Netflix Content Obligations Balloon to $12.3 Billion on Global Expansion

Netflix keeps pumping more dollars into global licensing and production deals — and the company has increased its bet that continued subscriber growth will keep pace to pay for its long-term content contracts.

The subscription VOD leader’s content obligations soared to $12.3 billion as of the end of the first quarter of 2016, up 26% from a year earlier, and up from $10.9 billion in the previous quarter. Of note, $5.16 billion of those content obligations as of March 31 are due in less than one year, according to Netflix’s 10-Q quarterly filing Wednesday. That’s up more than $1 billion from a year earlier.

The Q1 jump in the company’s content obligations — payments for licensed or produced programming over a period of several years — was due to Netflix’s global launch, according to CFO David Wells. The company in January expanded service to 130 new countries to reach more than 190 territories, and now has 81.5 million users around the globe.

“As we’re adding more content now for the rest of the world… those markets are growing in content spend more quickly than some of our more established markets,” Wells said on Netflix’s earnings call this week.

Worldwide, Netflix’s overall content obligations in the first quarter of 2016 were about $151 per subscriber, up from $145 in the fourth quarter of 2015 but down from $157 for Q1 of 2015. Under Netflix’s content deals, once a title becomes available on the service a content liability is generally recorded on its balance sheet.

But that’s not the whole story. The content obligation figures that Netflix discloses don’t include what it says could be “significant” payments for future titles that are not yet determinable. Those include traditional film output deals, like the U.S. output deal with Disney that kicks in starting this fall, as well as certain TV series license agreements where the number of seasons to be aired is unknown.

The tab for those “unknown” titles? It could amount to $3 billion to $5 billion over the next three years, Netflix disclosed in its 2015 annual filing in January.

Netflix said its higher spending on content budget will be fueled by higher subscriber fees. Starting in May, Netflix’s U.S. members who currently pay either $7.99 or $8.99 per month for the HD two-­screen plan will be rolled up to the $9.99 monthly tier. Thanks to that expected increase in revenue per sub, the company is projecting content spending to rise from $5 billion in 2016 to more than $6 billion in 2017 on a profit/loss basis.

What spooked investors this week was that Netflix projected adding 500,000 U.S. subs and 2 million internationally for the second quarter of 2016, below analyst estimates of 600,000 in the U.S. and 2.9 million overseas.

The company said it expects “modestly increased churn” with the price increases. It better hope so: Netflix is banking on the fact that it won’t lose a big number of users — and in fact will keep bringing in more new ones — because if that growth stalls, it won’t have the cash in years ahead when its hefty content bills come due.

Pictured above: Netflix’s “Crouching Tiger Hidden Dragon: Sword of Destiny”

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