S&P Cuts Netflix (NFLX) from BB to BB-; Outlook Stable
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Standard & Poor's Ratings Services said Monday that it lowered its rating on Los Gatos, Calif.-based Netflix Inc. (Nasdaq: NFLX) to 'BB-' from 'BB'. The rating outlook is stable.
At the same time, we lowered our issue-level rating on the company's debt by one notch in conjunction with the downgrade. The recovery rating on the debt issue remains unchanged.
"The 'BB-' corporate credit rating and stable outlook on Netflix reflect," said Standard & Poor's credit analyst Andy Liu, "our expectation that escalating content commitments will lower profitability over the intermediate term, international expansion will have a greater impact on overall profitability, and a return of domestic subscriber growth could occur slightly later than we initially expected." While acknowledging Netflix's growing programming commitments, we view the company as likely to maintain moderate debt usage as it expands into international markets and invests in new technology and content to grow market share.
The stable outlook is based on our expectation of subscriber growth in 2012.
We are still concerned with the company's escalating content costs and aggressive international expansion plans. Netflix's profit warning for 2012 is driven by its international expansion. If Netflix is unable to increase domestic paid subscribers at a rate commensurate with its spiraling content commitments (which grew to about $3.5 billion as of Sept. 30, 2011, from about $1 billion at the end of 2010), we could lower the rating. It is unlikely that we will raise the rating over the near term. That would likely entail very healthy subscriber growth, which more than offsets its growing content commitments.
At the same time, we lowered our issue-level rating on the company's debt by one notch in conjunction with the downgrade. The recovery rating on the debt issue remains unchanged.
"The 'BB-' corporate credit rating and stable outlook on Netflix reflect," said Standard & Poor's credit analyst Andy Liu, "our expectation that escalating content commitments will lower profitability over the intermediate term, international expansion will have a greater impact on overall profitability, and a return of domestic subscriber growth could occur slightly later than we initially expected." While acknowledging Netflix's growing programming commitments, we view the company as likely to maintain moderate debt usage as it expands into international markets and invests in new technology and content to grow market share.
The stable outlook is based on our expectation of subscriber growth in 2012.
We are still concerned with the company's escalating content costs and aggressive international expansion plans. Netflix's profit warning for 2012 is driven by its international expansion. If Netflix is unable to increase domestic paid subscribers at a rate commensurate with its spiraling content commitments (which grew to about $3.5 billion as of Sept. 30, 2011, from about $1 billion at the end of 2010), we could lower the rating. It is unlikely that we will raise the rating over the near term. That would likely entail very healthy subscriber growth, which more than offsets its growing content commitments.
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