For the third consecutive quarter, Netflix stock is spiking after reporting earnings, a repeat of what it did last quarter and the quarter before, up as much as 8% after hours, and reaching its all time high price of $334 per share and just shy of all time highs after reporting Q1 2018 numbers which while coming line with with expectations on revenue ($3.701Bn, Exp. $3.69Bn), and non-GAAP EPS (Adj. EPS $0.64, exp. $0.64), were far more remarkable once again for for the latest beat in the subscriber numbers, which again smashed expectations especially on the international streaming side, as follows:
- Q1 total net streaming additions 7.41MM, Exp. 6.43 MM
- Q1 domestic net streaming additions 1.96MM; Wall Street exp. 1.45MM, guidance 1.45MM
- Q1 international net streaming additions 5.46MM, Wall Street exp. 4.98MM, guidance 4.90MM
Meanwhile, Netflix' Q2 2018 outlook also blew out expectations, with the company now expecting Q2 net streaming adds of 6.2 million (1.2 MM in the US and 5.00 MM internationally) well above the consensus estimate of 4.83 million, although this will come at a cost: Netflix still expect to burn between $3 and $4 billion in cash in 2018.
NFLX also expects $3.934 billion in Q1 revenue, also above the consensus estimate of $3.80 billion, generating EPS of 63 cents, just below the Wall Street consensus of 65 cents.
And while investors are focusing on the impressive subscriber adds, one thing investors will surely focus on is the company's content spend for next year: having previously said they would spend $7 billion, they are raising that by as much as a $500 million on the low end forecasting that "we’ll spend $7.5-8 billion on content on a P&L basis in 2018." The good news: this is the same as the range unveiled last quarter, so it won't come as too big of a surprise.
Also, it will come as no surprise that with Wall Street expecting the company to spend $8.7 billion this year on content...
... it will continue spending an ungodly amount. Netflix now has 117.6 million subscribers worldwide, but the success has come at a steep price and as of Sept.30, NFLX's total content obligations were a record $17 billion.
The company's historical content spending is as follows:
- 2018: $7.5-$8 billion (forecast)
- 2017: $6 billion
- 2016: $5 billion
- 2015: $4 billion
- 2014: $3 billion
- 2013: $2 billion
Also, as one would expect, the company remains in its cash burning ways, reporting that in Q1 2018 it burned $286.5 million, which however was well below the $422 million it burned one year earlier.
Discussing its cash burn, the company said that "free cash flow in Q1 was -$287 million (less negative than we expected due to content payment timing differences), compared with -$524 million in Q4’17."
However, don't read the good quarterly number too much: the company continues to forecast free cash flow of -$3 to -$4 billion in 2018, and to be free cash flow negative for several more years as our original content spend rapidly grows."
As NFLX itself admits, it will have to raise cash soon: "We have about $2.6 billion in cash and we will continue to raise debt as needed to fund our increase in original content." The problem, of course, is that Netflix debt, between off and on balance sheet, is now a getting staggering, $16 billion. Which is why the management once again had to come up with the non-existent EV/debt multiple:
"Our debt levels are quite modest as a percentage of our enterprise value, and we believe the debt is lower cost of capital compared to equity."
And since Netflix prefers to keep its unfunded content obligations off the balance sheet, here is a recap of what Netflix' real obligations look like, courtesy of Paul Huettner:
- Debt, on balance sheet: $6.5B
- Debt, off balance sheet: $17.9B
- Total Debt: $24.4B
Net Debt: $21.8B
Market Cap: $148.6B
TTM Adj. EBITDA: $534mm
- Net Debt/EBITDA: 41x
- EV/EBITDA: 319x
We'll leave it to the algos to decide if $24 billion in effective debt on half a billion in EBITDA is viable.
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Below are some more highlights from Netflix' letter, first focusing on subscribers:
Global net adds totaled a new Q1-record of 7.41m, up 50% year over year and ahead of our 6.35m forecast. The variance relative to our guidance was driven by continued strong acquisition trends across the globe which we attribute to the growing breadth of our content and the worldwide adoption of internet entertainment. In the US, we added 1.96m memberships (compared with forecast of 1.45m).
Next, the company's comment on the recent price increase:
We completed our price adjustment during this past quarter, resulting in 12% ASP growth for the domestic segment. Outside of the US, membership grew by 5.46m (vs. forecast of 4.90m). Our international segment now accounts for 50% of revenue and 55% of memberships. Excluding a F/X impact of +$114 million, international revenue and ASP rose 59% and 13% year over year, respectively.
On the company's guidance, and Netflix' forecast of spending $7.5-$8.0 billion on content on a P&L basis in 2018
We’ll have $7.5-$8 billion of content expense (on a P&L basis) in 2018 across a wide variety of formats (series, films, unscripted, docs, comedy specials, non-English language) to serve the diverse tastes of our growing global membership base.
Q1 scripted original series debuts included the dark, coming of age story The End of the F***ing World and sci-fi thriller Altered Carbon as well as returning seasons of Marvel’s Jessica Jones, Grace and Frankie, Santa Clarita Diet and A Series of Unfortunate Events.
On the recent French snub of Netflix at Cannes:
We regret our films not being able to compete at this year’s Cannes film festival. The festival adopted a new rule that means if a film is in competition at Cannes, it can not be watched on Netflix in France for the following three years . We would never want to do that to our French members. We will continue to celebrate our films and filmmakers at other festivals around the world but unfortunately we will have to sit out Cannes for now so that our growing French membership can continue to enjoy our original films
Finally, cash burn:
Free cash flow in Q1 was -$287 million (less negative than we expected due to content payment timing differences), compared with -$524 million in Q4’17. We continue to forecast free cash flow of -$3 to -$4 billion in 2018, and to be free cash flow negative for several more years as our original content spend rapidly grows.
We have about $2.6 billion in cash and we will continue to raise debt as needed to fund our increase in original content. Our debt levels are quite modest as a percentage of our enterprise value, and we believe the debt is lower cost of capital compared to equity.
However, judging by the afterhours stock response, which briefly sent NFXL to a new all time high with a market cap of $140BN, just shy of Disney, investors are far less worried about the relentless cash burn, and the $17 billion in already accrued content commitments, and instead are are more impressed with the subscriber additions, as a result sending the stock as much as 8% higher. And as shown on the chart below, the stock is now 73.5% higher YTD.