Netflix’s Key Operational Metrics after Its 1Q17 Results
Negative free cash flow
Netflix (NFLX) had free cash flow of -$423 million in 1Q17, compared to -$261 million in 1Q16. Last year, the company raised its debt to ~$1.0 billion, and it expects to raise it regularly to fund its investments in original content.
The company stated in its 1Q17 earnings letter to shareholders that it perceives a huge market opportunity globally, as a result of which it intends to aggressively focus on original content. Netflix further said that the company intends to grow its operating margin at a slower rate so that it can spend on its original content and grow its revenue in the process.
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When it comes to the company’s operating costs in 2017, it expects to spend ~$6.0 billion on content and $1.0 billion each on technology and development and administrative costs.
The reason Netflix is burning cash
Netflix’s rising capital requirements are fueled by its increasing focus on original programming. Its production of original programming requires more upfront cash than the acquisition of licensed content.
The company expects free cash flow of ~-$2.0 billion in 2017. The company also stated in its 1Q17 earnings letter to shareholders that it currently has a debt-to-total capital ratio of 0.1. In contrast, Netflix’s peers in the media sector have debt-to-total capital ratios ranging from 0.3 to 0.7. As a result, Netflix will continue to take on long-term debt to finance its spending on original content.
Netflix believes that producing its own content has given it global content rights, which should interest its investors and shareholders.