Moody's Downgrades Netflix (NFLX) CFR to Ba3 from Ba2, Outlook Stable
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Moody's Investors Service downgraded Netflix, Inc.'s (Nasdaq: NFLX) Corporate Family Rating (CFR) to Ba3 from Ba2, Probability of Default Rating to Ba2 from Ba1, and the rating on its senior unsecured notes to Ba3 (LGD5-70%). This action concludes the review for downgrade initiated on October 9, 2012. The rating outlook is stable and the Speculative Grade Liquidity rating remains unchanged at SGL-1.
According to Moody's:
The downgrade reflects the higher risk surrounding the company's shift to a fixed cost streaming business model which requires much higher subscriber levels to reach profitability, combined with an increasingly competitive operating environment. While Netflix's initial Ba2 CFR, assigned in 2009, considered the risk associated with the company's ability to transition from physical DVD rentals to digital streaming, it did not consider the higher risk associated with a shift from a variable cost model to a fully fixed cost structure for the streaming business...
...In Moody's view, in order to maintain the same level of financial strength and reach a similar level of profitability as Netflix previously had under its DVD business when we initially rated it in 2009, Netflix would need to have at least 35 million domestic streaming subscribers, almost double the level of DVD subscribers it had at its peak...
...The downgrade also reflects Moody's concern over growing competition from a broad range of competitors for a streaming subscription video-on-demand
(SVOD) product.
According to Moody's:
The downgrade reflects the higher risk surrounding the company's shift to a fixed cost streaming business model which requires much higher subscriber levels to reach profitability, combined with an increasingly competitive operating environment. While Netflix's initial Ba2 CFR, assigned in 2009, considered the risk associated with the company's ability to transition from physical DVD rentals to digital streaming, it did not consider the higher risk associated with a shift from a variable cost model to a fully fixed cost structure for the streaming business...
...In Moody's view, in order to maintain the same level of financial strength and reach a similar level of profitability as Netflix previously had under its DVD business when we initially rated it in 2009, Netflix would need to have at least 35 million domestic streaming subscribers, almost double the level of DVD subscribers it had at its peak...
...The downgrade also reflects Moody's concern over growing competition from a broad range of competitors for a streaming subscription video-on-demand
(SVOD) product.
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