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Author: LeKitKat Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Feste Award Winner! Old School Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1081  
Subject: at last NFLX accounting solved? Date: 3/4/2013 11:18 AM
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I hope

With apologies to Etta James--at last

I have been screwing around with this for over a year and after many false starts and dead ends I managed to reverse engineer some numbers I got from the inimitable and always brilliant HowardRoark

This went back to a post he did in November 2011 using the 9 months 2011 10Q

Why bother with this at all? it does seem like a ginormous waste of effort. First off I was aggravated that Netflix feels it's some big state secret and they don't break out the cost of streaming from DVD S&H and royalty payments. So there's that.

Second I think it's critically important to know how the entire streaming business is doing without their nonGAAP manipulation of contribution to margins--you know the revenue minus cost of revenue minus marketing. They come up with poor results for international but domestic looks great and margins are expanding. Fact is that domestic is mature and international is unknown and tracking the combined result of the two is going to tell us a lot about the market and the potential for profit in streaming.

What I wanted to know is how the gross margins are and from there look into marketing and SG&A and R&D to get an idea of what goes to the bottom line without the help of DVDs.

here's how I think it works and any ideas on the veracity of the method as always are welcome

1. Take the entire change/increase in costs of subscription for the Q or year

2. Subtract the increase change year-over-year of amortization. That's part of the subscription cost but we are looking for that elusive cost that is above and beyond the amortized cost which is a known. Part of the increasing cost of subscription is amortized but part of it is not and paid off the balance sheet.

3. Subtract the increase in amortized cost from the total increase in cost of subscription. What you get is the cost increase of the unamortized content.

4. Go back a year and do steps 1-3. That gives you the unamortized increase for the previous year.

5. Add the two years together. That tells you how much was paid off the balance sheet in the current year

6. But wait there's more. This is the amount in the P&L net income that goes to the cash flow statement. We also have a cash amount not included in the net income that is cash paid for content on a schedule every quarter. That falls into prepaid. Take the change in prepaid and add that to the increase in subscription cost that is nonamortized expense.

7. Finally, subtract change in liability on the cash flow statement from additions to streaming content library.That gives you the cash paid for content not added to either current and non-current content liability.

8. Add #7 to #6 and that should give you the cash cost of streaming content either for a quarter, six months nine months and a year.

What do you think?
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