Instant Reaction: Netflix Misses, Reed Hastings Steps Down

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0:58Bloomberg Audio Studios. Podcasts. Radio. News. This is a breaking news update from Bloomberg. Instant reaction and analysis from our 3 ,000 journalists and analysts around the world. Focus is on Netflix, just out with its latest quarterly results. The company beating estimates, though. Reed Hastings, of course, one of the co-founders, is stepping down from the board after 29 years to pursue philanthropy and personal interests. But again, we should point out in terms of the company, we can talk about that in just a moment, did report revenue that beat analyst estimates in the first quarter, buoyed by strong subscriber growth, engagement, keeping subscribers there and bringing them in.

1:41That's important. The guidance, though, is what has people concerned. Second quarter earnings per share of 78 cents is what Netflix is guiding for. The estimate was for 84 cents. I want to bring in Geetha Ranganathan, Bloomberg Intelligence Senior Media Analyst. She joins us from Bloomberg Intelligence Headquarters in Princeton. And Geetha, there are two elements that we want to talk about here. One is the light guide that disappointed analysts, but also Reed Hastings moving away. Which one is a bigger way on the stock in the after hours? Yeah, thanks so much, Tim. And it's definitely the lighter guidance.

2:11So I think not only were we looking at the second quarter guidance, which, of course, is lighter both on the revenue side as well as on the EPS front, but we were also anticipating some kind of a take up for the full year revenue guidance. So remember, the quarter before, they had said 12 % to 14 % for the full year. And they basically just came out this time and reaffirmed that same number. And I think the street was really looking for the recently implemented price hikes to contribute to, you know, maybe at least 100 basis points of improvement in revenue growth. The same goes for operating margin.

2:48I mean, when the guidance first came out for operating margin at 31.5%, that was considered to be pretty muted. and I think the street was pretty disappointed last time around and they haven't, they continue to be pretty, I think they're still kind of taking a conservative approach, but definitely the street is going to be pretty disappointed on this. So what do we want to do? Does everybody want to push them on the call with analysts to say, wait, give us a little bit more color around this? Are you being conservative? Is it as easy as that, Keita? So I think there are a couple of different things here happening, Carol, especially with the second quarter.

3:19So the reason why their revenue guide fell a little short of analyst expectations was because they did implement a big price hike in the second quarter of last year. So they're obviously lapping those increases. So that's one thing to kind of keep in mind. And then the second thing is on the EPS front, and the reason why we're seeing a little bit of pressure in terms of guidance for EPS and operating profit is because they do expect very, very heavy content amortization in the second quarter. So they think that that would ease a little bit in the second half, but in the second quarter, it's going to be pretty heavy, which might be part of the reason why they're still kind of taking a little bit of a conservative stance.

3:58And, you know, we've seen them kind of really invest in a lot of different pieces of content, most notably sports, whether, you know, it was the MLB opening day game or the World Baseball Classic, and you have a couple of boxing matches coming up. And so I think all of that, with all of that, they're kind of taking probably a slightly more measured, cautious tone. We don't get actual subscriber numbers anymore, unfortunately, but the company, as you mentioned, boosted its standard plan without ads by$2 to$20 a month. That was in March. Any indication based on these numbers or doing some quick back of the envelope math, what that did in terms of churn or maybe pushing people to the advertising tiers that are less expensive?

4:38Yeah. So historically, Tim, what we've seen is, and we've seen this in multiple price increases that Netflix has done over the past four years or so, is that churn has been pretty low. It is actually, for Netflix, It's actually the lowest across the board. It's about 1.7%. You compare that to about 6 % to 8 % to 9 % for some of the other services. So they've historically seen very, very low cancellation rates. Of course, there is the possibility with the price increase that there could be a little bit of tearing down, as you just pointed. I'm not sure it necessarily had a huge impact, at least for the quarter that is reported.

5:12But maybe they are factoring in some of that for the second quarter, which is why we're kind of seeing that lighter than expected guidance in terms of revenue growth. Huh. Okay. I mean, listen, I feel like, you know, when we talked about Netflix, right, in the last how many months, the story that gave and gave and gave over the past year was Warner Brothers Discovery. I mean, is there any rethink that that was a mistake or no, that has nothing to do with what we're seeing here? So you bring up a really interesting point, Carol. And I think, you know, when they announced the deal, people were kind of, you know, flummoxed and they were like, why are you doing the deal?

5:46Is it because you need it or is it just nice to have? Is it because this is, you know, a once in a generation, once in a lifetime opportunity for you guys to get hands on an asset that will probably never again come to the market? What is it? And I think, you know, people were kind of looking at this first quarter report as, you know, providing some more answers to that. But I think we have more questions than answers at this point because, you know, we're not necessarily seeing a great acceleration in the revenue numbers, in the operating margin numbers, which is exactly what they needed to show in order to, you know, basically assuage investors that did not need Warner Brothers Discovery.

6:21So this kind of it's it's it kind of leaves investors, I think, a little bit, you know, hanging a little bit. What about the Ben Affleck acquisition? That is a great acquisition. So, you know, and I think we will continue to see more of this going forward. So that is, you know, I think as we kind of ponder about whether AI is going to be a positive or a negative for some of these media companies, I think we're definitely going to see Netflix kind of flip the script and be more of an AI winner. And that, you know, the Ben Affleck company interpositive acquisition, which was basically for$600 million, I think it's a really smart, disciplined move, which, again, helps them really kind of hone in on AI and make it a positive catalyst.

7:04But there's this balance, and maybe the Ben Affleck element helps because he is a creator. He's a Hollywood creative, more so than an executive. But the scary thing is, I think for a lot of people in Hollywood, is like, what does it mean for their own jobs? And is it existential if AI can do what they're doing? Yeah, and I think Netflix has said this many times. And just the fact that, you know, Ben Affleck is obviously he represents Hollywood and the creative community. I think the company itself is really more about offering creators better tools for storytelling. So I don't think it's necessarily replacing them.

7:40And that's the same story that Netflix obviously has been saying, too. This is just to help them do their jobs better. This is not necessarily to replace them. So we'll see how it all, you know, it's still early days, Tim, and we'll see how it plays out. But, you know, so far they're saying the right things, I guess. 20 seconds. The company is going to be OK with Reed Hastings off the board? I think so. I think he's kind of been in the background now for a while. It's really just been Ted Sarandos and Greg Peters running the show. And I think I think they will they will be fine. All right. Cool stuff.

8:11I want to bring in Eric Clark. He's AccuVest Global Advisors, CIO. He's also the portfolio manager of the Logo ETF, which has Netflix as its second biggest holding. He joins us from inside for some reason, even though he's in beautiful San Diego, California. Eric, thanks for going into the office today to actually talk to us. Do appreciate that. We want to just get your quick reaction on Netflix down 9 % right now. Carol mentioned some of the headlines. The light guide certainly has investors a little concerned. Reed Hastings stepping away. big deal, but maybe not as concerning to investors. What's your quick reaction?

8:50Well, Carol said it earlier, the stock's up 40%. I mean, it went down 40 % from the highs in September, and then it went up 40 % or 42 % since the lows at$75. So short-term, any stock that runs 40 % into an earnings print better be an absolutely perfect print. But we don't care. you know, short term noise in a quarter has never bothered us. It's as long as the dominant theme of any company is still intact, you ride through some of the noise quarter to quarter, and you take advantage of that. And we certainly the stock was down 40%. And we added to it a number of times to beef the position up pretty meaningfully, because we do believe in this long term.

9:37And we've been getting paid to do that. So sometimes you just have to be willing to look through short-term noise. And we did come hot into the print. Yeah, listen, I think based on, was it the end of last year? This looks like it's the number two holding in your ETF, the logo ETF. Roughly 5.8%, but you can correct me. You're going to add to that position or is, you know, is this kind of near the top of how much you want in the portfolio? Well, by flexibility, we can go higher. I don't know that, you know, on a small print, on a small pullback like this. I don't know that there's a reason to add to it.

10:12I think, you know, the goal is that there's been a lot of names that have come down. There's been a lot of turbulence under the surface. So we have a pretty full position in Netflix. Sometimes we trade around it. So, you know, if I got the opportunity to do that, I could certainly do that. But, you know, our goal is to find what are the next trillion dollar brands? Who else joins the trillion club. Walmart joined not long ago. And, you know, Netflix only has to do about 13 % revenue ongoing and generate good free cash flow. We even capped the margin assumption at 35%. We capped the content spend at 20 billion, driving some more share buybacks.

10:56And you get to a trillion in market cap in 2032. So big picture, there's a lot more upside to go. You just have to go through different noisy quarters in a market that can be volatile. That's a more than doubling of the market cap in the next six years. Do you think that happens? I do. I do. Without Warner Brothers Discovery? I don't know. I completely agree. I think it would have been great to have that big content library. But again, at what cost? They've just saddled Paramount with a pretty significant debt load. So they can do lots of other things on the content spend. They're going to clearly do more on sports.

11:36You know, the gaming is probably more of a free call option. I think going forward, it's a little hard to know, excuse me, how that's going to go. But if they just do what they've continued to do, ratchet up margins a bit, use AI to enhance the business, um, draw viewership in, you know, Netflix is still the benefit of it's the place we go first for content search. And then we go out from there. Well, there's nothing new on, on Netflix. Okay. Now I'll go to HBO. Okay. Now I'll go to Amazon or Apple. So there, you know, and at 27 bucks a month, it's still an incredible value to the average consumer for all the entertainment that you get.

12:18And obviously I do agree. We have an$8 billion revenue estimate from the ad tier in 2032. And I think your prior guest was talking about somebody having 10 billion. So I think there's just a lot of things that you can, a lot of levers to pull for Netflix on the free cashflow, on the margin, on the AI side, which is still a little bit of an unknown. So I think dips are to be bought here. Yeah, go ahead. No, go ahead. Well, Reed Hastings, he has Powder Mountain in Utah. He's off skiing and creating this. David Weston got to go to Powder Mountain last year and talked to Reed Hastings. I would like to do some skiing at Powder Mountain.

12:56I bet you would. An issue at all for this company that Reed Hastings, and look, he hasn't been CEO or co-CEO for a time at this point. Not an issue to you that he's exiting the board when his term is over? Not an issue at all. And he still has$2 billion worth of stock. So he's pretty vested in in keeping up with Netflix and being comfortable enough to to walk away while still having, you know, last I checked, 21 million shares. He's he's committed to Netflix success, similar to to Ballmer with with Microsoft success. And look how it's worked out for Steve Ballmer with all the things that he's done with with Microsoft stock.

13:34I should note, I do believe Reed Hastings is a board member of Bloomberg LP, the parent company of Bloomberg Radio and Bloomberg Television. So full disclosure there. Yeah, no, we like to do that. Having said that, all right, so let's talk about the folks that are behind the helm. And let's just remind everybody, first of all, we're talking to Eric Clark, AcuVest Global Advisor, CIO. He's also a portfolio manager of the Logo ETF. Netflix is the second largest position in that ETF. Right now, we're looking at Netflix shares continuing to trade near their lows in the aftermarket, down about 9%. This is after the company's revenue did beat estimates.

14:15We did have that in the first quarter, but revenue did go up 16 % in the first three months of the year to$12.3 billion. That was a slight beat. Earnings per share,$1.23 compared with estimates of$0.76. cents. In the current quarter, though, the company forecasting earnings per share of 78 cents a share. That's less than the 84 cents predicted by Wall Street analysts. So that is the backdrop for those earnings. We're headed off to the analyst and investor call in a little while. Eric, what do you want to listen out for? What would you want to be asking on that call? You are an investor in the name.

14:49What would you be asking of the co-CEOs and their C-suite team? Well, I think sports in there, I mean, they're, they're obviously not going to give you a ton of clarity or granularity on sports because they don't want to tip their hand. But it's clear that sports has been a very big win for them. So I expect them to, to talk more about double downing on, on those kinds of differentiated opportunities. and just trying to be as mindful about their spend and the quality of the spend is really what I would ask. Let's face it, for a while there, they were in fill the library up mode and people kind of critiqued some of the quality content that they created.

15:33Now they have the ability, they have a large library. Now they have the ability to really focus on quality content, which certainly drives a lot more viewership and engagement. So again, at$27 a month, there are very few other services that give people more delight and more entertainment. And the business is so predictable and consistent. In the last couple of months, every day the market was down with some of the Iran headlines. Netflix and Spotify were usually up on the day because of the stability of the business model. So it isn't just the growth that we are making it such a big weighting.

16:11It's the stability of the model that that is important, too. You know, you're just going to have some of this volatility on the earnings. Yeah. But what's interesting is we're in an environment when I think about the model, YouTube dominant global video program, roughly two point seventy four billion monthly active users as of early 2026, leading U.S. TV streaming with over 12 percent of TV viewing time driven heavily by users over 50. Daler viewership can include 70 billion shorts views, top creators, you know, we can get into that. But this is from Nielsen. But people are watching YouTube and I realize it's an older or skewed older, but I just wonder, you know, do the streaming models, do they have it right?

16:55And to be fair, they have a lot of people watching. I watch them. But I just wonder, like, what is the model of how people, there's so much coming at individuals. They have a lot of choices out there Or they could just, you know, turn off their laptop, turn off their TV or whatever and put down their phone. Well, I think, you know, we have this short term ism in a variety of our lives, this dopamine hit. And, you know, YouTube does provide that short term. You know, I just want a four minute clip. And so it wouldn't surprise me if YouTube started or Netflix started to kind of experiment with some of those, you know, short burst type of content as well.

17:40Yeah. Isn't that funny? That's so wild. But you just think about, right? Because you click on those short videos. I mean, listen, I have someone at home that's really into it. And yeah, he's above 50. but I mean like the amount of stuff and velocity you will go through you know like Instagram YouTube TikTok snap those short forms are everywhere yeah right but what do you think but he's not on that but I just think about those short things and you can have ads if you want like it's like YouTube copied YouTube now has YouTube shorts and they copied the you know I think snap it's fair to say kind of pioneered this and then Instagram copied it it's all over Facebook now LinkedIn has this all i know yeah it's everywhere i know i know i just think about you know how much youtube is on in our household it's pretty remarkable um you know so all right um yeah you're not worried but you're not necessarily buying more here no if we were at two or three percent weight then i would absolutely be buying but we have a full we have a full weight now and if it pulled back a little bit further again we love to trade around names if we can get the opportunity i'd certainly consider that as an opportunity, but I don't see us changing the core weight at 5 % or so anytime soon, particularly with the assumptions that we feel pretty good about by 2032 with, you know, kind of joining the trillion dollar club.

19:00Cause that is a big part of what we're doing at logo, trying to find the names who are the next firms to join the trillion dollar club. And that, you know, there's a few on our list that look pretty attractive. I want to go back to the AI question. and we touched on this with Geetha a little bit as well, the Ben Affleck company, Interpositive, that Netflix announced it was buying back in March. Is Netflix doing the right thing with AI? I think they are. I mean, you know, AI is still, I think, an unknown to most of the world. So you never, I think there's a lot of experimentation that has to occur.

19:38And if you are one of the lucky kind of companies that have a bunch of free cash that you can experiment with different things to try to see what resonates and then do a lot more of it once you have some good data. That just kind of distances your firm from all the peers. So I do think AI is going to continue to be a part of this, to be a part of this industry. And, you know, Netflix is in the catbird seat to be able to use their balance sheet to be able to figure out how to do it. And, you know, we do expect good share buyback activity with they can they can do all the content they need with 20 billion or less a year, which means that the more they grow subs, the more they can buy back shares and reduce the float.

20:23And that helps earnings per share growth. And there's just a lot to like about the core business and a few things that could be, you know, big optionality around the core. Eric, really appreciate it. Eric Clark, he's AccuVest Global Advisor, CIO, Logo ETF, Portfolio Manager, joining us once again from San Diego, as we've mentioned. Netflix, his second biggest holding in that Logo ETF.