Power To The Elbow

1. Cash is King

Netflix anticipates that their future capital needs from the debt market will be limited compared to prior years. They have $7.8 billion in cash or cash equivalents and $14.3 billion in short and long term debt. The amount of principal and interest on the outstanding notes due in the next twelve months is just $1.07 billion. 

However, they have a big $9.5 billion content obligations bill due in the next 12 months. They should be OK since they generated $5.3 billion in free cash from operations in the previous 9 months and gave guidance that they are expecting over $6 billion for the year, but I am sure there is a team at Netflix paying close attention to their cash situation.

The 5.3 billion in cash flow is way up compared to the previous 9 months. This was mostly due to a decrease of $3.3 billion in content obligations. That marks a significant reduction in content cash obligation spending. This is different from their budgeted content expenses which are staying consistent. I believe cash obligations occur when the shows are made where content expenses are amortized over time. This means I think they are making less new content now then they did 2 or 3 years ago.

2. Subscriber growth is back

Netflix grew their subscriber base in all four of their global regions. North America, Latin America, and Europe had all shown negative subscriber growth in the 9 months ended 2022. The company attributed the growth to “the roll out of paid sharing, strong, steady programming and the ongoing expansion of streaming globally.”

3. Non-material revenues

Netflix will stop mailing DVDs on September 29, 2023. They realized revenues of $22 million from DVD mailings. This isn’t really a material event for investors since this represents .2% of sales, but it is interesting that there were still people mailing DVDs back and forth from Netflix. 

Netflix briefly mentioned that they receive revenues from “advertisements presented on its streaming service”. However, those revenues were also not material to the results. They said in their “letter to shareholders” that add revenue was only $9 million with 30% of new subscribers choosing the ad plan. I wonder if the ad plan is driving the new subscriber growth or if this service will fail to stick around because it will not scale?

4. Share repurchases

In August Netflix bought back 2.6 million shares at an average price of $425.38. In September, they got a better deal and bought back 3.2 million shares at an average price of $414.05. They can still buy back $10.8 billion in shares under their stock repurchase program. With the current stock price around $400 after the earnings pop but around $345 before, I would be on the lookout for continued repurchases.

Conclusion

Overall this was a great quarterly report for Netflix. They are growing their subscriber base again and being disciplined on content spending. Are you going to buy shares of NFLX based on this report? Let me know in the comments.