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RED ALERT IN USA:
Enron, Lehman Brothers, and… Netflix?
Posted onAugust 15, 2012
Cash and cash equivalents $402,251Short-term investments $411,092Current content library, net $1,223,638Prepaid content $48,510Other current assets $52,294Total current assets $2,137,785Non-current content library, net $1,147,805Property and equipment, net $124,644Other non-current assets $ 68,056Content liabilities $1,204,209Accounts payable $ 90,961Accrued expenses $50,884Deferred revenue $152,790Total current liabilities $1,498,844Non-current content liabilities $ 829,163Long-term debt $200,000Long-term debt due to related party $200,000Other non-current liabilities $62,057Cash and cash equivalents $402,251 $402,251Short-term investments $411,092 $411,092Current content library, net $1,223,638 $1,223,638Prepaid content $48,510 $48,510Other current assets $52,294 $52,294Total current assets $2,137,785 $2,137,785Non-current content library, net $1,147,805 $1,147,805Property and equipment, net $124,644 $124,644Other non-current assets $68,056 $68,056Content liabilities $1,204,209Accounts payable $90,961 $90,961Accrued expenses $50,884 $50,884Deferred revenue $152,790 $152,790Total current liabilities $1,498,844Non-current content liabilities $829,163Long-term debt $200,000 $ 200,000Long-term debt due to related party $200,000 $200,000Other non-current liabilities $62,057 $62,057
When looking at a company’s Balance Sheet, other than looking at trends – which are crucial - it’s also useful to look at it as a snapshot of how the company’s finances are doing at any given day.
Theoretically, the Balance Sheet can provide an honest view of a firm’s assets & liabilities, enabling an investor to determine the company’s health.
That is unless the company has OTHER assets or liabilities that are OFF their balance sheet.
There are many off balance sheet items that should be & are rightfully kept off the balance sheet. For example, exploration companies spinning off controlling interests of specific projects. The risks (of these projects) fall to new investors, and although a minority stake is maintained by the parent company, the liabilities don’t belong to them. The same is true with an asset management company holding client assets off their balance sheet.
However, in reality there are many companies that keep liabilities off their balance sheet although they are fully responsible for those liabilities. Whether it is/was financial companies using different derivative instruments to offload debt (like Lehman using Repo 105), or Enron using hundreds of partnerships enabling them to hide billions of dollars of debt.
A company that I was shocked to see use this “loophole” was Netflix.(h/t to ‘s for initially alerting me to this.)
Sentiment: Strong Sell
Without focusing on the trends, let’s take a look at NFLX’s Balance Sheet snapshot from 6/30/2012.
AssetsTotal assets $3,478,290Liabilities and Stockholders’ EquityTotal liabilities $2,790,064Commitments and contingencies (Note 8)
—Total stockholders’ equity $688,226Total liabilities and stockholders’ equity $3,478,290
It seems pretty straight forward. The company has a lot of assets & liabilities tied to their content portfolio, and when netting them out, you can see they have more assets than debt, resulting in a positive Book Value of $688M or $11.70 per fully diluted share.
HOWEVER, there is that one (highlighted) line called “Commitments and contingencies (Note 8)” under liabilities.
Here is the “Note 8″ directly from NFLX’s recent 10-Q: (emphases are my own)
8. Commitments and Contingencies
The Company had $5.0 billion and $4.8 billion and December 31, 2011, respectively, of obligations at June 30, 2012including agreements to acquire and license streaming content that represent current or long-term liabilities or that are not reflected on the Consolidated Balance Sheets because they do not meet content library asset recognition criteria. The license agreements that are not reflected on the Consolidated Balance Sheets do not meet content library asset recognition criteria because either the fee is not known or reasonably determinable for a specific title or it is known but the title is not yet available for streaming to subscribers.
For those agreements with variable terms, the Company does not estimate what the total obligation may be beyond any minimum quantities and/or pricing as of the reporting date. For those agreements that include renewal provisions that are solely at the option of the content provider, the Company includes the commitments associated with the renewal period to the extent such commitments are fixed or a minimum amount is specified.
The Company has entered into certain license agreements that include an unspecified or a maximum number of titles that the Company may or may not receive in the future and/or that include pricing contingent upon certain variables, such as theatrical exhibition receipts for the title. As of the reporting date, it is unknown whether the Company will receive access to these titles or what the ultimate price per title will be. Accordingly, such amounts are not reflected in the commitments described above. However such amounts are expected to be significant and the expected timing of payments could range from less than one year to more than five years.
The expected timing of payments for these obligations is as follows:
June 30, 2012
March 31, 2012
Less than one year
Due after one year and through 3 years
Due after 3 years and through 5 years
Due after 5 years
Total streaming content obligations
(1) Prior period amounts have been presented to conform to the current period presentation which includes the streaming portion of current “Content liabilities” reflected on the Consolidated Balance Sheets. Note that total streaming content obligations remain unchanged with this presentation. Specifically, payments for streaming content obligations expected to be made in less than one year as of March 31, 2012 and December 31, 2011, as shown above, include $1.1 billion and $0.9 billion, respectively, of current “Content liabilities” reflected on the Consolidated Balance Sheets.
The Company has licenses with certain performing rights organizations (“PRO”), and is currently involved in negotiations with other PROs, that hold certain rights to musical compositions used in connection with streaming content. For the latter, the Company accrues for estimated royalties that are due to PROs and adjusts these accruals based on any changes in estimates. These amounts are included in the Company’s streaming content obligations. While the Company anticipates finalizing these negotiations, the outcome of these negotiations is uncertain. The results of any negotiation may be materially different from management’s estimates.
(Note (1) refers to another part of the 10-Q called “Content Liabilities”, which basically shows that $1,183,867 of the $2,053,397 that was quoted in “Note 8″ WAS already INCLUDED on the balance sheet.)
Either way (enough of these SEC filings), what this means is that that wasn’t included on their balance sheet.
NFLX really has ANOTHER $869.53M of “current” (due within one year) liabilities
They also have ANOTHER $2.97B (B, as in Billion!) of long term liabilities.
The reason NFLX says that these liabilities are not needed to be included on their balance sheet was included in the above 10-Q. I highlighted what I believe were the main points.
The key is that even if the company does not know the EXACT amount due, this IS money the company owes, and will have to pay content providers if they will use their content. (If they don’t get/use that content, you should assume a large drop-off in users/revenues.) These are liabilities that HAVE to be included if you are analyzing the financial well-being of NFLX.
What does NFLX balance sheet look like when they are included? (also )
here via google docAssets“REAL” Balance SheetTotal assets $3,478,290 $3,478,290 Liabilities and Stockholders’ Equity$2,073,739 $2,368,374 $3,799,514Total liabilities $2,790,064 $6,629,945 Total stockholders’ equity $688,226$(3,151,655)Total liabilities and stockholders’ equity $3,478,290 $3,478,290
That’s right! NFLX’s $688M stated Book Value is really a $3.15 BILLION NEGATIVE Book Value! (Or $11.70 per share to a NEGATIVE $53.59!)
Another issue is that their “real” Current Liabilities are greater ($2.37B) then Current Assets (at only $2.14B). Where will NFLX get the money to fund these liabilities?
Sentiment: Strong Sell
called for a 1 yr NFLX bk. If my model is correct, and NFLX has not raised $400M in capital in November 2011, they would have been $157M underwater in 2012! Great call .... my model is correct.
2013: $731M let over - $1.55B loss of $819M & NFLX underwater by $576M.
Sentiment: Strong Sell