Netflix's Cash Burn Continues -- and the Fire Rages
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Let's start with the bad news first: Streaming pioneer Netflix, Inc. (NASDAQ: NFLX) continues to burn copious amounts of cash. For 2017, the company had negative free cash flow (FCF) of over $2 billion, at the lower end of its forecast in a range of negative $2 billion to $2.5 billion -- and the company says it's only going to get worse.
In its fourth-quarter 2017 shareholder letter, Netflix pointed out that this was largely due to timing and moving some payments to this year. The company is doubling down and expects to go even deeper in the red this year, expecting FCF in a range of negative $3 billion to $4 billion for 2018.
This strategy isn't new. Netflix has previously stated that it expects to remain FCF negative "for many years." But that's only part of the story.
Is Netflix the industry leader in burning cash? Image source: Getty Images.
It gets worse before it gets better
In order to fund its growing content library, Netflix continues to tap the high-yield debt market. The following table details the obligations the company has incurred related to content:
| Balance Sheet Accounts -- as of Dec. 31, 2017 | Amount |
|---|---|
| Current content liabilities | $4.17 billion |
| Non-current content liabilities | $3.32 billion |
| Long-term debt | $6.50 billion |
| Total content-related liabilities | $14 billion |
Data from SEC filings. Chart by author.
It's important for investors to understand the logic behind the company's strategy. Netflix's content falls into three broad categories. The first includes shows and movies that are licensed from their owners, like How to Get Away with Murder and Captain America: Civil War. Then there are Netflix Originals that are licensed, like House of Cards and Marvel's Jessica Jones. (When the company first began producing original content, it licensed the material rather than owning it.) The third category is Netflix Originals that the company owns and will benefit from for years to come, like Stranger Things, The OA, and Bright.
Netflix has explained that, for its original programs, it begins laying out cash when it greenlights a project, between one and three years before customers ever see the program -- investing now for a future benefit.
The good news
Then there's the good news. Netflix has stated that by 2020, its goal is to have half its content as owned original productions, while the other half will be licensed TV shows and movies. This means spending more upfront, but will result in greater financial benefits down the road.
In the company's October 2016 shareholder letter, Netflix explained why it believes this is the most logical path forward: