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Netflix earnings Q1 2013

by May 12, 2013






Netflix Earnings Q1 2013

Netflix Earnings Q1 2013

The king of streaming.
The new cable TV.

Latest Netflix earnings Q1 2013 charted below.
The House of Cards is growing, but for how much?

Netflix earnings Q1 2013, Chart showing: sales, cost of sales, gross margin

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International expansion and firm advance in content streaming contributed decisively to ever-growing sales.
Cost of revenues increased at even a faster rate, so gross margin is not that spectacular.

Netflix earnings q1 2013, Chart showing: gross margin, OPEX, operating income

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Operating expenses increased as well.
Particularly general and administrative expenses shot up.
As consequence, not much operating income remains.

Netflix earnings q1 2013, Chart showing: sales, cost of sales, operating expenses, operating income

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A clearer view of how various expenses eat up revenues.
Not much as operating profit left for sure.

Netflix earnings q1 2013, Chart showing: gross margin, operating expenses, non-operating expenses, income taxes, exceptional expenses, preferred distributions, net income

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Net income is almost invisible on this chart.
Could be as well a statistical error, almost negligible.
Actually it looks like the CFO did his best to crank up some profit, no matter how small.

Netflix earnings q1 2013, Chart showing: detailed revenues and costs

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Actually to be fair, the loss from debt extinguishment almost killed the profit.

Netflix earnings q1 2013, Chart showing balance sheet components: current assets, long term assets, current liabilities, long-term liabilities, equity

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Current assets shot up by more than 300 milion.
Long term assets increased as well.
Netflix financed all that via a 300 million increase in long term debt.
We consider financing current liabilities via long term debt as unsound business practice, and a possible sign of distress.

Netflix earnings q1 2013, Chart showing current assets details: cash, investments, accounts receivable, inventory, deferred tax, others

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Increase in current assets split among all current assets classes.
Cash and short-term investments increased quite a lot, signalling Netflix may prepare for some major investment.

Netflix earnings q1 2013, Chart showing long term assets: property plant equipment, equity, goodwill, intangibles, others

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Netflix’ long-term assets are mostly in the form of content library.
That is perishable.

Netflix earnings q1 2013, Chart showing current liabilities: payables, debt, taxes, others

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Content liabilities, which make the largest part of current liabilities, went down for the first time in the last 10 quarters.
That should have been reflected in better earnings.

Netflix earnings q1 2013, Chart showing long term liabilities: debt, taxes, others

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We really do not like the spikes in long-term debt.
$200 million at the end of 2011 plus another $300 million debt spike in current quarter are really worrisome.
Also the $25 loss on extinguishment of convertible notes does add gas on fire, that’s not normal, and in our opinion should have been provisioned over the past quarters.
The conversion of all outstanding Convertible Notes with an aggregate principal amount of $200.0 million makes us believe that management thought Netflix stock price was just right (ie high).

Netflix earnings q1 2013, Chart showing equity components: stock, earnings, others

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Equity increased to a total of $812 million, mostly via addition of paid-in capital through conversion of convertible debt.
Quite a lot of dilution for existing shareholders.
As market doesn’t seem to care to much lately about the dilution, everybody is happy.

Netflix earnings q1 2013, Chart showing cash flows overview: net cash flow, operating, financing, investment cash flow

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Operating cash flow stayed next to nothing over the past 5 quarters.
Not spectacular at all.

Netflix earnings q1 2013, Chart showing operating cash flows details: net income, adjustments, accounts payable, accounts receivable, inventory, others

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Details on operating cash flow above.
No sign yet from where the future cash would come.

Netflix earnings q1 2013, Chart showing non cash details of operating cash flows

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The streaming and content libraries made for a lot of adjustment within cash flow.
Earnings are quite sensitive to assumption about the amortization of content library.
The operating cash flow, in line with earnings, let us believe those assumptions may be indeed reasonable.

Netflix earnings q1 2013, Chart showing financing cash flows details: debt, stock, dividend, others

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Here you see the new debt issued and corresponding repayments.

Netflix earnings q1 2013, Chart showing investment cash flows details: property plant and equipment, investments, securities

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So far, Netflix made no major acquisition yet, and keeps lots of cash in short-term securities.

Bottom line for Netflix Earnings q1 2013:
Steady advance in Netflix sales does not translate into profits.
We really do not like the spike in debt.
The spike in debt likely signals two possible options:
– possible large acquisitions
– possible distress.
Let’s see the outcome.

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