Netflix Shares Fall most Since 2022 as Tax Hit Spooks Investors

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break.

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1:02Bloomberg Audio Studios, podcasts, radio, news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Geetha Ranganathan joins us. She is the U.S. media analyst for Bloomberg Intelligence. Geetha, what's going on with their friends at Netflix? I mean, so they had a tax dispute in Brazil. Is that enough to knock the stock down 10 percent? Yeah, I think that's part of the story, Paul. So definitely nobody saw this coming in terms of this transaction tax.

1:42It's a little bit of a catch up charge that Netflix took in the third quarter. And there will be an ongoing charge as well, about 40 million or so per quarter. But again, nothing that will materially impact results. What that tax charge did was that it definitely depressed the margin performance. And this is something that everybody's been super focused on, operating margin numbers. Those came in definitely much lighter than what Netflix itself had projected. But actually, if you just strip out that Brazil tax impact, they would have had record operating margins. So they guided for 31.5. They would have come in at close to almost 34 percent if we didn't have that tax issue.

2:23I think fundamentals are definitely strong. But I think what is happening is, apart from the tax issue, was that it was just a very, very ordinary quarter. You know, people were definitely expecting something, you know, a much bigger beat in terms of revenue, just given that, you know, the second half content slate has absolutely been a monster slate. I mean, we've seen some of their biggest hits ever in the third quarter. We expect to see more coming in 4Q, but none of that was really reflected in the numbers. And I think that's why you're seeing so much of nervousness today. OK, so ordinary results at Netflix is like the new bad.

2:57And you talk about the contents like K-pop Demon Hunters, a new season of Wednesday, the sequel to Happy Gilmore. And then in the fourth quarter, there is the Stranger Things final season and a sequel to Knives Out. The third season of Diploment. That's what I'm watching. Yes. Oh, my God. That is really good. That is fantastic. Great acting by Keri Russell and Rufus Sewell. OK, anyway, going back to the results, Geetha, what was new, I thought, in the earnings report was that they flagged the possibility of M &A, which is not something you hear from Netflix. Of course, there have been all these reports that Netflix is interested in buying assets from Warner Brothers Discovery.

3:32Do these latest results show that Netflix is now in a position where it has to make a purchase? It's a defensive buyer as opposed to an offensive buyer. I don't know whether it has to make a purchase. They definitely left the door open, which suggests to us that they will take a long and hard look at the studio assets, not the cable networks. They made that extremely clear on the call. But the studio, if you just think about it, Scarlett, I mean, this is definitely, and I mean, we spoke about this yesterday as well. This is a once in a generational opportunity for anybody who wants to own this kind of a studio.

4:06I mean, this is a top tier studio with a lot of very, very, you know, beloved popular franchises across the world. We know that these titles resonate. I mean, Netflix themselves has a lot of the Warner Brothers titles. They perform extremely well on the platform. So yes, it is a defensive move. But again, if Netflix doesn't go ahead and doesn't make that purchase, I don't necessarily think that they are going to be in a much weaker position. It definitely complicates the strategy for them a little bit, just because you might have another player like a Paramount or a Comcast that becomes much stronger.

4:39but they still have a considerable lead versus all of their peers. So I don't think it's do or die. So what's the environment like out there in terms of creating content, movies and TV shows? Is Netflix still like the first phone call you make if you're a producer or you're a writer? I've got this project. I'm going to go to Netflix and get it done. Is that because they had the biggest and maybe still have the biggest checkbook in Hollywood? it? They do. They're spending close to about$17.5 to$18 billion on content every year. And there's been a lot of concerns, Paul, in general about the rise of AI, especially now that you have Sora 2, you have all of these new tools from Google, from Meta.

5:26Is that going to be a disruptive force for all of these streaming players and Netflix? And it looks like it actually won't. You know, we've run some numbers internally. We think that it should help Netflix actually curb content costs by about five to 10 percent. That's substantial cost savings, you know, for all of these streaming players, especially for Netflix, which typically has used AI really, really well. You're absolutely right. They've, you know, they've done a great job when it comes to content. They're going to, I think, continue to do that. I mean, not only do we have the second half slate for this year, which is extremely strong.

6:01Scarlett just mentioned all of those titles. But actually looking forward to 2026, again, you have a whole host of different titles coming on the platform, you know, including Emily in Paris. You have Bridgerton, which has been one of their biggest series. And then you have the movie Narnia, which is supposed to be like this huge event for them coming a little bit later. So they have a steady, steady, steady pipeline of titles that should help them, you know, drive engagement and ultimately drive pricing. Stay with us. More from Bloomberg Intelligence coming up after this.

6:35You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. AT &T reported numbers here. It looked pretty solid to me, but I know they had a lot of promotional stuff out there. So the revenue growth kind of came in a little bit lighter. John Butler, he covers this stock for us at Bloomberg Intelligence. He joins us here. We're going to have the CEO, Mr. Stanky, of AT &T coming up in just moments. John Butler, Senior Telecom Analyst for Bloomberg Intelligence, joins us here.

7:15John, talk to us about the AT &T quarter. We know that wireless business is a really competitive business out there. It's a tough one, Paul. It's a very mature market right now. You've had a lot of movement in the management suite with new CEOs at Verizon and T-Mobile. So the fear is that promotional activity is going to pick up as these new CEOs try and make their mark. And I think we saw some evidence of that in 3Q. You know, if you look at AT &T's numbers, they were truly mixed. I was really surprised at that. What we saw was revenue growth across the board just missed estimates slightly. It was a little bit slower than everyone expected.

7:58Subscriber growth, though, was higher than expected. And that really, to me, those are the kind of financial metrics you see in a highly promotional environment, right? You're promoting heavily. There's pressure on pricing. Their average revenue per user actually fell in the quarter on the wireless front. but subscribers rose. And so you're out there trying to build up your roles, your subscriber roles at the expense of revenue in the short term on the promise that in the long term, if you can keep those subscribers, it more than pays back. I always pay special attention to AT &T's results because I switched from AT &T after like, I don't know, 15 years because of the original iPhone to T-Mobile because they had all these great deals.

8:47and I don't know, it seemed more fun in general. I'm a sucker for fun. So the results are, it's down because of you. No, no, no. I actually switched last year. But the reason I ask, John, or the reason I bring this up is because now AT &T is actually the smallest of the big three wireless providers behind Verizon, behind T-Mobile. Does being the underdog work for it? It's a good question, Scarlett. What they're really doing is throwing their weight behind broadband. John Stanky, who's going to be on in a moment, can speak to this more eloquently than I can, but he has really pursued the broadband market in a big way.

9:25And I think a lot of it has to do with the fact that the broadband market is growing faster than wireless. It's still a mature market. It's still relatively saturated, but there's room for more growth there. AT &T is pursuing a fiber broadband strategy, And fiber is the single best way to deliver internet, period, full stop. There's nothing better out there. And AT &T is a real leader there. So I think on the wireless run, I don't want to say they have their eye off that ball in any way whatsoever. They're going through a big modernization of the wireless network right now, standing up a lot of new spectrums.

10:06So you're going to see network quality increase significantly over time. and that will drive more net additions, I think, down the road. But if you think about AT &T, don't just think wireless. I think it's important to pay attention to what's happening in that broadband business because that really is setting the foundation for their future growth. So, John, in the broadband business, are they competing against the cable companies? Because they've made that a key focus over the last decade or so. yeah i mean the broadband market's getting really interesting right now what you've seen is uh the cable guys are losing a lot of share to fiber and particularly to to fixed wireless access which is basically a wireless link of broadband into your home that's been a runaway hit with consumers really popular at &t was late to that game but they're getting a lot of growth in fwe right now, as it's called.

11:09So it's interesting to see the dynamic where the cable guys are losing share and the telcos are gaining share. And soon you're going to have Starlink enter the market in a bigger way. They're right on the cusp of upgrading the capacity of their Constellation. And so they're going to go from a very high priced product, I think, to a much more reasonably priced broadband offering once they get more capacity up there. They're going to look to fill that. And the way to do that is to cut your prices. And so suddenly you're going to have another wireless option, which is going to be satellite. So the competitive dynamics there are getting interesting, but for AT &T and their dedication to fiber, I think they're extremely well positioned to not only hold their own, but grow from here.

12:01You know what I've noticed is is that if you have the old school cable broadband, they're always trying to push you into fiber optic by making the old school cable broadband so expensive that you end up calling to complain about it. And then they're like, hey, we can upgrade you to fiber optic. That's been a point. I fell victim to it. John, AT &T's results, they set the tone for competitors' earnings. T-Mobile reports on Thursday, Verizon reports next week. The interesting bit there is that both of those companies have named new CEOs in the last month. So they're in a moment of transition here.

12:34What will you be looking for to carry over from AT &T's results to those numbers? So I'm going to be laser focused on what's called wireless service growth, which is the revenue they earn from charging you your monthly bill. Every one of them has sizable handset revenue, but I call them empty calories, if you will. You know, they're sold at cost or even a little bit below cost. So what matters most is that service revenue. And again, Scarlett, if service revenue goes down, but subscriber growth goes up, it tells you there's a lot of promotional activity out there. And in particular for both companies, again, they both have new CEOs.

13:18I'm going to be listening very carefully for any change in course on the strategy of either one. Verizon in particular has been a share donor for years. And I think the new CEO may be thinking about getting more promotional. I've even seen evidence of it in some of their advertising. So management commentary, pardon me, on strategy is going to be the big focus for me. We saw Apple shares hit a record earlier this week because of iPhone optimism. Apparently, the early numbers on the iPhone 17 were pretty positive. And I'm kind of surprised that that did not extend to AT &T, T-Mobile and Verizon in the same way, because, of course, they're partners with AT &T and with Apple and selling these new devices.

14:07What kind of numbers are we anticipating to hear from companies when it comes to early pre-sales of the iPhone 17? we know it's funny you bring that up because at &t over indexes to the to the iphone they have more iphone users in their base than the other two carriers and that goes back if you remember when the iphone first launched at &t had this exclusivity deal with apple for a couple of years and it really led to an outsized piece of iPhone users at AT &T. But there, pardon me, there were so many other issues going on in the quarter, it just never came up. Again, I go back to that thought that handset sales are sold at or below cost.

14:57I think the big danger with a popular iPhone launch is that it can spark outsized promotional activity. Right. And again, we saw evidence of that in AT &T's results. Stay with us. More from Bloomberg Intelligence coming up after this.

15:17You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. We're looking at companies that are reporting earnings this season and giving us any kind of indication that they are affected by tariffs. And so far this year, we haven't really seen much evidence of that until today. Mattel is now saying that it is delaying orders or retailers, its customers are delaying orders because of uncertainty over the tariffs. So we want to get perspective now from Lindsay Dutch.

15:56She is Bloomberg Intelligence's Consumer Hardline's senior analyst. And, Lindsay, I'm kind of surprised that this didn't happen earlier. Hi, Scarlett. Thanks for having me. Yes, so we heard earlier, actually, in the second quarter earnings, that there were possibilities for delays. And for the toy makers, you know, Walmart, Target, those retailers tend to take their holiday orders by July. So there was already worry sort of heading into third quarter earnings that we got last night. And of course, it was a negative surprise on the top and the bottom line. Those orders were delayed further than sort of everyone expected.

16:34And they're taking smaller quantities than usual, you know, onto their shelves ahead of the holiday season, which was a real concern for Mattel's fourth quarter earnings, which would be coming up. So, Lindsay, what's Mattel and some of the other companies saying about, you know, when their products, you know, get stamped with a tariff? Like how much do they try to push back on the manufacturer in whatever country it comes from, say, China? How much the importer may take in his or her P &L versus, you know, how are they saying that they're navigating that? So from the cost side, the toy makers actually have been managing this pretty well.

17:13So Mattel is forecasting less than$100 million hit on the cost side on an annual basis. They're mitigating that in several different ways. They're cutting costs in other areas. They did adjust sourcing as much as they could, you know, selling more internationally versus the U.S., you know, shifting that mix a little bit. And they are they did roll out some price increases in the second and the third quarter, which is ahead of holiday. day. So that should help protect on the profit on the margin side for that fourth quarter. It looks like those toy makers are bearing the brunt of that cost rather than sort of passing it through towards a retailer.

17:53So Mattel shares today fell as much as 9.7 percent, but they've paired their losses and are only off by a third of one percent. Where there's smoke, there's fire. So I wonder if this is something that also is an issue for Hasbro. Yet when I look at Hasbro's share price, it's up nine tenths of one percent. I realize that we shouldn't read too much into the day to day moves of each stock price. But can you just talk a little bit about how Hasbro is now positioned? Yes. So Hasbro, I think, faces very similar challenges on the toy side. Toys still for Hasbro account for more than 50 percent of annual revenue, but they do also have a very strong and a growing digital gaming business.

18:33So when I think about third quarter earnings and they're reporting tomorrow morning. I think that digital gaming business could shine and it could offset a lot of pressure on that toy product side. Hasbro also has significantly lower expectations for their toy business. So they are thinking about that business being down mid to high single digits, whereas Mattel has stuck with their guidance for sales growth of one to three percent on a constant currency basis. So Mattel's outlook is just much more ambitious and much more optimistic for that fourth quarter. Where Hasbro is going in, they have the digital gaming offset, and they already have lower expectations.

19:14Lindsay, what are the trends impacting the toy business these days? I mean, I guess a lot of electronics, but what are some of the big trends that you're paying attention to? So a big trend that we have seen growing momentum on is really the kid-old trend, which is adults 18 plus playing with more toys. And Hasbro, Mattel, Lego, they're all playing into this. So those big black box Legos that are very high price points, they've done very well the past couple of years. But Mattel is also leaning into that. A lot of their new products coming out, even with Barbie or Hot Wheels, are really collector's items.

19:54They're really aiming at that kid-old. And honestly, the industry was up 6 % in the first half, up high single digits in the third quarter. And that's really being driven by this trend. As we look ahead to the holiday season, I realize for companies themselves, they are already knee-deep in it. But as consumers were looking ahead to it, are there any must-have items that the toy makers are really counting on? Or these toy retailers are really counting on? So I looked through all the holiday lists, and I was a little bit disappointed. I didn't see any wow gifts or what I would call a wow gift. One cool collab that Mattel has, but it's really for 2026, pre-orders will be available in November.

20:35They are doing a collab with Netflix, the K-pop Demon Hunters. So they are doing action figures and dolls for that series. And that should be coming out next year. And I do think that could be a big hit. Particularly for kids' movies. I mean, Hollywood used to do these tie-ins with all toys and lunchboxes and things like that. Is that still a marketing lane for the toy industry, for the movie industry? It is. And these companies are really leaning into that. But there hasn't been a ton of new content. So Mattel has the Disney Princess on the Frozen license. You know, the Disney lineup for the past year, you know, hasn't been stellar.

21:15The Snow White movie was not really a huge success. They are looking forward to live action Moana coming out next year. You know, that could be another key thing for Mattel, you know, doing the dolls for the Moana movie. And other licensing agreements are key growth drivers. We just need a little bit of a stronger entertainment slate. Stay with us. More from Bloomberg Intelligence coming up after this.

21:42You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Hilton Hotels reported some pretty solid results there. The stock's up about 5 % today, up about 12 % year to date. Let's check in with Jody Laurie. Laurie, she is Senior Credit Analyst for Bloomberg Intelligence. She joins us from Princeton, New Jersey. Jodi, what did you hear from Hilton in their earnings release? So I think, Paul, you know, what's interesting is that Brian Egger, my equity counterpart, and I came up with the same conclusion in that they are a little bit too optimistic, it seems, in general.

22:27I think what's so funny is when you compare and actually taking a step back, it's a little alarming when equity and credit analysts agree, just as a side note. But when you compare what their estimates were for RevPAR, looking a year ago, fourth quarter of last year, you were talking 2 % to 3%, positive 2 % to 3%. Now they're saying 0 % to 1%. Yet for some reason, they're able to reach an EBITDA that's almost similar to what they were projecting then. So it's a little bit of a head scratcher. I guess a lot of it's coming from the cost component of it. You know, if your revenue per available room isn't necessarily growing, but then your EBDOT is growing, you sort of say, OK, well, where is that coming from and what does that mean overall?

23:11So what is the company saying about kind of their just the underlying book of business? How are their bookings looking and, you know, what are they saying about, I guess, components of their of their customer base? So if you break it out, the U.S. is a clear sort of underperformer at the moment in terms of travel. We're seeing some weakness, some more muted results on the leisure side of things. For group and business, which was supposed to be a tailwind this year, it's actually pulling back. It's a little bit decreased. Now, they're saying that group going into next year is going to be positive.

23:44But it is interesting to hear that this component where they're hanging their hat on as the area of growth is now not really performing. Now, if you look across their brands, what stood out for me, especially for the third quarter, but also year to date, is that comparing their higher end brands versus a year ago, it was very strong in terms of growth from an occupancy standpoint. But then if you look at the lower end brands, they're actually a lot weaker. So the farther down you go in terms of their quality of their brand. So if you're talking the Conrad brand, which is one of their more premier brands, Waldorf, Historia, etc., those have been doing pretty well compared to last year.

24:21If you go further down the line into some of their more economy-scale brands, that's where it's weakest. And that speaks to that K-shaped economy that everybody is talking about. I know that they get probably 80 % of their revenue is U.S.-based here. What's their international strategy these days? So internationally, they seem to be growing a lot. They're focusing on new types of brands to get there. They definitely see certain pockets of international doing well. I mean, the Middle East and Africa actually did very well this quarter, which was an interesting component to see. And I think that they're looking at Asia and they're sort of a little concerned to some extent.

24:56But they definitely it was an interesting sort of dichotomy between what's going on in the U.S. and what's going on elsewhere in the world. I think where we're sort of concerned is that they are still giving back to shareholders the same level that they were. You know, the three point three billion expected for this year. they have leverage that's roughly within their range of three to three and a half times. But if you're talking about a 2026 that's very uncertain, you say, OK, wouldn't you want to hold on to your cash maybe just a little bit more than you're giving out? What what what are the Hilton Hilton's of the world doing in terms of capacity?

25:33Is the industry are they building new hotels? Are they taking hotels off the market? Are they building higher end or lower end? Where's the kind of the capital for this industry going? For Hilton specifically, they're still very much growing. I mean, that was a lot of the conversation. You know, the management team was very optimistic about growth coming from these new properties and also from new brands. I mean, they have a new lifestyle brand that they're introducing as part of their growth strategy. And I think they're trying to key into these younger consumers, getting them to go into these lifestyle brands and more of these quick service brands that might not necessarily be traditional hotels.