Netflix top dogs say the streaming era has just begun – Reed Hastings and Ted Sarandos

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Netflix released its Q2 results after the bell in New York last night. The numbers were largely in line with what was expected by the market but the share has shed nearly 4% in the morning session today. In this fascinating broadcast dissecting the financials, co-CEOs Reed Hastings and Ted Sarandos as well as CFO, Spencer Neumann and chief product officer Greg Peters walk us through the numbers and prospects ahead. The growth journey is still in tact for streaming services despite a post-Covid world well underway in many parts of the world is the message from the board room. – Justin Rowe-Roberts

I think a big question on investors minds is just how do you feel about your ability to get back to pre Covid levels of net adds as we get into 2022? 

CFO, Spencer Neumann:

Yeah, well, you know, and others should chime in. I just want to emphasise, even with the Q3 guide and then into Q4, if we deliver on our Q3 guidance, we talk about in the letter that’s that will be the growth pattern in our business is over a long term over the long trends is remarkably consistent and steady. So if we deliver on our guide, it means we’ll have added 54 million subscribers over that two year period or on average 27 million a year, which is right in line with our past few years of growth in 2018 and 2019. So we remain on that growth trajectory. And again, once we get into Q4, what we would expect is as we get through hopefully that tail end of the Covid choppiness, we get into that strong strength of slate. We get to kind of a high seasonal period for us. We’d expect to end the year on a much more kind of normalised growth trajectory. But we kind of have to have to get there.

Co-CEO, Reed Hastings:

You can decompose the long term risk into two things. One is, does Internet streaming slow down? And that seems pretty unlikely, internet streaming has been amazingly consistent, prolific as you get new competition and you get validation of more reasons to get a smart TV or limited broadband. So I think for at least the next several years, the growth story of streaming as a whole is very intact. And then you’ve got the secular competition story. Does HBO or Disney or other entry have a differential impact compared to the past? And we’re not seeing that in the detail that we have for country because they’re launched in some countries and not in others. That gives us comfort. We’re not seeing that in the total viewing like the Nielsen measures. And so we think mostly all of streaming is a growth story competing from linear TV and that that will be true until, say, streaming is 50, 60, 70 percent of viewing, and then there’s going to be a shakeout and we want to be prepared and leaving that. But again, the next couple of years, streaming is still in the early stages.

So maybe just shifting gears to your longer term outlook. There’s been some focus in the market recently on additional sources of revenue that you might have in the future. But before we get to that. Help us understand what makes Netflix’s core business a great investment for shareholders over the next five plus years. What’s kind of the growth, free cash flow capital return algorithm that gets you excited that you think we should be focused on? 

Co-CEO Reed Hastings:

The picture that I’m sure all investors get is being a secular Internet play. And as much as Amazon was strong in 2005 and 2008, all of us collectively underestimated the impact of what the internet could do. And this is the internet applied to entertainment and consumer entertainment around the world is an enormous market. It has great potential for us and potentially our competitors. And so that big thesis is, again, what gets people excited. And when we’re growing revenue by 19%, it’s not that hard to grow 200 basis points of margin. You know, as the revenue growth slows, it’ll get a little bit tougher, but we’ll continue to lean into that. And so I would say it’s fundamentally a story of this big secular revenue growth, management team committed to growing profits and cash flows and then returning those cash flows through buybacks, which Spencer got a big start on this quarter. So over to you Spence.

CFO, Spencer Neumann:

Yeah, now I just you hit on on all the key points. I would just add that it’s still early days in pretty much every market around the world. I mean, if you go overall we’re roughly 20% penetrated in broadband homes. And we talked in the last call about there’s eight hundred to nine hundred million either broadband or pay-TV households around the world outside of China. And as we continue to improve our service and the accessibility of our service, we don’t see why we can’t be in all or most of those homes over time if we’re doing our job. And then if you look at the range from an APAC region where we’re only roughly 10% penetrated.

C0-CEO, Ted Sarandos:

I think we think about how slow the business fundamentally changes and how quickly streaming has changed the entire marketplace. In terms of the way consumers watch. I go back to about only eight to 10 years ago and no one was looking to the internet or to streaming for the highest quality content. And today the most watched, the most talked about, the most award winning television is all coming out on streaming services and Spencer’s point. You’ve got this enormous addressable audience. We’re only a fraction of them and we’re only getting a small percentage of their total viewing. So it’s still an enormous prize and we’re still in the best position to run after it as we’ve kind of expanded what Netflix is to members, which is not just a show you might like, but it’s the shows you like. It’s the films you love.

I think there’s a lot of debate in the market as to how long can you continue to grow revenue double digits?

Chief product officer, Greg Peters:

Yeah, and I would say we’re working hard to think about how do we find this wide range of price points that speaks to a feature set and consumer needs in more affluent markets. And we’re really trying to find a way to add more value there. While we are also thinking about the sort of populations that you’re talking about and making sure that we’re increasing the accessibility of the service and really the ability to participate in and derive joy from the stories that we’re telling to more and more parts of the world’s population that don’t have as much means to pay. Of course, the trick there is to find the right features and offerings that allow us to sort of broaden that range without cannibalising the other layers.

we really take this sort of iterative approach where we try different solutions to that sort of puzzle and then measure them based on this – what’s the net revenue that we’re seeing? And so very much what we’re trying to do is as we bring in lower price plan offerings that sort of decrease average revenue per member, we’re also thinking about that from the calculus of expanding the funnel in a way that delivers total net positive revenue. We’re definitely seeing that in the mobile plan launches that we did in 78 countries this quarter are an example of us trying to make incremental progress against that puzzle and broaden that reach.

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