Streaming media giant Netflix (Nasdaq: NFLX) returned to the primary market Tuesday with a US$2bn high yield bond sale, as the company continues to pour cash into original content.

Los Gatos, California-headquartered Netflix took advantage of relative market calm to offer new euro- and U.S. dollar-denominated debt, amid intensifying competition for video consumption.

The company said it intends to use the net proceeds from the private placement sale for general corporate purposes, which may include content acquisitions, production, and development, capital expenditures, investments, working capital, as well as other potential purchases and strategic transactions.

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At the time of launch, market participants had placed pricing of the 10 ½-year non-callable, U.S. dollar- and euro-denominated securities at yields to maturity of 4.875% and 3.625%, respectively. Demand for the junk bonds was also decent, with the multi-currency tranches each having improved by around 25 basis points from initial price talk.

Yields on the 10-year U.S. Treasury note and German Bund were last bid at around 1.778% and -0.376%, respectively.

The ‘BB’-rated issuance was being jointly managed by Goldman Sachs, Deutsche Bank, J.P. Morgan, Morgan Stanley, and Wells Fargo.

The fresh debt offering follows hot on the heels of the firm’s third-quarter of 2019 financial results, which fell somewhat short on expected subscriber additions but surged on revenues.

In Q3’19, Netflix generated a 31% spike in year-over-year sales to US$5.2bn, while doubling its operating income to US$1.0bn. It also posted total paid net adds of 6.8m, slightly shy of its 7.0m expected, but a healthy increase over the 6.1m in the same year-ago quarter.

The vast lion’s share of paid net adds stemmed from overseas subscribers, with its domestic total of 500k dwarfed by its 6.3m international additions – a rise of 23% year-on-year.

Netflix blamed the slower U.S. membership growth in large part on its cost increase earlier in 2019, as it failed to sustain retention to pre-price-change levels.

I Want My OTT

Indeed, Netflix has been competing for consumer video consumption with an increasing drove of over-the-top (OTT) entrants to the streaming media landscape, which has evolved a long way since the company first introduced its service in 2007.

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Players in the space now include companies such as Amazon’s (Nasdaq: AMZN) Prime and IMDb TV, Disney (NYSE: DIS)- and Comcast Corp (Nasdaq: CMCSA)-controlled Hulu, AT&T-owned (NYSE: T) HBO Now, Lions Gate Entertainment’s (NYSE: LGF-A) Starz Play, and CBS All Access (NYSE: CBS), among others.

Netflix admits that the subscription video on demand (SVoD) model has exploded, with the upcoming arrival of services such as Disney+, Apple’s (Nasdaq: AAPL) Apple TV+, HBO Max, and NBCUniversal’s Peacock creating further congestion. 

The company said the “launch of these new services will be noisy,” potentially causing “some modest headwind to our near-term growth,” which it has tried to factor into its guidance.

However, Netflix downplayed the SVoD proliferation as a direct threat to its content offerings and compared the trend to the evolution of linear TV, where all the internet-based platforms are still “small” by comparison. 

The company noted that “for the first few decades of cable, networks like TBS, USA, ESPN, MTV, and Discovery didn’t take much audience share from each other, but instead, they collectively took audience share from broadcast viewing,” and, similarly with SVoD, the “likely outcome from the launch of these new services will be to accelerate the shift from linear TV to on-demand consumption of entertainment.”

Overall, Netflix added that content creation is “booming around the world and everyone is vying for consumer attention.”

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Even ‘booming’ seems to be an understatement when considering the amount of available content for viewing at the three major streaming service providers Netflix, Prime and Hulu.

According to data and analytics firm Ampere, at the end of the first quarter of 2019, the average U.S. SVoD household had access to a little more than nine years (80k hours) of on-demand content from their SVoD providers, almost double the average SVoD household in Q3 2016, which had roughly five years (43k hours).

Ampere analyst Toby Holleran pointed out that of the three U.S. SVoD majors, Amazon offers subscribers the most content, providing around 50k hours (up from 20k in Q3 2016), followed by Hulu at 42k hours (a drop from 45k in Q3 2016) and Netflix at 36k hours (up from 29k in Q3 2016).

Against this landscape, the cost increase likely won’t help Netflix, as new entrants offer lower admission prices to their services.

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Disney, for example, had been touting its launch of Disney+ at US$6.99 a month compared with Netflix’s Standard plan, which is offered at a monthly rate of US$12.99 – up 18% since around the start of January.

Analysts at Finimize recently noted that initially, Disney+ will most likely have “significantly fewer hours of content than Netflix. But as Disney churns out more of its exclusive Marvel, Pixar, and Star Wars content – and potentially bundles in Hulu shows to boot – customers may eventually change channels.”

The Netflix Name

For now, Netflix is counting on its original content to lure consumers to its station, amassing mountainous debt to rake-in top talent such as media icons Martin Scorsese, Meryl Streep and Gary Oldman for its productions. 

The firm has already spent more than US$12bn in cash on content in 2018, a 35% increase over the prior year.

Netflix CFO Spencer Adam Neumann said that “with the size of content budget, we’ll take big swings and we can make some mistakes because we don’t have any kind of single title content concentration.”

While the company continues to operate with negative free cash flow (FCF), its earnings and margin have improved materially.

In Q3’19, Netflix’s FCF totaled -US$551m, down from -US$859m in the same year-ago quarter, with expectations for an estimated -US$3.5bn for the full year 2019. Meanwhile, its adjusted EBITDA exceeded US$1.1bn from roughly US$584m over the same period.

Dave Novosel, a senior analyst at corporate bond research service firm Gimme Credit, noted that the “substantial improvement” in EBITDA has driven leverage down to 4.4x, but despite the “outstanding operating metrics, our big concern remains with free cash flow.” 

On its most recent earnings call, Netflix tried to assuage investors with their strategic focus on content.

Netflix CFO Neumann said that in 2020, “as we continue to grow our profit margins, continue to scale our business at what you’ve seen this year, which is nearly 30% revenue growth and then increasing margins, that ultimately translates into more cash flow that can be converted into content investment and improving that profile.”

He added that the negative FCF position represents investment in future content, and the “bulk of our content investment is original programming.”

In the meantime, shares of Netflix plunged over 3.25% intraday Tuesday to around US$269.00, while its 5.875% notes due November 2028 were last down about 0.12% to US$109.76, according to the IBKR Trader Workstation.