Moody's Doesn't See Expected Price Increases by Netflix (NFLX) Impacting Ratings, Outlook

Moody's Investors Service said that Netflix, Inc.'s (Nasdaq: NFLX) announcement to increase subscription prices will not impact its Ba3 Corporate Family rating and positive rating outlook. Netflix announced that it plans to increase subscription prices by one or two dollars later in the quarter. The global price increase will impact new members initially and existing members will stay at current rates for a generous time period before eventually being impacted by the price increase. The move is not expected to have a material impact on subscriber churn rates as we believe this time the company is being particularly cautious in its approach by implementing a modest price adjustment and delaying rate increases for existing customers. However, we believe that new subscribers may want to take advantage of current pricing levels and be grandfathered in at lower rates. Accordingly we believe that the company could likely experience a moderate increase in new subscriptions over the coming month. Looking ahead, we anticipate the planned price hike will positively impact EBITDA and free cash flows over the long run and allow the company greater flexibility to invest in high quality content offerings.

Moody's also indicated that the company's 2014 first quarter earnings are in line with expectations factored into its current ratings and the positive rating outlook. Netflix reported a boost in top-line with year over year revenues up 24%, helped by a 9% sequential growth in its subscriber base, which stood at 48 million (international plus domestic streaming subscribers) at 3/31/2014. Driven by good execution and a 21% sequential increase in international subscribers (paid), the company demonstrated remarkable progress in stabilizing its international segment operations and curtailing international startup losses, which improved by over 50% on a year over year basis. Based on the company's solid Q1 results and expectations for continued growth momentum in the remainder of the year, Moody's anticipates that over the coming quarters, Netflix stands to position itself more solidly in the Ba rating category and move towards credit metrics that are indicative of a higher rating.

The positive outlook is supported by our belief that continued operating improvements will enable the company to reduce consolidated debt-to-EBITDA leverage from approximately 3.0x at 3/31/2014 (incorporating Moody's standard adjustments) to under 2.0x within the next 18 months. Notably, LTM 3/31/2014 EBITDA has surpassed 2010 levels (when the company was rated Ba2 and was a pure physical DVD rental business), driven by consistent growth in streaming subscribers, increased investments in premium content and original programming like House of Cards and Orange is the New Black and successful launches in international markets. Netflix's ongoing international expansion will continue to create a drag on earnings and cash flows over the coming years, but we expect that growth and maturing of early entry markets will offset some of the negative impact of new market launches. Overall, we believe that favorable operating trends seen thus far will continue over the near to intermediate term and nullify the concerns over the higher breakeven subscriber levels needed for the streaming business.

You May Also Be Interested In

• TechnipFMC (FTI) Tops Q1 EPS by 6c, provides guidance
• Ultralife Corp. (ULBI) Tops Q1 EPS by 12c
• Wausau Paper (WPP) Q1 Revenue Misses Estimates