Discussion Materials
December 10, 2012
Assumptions
• The following analysis estimates the break even U.S. streaming subscriber growth or price increases required in order
for Netflix to pay $300 to $350 million(1) in incremental programming spend for the Disney deal in 2016 and 2017, and
$575 to $650 million for Disney and Sony deals combined in 2017
• Our break even analysis assumes zero gross profit from Netflix’s Domestic DVD and International Streaming businesses
(Revenue = Programming Spend for these businesses)
• Over the last 12 months, Domestic DVD generated $1.3bn in revenue and $604mm of contribution profit;
however, these amounts are projected to decline over time
• Over the last 12 months, International Streaming generated $215mm of revenue and a contribution profit (loss) of
($344mm)
• Total projected company marketing, technology and G&A expenses are assumed to be fully absorbed by the U.S.
streaming business (including costs that could be attributed to Domestic DVD or International Streaming, such as
international marketing)
• If Domestic DVD and International Streaming businesses have positive gross margins, this would positive contribute to
Netflix EBIT
(1) Estimate based on public research to date
Conclusions
($ and subs in millions, except for $ per sub)
Netflix will need to continue to either grow faster than US Broadband households due to Word of Mouth, more/better/exclusive content
available, better user experience etc. or increase its monthly price per subscriber, or some combination of both. SPE’s preliminary view
is in agreement with equity research analysts that Netflix will need to pull a combination of levers in order to meet its content payment
obligations. The growth assumptions do not appear out-of-reach but carry a significant risk
2012E-2017E Expected CAGR
of Total Subs to Break Even
Subs
$300.0
10.8%
$325.0
10.9%
$350.0
11.1%
$575.0
12.3%
$600.0
12.4%
$625.0
12.5%
$650.0
12.7%
8.0%
5.0
5.3
5.6
7.9
8.2
8.4
8.7
10.0%
1.5
1.8
2.0
4.4
4.6
4.9
5.2
2017E Broadband
Household Penetration
2017E
Disney
Deal
Subs
41.9
42.1
42.4
44.7
45.0
45.3
45.5
$300.0
$325.0
$350.0
$575.0
$600.0
$625.0
$650.0
2017E Incremental Subs Required to Break Even
2013E - 2017E Sub Growth
0%
2.0%
4.0%
6.0%
16.8
14.2
11.4
8.3
17.1
14.5
11.6
8.6
17.3
14.7
11.9
8.9
19.7
17.1
14.2
11.2
19.9
17.3
14.5
11.5
20.2
17.6
14.8
11.7
20.5
17.8
15.0
12.0
2017E
Disney &
SPE Deals
2017E
Disney
Deal
$300.0
$325.0
$350.0
$575.0
$600.0
$625.0
$650.0
2017E
Disney &
SPE Deals
10.0%
($144.7)
($169.7)
($194.7)
($419.7)
($444.7)
($469.7)
($494.7)
2017E Total Subs
2017E
Disney &
SPE Deals
2017E
Disney &
SPE Deals
2017E
Disney
Deal
2017E Additional Subs vs.
Today (25.1mm subs)
Subs
$300.0
16.8
$325.0
17.1
$350.0
17.3
$575.0
19.7
$600.0
19.9
$625.0
20.2
$650.0
20.5
8.0%
($483.8)
($508.8)
($533.8)
($758.8)
($783.8)
($808.8)
($833.8)
2017E
Disney
Deal
2017E
Disney &
SPE Deals
2017E
Disney
Deal
Sensitivity: Break Even Analyses at $7.99 Constant Price and Varying Subs Growth
2017E Incremental EBIT Required to Break Even
2013E - 2017E Sub Growth
(1,391)
0.0%
2.0%
4.0%
6.0%
$300.0
($1,611.3)
($1,361.3)
($1,090.9)
($798.8)
$325.0
($1,636.3)
($1,386.3)
($1,115.9)
($823.8)
$350.0
($1,661.3)
($1,411.3)
($1,140.9)
($848.8)
$575.0
($1,886.3)
($1,636.3)
($1,365.9)
($1,073.8)
$600.0
($1,911.3)
($1,661.3)
($1,390.9)
($1,098.8)
$625.0
($1,936.3)
($1,686.3)
($1,415.9)
($1,123.8)
$650.0
($1,961.3)
($1,711.3)
($1,440.9)
($1,148.8)
2017E
Disney
Deal
Per the analysis below, at $7.99, paid US subs need to grow at a CAGR of 12.4% from $25.1mm for 2012E to 45.0mm in 2017E. This would
imply an increase in U.S. Broadband Households penetration from 28.6% in 2012E to 42.5% in 2017E
2017E
Disney &
SPE Deals
•
$300.0
$325.0
$350.0
$575.0
$600.0
$625.0
$650.0
Subs
39.6%
39.8%
40.0%
42.3%
42.5%
42.8%
43.0%
•
If subs grow at 4.0% CAGR in line with analyst projections for increases in U.S. broadband households, a price point of $11.79 in 2017E
would be needed to break even
10.0%
$0.30
$0.35
$0.40
$0.87
$0.92
$0.97
$1.02
2017E
Disney &
SPE Deals
2017E
Disney &
SPE Deals
2017E Incremental (over $7.99) Monthly Fee per Sub Required to Break Even
2013E - 2017E Sub Growth
0%
2.0%
4.0%
6.0%
8.0%
$300.0
$5.36
$4.10
$2.98
$1.99
$1.10
$325.0
$5.44
$4.18
$3.05
$2.05
$1.15
$350.0
$5.53
$4.25
$3.12
$2.11
$1.21
$575.0
$6.27
$4.93
$3.73
$2.67
$1.72
$600.0
$6.36
$5.00
$3.80
$2.73
$1.77
$625.0
$6.44
$5.08
$3.87
$2.79
$1.83
$650.0
$6.52
$5.16
$3.94
$2.86
$1.89
2017E
Disney
Deal
Per the analysis below, if subs remain flat at 25.1mm over the projection period, price points of $12.57 per US sub per month in 2016E and
$14.35 in 2017E would be needed to break even
2017E
Disney
Deal
•
0
$300.0
$325.0
$350.0
$575.0
$600.0
$625.0
$650.0
2017E Total Monthly Fee per Sub Required to Break Even
2013E - 2017E Sub Growth
0%
2.0%
4.0%
6.0%
$13.35
$12.09
$10.97
$9.98
$13.43
$12.17
$11.04
$10.04
$13.52
$12.24
$11.11
$10.10
$14.26
$12.92
$11.72
$10.66
$14.35
$12.99
$11.79
$10.72
$14.43
$13.07
$11.86
$10.78
$14.51
$13.15
$11.93
$10.85
8.0%
$9.09
$9.14
$9.20
$9.71
$9.76
$9.82
$9.88
10.0%
$8.29
$8.34
$8.39
$8.86
$8.91
$8.96
$9.01
Other Considerations
• Risks: 1) further increasing content costs, 2) potential new competitors in the company's streaming business, 3)
execution challenges and competition potentially limiting growth in new markets, 4) the possibility of ISPs to look to
recoup higher rents for Netflix's high bandwidth requirements for streaming, 5) subscriber price inelasticity risk if price
hike is to take place, 6) higher than expected churn
• Opportunities: 1) content costs rising slower than expected, 2) total subscriber growth is faster than expected, 3) Netflix
repairs public image and regains lost customer loyalty, 4) Netflix gets acquired, 5) Netflix develops successful original
content and establishes itself as a head-to-head competitor of traditional PayTV networks (5 originals expected to be
released in 2013), 6) Netflix has churned off subs of ~17mm in FYE 2011 and is expected to have churn off subs of
~19mm by 4Q13. If these subs are added to the current US subs of 25.1mm, Netflix would have or have already gone
through ~ 50% of total US broadband households, a possible but unlikely penetration scenario
• Additional Financing: It is unlikely that Netflix will be able to raise a substantial amount of debt or equity in 2017 to
finance programming spend given its on and off balance sheet liabilities and assuming similar to the current capital
structure
• If we assume 4% annual subscriber growth and $600mm of additional combined programming spend in 2017 for
the Sony and Disney deals, the additional EBIT required to break even of $1.4bn would imply an equity dilution
of 22.6%(1) if shortage financed through new equity, a very unlikely scenario
• Netflix has limited capacity to raise additional debt. Although the company has only $400mm of debt (2.7x
Debt/EBITDA), it has significant on and off balance sheet liabilities. Netflix has (i) $4bn of on balance sheet
content liabilities and an additional $5bn of off balance sheet liabilities (commitments to studios). As studios will
need to get paid prior to debtholders and shareholders in the event of default/liquidation, the $9bn of priority
studio commitments makes a significant new debt offering unlikely
(1) Based on $4.8bn current market capitalization
Appendix
Netflix U.S. Streaming Historical & Projected
Financials
11.9
29.8%
Historical
2010
11.9
6.0
17.9
50.8%
16.6%
23.8%
2009
Wall Street Research and SPE Projections
2013E
2014E
2015E
2016E
25.1
26.1
27.1
28.2
1.0
1.0
1.1
1.1
26.1
27.1
28.2
29.3
4.0%
4.0%
4.0%
4.0%
2011
17.9
4.9
22.9
27.4%
2012E
22.9
2.2
25.1
9.6%
27.5%
28.6%
28.5%
1.0
28.4%
2.0
28.4%
3.1
28.6%
4.3
28.8%
5.4
$7.99
$7.99
$96.1
$96.1
$7.99
$99.9
$196.0
$7.99
$103.9
$300.0
$7.99
$108.1
$408.1
$7.99
$112.4
$520.5
Total Revenue US Streaming Revenue
Cost of Revenues
Incremental Cost of Revenue-Disney
Incremental Cost of Revenue-Sony
Total Cost of Revenue
Gross Profit
Gross Margin
$2,402
$1,492
$2,498
$1,738
$2,598
$1,883
$2,702
$2,039
$2,810
$2,209
$325
$1,492
$911
37.9%
$1,738
$760
30.4%
$1,883
$716
27.5%
$2,039
$663
24.5%
$2,534
$277
9.9%
$2,923
$2,392
$325
$275
$2,992
($69)
-2.4%
Marketing Expense
Technology
G&A
EBIT - Excluding DVD Business and Intl
$505
$334
$122
($50)
$545
$363
$139
($286)
$560
$397
$151
($392)
$576
$433
$165
($511)
$592
$473
$180
($968)
$609
$517
$196
($1,391)
0.5
25.6
3.0
29.0
4.1
31.2
5.3
33.5
10.1
39.4
14.5
45.0
29.2%
31.7%
32.6%
33.8%
38.4%
42.51%
4.0
15.9%
6.1
11.6%
8.5
10.2%
14.4
12.0%
19.9
12.4%
26.1
$286.0
$0.91
$7.99
$8.90
27.1
$392.0
$1.21
$7.99
$9.20
28.2
$510.6
$1.51
$7.99
$9.50
29.3
$968.1
$2.75
$7.99
$10.74
30.5
$1,390.9
$3.80
$7.99
$11.79
Beginning N etflix Streaming Subscribers (US & Paid)
Plus: Incremental Subs
Ending N etflix Streaming Subscribers (US & Paid)
Growth %
Implied Penetration of N etflix Subs / Broadband Households
Cumulative Incremental Subs
Subscriber Cost per Month
Incremental Revenue from Incremental Subs
Cumulative Incremental Revenue
Break Even Analysis
Break Even Based on Growing Subs
Additional US Paid Subs Needed to Break-Even @
Total Subs for break even
$7.99
Implied Penetration of N etflix Subs / Broadband Households
Additional Subs vs. Today (25.1mm)
Expected CA GR to break even
Break Even Based on Growing Monthly Sub Fee
Current Subs
Amount of EBIT Needed to break even ($MM)
Implied Incremental Monthly Fee per Sub Needed
Current Monthly Fee per Sub
Per Sub Monthly Fee Required to Break Even
Growth:
4.0%
25.1
$50.1
$0.17
$7.99
$8.16
2017E
29.3
1.2
30.5
4.0%
U.S. Broadband Households Forecast
Total Households (US)
Growth %
Internet Households (US)
Growth %
2009
115.1
1.1%
93.5
2.1%
Historical
2010
116.0
0.7%
93.2
(0.3%)
Broadband Households (US)
SNL
PWC
Average Broadband Households (US)
Growth %
71.5
71.5
5.8%
75.2
75.2
5.2%
62.1%
64.9%
Broadband Household Penetration / Total Households
2012E
117.9
1.1%
94.7
0.3%
Third Party Research Projections
2013E
2014E
2015E
119.4
120.5
121.6
1.3%
0.9%
0.9%
94.7
97.2
99.8
0.1%
2.6%
2.7%
2016E
122.5
0.8%
103.5
3.7%
2017E
123.4
0.8%
107.3
3.7%
86.1
80.4
83.2
10.6%
89.9
85.2
87.5
5.2%
93.4
89.7
91.6
4.6%
96.5
94.7
95.6
4.4%
99.5
98.8
99.2
3.7%
102.3
103.0
102.7
3.5%
105.0
106.6
105.8
3.1%
71.4%
74.2%
76.7%
79.3%
81.6%
83.8%
85.8%
2011
116.5
0.5%
94.4
1.3%
PayTV Landscape
Pay TV Channel
HBO
Cinemax
Showtime
TMC
Flix
Starz
Encore
Epix
Netflix
Netflix (2017)
# of Subs (mm) (2012)
28.6
12.0
21.9
21.8
32.0
20.8
34.3
5.6
25.1
45.0
Total HH Penetration (2012)
24.3%
10.2%
18.6%
18.5%
27.2%
17.7%
29.1%
4.7%
21.3%
36.5%
Revenue ($ bn) (2012E)
$3.1
$1.3
$0.5
$0.5
$0.7
$0.5
$0.8
$0.4
$2.4
$4.3
Source: SNL Kagan and Netflix breakeven analysis for Netflix (2017) data
Revenue for Starz/Encore and for Showtime/TMC/Flix provided in total and allocated to the specific network based on the number of subscribers.
Monthly Revenue per Sub
$9.14
$9.14
$1.77
$1.77
$1.77
$2.03
$2.03
$6.65
$7.99
$7.99