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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9-year-old genius to graduate university
(CNN) – A child prodigy from Belgium is on course to gain a bachelor’s degree at the tender age of 9.
Laurent Simons is studying electrical engineering at the Eindhoven University of Technology (TUE) — a tough course even for students of an average graduate age.
Described by staff as “simply extraordinary,” Laurent is on course to finish his degree in December.
He then plans to embark on a PhD program in electrical engineering while also studying for a medicine degree, his father told CNN.
His parents, Lydia and Alexander Simons, said they thought Laurent’s grandparents were exaggerating when they said he had a gift, but his teachers soon concurred.
“They noticed something very special about Laurent,” said Lydia.
Laurent was given test after test as teachers tried to work out the extent of his talents. “They told us he is like a sponge,” said Alexander.
While Laurent comes from a family of doctors, his parents have so far not received any explanation as to why their child prodigy is capable of learning so quickly.
But Lydia has her own theory.
“I ate a lot of fish during the pregnancy,” she joked.
The TUE has allowed Laurent to complete his course faster than other students.
“That is not unusual,” said Sjoerd Hulshof, education director of the TUE bachelor’s degree in electrical engineering, in a statement.
“Special students that have good reasons for doing so can arrange an adjusted schedule. In much the same way we help students who participate in top sport.”
Hulshof said Laurent is “simply extraordinary” and praised the youngster.
“Laurent is the fastest student we have ever had here,” he said. “Not only is he hyper intelligent but also a very sympathetic boy.”
Laurent told CNN his favorite subject is electrical engineering and he’s also “going to study a bit of medicine.”
His progress has not gone unnoticed and he is already being sought out by prestigious universities around the world, although Laurent’s family wouldn’t be drawn on naming which of them he is considering for his PhD.
“The absorption of information is no problem for Laurent,” said his father.
“I think the focus will be on research and applying the knowledge to discover new things.”
While Laurent is evidently able to learn faster than most, his parents are being careful to let him enjoy himself too.
“We don’t want him to get too serious. He does whatever he likes,” said Alexander. “We need to find a balance between being a child and his talents.”
Laurent said he enjoys playing with his dog Sammy and playing on his phone, like many young people.
However, unlike most 9-year-olds, he has already worked out what he wants to do with his life: develop artificial organs.
In the meantime, Laurent has to finish his bachelor’s degree and choose which academic institution will play host to the next stage in his remarkable journey.
Before that, he plans on taking a vacation to Japan for an undoubtedly well-deserved break.
New award to honor arts and activism named after Lena Horne
Gang members slam BMW into rival and his 8-year-old son in Harlem
Two gangbangers aimed their BMW like a missile at a father and his 8-year-old son on a Harlem sidewalk in a horrifying incident captured by video distributed by police Thursday.
The BMW — driven by a man police believe is a member of the Gorilla Stone Bloods Gang — was zeroed in on the father, a rival gang member, said cops.
Around 3:45 p.m. Nov. 6, the boy and his father were walking on W. 112th St. by Adam Clayton Powell Jr. Blvd. when the BMW jumped the sidewalk and slammed into them both, said cops.
🚨WANTED for ASSAULT: on 11/6 at approx 3:43 PM in front of 128 West 112th St in Manhattan, a 32 yr old male was walking with his 8 yr old son when a white BMW jumped the curb & hit the father & son. The driver then got out and slashed the father. Call @NYPDTips with any info. pic.twitter.com/cwd79rcM4c
— NYPD NEWS (@NYPDnews) November 15, 2019
Father and son were both knocked through a gate.
The BMW driver then backed up — and its driver and passenger, also believed to be a gang member, jumped out of the car and ran toward the father and the son.
One of the attackers slashed the father, identified by sources as 32-year-old Brian McIntosh, who’s served prison time for robbery and bail jumping.
McIntosh and his son went to Harlem Hospital. Miraculously, the boy escaped serious harm.
McIntosh was so adamant about refusing to help police catch his attackers that the young boy’s mother had to file a police report alleging he was the victim of a crime, police sources said.
Cops released video of the attack, and ask anyone with information about the suspects to call Crime Stoppers at (800) 577-TIPS.
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