Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is a breaking news update from Bloomberg.
Speaker 3: Instant reaction and analysis from our three thousand journalists and
Speaker 3: analysts around the world looking at Netflix shares. They're continuing
Speaker 3: to move lower this after the company reported results for
Speaker 3: the most recent quarter, concerns about the guidance and boosting
Speaker 3: spending the company saying, for even though they largely beat
Speaker 3: Wall Street estimates, they issued a cautious forecast for the
Speaker 3: months ahead, setting higher program spending, and then, of course,
Speaker 3: Carol the cost of closing its deal with Warner Brothers Discovery.
Speaker 2: Number of customers growing by almost eight percent last year,
Speaker 2: topping three hundred and twenty five million subscribers. Let's get
Speaker 2: to our team who certainly follows it, and of course
Speaker 2: our own Chris Paul Mary, who's been following this company
Speaker 2: and the ins and out of the pursuit of Warner
Speaker 2: Brothers Discovery. Chris, there out there on the West coast, Chris,
Speaker 2: you know you've known this company, you followed it. Investors
Speaker 2: not too impressed. They're worried about I guess it seems
Speaker 2: like the spend that's out there. But walk us through
Speaker 2: what really jumped out for you in their reporting.
Speaker 4: Well, first of all, obviously, investments has been really concerned
Speaker 4: about the Warner Brothers bid. The stock has lost a
Speaker 4: lot of money since the since the you know, in
Speaker 4: October when it first came out the Netflix was interested
Speaker 4: in bidding, and you still see concern here. I mean,
Speaker 4: they said they've spent sixty million dollars already on pursuing
Speaker 4: Warner Brothers. They're anticipating another two hundred and seventy five
Speaker 4: million in cost for that. They paused their share buybacks,
Speaker 4: which were considerable. They had eight billion dollars left in
Speaker 4: their buyback program, so they can conserve cash for the
Speaker 4: Warner Brothers bid. So if you're if you're concerned about
Speaker 4: all this, there's certainly enough in there for that.
Speaker 3: You know. I'm I'm just looking at some of the
Speaker 3: headlines from here, and given Chris, the re action from
Speaker 3: investors over the last few months as Netflix emerged as
Speaker 3: a bidder, it hasn't exactly been a positive one. What's
Speaker 3: the case for why Netflix actually needs these assets? Because
Speaker 3: this is a lot of money to spend, especially when
Speaker 3: investors are getting increasingly concerned about how much money the
Speaker 3: company is spending on content.
Speaker 4: Well, they do in their Letterator shareholders sort of cite
Speaker 4: the broader case that they're you know, no longer just
Speaker 4: competing against you know, HBO or Paramount Plus or whoever,
Speaker 4: that they're competing against YouTube, TikTok, Instagram, and that they
Speaker 4: really only have a still small share of overall TV
Speaker 4: viewing about nine percent, and by acquiring this great library
Speaker 4: and these facilities Warner Brothers, they could really increase their
Speaker 4: production of stuff all around the world and getting into
Speaker 4: some new business, more consumer products, more video games, and
Speaker 4: so that's the that's their argument. HBO Max would would
Speaker 4: give them the oppagility offer different pricing plans. So somebody
Speaker 4: just wanted HBO programming, they could get that instead of Netflix.
Speaker 4: So those are the things they're talking about.
Speaker 2: I'm going to play Netflix's accountant. I mean how much
Speaker 2: I mean the content that they do get, They're going
Speaker 2: to get a lot of content right in one like
Speaker 2: if they get the deal. If they get the.
Speaker 4: Deal, yeah huge, I mean it's a massive purchase in
Speaker 4: the seventy eighty billion range. There's numbers that came out
Speaker 4: today with Warner Brothers projections of what their studios and
Speaker 4: streaming business are going to doout five years, and you
Speaker 4: know it's a potentially huge boost you know, Batman, Bugs, Bunny,
Speaker 4: everything you can imagine for Netflix to own. But you
Speaker 4: know they've also been investing in their own licensing deals.
Speaker 4: Huge deal just announced with Sony Universal kicked in as
Speaker 4: well this month, and they're even licensing shows they noted
Speaker 4: from Paramount twenty programs, So huge perchon is of every variety.
Speaker 3: Does Netflix christ get these assets?
Speaker 4: You mean, do they ultimately win Warner Brothers to think?
Speaker 4: Is that what you're saying?
Speaker 3: Yeah, there's quite a few chuckles. Yeah, yeah, Well to
Speaker 3: be expected with a question like that where you know
Speaker 3: where you can't release either yes or no.
Speaker 4: Right, they look like, well, let's do the poly market
Speaker 4: prediction exactly.
Speaker 3: But they are the favorable. They are the favorite, no
Speaker 3: question about that. It's it's the board has said this
Speaker 3: is a better offer.
Speaker 4: Well, they're the favorite from Warner Brothers standpoint for sure.
Speaker 4: But there's certainly a community of people that think smart
Speaker 4: people who think the Paramount is going to increase the offer,
Speaker 4: or that this is going to fail from a regulatory standpoint.
Speaker 4: So to pick the winner from here is a real
Speaker 4: dicey proposition.
Speaker 2: In terms of their subscriber numbers. Where does that? I
Speaker 2: mean this has been something investors have been concerned about
Speaker 2: right now, the sustainability of their growth based on what
Speaker 2: we got from the company. How does that you know,
Speaker 2: push back on that argument or does it not?
Speaker 4: It was pretty strong growth eight percent to the past
Speaker 4: three hundred and twenty five million. That was a year
Speaker 4: end that was in line with what investors were forecasting.
Speaker 4: Stronger numbers were the you know, the sales growth, which
Speaker 4: you know any company would kill for double digit like that. Uh,
Speaker 4: they said, where it's coming from, it's it's new members
Speaker 4: all around the world. And price increases. They said they're
Speaker 4: going to increase prices again this year. They weren't specific,
Speaker 4: so it could be just in certain markets. Advertising business
Speaker 4: is growing. We all wondered how big a deal that
Speaker 4: was going to be. They said it was one point
Speaker 4: five billion last year. That's only about three percent of
Speaker 4: their overall revenue. But they said the number was going
Speaker 4: to double this year. Is that part of it's growing.
Speaker 4: So as long as they can keep the prices climbing
Speaker 4: and the and the subscribers growing and the ad sales coming,
Speaker 4: you know, they're going to see that revenue growth.
Speaker 2: I just want to especially for those people who are
Speaker 2: listening on radio. Netflix shares are down about four and
Speaker 2: a half. They've been as low as a five percent
Speaker 2: decline here in the aftermarket. This is after the company
Speaker 2: plans to be spending on programs in twenty twenty six,
Speaker 2: crimping profits at the massive streaming company.
Speaker 3: A Chris, before we let you go, pricing power that
Speaker 3: the company has, you mentioned price increases that we could
Speaker 3: see how much pricing power does Netflix have in the US,
Speaker 3: Like there are there's no shortage of places to go
Speaker 3: for content, but you know Netflix, they're kind of the og.
Speaker 4: Right, Well, I think the big story of last year
Speaker 4: really was that everybody raised prices and we didn't see
Speaker 4: huge defections of subscribers. And it's certainly getting to the
Speaker 4: point where you know, it's getting very pricey. Netflix has
Speaker 4: kind of been like the video utility, that's the one
Speaker 4: you can't cancel. It's the it's got the just about
Speaker 4: the lowest churn rate of you know, subscriber cancelations of
Speaker 4: any of the big ones. So you know, how long
Speaker 4: can it continue to do that? And maybe they would say,
Speaker 4: if we have Warner brothers. It's going to be a
Speaker 4: long time.
Speaker 2: All right, Chris, thank you so much, really appreciate it. Chris,
Speaker 2: Paul Mary, Senior editor and Entertainment team leader here at
Speaker 2: Bloomberg News out there in our bureau in Los Angeles.
Speaker 2: We're going to stay on Netflix though.
Speaker 3: Yeah. Let's bring in Eric Clark. He's chief investment officer
Speaker 3: of the ra Acuvest Global Advisors, about one point two
Speaker 3: billion dollars in assets under management, portfolio manager too of
Speaker 3: the Alpha Brand's logo ETF. He covers about two hundred
Speaker 3: consumer stocks, including Netflix. It's the eleventh biggest holding in
Speaker 3: the logo ETF. Eric joins us from San Diego, which
Speaker 3: I understand. It's like sixty nine degrees there. It's not
Speaker 3: like here, Eric, where the high today was twenty one degrees.
Speaker 2: So don't rub it in.
Speaker 3: Yeah. I don't even know why you guys like watch
Speaker 3: Netflix in San Diego. You just should be playing outside
Speaker 3: all the time. A decline of four percent after hours
Speaker 3: right now, are you buying more Netflix? I will buy
Speaker 3: more Netflix.
Speaker 1: Tomorrow, absolutely, because it's seventy five here.
Speaker 3: By the way, Oh my bad.
Speaker 2: Thanks thanks very much for that. We're done with this interview.
Speaker 2: All right, so why are you going to be buying tomorrow?
Speaker 1: Well, you know, bigger picture, nothing's really changed with the business.
Speaker 3: It's just that people have left Netflix.
Speaker 1: Stock because of the Warner Brothers the time that it
Speaker 1: takes to get a deal done like this. So people
Speaker 1: just say, I just don't want to have my money
Speaker 1: tied up in something that's going to be a little
Speaker 1: more uncertain than maybe quote dead money. That's the opportunity.
Speaker 1: So the stock's down over thirty percent and business is
Speaker 1: still doing really well. And at this point where the
Speaker 1: stock is now, I don't even think it matters what
Speaker 1: the outcome of the Warner Brothers deal is. You're just
Speaker 1: getting the stock at a great price here, So we
Speaker 1: just have to be patient.
Speaker 3: That's all. Are you? Are you saying that the Warner
Speaker 3: Brothers Discovery deal will happen, Netflix will get.
Speaker 1: That That one is a little tough because there are
Speaker 1: the unknowns of the regulatory part. I think, generally speaking,
Speaker 1: I agree with the concept that Netflix really is competing
Speaker 1: with all of our time, not just you know, other
Speaker 1: streamers or cable. It's YouTube and TikTok and Instagram, et cetera.
Speaker 1: But within the streaming within the quote, you know, kind
Speaker 1: of core cable TV viewing. They obviously are the dominant one.
Speaker 1: It's just there's much more than just streaming and and
Speaker 1: there's room for every brand here. You know, Netflix is
Speaker 1: the first place that people generally start that gives them
Speaker 1: that pricing power. And then we bolt on the paramount
Speaker 1: for the landman and you know Mayor of Kingstown, et cetera.
Speaker 3: And you know HBO, Max, et cetera.
Speaker 5: But you know, the.
Speaker 1: Assets and Warner are so powerful and they are in
Speaker 1: the best hands with Netflix. It's impossible to know about
Speaker 1: the regulatory stuff.
Speaker 2: But Eric, what if Netflix doesn't get Warner Brothers, do
Speaker 2: you still like Netflix going forward or do you think
Speaker 2: then there is this would be a big loss. We've
Speaker 2: done some reporting. I think we've had some stories that say,
Speaker 2: you know, this is going to help shape Hollywood, you know,
Speaker 2: for years to come. Whoever gets this property. So I'm
Speaker 2: just curious. If they don't get it, Netflix does not
Speaker 2: get it, then what well.
Speaker 1: I think they're just going to go back to the
Speaker 1: same playbook that has you know, driven seventeen percent annual
Speaker 1: subscriber growth for the last decade. I mean, they're just
Speaker 1: nobody can compete with them on the content spend. So
Speaker 1: they're just going to go back to doing the spending.
Speaker 1: Maybe they do some tuck in acquisitions. It's you know,
Speaker 1: it's it's hard to know, but you know, you have
Speaker 1: to give management the benefit of the doubt. They've done,
Speaker 1: generally speaking, a pretty amazing job building this brand, and
Speaker 1: so you have to assume that they're going to continue
Speaker 1: making solid decisions. And you're getting it. You know, a
Speaker 1: stock that's thirty percent off the highs with strong free
Speaker 1: cash flow. I know they will continue to grow margins,
Speaker 1: they will continue to grow subscriber growth, the ad teers
Speaker 1: growing like a weed. So there's just a lot to
Speaker 1: like here. So I love this thing on a dip.
Speaker 3: You know. I'm looking at the the most the ten
Speaker 3: most watch movies from the second half of twenty twenty
Speaker 3: five Carol k Pop, Demon Hunter is Happy, gil Moore
Speaker 3: to Frankenstein, My Oxford. I did not see one of these.
Speaker 5: I was just thinking movies, Wait.
Speaker 2: The Woman and Cavin ten, A House of Dynamite.
Speaker 3: Those are movies, not shows. Oh okay, okay, And even
Speaker 3: the top ten shows didn't see a single one of them. Wednesday,
Speaker 3: Stranger Things five, Untamed Squid Game, Stranger Things, Eric, this
Speaker 3: is interesting the way that people watch the different seasons
Speaker 3: of Stranger Things in the second half of the year
Speaker 3: in anticipation for season five. In the second half of
Speaker 3: the year, Stranger with different different seasons of Stranger Things
Speaker 3: were three of the top ten shows most watched on Netflix.
Speaker 3: So is that is that an issue for Netflix moving forward?
Speaker 3: That's it for Stranger Things.
Speaker 1: No, I don't think so. They will continue to bring
Speaker 1: out other stuff. I mean, they're just so good at
Speaker 1: this concept. I mean, listen, if they get Warner that's
Speaker 1: even better because there's so much more that they can
Speaker 1: do to refresh.
Speaker 3: That entire library. Oh so you're saying, you're saying, like, Okay,
Speaker 3: Happy Gillmore two was in there, so maybe like another
Speaker 3: version of a classic each show or another version of
Speaker 3: classic Warner Brothers movies. Is that what you're saying? I
Speaker 3: think there.
Speaker 1: I think you know, you get a bunch of creative
Speaker 1: people in a room and they take something. Let's say,
Speaker 1: let's say Sopranos for instance, what could we do to
Speaker 1: refresh Sopranos in the same theme. There's just so many,
Speaker 1: so many things that they could potentially do hard to
Speaker 1: see again, because you need the budget and nobody else
Speaker 1: has the budget.
Speaker 3: Does does Paramount Skuidance? If they get the assets, do
Speaker 3: they have the creatives, do they have the budget to do?
Speaker 1: I think they catalogue what you think Netflix could do.
Speaker 1: I don't think that they can compete with Netflix. And
Speaker 1: remember they get they're still going to have a metric
Speaker 1: ton of debt to deal with. So I look at
Speaker 1: this like a private equity owner. If if I owned
Speaker 1: Warner and that was my baby, who would I love
Speaker 1: to be able to sell that library to that would
Speaker 1: put it in the best shape for the rest of time.
Speaker 3: And that's clearly Netflix. It is not Paramount Sky.
Speaker 2: Okay, all right, So top of mind on the call
Speaker 2: with analysts and investors, Eric like, what is it that
Speaker 2: you know we need to be asking this company right now?
Speaker 2: Or is it just really all about their pursuit of
Speaker 2: Warner Brothers.
Speaker 1: Well, I just think that there's obviously just a lot
Speaker 1: of noise, and there's a lot of assumptions. There's a
Speaker 1: lot of assumptions and a lot of industries like AI too.
Speaker 1: But I think that if you widen the lens, nothing
Speaker 1: has changed. It's still an important part of people's consumption.
Speaker 1: It's still an absolute, crazy good value even at twenty
Speaker 1: five bucks. I mean, I go out to dinner in
Speaker 1: San Diego and you get a drink and a half
Speaker 1: and it's twenty five bucks. I can watch an unlimited
Speaker 1: amount of content on Netflix, So there's still a lot
Speaker 1: of value there, and you know, recurring revenue, business global
Speaker 1: in size and scope, you know, reaching kids as well
Speaker 1: as my mom. At eighty three male female. I mean, like,
Speaker 1: there's just a lot to love about a business like this.
Speaker 1: And I feel the same way about Spotify too. Similar
Speaker 1: you know, similar business, slightly different category, but for the
Speaker 1: same reason. And Spotify is off thirty five percent too.
Speaker 2: You know, it's interesting too they talk about you know,
Speaker 2: we've already begun to launch video podcasts from our partnerships
Speaker 2: with Spotify, The Ringer, iHeartMedia and Barstool Sports, and I've
Speaker 2: just announced two new original podcasts with Pete Davis in
Speaker 2: The Comedian and NFL read Legend Michael Irvin. So like,
Speaker 2: you know, we talked too about just podcast taking off,
Speaker 2: and now it's not just audio anymore, it's video. So
Speaker 2: is this a big opportunity for this company or just
Speaker 2: a nice side business.
Speaker 1: No, I think it's a big I think it's a
Speaker 1: big opportunity. I don't know about you guys, but I
Speaker 1: can consume five, ten, ten times more content when I
Speaker 1: can listen to it in the car and you know,
Speaker 1: listen to it on a bike rider or whatever. It's
Speaker 1: not just about reading anymore. People want audiobooks, they want music,
Speaker 1: they want videos, they want podcasts. There's just there's there's
Speaker 1: so much opportunity, and both of these brands have just
Speaker 1: a wild opportunity, you know, long term gathering subscribers and
Speaker 1: bolting on new opportunities that drive operating efficiencies.
Speaker 3: Add AI to the to the.
Speaker 1: Mix in in more engagement, better profitability.
Speaker 3: There's there's just a lot of lot.
Speaker 1: To like, and you don't often get a compounder on
Speaker 1: sale like both of these companies, so you should take
Speaker 1: advantage of it if you can look through some of
Speaker 1: the short term, you know, kind of noise.
Speaker 3: Eric loves Netflix. Eric, always good to see you. Thanks
Speaker 3: for great to see you. Going to come out here, yes, yeah,
Speaker 3: we will.
Speaker 2: Stupidly, I think the studio is about ten degrees.
Speaker 3: We were out there last year and it was actually
Speaker 3: like kind of June gloom. When we were out in
Speaker 3: San Diego? Was it? Oh? Was yeah? Netflix shares let's
Speaker 3: stay on this. The company shares fell in the after
Speaker 3: hours as much as five point one percent, this after
Speaker 3: it for cast first quarter EPs below the average analyssessment.
Speaker 3: The company also plans to posits share buybacks in an
Speaker 3: effort to accumulate cash to fund them pending acquisition of
Speaker 3: Warner Brothers. I want to bring in a Bloomberg Intelligence
Speaker 3: senior media analyst, Geetha Ranganoth, and she joins us from Princeton,
Speaker 3: New Jersey, where Bloomberg Intelligence headquarters are. Githa, just your
Speaker 3: takeaway from this report? The outlook is a concern spending
Speaker 3: on content. Got to tell you this is like an
Speaker 3: age old story for Netflix, right, the concern about, oh,
Speaker 3: you guys are spending way too much. We could have
Speaker 3: had this discussion a dozen years ago, I know.
Speaker 5: And yes, content spending, so it was up about seven
Speaker 5: percent in twenty twenty five. They're projecting about a ten
Speaker 5: percent increase in content spend going into twenty twenty six.
Speaker 5: And then of course you have the cost related to
Speaker 5: the Warner Brothers deal. And I think it's not just
Speaker 5: the cost site right, Yes, operating margin. The guidance of
Speaker 5: tim looks a little bit light. It's below thirty two percent.
Speaker 5: I think the street was looking for something like closer
Speaker 5: to thirty three percent. But also the ad revenue, you know,
Speaker 5: definitely not bad, but not gangbusters. So this is the
Speaker 5: very first time that they've actually reported advertising revenue. They
Speaker 5: said it was about a one and a half billion
Speaker 5: dollars in twenty twenty five. They expect to double that
Speaker 5: in going into twenty twenty six. Again, definitely not bad
Speaker 5: given that you know, this company made its foray into
Speaker 5: adds just a few years ago versus all of the
Speaker 5: other media giants, But again, not really a number to
Speaker 5: kind of get too too thrilled about.
Speaker 3: Was so that's not I was just going to ask,
Speaker 3: is that in line or below or above the expectations
Speaker 3: that you've been making of late. I mean, a nice
Speaker 3: to get some new data from the company, especially yeah,
Speaker 3: in recent quarters that you know they're not doing the
Speaker 3: same same sort of disclosures they have in the past.
Speaker 5: No, absolutely, I mean, so really twenty twenty so you know,
Speaker 5: as we kind of zoom out and we just take
Speaker 5: a look at Netflix. So twenty twenty four was all
Speaker 5: about subscriber growth, right, they had about forty two million
Speaker 5: new subscribers. Twenty twenty five was all about pricing, right,
Speaker 5: huge price increases. Again, pretty stable subscriber growth. They obviously
Speaker 5: did add close to almost twenty five million subscribers. But
Speaker 5: then twenty twenty six, as we kind of looked at
Speaker 5: twenty twenty six, here was like the big head scratcher, Right,
Speaker 5: what is the big growth catalyst for this company going
Speaker 5: into twenty twenty six. And that's really where people were wondering,
Speaker 5: whether you know, that's why they had to buy Warner.
Speaker 5: And of course one of the big things that everybody
Speaker 5: was looking for was AD revenue. Again, it has gotten
Speaker 5: off to I would say, an okay start, but slightly
Speaker 5: on the lower side than I think people were expecting.
Speaker 5: People who are probably expecting something closer to about two
Speaker 5: to two and a half billion dollars in twenty twenty five.
Speaker 5: So definitely I think fell slightly lower than general expectations.
Speaker 2: You know, I always think about Giza, like what's the
Speaker 2: next markets or how much more is they're out there?
Speaker 2: And in their company release they talk about, you know,
Speaker 2: we relish competition, work to earn more of our consumer's attention,
Speaker 2: and they say, despite our success over the years, our
Speaker 2: share of TV time remains below ten percent in the
Speaker 2: major markets in which we operate. And then they said,
Speaker 2: for example, to Nielsen, in December, our share of US
Speaker 2: TV time reached an all time high nine percent point
Speaker 2: five points year overy year, yet linear TV still comprises
Speaker 2: over forty percent of US TV screen time. You know,
Speaker 2: is this just blowing smoke or is it really that
Speaker 2: there is still a lot out there for either Netflix
Speaker 2: or Amazon or some others to still grab when it
Speaker 2: comes to screen time.
Speaker 4: Oh.
Speaker 5: Absolutely, there is still a lot more room for streaming
Speaker 5: to grow, and I think it absolutely will. So I
Speaker 5: think one of the big things that we've seen, especially
Speaker 5: towards the end of twenty twenty five and going more
Speaker 5: into twenty twenty six, is that, you know, most of
Speaker 5: the Marquee sports properties are now moving to streaming. So
Speaker 5: obviously you have the big launch of ESPN. You know,
Speaker 5: for the very first time in the history of television,
Speaker 5: all of the Marque sports are now available for people
Speaker 5: to watch on streaming. They don't have to subscribe to
Speaker 5: a PATV bundle anymore, and I think that makes a
Speaker 5: huge difference. You know, consumer behavior is changing, It's changing rapidly,
Speaker 5: and so obviously there is you know, a lot more
Speaker 5: room for a Netflix for and Amazon as you pointed out,
Speaker 5: but also equally for a YouTube to grow. And this
Speaker 5: is where you have this whole, this whole debate with AI,
Speaker 5: right because as AI comes in and kind of democratizes
Speaker 5: content creation, you have more and more user generated content.
Speaker 5: Are people going to be spending more time on YouTube
Speaker 5: and less time with like premiere platforms like a Netflix,
Speaker 5: like an HBO.
Speaker 2: I've just seen junk is obsessed with YouTube?
Speaker 3: Yeah, but but not with the AI junk. I mean
Speaker 3: social feeds. Have you seen anything good? I mean, nothing good,
Speaker 3: nothing creative. It's like the junk with the.
Speaker 2: AI you're talking, You're not talking YouTube.
Speaker 3: No, like the junkiest junk.
Speaker 5: You cannot think out there, Not yet, Tim, But I
Speaker 5: think just give it about a year or two and
Speaker 5: I think soon we're going to be seeing pretty high
Speaker 5: quality stuff come out. I mean, I know, so how
Speaker 5: the industry experts have basically projected that that, you know,
Speaker 5: another two to two and a half years you will
Speaker 5: see the first high quoquality fully AI generated movie you know,
Speaker 5: come out. So again, have to wait and watch, but
Speaker 5: definitely a possibility and definitely something Netflix is preparing for.