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 [3]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 [4]: