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Rating Action:

Moody's assigns Ba3 rating to Netflix's proposed notes offering

21 Oct 2019

New York, October 21, 2019 -- Moody's Investors Service ("Moody's") has assigned a Ba3 rating to Netflix, Inc.'s (Netflix) proposed $2 billion senior unsecured notes offering split between dollar and Euro issuance and maturing in 2030. Proceeds from the issuance will be used for general corporate purposes, which may include content acquisitions, capital expenditures, investments, working capital and potential acquisitions and strategic transactions. Netflix's Ba3 corporate family rating (CFR) and Ba2-PD probability of default rating (PDR) remain unchanged. The speculative grade liquidity rating (SGL) is maintained at SGL-1. The outlook remains stable.

A summary of today's action follows:

Assignments:

..Issuer: Netflix, Inc.

....Senior Unsecured Regular Bond/Debenture, Assigned Ba3 (LGD4)

RATINGS RATIONALE

Pro forma for this debt issuance, Netflix's gross leverage will be 6.6x (including Moody's adjustments) for the last twelve months ended September 30, 2019 (4.3x on a last quarter annualized (LQA) basis and 4.0x on a pro forma net debt basis). However, despite the continuing issuances of debt to fund the company's negative cash flows, we expect leverage to drop gradually over time with subscriber growth, as the transition from licensed content to produced original content levels off, and international markets mature and begin to contribute to profits, all which we expect to contribute to margin improvement. We anticipate that gross leverage will fall to below 6.0x by the end of 2019 and below 5.0x by the end of 2020, as the company's EBITDA growth outpaces the growth in content spend and in debt. Further, we believe the company will easily surpass 200 million paid streaming subscriber in fiscal year 2021, with an outside chance that it reaches that number by the end of fiscal year 2020. However, greater levels of SVOD competition from major traditional media companies like Walt Disney Company (The) (A2), AT&T Inc.'s (Baa2) Warner Media, LLC, and Comcast Corporation's (A3) NBCUniversal Enterprise, Inc may temper subscriber and revenue growth at Netflix. While the programming offered by each of the companies is dissimilar, we believe that increasing SVOD options could impact pricing power for Netflix over the intermediate-term, but we expect Netflix to be a foundation for Tier 1 SVOD service in many markets. Notwithstanding the increasing competition, we project that the company has the ability to reach cash flow breakeven by 2023 as they grow total margins to the low to mid 20% range. We believe the company's strategy to procure its own content has positive long-term implications as it builds its owned library assets as compared to pure licensing of content which has supply considerations. We also believe owned content will provide scale benefits for the company and increasingly provide proprietary value to consumers, not to mention provide a valuable asset base for investors. With distribution reaching across the entire world, Netflix has the capability to create content at a fixed cost and scale it across a near global footprint.

The stable outlook reflects our expectation that 2019 is a negative cash flow trough year and Netflix's operating results will improve gradually. We forecast that the company will de-lever through revenue, EBITDA and margin growth. We anticipate that credit metrics should become less volatile over time since no new markets are being launched, which have been a significant drag on margins in the past.

Ratings could be upgraded if Netflix: 1) is expected to be able to generate sustained free cash flows over a two to three year forward period; 2) continues to expand subscriber numbers and margins, helping to fund increases in content spend working capital such that it can maintain its significant lead on its content offering relative to competitors; and 3) deleverages over the next 12 to 24 months, sustaining debt-to-EBITDA leverage below 4.0x. Higher profitability would be needed for a higher rating along with a strong commitment from management to sustain stronger credit metrics given the company's view that an optimized capital structure for the company includes a ratio of 20 to 25% debt to enterprise value.

Moody's would consider a downgrade to Netflix's ratings: 1) if consistent and continuous margin improvements fail to be achieved such that negative cash flows persist at high levels; 2) leverage remains stubbornly high and are not on a trajectory to decline to below 5.0x; 3) if there are expectations for deterioration in subscriber numbers due to competitive pressures or operational setbacks; and 4) if liquidity issues arise due to capital market access issues and capital needs exceeded the company's cash balance and revolving credit facility availability.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Netflix, Inc. is a public company with a financial policy that allows for elevated leverage to fund negative cash flows. Netflix's leverage profile is higher than most of its peer media companies, and its willingness to operate with higher leverage represents an aggressive financial policy. Social risks for Netflix can include a data breach event, where intellectual property and sensitive subscriber data could be subject to legal or reputational issues. However, management monitors its social risks closely, including data protection, and workforce resource planning.

Netflix, Inc., with its headquarters in Los Gatos, California, is the world's leading subscription video on demand ("SVOD") internet television network with three operating segments: Domestic streaming, International streaming and Domestic DVD. Domestic and International streaming segments derive revenues from monthly subscription services consisting of streaming content over the internet, and the Domestic DVD division derives revenues from monthly subscription services consisting solely of DVD-by-mail. Revenue for the last twelve months ended September 30, 2019 was approximately $18.9 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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