Several strong articles have been written on Seeking Alpha criticizing Netflix's (NFLX) finances; however, none have gone in depth to break out the finances for whole year 2012 & 2013. NFLX's 10K for 2011 was posted last Friday (10 February) and contains further insight into upcoming liquidity issues.
Following the release of NFLX's Q4-11 last month, I ran the numbers on the previous 12 quarterly reports. I wanted to focus on three main issues-subscriber profitability, subscriber growth, and accounts payable coverage. I highlighted the two best results in green and the two worst results in red.
- As referenced in the above chart, subscriber profitability has taken a nosedive and is expected to be negative in 2012. Through my analysis, I project subscriber profitability to be negative throughout 2013 as well.
- Subscriber growth has been abysmal for the past two months, after three straight blowout quarters. This slowing in growth is with the international expansion, but the program is new, so actual 2012+ growth remains to be seen. I project strong (percentage-wise) growth in international streaming coupled with a strong decline in domestic DVD and a stagnation in domestic streaming.
- Coverage of Accounts Payable (Rev/AP) has plummeted which has led a handful of Seeking Alpha authors to declare a cash flow emergency. This calculation assumes current (qtr revenues X4 / ap) which assumes that the growth in both will be concurrent. According to current trends, this actually understates the issue, and I am projecting actual Rev/AP of 3.41 in 2012 and 1.94 in 2013 (math below).
Although projecting a NFLX bankruptcy (or need for a strong capital increase) was a fringe opinion in summer/fall '11, NFLX recently raised $400M through a convertible bond and stock offering. As shown by the model below, this was likely to avoid a 2012 liquidity crunch.
According to the 2011 10K, Netflix has $508M in cash + $290M in Short-term Investments for total quick assets of $798M. With the inclusions of Other accts payable, accrued expenses, and deferred revenue ($300M), NFLX has a quick liquidity of $498M (2.7 ratio). I did not include the content accounts payable in the quick liquidity equation since I am attacking that beast separately; however, with inclusion, the quick liquidity drops to -$427M (0.65! ratio).
For 2012 as a whole, I expect international to exhibit strong growth in terms of percentages (close to 100%), but nothing strong in terms of total numbers.
I expect DVD to continue to decline to a yearly average of 7M subs, and I expect domestic streaming to stagnate. These projections are arbitrary, and if you disagree with my numbers, feel free to add your own into the model. For 2013, I expect international to continue growing while domestic DVD drops rapidly and domestic streaming continues to stagnate.
2012: 9M DVD @$11.50 + 19.5M dom & 2.5M intl @$8= $3.35B
2013: 7M DVD @$11.50 + 19.5M dom & 3.5M intl @$8= $3.17B
In 2011, Netflix had operating expenses of $780M (marketing, tech, and G&A while discounting legal) which was 24.3% of revenue. In 2012, in line with Reed Hastings' predictions of an increase in spending, I am predicting operating expenses of 30% revenue. In 2013, I expect the nominal expenses to decrease, but with decreasing revenue, I still expect the 30% margin.
2012: 30% of $3.35B = $1.01B
2013: 30% of 3.17B = $950M
Cost of Subscriptions & Fulfillment-
To separate the 2011 "Subscription Cost" into content amortization and Etc Costs, I referenced the total cost of $1.79B and subtracted the $699M of amortization referenced in the yearly cash flows. This leaves a cost of $1.09B for 2011 or roughly 34% of revenue. International expansion will likely increase this percentage, and my prediction is roughly 40% of revenue.
2012: 40% of $3.35B = $1.34B
2013: 40% of 3.17B = $1.27B
I expect the fulfillment expenses to drop in line with a corresponding drop in DVD subscribers.
2012: 10% drop from $250M in 2011 = $225M
2013: 10% drop from $225M in 2012 = $202.5M
2012 & 2013: $17M
The Streaming Bomb-
The table below shows Netflix's upcoming pitfall - according to my model, NFLX will have $758M left over to cover streaming costs in 2012 and $731M left over in 2013.
In NFLX's 2010 10K the following obligations were posted:
NFLX ended up amortizing $699M in 2011, a growth of 31.6% from the projected content costs in the 2010 10K. With international expansion in full swing for 2012, I expect a similar 30% increase in content costs. The 1-3 year bracket grew 348% and the 3-5 year bracket grew 175%. I expect a (comparably) modest increase of 30% this time around.
2012: Current $798M + 30% increase $1.04B
2013: 50% of 1-3 bracket + 30% increase $1.55B
2012: $785M left over - $1.04B loss of $255M & quick cushion reduced to $243M total.
Note: In Liqddynamite' s October 14 article, he called for a 1 yr NFLX bk. If my model is correct, and NFLX has not raised $400M in capital in November 2011, they would have been $157M underwater in 2012! Great call IF my model is correct.
2013: $731M let over - $1.55B loss of $819M & NFLX underwater by $576M.
Netflix probably will not go bankrupt; however, expect a massive round of capital increases most likely in mid to late 2012. Netflix will bill these increases as necessary to support the "thriving international growth."
Netflix WILL NOT be bought out. With offsheet liabilities of over $4B total (including leases) and debt of $400M, NFLX is not attractive even in the sub-$50 range.
Feel free to tinker with the numbers and come up with your own model/predictions. Think I'm way off base? You're welcome to discuss your disagreements below, or ask any further questions!
This may sound shocking, but I believe that I am actually being very generous on the streaming #s for 2013 as I expect Verizon (VZ), Amazon (AMZN), Dish (DISH), and Hulu to have a much stronger presence by then. Time will tell.
Disclosure: I am short NFLX. $70 and $90 Feb 12 puts (failed Q4-11 earnings read). I may initiate a NFLX short position via options within the next 72 hours; however, I will most likely wait for a 1 week massive otm put play on Q1-12 earnings.