Some Notes On NFLX's Q4 Results

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.