Netflix executives give insight on Q2 earnings: stock price rises 13% the following day

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By Andy Milone

Netflix had its Q2 Earnings Call this past Monday which featured an interview with Reed Hastings (CEO), David Wells (Chief Financial Officer), and Ted Sarandos (Chief Content Officer) along with Doug Mitchelson of UBS, who acted as the lone interviewer. The Netflix executives gave reasoning as to why they had an additional 5+ million subscribers this past quarter — reaching a total of 104 million memberships — and how they see continued trends in their success through globalization, self-commissioned original content, and diversity of content. Investors clearly liked what they heard as the stock price rose more than 13% on Tuesday and is up again today.

The executives brought up Okja as one of its original movies which is symbolic of the media company’s globalization efforts.

“Think about it as local content for global audiences — so it’s a fantastic story that we make a Korean movie for Korea, but it’s an even bigger story that the movie is being watched by the millions all around the world,” said Sarandos.

Bong Joon-ho, one of the most celebrated stars in Korea, directed the film, and it created traction at the Cannes Festival. When the movie was released in Korea, Netflix gained a lot of new subscribers because they took the risk of adding the movie to its diverse list of content.

With Japan and India (still no China), Asia is one of the largest markets in the world, and Netflix will prioritize Asian nations based upon a country’s market size and growth of the Internet. Latin America, North America, and Europe have been markets of great success, the executives announced, and Netflix has some “amazing” productions in Europe and Latin America, not just North America. Their strategy is complying with local tastes, so this will continue to be the strategy going into Asia as their international members account for around 50% of total subscribers.

While licensing of exclusive originals from Hollywood studios and third party reruns is essential to Netflix’s growth, original content is a controllable asset. 93% of their self-produced shows have been renewed, which demonstrates no fear of creative destruction.

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Ted Sarandos, Chief Content Officer, gives insight during Q2 Earnings Interview

“On network television, about a third of the content gets cut in the first season versus our content which is mostly renewed. And it’s not because we are less careful about it, it’s because we can more efficiently build it, and this is one hundred percent of the time,” said Sarandos. “We want to launch shows, uncover a deep passionate fan base, and we just need it to be big enough in order to support the economics of the show, so we don’t create opportunity costs for future fans of new shows.”

“Many of these shows, even if they are not picked up for a renewal, they may have a story arc that completes the narrative and so it’s about the continuity of viewing over the life of the show,” Wells added. “Many of the non-renewals get wrapped up.”

Netflix compiled 91 Emmy nominations for 27 original programs, and this compilation represents the diversity of brands within Netflix’s dashboard. While internet television is the major driver of the Netflix operation, content demand has the power to control the influx of revenue and can cause unpredictable over/under results.

Any extra growth on the top line will be reinvested as Netflix aims to finish with a targeted 7% profit margin. This target will be reached through a balance of growth in the business as well as reinvestment; revenue trickles in from the payout on content over the following years after it’s released.

Netflix is a “super network,” Sarandos stated in response to a question comparing the company to HBO. Netflix has diversity across the content slate, and there is no niche programming as one will see with present-day networks. Netflix has control over comedies, documentaries, etc. These are original brands, which will not be picked based upon a business model, but instead, because they are great shows.

“The success with our self-produced shows has given us a lot more confidence to expand it. Because we are a global network, those rights are really important in term of controlling our destiny, deciding when to make shows available and what formats to make them available,” said Sarandos.

“Beyond that, there is an economic tradeoff, which is the big studio margin that we’re able to put on the screen and make better shows when we produce it ourselves.”

Other important points brought up by executives:

  • Prided themselves in being able to maintain the $8 (8 euros) base level subscription, which gives access to even more content than previous years
  • Identified some of its successful television series in Q2: 13 Reasons Why, House of Cards, Orange Is the New Black
  • Identified future new programs/movies with high expectations : Ozark (television series) starring Jason Bateman, Death Note (movie), The Defenders (television series) with all of the Marvel’s defenders with Jessica Jones, Luke Cage, Daredevil and Iron Fist, and Bright (movie) starring Will Smith
  • Viewed themselves still as a small player versus linear television and YouTube
  • Have begun to realize the positive results of of bundling Netflix with other services in Europe
  • Have leveraged more of its budget towards marketing as Netflix becomes more of a media company
  • Don’t view negative cash flow as drawback; it’s a sign of growth and positive reinvestment

 

 

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