Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is a breaking
Speaker 1: news update from Bloomberg instant reaction and analysis from our
Speaker 1: three thousand journalists and analysts around the world. Netflix reported
Speaker 1: second quarter results that exceeded investor expectations. It raised its
Speaker 1: forecast as well. I want to bring in Getha Ranganathan.
Speaker 1: She's Bloomberg Intelligence senior media analyst. She joins us from
Speaker 1: New Jersey at Bloomberg Intelligence headquarters. What is the most
Speaker 1: important metric that you watch now that Netflix no longer
Speaker 1: reports subscribers or gives guidance on subscribers.
Speaker 2: Yeah, the focus tim has obviously changed from the subscriber
Speaker 2: metrics and ARM or average revenue per member to broader
Speaker 2: financial metrics. So really the two most I think important
Speaker 2: numbers that everybody looks for right now is revenue growth
Speaker 2: and operating margin. And as you write pointed out the
Speaker 2: two Q numbers, Netflix surpassed expectations or they exceeded guidance
Speaker 2: on both those accounts.
Speaker 3: So of course we see that they did beat on
Speaker 3: multiple metrics, even some of the loftiest of expectations, raising
Speaker 3: their forecast. But we're still seeing the street selling off
Speaker 3: on and do you think maybe this is some profit
Speaker 3: taking or was there anything in the report that you
Speaker 3: saw that was particularly concerning.
Speaker 2: Absolutely not. I think the report was definitely solid, So
Speaker 2: I would characterize this as a solid report, but maybe
Speaker 2: not spectacular. So I think even in terms of the
Speaker 2: guidance RaSE, yes, we did have the revenue guidance raised
Speaker 2: from about thirteen percent to fifteen percent for the full year,
Speaker 2: which I think is really solid. Mid teen's revenue growth
Speaker 2: is really solid for a mature company like Netflix. But
Speaker 2: I think with the operating margin, and I think this
Speaker 2: is where maybe investors are slightly disappointed. You know, they
Speaker 2: raised the guidance from twenty nine percent only a smidge
Speaker 2: to twenty nine point five. I think a lot of
Speaker 2: the investment community was looking at something and excess of
Speaker 2: thirty percent. But again, they're operating margin guidance for three
Speaker 2: Q seems really strong. I think they're taking a little
Speaker 2: bit of a conservative approach. Of course, they do point
Speaker 2: out that they do have all of their big content
Speaker 2: releases coming out in the second half, which is obviously
Speaker 2: going to crimp that margin, but I think still it
Speaker 2: is a little bit conservative conservative, and I think eventually
Speaker 2: they can go above thirty percent for this year.
Speaker 1: Expectations were so high going into this This is a
Speaker 1: I was shocked when I looked this morning that Netflix's
Speaker 1: market cap is up to five hundred and forty two
Speaker 1: billion dollars. It's up forty three percent this year. The
Speaker 1: value has pretty much doubled over the last year. It's
Speaker 1: pretty remarkable that even though expectations were so high, they
Speaker 1: were still able to beat and raise.
Speaker 2: Oh absolutely, I mean, and remember Tim, you know, they
Speaker 2: have set not just expectations for this quarter or this year,
Speaker 2: they have expectations going out till twenty thirty. So their
Speaker 2: whole goal by the time of twenty thirty is to
Speaker 2: reach the trillion dollar market market cap club. And they
Speaker 2: have so many other different metrics. You know, they want
Speaker 2: to across the four hundred and ten million subscriber mark
Speaker 2: right now they're somewhere right above three hundred million. They
Speaker 2: want to get an operating margin of somewhere around thirty
Speaker 2: eight to close to almost forty percent. They want to
Speaker 2: double revenue, and then most importantly, they want to get
Speaker 2: their advertising business really growing at nine billions. So you know,
Speaker 2: there are multiple metrics, there are multiple catalysts. Twenty twenty
Speaker 2: four obviously was the biggest year in terms of subscriber numbers.
Speaker 2: They gained something like over forty million new subscribers. This
Speaker 2: year is all about price increases. We already saw them
Speaker 2: take those price increases, and then next year is all
Speaker 2: about building their advertising business. So they do have multiple catalysts,
Speaker 2: you know, through twenty twenty five through twenty twenty six.
Speaker 2: I think the street is going to those start to
Speaker 2: wonder what happens after that, and so we do need
Speaker 2: some strategic direction from them, you know, sooner rather than later.
Speaker 3: Jitha, I remember back when Netflix used to be options
Speaker 3: to get DVDs? Do you remember that? To him? I
Speaker 3: used to go and actually go get a DVD. Then
Speaker 3: there weren't any commercials at the time.
Speaker 1: Really did I did that?
Speaker 3: Hey, you know I can hang with the big dogs,
Speaker 3: say okay, but we used to have DVDs. Then there
Speaker 3: was no commercials. Now we're seeing commercials. We're seeing a
Speaker 3: lot of these competitors coming out and doing the ad
Speaker 3: tier version as well. How is Netflix settling in this
Speaker 3: entire thing? Are they still the front runner here or
Speaker 3: do we see the likes of Peacock and Disney Plus
Speaker 3: and all these other streaming services coming in to compete.
Speaker 2: So they are definitely not the front runner. Nora, So
Speaker 2: they might have won the streaming wars, the streaming subscription wars,
Speaker 2: but they're definitely a late entrant to the whole advertising party.
Speaker 2: I would say the front runner there in terms of
Speaker 2: streaming ad dollars is definitely Disney. They have an absolutely
Speaker 2: fantastic business. They have Hulu, they have Disney Plus, they
Speaker 2: have all of their ad infrastructure up and running from
Speaker 2: their linear TV business. So Netflix definitely late to the game,
Speaker 2: but I think they can still make a dent here
Speaker 2: because we're seeing a whole huge shift, an industry wide
Speaker 2: shift away from linear TV, which used to be about
Speaker 2: a fifty five sixty billion dollar industry, to what is
Speaker 2: called connected TV digital advertising, and Netflix is kind of
Speaker 2: putting everything in place. So they're making sure that they
Speaker 2: have the right type of content because this type of
Speaker 2: on demand content doesn't necessarily really play well to advertising.
Speaker 2: You really need to have more of a live event
Speaker 2: or a sports type of content where you have you know,
Speaker 2: a huge audience tuning and at the same time to
Speaker 2: really appeal to advertisers. And they're making you know, they're
Speaker 2: definitely making those investments. So we know that they went
Speaker 2: after WWE, They're going after NFL. There's more and more
Speaker 2: live programming that they're adding every day. And then of
Speaker 2: course it is building on the tech side, right they
Speaker 2: need all of the ad inventory capability. They just recently
Speaker 2: partnered with Yahoo. They set up their own proprietary, proprietary
Speaker 2: ad tech platform, so they're you know, kind of getting
Speaker 2: all the infrastructure, all the plumbing in place for the
Speaker 2: ad business to take off in a pretty big way.
Speaker 2: And even this year, you know, they expected to double
Speaker 2: from last year, and while they didn't give any numbers,
Speaker 2: we think that even this year it will approach about
Speaker 2: two and a half to three billion dollars in revenue,
Speaker 2: which is pretty significant considering that, you know, they just
Speaker 2: introduced advertising about two years ago.
Speaker 3: What is international programming looking like?
Speaker 2: Very strong? I mean, quarter after quarter we see you know,
Speaker 2: some of their biggest titles being non English titles. I mean,
Speaker 2: the greatest example, of course, is Squid Game, which is
Speaker 2: their biggest title ever in the history of Netflix. And
Speaker 2: they have multiple, you know, titles that they highlighted in
Speaker 2: their investor newsletter for the second quarter. I mean, whether
Speaker 2: it was X Territorial, which is a German movie. You know,
Speaker 2: so many there was a big animation series from Korea.
Speaker 2: You know, multiple series across the globe playing really really
Speaker 2: well and scoring on par or even better with the
Speaker 2: English titles. So you know, this has been a really
Speaker 2: good strategy for them, you know, localizing a lot of
Speaker 2: the content, going after international content in all of the
Speaker 2: different territories, and that really health drive subscriber numbers as well.
Speaker 2: You know, seventy percent of Netflix a subscriber bases outside
Speaker 2: the United States.
Speaker 1: Getha, Since it's your job to know what Netflix has?
Speaker 1: Can you just sit at work all day watch Netflix?
Speaker 2: I wish I could, damn all.
Speaker 1: Right, Well, it sounds like you know what you're doing,
Speaker 1: so you're doing something right, and we really appreciate you
Speaker 1: joining us on Netflix earnings Day. It's always great to
Speaker 1: have you on the program. Getha Ranganath and she's Bloomberg
Speaker 1: Intelligence senior media analyst joining us on Netflix. Check out
Speaker 1: her research. It's going to be updated soon if it's
Speaker 1: not already, it's on the Bloomberg terminal. We are seeing
Speaker 1: shares of Netflix actually move lower in the after hours
Speaker 1: after an initial bounts hired. The company did report results
Speaker 1: that exceeded investor expectations in every major metric, revenue growing
Speaker 1: to eleven point one billion dollars, earnings jumping from seven,
Speaker 1: earn is jumping two rather seven dollars, and nineteen cents
Speaker 1: per share. The company also raised its forecast for full
Speaker 1: year sales and profit margins. It expects to generate up
Speaker 1: to forty five point two billion dollars in sales and
Speaker 1: have an operating margin of twenty nine point five percent.
Speaker 1: Let's bring in Mark Douglass, the CEO of the publicly
Speaker 1: traded advertising and marketing company Mountain ticker MNTN. He joins
Speaker 1: us from Miami. Mark, always good to check in with you.
Speaker 1: I want to focus specifically with you on the ads
Speaker 1: supported element of this. I was telling Nora earlier. You know,
Speaker 1: I'm old enough to remember when Netflix said they would
Speaker 1: never do ads, they would never do live content, they
Speaker 1: would never do news, they would never do sports. Now
Speaker 1: they do all of those things, And is the and
Speaker 1: more is the ads business working?
Speaker 4: I think the ad business is off to a start.
Speaker 4: It can grow so much bigger, and you know it's
Speaker 4: obviously growing. I think they're they're saying that they expect
Speaker 4: a lot more growth, but it's also in a competitive space.
Speaker 4: They're competing with Disney, with Peacock, with Paramount, Warner Brothers,
Speaker 4: and you know those big spenders, those big brands, they
Speaker 4: don't really increase their budget, So if you want to
Speaker 4: come into that space, you have to take market share
Speaker 4: from someone else. Netflix is what I would expect over time,
Speaker 4: is that whatever percentage of viewership they have is what
Speaker 4: percentage of the ad market they can get, So they
Speaker 4: have a lot of room to grow. It is working,
Speaker 4: but it's still relatively small compared to where it can be.
Speaker 3: I find it really interesting. We were discussing how people
Speaker 3: are willing to pay for these subscriptions even if they
Speaker 3: do contain ads. I can literally remember when you would
Speaker 3: watch Netflix all the way through, no gaps at all.
Speaker 3: But it seems as though this is a really thriving
Speaker 3: part of their business here.
Speaker 4: Yeah. Well, I mean why did they add the ads?
Speaker 4: Because their customers wanted a lower price point, and so
Speaker 4: it's a simple trade off. We'll give you the lower
Speaker 4: price point if you'll let advertisers pay for part of
Speaker 4: your subscription. That's effectively what's happening. And so the customer
Speaker 4: is getting what they want and Netflix is getting the
Speaker 4: revenue they need know in order to make that possible.
Speaker 4: So it is a win win. I'm not sure sure
Speaker 4: everyone that gets ads thinks it's a win, but it's
Speaker 4: certainly a win that they don't have to pay as
Speaker 4: much to get the content.
Speaker 1: So I'm looking at the different plans and pricing for
Speaker 1: Netflix here in the US. There's the standard with ads.
Speaker 1: There's standard, there's premium, so it starts with seven to
Speaker 1: ninety nine a month. You can go for premium up
Speaker 1: to twenty five dollars a month. Again, this is here
Speaker 1: in the US. There are different intricacies to this because
Speaker 1: you can pay for extra members and the like. Netflix
Speaker 1: has gotten really good at as my brother likes to
Speaker 1: remind our entire family understanding if you're sharing an account
Speaker 1: and now everybody kind of needs their own accounts. Is
Speaker 1: there from the perspective of actual growth here in a
Speaker 1: saturated market in the US, is there a concern or
Speaker 1: is this by design that if Netflix raises the premium
Speaker 1: price then there will be a small portion of the
Speaker 1: folks who don't want to pay twenty five dollars a
Speaker 1: month or whatever, and instead they'll drop down to that
Speaker 1: ad supported model. Is that the strategy?
Speaker 4: I think yeah. I think worldwide Netflix maybe last quarter,
Speaker 4: the quarter before Essential, the last time they were reporting
Speaker 4: subscriber numbers, they said the number one, you know, kind
Speaker 4: of tier that people were buying was the ad supported tier.
Speaker 4: I think it was as much as half of all
Speaker 4: new subscribers. And so people want it. They want that
Speaker 4: price point. I think what's really interesting is the way
Speaker 4: to think of it is Netflix is building a backlog
Speaker 4: of future revenue. So, in other words, they bring on
Speaker 4: the subscribers that they are essentially under moonetizing. They're charging
Speaker 4: them seven ninety nine, and they're getting relatively few ads.
Speaker 4: And as Netflix increases the ad load and essentially makes
Speaker 4: more money, that is just like pure like that's going
Speaker 4: to flow directly a bottom line. I would expect Netflix's
Speaker 4: earnings to outstrip their revenue growth literally for years to come.
Speaker 4: It's somewhat similar to the password backlog, where they knew
Speaker 4: all these people were sharing the password, and at any
Speaker 4: time they can just kind of kind of get more
Speaker 4: serious about that and all of a sudden it produced
Speaker 4: all this additional revenue. That's what's going to happen with
Speaker 4: Netflix is advertising and I think I have never seen
Speaker 4: a company this large that I would say should be
Speaker 4: treated as a high growth stock. That's the potential in
Speaker 4: the at business right Mark.
Speaker 3: One thing that was interesting to me as we're parsing
Speaker 3: through this earnings was the fact that Netflix boosted its
Speaker 3: full year revenue primarily due to US dollar depreciation. What's
Speaker 3: your takeaway from.
Speaker 4: That, Well, I mean their global business. I mean, I
Speaker 4: think that's for financial analysts to really look at. I mean,
Speaker 4: obviously they don't want to be fluctuating their price points
Speaker 4: based on the way financial markets are valuing the dollar
Speaker 4: and other things. But I think the I think most
Speaker 4: investors are going to look at the growth in revenue,
Speaker 4: growth in earnings, continue expansion in national and I think
Speaker 4: the most important value for Netflix, which is not really
Speaker 4: explicitly measured in numbers, is they, through surveys, they are
Speaker 4: the first place people go when they turn on their TV.
Speaker 4: Is they turn on Netflix. And the amount of power
Speaker 4: that gives this company is it's almost hard to state
Speaker 4: that that's how they can turn you know, like fights
Speaker 4: into like numbers that rival some of the biggest sporting events,
Speaker 4: or turn wwee into you know, a big show on
Speaker 4: Netflix where one has been as big as another channel.
Speaker 4: And if I'm gonna invest, I'm going to be as
Speaker 4: long as Netflix is the first place people go, It's
Speaker 4: going to be the first stock I want to invest
Speaker 4: in that. I think that's the biggest correlation.
Speaker 1: Hey, hey, Mark, since you are focused on the ads business,
Speaker 1: in your view, what's a more profitable subscriber for Netflix?
Speaker 1: Is it the one who's paying seven to ninety nine
Speaker 1: a month for the ad supported version, or is it
Speaker 1: the premium subscriber at twenty five or the standard subscriber
Speaker 1: at eighteen bucks.
Speaker 4: I think the premium is probably the most profitable, but
Speaker 4: I think then the ad supported has the potential to
Speaker 4: become the second most profitable. I don't think it's there
Speaker 4: yet because they simply are not monetizing all those entertainment
Speaker 4: consumers at the level they could be. But when they are,
Speaker 4: they're doing seven ninety nine on that price point, who knows,
Speaker 4: it might be eight ninety nine next year something like that,
Speaker 4: and they can make probably equal to that in terms
Speaker 4: of AD dollars per user, and maybe even a bit
Speaker 4: more than equal to that in AD dollars per user.
Speaker 4: And you see that's what Amazon did were Prime where
Speaker 4: they just flipped the entire customer base and the AD supported,
Speaker 4: So that ad supported in terms of volume because most
Speaker 4: of the subscribers I think will be AD supported over time.
Speaker 4: Is the most profitable in terms of just share dollars
Speaker 4: right now, it's probably the premium at twenty five dollars mark.
Speaker 3: I mean, when you think about Netflix historically, they were
Speaker 3: initially felt like the leader, but you're seeing a lot
Speaker 3: of these other companies any here trying to additionally monopolize
Speaker 3: the space. But that being said, we did see some
Speaker 3: news earlier that Comcast is raising the price of his
Speaker 3: Peacock streaming service by three dollars a month. Very fitting
Speaker 3: today when we have Netflix earnings. How are you thinking
Speaker 3: about Netflix as a potential leader right now in this space?
Speaker 4: Yeah, I mean that losing that leadership position is going
Speaker 4: to be hard for them because they just have to
Speaker 4: keep investing in content, and they're profitable and very profitable,
Speaker 4: so they can afford to keep doing that. But I
Speaker 4: think what you're seeing happening is the other networks are
Speaker 4: fighting back. Peacock with Love Island just massive show over
Speaker 4: the last month from what I know, did incredibly well
Speaker 4: advertise in terms of revenue generation. I think it's the
Speaker 4: number one reality show in the world. Plus they have
Speaker 4: Bravo and others. You have Disney with all the children's content,
Speaker 4: Star Wars content, ESPN now going into live sports. I
Speaker 4: think all the networks have gotten way more serious about
Speaker 4: competing and they're bringing out their own hit content. But
Speaker 4: as long as Netflix is number one, I think it's
Speaker 4: hard for them to lose that spot. Probably the only
Speaker 4: company that can really truly challenge them is Disney.
Speaker 3: Absolutely. It's interesting. We were just talking about Love Island.
Speaker 4: I am.
Speaker 3: I'm a watcher of Love Island, so I see how
Speaker 3: they were able to skyrocket.
Speaker 1: Here somebody who I'm co anchoring with today went to
Speaker 1: like a Love Island premiere, a watch party, watch party, or.
Speaker 3: That you hosted a watch party of my own two
Speaker 3: days later.
Speaker 1: Meanwhile, I've never even seen an episode of whatever you
Speaker 1: guys are talking about. Mark Douglas, always good to see
Speaker 1: you fly on up here to New York next time
Speaker 1: so we can hang out in the studio. Mark Douglas
Speaker 1: is CEO of the publicly traded advertising and marketing company
Speaker 1: Mountain