have watched all the content you care about and drop the service. Maybe a little while later you'll sign up again. Many of Netflix's new subscribers are probably people signing up again to try it out again to see what's new. Next month they will probably be gone again.

When the net was young, how many people dropped AOL to try Compuserve or Prodigy only to return to AOL? Then drop AOL a second time when Prodigy gave them another free 60 day trial. I know people who never paid for dialup becuase they kept switching back and forth using different names. It was a pain in the ass but better than paying $30 a month.

Pretty soon AOL figured out having online cancellation made it too easy to drop their service and they decided to make you go through 200 hoops just to cancel using the worst automated telephone service ever created. People just said, fuck it I want the internet so I'll just keep AOL. The rest is history.

If you don't know what I am talking about you are too young to really be reading ZH.

ebworthen's picture

28K modem "Don't use the phone" Netscape, AOL, NetZero Dittos to you!

Agree, there will be lots of "manuevering" in this space next couple of years.

walküre's picture

First AAPL, now NFLX with much better than expected results.

More cash at hand than many banks these days. How is their cash invested and how much yield can they earn on their cash?

ZIRP makes sense. Think about it. Too much cash is parked. Watch volume come back into the casino.

Roy T's picture

I will be getting my nuts handed to me tomorrow.


In addition to all ZH metrics

All I need to look at is operating income


Q3-96.8 million

Q4-70.9 million


BIG BEAT  <snark off>

tmftdoyle's picture

forget the quarterly numbers, the biggest issue in the release is the company's cessation of its disclosure of gross subscriber additions and customer churn after this quarter. This is a lousy business model. Run the math with customer acquisitions costs of $15, monthly churn of more than 5% at the company's revenue and contribution profit rates. After this quarter the company's business model is unanalizable. 

disabledvet's picture

GOING is my belief that "gettin' your flix on the net" (which is WAY hotter than going to the my guess would be (and it is a guess!) that "Apple TV will display the Flix on the Net thing" prominently. We're moving away from stupid tv zh'ers! invest accordingly!!! ZH T.V RIGHT AROUND THE CORNER!

adr's picture

When you can watch anything at any time, you will watch nothing because no choice will be made for you. If you had access to being able to do anything you want, you wouldn't end up doing anything because you wouldn't be able to come to a decision.


flattrader's picture

I think that's true for some people who have more time than organizational skills.

If I could select my cable or sat channels, rather than pay for a bunch of packaged-up crap I don't want at an inflated price (to get the programming I really want) I would re-subscribe.  With my DVR or similar device I could watch what I wanted when I wanted, rather than view on their schedule.

The last subscription hike with the addition of pure crappola programming to justify it was more than I could stand.

adr's picture

SO I guess Netflix is going above $250 again? What f'in BS. $10 and Netflix doubles off its 52 week low just a couple months ago. My desire to want these bullshit corporations burn kept me from buying shares at the lows. I knew I should have bought BAC at $5 but the problem is knowing when to get out. At any time you can lose everything if you aren't looking at your computer 24/7.

The turnaround in Netflix stock is sickening. Puke your guts out sickening. Have traders learned nothing? I guess the fact of the matter is nobody cares. Nobody cares about the facts behind a casino game. Just whether or not they win.

The stock market really has become nothing but cocaine to an addict. The addict just can't stop buying the shit he knows will kill him eventually, he just always thinks the day of reckoning will be down the road.

Waterfallsparkles's picture

I wonder if subscribers are up because of the split of the DVD and Streaming.

If there was one customer that subscribed and got DVD and Streaming combined, was counted a one Subscriber.  When they split the Company, into 2 different Businesses, the Subscriber would then be counted a 2 subscribers as they would then be charged seperatly for each service.  Counted as a Subscriber to DVD and then counted again as a Subscriber to Streaming.

So, even though they lost a lot of Subscribers thru splitting the DVD and Subscription Business, they now can double count the Subscribers they retained.