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Negative Free Cash Flow Will Be an Indicator of Enormous Success For Netflix, Says CEO (barrons.com)
During Netflix's quarterly earnings call, in which it noted it had added more than five million subscribers in the last three months, CEO Red Hastings was also asked about the millions of dollars it burns every quarter. Hastings said that burning cash is a sign of success, in a way. Here's the money quote: Look, when we produce an amazing show like Stranger Things, that's a lot of capital up front, and then you get a payout over many years. And seeing the positive returns on that for the business as a whole is what makes us comfortable that we should continue to invest and integrate to basically self-develop many more properties as Ted (the content head) can find the appropriate ones. And then there's comfort with being able to finance it, and of course, our debt-to-market cap is incredibly low and conservative, so we've got lots of room there. And I think that combination that it's spent well and we can raise it is what makes us very excited. And the irony is the faster that we grow and the faster we grow the owned originals, the more drawn on free cash flow that we'll be. So in some senses, negative free cash flow will be an indicator of enormous success. On Monday, Netflix updated its estimate for negative free cash flow for 2017. While previously the company had said it would be $2 billion, Netflix now says it will be $2 to $2.5 billion (versus $1.7 billion in 2016).
I think he's saying that spending money developing new shows is better than resting on their laurels and collecting cash.
Basically taking the long view.. it's no different than investing in a factory that increases output over the next 30 years, despite the current quarter's balance sheet taking a hit. (exactly the opposite what the fucking MBA culture seems to suggest.)
Works for Amazon.
This is the world's new business model, for better or worse. If you don't run a business this way, you can't compete (with the likes of Amazon & Netflix) and they will crush you. And if you do run a business this way, you might [spectacularly] fail, but if you are able to survive, then you'll be the only player. It's like running a monopoly before it's officially a monopoly (the way Standard Oil used to undercut competitors until they went out of business). You can use debt, equity and VC funding to do this today instead of a monopolist's war chest.
As a major plus to those who make these decisions--the board, the CEO, and the rest of the executive team--they don't care. They get paid handsomely win or lose, and if everything goes bust, they can just spin up the next one while coasting on their ludicrous money from the last job.
That statement makes no sense. He's saying his cash flow will be negative because they will be investing in new products. However, new products are not an indicator for success. Sales is!
It's nicer than saying, "We're reinvesting our earnings into the long term growth of netflix rather than pushing net cashflow that can be paid out as investor dividends because I care more about the longevity of Netflix more than your capital gains" to your shareholders.
But shareholders don't want to hear about long term growth or longevity, they want quarterly stock gains and dividends at the expense of all else - which is why our economy is so skewed.
the only people who don't like the idea of spending X amount of money to make Y amount in returns over a few years time are idiot MBAs that continually screw us over for meaningless quarterly results. The Harvard Business School mentality is like some kind of plague on capitalism.
I think he's saying that spending money developing new shows is better than resting on their laurels and collecting cash.
That might be what he meant to say, but that's not what he said. He should have said, "we anticipate a reduction in cash as we make substantial investment in our in house programming. We expect a substantial return on this investment in the future."
Instead, he basically said, "High cost structure is an indicator of a successful business." Which is the opposite of true.
One of our competitors trademarked the term "hypothesis". From now on, we will call them "boneheaded ideas".
Well the alternatives are sitting on the cash under the assumption that they will somehow be able to invest it more wisely in growing the business in the future or returning the additional money to shareholders under the assumption that Netflix can't invest the money better than the shareholders would be able to do so.
Unless you have a really good reason for the first (e.g. key talent viewed as valuable currently being tied up in other projects for a short term basis, etc.) there isn't any good reason for a company to sit on huge piles of cash. If they really don't want to hand it over to shareholders, the company can just invest it in other companies or investment vehicles, but that's also essentially admitting that the company can't put the money to good use itself.
Netflix has a pretty good track record, so unless the CEO is spouting some off-the-rails crap, I'll assume that they have a good plan in place. That's probably not something they're going to fully expound upon in detail in a shareholder meeting, so the CEO just makes some terse comments to assure shareholders that the company is taking the best course of action.
It's nicer than saying, "We're reinvesting our earnings into the long term growth of netflix rather than pushing net cashflow that can be paid out as investor dividends because I care more about the longevity of Netflix more than your capital gains" to your shareholders.
Most investors will accept that statement eagerly. If investors only cared about dividends, the startups in Silicon Valley would have no funding.
A company flush with cash has two options to make investors happy:
1. Invest the cash into a new area that promises to have a large return on investment (this case).
2. Pay a dividend, or buy back stock.
The worst thing a company can do is sit on loads of cash, like Apple.
One of our competitors trademarked the term "hypothesis". From now on, we will call them "boneheaded ideas".
> Most successful enterprises start out with debt
So do almost all unsuccessful ones.
Your logic really isn't logic at all. To put it simply, I am a Netflix subscriber. I give them money every month because I want to watch the content they provide on their service. Netflix on the other hand work to make sure when I have consumed that content, I have more content to consume and that is our relationship. Now if Netflix decided to stop investing in new content the day would come when I would run out of things I want to watch on Netflix and I would terminate our contract. In order for that not to happen, Netflix need to invest in more for me to watch. Investment isn't foolproof, you can always get it wrong but then again neither is driving foolproof, thousands of people die on the road everyday, taking a risk isn't business, it's existence. Now if you drive at 300MPH blackout drunk through a busy city during lunch hour then you are probably going to have a memorable evening. However you can mitigate the risk by sobering up, catching a bus or just staying home and watching the service that replaced Netflix or whatever it was called before they went bankrupt because Stranger Things is only good the first 89 times. Netflix intends to invest 6 billion USD in content this year if I remember correctly. Now if they made Game of Drones for 6 dillion dollars and their investment failed, they would be in serious trouble and probably selling assets to keep afloat. However maybe they could take that 6 billion dollars and divide it into chunks, a LOT of chunks and then they could have 10 investments instead of 1, or maybe even 100 investments, or even more! Now naturally we can't do the mathematics to calculate the future outcome of investments(at least not yet) so every investment, however wise or not wise can only be seen as such after the fact. However this is a situation with binary outcomes and yes, investing is the more complicated one because there are more outcomes but that isn't very reassuring when the only outcome for not investing is being replaced by that service that made Stranger Things season 2. Bad investments hurt. No investment doesn't hurt very long, because you just don't have long enough to get to that part.