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In addition to issuing soft subscriber growth guidance in his company's Q3 report and...

In addition to issuing soft subscriber growth guidance in his company's Q3 report and shareholder letter (.pdf), Netflix (NFLX) CEO Reed Hastings made waves by admitting competition from Amazon, Hulu, and others is a matter of concern, and predicting HBO (TWX) will launch a streaming-only U.S. service. Also of concern: 1) Netflix's "known" content liabilities total $5B, of which $2.1B are due in the next 12 months. 2) Domestic streaming's contributing margin remains ~1/3 that of the declining DVD business. Shares -16.1% AH.
Comments (17)
  • according to Netflix letter the $5 billion of content commitments does not include obligations that $NFLX cannot quantify "but could be significant"
    23 Oct 2012, 07:23 PM Reply Like
  • Yes- been jumping on this as well. Waiting for the 10Q to get the full look at the liabilities.
    23 Oct 2012, 07:38 PM Reply Like
  • Except, that's not exactly new, that same wording has been in all of the 10-Q's and such for years. They have to say it.


    The real issue now is that content prices could actually soar, more so than the past, as Netflix dumps exclusivity on some deals. As their deals expire, like Epix next year, they may be forced to re-work the deal at much higher rates.


    But the wording in the letter is not significant. It's repetitive.


    Taken from the 10-Q two years ago. Page 30.


    "We anticipate entering into other agreements to license streaming content, which if consummated, would result in significant additional commitments."

    23 Oct 2012, 08:40 PM Reply Like
  • The first difference is that they feel the need to state it on the front of their letter now. Makes you think something is coming and they are in CYA mode. The off-balance sheet liabilities have been around for over a year, but analysts only started talking about them in Spring 2012. NFLX recently added that slideshow on their investor relations site. That wasn't there in 2011.


    The second, and BIGGER difference-- in the 2 year ago 10Q they state "we anticipate entering INTO OTHER" as in. "we currently have no other obligations, but we might sign up for some whoppers in the future." The words now say "does not include OBLIGATIONS that we cannot quantify, but could be significant" as in "we signed up for some stuff that we don't really understand, but we could be in for some massive financial liabilities here."


    One is a future expectation, the other is a statement of liability. Huge difference.
    23 Oct 2012, 10:30 PM Reply Like
  • But the language is basically the same. In the year ago 10-Q they say:


    We have entered into certain license agreements that include an unspecified or a maximum number of titles that we may or may not receive in the future and/or that include pricing contingent upon certain variables, such as theatrical exhibition receipts for the title. As of the reporting date, it is unknown whether we will receive access to these titles or what the ultimate price per title will be. Accordingly such amounts are not reflected in the above contractual obligations table. However, such amounts are expected to be significant and the expected timing of payments for these commitments could range from less than one year to more than five years.


    Isn't that basically the same thing?


    As for the investor letter, I wrote in a past article that they change the format of it each quarter. They do. Every time they either change the financials they present, in Q1 they presented that stupid seasonality table, Q4 was cash flow / net income and such.


    It's basically a bunch of junk. What can we try to say to make investors feel good, but in the end, show that we're not meeting our goals. But if we throw out 1000 pages, maybe you'll miss what is on page 783.
    23 Oct 2012, 10:44 PM Reply Like
  • Bill, thanks for your response in detail. What you posted above is virtually the same, but what you posted originally said "we anticipate entering." I see that you're making the distinction between 2 years ago and 1 year ago?


    This topic of unforeseen liabilities has been brought up before-- it's due to this "uncertainty" loophole that NFLX can even get away with 'hiding' the liabilities. The huge difference was that NFLX brought it to the forefront. That tells me a mega nasty surprise is coming in a few months and they don't want to get sued or face other legal action.
    23 Oct 2012, 11:27 PM Reply Like
  • It kinda goes back to one of my earlier points though. Two years ago, they were "looking to enter more obligations". Now, they are saying "current ones could increase in price significantly".


    The point is that they don't seem to be entering as many new contracts, something I've pointed out recently. Now, they are just waiting for the ones that they have already "agreed to for the future" to come current, in a matter of speaking.
    23 Oct 2012, 11:36 PM Reply Like
  • These current contracts could bankrupt them. I won't write an article with that title since I'm currently long some puts and don't want accusations, but I'll send you my napkin calculation Instablog in a second.
    23 Oct 2012, 11:39 PM Reply Like
  • Really feel stupid for not shorting this before earnings!
    23 Oct 2012, 08:32 PM Reply Like
  • NFLX has been a great short before earnings for a little while now lol
    23 Oct 2012, 09:13 PM Reply Like
  • Whitney Tilson is sucking throat lozenges to tune his voice in preparation for pumping Netflix on every possible media outlet tomorrow. Rocco Pendola is probably burning the midnight oil to sugar coat the bitter taste of this earnings report...
    23 Oct 2012, 08:55 PM Reply Like
  • I would think Tilson won't pump it tomorrow. He'd rather wait until it drops to like $40 or $45, buy it, then pump it back up to $60.
    23 Oct 2012, 08:59 PM Reply Like
  • Bill- good insight. We've seen this before. NFLX down to $45, back up to $75 before the next earnings report.
    23 Oct 2012, 10:32 PM Reply Like
  • How many times can Tilson get away with applauding a big share price drop as another "opportunity" for him to make more money, and then tell us later that he trimmed his position near the high?


    I would love to see a spreadsheet of all of Tilson's trades. To hear him talk, after existing his short position at a loss, it's been all sunshine and roses. Something tells me the actual net profit/loss from those trades is a bit more sobering. Maybe it's because every time NFLX goes down, he couples his statements about adding to the position (Translation = "This is a good thing") with a reminder that NFLX is a very small portion of his portfolio (Translation = "We're not getting hammered too hard").
    24 Oct 2012, 08:31 AM Reply Like
  • Tilson has literally shredded his reputation with this stock.
    24 Oct 2012, 06:14 AM Reply Like
  • NFLX has shredded its reputation by exposing how little moat it has as a company.
    24 Oct 2012, 08:41 AM Reply Like
  • Do not understand how this shares to recover almost $ 75 from $ 52. There was no reason. Clearly these shares should cross below $ 50, as I predicted three months ago. The business already ruined it, many companies are already Netflix.
    24 Oct 2012, 09:11 AM Reply Like
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