While the numbers are out Netflix, loses nine hundred, and
seventy thousand subscribers compared to their forecasts of
losing two million. So even though they still lost
subscribers, this was considered a beat which is good news.
Good news for investors and investors are responding as this
being good news. It's not amazing, they're still
losing subscribers so it wasn't like they swung this back into
the positive and gained a million subscribers that would
have been amazing, but they're not losing quite as many.
And this wasn't disastrous to the point where they lost three
to five million Ian, like some analysts are saying.
So right now, the stock today was up, 5.6% after hours, it's
currently up 7.7 percent as investors are trying to digest
this news. So, having said that, I have the
official earnings report, pulled up on my screen, and I want to
go through this with you and give you my instant reaction and
fresh take on this. So having said that let's go
ahead and Jump Right In before we start just a quick shout out,
this video is sponsored by FTX u.s. if you haven't already use
the pin comment links and The brokerage account its free.
You can you can open it up and use the code Carlson to get $10
when you do a hundred dollar trade now.
Let's go ahead and jump right into this.
July 19, 20 22, that's today just an hour ago.
Fellow shareholders Q2 is better than expected on membership
growth. Used a term growth lightly there
they lost subscribers but it's their membership growth and
foreign exchange was worse than expected stronger.
US dollar. This is something that every
company including Microsoft has to deal with resulting in nine
percent Revenue growth. %, constant currency, constant,
currency for those, not aware means what the growth would have
been had. You - doubt any foreign exchange
issues. So if there wasn't the dollar
going up and down in value, then the 13% constant currency means
they would have had 13 percent Revenue growth, but since there
was foreign exchange changes 9%, was what their growth netted out
to our Challenge and opportunity is to accelerate, our Revenue
membership growth by continuing to improve our product.
Content and marketing, as we've done for the last 25 years.
And to better monetize, our big audience, we're in a position of
strength, given our 30 billion plus in Revenue.
Six billion in operating profit last year, growing free, cash
flow, and strong balance. Sheet are summary.
Results are forecasted and forecasts are below, so they
highlight that they have 30 billion in Revenue.
Six billion in operating profit last year, growing free cash
flow, strong balance sheet, which I agree with all of that.
For the most part. Now we have a summary of
everything right here. Let's go ahead and just take a
look at this for a minute, Global screaming paid members,
they have the forecast here, 220.
So last quarter they ended with 220 million point 600 so 220
million, six hundred and seventy thousand is what they ended this
quarter with last quarter. Before that they had 221 million
six, hundred forty thousand. So they lost the nine hundred
and seventy thousand Ivers. That's right there.
This minus nine point, nine seven and they're expecting to
gain next quarter. It looks like a million
subscribers so that's low. That is low.
They are obviously struggling to grow.
This is an amazing. They're not like, oh, now we're
expected to grow four million, but I'm hoping that Netflix has
learned their lesson and they're doing things the right way,
where they did it like this quarter, they under promised
they'd over-delivered. They said they're going to Lose
two million and they lost less than 1 million.
So if they say they're going to gain 1 million, I hope that
that's a low estimate and they really gain 1.8 million.
It's better than expected. That's what I would hope from
Netflix. I really, really hope they learn
their lesson and they're giving themselves a little bit of a
margin of safety with these forecasts.
But right now that is a 1 million subscriber gain
forecast, which is just slow, this is slow going into next
quarter. Hopefully it picks up the
quarter afterwards, when we get To the the winter seasons when
people are home with their family, people tend to do more
subscriber. They do more streaming, those
type of activities, watching movies, but this quarter, I
believe typically is a bigger one for them.
This upcoming 1, so 1 million is very soft guidance.
But again, my suspicion is it's very similar to this quarter.
They are under promising over-delivering, that's what
they're trying to do. Now, let's go ahead and look at
their cute to results. What they say Revenue, gained
nine percent 13%, excluding the 339 million foreign exchange,
currency impact, driven, by six percent and 2 percent increases
in paid membership and arm average revenue per member
respectively, excluding the impact of Foreign Exchange arm
rows 7% year-over-year. So on a per member basis,
they're still making more money in the asia-pacific region
region, they grew Revenue by Only 3%, that's fast Revenue
growth, 23%, I think this is one of their best regions right now
where they're still growing. Let's take a look here at over
900 million of Revenue. Apex approaching the size of our
Latin America business. We added 1.1 million members in
the region, verse 1 million last Q2.
So they added 1.1 million in Asia Pacific.
This is likely kind of saving Netflix.
This this area they say due to the impact from our price.
In India last December, as well as a plan mix which was parked
partially offset by higher arm and Korea and Australia.
So they actually had Revenue go down because of their price.
Decrease in India, they're lowering prices to be
competitive in India, because in India, it's highly competitive.
They're everyone's trying to get their streaming service in and
usually they charge a couple bucks a month.
So they lowered prices to be more competitive but they say
excluding India, a pack arm grew four percent year-over-year on a
constant current He bases. We have Europe revenue and arm
increased 13% six percent year over year respectively while
paid net ads. Ditions totaled - 800,000 verse
plus two hundred thousand a year ago so they lost a lot in the
European. I believe that's the American
European market revenue and lot of Latin America grew 19 percent
year-over-year excluding FX and surpassed 1 billion.
It's interesting that the The average revenue per user is
increasing while the paid net ads are going down.
So it's just means they have turn.
They have a lot of people paying more and they like the service
they're continuing to watch it. Then they have some light users
on the probably the smaller plans, just saying, you know, I
don't need it for the next couple of months, I'll sign up
later when they have some shows that interest me.
So they have turned every one of these streaming services, every
one of them deal with turn Apple deals with a lot of turn.
They're turning users all the time with Apple.
B plus all these companies are doing this.
So moving on, they say that you can arm and revenue each
increased ten percent year-over-year, excluding the
impact of FX paid. Net ads were - 1.3 million verse
point, four million. So they lost subscribers in both
Europe. They lost subscribers in the
u.s. a lot of subscribers in the u.s. they gain them in Asia
Pacific. So this is probably their
guidance saying we're going to lose about 2 million.
It was these areas but they probably didn't realize.
Why's that asia-pacific Korea. These areas would bail them out
and gain. Gain a million subscribers.
Retention improved over the course of the quarter, and while
churn remains slightly elevated, it is now back to ne'er
pre-priced change levels. So, on their earnings report,
which I haven't listened to their earnings call.
Last one, they said, typically, when we raise prices, it
immediately has an effect of causing turn to go up as people
are frustrated prices, go up, but then it goes back down to
Normal levels of our time, over a quarter or two, it goes back
down, and the price increases are very accretive overall to
revenue. Meaning the amount of money they
make from the people that stay in Netflix, compared to the
amount of people they lose. Overall, they gained a lot of
Revenue in the process. So even though it looks bad,
because they lose some subscribers to price increases
overall, the business pulls in more Revenue, We adjusted our
cost structure for a current rate of Revenue growth.
This results in approximately 70 million of severance costs and
an 80 million non-cash impairment of certain.
Real estate lease is primarily related to right-sizing or
office footprint. No, surprise Netflix has been
doing layoffs in and firing people.
They have an incredibly generous compensation severance package.
When, when you get laid off at Netflix, you get paid for a long
time, full salary with benefits, they really try to Treat their
employees. Well, so when they leave, they
can leave any time and be happy and they can transition to a new
job. But anyways, that's the 70
million dollars. They're excluding these items
totaling 150 million. The FX impact of the stronger
dollar since the last April report operating profit and
operating margins were slightly ahead of our guidance forecast
earnings per share. Nobody ever pays attention to
the earnings per share of debt Flex even though they've been
steadily beating it every quarter every year they've been
crushing their earnings per share, Projections growing their
EPS, but investors don't really care about it.
They care about the subscriber numbers.
EBS, have three $23.20 compared 22.97 a year ago, exceeded our
guidance of three dollars due to a 305 million non-cash
unrealized gain from FX remeasurement on our Euro
denominated debt, which is recognized below the net income.
All right, so they beat their own, internal earnings report.
Now I think when I look at this and compare let's see.
Let's see what the street hat on this compare this EPS forecast
earnings per share, three dollars and twenty cents versus
the streets, two dollars and Ninety Four Cents.
So they they beat their EPS by a wide margin, their revenue.
Seven point nine seven billion versus eight point three five
billion which the analysts expected the reason they didn't
beat that was the 300 million from foreign exchange impacts.
That's the reason that I think Microsoft might have a tough
time with their Next report that foreign exchange is going to
crush them with the amount of globally, Diversified business
day. Do and then, of course the
global paid. Net ads 970,000 versus the 22
million so across the board, their earnings report in terms
of eps. So it's actually good.
There are subscribers came in better than expected their
forecasts. We read that they're going to be
forecasting 1 million, but let's go ahead and let them explain
this. As a reminder, the quarterly
guidance, we provide is our actual internal forecast at the
time we report. Sure that that's what they
officially say. I'm hoping they give themselves
a little wiggle room. I hope 1 million forecast is on
the low side and it really comes out better.
As always we strive for accuracy, although the current
uncertain macroeconomic environment leads to less than
normal visibility. The US dollar continues to
strengthen meaningfully against most currencies at a historic
Pace with the Euro recently falling below.
The US dollar for the first time in two decades, a significant
headwind for almost National us companies, we have high exposure
to the unprecedented appreciation and USD because
nearly 60 percent of our Revenue comes from outside of the US and
Swings in FX have large flow through to our operating profit
as most other expenses are in USD and don't benefit from the
stronger USD. So they earn a lot of money
outside of the US. They bring that money in and get
hurt by the FX and all their expenses.
All the things to run the business, all their content
creation is mostly for the most part.
Art done with in the US. That's a very unfavorable
situation to be in for Netflix for any other company that has a
lot of expenses in the US like Microsoft that has a lot of
Revenue outside of the US. Our Q3 Revenue growth forecast
of 5% translates into 12 percent year-over-year, Revenue growth
on a constant currency basis, that's still decent Revenue.
Growth 12%. They say, similarly, excluding
the impact of currency operating profits should grow by growth.
Should be minus 3%, a year versus our forecast decline of
29% and operating, margin would be 20% versus our forecast of 16
percent. As we have written in the past
over the medium term, Intend to continue to adjust our business
as appropriate, given the relative strength of USD to
protect our operating margins and try to avoid immediate
action. That would, that we believe
would be detrimental to the business.
So they need to rejigger and reposition the business because
of the for an experiment, foreign exchange currency
issues. We forecast paid net adds a Q3
some next quarter of plus 1 million versus 4.4 million in
the year according order ago. This is not great as a Netflix
shareholder forecasting, 1 million gain verse 4 million
last year. This is not the original thesis.
When I originally invested in Netflix, I thought they would
continue to grow at least 34 million a quarter, nothing
crazy. I wasn't expecting covid like
growth, but at least a couple million a quarter because
there's hundreds of millions of families out there.
They're forecasting 1 million subscriber gain next quarter.
It's just slow. We continue to expect full year.
To operating margin of 19, to 20 percent.
Excluding the unanticipated, 150 million of restructuring costs,
and Q2 noted above, and the material movement, and FX from
January 2020 to, as our guidance, was set based on FX at
the time. So they're basically using the
foreign exchange as an excuse for not hitting some of their
targets here, which I think is a valid excuse.
We seen Microsoft lower their guidance for the very same
reason. Lots of companies, this earnings
season, I think are going to get hurt by that content, marketing
product last quarter, we discussed are slowing Revenue
growth, which we believe is result of the connected TV
adoption account, sharing competition, and macro factors
as sluggish economic growth and the impacts of the war in
Ukraine. We've now had more time to
understand these issues, as well as how to best address them.
First, and foremost, we need to continue to improve all aspects
of Netflix. This focus on improving.
Our core service has served Well over the past 25 years and
remains our North Star to drive, continuous growth.
It's why we strive for an Ever better content marketing product
experience. Also a pure play streaming
business where unencumbered by Legacy revenue streams.
This Freedom means that we can offer big movies, direct to
Netflix without the need for extended or exclusive theatrical
windows and let members binge watch TV if they want without
having to wait for a new episode to drop each week.
Eek I think this is a mistake. I think Netflix needs to ditch
this one. They have key series key series.
Like stranger things. It should be like the NBA
Playoffs every week. You just have this massive
two-hour episode to look forward to a stranger things.
It gives time for YouTubers to make videos and fairies and read
it to post about it and discuss episodes and for cooler, you
know, the cooler talk, right? You don't have that one, you
just release it on a day. I think it just, it makes it
tough for Netflix to keep to keep people subscribed when they
release all their key content in one go in one weekend.
So this is something that I think strategically Netflix is
making mistake on. I wish they dragged out as an
investor their their key series longer than they do from a user
experience. I do like that, they just
release it all at once, but from an investment side, I think they
should take the strategy of Disney, some of their key
series. I think they should drag out
longer this focus on choice and control for members influences.
All Ex of our strategy creating what?
We believe to be a significant long-term business Advantage.
Our content offering is designed to satisfy a broad range of
member taste and providing an unmatched variety on quality
titles are Q2 slate is emblematic of this approach.
Headlines by season, for stranger things, which returned
to tremendous fan reception and was a smash hit by all measures
including an outstanding drama Emmy, nomination along with
Ozark and Squid game, yada yada. They're going to brag a little
bit about their series. Stranger things season for
generated 1.3 billion hours viewed making it our biggest
season of English TV ever. They always have to say English
TV. After squid game crushed every
single record season, for also reignited interest in past
episodes with season 1 through 3, experiencing a greater than
fivefold. Increase in viewing in the
months after the release of season four.
So a lot of people are like, wow, this new season looks
really good. I'm going to start it from the
beginning or people want to watch it over from the beginning
because it's been such a long Ang series season for stranger
things. Also showcase the effectiveness
of our marketing strategy and driving conversions around our
titles. When we deliver shows and movies
that members are talking about in large numbers, we can
influence pop culture, build passion for Netflix and create
an experience that is differentiated and difficult to
replicate. For example, the show.
Catapulted the 1985 song Running up that hill.
I've heard that so many times on the radio everywhere to the top
of the music charts. Metallica.
Also enjoyed a returned to the charts in the US and UK with
their 1986 song, Master of Puppets, after being featured on
the new season of stranger things.
The cumulative, Twitter volume for stranger things, continues
to outpace, both, Obi-Wan Kenobi, and top gun Maverick.
Highlights the big conversation around the titles and
reinforcing that are binge versus one week at a time.
Strategy drives. A lot of water cooler
conversations, so they are directly is like they haven't
read this. Events.
It's like they directly knew that I was going to bring this
up. I literally have not read this
in advance. They have good argument here.
I'm just saying Disney grew 70 like 60 million subscribers with
one TV show with just just the Mandalorian and they did it by
releasing it once a week. So people really paid for three
months of content to watch one show.
Netflix could do that. I think if they have some series
having that Weekly release, I think is something some people
actually prefer when Breaking Bad came out, those weekly
releases on television that people waited for every week
week. With something that I think a
lot of people had fun doing but they are going a different way.
They have their reasons, they have their data, they're saying
that they can still generate the water cooler conversations with
their binge, their binge release and this is something just on a
side note, my wife completely disagrees with me.
She loves binge-watching shows. So the fact that Netflix is one
of the only places where they just drop an entire season, she
much prefers that to just see what happens in a series.
Watch it in a weekend, then dragging it on week, after week,
she hates the week after week things.
So we have discussions about this all the time.
This is a different graph than what they normally bring up.
What Netflix normally brings up is a graph showing their
year-over-year subscriber growth and they ditch that one.
It's no longer in their earnings reports for good reason.
It doesn't look good. This in though, looks different.
What do we have here? They're comparing it to the
competition. Now now the competition isn't
sleep, it's not Facebook. The competition is Obi-Wan
Kenobi and top gun Maverick, cumulative, Twitter volume.
This is like a buzz rating, communitive engagement and
millions and days from Premier stranger things.
Trending up by the metrics are using to measure this.
The engagement metrics, stranger things as crushing.
Obi-Wan, Kenobi and top gun Maverick, which I haven't seen
all of Obi-Wan Kenobi. But top gun Maverick was
fantastic in my opinion, so that's good to see that their
series are our buzzworthy still. We also delivered a wide variety
of other English language series and Q2 including season, 3 of
Umbrella Academy Lincoln Lawyer, they have a lot of good shows.
This is one point that I made, and I made this on Twitter,
Netflix does have a lot of good shows if you watch The Haunting
of Hill, House The Witcher stranger things, Ozark that,
what's the chest one that came out with, I can't remember the
name of it. They had a lot of really good
seasons of shows, but I think that people just burn through
them so fast. You watch them in one week and
then you're on to the next show and Netflix does have a lot of
low quality shows, the end up thinking that Netflix has more
low quality shows than high quality, and that's an issue.
I think they have. They say that they're building
up their non-english programming something that they've been
working on that. I think they're, well, ahead of
competition. And we want Netflix be relevant
to audiences all over the globe and our local language titles
are differentiator for us. We focus first on telling
authentic stories for local impact, but we see the great
stories that can travel everywhere.
Another example of this, in the market heart, I don't know these
series because they're not, you know, non us ones while we have
room to improve that's odd. They're taking a little bit of a
humble approach. Their Netflix is usually like we
got this when the stock price is high, they say We're very
pleased with how far we've come and providing so much
satisfaction and enjoyment to our members, for instance, in
the US which is one of the most competitive markets in the
world. We drew more TV viewing time
than any other Outlet. During the 2021 2022 TV season.
See chart below nearly matching the combined.
Total of the two most watch broadcast networks and as Nelson
will announced on Thursday. Our share of u.s.
TV viewing reached, an all-time high of 7.7% And that's an
all-time high, but they still have a long ways to go.
Netflix needs to get to, like 30% demonstrating our ability,
to grow our engagement share as we continue to improve our
service, share of u.s. TV viewing Netflix on top, CBS
NBC ABC Fox, then way down there, Disney plus Prime video
and Hulu. I'm very bullish on Prime video.
By the way, I look at the series are coming out with the boys,
the terminal list. All these new series are coming
out with that are very popular. Are there doing a lot of effort
in it with their Lord of the Rings?
When I think they'll do, they'll do really well, but Netflix is
clearly. In terms of viewing, no one's
even close people on average view Netflix for over two hours.
A day, two hours a day, getting that much attention in one day.
Every day for a service is incredible since our launch of a
small selection of license mobile games last November.
All right, so they're getting in the mobile games here.
I don't care as much about this. Be honest with you.
I don't care as much about the games on Netflix, I know there,
but they're doing a big push in it.
Don't see this as anything. It's not the story that I
invested in for Netflix. It is their entertainment video
television, documentary comedy entertainment service near term
focus in the near-term. Our key priorities to
re-accelerate revenue growth is to evolve and improve our
monetization in the early days of streaming.
We kept our pricing very simple with just one plane level 2014.
We introduced three price tears to better segment.
Demand going forward. We will focus on better.
Ization. They're getting into ads are
there they're laying the framework of it better.
Monetization usage. Monetizing usage, through both
continued optimization of our pricing and tear structures as
well as the addition of new lower-priced ad-supported tears.
So they're not going to make pop-up ads and video ads and
you're paid for tear that you currently have.
They're building a new lower-priced ad-supported tear.
Advertising are lower-priced advertising.
Support offering will complete will complement.
Our existing plans which will remain ad-free they have to
clarify that because there's lots of people that spread
nonsense on Twitter and social media saying Netflix is going to
add ads to all of their tears, their just causing people to
hate Netflix for something. You're not even doing our
Global. A RM has grown out of five
percent compound annual rate from 2013 to 2020 one.
So, it makes sense. Now to give consumers Is a
choice for a lower price option with advertisements.
If they desire, we recently announced Microsoft as our
technology and sales partner, and we're targeting to launch
this tear around the early part of 2023.
That's right. Where I thought they would very
happy to see them partner with Microsoft, I think a great
partner, one of my massive investments in the passive
income portfolio. They say they are investing
heavily to expand their multi-billion and advertisement
business in the premium television video.
And we are thrilled to be working with such a strong
Global partner. We're excited by the
opportunity, given the combination of are very engaged
audience and high quality content which we think will
attract premium cpms for brand advertisements.
It absolutely will. There's brands that don't just
want to advertise anywhere. They want to advertise in a
select type of Show on Netflix. For example, Nike Peloton, those
type of Brands won't just want to advertise on any Show on
Netflix, they're going to want to advertise on the Shows that
they believe will be the type of people most likely to buy their
product that will result in much higher cpms if they can get it
right. If they have the right ad
partner, Microsoft is the right ad partner.
In my opinion, Microsoft has over 10 billion dollars in ads.
They own LinkedIn. They know ads, they are very
good at them and I think they'll be able to help Netflix
accomplished icp-ms, that they will likely make more money
based on their advertising viewers.
That watch a couple hours a day. With ads, then they will with
the premium tears that you pay for the advertising.
Viewers will likely make Netflix more money.
Will likely start in a handful of markets, where advertising
spend is significant like most of our new initiative.
Our intention is to roll it out, listen and learn and iterate
quickly to improve the offering. So our advertising business in a
few years will likely look quite different than what it looks
like than one then, like one today over time, our hope is to
create a better than linear TV. Advertisement model, that's more
seamless and relevant for consumers and more effective for
our advertising Partners while We'll take some time to grow Our
member base for the ad tear and the associated ad revenues over
the long run. We think advertising can enable
substantial incremental, membership through lower prices
and profit growth through ad revenues, one of the common
concerns here is Joseph. What happens if it cannibalizes
their normal subscribers, I might cancel my premium, I won't
but some people might say I might cancel my premium
membership and move to the free or lower priced.
Add tear one. You will be paying Netflix more
money. By virtue of you being on the ad
Care by watching Those ads, Netflix probably will make more
money than they would have. Had you just stayed on the paid
tier page sharing? This is an update that I really
am interested in. We're in the early stages of
working to monetize the one hundred plus million households
that are currently enjoying but not directly paying for Netflix.
We know this will be a change for our members as such.
We have launched two different approaches in Latin America to
learn more. Our goal is to find an easy to
use. Paid sharing offering that
Believe works for our members and our business that we can
roll out in 2023. We're encouraged by our early
learnings and the ability to convert consumers to pay
cheering in Latin America. People are throwing a fit about
this. So this I think is a potential
risk factor that could raise turn we'll see.
But if Netflix really does continue to create content, like
stranger things and other big franchises.
The people want to see people will pay for it and Netflix does
need to make money. Lots of people just share
accounts and they're watching Netflix for free for a long.
Longtime simplicity at, Netflix, Focus remains very important to
us. These initiatives paid sharing
and advertising do introduce some additional complexity.
But our approach has always been to keep our business model as
simple as possible. Within the context of our growth
objectives in this vein. These initiatives are similar to
expanding and two Originals launching our service, across
the world and building our own Studios, Each of which also
increased complexity, but our natural extensions into the
enhanced of intended to enhance our existing business.
All right? That is, is I think that's
basically it. So, let's go ahead and look at
the financials here, but that's a bit of the, the business side
of Netflix, my reaction to. This is as a shareholder right
now, I was, I bought Netflix, three times as it traded down
further and further. And it got to a point where I
thought, you know what, I just want to see if they can turn
this around if they can right the ship and start to grow
overall. I don't need Netflix to grow
every single quarter, I need them to grow on a year.
Basis and show that their business model really, has
opportunity to grow free cash flows, because when I'm looking
at this, let me bring this up on Quantum insights here.
This is website available to all patreon members.
This shows the the actual free cash flow of the business.
I can bring up this chart right here as you can see Netflix is
free cash flow for years with always - this is a big pain
point for the company they invested in content heavily
because they knew competition was coming.
Now it's time to actually become free cash, flow positive, If
they've had a couple quarters of it but now they really need to
make this free cash flow positive every quarter at least
on a yearly basis. That's right.
They're going to highlight hair. My prediction is they're going
to struggle with this more than expected because of the FX
problems. Free cash flow, which is a cash
loan capital structure. Net cash generated by operating
activities and Q2 was plus 103 million versus - 64 million in
the prior year. Free cash flow in this quarter
total. 13 million Not a lot that's a minuscule amount
compared to minus 175 million in Q2 of 2021.
But it did swing from heavily in the - at least to the positive.
So I guess it's going in the right direction but this
certainly isn't a lot of free cash flow.
Again, we look at this on a full year basis.
Not quarter to quarter cash declined, 190 million
sequentially primarily due to our next games acquisition.
So they bought next games for 70 million and the FX impact of 145
million As we discussed previously, we are now self
funding for the full year of 2022.
We expect free cash flow to be approximately plus 1 billion.
They're going to generate over a billion dollars in free cash
flow in 2022. Despite FX issues plus or minus
a few hundred million dollars, assuming no material further
movements and FX. So based on FX right now is
going to be plus 1 billion. We expect annual positive, free
cash flow, going forward with substantial growth and free cash
flow 2023. 20:22 due to our increasing Revenue solid
profitability and the successful multi-year evolution of our
content model. We're now more than a decade
into Transforming Our service from a license second run
content to mostly Netflix originals.
Including more than five years into building our own internal
Studio produce this, the majority of our original titles.
So yeah, they're internal Studios, do produce the majority
of their titles. Now sixteen percent of our net
content assets on our Balance sheet are Netflix produce.
We're now through the most cash intensive part of that
transition. As a result, our cache content
spend a Content amortization expense ratio peaked at 1.6,
along with Peak - free cash flow of 3.3 billion in 2019.
Anna's expected to be about 1.2 1.3 times 2022.
It sounds very complicated. Let me explain this for you.
This is like the biggest problem with Netflix.
The biggest issue that people highlight, some people actually
say, This is kind of shady of Netflix right?
We look at the company here. We have this chart right here
which is the easy bit of the company and it just looks
amazing. Netflix has great Revenue that
grows over time right? Then they have the ibadah that
grows over time. This nice, gradual chart, but
what they do is they capitalized their content costs and then the
amateur eyes them. So the amortize, the expense of
it, over the lifetime of the content.
So even though they have this ibadah, your actual cash flow
looks completely different, right?
It's in the negative. That's why on quatrain I like
it. So you can see all of this.
So you can get a more full picture and the reason why is
because they're spending more on content in expenses every single
year. And that's what this graph shows
here, cache contents pain to content amortization ratio.
So this is how much they're spending in new content compared
to how much is previous content. Spend that their their expensing
every year. So if they, if they paid for a
new Series 3 years ago, they don't actually start to expense
it until it's actually released on Netflix and people have
criticized Netflix for this but it's the exact same thing that
Amazon does with Amazon. Prime.
They amateur eyes it based on the lifetime of the content they
say right here between 2014 and 2019.
The build-out of originals and self-produced.
Content was when this ratio kept growing more and more making the
discrepancy between ibadah and cash, flows, greater and
greater, we can see that right? With these, Has two graphs, the
ibadah discrepancy since 2014 to 2018 and then the free cash flow
from 2014 to 2019. It's a huge discrepancy.
They say that that was from 2014 to 2019 on this chart now it's
starting to go go back the other way.
It's starting to reverse. The covid-19, production
slowdowns the shutdown's made this artificially go down, but
you could see even without covid.
This is naturally coming down over I'm as their amateur Rising
less ratio of produce contents. So, this is a good thing.
This just means they're moving in the right direction, their
cash flow should improve over time.
Gross debt at the quarter end amounted to a fourteen point
three billion within our targeted range of 10 to 15
billion with cash of 5.8 billion.
Net debt totaled, eight point five billion.
Not a lot of debt it's one point three times.
Last 12 months ibadah that I like to invest in companies that
are within a range of three times debt to ibadah.
Not beyond that, typically not beyond that.
Our capital structure policy remains unchanged.
The first priority of our cash is to reinvest in our Core
Business and to fund new growth opportunities.
Like gaming, followed by selective Acquisitions.
We target maintaining a minimum cash equivalent to roughly two
months of Revenue example about 5.3 billion based on cue to
revenue after meeting those needs.
Our intent is to return excess cash to shareholders through
share repurchases. So Netflix is actually going to,
they're going to have extra cash, they're going to do share
repurchases, which means that this graph right here, their
shares outstanding. It'll actually not just flatten
out, but you'll see this go down quarter over quarter, which
makes it. So you have more Equity in the
company for a long time. They've been doing, they've been
doing share dilution, which is a - now they're going to be doing
share Buybacks in summary. We accelerating our Revenue.
Growth is a big challenge, but we've been through hard times
before. We built this company to be
flexible and adaptable, and this will be great test for us and
our high performance culture. We're fortunate to be in a
position of strength, as a leader in the streaming
entertainment, by all metrics Revenue engagement subscribers,
profit and free cash flow. We're confident and optimistic.
Mistake about the future. That is a report that's me going
through it for the first time. So I hope you enjoyed it.
My takeaway from this I like it. I know that this wasn't like an
amazing report. They didn't just Dazzle
Everyone. By gaining two million
subscribers when they're projected to lose 2 million,
they still lost subscribers. And the US and in Europe,
primarily primarily, but they gain subscribers in, Asia
Pacific. They're coming out with better
content, they're not going to be just relying on Stranger Things.
They have a lot of different series that they're building out
and I remain invested in the company.
Look, I invested in Netflix at, with the intention of holding
the Any for five to ten years and as long as they stay on
track and they're able to grow over a long period of time, I
still want to own a piece of the biggest streaming company in the
world, that's currently Netflix. And no one else is even close to
him. So I'm going to continue holding
my Netflix position. The stock doesn't look like it's
raised up like, like any insane amounts up, 12 percent 14 bucks.
So, I might actually over the next couple of days.
I may actually be adding more to my Netflix position and lowering
my cost basis on the stock. Shocked, because I am bullish on
it if they can grow a million next quarter, then a couple
million to quarter after that during the winter months, this
company could be on track and I do see their free cash flow
profile improving over time. In the meantime, Netflix remains
a very devaluation of it. It's at a 17 PE ratio, 16
trailing P/E. It's at a price to sales of 2.7.
So the, the valuation of the hype has been taken out of the
stock. So it may be one that I actually
might Add a little bit more to over the upcoming week, but
that's my thoughts on it. I hope you enjoyed this little
quick reaction video and I'll see you in the next one.