Netflix, Inc. Micah George

Netflix's cost of content need to stabilize, management needs to disclose amortization methods, and international membership growth is crucial

Domestic

  • 10% market growth average & 36% gross margin

International

  • 40% market growth & 10% gross loss

DVD segment

  • offsets International loss
  • (52% gross profit)

industry competition

  • Netflix leads in the industry
  • AT&T's acquisition of Direct TV & Time Warner Cable (TWX)

Zero Rating

Netflix's response was lower quality streaming in 360p, 20% reduction in data consumption streaming, 20% boost in quality

  • 75% of homes with Over The Top video service on WiFi had Netflix
  • 33% Prime - Largest international threat

Financial Position and Outlook

INCOME STATEMENT

  • Profitability margins - low

CASH FLOW STATEMENT

  • FCF 2016 negative $1.65 billion

Edward Hoofnagel (CFA) "Any implicit error in the approach is material to the evaluation of profits/loss."

Einstein “you don’t really understand something unless you can explain it to your grandmother.”

  • 2016 - $1 billion of debt
  • 2015 - $1.5 billion of debt

Balance Sheet

  • off balance sheet liabilities of $14 billion
  • working capital is decreasing
  • good liquidity
  • sold 200 million in marketable securities
  • Success Factor - Entertaining different key demographics and psycho-graphic segments in cost efficient ways.

continuation of shows is more cost efficient and helps retain key customers.

  • Goal - To reach 60 million - 90 million homes in America
  • Goal - Produce 1000 hours of original content in 2017

Reflection

  • Netflix management is not disclosing key accounting information on amortization data clearly for investors to understand.
  • Amortization costs affect NI and FCF significantly
  • Very high risk investment (Facebook, Alphabet, Netflix, Amazon (FANA))
  • Costs efficiencies are crucial

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