Q4 profit surprises; Hastings says Sony output deal on his radar
Boasting an unexpected quarterly profit, Netflix signaled interest Wednesday in finding new financing for more original programming.Despite analyst expectations of a fourth-quarter loss, the Los Gatos, Calif.-based streaming service generated $8 million in net income, reaching $945 million in revenues. That sent shares zooming 25% in after-hours trading. In a letter to investors, Netflix indicated it is looking to raise more money through debt financing to fund original programming, in addition to refinancing $200 million in outstanding notes. “This is about the opportunity provided by the debt market to get really low cost, long-term capital,” said CFO David Wells in a conference call with analysts. “(It’s) for us to preserve the flexibility, if we see massive success with originals, to expand that program and develop more down the road.” On Feb. 1, Netflix will launch “House of Cards,” the first of at least four original series to hit the streaming service. The investor letter also indicated there’s already enough in Netflix coffers to afford more programming. But it also warned that those costs, which already began weighing on free cash flow in Q4, are likely to get more onerous before improving in the second quarter. Original programming expenses differ from those of licensing because they typically require more frequent upfront payments. Netflix has an estimated $5 billion in streaming content costs on its books over the next five years, which had prompted analyst skepticism for the quarter and beyond. But Netflix impressed by exceeding expectations with a haul of 2.05 million U.S. subscribers for the quarter, reaching a total of 27.15 million. With overseas adds, that makes for approximately 33 million global subs. But even as they raised the prospect of doling out more for originals, Wells and CEO Reed Hastings sought to downplay the impact “Cards” et al will have on its balance sheet and subscriber growth. “When you think about the size of any one original in our multibillion-per-year content budget, it’s not a huge risk,” said Hastings. Speaking specifically of “Cards,” “We think it will be a pretty small benefit for Q1,” said Wells of the potential for the drama series to goose sub numbers. Hastings held out the possibility that original programming could stimulate significant sub growth. “But some of us are optimistic that may in fact be substantial but we don’t know and don’t want to count on it until it happens,” he said. Hastings seemed a bit more bullish on the impact of “Arrested Development,” the revival of the Fox comedy expected to hit Netflix in the second quarter. “‘Arrested’ is unique because its already got a big brand,” he said. “It’s going to be more frontloaded in its overall viewing and attention.” Netflix execs emphasized they had no plans in place for original programming beyond this year until they can study the data from how they perform in the first half of the year. Another area where Netflix could be spending is for an output deal in the pay-TV window with Sony Pictures, which is currently tied up at Starz but Hastings acknowledged has drawn his interest. “Our appetite is just like it was for Disney, we’ll see how it works out,” said Hastings. “There’s no specific piece of content that we must have.” Netflix stunned the industry last year by securing its first major output deal with Disney, with new releases coming to the service in 2017 and library fare already available. Netflix previously had access to Disney releases through a licensing agreement with Starz (which ended last year), and at that time the Mouse pics only accounted for 2% of Netflix’s streaming hours. Hastings said the Mouse content would be more meaningful to subscribers now that it’s exclusive to Netflix. “It’s going to be bigger than it would have otherwise,” he said, noting output from Disney acquisitions Marvel and Lucasfilm also drove added value. Hastings nixed additional funding needed for international expansion, which Netflix is still interested in but has no specific plans in place for anything in the first half of the year. In November 2011, Netflix sold $200 million in stock to mutual fund manager T. Rowe Price and $200 million in convertible bonds to investment firm Technology Crossover Ventures for a $400 million cash infusion, but didn’t specify any particular usage for that capital.
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