Netflix sinking deeper into debt to fuel growthNetflix is sinking deeper into debt in its relentless pursuit of more viewers, leaving the company little margin for error as it tries to build the world’s biggest video subscription service.
The big burden that Netflix is shouldering hasn’t been a major concern on Wall Street so far, as CEO Reed Hastings’ strategy has been paying off.
The billions of dollars that Netflix has borrowed to pay for exclusive series such as “House of Cards,” “Stranger Things,” and “The Crown” has helped its service more than triple its global audience during the past four years — leaving it with 109 million subscribers worldwide through September.
That figure includes 5.3 million subscribers added during the July-September period, according to Netflix’s quarterly earnings report released Monday. The growth exceeded management forecasts and analyst projections. Netflix’s stock rose 1 percent in extended trading, putting it on track to touch new highs Tuesday. The shares have increased by about five-fold during the past four years.
If the subscribers keep coming at the current pace, Netflix may surpass its role model — HBO — within the next few years. HBO started this year with 134 million subscribers worldwide.
“We are running around 100 miles an hour doing our thing around the world,” Hastings said during a review of the third-quarter results.
But Netflix’s subscriber growth could slow if it can’t continue to win programming rights to hit TV series and movies, now that there are more competitors, including Apple, Amazon, Hulu and YouTube.
If that happens, there will be more attention on Netflix’s huge programming bills, and “then we could see an investor backlash,” CFRA Research analyst Tuna Amobi says. “But Netflix has been delivering great subscriber growth so far.”
Netflix’s long-term debt and other obligations totaled $21.9 billion as of Sept. 30, up from $16.8 billion at the same time last year. That includes $17 billion for video programming, up from $14.4 billion a year ago. Most of the programming payments are due within the next five years. Netflix expects to spend $7 billion to $8 billion on programming next year, up from $6 billion this year.
The Los Gatos, California, company has to borrow to pay for most of its programming expenses because it doesn’t generate enough cash on its own. Netflix burned through another $465 million in the most recent quarter, which is known as “negative cash flow” in accounting parlance.
For all of this year, Netflix has warned that its negative cash flow might be as high as $2.5 billion, a trend that management expects will continue for at least the next several years as it tries to diversify its video library to appeal to divergent tastes in about 190 countries.
Nonetheless, Netflix has remained profitable, under U.S. accounting rules. The company earned $130 million on $3 billion in revenue in its latest quarter.
And management appears to be trying to ease the financial drain with price increases of $1 and $2 a month for most of its 53 million U.S. subscribers before the end of the year.