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My Napkin Calculation For A Netflix Bankruptcy

|Includes: Netflix, Inc. (NFLX)



For a background basis- check out my original hypothesis last February. I missed the mark on revenues which has pushed my date for a liquidity crunch back a few months to a year. There's a chance I could be wrong again IF subscribers can grow fast enough.

Numbers are based on an annualized basis from the Q3-12 letter to shareholders data.

My recent article sums up the earnings miss and related events.

The Napkin Calculation

Please keep in mind this assumes 4 quarters at the annualized rate of Q3-12. It's very likely that revenue will increase slightly and that other expenditures will also increase. The question is whether or not revenue growth will outpace additional expenditures, especially international expansion.

Revenue at $905M*4= 3620M in cash inflows

Content liabilities are estimated at $2.1-$2.2B --> $2150M

$1470M left.

interest+g&a+marketing+techdev+fulfillment ($291.7*4=1167M)

$303M left. (please note that fulfillment will likely slightly decrease due to less DVD traffic, marketing and G&A increases should more than comp)

Subscription costs are difficult to breakdown... What is the cost of bandwith/servers/etc. What are the costs of tech support, and other related fees? The best method I can figure is to take the $602.1M in "subscription costs and subtract the $410.9M amortization of streaming content liabilities that is include in the operating cash flow statement. I am taking out the $410.9M since this figure would already be included in the upcoming $2.15B liability bomb.

This leaves $191.2M per Q X 4 = $764.8M annually

Netflix will burn $461.8M in cash in the next 12 months if revenues do not outpace related expenses!

Netflix has $790M in cash and STI, but the next 12m will not be much better. Plus NFLX will be forced to stop buying new content which will drive subs away. Any way you slice it, going cash flow negative on a large scale will spell the end for NFLX.

To avoid this end, they need to find $435M more revenue in the next 12m while holding expenses constant. Since it's impossible to hold these other expenses constant, I'll be extremely genererous and assume 50% growth. They need $870M.

How Many Subscribers Do They Need?

As DVD continues to go away, the revenue/sub continues to fall, although it appears to be stabilizing around $30/q--> $120y. Effectively they need 7.25M subs TODAY to breakeven, and that is WITHOUT counting DVD exits.

Let's assume DVD exits are extremely slow- only 250k leave each qtr. Since it takes approx 1.5 streamers to replace the revenue of a DVD user, we need a qtrly gain of 375k subs just to break even.

For the 7.25M mentioned above, assuming equal quarterly gains, and 0 gains today, they need approx 14.5M at the end of the year/4 qtrs = 3.625M subs + .375M from DVD = 4M each quarter.

In Summary

I'm being VERY generous to Netflix here, and they still need to gain 4M streamers each quarter for all 4 next quarters just to stay cash flow neutral.

The past 4 quarters from Q4-11 to Q3-12, NFLX has added .1M, 2.83M, 1.28M, and 1.78M.

Good luck!!

Disclosure: I am short NFLX, AMZN.