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  • Netflix Crisis Abates, Future Is Promising [View article]
    In their Q3 letter to shareholders, management broke down the outlook for Q4, and domestic streaming will contribute $30-$42 million in profit, or between $0.56 and $0.78 cents in EPS. We should note that Netflix's international losses will, at best be around $1.11/share (54 million shares outstanding on the high end, loss of $60 million on the high end)

    Netflix's largest expense is content cost. For a long time, the deals it signed were relatively simple, $X million for Y content. But, the studios became more demanding, and our theory as to what happened is that the studios began demanding a payment for every user that connects to Netflix's streaming servers, regardless of whether they actually watch streaming content. Netflix can afford to pay for the users who watch its streaming content, the streaming segment is profitable (as per Q4 guidance) but if those streaming costs were to be paid for the entire customer base, the model does not work anymore.

    We think Netflix seperated the two not only as a way to generate increased revenue, but to define just who actually uses streaming.

    Furthermore, the margin in streaming is currently at 8%, and management expects it to rise. The costs for streaming do indeed rise over time, but they are more than matched by a corresponding rise in revenue. The Q3 letter states that, "As we grow the domestic streaming member base over coming quarters, we plan to take the streaming contribution margin up about 100 basis points every quarter."
    Oct 28 12:27 PM | 1 Like Like |Link to Comment
  • Netflix Crisis Abates, Future Is Promising [View article]
    The churn rate was indeed elevated, but they did bring in customers as well, 4.7 million new customers. Churn will be an important metric to watch going forward, but we do not feel that it will deviate that much from a historical range, as in Q3 most customers who WOULD leave Netflix chose to do so. Furthermore, subscriber acquisition cost was $15 during the quarter, unchanged from Q2 and down 24% from a year ago. While Netflix did lose customers, it cost them no more to replace them than before.
    Oct 28 11:42 AM | 1 Like Like |Link to Comment
  • Netflix Crisis Abates, Future Is Promising [View article]
    our point is that accounting methods can be used to argue for or against a company, just as has been done with salesforce. at a price of $300, it is wholly plausible that the accounting at Netflix must be done in a much more conservative way to justify the valuation. But we think that at $80, the valuation is such that the accounting can be more subjective. The numbers you post are correct, yet they are correct in a specific interpretation. We do not see significant issues with NFLX's accounting. Neither does the SEC, or the majority of the Street. there is a presentation on Netflix's site that explains their accounting practices.
    Oct 28 03:10 AM | 1 Like Like |Link to Comment
  • Netflix Crisis Abates, Future Is Promising [View article]
    Netflix's accounting is an entirely separate matter, because the rules on accounting, are, to be frank, at times vague as to how categorize income and expenses. is a prime example of the vagaries of accounting, and depending how you look at the balance sheet and income statement, that company company is either doing great or doing horribly.

    Clearly, the current model of accounting has worked for the company, as EPS, in the end the ultimate proof of success or failure for a company, has grown by 35.8% annually over the last 5 years. We do not think a company as scrutinized as Netflix would be able to get away with outright accounting fraud. Whitney Tilson, in laying out his short thesis on NFLX sometime ago, brought up this very point, conceding that the accounting rules on the amortization of intangible assets are complex and rely on a host of assumptions. a barron's story on NFLX accounting can be found here:
    Oct 28 02:27 AM | 1 Like Like |Link to Comment
  • Netflix Crisis Abates, Future Is Promising [View article]
    Netflix has a CAGR of 35.8% in EPS over the past 5 years, and domestic subscribers have gone from 12.268 million at the end of 2009, 19.501 million at the end of 2010, and are currently at 23.789 million. International subscriptions should reach 1.6-2 million by the end of this year. There is a clear trend of EPS increases alongside subscriber increases, and there should be net positive streaming subscription increases by december
    Oct 28 12:36 AM | 1 Like Like |Link to Comment
  • Netflix Crisis Abates, Future Is Promising [View article]
    the dvd division will indeed post lower revenues in 2012, but this will most likely be offset by an increase in streaming subscriptions. Netflix, on the call, stated that it is still seeing net additions in the streaming business, which should support the company going forward. The holiday shopping season will likely help Netflix reinvigorate subscriber growth, and should carry the company through 2012. The company, based on cash flow analysis, can in fact survive a predicted negative cash flow for the overall year, and beyond that, cash flow should become positive again.
    Oct 27 11:30 PM | 1 Like Like |Link to Comment
  • Netflix Crisis Abates, Future Is Promising [View article]
    If you look at the Credit Suisse table above, as well as the 10Q, which can be found here:, you will see that NFLX is expected to generate positive unlevered FCF in 2011. Its streaming obligations, as outlined in the 10Q are not all due at once. It's not as if NFLX must pay all of its streaming obligations at once. the breakdown is as follows (in millions):

    Less than one year, $740.9
    Due after one year and through 3 years: $2,136.9
    Due after 3 years and through 5 years: $535.7
    Due after 5 years: $45.5
    Total streaming content obligations: $3,458.9

    Netflix will pay out around $2 billion this year in content acquisition costs, and still have FCF of around 31 million.

    furthermore, as pointed out here,, the off-balance sheet obligations will indeed be brought onto the balance sheet when the time is right. When the costs are brought onto the balance sheet, the content itself comes too, becoming an asset. an explanation of Netflix's accounting methods regarding the off-balance sheet obligations can be found here:

    In essence, it states that some content, like that from Starz, are not categorized as accounts payable (some content is simply put there under accounting rule FAS 63. Other content, like Starz, is not capitalized that way.

    Oct 27 11:01 PM | 2 Likes Like |Link to Comment
  • Netflix Crisis Abates, Future Is Promising [View article]
    Hulu does however have current season TV shows, and that is the draw of the model. People who argue that Hulu is a competitor fail to see that it is in fact complementary to Netflix, not in competition with it.
    Oct 27 07:52 PM | 1 Like Like |Link to Comment
  • Netflix Crisis Abates, Future Is Promising [View article]
    Netflix's use of a letter to shareholders instead of a press release offers some interesting insights into the company. You bring up a fair number of good points.

    Content is no doubt expensive, but NFLX cash flow has been adequate to pay for it, and we feel that it will continue to be adequate. no debt or equity has been issued to pay for content. As dgulick said, revenues should be able to pay for content. Furthermore, the studios realize that there is only one player in the industry who can effectively monetize their content: Netflix. Ted Sarandos is an effective executive, and as Chief Content Officer he is responsible for acquiring content. The studios will not bankrupt Netflix, because Netflix has proven to them that it can monetize that content, and as such, studios have a huge incentive to see Netflix survive.

    Further, Netflx's streaming margins are currently at around 8%, and given its largely fixed costs, growth in subscribers will boost margins. More on that at the WSJ here:

    International expansion will indeed cost NFLX money, and cash flows will most be negative for 2012. However, it should rebound by 2013. The street, including Credit Suisse, sees positive EPS for 2012. While we think that NFLX will indeed be profitable in 2012 overall, it will not be a large profit. 2012 will be a transition year for the company. Yet, the international division is succeeding. Subscribers grew by over 1,000% year-over-year in Q3 (from 0.13 million to 1.48 million) and grew over 52% over Q2.
    Oct 27 07:21 PM | 2 Likes Like |Link to Comment
  • 6 Reasons To Buy GE For The Recovery [View article]
    the backlog is a gauge of future demand, and it can be an indicator of whether or not the company is growing. GE is processing the backlog as fast as it can.

    We agree that the dividend should be raised, but the GE of the past was inflated by GE Capital, which is what dragged the company down during the financial crisis. The GE of today is less reliant on GE Capital than before, and it will take longer to restore the dividend because of that.
    Oct 25 11:50 PM | Likes Like |Link to Comment
  • Wells Fargo: Buy A Bank Truly Focused on Banking [View article]
    so far we have not heard anything, but yes, we shall provide an update if we hear anything
    Oct 25 09:01 PM | Likes Like |Link to Comment
  • First Solar: A Contrarian Long-Term Play [View article]
    the ouster of Rob Gillette came as a total surprise to the street, but we think the stock reaction to this is overdone. excluding today, the stock is essentially unchanged from October 4. we want to hear more details about this and why Rob Gillette was ousted. the stock is plunging due to fears of the unknown. However, we think that the CEO resignation, at least at this time, presents nothing new. Rob Gillette, while a skilled manager, is no Steve Jobs or Jeff Bezos. in our mind, his skill-set, while extensive, is not irreplaceable.

    we think the issues surrounding FSLR are well documented, and this sell-off is a sign that the street is in a shoot first, ask questions later mode. nervousness over FSLR's near-term outlook has exacerbated this sell-off.
    Oct 25 04:05 PM | Likes Like |Link to Comment
  • 6 Reasons To Buy GE For The Recovery [View article]
    while GE stock is off of its all time highs by a fair amount, we are advocating the stock as a good opportunity going forward. timing is crucial in successful investing, and we believe that now is the proper time to invest in GE, given the reasons outlined above
    Oct 24 08:13 PM | Likes Like |Link to Comment
  • Chipotle: Love The Food, Short The Stock [View article]
    CMG has broken out to $342 as of today
    Oct 24 02:57 PM | Likes Like |Link to Comment
  • Who's Right About Green Mountain Coffee Roasters? Einhorn Or The Street? [View article]
    a thoughtful analysis, we do think the timing of einhorn's comments are interesting, and look forward to the next conference call to hear what management has to say in regards to this
    Oct 20 03:33 AM | Likes Like |Link to Comment