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World focuses on Netflix, just out with its latest quarterly results. The company beating estimates though read hate stings. Of course, one of the co founders is stepping down from the board after twenty nine years to pursue philanthropy and personal interests. But again you should point out in terms of the company,
we can talk about that in just a moment. Did report revenue that beat analyst estimates in the first quarter, buoyed by strong subscriber growth, engagement, keeping subscribers there and bringing them in. That's important.
The guidance, though, is what has people concerned. Second quarter earnings for sheriff seventy eight cents is what Netflix is guiding for the estimates for eighty four cents. I want to bring in Githa Ranganathan, Bloomberg Intelligence Senior media analyst. She joins us from Bloomberg Intelligence quarters in Princeton. Keith, are there two elements that we want to talk about here.
One is the light guide that disappointed analysts but also read Hastings moving away, which one is a bigger way on the stock in the after hours.
Yeah, thanks so much, Tim, And it's definitely the lighter guidance. So I think not only were we looking at the second quarter guidance, which of course is lighter both on the revenue side as well as on the EPs front, but we were also anticipating some kind of take up for the full year revenue guidance. So remember the quarter before they had set twelve to fourteen percent for the full year, and they basically just came out this time
and reaffirmed that same number. And I think the street was really looking for all the recently implemented price hikes to contribute to maybe at least one hundred basis points of improvement in revenue growth. The same goes for operating margin. I mean when the guidance first came out for operating margin at thirty one point five percent, that was considered to be pretty muted, and I think the street was
disappointed last time around, and they haven't. They continue to be pretty I think they're still kind of taking conservative approach, but definitely the street is going to be pretty disappointed on this.
So what do we want to do. Does everybody want to push them on the call with analysts to say, wait, give us a little bit more color around this. Are you being conservative? Is it as easy as that, KEITHA.
So, I think there are a couple of different things here happening, Carol, especially with the second quarter. So the reason why their revenue guide fell a little short of analyst expectations was because they did implement a big price hike in the second quarter of last year, so they're obviously lapping those increases. So that's one thing to kind
of keep in mind. And then the second thing is on the on the EPs front, and the reason why we're seeing a little bit of pressure in terms of guidance for EPs and operating profit is because they do expect very very heavy content amortization in the second quarter. So you know, they think that that would ease a little bit in the second half, but in the second quarter it's going to be pretty heavy, which might be part of the reason why they're still kind of take
a little bit of a conservative stance. And you know, we've seen them kind of really invest in a lot of different pieces of content, most notably sports. Whether you know it was the MLB opening Day game or the World Baseball Classic, and you have a couple of boxing matches coming up, and so I think all of that, With all of that, they're kind of taking probably a slightly more measured, cautious stone.
We don't get actual subscriber numbers anymore, unfortunately, but the company, as you mentioned, boosted its standard plan with that ads by two dollars to twenty dollars a month. That was in March. Any indication based on these numbers or doing some quick back of the envelope math what that did in terms of churn or maybe pushing people to the advertising tiers that are less expensive.
Yeah, So historically, Tim, what we've seen is, and we've seen this in multiple price increases that Netflix has done over the past four years or so, is that churn has been pretty low. It is actually for Netflix, it's actually the lowest across the board. It's about one point seven percent. You compare that to about six to eight to nine percent for some of the others services, So you know, they've historically seen very very low cancelation rates.
Of course, there is the possibility, you know, with the price increase, that there could be a little bit of tearing down. As you just pointed, I'm not sure it necessarily had a huge impact at least for the quarter that is reported, but maybe they are factoring in some of that for the second quarter, which is why we're kind of seeing that lighter than expected guidance in terms of revenue growth.
Huh okay, I mean listen, I feel like, you know, when we talked about Netflix right in the last how many months, of the story that gave and gave and gave over the past year was Warner Brothers Discovery. I mean, is there any rethink that that was a mistake or now that has nothing to do with what we're seeing here.
So you bring up a really interesting point, Carol, And I think you know, when they announced the deal, people were kind of, you know, flummox and they were like, why are you doing the deal? Is it because you need it or is it just nice to have? Is it because this is you know, a once in a generation, once in a lifetime opportunity for you guys to get hands on an asset that will probably never come to
the market. What is it? And I think you know, people were kind of looking at this first quarter report, as you know, providing some more answers to that, but I think we have more questions than answers at this point because you know, we're not necessarily seeing a great acceleration in the revenue numbers, in the operating margin numbers, which is exactly what they needed to show in order to you know, basically assuage investors that did not need
Warner Brothers Discovery. So this kind of it's it's it kind of leaves investors, I think a little bit, you know, hanging a little bit.
What about the ben Affleck acquisition.
That is a great acquisition, so, you know, and I think we can we will continue to see more of
this going forward. So that is you know, I think as we kind of ponder about whether AI is going to be a positive or a negative for some of these media companies, I think we're definitely going to see Netflix kind of flip the script and be more of an AI winner, and that you know, the ben Affleck company Interpositive acquisition, which was basically for six hundred million dollars, I think it's a really smart discipline move, which again helps them really kind of hone in on AI and
make it, you know, make it a positive gap.
But there's this balance and maybe the Ben Affleck element helps because he is a creator. He's a Hollywood creative more more so than an executive. But the scary thing is, I think for a lot of people in Hollywood is like, what does it mean for their own jobs? And is it existential if AI can do what they're doing?
Yeah, and I think you know, Netflix has said this many times and just the fact that you know, Ben Affleck is obviously he represents Hollywood and the creative community. I think the company itself is really more about offering creators better tools for storytelling. So I don't think it's necessarily replacing them. And that's the same story that that Netflix obviously has been saying to This is just to help them do their jobs better. This is not necessarily
to replace them. So we'll see how it all. You know, it's still early days to tim and we'll see how it plays out. But you know, so far, they're you know, saying the right things.
I guess seconds the company's going to be okay with read Hastings off.
The board, I think, so. I think he's kind of been in the background now for a while. It's really just been tet Sorrando's and Greg Peters running the show, and I think they will be fine.
All right, cool, Steph.
I want to bring in Eric Clark. He's Accuvest Global Advisor's CIO. He's also the portfolio manager of the logo ETF, which has Netflix as its second biggest holding. He joins us from inside for some reason, even though he's in beautiful San Diego, California. Eric, thanks for going into the office today to actually talk to us. Do appreciate that we want to just get your quick reaction on Netflix
down nine percent right now? Carol mentioned some of the headlines The light guide certainly has investors a little concerned read Hastings stepping away a big deal, but maybe not as concerning to investors. What's your quick reaction?
Well, Carol said it earlier, the stocks up forty percent. I mean, you know, it went down forty per from the highs in September, and then it went up forty percent or forty two percent since the lows. It's seventy five bucks. So you know, short term, any stock that runs forty percent into an earnings print better be an absolutely perfect print. And but we don't care that, you know, short term noise in a quarter has never bothered us. It's as long as the dominant theme of any company
is still intact. You ride through some of the noise quarter to quarter and you take advantage of that. And we certainly the stock was down forty percent and we added to it a number of times to beef the position up pretty meaningfully because we do believe in this long term and we've been getting paid to do that. So sometimes you just have to be willing to look through short term noise, and we did come hot into the print.
Yeah, listen, I think based on was it the end of last year, this looks like it's the number two holding in your ETF the logo ETF roughly five point eight percent. But you can correct me. You're going to add to that position or is you know, is this kind of near the top of how much you want in the portfolio?
Well, we by flexibility, we can go higher. I don't know that, you know, on a small print, on a small pullback like this, I don't know that there's a reason to add to it. I think, you know, the goal is that there's been a lot of names that have come down. There's been a lot of turbulence under the surface, so We have a pretty full position in Netflix. Sometimes we trade around it. So you know, if I got the opportunity to do that, I could certainly do that.
But you know, our goal is to find what are the next trillion dollar brands? Who else joins the trillion dollar club? Walmart joined not long ago, And you know Netflix only has to to do about thirteen percent revenue ongoing and generate good free cash flow. We even cap the margin assumption at thirty five percent. We cap the content spend at twenty billion, driving some more share ibas, and you get to a trillion in market cap in twenty thirty two. So big picture, there's a lot more
upside to go. You just have to go through different, you know, noisy quarters in a market that can be volatile.
That's a more than doubling of the market cap in the next six years. Do you think that happens? I do I do without without Warner Brothers Discovery? I don't know.
I completely agree. I think it would have been great to have that big content library, But you know, again, at what costs they've They've just saddled paramount with a pretty significant debt load so that they can do lots of other things on the content spend. They're going to clearly do more on sports. You know, the gaming is probably more of a free call option. I think going forward, it's a little hard to know, excuse me, how that's
going to go. But if they just do what they've continued to do, ratchet up margins a bit, use AI to enhance the business, draw viewership in, and you know, Netflix is still the benefit of It's the place we go first for content search, and then we go out from there. Well there's nothing new on Netflix, Okay, now I'll go to HBO and okay, now I'll go to
Amazon or Apple. So there, you know, and at twenty seven bucks a month, it's still an incredible value to the average consumer for all the entertainment that you get. And obviously I do agree eight we have a ten We have an eight billion dollar revenue estimate from the AD tier in twenty thirty two, and I think your
prior guest was talking about somebody having ten billions. So I think there's just a lot of things that you can a lot of levers to pull for Netflix on the free cash flow, on the margin, on the AI side, which is still a little bit of an unknown so I think Dipster are to be bought here.
Yeah, go go.
Ahead, go ahead.
Well, Read Hastings, he has Powder Mountain in Utah. He's off skiing and creating this. David Weston got to go to Powder Mountain last year and talk to Read Hastings. I would like to do some skiing at Powder MOUNTA. I bet you would an issue at all for this company that Read actings. And look, he hasn't been CEO or co CEO for a time at this point. Not an issue to you. That he's exiting the board when his term is over.
Not an issue at all. And he still has two billion dollars worth of stock. So he's pretty vested in keeping up with Netflix and being comfortable enough to walk away while still having you know, last I checked twenty one million shares. He's committed to Netflix success, similar to Balmer with Microsoft success. And look how it's worked out for Steve Balmer with all the things that he's done with with Microsoft stock.
I should note I do believe Read Hastings is a board member of Bloomberg LP, the parent company he is of Bloomberg Radio and Bloomberg Television. So full disclosure there.
Yeah, no, we like to do that. Having said that, all right, so let's talk about the folks that are behind the helm, and let's just remind everybody. First of all, we're talking to Eric Clark Akives Global Advisor CIO, so he's also a portfolio manager of the logo ETF. Netflix is the second largest position in that ETF. Right now, we're looking at Netflix shares continuing to trade near their lows in the aftermarket, down about nine percent. This is
after the company's revenue did beat estimates. We did have that in the first quarter, but revenue did go up sixteen percent in the first three months of the year to twelve point three billion. That was a slight beat. Earnings per share about twenty three compared with estimates of seventy six cents in the current quarter, though the company forecasting earnings per share of seventy eight cents a share. That's less than the eighty four cents predicted by Wall
Street analysts. So that is the backdrop for those earnings. We're headed off to the analyst and investor call in a little while, Eric, what do you want to listen out for? What would you want to be asking on that call? You are an investor in the name, what would you be asking of the co CEOs and their C suite team.
Well, I think and they're I mean, they're obviously not going to give you a ton of clarity or granularity on sports because they don't want to tip their hand. But it's clear that sports has been a very big win for them. So I expect them to talk more about double downing on those kinds of differentiated opportunities and just you know, trying to be as mindful about their
spend and the quality of the spend. Is really what I would ask is you know, let's face it, for a while there they were in fill the library up mode and people kind of critiqued some of the quality content that they created. Now they have the ability, they have a large library. Now they have the ability to really focus on quality content, which certainly drives a lot
more viewership and engagement. So again, I at twenty seven bucks a month, there are very few other services that give people more delight and more entertainment, and so there's just and the business is so predictable and can system if you you know, in the last couple of months, every day the market was down with some of the Iran headlines. Netflix and Spotify were usually up on the day because of the stability of the business model. So it isn't just the growth that we are making it
such a big waiting. It's the stability of the model that that is important too. You know, you're just going to have some of this volatility on the earnings.
Yeah, But what's interesting is we're in an environment. When I think about the model. YouTube dominant global video program roughly two points seventy four billion monthly active users as of early twenty twenty six, leading US TV streaming with over twelve percent of TV viewing time, driven heavily by users over fifty dale. Viewership can include seventy billion shorts views, top creators. You know, we can get into that, but
this is from Nielsen. But people are watching YouTube, and I realize it's an older or skewed older, but I just wonder, you know, do the streaming models do they have it right? And to be fair, they have a lot of people watching. I watch them, but I just wonder, like, what is the model of how people There's so much coming at individuals. They have a lot of choices out there or they could just you know, turn off their laptop, turn off their TV or whatever, and put down their phone.
Well, I think, you know, we have this short termism in a variety of our lives, this dopamine hit. And you know, YouTube does provide that short term you know, I just want a four minute clip, and so it wouldn't surprise me if if YouTube started or Netflix started to kind of experiment with some of those you know, short type of content as well.
Yeah, isn't that fun?
That's so wild?
But you just think about, right, because you click on those short videos. I mean, listen, I have someone at home that's really into it. And yeah he's above fifty, but I mean, like the amount of stuff in velocity.
He will go through, you know, like the Instagram YouTube TikTok Snap, those short forms are everywhere.
Yeah, right, but what do you but he's not on that. But I just think about those short things and you can have ads if you want.
Like the YouTube copied YouTube now is YouTube shorts and they copied the you know, I think Snap, it's fair to say, kind of pioneered this and then Instagram copied it. It's all over Facebook now LinkedIn has this all?
I know, Yeah, it's everywhere. I know, I know, I just think about, you know, how much YouTube is on in our household. It's pretty remarkable, you know. So all right, yeah, you're not worried, but you're not necessarily buying more here.
No, if we were at two or three percent weight, then I would absolutely be buying. But we have a full We have a full weight now, and if it pulled back a little bit further again, we love to trade around names. If we can get the opportunity, I'd
certainly consider that as an opportunity. But I don't see us changing the core weight at five percent or so anytime soon, particularly with the assumptions that we feel pretty good about by twenty thirty two, with being you know, kind of joining the trillion dollar club, because that is a big part of what we're doing at Logo, trying to find the names who are the next firms to join the trillion dollar club, and that you know, there's a few on our list that look pretty attractive.
I want to go back to the AI question. We touched on this with keitha a little bit as well. The ben Affleck Company are interpositive that Netflix announced it was buying back in March. Is Netflix doing the right thing? With AI, I.
Think they are. I mean, you know, AI is still I think an unknown to most of the world, so you never I think there's a lot of experimentation that has to occur. And if you are one of the lucky kind of companies that have a bunch of free cash that you can experiment with different things to try to see what resonates and then do a lot more of it once you have some good data that that just kind of distances you your firm from all the peers.
So I do think AI is going to continue to be a part of this to be a part of this industry. And you know, Netflix is in the cat bird seat to be able to use their balance sheet to be able to figure out how to do it. And you know, we do expect good share buyback activity with A They can do all the content they need with twenty billion or less a year, which means that the more they grow subs, the more they can buy back shares and reduce the float, and that helps earnings
for share growth. And there's just a lot to like about the core business and a few things that could be you know, big optionality around the core.
Eric really appreciated Eric Clark he's Acuves Global Advisor CIO Logo ETF Portfolio Manager, joining us once again from San Diego. As we've mentioned, Netflix his second biggest holding in that Logo ETF