About that #NFLX debt

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Immediately after releasing the financial results for Q3-2018  Netflix has announced and priced a new issue of $1.9B debt in senior notes – rated as junk bond – to finance new investments in content and other long-term assets such as the new production facility in Albuquerque.

It might look sensational adding up to the roughly $8B already on the balance  sheet, but Netflix’s capital structure is actually not too different from comparable companies such as Amazon: the Debt to Assets ratio, for example, is roughly .34 for both, and slightly higher than .30 for AAPL and .26 for DIS. The liquidity is actually much better than Amazon and also better than the industry: the Quick ratio, for example, which measures the company’s ability to meet its short-term obligations with its most liquid assets is 1.4 for NFLX vs .76 for AMZN. NFLX’ s Interest Coverage, which measures earnings compared to interest expenses, over the past 10 years ranges from 2.3 to about 49.4 and is currently at a not so safe but not too worrying either 4.45.

So are they burning cash? Yes, quite a lot: about $1.4B in the last 9 months (despite the debatable accelerated amortization).

But is this an operating issue? No, not at all. Cash on the Balance Sheet actually grew from 2.8 to $3B YTD, while revenue and net income are also growing steadily. Growth comes from the international markets whose value has now surpassed domestic.

Regarding its valuation, EV/EBITDA is 21x (vs 59x AMZN). And how about efficiency? More than $2M revenues per employee (vs $314k AMZN).

Profitability is also looking great with ROE (ttm) above 30% and higher than 89% of companies in its industry, and operating margin (ttm) above 10% (vs AMZN just slightly higher than 3% even though still way lower than the amazing 25% of DIS).

All in all, Netflix is doing just fine folks! Are these announcements part of a magisterially conducted PR strategy? Partially, yes because Netflix is as strong as its brand and part of its marketing strategy is to shock the public opinion and make the world (and the markets) believe they are doing the best they can to deliver – and now produce – the best content.

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For what concerns the entertainment industry and most of all the content creators, all that matters is that they will keep investing more than $3B in original content each trimester, in the “three major categories of content: licensed non-first-window content such as Shameless, licensed original first-window content such as Orange is the New Black (owned and developed by Lionsgate), and now owned original first-window content from the Netflix studio, such as Stranger Things”.

Nonetheless, they are still looking for the real competitors, but they are now being challenged by the major studios – Disney above all, from which they are progressively parting ways – and in Europe by Amazon and a handful of local operators as well as traditional players and trying to partner with them – e.g. Sky UK – rather than fight them and due to the new EU regulations which require OTT players to carry a minimum of local content.

But they are as relevant as it’s possible to be, in television as well as feature films, where they gave new life, for example, to The Irishman by Scorsese and now they are a stable presence also at some very important film festivals such as Venice. Watch next at the Oscars, where they could win in the foreign language category with Roma by Alfonso Cuarón, by general consensus of the critics one of this year’s best films.

Fancy a negative pickup?

Superman, The Empire Strikes Back, Never Say Never Again and Lone Survivor. What do these films have in common?

They were all financed and distributed according to a negative pickup arrangement. Even Terry Gilliam’s Brazil, a negative pickup for Universal Pictures produced by Arnon Milchan: in this particular case, the studio had creative disagreements with the director over choice of star, content, and duration, and failed to resolve these issues to its satisfaction, because the negative pickup had essentially granted Milchan final cut.

The negative pickup is a type of film financing arrangement, an interparty agreement in which the parties involved are bank, completion guarantor, producer, and distributor, usually bank financed with the collateral being a Distribution Agreement from a trusted and creditworthy Distributor or Studio then owning distribution rights upon delivery of a completed film negative by a stipulated date and in accordance with the terms of the agreement, where the pickup price shall include cost of budget (which has to include a completion bond which premium usually amounts 3-5% of the production budget and contingency), cost of interest, origination fee, bank and legal expenses.

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Superman (1978)

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#RomaFF9 showcases new patterns of film distribution

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The ninth edition of the Rome Film Festival is coming to an end having showcased some interesting new patterns of film marketing and distribution.

The film market named The Business Street has brought to Rome 811 professionals, of which 295 buyers, 104 world sales agents e 246 producers from 52 countries, with a 30% increase of international participants (35% more buyers and 14% more world sales agents). A very needed initiative for boosting the film business.

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