Q: Mohammad Saab, CPA, is the head of research of the Intermediate Finance Asset Management. He is analyzing the financial strategy and risk of Netix. In his report, he provided the following analysis: In its great thrust to grow, Netflix spent billions of dollars to buy more exclusive television series and movies and on international expansion. The company has already spent $6 billion in 2017 and it is planning to spend $7 billion next year to license or purchase entertainment programming. However, since the third quarter 2014, Netflix free cash ow, dened as cash ow from operations minus capital expenditure, has been negative (Exhibit 1). Exhibit 1: Netflix Free Cash Flow (in millions) O Freecashow S100M g _ - - 711m -200 4300 400 -500 600 J'IJEI 02 03 Q4 01 Q2 ()3 O4 01 02 03 Q4 01 02 Q3 04 O1 02 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 201ir 2017 Solute: Blwmberg As a response to this negative trend in free cash ows, Netix decided to increase its subscription price to from $9.99 to $10.99. Also, in October 2017, Netflix issued $1 billion bonds to expand its web streaming into nearly every country in the world. One concern to us, is the slowdown in the number of subscribers' growth around the world. The subscribers' growth rate has declined from 7.29% Compounded Annual Growth Rate (CAGR) in period Q2 2013-Q1 2016 to 4.98% CAGR in the period Q1 2016-Q2 2017. Exhibit 2 displays the number of subscribers since the second quarter of 2013 until the second quarter of 2017. Exhibit 2: The Number of Subscribers Around the World (in millions) .._ 2.. :5 s ..- .E :I ll 103.95 93.75 Ell! IGN- "135 ill 05 SI 39 65 55 691? 3? 55 4023