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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is a breaking news update from Bloomberg.

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Speaker 3: Instant reaction and analysis from our three thousand journalists and

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Speaker 3: analysts around the world looking at Netflix shares. They're continuing

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Speaker 3: to move lower this after the company reported results for

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Speaker 3: the most recent quarter, concerns about the guidance and boosting

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Speaker 3: spending the company saying, for even though they largely beat

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Speaker 3: Wall Street estimates, they issued a cautious forecast for the

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Speaker 3: months ahead, setting higher program spending, and then, of course,

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Speaker 3: Carol the cost of closing its deal with Warner Brothers Discovery.

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Speaker 2: Number of customers growing by almost eight percent last year,

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Speaker 2: topping three hundred and twenty five million subscribers. Let's get

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Speaker 2: to our team who certainly follows it, and of course

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Speaker 2: our own Chris Paul Mary, who's been following this company

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Speaker 2: and the ins and out of the pursuit of Warner

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Speaker 2: Brothers Discovery. Chris, there out there on the West coast, Chris,

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Speaker 2: you know you've known this company, you followed it. Investors

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Speaker 2: not too impressed. They're worried about I guess it seems

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Speaker 2: like the spend that's out there. But walk us through

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Speaker 2: what really jumped out for you in their reporting.

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Speaker 4: Well, first of all, obviously, investments has been really concerned

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Speaker 4: about the Warner Brothers bid. The stock has lost a

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Speaker 4: lot of money since the since the you know, in

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Speaker 4: October when it first came out the Netflix was interested

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Speaker 4: in bidding, and you still see concern here. I mean,

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Speaker 4: they said they've spent sixty million dollars already on pursuing

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Speaker 4: Warner Brothers. They're anticipating another two hundred and seventy five

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Speaker 4: million in cost for that. They paused their share buybacks,

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Speaker 4: which were considerable. They had eight billion dollars left in

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Speaker 4: their buyback program, so they can conserve cash for the

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Speaker 4: Warner Brothers bid. So if you're if you're concerned about

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Speaker 4: all this, there's certainly enough in there for that.

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Speaker 3: You know. I'm I'm just looking at some of the

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Speaker 3: headlines from here, and given Chris, the re action from

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Speaker 3: investors over the last few months as Netflix emerged as

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Speaker 3: a bidder, it hasn't exactly been a positive one. What's

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Speaker 3: the case for why Netflix actually needs these assets? Because

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Speaker 3: this is a lot of money to spend, especially when

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Speaker 3: investors are getting increasingly concerned about how much money the

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Speaker 3: company is spending on content.

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Speaker 4: Well, they do in their Letterator shareholders sort of cite

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Speaker 4: the broader case that they're you know, no longer just

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Speaker 4: competing against you know, HBO or Paramount Plus or whoever,

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Speaker 4: that they're competing against YouTube, TikTok, Instagram, and that they

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Speaker 4: really only have a still small share of overall TV

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Speaker 4: viewing about nine percent, and by acquiring this great library

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Speaker 4: and these facilities Warner Brothers, they could really increase their

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Speaker 4: production of stuff all around the world and getting into

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Speaker 4: some new business, more consumer products, more video games, and

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Speaker 4: so that's the that's their argument. HBO Max would would

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Speaker 4: give them the oppagility offer different pricing plans. So somebody

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Speaker 4: just wanted HBO programming, they could get that instead of Netflix.

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Speaker 4: So those are the things they're talking about.

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Speaker 2: I'm going to play Netflix's accountant. I mean how much

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Speaker 2: I mean the content that they do get, They're going

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Speaker 2: to get a lot of content right in one like

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Speaker 2: if they get the deal. If they get the.

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Speaker 4: Deal, yeah huge, I mean it's a massive purchase in

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Speaker 4: the seventy eighty billion range. There's numbers that came out

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Speaker 4: today with Warner Brothers projections of what their studios and

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Speaker 4: streaming business are going to doout five years, and you

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Speaker 4: know it's a potentially huge boost you know, Batman, Bugs, Bunny,

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Speaker 4: everything you can imagine for Netflix to own. But you

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Speaker 4: know they've also been investing in their own licensing deals.

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Speaker 4: Huge deal just announced with Sony Universal kicked in as

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Speaker 4: well this month, and they're even licensing shows they noted

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Speaker 4: from Paramount twenty programs, So huge perchon is of every variety.

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Speaker 3: Does Netflix christ get these assets?

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Speaker 4: You mean, do they ultimately win Warner Brothers to think?

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Speaker 4: Is that what you're saying?

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Speaker 3: Yeah, there's quite a few chuckles. Yeah, yeah, Well to

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Speaker 3: be expected with a question like that where you know

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Speaker 3: where you can't release either yes or no.

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Speaker 4: Right, they look like, well, let's do the poly market

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Speaker 4: prediction exactly.

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Speaker 3: But they are the favorable. They are the favorite, no

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Speaker 3: question about that. It's it's the board has said this

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Speaker 3: is a better offer.

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Speaker 4: Well, they're the favorite from Warner Brothers standpoint for sure.

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Speaker 4: But there's certainly a community of people that think smart

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Speaker 4: people who think the Paramount is going to increase the offer,

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Speaker 4: or that this is going to fail from a regulatory standpoint.

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Speaker 4: So to pick the winner from here is a real

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Speaker 4: dicey proposition.

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Speaker 2: In terms of their subscriber numbers. Where does that? I

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Speaker 2: mean this has been something investors have been concerned about

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Speaker 2: right now, the sustainability of their growth based on what

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Speaker 2: we got from the company. How does that you know,

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Speaker 2: push back on that argument or does it not?

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Speaker 4: It was pretty strong growth eight percent to the past

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Speaker 4: three hundred and twenty five million. That was a year

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Speaker 4: end that was in line with what investors were forecasting.

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Speaker 4: Stronger numbers were the you know, the sales growth, which

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Speaker 4: you know any company would kill for double digit like that. Uh,

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Speaker 4: they said, where it's coming from, it's it's new members

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Speaker 4: all around the world. And price increases. They said they're

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Speaker 4: going to increase prices again this year. They weren't specific,

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Speaker 4: so it could be just in certain markets. Advertising business

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Speaker 4: is growing. We all wondered how big a deal that

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Speaker 4: was going to be. They said it was one point

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Speaker 4: five billion last year. That's only about three percent of

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Speaker 4: their overall revenue. But they said the number was going

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Speaker 4: to double this year. Is that part of it's growing.

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Speaker 4: So as long as they can keep the prices climbing

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Speaker 4: and the and the subscribers growing and the ad sales coming,

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Speaker 4: you know, they're going to see that revenue growth.

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Speaker 2: I just want to especially for those people who are

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Speaker 2: listening on radio. Netflix shares are down about four and

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Speaker 2: a half. They've been as low as a five percent

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Speaker 2: decline here in the aftermarket. This is after the company

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Speaker 2: plans to be spending on programs in twenty twenty six,

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Speaker 2: crimping profits at the massive streaming company.

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Speaker 3: A Chris, before we let you go, pricing power that

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Speaker 3: the company has, you mentioned price increases that we could

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Speaker 3: see how much pricing power does Netflix have in the US,

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Speaker 3: Like there are there's no shortage of places to go

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Speaker 3: for content, but you know Netflix, they're kind of the og.

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Speaker 4: Right, Well, I think the big story of last year

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Speaker 4: really was that everybody raised prices and we didn't see

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Speaker 4: huge defections of subscribers. And it's certainly getting to the

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Speaker 4: point where you know, it's getting very pricey. Netflix has

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Speaker 4: kind of been like the video utility, that's the one

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Speaker 4: you can't cancel. It's the it's got the just about

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Speaker 4: the lowest churn rate of you know, subscriber cancelations of

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Speaker 4: any of the big ones. So you know, how long

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Speaker 4: can it continue to do that? And maybe they would say,

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Speaker 4: if we have Warner brothers. It's going to be a

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Speaker 4: long time.

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Speaker 2: All right, Chris, thank you so much, really appreciate it. Chris,

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Speaker 2: Paul Mary, Senior editor and Entertainment team leader here at

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Speaker 2: Bloomberg News out there in our bureau in Los Angeles.

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Speaker 2: We're going to stay on Netflix though.

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Speaker 3: Yeah. Let's bring in Eric Clark. He's chief investment officer

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Speaker 3: of the ra Acuvest Global Advisors, about one point two

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Speaker 3: billion dollars in assets under management, portfolio manager too of

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Speaker 3: the Alpha Brand's logo ETF. He covers about two hundred

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Speaker 3: consumer stocks, including Netflix. It's the eleventh biggest holding in

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Speaker 3: the logo ETF. Eric joins us from San Diego, which

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Speaker 3: I understand. It's like sixty nine degrees there. It's not

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Speaker 3: like here, Eric, where the high today was twenty one degrees.

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Speaker 2: So don't rub it in.

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Speaker 3: Yeah. I don't even know why you guys like watch

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Speaker 3: Netflix in San Diego. You just should be playing outside

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Speaker 3: all the time. A decline of four percent after hours

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Speaker 3: right now, are you buying more Netflix? I will buy

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Speaker 3: more Netflix.

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Speaker 1: Tomorrow, absolutely, because it's seventy five here.

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Speaker 3: By the way, Oh my bad.

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Speaker 2: Thanks thanks very much for that. We're done with this interview.

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Speaker 2: All right, so why are you going to be buying tomorrow?

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Speaker 1: Well, you know, bigger picture, nothing's really changed with the business.

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Speaker 3: It's just that people have left Netflix.

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Speaker 1: Stock because of the Warner Brothers the time that it

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Speaker 1: takes to get a deal done like this. So people

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Speaker 1: just say, I just don't want to have my money

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Speaker 1: tied up in something that's going to be a little

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Speaker 1: more uncertain than maybe quote dead money. That's the opportunity.

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Speaker 1: So the stock's down over thirty percent and business is

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Speaker 1: still doing really well. And at this point where the

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Speaker 1: stock is now, I don't even think it matters what

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Speaker 1: the outcome of the Warner Brothers deal is. You're just

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Speaker 1: getting the stock at a great price here, So we

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Speaker 1: just have to be patient.

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Speaker 3: That's all. Are you? Are you saying that the Warner

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Speaker 3: Brothers Discovery deal will happen, Netflix will get.

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Speaker 1: That That one is a little tough because there are

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Speaker 1: the unknowns of the regulatory part. I think, generally speaking,

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Speaker 1: I agree with the concept that Netflix really is competing

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Speaker 1: with all of our time, not just you know, other

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Speaker 1: streamers or cable. It's YouTube and TikTok and Instagram, et cetera.

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Speaker 1: But within the streaming within the quote, you know, kind

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Speaker 1: of core cable TV viewing. They obviously are the dominant one.

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Speaker 1: It's just there's much more than just streaming and and

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Speaker 1: there's room for every brand here. You know, Netflix is

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Speaker 1: the first place that people generally start that gives them

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Speaker 1: that pricing power. And then we bolt on the paramount

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Speaker 1: for the landman and you know Mayor of Kingstown, et cetera.

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Speaker 3: And you know HBO, Max, et cetera.

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Speaker 5: But you know, the.

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Speaker 1: Assets and Warner are so powerful and they are in

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Speaker 1: the best hands with Netflix. It's impossible to know about

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Speaker 1: the regulatory stuff.

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Speaker 2: But Eric, what if Netflix doesn't get Warner Brothers, do

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Speaker 2: you still like Netflix going forward or do you think

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Speaker 2: then there is this would be a big loss. We've

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Speaker 2: done some reporting. I think we've had some stories that say,

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Speaker 2: you know, this is going to help shape Hollywood, you know,

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Speaker 2: for years to come. Whoever gets this property. So I'm

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Speaker 2: just curious. If they don't get it, Netflix does not

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Speaker 2: get it, then what well.

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Speaker 1: I think they're just going to go back to the

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Speaker 1: same playbook that has you know, driven seventeen percent annual

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Speaker 1: subscriber growth for the last decade. I mean, they're just

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Speaker 1: nobody can compete with them on the content spend. So

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Speaker 1: they're just going to go back to doing the spending.

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Speaker 1: Maybe they do some tuck in acquisitions. It's you know,

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Speaker 1: it's it's hard to know, but you know, you have

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Speaker 1: to give management the benefit of the doubt. They've done,

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Speaker 1: generally speaking, a pretty amazing job building this brand, and

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Speaker 1: so you have to assume that they're going to continue

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Speaker 1: making solid decisions. And you're getting it. You know, a

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Speaker 1: stock that's thirty percent off the highs with strong free

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Speaker 1: cash flow. I know they will continue to grow margins,

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Speaker 1: they will continue to grow subscriber growth, the ad teers

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Speaker 1: growing like a weed. So there's just a lot to

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Speaker 1: like here. So I love this thing on a dip.

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Speaker 3: You know. I'm looking at the the most the ten

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Speaker 3: most watch movies from the second half of twenty twenty

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Speaker 3: five Carol k Pop, Demon Hunter is Happy, gil Moore

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Speaker 3: to Frankenstein, My Oxford. I did not see one of these.

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Speaker 5: I was just thinking movies, Wait.

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Speaker 2: The Woman and Cavin ten, A House of Dynamite.

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Speaker 3: Those are movies, not shows. Oh okay, okay, And even

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Speaker 3: the top ten shows didn't see a single one of them. Wednesday,

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Speaker 3: Stranger Things five, Untamed Squid Game, Stranger Things, Eric, this

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Speaker 3: is interesting the way that people watch the different seasons

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Speaker 3: of Stranger Things in the second half of the year

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Speaker 3: in anticipation for season five. In the second half of

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Speaker 3: the year, Stranger with different different seasons of Stranger Things

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Speaker 3: were three of the top ten shows most watched on Netflix.

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Speaker 3: So is that is that an issue for Netflix moving forward?

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Speaker 3: That's it for Stranger Things.

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Speaker 1: No, I don't think so. They will continue to bring

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Speaker 1: out other stuff. I mean, they're just so good at

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Speaker 1: this concept. I mean, listen, if they get Warner that's

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Speaker 1: even better because there's so much more that they can

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Speaker 1: do to refresh.

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Speaker 3: That entire library. Oh so you're saying, you're saying, like, Okay,

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Speaker 3: Happy Gillmore two was in there, so maybe like another

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Speaker 3: version of a classic each show or another version of

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Speaker 3: classic Warner Brothers movies. Is that what you're saying? I

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Speaker 3: think there.

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Speaker 1: I think you know, you get a bunch of creative

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Speaker 1: people in a room and they take something. Let's say,

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Speaker 1: let's say Sopranos for instance, what could we do to

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Speaker 1: refresh Sopranos in the same theme. There's just so many,

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Speaker 1: so many things that they could potentially do hard to

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Speaker 1: see again, because you need the budget and nobody else

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Speaker 1: has the budget.

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Speaker 3: Does does Paramount Skuidance? If they get the assets, do

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Speaker 3: they have the creatives, do they have the budget to do?

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Speaker 1: I think they catalogue what you think Netflix could do.

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Speaker 1: I don't think that they can compete with Netflix. And

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Speaker 1: remember they get they're still going to have a metric

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Speaker 1: ton of debt to deal with. So I look at

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Speaker 1: this like a private equity owner. If if I owned

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Speaker 1: Warner and that was my baby, who would I love

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Speaker 1: to be able to sell that library to that would

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Speaker 1: put it in the best shape for the rest of time.

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Speaker 3: And that's clearly Netflix. It is not Paramount Sky.

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Speaker 2: Okay, all right, So top of mind on the call

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Speaker 2: with analysts and investors, Eric like, what is it that

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Speaker 2: you know we need to be asking this company right now?

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Speaker 2: Or is it just really all about their pursuit of

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Speaker 2: Warner Brothers.

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Speaker 1: Well, I just think that there's obviously just a lot

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Speaker 1: of noise, and there's a lot of assumptions. There's a

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Speaker 1: lot of assumptions and a lot of industries like AI too.

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Speaker 1: But I think that if you widen the lens, nothing

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Speaker 1: has changed. It's still an important part of people's consumption.

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Speaker 1: It's still an absolute, crazy good value even at twenty

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Speaker 1: five bucks. I mean, I go out to dinner in

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Speaker 1: San Diego and you get a drink and a half

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Speaker 1: and it's twenty five bucks. I can watch an unlimited

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Speaker 1: amount of content on Netflix, So there's still a lot

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Speaker 1: of value there, and you know, recurring revenue, business global

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Speaker 1: in size and scope, you know, reaching kids as well

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Speaker 1: as my mom. At eighty three male female. I mean, like,

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Speaker 1: there's just a lot to love about a business like this.

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Speaker 1: And I feel the same way about Spotify too. Similar

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Speaker 1: you know, similar business, slightly different category, but for the

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Speaker 1: same reason. And Spotify is off thirty five percent too.

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Speaker 2: You know, it's interesting too they talk about you know,

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Speaker 2: we've already begun to launch video podcasts from our partnerships

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Speaker 2: with Spotify, The Ringer, iHeartMedia and Barstool Sports, and I've

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Speaker 2: just announced two new original podcasts with Pete Davis in

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Speaker 2: The Comedian and NFL read Legend Michael Irvin. So like,

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Speaker 2: you know, we talked too about just podcast taking off,

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Speaker 2: and now it's not just audio anymore, it's video. So

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Speaker 2: is this a big opportunity for this company or just

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Speaker 2: a nice side business.

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Speaker 1: No, I think it's a big I think it's a

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Speaker 1: big opportunity. I don't know about you guys, but I

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Speaker 1: can consume five, ten, ten times more content when I

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Speaker 1: can listen to it in the car and you know,

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Speaker 1: listen to it on a bike rider or whatever. It's

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Speaker 1: not just about reading anymore. People want audiobooks, they want music,

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Speaker 1: they want videos, they want podcasts. There's just there's there's

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Speaker 1: so much opportunity, and both of these brands have just

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Speaker 1: a wild opportunity, you know, long term gathering subscribers and

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Speaker 1: bolting on new opportunities that drive operating efficiencies.

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Speaker 3: Add AI to the to the.

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Speaker 1: Mix in in more engagement, better profitability.

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Speaker 3: There's there's just a lot of lot.

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Speaker 1: To like, and you don't often get a compounder on

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Speaker 1: sale like both of these companies, so you should take

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Speaker 1: advantage of it if you can look through some of

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Speaker 1: the short term, you know, kind of noise.

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Speaker 3: Eric loves Netflix. Eric, always good to see you. Thanks

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Speaker 3: for great to see you. Going to come out here, yes, yeah,

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Speaker 3: we will.

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Speaker 2: Stupidly, I think the studio is about ten degrees.

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Speaker 3: We were out there last year and it was actually

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Speaker 3: like kind of June gloom. When we were out in

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Speaker 3: San Diego? Was it? Oh? Was yeah? Netflix shares let's

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Speaker 3: stay on this. The company shares fell in the after

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Speaker 3: hours as much as five point one percent, this after

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Speaker 3: it for cast first quarter EPs below the average analyssessment.

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Speaker 3: The company also plans to posits share buybacks in an

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Speaker 3: effort to accumulate cash to fund them pending acquisition of

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Speaker 3: Warner Brothers. I want to bring in a Bloomberg Intelligence

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Speaker 3: senior media analyst, Geetha Ranganoth, and she joins us from Princeton,

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Speaker 3: New Jersey, where Bloomberg Intelligence headquarters are. Githa, just your

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Speaker 3: takeaway from this report? The outlook is a concern spending

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Speaker 3: on content. Got to tell you this is like an

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Speaker 3: age old story for Netflix, right, the concern about, oh,

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Speaker 3: you guys are spending way too much. We could have

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Speaker 3: had this discussion a dozen years ago, I know.

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Speaker 5: And yes, content spending, so it was up about seven

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Speaker 5: percent in twenty twenty five. They're projecting about a ten

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Speaker 5: percent increase in content spend going into twenty twenty six.

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Speaker 5: And then of course you have the cost related to

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Speaker 5: the Warner Brothers deal. And I think it's not just

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Speaker 5: the cost site right, Yes, operating margin. The guidance of

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Speaker 5: tim looks a little bit light. It's below thirty two percent.

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Speaker 5: I think the street was looking for something like closer

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Speaker 5: to thirty three percent. But also the ad revenue, you know,

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Speaker 5: definitely not bad, but not gangbusters. So this is the

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Speaker 5: very first time that they've actually reported advertising revenue. They

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Speaker 5: said it was about a one and a half billion

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Speaker 5: dollars in twenty twenty five. They expect to double that

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Speaker 5: in going into twenty twenty six. Again, definitely not bad

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Speaker 5: given that you know, this company made its foray into

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Speaker 5: adds just a few years ago versus all of the

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Speaker 5: other media giants, But again, not really a number to

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Speaker 5: kind of get too too thrilled about.

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Speaker 3: Was so that's not I was just going to ask,

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Speaker 3: is that in line or below or above the expectations

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Speaker 3: that you've been making of late. I mean, a nice

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Speaker 3: to get some new data from the company, especially yeah,

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Speaker 3: in recent quarters that you know they're not doing the

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Speaker 3: same same sort of disclosures they have in the past.

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Speaker 5: No, absolutely, I mean, so really twenty twenty so you know,

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Speaker 5: as we kind of zoom out and we just take

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Speaker 5: a look at Netflix. So twenty twenty four was all

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Speaker 5: about subscriber growth, right, they had about forty two million

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Speaker 5: new subscribers. Twenty twenty five was all about pricing, right,

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Speaker 5: huge price increases. Again, pretty stable subscriber growth. They obviously

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Speaker 5: did add close to almost twenty five million subscribers. But

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Speaker 5: then twenty twenty six, as we kind of looked at

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Speaker 5: twenty twenty six, here was like the big head scratcher, Right,

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Speaker 5: what is the big growth catalyst for this company going

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Speaker 5: into twenty twenty six. And that's really where people were wondering,

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Speaker 5: whether you know, that's why they had to buy Warner.

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Speaker 5: And of course one of the big things that everybody

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Speaker 5: was looking for was AD revenue. Again, it has gotten

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Speaker 5: off to I would say, an okay start, but slightly

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Speaker 5: on the lower side than I think people were expecting.

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Speaker 5: People who are probably expecting something closer to about two

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Speaker 5: to two and a half billion dollars in twenty twenty five.

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Speaker 5: So definitely I think fell slightly lower than general expectations.

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Speaker 2: You know, I always think about Giza, like what's the

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Speaker 2: next markets or how much more is they're out there?

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Speaker 2: And in their company release they talk about, you know,

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Speaker 2: we relish competition, work to earn more of our consumer's attention,

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Speaker 2: and they say, despite our success over the years, our

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Speaker 2: share of TV time remains below ten percent in the

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Speaker 2: major markets in which we operate. And then they said,

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Speaker 2: for example, to Nielsen, in December, our share of US

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Speaker 2: TV time reached an all time high nine percent point

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Speaker 2: five points year overy year, yet linear TV still comprises

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Speaker 2: over forty percent of US TV screen time. You know,

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Speaker 2: is this just blowing smoke or is it really that

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Speaker 2: there is still a lot out there for either Netflix

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Speaker 2: or Amazon or some others to still grab when it

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Speaker 2: comes to screen time.

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Speaker 4: Oh.

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Speaker 5: Absolutely, there is still a lot more room for streaming

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Speaker 5: to grow, and I think it absolutely will. So I

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Speaker 5: think one of the big things that we've seen, especially

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Speaker 5: towards the end of twenty twenty five and going more

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Speaker 5: into twenty twenty six, is that, you know, most of

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Speaker 5: the Marquee sports properties are now moving to streaming. So

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Speaker 5: obviously you have the big launch of ESPN. You know,

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Speaker 5: for the very first time in the history of television,

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Speaker 5: all of the Marque sports are now available for people

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Speaker 5: to watch on streaming. They don't have to subscribe to

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Speaker 5: a PATV bundle anymore, and I think that makes a

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Speaker 5: huge difference. You know, consumer behavior is changing, It's changing rapidly,

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Speaker 5: and so obviously there is you know, a lot more

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Speaker 5: room for a Netflix for and Amazon as you pointed out,

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Speaker 5: but also equally for a YouTube to grow. And this

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Speaker 5: is where you have this whole, this whole debate with AI,

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Speaker 5: right because as AI comes in and kind of democratizes

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Speaker 5: content creation, you have more and more user generated content.

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Speaker 5: Are people going to be spending more time on YouTube

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Speaker 5: and less time with like premiere platforms like a Netflix,

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Speaker 5: like an HBO.

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Speaker 2: I've just seen junk is obsessed with YouTube?

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Speaker 3: Yeah, but but not with the AI junk. I mean

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Speaker 3: social feeds. Have you seen anything good? I mean, nothing good,

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Speaker 3: nothing creative. It's like the junk with the.

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Speaker 2: AI you're talking, You're not talking YouTube.

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Speaker 3: No, like the junkiest junk.

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Speaker 5: You cannot think out there, Not yet, Tim, But I

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Speaker 5: think just give it about a year or two and

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Speaker 5: I think soon we're going to be seeing pretty high

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Speaker 5: quality stuff come out. I mean, I know, so how

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Speaker 5: the industry experts have basically projected that that, you know,

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Speaker 5: another two to two and a half years you will

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Speaker 5: see the first high quoquality fully AI generated movie you know,

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Speaker 5: come out. So again, have to wait and watch, but

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Speaker 5: definitely a possibility and definitely something Netflix is preparing for.