×
You will be redirected back to your article in seconds

Netflix Streams More Debt as Investors Wait to See Payoff

Netflix is again going deeper into hock.

In the streaming service’s latest move to cover its massive global content costs, Netflix this week closed $1.4 billion in new debt financing, adding to its $3.37 billion in existing long-term obligations. It’s the third time in a little more than two years that Netflix has raised more than $1 billion in debt financing.

But the company’s mounting debt and content-payment obligations have raised a new question on Wall Street: When will Netflix take its foot off the gas pedal?

“You can’t spend like this on programming forever,” said Michael Nathanson, principal at MoffettNathanson, who expects Netflix to shell out $8 billion in cash for content in 2017. “When do they feel they’ve built the perfect scale and can slow it down?”

The company has reassured investors that it isn’t excessively leveraged, noting in its first-quarter letter to shareholders that it has a debt-to-market-cap ratio of less than 10%, far smaller than that of industry peers.

But that doesn’t account for Netflix’s content obligations — the billions in payments for programming over a period of several years. That figure stood at $15.3 billion at the end of the first quarter, more than double that of the same quarter three years earlier. A whopping $8.4 billion of that $15.3 billion isn’t reflected on Netflix’s balance sheet.

Netflix is betting subscriber growth will keep pace with its growing debt load and content commitments.* Excludes $1.4 billion in new debt expected to close May 2 ** Bulk of payments due within three years
Sources: Company reports, SEC filings

To finance the latest debt offering, a Netflix representative said the company is targeting non-U.S. lenders because European interest rates are attractive. Moreover, the rep said, “Netflix is a global company, and we want to have access to global capital markets.”

The company’s hypothesis: It needs to spend big now to keep the customer-growth engine humming before it can reach cruising speed and live within its means. So far, execs have sold that story to the investment community, and nobody on Wall Street is worried that Netflix is becoming over-leveraged. “The market is surprisingly comfortable with Netflix’s balance sheet,” Nathanson said.

With access to cheap credit, and investors not expecting big profit margins, Netflix has an advantage over traditional media companies that need to worry about the bottom line. To Nathanson, Netflix’s current investment mode is akin to the U.S. cable sector’s heavy capex spending two decades ago when operators built out fiber-optic networks to set the stage for growth.

Netflix shareholders are fans of the debt-fueled strategy for one key reason: “The correlation between content spending and subscriber growth is strong,” said CFRA Research senior analyst Tuna Amobi.

To be sure, Netflix’s long-term debt has not been a huge drag on earnings, as it continues to grow the top line. The company reported $46.7 million in interest expense for the first quarter of 2017, on revenue of $2.67 billion (up 35% year over year). But in addition to the content itself, Netflix will have to promote it, which the company expects will gobble up more than $1 billion.

It all makes sense if Netflix successfully signs up millions more users (and keeps them). If subscriber levels start to taper off, though, in a worst-case scenario Netflix would be forced to raise prices again.

While that would obviously stifle subscriber growth, hiking rates by $1 per month would generate an incremental $1.2 billion in cash per year, giving the company enough money to cover content obligations and pay down debt over a few years, said Wedbush Securities analyst Michael Pachter. The analyst (who has a “sell” rating on the stock) doesn’t see extreme risk in Netflix’s model per se. The danger, he said, is that the pricey content won’t resonate with customers.

“I think they’re spending way too much,” he said, “and have way too little to show for it.”

More Biz

  • PledgeMusic Down to a ‘Skeleton Staff,’

    PledgeMusic Down to a ‘Skeleton Staff,’ Although a Potential Buyer Is in the Wings

    PledgeMusic, the direct-to-fan marketplace that has faced serious financial troubles in recent months, is down to a “skeleton staff” and payroll in the U.S. office ceased within the last month, sources close to the situation tell Variety, although a potential buyer is “very interested” in the company and has been in due diligence for several [...]

  • Michael Avenatti

    Michael Avenatti Arrested on Bank Fraud and Extortion Charges

    Attorney Michael Avenatti was arrested Monday and is facing federal charges on both coasts of bank fraud, misappropriating client funds, and trying to extort Nike. Prosecutors in the Southern District of New York allege that Avenatti tried to extract more than $20 million from Nike, and said that if the company did not pay him, [...]

  • Daily Show Viacom

    DirecTV, Viacom Avert Blackout After Marathon Negotiation

    DirecTV and Viacom have agreed on a carriage renewal pact covering a raft of Viacom’s cable channels after a marathon negotiation over the weekend. In a joint statement early Monday, the companies said: “We are pleased to announce a renewed Viacom-AT&T contract that includes continued carriage of Viacom services across multiple AT&T platforms and products. [...]

  • Discovery CEO David Zaslav Sees 2018

    Discovery CEO David Zaslav Sees 2018 Compensation Soar to $129.4 Million

    Discovery Inc. president-CEO David Zaslav is once again making headlines for an enormous compensation package. Zaslav’s 2018 compensation soared to $129.44 million in 2018, fueled by stock options and grants awarded as the longtime Discovery chief signed a new employment contract last July that takes him through 2023 at the cable programming group. Zaslav received [...]

  • Jonathan Lamy RIAA

    Jonathan Lamy Stepping Down From RIAA

    Jonathan Lamy, the Recording Industry Association of America’s longtime executive VP of communications and marketing, is stepping down from his post after 17 years, he announced today. As he put it in an email to Variety, “I started back in 2002, which means it’s been 17+ years, four different RIAA CEOs, three format changes and [...]

  • Fox Layoffs

    Disney-21st Fox Layoffs: TV Divisions Brace for Deep Cuts

    A second day of layoffs has begun on the Fox lot in the wake of Disney completing its acquisition of 21st Century Fox on Wednesday. Longtime 20th Century Fox Television Distribution president Mark Kaner is among the senior executives who were formally notified with severance details on Friday morning. 21st Century Fox’s international TV sales [...]

  • anthony pellicano

    Hollywood Fixer Anthony Pellicano Released From Federal Prison

    Anthony Pellicano, the Hollywood private eye whose wiretapping case riveted the industry a decade ago, was released from a federal prison on Friday, a prison spokeswoman confirmed. Pellicano was sentenced in 2008 to 15 years, following his conviction on 78 charges of wiretapping, racketeering, conspiracy and wire fraud. He had been in custody since 2003, [...]

More From Our Brands

Access exclusive content