Netflix: Moody's Sees 'Reduced Cushion' for Existing, New Content Agreements

Slowed subscriber and financial momentum leads the debt ratings firm to change its outlook on approximately $200 million of Netflix debt from "positive" to "stable."

NEW YORK -- Moody's Investors Service said Wednesday that it has changed its outlook on approximately $200 million of Netflix debt from "positive" to "stable," citing the company's worse-than-expected subscriber declines and management's negative cash flow forecast for the upcoming quarters.

"The result will mean limited free cash flow for the next year, which in our view, reduces the cushion that has existed to support new and existing content contractual commitments," the debt ratings agency said.

All that diminishes the probability of a debt ratings upgrade over the coming 12 months, it added. Better debt ratings tend to make borrowing cheaper for companies.‬

One key concern for Moody's are Netflix's content costs. "The company has significantly upped its investments and contractually fixed commitments for streaming programming (in contrast to the mostly variable physical DVD model)," it said. As subscribers grow, the relatively fixed content cost and lower shipping and handling costs are expected to boost profits.

"However, if new investments do not draw new subscribers at a faster pace than they are churning out, or there are material subscriber losses those streaming contracts will diminish what are already low margins or cause losses if this were to occur in a short period of time," Moody's wrote.

The credit ratings agency also cautioned about another potential financial drain for Netflix. The company's newest expansion in the U.K. and Ireland "may be ill timed given the stall in the domestic business and lack of visibility as to how quickly it can recover," Moody's cautioned.

‪"We believe management grossly underestimated the price sensitivity of its customers, particularly during the weak economic environment, and embarked on a mistaken classic strategy of making material changes to a successful business model which suits the company's needs and goals while ignoring those of its customers, in this case undermining the company's primary strength which drove consumers to the service in great numbers," said Neil Begley,  Moody's entertainment industry expert.

"As of today, it is Moody's view that there still isn't sufficient streaming content available to move subscribers seamlessly to the all streaming plan, which was the company's hope," he said. "Many newer theatrical and television titles, while available on DVD, have not been available for streaming at the same time."

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