Instant Reaction: Netflix Tops Wall Street Estimates

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1:55forecast as well. I want to bring in Geetha Ranganathan. She's Bloomberg Intelligence Senior Media Analyst. She joins us from New Jersey at Bloomberg Intelligence headquarters. What is the most important metric that you watch now that Netflix no longer reports subscribers or gives guidance on subscribers? Yeah, the focus, Tim, has obviously changed from, you know, the subscriber metrics and ARM or average revenue per member to broader financial metrics. So really the two most, I think, important numbers that everybody looks for right now is revenue growth and operating margin. And as you rightly pointed out, the two Q numbers, Netflix surpassed expectations or they exceeded guidance on both those accounts.

2:39So, of course, we see that they did beat on multiple metrics, even some of the loftiest of expectations, raising their forecast. But we're still seeing the street selling off on it. Do you think maybe this is some profit taking or was there anything in the report that you saw that was particularly concerning? Absolutely not. I think the report was definitely solid. So I would I would characterize this as a solid report, but maybe not spectacular. So I think even in terms of the guidance raise, yes, we did have the revenue guidance raised from about 13 percent to 15 percent for the full year, which I think is really solid.

3:13Mid-teens revenue growth is really solid for a mature company like Netflix. But I think with the operating margin, and I think this is where maybe investors are slightly disappointed, you know, they raised the guidance from 29 percent, only a smidge, to 29.5. I think a lot of the investment community was looking at something in excess of 30 percent. But again, their operating margin guidance for 3Q seems really strong. I think they're taking a little bit of a conservative approach. Of course, they do point out that they do have all of their big content releases coming out in the second half, which is obviously going to crimp that margin.

3:50But I think still it is a little bit conservative. And I think eventually they can go above 30 percent for this year. Expectations were so high going into this. I was shocked when I looked this morning that Netflix's market cap is up to$542 billion. It's up 43 percent this year. The value has pretty much doubled over the last year. It's pretty remarkable that even though expectations were so high, they were still able to beat and raise. Oh, absolutely. I mean, and remember, Tim, you know, they have set not just expectations for this quarter or this year. They have expectations going out till 2030.

4:25So their whole goal by the time of 2030 is to reach the trillion dollar market cap club. And they have so many other different metrics. You know, they want to cross the 410 million subscriber mark right now. They're somewhere right above 300 million. They want to get an operating margin of somewhere around 38 to close to almost 40 percent. They want to double revenue. And then most importantly, they want to get their advertising business really growing at 9 billion. So, you know, there are multiple metrics. There are multiple catalysts. 2024 obviously was the biggest year in terms of subscriber numbers.

5:02They gained something like over 40 million new subscribers. This year is all about price increases. We already saw them take those price increases. And then next year is all about building their advertising business. So they do have multiple catalysts, you know, through 2025 through 2026. I think the street is going to start to wonder what happens after that. And so we do need some strategic direction from them, you know, sooner rather than later. Geetha, I remember back when Netflix used to be options to get DVDs. Do you remember that, Tim? I used to go and actually go get a DVD. Then there weren't any commercials at the time.

5:36Really? You did that? I did. I mean, I'm old enough to do that. Hey, you know, I can hang with the big dogs. OK, but we used to have DVDs. Then there was no commercials. Now we're seeing commercials. We're seeing a lot of these competitors coming out and doing the ad tier version as well. How is Netflix settling in this entire thing? Are they still the front runner here or do we see the likes of Peacock and Disney Plus and all these other streaming services coming in to compete? So they are definitely not the frontrunner, Nora. So they might have won the streaming wars, the streaming subscription wars, but they're definitely a late entrant to the whole advertising party.

6:14I would say the frontrunner there in terms of streaming ad dollars is definitely Disney. They have an absolutely fantastic business. They have Hulu. They have Disney+. They have all of their ad infrastructure up and running from their linear TV business. So Netflix definitely late to the game. But I think they can still make a dent here because we're seeing a whole huge shift, an industry-wide shift away from linear TV, which used to be about a$55,$60 billion industry, to what is called connected TV digital advertising. And Netflix is kind of putting everything in place. So they're making sure that they have the right type of content because this type of on-demand content doesn't necessarily really play well to advertising.

6:51You really need to have more of a live event or a sports type of content where you have, you know, a huge audience tuning in at the same time to really appeal to advertisers. And they're making, you know, they're definitely making those investments. So we know that they went after WWE. They're going after NFL. There's more and more live programming that they're adding every day. And then, of course, it is building on the tech side, right? They need all of the ad inventory capability. They just recently partnered with Yahoo. who they set up their own proprietary ad tech platform. So they're kind of getting all the infrastructure, all the plumbing in place for the ad business to take off in a pretty big way.

7:27And even this year, they expect it to double from last year. And while they didn't give any numbers, we think that even this year, it will approach about two and a half to$3 billion in revenue, which is pretty significant considering that, you know, they just introduced advertising about two years ago. Geetha, what is international programming looking like? Very strong. I mean, quarter after quarter, we see, you know, some of their biggest titles being non-English titles. I mean, the greatest example, of course, is Squid Game, which is their biggest title ever in the history of Netflix. And they have multiple, you know, titles that they highlighted in their investor newsletter for the second quarter.

8:06I mean, whether it was Exterritorial, which is a German movie, you know, so many. There was a big animation series from Korea, you know, multiple series across the globe playing really, really well and scoring on par or even better with the English titles. So, you know, this has been a really good strategy for them, you know, localizing a lot of the content, going after international content in all of the different territories. And that really helped drive subscriber numbers as well. You know, 70 percent of Netflix's subscriber base is outside the United States. Geetha, since it's your job to know what Netflix has, can you just sit at work all day, watch Netflix?

8:42I wish I could, Tim. All right. Well, it sounds like you know what you're doing. So you're doing something right. And we really appreciate you joining us on Netflix Earnings Day. It's always great to have you on the program. Geetha Ranganathan, she's Bloomberg Intelligence Senior Media Analyst, joining us on Netflix. Check out her research. It's going to be updated soon. If it's not already, it's on the Bloomberg Terminal. We are seeing shares of Netflix actually move lower in the after hours after an initial bounce higher. The company did report results that exceeded investor expectations in every major metric, revenue growing to$11.1 billion, earnings jumping to$7.19 per share.

9:22The company also raised its forecast for full-year sales and profit margins. It expects to generate up to$45.2 billion in sales and have an operating margin of 29.5%. Let's bring in Mark Douglas. He's CEO of the publicly traded advertising and marketing company Mountain, ticker MNTN. He joins us from Miami. Mark, always good to check in with you. I want to focus specifically with you on the ad-supported element of this. I was telling Nora earlier, you know, I'm old enough to remember when Netflix said they would never do ads, they would never do live content, they would never do news, they would never do sports.

9:59Now they do all of those things and more. Is the ads business working? I think the ad business is off to a start. It can grow so much bigger. And, you know, it's obviously growing. I think they're saying that they expect a lot more growth. But it's also in a competitive space. They're competing with Disney, with Peacock, with Paramount, Warner Brothers. And, you know, those big spenders, those big brands, they don't really increase their budget. So if you want to come into that space, you have to take market share from someone else. Netflix is what I would expect over time is that whatever percentage of viewership they have is what percentage of the ad market they can get.

10:43So they have a lot of room to grow. It is working. But it's still relatively small compared to where it can be. I find it really interesting. We were discussing how people are willing to pay for these subscriptions, even if they do contain ads. I can literally remember when you would watch Netflix all the way through, no gaps at all. But it seems as though this is a really thriving part of their business here. Yeah. Well, I mean, why did they add the ads? Because their customers wanted a lower price point. And so it's a simple tradeoff. We'll give you the lower price point if you'll let advertisers pay for part of your subscription.

11:20That's effectively what's happening. And so the customer is getting what they want and Netflix is getting the revenue they need in order to make that possible. So it is a win-win. I'm not sure everyone that gets ads thinks it's a win, but it's certainly a win that they don't have to pay as much to get the content. So I'm looking at the different plans and pricing for Netflix here in the U.S. There's the standard with ads, there's standard, there's premium. So it starts at$7.99 a month. You can go for premium up to$25 a month. Again, this is here in the US. There are different intricacies to this because you can pay for extra members and the like.

11:58Netflix has gotten really good at, as my brother likes to remind our entire family, understanding if you're sharing an account and now everybody kind of needs their own accounts. um yeah is there from the perspective of actual growth here in a saturated market in the u.s is there a concern or is this by design that if netflix raises the premium price then there will be a small portion of the folks who don't want to pay 25 a month or whatever and instead they'll drop down to that ad supported model is that the strategy i think yeah i think worldwide, Netflix, maybe last quarter, the quarter before, essentially, the last time they were reporting subscriber numbers, they said the number one, you know, kind of tier that people were buying was the ad-supported tier.

12:47I think it was as much as half of all new subscribers. And so people want it. They want that price point. I think what's really interesting is the way to think of it is Netflix is building a backlog of future revenue. So in other words, they bring on the subscribers that they are essentially under monetizing. They're charging them$7.99 and they're getting relatively few ads. And as Netflix increases the ad load and essentially makes more money, that is just like pure, like that's going to flow directly to the bottom line. I would expect Netflix's earnings to outstrip their revenue growth literally for years to come.

13:26It's somewhat similar to the password backlog, where they knew all these people were sharing the passwords, and at any time they can just kind of get more serious about that, and all of a sudden it produced all this additional revenue. That's what's going to happen with Netflix's advertising. And I think I have never seen a company this large that I would say should be treated as a high growth stock. That's the potential in the ad business. Mark, one thing that was interesting to me as we're parsing through this earnings was the fact that Netflix boosted its full year revenue primarily due to U.S.

14:01dollar depreciation. What's your takeaway from that? Well, I mean, the their global business. I mean, I think that's for financial analysts to really to really look at. I mean, obviously, they don't want to be fluctuating their price points based on the way financial markets are valuing the dollar and other things. But I think most investors are going to look at the growth in revenue, growth in earnings, continued expansion in national. And I think the most important value for Netflix, which is not really explicitly measured in numbers, is they do surveys. They are the first place people go when they turn on their TV is they turn on Netflix.

14:45And the amount of power that gives this company is it's almost hard to state that that's how they can turn, you know, like fights into like numbers that rival some of the biggest sporting events or turn WWE into, you know, big show on Netflix where one has been as big as another channel. And if I'm an investor, I'm going to be as long as Netflix is the first place people go, it's going to be the first stock I want to invest in. I think that's the biggest correlation. Hey, Mark, since you are focused on the ads business, in your view, what's a more profitable subscriber for Netflix? Is it the one who's paying$7.99 a month for the ad-supported version, or is it the premium subscriber at$25 or the standard subscriber at$18?

15:34I think the premium is probably the most profitable, but I think then the ad supported has the potential to become the second most profitable. I don't think it's there yet because they simply are not monetizing all those entertainment consumers at the level they could be. But when they are, they're doing$7.99 on that price point. Who knows? It might be$8.99 next year or something like that. And they can make probably equal to that in terms of ad dollars per user. And maybe even a bit more than equal to that in ad dollars per user. And you see, that's what Amazon did with Prime, where they just flipped the entire customer base into ad supported.

16:12So that ad supported in terms of volume, because most of the subscribers I think will be ad supported over time, is the most profitable in terms of just sheer dollars right now. It's probably the premium at$25. Mark, I mean, when you think about Netflix historically, they were initially felt like the leader. But you're seeing a lot of these other companies in here trying to additionally monopolize the space. But that being said, we did see some news earlier that Comcast is raising the price of its Peacock streaming service by three dollars a month. Very fitting today when we have Netflix earnings.

16:43How are you thinking about Netflix as a potential leader right now in this space? Yeah, I mean, that losing that leadership position is going to be hard for them because they just have to keep investing in content and they're profitable and very profitable so they can afford to keep doing that. But I think what you're seeing happening is the other networks are fighting back. Peacock with Love Island, just massive show over the last month, from what I know, did incredibly well in terms of revenue generation. I think it's the number one reality show in the world. Plus, they have Bravo and others.

17:17You have Disney with all the children's content and Star Wars content. ESPN now going to live sports. I think all the networks have gotten way more serious about competing and they're bringing out their own hit content. But as long as Netflix is number one, I think it's hard for them to lose that spot. Probably the only company that can really, truly challenge them is Disney. Absolutely. It's interesting. We were just talking about Love Island. I'm a watcher of Love Island, so I see how they were able to skyrocket here. somebody who I'm co-anchoring with today went to like a love island premiere a watch party watch party or on Friday and I hosted a watch party of my own two days later meanwhile I've never even seen an episode of whatever you guys are talking about Mark Douglas always good to see you uh fly on up here to New York next time so we can hang out in the studio Mark Douglas is CEO of the publicly traded advertising and marketing company Mountain

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19:33ChatGPT for Business gives teams a shared workspace with admin controls, permissions, and access to work and codecs in ChatGPT. This means your business can move from question to answer and code to rollout quicker. Join over 10 million business and enterprise users worldwide already using ChatGPT for work. Download the ChatGPT desktop app or contact sales to learn more.