Netflix will burn through $2 billion in 2017, and negative free cash flow will continue 'for many years'
On Monday, Netflix reiterated that it expects to have a negative free cash flow of $2 billion in 2017, versus $1.7 billion in 2016.
"The growth in our original content means we continue to plan to have around $2B in negative FCF this year," Netflix wrote in a letter to shareholders Monday.Here's how Netflix explained it:
We have a large market opportunity ahead of us and we're optimizing long-term FCF by growing our original content aggressively. Negative near-term FCF is the result of the big increases in our original content, combined with small but growing operating margins.
Netflix is confident it will make that money back over the long run, but expects negative free cash flow "to accompany our rapid growth for many years." It's that "many years" part that has Wall Street a bit concerned.
"While FCF loss of $422 million in the quarter was better than our estimate of -$516 million, management's commentary around sustained FCF burn 'for many years' in order to fuel the company's growth does create some incremental debate and concern for some," Instinet-Nomura analyst Anthony DiClemente wrote in a note to clients Tuesday.
Why do originals cause Netflix to burn so much cash? For a fuller explanation, it's good to go back to Netflix's Q3 letter to shareholders in 2016, where the company lays out the case for the continued escalation of its cash burn.
Here's what Netflix said in its Q3 letter:The increase in our free cash flow deficit reflects the growth of original content, which we are increasingly producing and owning (rather than licensing). Self-produced shows like Stranger Things require more cash upfront as we incur spending during the creation of each show prior to its completion and release. In comparison, we generally pay on delivery for licensed originals like Orange is the New Black and we pay over the term of the agreement for licensed non-originals (eg, Scandal).
Over the long run, we believe self-producing is less expensive (including cost of capital) than licensing a series or film, as we work directly with the creative community and eliminate additional overhead and fees. In addition, we own the underlying intellectual property, providing us with global rights and more business and creative control. Combined with the success of our portfolio of originals and the positive impact on our member and revenue growth, we believe this is a wise investment that creates long term value. Consequently, we plan on investing more, which will continue to weigh on free cash flow.
In October, Netflix announced it was raising another $800 million in debt, bringing its total long-term debt to over $3 billion. The question is whether Netflix can grow subscribers enough to offset the gargantuan amount of money it's spending on content - $6 billion in 2016.
"It's another quarter of the same old debate on Netflix stock," DiClemente wrote Tuesday. "Can [subscriber] growth outweigh FCF concerns?"