Netflix Ups 2023 Free Cash Flow Estimate to $5 Billion, Citing Lower Content Spend Due to Hollywood Strikes

Netflix said it expects to spend less on content for the remainder of 2023 due in part to the ongoing strikes by Hollywood writers and actors. As a result, the streamer has upped its projected free cash flow for the year to at least $5 billion, from previous estimates of $3.5 billion. The streamer generated $1.3 billion in free cash in Q2.

Free cash flow (FCF) represents the cash that a company generates after accounting for monies to support operations and maintain its capital assets. FCF remains a singular focus on Wall Street as investors scrutinize what companies do with their excess cash, i.e. stock dividends, etc.

“Our updated expectation reflects lower cash content spend in 2023 than we originally anticipated due to timing of production starts and the ongoing WGA and SAG-AFTRA strikes,” wrote co-CEOs Ted Sarandos and Greg Peters and CFO Spence Neumann in a shareholder letter. “While this
may create some lumpiness in FCF from 2023 to 2024, we plan to deliver substantial positive FCF in 2024.”

The 42% uptick in projected free cash won’t sit well with striking writers and actors. The writers union has maintained that Netflix’s restructuring of episodic productions, number of season episodes and required writing teams, among other cost-cutting measures, have relegated TV writing to financially unsustainable gig work.

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At the same time, Netflix is projecting a 7.5% increase year-over-year in third quarter revenue to $8.52 billion, with operating income of $1.89 billion based on an operating margin of 22.2%.

“No doubt writers and actors will bring [free cash flow] up,” said Michael Pachter, media analyst with Wedbush Securities in Los Angeles. Pachter cautions, however, that Netflix remains an outlier among fellow members of the Alliance of Motion Picture and Television Producers, which is representing studios and streamers in labor talks with SAG-AFTRA.

Specifically, the analyst says many of AMPTP members’ direct-to-c0nsumer business operations are losing billions of dollars, supporting their fiscally conservative stance toward the unions’ demands.

“So, that’s the counter argument,” Pachter said.

Netflix Stock Opens at Record High Following Record 2020 Report

As expected, Netflix shares opened Jan. 20 up nearly 14% to a record $573.43 per share following the previous day’s 2020 fiscal report that underscored the the streaming behemoth’s market dominance. The service saw a record 37 million new subscribers, record revenue of nearly $30 billion and profit of $2.76 billion.

The SVOD topped 203 million paid subscribers for the first time, driven by a global market eager to consume content at home during the ongoing pandemic. Nowhere was that more prevalent than in North America — Netflix’s first and most-saturated market. The streamer added more than 850,000 subs in the U.S. and Canada — well above the projected 300,000+ subs.

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“Importantly, while Netflix beat subscriber expectations in all major territories, Netflix’s most mature market U.S./Canada reported materially better than expected, which highlights that the ultimate penetration for Netflix’s services globally could be higher than anticipated,” analyst Jeff Wlodarczak with Pivotal Research Group wrote in a note.

Moving past the headlines, Netflix appeared to turn the page on what has always rankled some on Wall Street: free cash flow, or the cash left over after a company pays for its operating expenses and capital expenditures. Netflix historically has operated in the red, to the tune of $1 billion or more.

But in its fiscal 2021 guidance, Netflix said cash flow is moving toward a breakeven level at around $1 billion, an impressive turnaround driven in part by reduced spending due to the ongoing pandemic. Then the kicker: Netflix believes it no longer needs to raise external financing for day-to-day operations.

“Netflix has been working toward this moment for multiple years, and is now in the unique position to continue its aggressive content spend, while still generating significant future cash flows,” Jefferies analyst Alex Giaimo wrote in a separate note.

Longtime Netflix bear Wedbush Securities media analyst Michael Pachter, in a Jan. 20 note, said service “has consistently surprised us” by keeping its foot on the gas pedal for subscriber growth, while benefiting from a disruption in production to generate positive free cash flow.

“While we are far more constructive about Netflix than we have been at any point in nearly a decade, we continue to question its valuation,” Pachter wrote.

The analyst lauded Netflix’s pledge to be free cash flow positive through 2030. Rather than continuing to borrow to finance its content needs, Pachter said it has become clear that Netflix has reached a point where it can maintain a healthy balance sheet and finance operations from operating cash flow. He still contends the stock remains overvalued.

“We have been consistently wrong about Netflix, but optimism about the company’s potential to generate free cash flow growth of more than $1 billion per year seems to us to be misplaced,” Pachter wrote.

Netflix Bear Analyst Eyes 15 Million Q2 Subscriber Growth

Wedbush Securities media analyst Michael Pachter has long rebuffed conventional wisdom when it comes to Netflix. The Los Angeles-based analyst steadfastly considers the streaming behemoth’s excessive use of free cash an underling weakness in the Netflix story.

Free cash flow is often considered an important measurement since it outlines how effective a company is at generating enough cash after funding operations and capital expenditures to pay investors via dividends and share buybacks.

Netflix has consistently been in the red with available free cash, with Pachter projecting $1 billion negative FCF for the SVOD pioneer in the 2020 fiscal year.

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But following a July 10-12 survey panel of 1,315 Americans on their current streaming and cable subscriptions, Pachter contends Netflix’s FCF situation is improving — albeit in the short term.

Michael Pachter

The analyst found that 50% of respondents cite Netflix as their favorite service, with 8% signing up for the first time in the past 90 days — a similar percentage of newbies resisted in Pachter’s previous survey in March.

“[It] suggests continued robust subscription growth,” Pachter wrote in a July 14 note.

Indeed, the analyst believes Netflix could report net sub additions of 15 million worldwide — up from Pachter’s estimated 7.9 million net sub additions. More importantly, the outsized sub growth could see a $250 million lift to FCF for the year.

“This would improve our estimated [Netflix FCF] loss of $1 billion (in-line with guidance for a $1 billion loss or better) to $750 million,” Pachter wrote, who added the improved economics portend other issues.

“We think the likely giant spike in new subscribers increases pressure on Netflix for retention.,” he wrote. “More consumption of content suggests even greater need to replace content with something new, and we expect spending and negative free cash flow to return to 2019 levels in 2021.”

Netflix reports second-quarter fiscal results July 16.

Netflix Ups Long-Term Debt by $2 Billion

Netflix Oct. 21 announced that it intends to offer, subject to market and other considerations, about $2 billion worth of bonds to institutional buyers.

The interest rate, redemption provisions, maturity date and other terms of each series of notes will be determined by negotiations between Netflix and the initial purchasers.

Netflix said it intends to use the net proceeds from the bond sale for general corporate purposes, which includes content acquisitions, production and development, capital expenditures, investments, working capital and potential acquisitions and strategic transactions.

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Netflix ended its most-recent fiscal period with more than $12.4 billion in long-term debt. It also has $19.1 billion in third-party content streaming obligations.

Critics cite Netflix’s ongoing negative cash flow as proof the company is operating beyond its fiscal means.

Net cash used in operating activities in Q3 was a negative $502 million, which was an improvement from the negative $690 million used in in the prior-year period. Free cash flow in Q3 totaled negative $551 million compared to negative $859 million in Q3 2018

Netflix contends that with a growing revenue base and expanding operating margins, it will be able to fund more of its content spending internally.

“We are expecting free cash flow to improve in 2020 vs. 2019 and we expect to continue to improve annually beyond 2020,” the service wrote in its shareholder letter. “As we move slowly toward FCF positive, our plan is to continue to use the high yield market in the interim to finance our investment needs.”


Netflix Tops Q3 Sub Growth Forecast with Nearly 7 Million Additions

Netflix Oct. 16 returned to business as usual, reporting record third-quarter (ended Sept. 30) global subscriber growth of nearly 7 million, including 1 million in the United States – beating company projections. The service ended the period with 137 million subs, including 130 million paid.

The SVOD pioneer generated nearly $4 billion in revenue, up 34% from the previous-year period of nearly $3 billion. Net income tripled to $403 million from $130 million last year.

“Our broad slate of original programming helped drive a solid quarter of growth,” CEO Reed Hastings wrote in the shareholder letter. “We’re thrilled to be growing Internet entertainment across the globe.”

On the flip side, free cash flow ballooned 85% to $859 million from $465 million as Netflix continues to spend large on original content. Third-party streaming content obligations reached $18.6 billion compared to $17 billion last year.

Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, FCF is the cash left over after a company pays for its operating expenses and capital expenditures.

“We recognize we are making huge cash investments in content, and we want to assure our investors that we have the same high confidence in the underlying economics as our cash investments in the past,” CEO Reed Hastings wrote in the shareholder letter. “These investments we see as very likely to help us to keep our revenue and operating profits growing for a very long time ahead.”

Indeed, Netflix believes negative free cash flow will be closer to $3 billion than $4 billion for the full year 2018 as the FCF deficit year to date is negative $1.7 billion.

Finally, Netflix ended the period with more than 2.8 million by-mail disc subscribers, compared with 3.5 million last year. The packaged media unit generated $51.6 million operating profit on revenue of $88.7 million. That compared to operating income of $63.1 million and revenue of $110.2 million last year.

Analyst: Netflix Can Stop Negative Cash Flow with Price Hike

With more than 130 million subscribers and growing globally, SVOD behemoth Netflix has few problems – except an operating strategy bent on spending every free dollar (and more) it generates.

The service reported negative free cash flow (FCF) of $559 million in the most-recent quarter ended June 30 – part of a projected $3+ billion negative free cash flow in 2018.

Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, FCF is the cash left over after a company pays for its operating expenses and capital expenditures.

And with Netflix on a breakneck pace to outspend ($13 billion this year) every competitor on original content, the SVOD pioneer continues to significantly exceed internal fiscal resources – typically a red flag to Wall Street.

But Netflix isn’t a typical company.

In Q2, the service completed a bond (debt) deal, raising $1.9 billion. At the end of the fiscal period, its gross debt stood at $8.4 billion, with a cash balance of $3.9 billion and a $500 million undrawn credit facility.

“We judge that our after-tax cost of debt continues to be lower than our cost of equity, so we anticipate that we’ll continue to finance our capital needs in the high yield market,” CEO Reed Hastings and CFO David Wells wrote in the shareholder letter.

Michael Pachter, media analyst at Wedbush Securities in Los Angeles, contends Netflix could remedy (break-even) its cash flow issue by raising the subscription price to $15 monthly.

“While an increase of $4 per month for domestic subs and $6 for international subs would add around $7.6 billion to revenue, more than offsetting negative free cash flow, we think that higher pricing would result in even higher content and marketing spending,” Pachter wrote in a note.

In other words, Pachter believes Netflix would continue spending like a drunken sailor.

While any mention of a price hike undoubtedly causes nightmares for Netflix brass following the well-documented fiscal debacle in 2011 when it raised – by 60% — the price of a popular hybrid streaming/DVD subscription plan. More than 800,000 subs dropped the service, and Netflix shares plummeted 75% in value, losing billions in market capitalization.

Pachter said anything charged above $15 per month would likely drive substantial profits, although, at higher prices, subscribers would expect more, and content license costs would likely rise.

“We estimate that at $20 per month, Netflix would generate around $3 per month in cash profit per subscriber,” he wrote.

In the meantime, Pachter expects Netflix to impose modest price increase every 18 – 24 months for the foreseeable future and thinks it could take as long as eight years to generate meaningful positive free cash flow.

To do so, Netflix has to keep adding subs at current growth levels – not unreasonable considering original programming continues to generate the bulk of online attention among consumers, according to Parrot Analytics.

“[Netflix] is likely to top out at around 200 million global customers,” wrote Pachter. “At that level, FCF would be $600 million per month, or $7.2 billion annually.”

Netflix reports Q3 financial results Oct. 16.