Netflix $9.5 Billion Bet

Over $9.5 billion in commitments to produce content
January 20, 2015 Updated: January 21, 2015

The stock is up more than 3 percent after hours and a positive earnings release but Netflix is in trouble.

No it’s not because it is airing Sony’s North Korea film The Interview about a month late this Saturday. It’s also not because it beat earnings by almost 100 percent ($1.35 vs. $0.72 expected). The company also added 4.3 million subscribers to a total of 57.4 worldwide.

 It’s because of the quality of the earnings, the future commitments for developing content, and an outrageous cash burn.

 First, the extra 63 cents no analyst predicted the company would earn came from a so-called non-recurring source, namely from money stashed away for tax purposes, which now isn’t needed. It will boost earnings this year, but this source of income is non-cash and will not come again.

Talking about cash. The company is burning through cash at a record rate of $78 million, money the company is spending now on producing and licensing content, but will only mark as expenses on the income statement once it has revenue associated with it.

With our initial round of international expansion, we’ll get some things wrong and do our best to fix them quickly.
— Netflix

 However, because developing original content is cheaper for Netflix than licensing, the company will “continue to grow the percentage of our content spending dedicated to originals for the next several years.” Netflix wants to fund the new content by issuing more debt.

 In principle, this is a prudent strategy, but commitments for original content and licensing now stand at $9.5 billion. Of course, these commitments are spread out over several years, but went up by $600 million last year, whereas revenue actually disappointed expectations and only increased by $82 million.

 The company thinks it’s on track for global expansion and wants to grow as fast as possible: “Our international expansion strategy over the last few years has been to expand as fast as we can while staying profitable on a global basis,” the report says.

 As for the immediate future, the company is less sanguine: Revenue is only expected to increase by $93 million and earnings per share will plummet to $0.60, a level not seen in years.

 “With our initial round of international expansion, we’ll get some things wrong and do our best to fix them quickly.”