Netflix (NASDAQ:NFLX) isn’t shy about discussing how much cash it burns. It’s been free cash flow negative for a few years now, and management wrote, “[W]e expect to be FCF negative for many years” in its second-quarter letter to shareholders. In a recent interview at the Goldman Sachs Communicopia Conference, CFO David Wells reiterated that statement. He added that the more successful Netflix is, the longer it plans to burn cash.
Netflix’s ongoing cash burn means it will continue to pile up debt. And it’s paying a premium on that debt, since it’s already carrying a relatively high debt-to-EBITDA ratio. Considering Netflix doesn’t plan to increase EBITDA anytime in the near future, it’s going to continue racking up interest expenses to fund its growth.
Original content is to blame
Wells said the company could produce positive free cash flow, or at least be close to it, if it licensed its original programming instead of financing it. Indeed, before Netflix dove headlong into original content, it occasionally produced positive free cash flow. Even its quarters of cash burn were relatively modest — $50 million here, $20 million there. Now it’s burning $2 billion to $2.5 billion per year.
But Wells says there are a couple of major advantages to producing content in-house despite the fact that it costs the company more upfront. First, it allows for better long-term economics by removing the profits of the production company. That may be why Netflix claims originals are some of its most efficient content spend. Second, Netflix obtains better control over the content and intellectual property rights, allowing it to distribute the productions globally.
So even with Netflix’s high interest rates on its bond issues, it might be saving money in the long run by financing productions itself and removing the middleman.
Spending won’t slow down until user growth does
Wells told the audience at Communicopia, “The faster we grow, the more we’re going to reinvest in content.” And that only makes sense. Netflix’s originals are perhaps the biggest driving factor behind its subscriber growth. As the company expands globally, producing originals in-house is the most efficient way to secure global rights.
Right now, the incremental cost of adding another subscriber is less than the previous one, as Wells put it. Netflix is still benefiting from increased scale as subscriber growth outpaces content spend. The company had its biggest second quarter this year, adding 5.2 million global subscribers.
Eventually that won’t be the case anymore. If Netflix wants to reach another subscriber it’ll have to invest more than it’s worth in content. But management believes it still has a long way to go before it reaches that point. It maintains the addressable market in the U.S. is 60 million to 90 million subscribers. It currently has 50 million. Globally, the opportunity is even bigger, and Netflix has yet to surpass the subscriber count of the U.S. in its international markets.
Raising debt and burning cash
Netflix says it will continue tapping the debt market to fund the capital needs of its original productions. Despite its poor ratings from credit agencies, Wells says he’s fine with the company’s position. Management isn’t going to sacrifice the company’s growth to get its bonds to investment grade, he said.
The important thing for investors to remember, though, is that Netflix is completely in control of how much it spends on content. If the growth isn’t there, it’s not going to spend more. Even with a bunch of new content buyers in the market, Wells says it won’t impact the company’s budget. Netflix will just produce fewer shows if it has to.
That said, he likened the content market to the professional athlete market. Top-notch performers are seeing bigger and bigger contracts, but replacement-level players might see their average salary go down. If anyone is capable of finding diamonds in the rough, it’s Netflix and its troves of data.
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Evacuations, rescues as ‘historic’ floods hit northeastern U.S.
New Jersey declared a partial state of emergency on Tuesday as forecasts for further heavy rainfall posed new danger in parts of that state, New York and Pennsylvania, where rescuers hauled people from waterways, flooded cars and homes.
Following several days of torrential rain throughout the northeastern United States, the National Weather Service issued new warnings for flooding in areas around Binghamton, New York, near the Pennsylvania border, and in New Jersey.
Federal forecasters warned that areas in the region could see as much as 4 inches (10 cm) more rain on Tuesday.
New Jersey Governor Phil Murphy said in a statement five of the state’s 21 counties were under a state of emergency, where additional rainfall could further complicate flood cleanup.
“Parts of our state have received nothing less than historic amounts of rain, and some communities received an entire month’s worth in just a few hours,” said Murphy.
The police department in Brick, a town of 75,000 on the Atlantic coast, said on Facebook that residents were barred from returning to 105 homes without a security escort until township officials finished inspecting them.
In Seneca County, New York, emergency crews were evacuating some residents by boat and taking them to a nearby shelter, the sheriff’s office said in a statement.
“Flooding is one of the primary killers with regards to weather. It’s not tornadoes. It’s not wind damage,” said Brett Rossio, an Accuweather meteorologist. “It doesn’t take much. Even just a foot of water can pull you away very easily.”
More than 8,000 people had lost power in areas drenched by the storms and the Red Cross said it was operating shelters. It was not immediately clear how many people were in them.
“It’s Mother Nature so it’s a fluid situation, watching where the rain falls and if there’s additional evacuations necessary,” said Jay Bonafede, the Red Cross spokesman.
Both Pennsylvania and New York have already activated their emergency response centers for the storms, which started over the weekend.
Molly Dougherty, a spokeswoman for the Pennsylvania Emergency Management Agency, said some people affected by the flooding had been recovering from deluges three weeks ago.
“People are looking at losses of most of their belongings and, in some cases, we’re still concerned about the safety of folks and making sure they’re able to stabilize,” said Dougherty.
New York names new state author and poet
ALBANY, N.Y. — New York state has named two new writers as the state poet and author.
Democratic Gov. Andrew Cuomo announced Wednesday that Colson Whitehead will serve as state author and Alicia Ostriker will be state poet.
Whitehead is a novelist whose most recent work is “The Underground Railroad.” He will succeed former state author Edmund White.
Ostriker has written 16 poetry collections, with her latest titled “Waiting for the Light.” She takes over from former state poet Yusef Komunyakaa.
The honorary titles are bestowed every two years as a way to celebrate reading, writing and the arts.
Copyright 2018 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Go Back-to-School With OurBus: Tech Company Offers New Transportation Option for State College, PA Students To NYC
OurBus is expanding to more than two dozen college towns across the United States, targeting busy students who are looking for inexpensive and convenient travel options for visiting family, friends and vacationing. To kick it off, OurBus is starting service from State College, Pennsylvania to New York City.
State College service will depart from South Fraser Street, Thursday through Monday.
“While serving both leisure travelers and commuters has been a priority for us over the last two years, we’re eager to now expand our service to more college students, starting with State College, Pennsylvania, with additional service starting soon in Newark, Delaware, California and Florida college towns,” said Axel Hellman, co-founder, OurBus. “Many of these college communities lack convenient and budget-friendly transportation options to major metropolitan cities and towns.”
The company will be offering complimentary bus rides to prospective students visiting select colleges starting this fall as part of the college initiative. OurBus will also be piloting additional luggage service for students going back-to-school, beginning with Ithaca this August. Services like these are a testament to OurBus’s commitment to the student traveler!
The company understands the needs of students who are juggling academics, sports, work gigs, and life. OurBus offers express bus service to major cities on the East and West coasts, and Florida, including “pop-up” routes during Spring and Winter breaks.
The company brings flexibility and creativity to developing bus routes in partnership with current and future customers, via crowdsourcing.
OurBus currently offers bus service serving students in:
Binghamton, New York
Fort Myers, Florida
Ithaca, New York
New York City
New Brunswick, New Jersey
Syracuse, New York
West Chester, Pennsylvania
By using crowdsourcing to bring efficient bus service to leisure travelers, students, and families on a budget, OurBus is bucking the traditional bus service model, which utilizes a point to point network concept, recognizing that travelers need reliable and efficient transportation that’s close to their home, with less transfers, and less time in the car.
On OurBus, riders can be as productive or as relaxed as they want to be, with all buses equipped with free wi-fi, individual charging ports, bottled water, and bathrooms.
The company is now offering the OurBus Select Membership program, targeting students, frequent travelers, and families on a budget. Members will receive 50 percent off of 10 tickets, for $49.99.
It’s easy to book tickets and suggest new service, by downloading the free OurBus app from the Google Play Store or Apple App Store. OurBus customers have the ability to:
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