Netflix to raise US$400 million for expansion, original content

Netflix is planning to raise US$400 million (€296 million) in long-term debt in the first quarter of this year as it plans to “significantly increase” investments in original programming and international expansion.

In its annual report, filed yesterday with the US Securities and Exchange Commission, Netflix said that it expects to substantially increase its investment in original content in 2014, but cautioned this would still represent “less than 10% of our overall global content expense.”

It also said that it plans to continue to grow its services internationally, and expects a “substantial European expansion in 2014” – an intention first outlined in its fourth quarter investment announcement last month.

“To take advantage of the current favourable interest rate environment, we plan to obtain approximately US$400 million in long term debt in the first quarter of 2014,” said Netflix in the filing.

“Our ability to obtain this, or any additional financing that we may choose to or need to obtain, will depend on, among other things, our development efforts, business plans, operating performance and the condition of the capital markets at the time we seek financing.”

Referring to its original content plans – which has already seen Netflix produce acclaimed series such as House of Cards and Orange Is the New Black – the firm said that these shows, as well as content that is licensed in an earlier window through an output deal, will “typically require more up-front cash payments.”

For full year 2013, Netflix said that free cash flow was negative US$16.3 million – $128.7 million lower than net income – with an excess of net income over free cash flow increasing year-on-year thanks to higher content investments.

Netflix also admitted that viewing patterns for its original productions were “significantly higher in the first few months” relative to the rest of the shows’ four-year predicted amortization period than previously estimated.

As a result, it was forced to change its contribution estimates for these shows leading to a US$18.9 million decrease in contribution profit for the domestic streaming segment and a US$6.1 million increase in contribution loss for the international streaming segment for full year 2013.

“The effect of this change in estimate was a decrease in operating income and net income of US$25.0 million and US$15.4 million, respectively for the year ended December 31, 2013,” said Netflix.

The firm did not disclose which markets it planned to roll out to next. Its most recent European launches were in Finland, Denmark, Sweden and Norway in October 2012 and in the Netherlands in September 2013.