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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 1116  
Subject: Netlix cash costs Date: 11/3/2012 1:04 PM
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http://boards.fool.com/hi-jean-please-forgive-me-for-not-ans...

Sorry to be so long getting back to this but I wanted the 10Q for Q3 to be out before I tried to see what you are doing.

Cash cost for streaming content for 9 months is $2175.7 million.

See if you think this is the right way to do it. BTW, this is a lot of expense considering revenue was $2664 million

Starting with cash flow statement

additions to SC 1883.9
change in SC liability 631.8
================================
cash cost cash flow 1252.1


This is only the cash cost we can see on the cash flow statement. There is that off balance sheet cash paid that is included in net income that we can't see.

You said add back current liabilities from December 2011. I think this may be double counting. All the current and long term liability has been accounted for in the change in SC liability that is on the cash flow statement

You can do the math--I wont put it here. If you go to the footnotes and calculate the changes in current and LT SC liabilities it is $631 million

What we need to get to is the off balance sheet current liabilities that are in the footnotes in the table of obligations.

They do now put the amount of current liabilities that are in these obligations that are not on the balance sheet. I don't think they used to do that so now we do have a way to find the amount that is not on the balance sheet and has changed in the current 9 months.

Specifically, payments for streaming content obligations expected to be made in less than one year as of September 30, 2012 and December 31, 2011, as shown above, include $1.3 billion and $0.9 billion, respectively, of current "Content liabilities" reflected on the Consolidated Balance Sheets.


If we take these off the obligations table for current SC liabilities we finally get that amount that has been paid off in 9 months that is not reflected on the cash flow statement entry "change in SC liabilities"

That value is ($923.6) indicating they have that much in fewer current liabilities meaning it had to be paid.

Add that to the $1252.1 and we get $2175.7.

What do you think?
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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: 826 of 1116
Subject: Re: Netlix cash costs Date: 11/5/2012 5:31 PM
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scratch the above--amortization did not get in there on the spreadsheet

correct value is $1765

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Author: TMFGebinr Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: Re: Netlix cash costs Date: 11/8/2012 12:55 PM
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What do you think?

Hi KitKat,

I read through this and saw your follow up post, but I haven't had the time to work through this and probably won't for a couple of weeks. If you don't hear back from me by Thanksgiving weekend, could you please give me a poke?

Cheers,
Jim

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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: 833 of 1116
Subject: Re: Netlix cash costs Date: 11/11/2012 10:08 AM
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hey jim

no worries this is a concept I have had simmering for a year trying to get a figure for

While we are on the subject of NFLX, any opinions on off balance sheet obligations as debt? I have an email into the oracle of valuation --Dmaodaran where he wold come down on it. He haas answered my emails on accounting questions before so I have some hope I will hear from him.

The idea of content obligation is akin to operating leases as debt and these off balance sheet amounts are concerning enough to the FASB that there will likely be some changes in accounting for these. I was somewhat sarcastically and rudely dismissed by one of your SA analysts at the Netflix board so will raise the question here. Any opinion?

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Author: TMFGebinr Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: Re: Netlix cash costs Date: 11/11/2012 12:38 PM
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While we are on the subject of NFLX, any opinions on off balance sheet obligations as debt?

Hi kitkat,

It's a tricky question. You're right that operating leases are routinely counted as "debt" when analyst's adjust the balance sheet. I'm fine with that on the whole.

The question of whether the content obligations that Netflix has are enough like debt isn't quite as clear cut, I think, but I lean toward not capitalizing them, unlike operating leases.

Remember that when Netflix knows the content and its related cost, it goes onto the balance sheet, both as an asset which is amortized and as a liability which is paid off. But until the content is knowable, it's not a fully recognizable asset / liability. This is unlike an operating lease, where one can point to the land / building / improvements as the asset and the value of the lease as the matching liability. GAAP lets these be carried off balance sheet because the company isn't buying them outright. It's more like a renting situation, where ownership remains with the property owner, not the occupant, but that can be viewed as a mortgage equivalent. That doesn't seem, to me, to be the situation for Netflix's content obligations.

The other thing about operating leases is that when they're capitalized, there's usually an interest rate that's assigned and charged to the income statement, because of that mortgage "conversion" that capitalizing performs. I don't think assigning an interest charge to them is the right treatment for the content obligations.

Finally, I don't know how enforceable the contracts are if Netflix goes bankrupt. With debt, the holders are first in line. But for the right to stream somebody else's electrons? Are the contracts written such that the whole is due upon bankruptcy? I don't know, but I'd be surprised if that were the case. (I'm not sure where leases, with or without "due upon termination" clauses, land on the spectrum of claims against the company upon bankruptcy.)


In short, I think the rationale for capitalizing operating leases is because they're more like a mortgage than not. I'm not sure the same argument can be made for Netflix's content obligations. If anything, they're more like inventory that runs through COGS than anything else. And all the expense for all the content obligations (both on and off balance sheet) already run through the income statement as part of COGS.

However, I agree that one cannot ignore the content obligations when looking at the totality of Netflix and its financial statements. I just don't think that capitalizing them, beyond what happens when the content and obligation is knowable, is the right solution.

Cheers,
Jim

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Author: cautiousone100 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 839 of 1116
Subject: Re: Netlix cash costs Date: 11/27/2012 2:36 PM
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Netflix notes FASB 63 Broadcast Rights in its financial reports, but Google "ASC 920", which is the FASB codification for Entertainment - Broadcasters, and you'll find specific information regarding GAAP guidance on this issue. Here is an example that I think you'll find helpful:
http://www.pwc.com/us/en/industry/entertainment-media/assets...

After reading the above, I think you'll see that there's really no need to say it's "like op lease debt" or "like inventory" - both are true, but not totally useful, which is why acquired programming rights have their own FASB pronouncements.

Unless you've worked for a big corp in accounting, you probably aren't aware that corps have their own Regulatory Accounting and Tax Accounting staff. (This whole discussion has made me fondly remember a friend who was the head of Reg at a tech company I worked for back in the '80s - attained the highest CPA score for CA the year he sat and scored 71st in the nation.) Basically, they decide how things get booked, often after reaching consensus with the corp's CPA firm.

cautiousone

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