Expect Netflix to Raise Cash in Dire Bid for Survival

NEW YORK (TheStreet) -- Towards the end of 2011, writing at Seeking Beta, I predicted Netflix (NFLX) would raise more cash in 2012.

I have 25 more days to be "right." But, cut me some slack. You can't expect precision on these types of predictions. If it doesn't come true until 2013 or 2014, is the overarching theme any less valid? It's not like I said, "Buy this call option that expires in December 2012," only to be correct on the price trajectory a year later.

Netflix will need to raise cash -- and raise it soon. That's all you need to know.

I simply cannot see a way its business -- without another infusion --- can support its existing content obligations not to mention a rumored -- by the LA Times -- $300 million annually on the just-announced mega content deal with Disney ( DIS).

Netflix CEO Reed Hastings will undoubtedly spin this agreement as groundbreaking and a major coup for his company. He's almost half right.

There's no doubt it's unprecedented. An online streaming service getting exclusive domestic first-run rights to movies from one of the world's biggest and most prolific studios, But, it will also prove groundbreaking vis-a-vis the height of corporate arrogance and fiscal irresponsibility.

And don't let Hastings fool you: Netflix does not make this deal from a position of strength; it does it in a dire quest for survival.

The classic Reed Hastings smokescreen -- that's also back on an exclusive, first-run basis on Wall Street.

It doesn't take a Harvard MBA to figure out what's happening here.

Netflix raised $400 million in late 2011. At the time the company claimed it was merely providing itself with a cushion so its clients would not start worrying about a cash problem. The company had the nerve to say, We don't really need the cash, but it's nice to have it, as it proceeded to further dilute shareholder value.

As of the most recent quarter, Netflix reports cash and cash equivalents of $370 million. That's down sequentially by about $30 million, but up "impressively" year-over-year when Netflix "only" had $159 million in cash.

Let's spell out what happened:
  • Three months ended Sept. 30, 2011: $159 million in cash.
  • Three months ended Dec. 31, 2011: $508 million in cash.
  • Three months ended Sept. 30: $370 million in cash.

That spike at the end of the 2011 wasn't a sign of growth or the business operating more efficiently; it was another indicator of the house of cards that is Netflix's business model. It signaled, yet again, a corporate incompetence that should lead to shareholder mutiny.

Chew on some more numbers.

On-balance sheet content liabilities continue to soar, from $685 million a year ago to $1.28 billion at the end of last quarter.

You have to bury yourself in Netflix's most recent 10Q, filed with the SEC to see that off-balance sheet content obligations due within five years hit nearly $5 billion last quarter. More than $2 billion of that is due in less than a year.

But don't just read the numbers, look at the fine print:

We have entered into certain streaming content license agreements that include an unspecified or a maximum number of titles that we may or may not receive in the future and/or that include pricing contingent upon certain variables, such as theatrical exhibition receipts for the title. As of the reporting date, it is unknown whether we will receive access to these titles or what the ultimate price per title will be. Accordingly such amounts are not reflected in the above contractual obligations table. However, such amounts are expected to be significant and the expected timing of payments for these commitments could range from less than one year to more than five years. (emphasis added)

Amidst all of this, subscriber growth has slowed to a relative crawl.

Even in our inconsistent environment, there's not a bank in its right mind that will lend Netflix money.

Netflix will do one of two things "very soon" (I am done pinpointing it down to a year!): Raise cash like it did at the end of 2011 or sell off the DVD division as I have been consulting it to do for 18 months.

Hastings will have to swallow his pride to do either, but he will because he loves his company. Its fate hinges on another lifeline.

--Written by Rocco Pendola in Santa Monica, Calif.

Rocco Pendola is TheStreet's Director of Social Media. Pendola's daily contributions to TheStreet frequently appear on CNBC and at various top online properties, such as Forbes.

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