Netflix Explodes Higher After Smashing Subscriber Expectations, Will Burn Up To $4BN In 2018

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...

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... 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The company's historical content spending is as follows: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

Cash: $2.6B

Net Debt: $21.8B
Market Cap: $148.6B

EV: $170.4B

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.

* * *

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.

Comments

Hal n back Disgruntled Goat Mon, 04/16/2018 - 17:13 Permalink

several years out before cash flow positiive? I think the company has been around 15 years already. Hence--20-25 years before cash flow positve--thats 1/2 of ones investing lifetime.

then if you beleive in discounted cash flows for valuation, which algos do not, there is no payback on the actual business model-its all in getting fools to buy the stock hoping a bigger fool buys the stock from them.

 

In reply to by Disgruntled Goat

Newbie lurker Mon, 04/16/2018 - 16:39 Permalink

Who is bank rolling this business model? 

 

I don’t have NFLX so I don’t know what their ‘original content’ is...

 

Is it of the standard (((Hollywood))) ilk? Are (((they))) just switching their means of providing us degeneracy? Thus Jacks total lack of concern over a 4 billion cash burn.

pitz Mon, 04/16/2018 - 16:41 Permalink

Why do FTP sites like Netflix and Dropbox burn cash?  These should be hugely cash generating businesses straight out of the gates.  Its not like they have any meaningful barriers to entry, nor 'moats'.  

itstippy AlphaSeraph Mon, 04/16/2018 - 18:24 Permalink

This is what I don't understand about Netflix stock valuations.

People worldwide love to watch television.  They're desperate for something worth watching.  Netflix provides programming that millions of people want to watch, and they're willing to pay to watch it.  Sounds good.

However . . . it costs Netflix more to produce and distribute their programming than they receive in subscription fees, so they borrow lots and lots of money to make up the difference.  How is this a viable business model?  How can they claim to be "earning" $0.63 per share when they lose billions of dollars every year?  

Netflix isn't investing in factories, tracts of forrest, ore-rich mines, new technology, or anything with longterm value.  They're investing in movies that get dated and unmarketable very quickly.  Why are people so eager to invest in a company like that?

People love to eat chocolate bars.  If I manufactured and sold high quality chocolate bars for $0.50 each I'd sell millions.  If it cost me $0.75 per bar to manufacture and market them, how many investors could I attract?

In reply to by AlphaSeraph

Buckaroo Banzai itstippy Tue, 04/17/2018 - 00:57 Permalink

Filmed entertainment is something you can create once, but sell over and over again. They are trying to build a critical mass of content that will help them retain a customer base for a long time. They are burning cash while its cheap to borrow cash.

This is what clown world looks like, infinite amounts of money to film Cultural Marxist social programming to make people stupid and also crowd out investment in actual productive enterprise.

In reply to by itstippy

Utopia Planitia Mon, 04/16/2018 - 16:41 Permalink

The coolest thing you can do these days is burn cash like crazy!  Far beyond your ability to pay your bills.  It makes the kids think they have stumbled on the next AMZN or TSLA!

wmbz Mon, 04/16/2018 - 16:42 Permalink

"NFLX continues to hemmorhage cash, and will burn between $3 to $4 billion in 2018, and "be free cash flow negative for several more years."

~ Just make it up on volume! That's what all the best cash burners do.

affirmed_78 Mon, 04/16/2018 - 17:08 Permalink

I gave up on picking stocks long ago.  Nowadays, profits are immaterial (see AMZN, NFLX, TSLA), until eventually one day they'll matter again.

 

The obvious method is to start a company and tell a great story.  Sell stuff at a loss.  Profits and cash flows don't matter as long as the story is still a good one and the capital markets are receptive.  Up goes the stock, leading to less dilutive capital raises, and you can push competitors out of business (since they can't operate at a loss - their story isn't as sexy).  Once they're all out of business, then you can consider raising prices.  But then again, with your stock still at all-time highs, what's the point? 

Mr. Big Mon, 04/16/2018 - 17:20 Permalink

"Netflix Explodes Higher After Smashing Subscriber Expectations, Will Burn Up To $4BN In 2018"

 

lol, and I will never subscribe, and never order anything from Amascam etc, etc,.............these vultures love the sheep!

VK Mon, 04/16/2018 - 17:46 Permalink

Subsidized circuses for the masses. I don't personally have it, but friends do. Netflix does have some really good content but a sheer waste of time. 

monopoly Mon, 04/16/2018 - 17:58 Permalink

NFLX earned .64 cents, .64 cents and it is priced at 325. My goodness. How is that even possible? So many great shorts out there.....but it is still impossible to short them.

GotGalt Mon, 04/16/2018 - 18:01 Permalink

Man, putting a whole bunch of Obama/Clinton'ites on the board and in executive positions is really paying off it seems!  Stock to the moon no matter it will never ever EVER be profitable on a FCF basis.