While reporting solid Q1 2011 earnings for CBS (NYSE:CBS), company President and CEO Leslie Moonves provided more new information than Netflix would likely go public if you go by CEO Reed Hastings and CFO David Wells' performances on the firm's recent faux live earnings call. I wonder how long it took Hastings to fire off a telegram to Moonves?
Les, shut up! Thanks, Reed.
Moonves said quite a bit there. First, consider the dollar amount -- hundreds of millions. Also consider that Netflix is enhancing CBS's bottom line for programming CBS can still sell into syndication, resell domestically, and offer to buyers other than Netflix who intend to air the content online internationally. And some of this money will hit CBS's books, in a "meaningful" way, in the second quarter (in other words, it's happening now).
While we don't know exactly what Moonves means by "meaningful" and we're not sure how Netflix accounts for this expenditure in its books, it helps illustrate a point I -- and others like Len Brecken of Brecken Capital and Michael Pachter of Wedbush Securities -- have been attempting to drive home lately. Over a billion dollars worth of content costs -- soon to be billions of dollars worth -- will hit Netflix's income statement and pressure its P&L between now and 2015/16. And if Moonves says its hitting his books now, Netflix, presumably, has written a check. These costs do not include losses from international operations, which Netflix estimates will be higher than first anticipated, at $50 to $70 million, for the second half of 2011 alone.
Moonves then points to "competition for Netflix growing all the time," inferring that CBS can work even better deals for itself going forward.
After Moonves spoke, CBS CFO Joseph Ianniello discussed the company's revenues, including "content licensing," making it a point to note "that these results do not reflect the impact of our new Netflix deal, which starts in Q2." For Ianniello to explicitly point to the "new Netflix deal," a significant chunk of those "hundreds of millions of new dollars" must be coming through as we speak. CBS reported $3.5 billion in revenue in Q1; it's not going to focus on one deal like it did the "new Netflix deal" unless that deals represents something significant relative to total revenues.
Simply put, I can see people habitually high-fiving one another in the halls of CBS as they chuckle about the "Netflix deal."
This drives home the point about competition. I have written about one of Netflix's fundamental disadvantages before. How can it compete in a content acquisition bidding war, which Moonves seems to say is likely, against firms that have billions in cash on their books? Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) could buy Netflix with one swipe of Jeff Bezos's or Larry Page's debit card. Dish Network (NASDAQ:DISH) also has several billions in cash. If you read between the lines, you can almost see Moonves salivating.
And, of course, Moonves let us know the region where Netflix will expand internationally after Canada - Latin America. That was my guess, but at least we can now rule out Europe and Asia.
Ianniello could have really spoken out of turn when pressed for details on the Netflix money. He held back a bit, but still provided investors with far more color than Netflix ever has. And, clearly, he's not holding back for anybody's sake other than Netflix's. CBS appears more than happy to open its books and tell the world. Netflix takes a much different approach.
While it's tough to put two and two together when reviewing the ways Netflix amortizes expenses, it's fair to say (or so I presume) that just as CBS recoginizes revenue as they make content available to Netflix, Netflix recognizes an expense when it can run that content. It could also be the case that Netflix somehow pushes the expense off into the future, but I don't think it does. Again, it's a bit murky. Ianniello did utter key words, though, when he said, "But again, the biggest cost starting in Q2." It's front-loaded deal, in other words.
Shortly after the call, Bloomberg reported that, in addition to CBS, Netflix is in discussions with Disney (NYSE:DIS), Lions Gate (NYSE:LGF), and Viacom (NASDAQ:VIA) regarding Latin American content agreements. No matter where Netflix expands, it will pay all of the costs associated with going international -- logistical, marketing, sales, etc. -- in addition to more content costs. Thanks to CBS, we now have a bit more color on not only Netflix's future plans, but the amount of money it has dished out at what's really just the beginning of the journey.
I have no reason not to continue my short call on NFLX. I believe Netflix will report an operating loss either late in 2011 or during the first half of 2012. It will "shock" Wall Street and send the shares below $150 and, possibly, below $100, depending on how far they continue to fall before the "unexpected" miss.
I urge caution, however, if you enter this trade. Take at least some profits as they become available. I did by closing up my long position in NFLX puts yesterday. I will reopen the trade, likely on a day when NFLX shows some strength. I suggest caution because I am not sure how Netflix can carry out its plan against monsters like Google and Amazon. I don't see it being financially feasible. That said, I think Netflix looks for a partner or buyer. If that happens, you could get hurt being short.
On the other hand, Hastings might be too stubborn, wanting to prove everybody wrong. If he avoids calling for help, he'll still need cash to fund operations. I don't see many options other than significant dilution. There's been lots of talk about a secondary offering. Count on it. It's a long way from the witch's brew of insider selling and a share buyback program, but other than opening itself up to a large suitor, dilution may represent Netflix's only chance for continuing relevance in an ultra-competitive and cutthroat environment, not to mention survival.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in NFLX over the next 72 hours. Author may also initiate a long or short position in AMZN at any time.