Netflix’s top executives defended the streaming company’s free-spending ways, as well as a recent spate of show cancellations, after the company reported stronger-than-expected quarterly subscriber gains that sent its shares soaring to a new all-time high.
On the subject of Netflix’s massive spending—including $6 billion on programming this year alone—CEO Reed Hastings said during the company’s quarterly earnings call on Monday that Netflix’s increasing long-term debt load and a large negative free cash flow are nothing to worry about. On Monday, Netflix reported updated long-term debt of roughly $4.8 billion, much of which has been the result of spending to grow Netflix’s portfolio of original content, as the company is now on the hook for $15.7 billion in streaming content payments over the next several years.
Hastings told investors not to worry, noting that Netflix’s ratio of debt to its market capitalization (which is rapidly approaching $80 billion) is low enough to allay any concerns. But, most importantly, the CEO also said that Netflix’s high spending is really a sign of the company’s success. “The irony is the faster that we grow—and the faster we grow the [Netflix-]owned originals—the more drawn on free cash flow that will be,” Hastings said during the call. “So, in some senses, that negative free cash flow will be an indicator of enormous success.”
In other words, Hastings tied Netflix’s spending to the strong subscriber growth (5.2 million added subscribers in the most recent quarter) that inspired Wall Street to send the company’s shares spiking roughly 14% on Tuesday. Netflix is investing billions of dollars in its original programming—which were recently valued at a robust $11 billion—in order to spur subscriber growth as the company faces mounting competition around the world from rivals like Amazon, Apple, Hulu, and Google’s YouTube.
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That strategy has been working of late, as the latest big quarter sent Netflix’s subscriber total to 104 million globally, with most of the recent growth coming overseas as Netflix expects more than 80% of the new subscribers it’s forecasting in the current quarter will come in foreign markets. And, Hastings pointed out, Netflix will continue spending more and more money on growing its content portfolio as long as viewers keep watching an increasing amount of programming. Hastings said: “We’re continuing to see increased median viewing compared to a year ago, two years ago, three years ago.”
Meanwhile, also on the Monday earnings call, Netflix’s chief content officer Ted Sarandos defended the company’s recent cancellations of a handful of expensive, but underperforming, original series. “The more shows we have, the more likely in absolute numbers that you’ll see cancellations, of course,” Sarandos said. The executive compared Netflix’s recent spate of cancellations—including big-budget series like The Get Down and Sense8—to traditional TV networks that cancel nearly one-third of their new shows after their first seasons. Netflix, he said, has renewed 93% of its original series. With respect to the shows that Netflix opted not to renew, Sarandos argued: “If you’re not failing, maybe you’re not trying hard enough.”