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).

Comments

Sell! Sell! Sell!

[Thelasko]

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!

Re:Sell! Sell! Sell!

[rogoshen1]

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.)

Re:Sell! Sell! Sell!

[Captain Splendid]

Sales is!

That'll be the 5 million new subscribers referenced in the summary then.

Re:Sell! Sell! Sell!

[Notabadguy]

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.

Re:Sell! Sell! Sell!

[TrekkieGod]

That statement makes no sense.

It makes perfect sense.

He's saying his cash flow will be negative because they will be investing in new products.

And that those products will lead to money in the long-term: "that's a lot of capital up front, and then you get a payout over many years"

However, new products are not an indicator for success. Sales is!

"During Netflix's quarterly earnings call, in which it noted it had added more than five million subscribers in the last three months..." Those are the sales, right? Ideally the new subscribers are going to stay with netflix and keep paying them for a long time.

Re:Sell! Sell! Sell!

[Dan East]

Netflix would also have the option of syndicating and selling rights to play its original content on traditional networks if desired or needed for income down the road.

Re:Sell! Sell! Sell!

[Junta]

I think the point is that while that can make sense for 'starting up', at *some* point you have to point and say 'here's where revenue will exceed investment'.

The problem is the statement on its face doesn't imply that the investment will stop.

If their investment outstrips subscription revenue by 2.5 billion annually, well you need to be able to find 2.5 billion worth of new subscribers. That's actually better than reality, as some analysts have noted that license costs grow with subscriber count for shows they don't own (including many 'netflix original series' like house of cards or orange is the new black, they license, not own), so the number is worse than 2.5 billion. Further complicating matters as that netflix may pretty well be close to saturating the market.

We are not talking about a capital 2.5 billion dollar investment and we are done either. We are talking about content creation, which means that they have to keep this up *every single year*, lest they stop having new content and subscribers tire of stale content.

Re:Sell! Sell! Sell!

[Thelasko]

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.

Re:Sell! Sell! Sell!

[TrekkieGod]

I think the point is that while that can make sense for 'starting up', at *some* point you have to point and say 'here's where revenue will exceed investment'.

Agreed.

The problem is the statement on its face doesn't imply that the investment will stop.

Not agreed. It just means you need a critical mass of subscribers to support the continued investment.

If their investment outstrips subscription revenue by 2.5 billion annually, well you need to be able to find 2.5 billion worth of new subscribers.

Netflix costs more than $1 / year per subscriber. At the minimum of $8/month, it means they would need an additional ~26 million subscribers, and they got 5 million in the past 3 months. That's without considering the people paying $10 for hd streaming and $12 for 4k streaming, or excluding future price increases once they think they have enough content to keep subscribers with said increase.

Re:Sell! Sell! Sell!

[rhazz]

"During Netflix's quarterly earnings call, in which it noted it had added more than five million subscribers in the last three months..." Those are the sales, right? Ideally the new subscribers are going to stay with netflix and keep paying them for a long time.

This needs to be quantified: 5,000,000 x $10/month = $50,000,000 per month. So Netflix revenues went up $50m per month, in just one quarter. Those are sales indeed.

Re:Sell! Sell! Sell!

[hord]

Everyone that has ever made money on a long view will tell you that cash-flow is king. While I understand the reasoning, from the outside looking in I wouldn't touch it. They are taking huge risks on IP, not hard assets like factories and they appear to be doing it unwisely.

Re:Sell! Sell! Sell!

[hey!]

However, new products are not an indicator for success. Sales is!

Not exactly; and sales does not necessarily equal good cash flow, although it contributes to it. You can nearly always generate more sales by spending more money on promotions -- more sales, more cash going in, but often even more cash going out.

What's more, sales and profit aren't necessarily the same thing; you can easily go bankrupt while profitable; you can also run a company that loses money for years on end if it has a cash cow.

What businesses need to keep going, day to day, is to meet current obligations (bills they have to pay right away). That's the significance of cash flow. Vendors will always accept cash for debt; getting them to accept a share of *Stranger Things* wouldn't work, although you can get bond holders, investors and banks to in effect do that, all at a price of course.

Having positive cash flow is always good; but burning cash, while always risky, is normal in certain circumstances (e.g. startups or companies acting like startups). So the big question isn't whether Netflix was cash negative, but whether cash flows are proceeding as planned.

If this is the cash flow situation Netflix expected, the CEO is right to point to things like the products they're developing. That shows that things are indeed proceeding as planned: they were always planning to burn cash over a number quarters to do stuff like that. However if cash inflows that were expected didn't materialize, or if cash outlays occurred that were unexpected, that's just bad. It's not necessarily fatal, however. As long as Netflix can keep paying the bills and is generating *value*, it's possible to engineer some kind of soft landing.

Re:Sell! Sell! Sell!

[Thelasko]

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.

Re:Sell! Sell! Sell!

[bobbied]

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!

Think about it this way... He's playing the "old saw" that goes like this:

It takes money to make money.

Netflix is spending it's cash on producing new unique products it can use to sell it's service. Netflix will have exclusive rights to products which are in high demand if they spend their cash well and produce things folks want to watch. This takes cash up front and will pay back Netflix out over years of increased subscriber base.

Still, I have to admit that Amazon Prime has more stuff I want to watch than Netflix for a better cost...

Re:Sell! Sell! Sell!

[Junta]

Well, that's also putting the marginal cost of the subscriber at 0. There is some cost for infrastructure that increases with subscriber count, and more dramatic: licensing costs for the content. They are talking a *lot* about 'Stranger Things' which they do outright completely own, but the vast majority of content they provide is licensed, and that licensed content costs money per subscriber. One can imagine how much money they are spending on a per-subscriber basis for Disney alone.... Even the much talked about House of Cards and Orange is the New Black is not owned by netflix....

Re:Sell! Sell! Sell!

[catchblue22]

+1 for "...fucking MBA culture..."

Companies that have largely avoided MBA ideology and become wildly successful: Google, Apple (under Steve Jobs, Tesla, Space X, Paypal, Amazon, Netflix...

Re:Sell! Sell! Sell!

[MangoCats]

Exactly, he's talking about "R&D" investment with long term payouts.

Re:Sell! Sell! Sell!

[TrekkieGod]

Well, that's also putting the marginal cost of the subscriber at 0. There is some cost for infrastructure that increases with subscriber coun

I agree, but that number doesn't include things that decrease the cost. You mentioned that costs go up with shows they have to license, but you didn't mention they have to license less shows if they have enough content they own. Original shows like Daredevil are also getting blu-ray releases, and we're not counting the revenue from that, etc.

Re:Sell! Sell! Sell!

[AK Marc]

Nope. Much like UUNET was spending more on building out the Internet in 1999 than anyone else, that was a sign of success. They were big and "growing" through investment. So MCI bought them and shut them down.

Growth is a sign of success. Negative cash flow is a sign of success (or failure). He's saying that in this case, it's success, not failure.

Re:Sell! Sell! Sell!

[Ramze]

I think he's saying that their willingness to go into debt to produce quality content is an indicator that they're confident in the long term results, and that the more often you see this negative cash flow, the better of an indicator (to a degree) it is of their confidence in their growth and future prosperity.

To use your factory analogy, the more factories they build with money from debt, the greater the indicator of their confidence in future success... and while they're building out, they're gaining more customers which add to those cash flows in the future.

Still, it's a risk -- though he says their debt to market cap is really low, so it's not as big of a risk as one might think.

As an actual MBA, I can tell you that negative cash flows is one of many indicators we look at, but blips for expenditures on investments generally aren't a bad thing. However, I have seen more than one very prosperous company over-extend expansion and collapse from bankruptcy because of their high debt level and negative cash flows. I mean perfectly great (usually small, fast-growing) companies that built too many locations, hired too many people, produced too much product all on debt... and then couldn't make the payments on the debt in a timely manner -- even though they had customers lined up. If they'd deployed slower with less use of debt, they'd have prospered. That doesn't seem to be the case with Netflix. Netflix is expanding globally, producing quality content, and is taking advantage of their low debt ratio to take on more debt to expand faster than they could have otherwise.

It's the smart thing to do, and once their strategy is factored into the valuations of the company, the negative cash flows won't cause any issues with the stock price unless the debt ratio gets too high.

I'm still a bit surprised a big player like HBO, Comcast, or Amazon hasn't tried to snap up Netflix. I doubt any regulatory agency under this presidency would stop them. Comcast got most of Hulu, HBO made HBO Go (and contracts to work through Hulu), and Amazon is kind of sitting on its streaming service as a bundle for Amazon Prime. Sooner or later, Netflix will be a big enough competitor to become an issue, and if they can't strangle it by raising licensing terms through studios, they'll have to try to acquire it. My bet is if/when Netflix has its own Game of Thrones - level programming (beyond Orange is the New Black or House of Cards fame), HBO will make an offer Netflix can't refuse.

Re:Sell! Sell! Sell!

[trepanne]

I wouldn't touch NFLX with your money, but what Hastings is saying (albeit somewhat promotionally) is that shareholders should be rooting for negative FCF... the more negative the better... if the model is working as intended, because they're at the investment stage of a major growth initiative.

If you trust the mgmt that's a valid statement... and surely Netflix mgmt has earned some credibility on the original programming front. I do not get the valuation on the stock at all, but you have to admit that Reed Hastings is killing it, and should be given carte blanche to invest capital until proven otherwise. This is not the area to focus fiscal discipline.

Proper financial analysis doesn't focus on a single magic number; nobody's seriously talking about negative FCF as an actual metric for operational success like you'd use to figure out an employee performance bonus ("Look, we piled a 60-foot pyramid of benjamins in the parking lot, doused it with kerosene, and lit on fire! High fives all around"). Actual financial analysts will instead be largely focusing on the balance sheet impact... corporate finance... and Hasting's comment about "debt-to-market cap ratio" is right on target. He's saying they can borrow money cheap whenever they want, and clean it up with secondary stock offerings whenever pricing is attractive (such as, say, right about now). I'd look for a steady program of stock issuance to fund this risky initiative.

Re: Sell! Sell! Sell!

[Zero__Kelvin]

Trump says yes.

Re: Sell! Sell! Sell!

[Zero__Kelvin]

A stockholder isn't the same as an investor. Stop using the terms interchangeably.

Re:Sell! Sell! Sell!

[Kjella]

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."

What part of "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. " doesn't sound like just that?

Re:Sell! Sell! Sell!

[AHuxley]

In computer terms?
A card is made that allows a low cost consumer computer to work advanced business grade applications.
Design, tooling, testing, coding, packing, sales, postage all has a steep cost at first.
Magazine interviews and trade conventions gets the word out that the product exists, works and fully supports the decades must have business applications.
That a person with a low cost computer with that card can do complex work at home.
Out of that short term design cash flow long term sales profits result.
Take the profits and invest in the next big things like an OS or business applications because next years hardware is now fast enough.

Every year and decade has its must have hardware or software but movies and series hold some value for a few years.
Domestic and international sales on your own network. Blu ray sales later. The first season builds to season two.

Re:Sell! Sell! Sell!

[Maxwell]

Companies run by MBAs and have become wildly successful: Google, Apple , Tesla, Space X, Paypal, Amazon, Netflix... Google CEO has MBA Apple CEO has MBA Tesla COO, CFO, VP EMEA, VP sales, basically everyone except the CTO and Elon had MBA's. Paypal CEO has MBA Amazon - entire executive team except Jeff including CFO, CCO, CTO, CEO of AWS have MBA netflix CEO quoted in the fucking article has MBA

So if you are a CEO and you don't have an MBA you surround yourself with them. As Elon and Jeff have done.

All these guys have big buck MBAs, Wharton, Harvard, Stanford etc too.. I am guessing you don't. The GMAT was harder then you thought huh? Can't run with the big dogs so you just like to piss all over them with your *astounding* ignorance ? Keep coding dude, keep on coding.

Re:Sell! Sell! Sell!

[Kjella]

What's more, sales and profit aren't necessarily the same thing; you can easily go bankrupt while profitable; you can also run a company that loses money for years on end if it has a cash cow.

Actually the former is usually a sign of gross management incompetence. If you're really profitable after paying interest on your debt you're in a liquidity problem because you got assets but not cash. There's usually some form of line of credit, sale and rental/lease-back agreement, joint venture merging your assets with their cash, offering new stock for cash or some other way to liquefy your assets for a price. If you go under it's usually because you're now turning a small profit but you're buried under a mountain of debt, which is not being genuinely profitable. If you're going to offer a taxi service then in the long run it has to pay for the car, you can't just ignore that and say you're making a profit driving it.

Re:Sell! Sell! Sell!

[maroberts]

They are taking huge risks on IP, not hard assets like factories and they appear to be doing it unwisely.

Well due to the current copyright legislation, IP can pay back over a period of up to an hundred years, whereas a factory often only has a relatively short payback time during which you need to continously retool it.

Re:Sell! Sell! Sell!

[Junta]

Near as I can tell, Netflix licenses Daredevil from Marvel Television. It may be a 'netflix original series', but does not seem to be like Stranger Things where Netflix owns the copyright.

Just because a show is 'Netflix original' does not mean it controls the copyright.

Re:Sell! Sell! Sell!

[Thelasko]

What part of "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. " doesn't sound like just that?

"... negative free cash flow will be an indicator of enormous success."

Re: Sell! Sell! Sell!

[Thelasko]

A stockholder isn't the same as an investor. Stop using the terms interchangeably.

Please explain your reasoning.

Re: Sell! Sell! Sell!

[Falos]

will be*

Scroll down and there's 9000 MBAs chatting away when this whole conversation is basically "There is no absolute way to know the future." ie the viability of the investing.

This whole headline is probably the result of some pointed question from the "CURRENT QUARTER THO" gallery. Shareholders wet themselves if there isn't 9000% growth this quarter, every quarter.

Personally I'm happy when a corp moves their gains around, not piles them up and shrugs.

Re: Sell! Sell! Sell!

[Thelasko]

There is a thing called google you can use to learn more

Google says your wrong.

...someone who provides a business with capital and someone who buys a stock are both investors. An investor who owns a stock is a shareholder.

Re: Sell! Sell! Sell!

[Zero__Kelvin]

No it doesn't (Even that link makes clear that the two aren't interchangeable, even though it gets it wrong.) An investor makes an investment, while a stockholde attempts to capatilize. The latter can and often does pull out at a moment's notice, which alas your father failed to do.

Re:Sell! Sell! Sell!

[TrekkieGod]

You have a fair point, you're right about the Marvel series, my bad.

Still, the stuff they do actually produce and own can become additional sources of income.

Re:Sell! Sell! Sell!

[Junta]

Of course, this reaction by people is only partially about Netflix per se. The general sentiment of 'any company is successful if they spend more money than they make' brings back many bad memories of companies that go bust. Netflix would be sorely missed if they got *too* caught up in overspending and failed as a result, but also a company like Netflix reinforcing this concept that is prevalent across the industry contributes to continued unsustainable behavior across companies in the industry, and when just a few noteworthy ones finally collapse under the weight, it will probably trigger a bust that would take a lot of good work with it.

Re:Sell! Sell! Sell!

[catchblue22]

Here is a quote from Elon Musk on MBA's:

"I wouldn't recommend an MBA. I'd say no MBA needed. An MBA is a bad idea. [...] It teaches people all sorts of wrong things. [...] They don't teach people to think in MBA schools. And the top MBA schools are the worst. Because they actually teach people that you must be special, and it causes people to close down their feedback loop and not rigorously examine when they are wrong. [...] I hire people in spite of an MBA, not because of one. If you look at the senior managers of my companies, you'll see very few MBAs there."

Source.

"As much as possible, avoid hiring MBAs. MBA programs don't teach people how to create companies."

And Steve Jobs regularly violated MBA ideology. He was a notorious micromanager, which is exactly what MBA's aren't supposed to do. He personally led a small team of engineers in designing the original iPhone. And we all know how much of a flop the iPhone was.

As for my degree, my field is physics and mathematics. I wouldn't join the MBA cult for anything. LOL GMAT.

Re:Sell! Sell! Sell!

[catchblue22]

And if you want to know where my animus against MBA's comes from, it is this: In my long time and well considered opinion, MBA ideology is one of the primary causes of the de-industrialization of the United States of America. All that downsizing, exporting of jobs, industrial stagnation, and the lack of stewardship of the conditions necessary for the flourishing of domestic industry...I believe that the MBA mindset is in large part responsible for these things.

Why Not?

[31415926535897]

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.

Re:Why Not?

[Luthair]

While content may be investing in the future like R&D, its pretty misleading to say that negative cash flow is an indicator of success is misleading. Its entirely possible for them to be burning cash creating content that subscribers aren't interested in watching (and from my subjective opinion that is the case).

I suspect at some point they're going to be forced to disclose some numbers at least in aggregate to show investors that the content is popular and worth the money relative to other content.

Re:Why Not?

[gnick]

Its entirely possible for them to be burning cash creating content that subscribers aren't interested in watching (and from my subjective opinion that is the case).

Netflix knows very well what people are interested in watching. They may make imperfect predictions, but they know what gets streamed.

Re:Why Not?

[gmack]

I suspect at some point they're going to be forced to disclose some numbers at least in aggregate to show investors that the content is popular and worth the money relative to other content.

The thing to remember here, is that a lot of the other content was going away while the US studios tried to fight the rise of Netflix. I still recall how many people here said Netflix wasn't worth the money since it didn't have as many shows as it sued to. Coming up with their own content was really their only option.

Re:Why Not?

[Luthair]

Netflix knows very well what people are interested in watching. They may make imperfect predictions, but they know what gets streamed.

And Hollywood has 100-years of knowing what movies people go to yet there are regularly box office bombs? The chairman of Disney had to quit after John Carter, eventually Netflix will have to have similar accountability to their shareholders.

Re:Why Not?

[gnick]

Netflix knows very well what people are interested in watching. They may make imperfect predictions, but they know what gets streamed.

And Hollywood has 100-years of knowing what movies people go to yet there are regularly box office bombs?

That would fall under "imperfect predictions." Netflix knows very well what is a hit. Nobody knows what will be.

Re:Why Not?

[Impy the Impiuos Imp]

There's still plenty of content, just that there are other competitors, from Amazon and Hulu, to the original networks keeping their libraries instead of renting them to Netflix.

Re:Why Not?

[Luthair]

That would fall under "imperfect predictions." Netflix knows very well what is a hit. Nobody knows what will be.

No one said they didn't. The point is that they are spending money on content that they don't know will pay off, which is why its misleading for Reeds to claim burning cash its in an indication of success

Fake Profits!

[Tablizer]

"Profits are so 90's, believe me. Losing is winning, and I win by losing bigly! I know more about losing than losers you never hear about. Ya never hear about em', right? They lose wrong, so sad. But everyone knows ME because I do the best losing, beautiful losing!"

pay once, reap forever

[liquid_schwartz]

Content costs something to produce once and the media companies milk it for ages to come. Thanks to copyright being extended essentially forever it's a great investment.

Re:pay once, reap forever

[alvinrod]

On the other hand, digital content being impossibly cheap to reproduce also opens producers up to the risk that no one actually buys or pays them for it because it can be had less expensively from other sources. Whereas physical goods always need someone to actually produce them from raw materials which have their own cost, so unless you can source and create it yourself, you'll have to purchase from them again if you need a replacement or want a newer model of whatever it is you bought.

I can understand that thinking behind those companies that push for indefinite copyright, but I don't think it's necessary. There are very few works that are still regularly consumed after 25 years. Even important works that are deemed highly important or superlative examples of their craft (at the time or beyond it) aren't viewed by the population at large to the extend that modern productions are. Citizen Kane is still regarded by critics as one of the best films ever made, but outside of film schools, how many people under 30 have actually watched it?

I suspect that as technology continues to drive down costs, patronage models will become more viable which will still allow for new content to be made. Patreon has stated they've paid out over $100 million so far and that's one site in market of other similar options like Kickstarter. People might be cutting the cord, but they're still hungry for new content and willing to pay for it. Sure the money that goes through those sites to producing new art is small potatoes compared to traditional media companies, but it's something that didn't exist to anywhere near the current scale a decade ago.

Re:pay once, reap forever

[dj245]

Content costs something to produce once and the media companies milk it for ages to come. Thanks to copyright being extended essentially forever it's a great investment.

That used to be the way to do business, I'm not sure it will hold up over time the way things are going. We are already in the middle of a gluttony of excellent TV. There are many excellent shows that I will never have time to watch. Streaming services that self-produce content mean that "reruns" are now available indefinitely, but viewership probably drops off sharply over time. The value of that content declines quite rapidly, so content producers will have to maintain this level of production indefinitely unless the market situation changes.

ok, and?

[Anonymous Coward]

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.

Re:ok, and?

[0123456]

MBAs must have been a Communist plot to destroy the West. They make absolutely no sense otherwise.

Re:ok, and?

[captaindomon]

MBAs are not what drive quarterly results mentality. It is driven by industrial investors. You know that 401(k) you have? Or your kid's 529 college savings account? The traders for those companies are often what are driving quarterly results. MBAs are people that study the science of business. Blaming the MBAs is like blaming MDs for Obamacare. Just because the MD gives you the bad news that your insurance doesn't cover the procedure, doesn't mean the MD is at fault. Think of it that way, it is more accurate.

Re:ok, and?

[tbannist]

MBAs are not what drive quarterly results mentality.

Having worked with bad MBAs, I think you are pretty much wrong. The problem is there are good MBAs, incompetent MBAs, and evil MBAs and they all have different goals. The good MBAs want to grow the company, they like long term investments that are profitable. The incompetent MBAs want to maximize this quarter's results so they look good and can't understand why anybody looks beyond the current quarter. The evil MBAs also want to maximize this quarter's results, but are willing to deliberately sabotage the company's long term future to do so. That way they make themselves look good and they will be gone by the time the events they set in motion play out. Of course, after they've left, they will point at the company and loudly proclaim that the company would be doing great if they had only listened to the evil MBA's advice...

It has been my anecdotal experience that the majority of MBAs fall into category 2, partly because it seems that sub-par MBA programs teach people that maximizing that always maximizing the current quarter's results is a fool proof way to maximize long term results.

oblig

[dasgoober]

"We lose money on every sale, but make up for it in volume !"

Forward thinking != automatic success

[Roger W Moore]

I think he's saying that spending money developing new shows is better than resting on their laurels and collecting cash.

If so he is saying very wrong. Investing in the future is a great way to ensure success in the future but it is by no means an indication or guarantee of success in the present or future. It's entirely possible to invest heavily and be an utter failure e.g. if they invested in shows which were complete flops. The fact that their CEO equates investment in the future to automatic success is not a healthy sign since it suggests they have not planned for what happens if the investments go awry.

Re:Forward thinking != automatic success

[Thelasko]

Exactly!

Re:Forward thinking != automatic success

[alvinrod]

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.

Re:Forward thinking != automatic success

[MightyMartian]

Most successful enterprises start out with debt; either in the form of loans and mortgages, or in the form of owner or shareholder equity via raising capital from investors. In either case, one is spending money that one has not yet earned under the assumption that future profits will pay back the debts or pay investors dividends. What Netflix is doing is no different than on me going to the bank or to investors to raise money to build a factory, and it's no different than how governments build infrastructure (selling bonds). Maybe it's that it was awkwardly worded, but what is Netflix doing that any other business of any size doesn't do?

Re:Forward thinking != automatic success

[cfalcon]

> Most successful enterprises start out with debt

So do almost all unsuccessful ones.

Re:Forward thinking != automatic success

[Junta]

The problem is that even if it is a wise move and correct, it is still not an 'indicator of success'. An 'indicator' would be positive cash flow.

Note that the alternative to spending more than you have is not 'sitting on cash'. You can spend exactly as much as you have. Again, circumstances may dictate temporarily exceeding your cash on hand and taking on debt, but if it is a long term situation that revenue never outpaces your costs, then it's a big problem.

Not necessarily netflix, but a *lot* of companies that look suspciously like netflix in this attitude flounder around and ultimately fail, because they never parlayed their investments to profit.

Re:Forward thinking != automatic success

[IsaacGrimnebulin]

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.

Re:Forward thinking != automatic success

[DontBeAMoran]

As a paying subscriber, I don't give a rat's ass about the shareholders returns or whatnot. The only way to keep me as a paying subscriber is to give me things to watch - that's what Netflix is for.

Re:Forward thinking != automatic success

[MangoCats]

Long running properties like a series (Stranger Things) have pretty well mapped future income curves, if they're a smash hit on release that's almost like money in the bank for the next decade.

Re:Forward thinking != automatic success

[Thelasko]

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.

In terms of off the rail crap, this statement qualifies in my opinion:

So in some senses, negative free cash flow will be an indicator of enormous success.

Negative cash flow is an indicator of huge expenses. They can either be out of control operating expenses (very bad), capital expenses (investment), or payments on debt. In none of these cases are they an indication of success.

In this case, negative cashflow is an indicator of a huge investment in content creation, which may or may not pan out. The CEO seems to think it's a sure thing, and investing vast sums of cash as a result.

On the other hand, this statement makes perfect sense:

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.

He's saying the negative cash flow is due to capital expenses, and he expects to have a good return on that investment.

Re:Forward thinking != automatic success

[Roger W Moore]

All you are saying is that it is possible to invest the money they are making wisely and I completely agree. The point is that it is also possible to invest foolishly and this should be a particular concern when you have negative cash flow because it means that you cannot sustain that state for too long and so even small missteps in that situation can have a very magnified impact. Taking these sorts of risks is usually the indication of a company fighting to stay ahead of its competitors, not an indication of success.

Re:Forward thinking != automatic success

[Roger W Moore]

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.

This is "off-the-rails crap". All negative cash flow is an indication of is that the company is spending money faster than it can make it. This is an indication that whatever success you have had so far is at risk. The investments Netflix is making now need to not only keep its existing subscribers happy but must also attract enough new subscribers to increase revenue enough to cover the current level of expenses. The shows might all be successes but just not generate enough increase in revenue or the rate of new shows may turn out to be too low to maintain the existing subscribers.

I really like Netflix (I'm a subscriber myself) and I think they are doing exactly what they have to do to keep the company going but that's not an indication of success it's an indication of a company fighting to remain competitive.

Re:Forward thinking != automatic success

[tbannist]

Note that the alternative to spending more than you have is not 'sitting on cash'. You can spend exactly as much as you have. Again, circumstances may dictate temporarily exceeding your cash on hand and taking on debt, but if it is a long term situation that revenue never outpaces your costs, then it's a big problem.

It depends on how loyal Netflix's customers will be. They are spending cash now to buy market share before a seriously good competitor shows up, and it seems to be working since they added 5m new customers. If they keep adding new customers at a high rate without losing too many current customers, they can simply choose to grow new content spending more slowly than their net revenue increases and eventually they will become profitable.

Re:Forward thinking != automatic success

[tbannist]

Taking these sorts of risks is usually the indication of a company fighting to stay ahead of its competitors, not an indication of success.

Yes, but he's a CEO and talking about his company to reporters, so he has to put at least some positive spin on it. You should also consider that it's also what every successful business in a relatively new field does. The ones who don't spend, get overtaken by competition and fade away. And he's not wrong, they are continuing the strategy because it has been hugely successful. I think the point, however awkwardly put, is that the negative cash flow is a sign that their strategy is succeeding (because otherwise they'd have to put an end to it PDQ). Specifically, as long as they are growing their audience by leaps and bounds (and thus their market cap), their investors will tolerate the negative cash flow and wait for the eventual dividends.

Re:Forward thinking != automatic success

[Roger W Moore]

Yes, but he's a CEO and talking about his company to reporters, so he has to put at least some positive spin on it.

A "positive spin" would be saying that we are spending lots of money making fantastic shows to rapidly grow our subscriber base and look at the millions we added in the last quarter so our plan is working, we stand to make lots of money and our customers are ecstatic about us but yes we will have some short term negative cash flow. Saying "our negative cash flow shows we are a success" suggests the CEO is spinning so fast he does know which direction reality is anymore which, were I an investor in Netflix, would concern me, not reassure me.

Yes, it is always true.

[140Mandak262Jamuna]

I can "invest" in beany baby dolls or original content, it does not matter. The accounting laws are strict. The SEC disclosure is clear. You have state how much cash you spent on them. Then it is up to the management to convince, and the investors to agree, that the baseball cards, rental properties, mortgage backed securities or original content will produce positive cash flow at some point in the future.

He is doing his job convincing people there is value created in all those properties. As long as the investors buy that story, it is all hunky-dory.

i am personally very successful

[Anonymous Coward]

burning cash is a sign of success

Today I learned that I am personally very, very successful.

(But more seriously, he is not necessarily wrong. Sometimes it is better to re-invest income into things that can generate more of it in the future).

Re:Rate of burn is not success, growth is.

[0123456]

"We lose money on every user, but make it up in volume."

Debt to Market Cap...

[Tulsa_Time]

Wow, that is the new measure of low risk ?

It is not the case

[SuperKendall]

Its entirely possible for them to be burning cash creating content that subscribers aren't interested in watching (and from my subjective opinion that is the case).

While even lots of it may be content few really are about watching, do you truly deny that they have SOME content that subscribers are very interested in watching?

Even if you left off Stranger things, they still have a pretty decent number of exclusive Marvel shows that have all been pretty popular. And then they have more artistic stuff that can develop a cult following (like "The OA").

Heck they even have some very popular animated stuff, like the new Voltron...

All it takes are a few very popular properties created each year, and not only do you get a large stream of regular subscribers added each year, you get people who keep a subscription active.

This has been HBO's problem (for me), once a season of Game of Thrones is over I have exhausted entertainment from HBO and drop the subscription for a while. But there's just enough new and interesting stuff on Netflix to keep not just me, but hundreds of millions of others ticking around - and that is an objective fact.

Re:It is not the case

[Luthair]

Even if you left off Stranger things, they still have a pretty decent number of exclusive Marvel shows that have all been pretty popular. And then they have more artistic stuff that can develop a cult following (like "The OA").

I'd say the Marvel shows cater to a niche audience. While I'm sure there are people out there that like Netflix's original content, I just don't know anyone who watches it.

Re:It is not the case

[SuperKendall]

I'd say the Marvel shows cater to a niche audience.

Judging by the bulk of recent years Hollywood top hits, the rest of the world disagrees with you.

Re:It is not the case

[tbannist]

While I'm sure there are people out there that like Netflix's original content, I just don't know anyone who watches it.

I find that hard to believe unless you associate with a very small group of people who are significantly a-typical. Have you considered the possibility that there are people that you know who are watching those shows, but for whatever reason they just don't want to talk to you about it?

Re:It is not the case

[Luthair]

Judging by the bulk of recent years Hollywood top hits, the rest of the world disagrees with you [the-numbers.com]

Except that hasn't translated to TV, see: Smallville, The Flash, Green Arrow, etc.

I am enormously successful also... just check my

[Tulsa_Time]

Credit Card Debt - to - Self Image ratio...

Both are astronomical... but the ratio is low.

Umm.. remember Sense8?

[SomePoorSchmuck]

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.

Um.

Doesn't this entire train of thought completely contradict the reasoning Netflix execs gave for cancelling Sense8?

Remember just a month ago when that announcement was made, and one of the Netflix guys said [I'm paraphrasing]: "Our cancellation rate is much lower than it should be. It's a sign of creativity to be cancelling more shows. It's good to cancel shows"?

And now this guy is saying "It's good to spend lots of money on shows and invest in shows for future earnings".

Re:Umm.. remember Sense8?

[tbannist]

To interpret this for you: "Sense8 didn't make the cut because not enough people were watching it to justify keeping it going and it was losing, not gaining viewers. Netflix still gave it a much longer time to find it's audience than a traditional television show would ever have been given. Instead Netflix is going to put that money in to a new show which will be more likely to grow Netflix's subscriber base than Sense8."

There doesn't seem to be anything inconsistent to me, here. There's a difference between investing money in an unproven investment (like a new show) and investing in an investment with a poor track record and slim prospects for improvement.

Re:Umm.. remember Sense8?

[SomePoorSchmuck]

To interpret this for you: "Sense8 didn't make the cut because not enough people were watching it to justify keeping it going and it was losing, not gaining viewers. Netflix still gave it a much longer time to find it's audience than a traditional television show would ever have been given. Instead Netflix is going to put that money in to a new show which will be more likely to grow Netflix's subscriber base than Sense8."

There doesn't seem to be anything inconsistent to me, here. There's a difference between investing money in an unproven investment (like a new show) and investing in an investment with a poor track record and slim prospects for improvement.

But that's just the thing, Sense8 and other similar properties on Netflix aren't traditional television shows. The second season was out for a very short time before the cancellation announcement was made. The problem is that Sense8 is never going to be Simpsons or Friends or Sex & The City -- shows that have a small but steady, periodic/episodic viewership over a long period of time. They made the cancellation decision so early that some people I knew hadn't watched the second season -- not from lack of interest, but because they were saving it up for a weekend when they could binge watch the whole thing. And what's more, I know two people who hadn't heard about the series until they heard some of us talking about the upcoming season 2 release, and both of them said the same thing... it sounded like a great show and they planned to watch it but were going to wait until they had time to watch all of 1 and 2 together.

I'm sure the Netflix financial team has some big system of metrics they use to calculate ROIs for their properties, but in an increasingly fractured media marketplace where it isn't as simple as all 300 million people in the country watching the same shows at the same time on the same 4 big broadcast networks, with a subset also watching stuff on HBO, and hype spreads solely by word of mouth I'm not sure I have the same confidence you seem to have that there even exists yet a solid framework for understanding the trade-off between immediate viewership spikes versus having the patience to continue developing stuff for "the long tail" revenue stream. Every few months someone will recommend to me a show on Netflix or Prime that I've never even heard of before, and I try a couple episodes and really like it and discover there are already 3 seasons going.

Re:Umm.. remember Sense8?

[tbannist]

Now this is just my guess, but I think they place a very heavy weight on the ability of a show to stop the loss of viewers. I remember it being mentioned that according to their metrics virtually everyone who watched the 5th (I think) episode of Daredevil, finished the entire series. My guess is that Sense8 wasn't doing that. If they were continuing to lose customers all through the series' second season, that might have been a clear enough indication that the situation had little to no hope for improvement. Again, this is just my educated guess. For reference, I watched the first episode of Sense8 and I didn't like the show enough to watch the second... In my case, there was nothing that peaked my interest in the first episode, and there was a tonne of other shows that were more appealing. I may eventually work my way back around to Sense8 and watch the second episode, but frankly my list of shows to watch is currently getting longer, not shorter.

One important thing to understand about the customer drop off metric is it should scale pretty well. The group of early watchers is probably indicative of the peak completion rate for the series since these are likely to be the viewers that are likely to be the most enthusiastic about the program. If the completion rate for that group looks poor, it would be unlikely to improve unless the show finds a new, qualitatively different, audience. This means the metric would be mostly independent of the size of the show's current audience.

Re:Umm.. remember Sense8?

[SomePoorSchmuck]

Great point. Sounds right.

I think for Sense8 in particular, the entire show has more of a cinematic feel than a TV feel. It's a bit more sweeping and suspense-driven (and, to be honest, sex-driven) than a TV show like Daredevil where the viewer KNOWS going into it that this is going to be a long, serialized set of story arcs which are theoretically neverending, just like the comic book genre the show arises from. Daredevil only needs to get you to like the main hero and his sidekicks, and to present compelling villains. Daredevil, The Arrow, Flash, etc. benefit greatly from being able to pause the major story arc and do "monster of the week" episodes which are still fun to watch, the way X-Files worked.

I suspect a large part of Sense8's viewership drop-off is that the show was TOO successful in creating this one huge dramatic question, and viewers responded to it more like a movie -- that is, the viewer is expecting a much quicker payoff of rising action leading into a grand climax leading into resolution. In fact, now that I think about it, even as someone who loved the show and the chemistry between the main cluster's characters, if you were to ask me whether I could imagine watching the same characters in a hypothetical 4th/5th season, I'd have to say "probably not". The way the story is told really demands a money shot sooner rather than later. In retrospect it might have been much better suited to the british "Sherlock" format with a small handful of 80-90 minute episodes per season. But then that doesn't fit the Netflix model where the goal is to create content that will last long enough to keep people re-subscribing in order to keep watching.

Language != Message

[LS1 Brains]

Some of y'all are WAY too hung up on the language, rather than on the message conveyed. Just sayin'

Hastings is playing the long game. What I heard is pretty simple - the demand for home grown content is sufficient to forecast sustained profit while burning through cash in order to get there. So then by reason, their expenditures in the near term are indicative of that belief. AND I would agree.

While Hollywood is looking at everything in their catalog to merely remake (poorly), Netflix (and others) who traditionally just distributed others' content are seizing a massive opportunity to get into the game (directly or indirectly) of content creation. House of Cards (Netflix), Orange is the new Black (Netflix), The Walking Dead (AMC), Game of Thrones (HBO), Breaking Bad (AMC) for a few examples.

Re:Language != Message

[Thelasko]

Some of y'all are WAY too hung up on the language, rather than on the message conveyed. Just sayin'

Yes, but if it wasn't for the screwed up wording, this wouldn't be news. The headline would read, "Netflix investing heavily in original content," and no one would care. They've been doing that for some time now.

Re:Language != Message

[Shimbo]

I take your point but I always have a chuckle when a remake of a 20 year old BBC show like House of Cards gets passed off as outstanding original content.

"baffle them with bull$4!7"

[swschrad]

total freaking nonsense. what he's saying is, "hey, we can spend really well, and you don't hold us responsible. we like it." I can't get away with that, and neither can you.

kids don't know about budgets. investment analysts ought to.

Re:We've heard this before....

[JamesKeane7745]

1.) Acquire Customers
2.) Charge them each a subscription fee
3.) PROFIT!!

This is so 1998.

FTFY