Netflix has raised $1.9 B in new debt financing to fund its original content
Just a week ago, Netflix revealed that it had had a stunning first quarter, beating all growth expectations for the number of subscribers as well as revenue. The video streaming platform announced that it had hit 125 million subscribers worldwide, and generated $3.6 billion in streaming revenue, with more profits – $290 million – than the company had earned in all of 2016. However, the news was tempered by additions that the company planned to spend about $8 billion in 2018 alone for creating original content, as well as a large amount of long-term debt ($6.5 billion as of March 31, 2018). Now, the platform has revealed that it aims to take on even more debt to fund its ambition original content strategy.
In a press release published yesterday, April 23, Netflix announced that it would seek $1.5 billion in debt financing by selling off senior bonds to qualified institutional buyers. The press release reads, “Netflix intends to use the net proceeds from this offering for general corporate purposes, which may include content acquisitions, production and development, capital expenditures, investments, working capital, and potential acquisitions and strategic transactions.” According to a report in Bloomberg, the company eventually ended up selling $1.9 billion of the bonds, its largest-ever dollar-denominated offering.
As per Bloomberg, Netflix’s bonds are rated B+ by S&P Global Ratings, four steps below investment grade, or classified as “junk”. Netflix is notorious for burning through massive amounts of cash, as evidenced by its Q1 2018 report where it posted only $290 million net income against total revenue of $3.7 billion. However, as Bloomberg notes, this has not dissuaded debt investors from pumping in massive amounts of capital to fund the platform’s efforts to use original programming to fuel subscriber growth.
In a separate SEC filing yesterday, Netflix revealed that Ted Sarandos, the company’s Chief Content Officer and the man behind its capital-intensive programming strategy, made $22.4 million in 2017, an 18 percent increase from his 2016 earnings. Company CEO Reed Hastings also saw his pay increase, albeit at a more modest rate of 5 percent to $24.4 million. The platform’s success has taken the top executives at Netflix by surprise as well, with CFO David Wells commenting after the quarterly earnings report, “We’ve outperformed the business in a way we didn’t predict...The business has grown faster than we expected.”
Netflix is facing increasing pressure from competing platforms, with Amazon Prime Video in particular rapidly closing the gap with the market leader. Local platforms like India’s Hotstar are also quickly making inroads into Netflix’s target audience, which makes the company’s push for additional funding for original programming even more urgent. Netflix has grappled with sky-high amounts of long-term debt before (it was as high as $21.9 billion in September 2017) but has not let the issue stop its growth. Rahim Shad, a senior analyst in high-yield credit research at investment management company Invesco Ltd., echoed this sentiment to Bloomberg: “Of course there’s the massive cash burn, just ignore that for a second. The rest of the story is doing something that’s quite unique – subscriber growth and ASP growth...Netflix is essentially in its own league.”