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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.
Sales is!
That'll be the 5 million new subscribers referenced in the summary then.
Linux, you magnificent bastard, I read the fucking manual!
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.
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.
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.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
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".
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.
Warning: Opinions known to be heavily biased.
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".