Netflix’s New Free Cash Flow Calculation Hints at Potential Acquisition
Streaming pioneer wants to make an acquisition while showing positive free cash flow.
April 26, 2021
Netflix (NFLX), a streaming content and entertainment services pioneer, has changed the way it calculates free cash flow. In its previous 10-Q, Netflix offered the following free cash flow calculation method:

“We define free cash flow as cash provided by (used in) operating and investing activities.”

In its latest 10-Q, Netflix provided a new calculation:

“We define free cash flow as cash provided by (used in) operating activities less purchases of property and equipment and change in other assets.”

The change isn’t as significant as it may first appear. Netflix’s cash flow statement indicates that its cash flow from investing activities— which it previously included in its free cash flow calculation— consists of purchases of property and equipment and change in other assets, both of which are now used in the company’s new calculation.

The language changed but the components of Netflix’s free cash flow calculation did not. Thus, the new calculation or definition had no impact on the company’s free cash flow this quarter. The change isn’t an accident though and is likely to have a significant impact in the future. The move seems to suggest Netflix may be considering using cash from investing activities for purposes it hasn’t previously and doesn’t want included in future free cash flow calculations.

What might Netflix have up its sleeve?

We believe the change may indicate Netflix is planning to make an acquisition. The latest quarterly report includes new language suggesting as much. In the prior quarter’s 10-Q, Netflix provides the following opportunities for which it may use its cash:

“...to repay debt obligations, make investments and for certain other activities or the amount of cash used in operations, including investments in global content.”

In the latest quarterly filing, Netflix adds language indicating it’s now ready to use its cash to, among other things, make an acquisition:

“...to repay debt obligations, make strategic acquisitions and investments and for certain other activities like stock repurchases.”

With $8.4 billion in cash, Netflix has the firepower to acquire assets that complement its television, documentary, and movie content or move into new sectors like gaming. Separately, Neftlix recently authorized a $5 billion share repurchase. As of March 31, 2021, the most recent filing indicates the company has not repurchased any shares.

The new calculation allows the company to creatively report positive free cash flow in the future by not counting acquisitions, buybacks, or other uses of cash from investing activities. Netflix has routinely had to defend itself over the way it accounts for content. Though the new free cash flow definition will further muddy the company’s accounting— the footnotes reveal $13.9 billion in future content obligations remain off-balance sheet— the true importance of the disclosure for investors is that Netflix is looking to make an acquisition to spur post-pandemic growth.
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