On this week exactly a year ago, our co-Head of Fixed Income Adrian Hull wrote about Netflix’s debut issuance (Netflix launches Billions) into the euro bond market, when it printed €1bn of 10-year maturity bonds. One year on and Netflix has just priced its first issuance of 2018, this time in US dollars. Having initially targeted raising $1.5bn through senior bond issuance, the company ended up printing almost $2bn. Pricing at 5.875% for a 10.5 year maturity, this bullet bond proved to be another successful bond issue for Netflix. So what has changed for the business in the last year?
Netflix continues to surpass expectations for subscriber and EBITDA (earnings before interest, taxes, depreciation and amortization) growth. Both US and overseas segments saw net additions to subscribers well above company expectations. On top of this, Netflix successfully passed through its planned subscription price increase without significant churn in either its US or overseas base. Last year, US profits meaningfully supported overseas expansion; one year on, international improvements are offsetting margin declines in the US market.
The proceeds for the new bond have been earmarked for ‘general corporate purposes’, which is likely to mean a significant portion will be used to fund Netflix’s anticipated $3-4bn cash flow burn in 2018. We think Netflix will have to keep tapping the debt market in the near term as it burns through its cash pile in its quest to create new content.
On that basis we’re not taking a “Daredevil” approach to this bond issue, and will instead continue to focus our efforts on finding companies with secure and stable cash flows, and of course sustainable returns for our clients.