Netflix Has to Knock It Out of the Park: Wedbush's Reese

Bloomberg

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00:00Let's start with what is the headline, the Brazil tax dispute, idiosyncratic to the quarter

00:06and Netflix itself, let alone the sort of broader streaming landscape. What did you make of that?

00:14Well, they took the tax from 2022 to present. And so if you look at it on a holistic basis,

00:23it was over 300 basis points impact to operating margin in the quarter. So that's why there was

00:28such a huge miss. But if you look forward, if you extrapolate that, it's only going to be about

00:3220 basis points hit annually going forward. So there's a pretty big difference having had to

00:38take that over that long period of time. The legislation in Brazil, it was unclear and made

00:46them think, and many other companies, not just Netflix, think that they didn't need to pay that

00:50up until recently. So they had to kind of back pay that or at least set aside the money for that.

00:56You know, again, idiosyncratic, as you say, but there are a lot of other interesting highlights

01:03and maybe some disappointments on the on the revenue line, given the K-pop demon hunters phenomenon.

01:11OK, so dig into some of those disappointments. You know, is that you disappointed with in the

01:16sense you had higher expectations?

01:18Slightly higher expectations. The thing is that Netflix is trading at such a high or it was trading

01:25at such a high multiple. Netflix has to continually knock it out of the park and revenue was in line

01:32roughly. And the fourth quarter guidance didn't impress, you know, extravagantly as Netflix typically

01:40does. And that's one of the big reasons I think the stock's trading down. That being said, I think there's

01:45still plenty that you could pick out of the earnings call and the shareholder letter. They're

01:50very exciting for the future.

01:53You know, like I've been super fixated on programming. I've been watching Black Rabbit, which is an

01:59interesting piece of television. Despite the kind of spend and commitment to the slate, the free cash

02:05flow figures were really interesting. Like, what do you make of the balance between like committing

02:10to content, but also those traditional financial metrics?

02:15Yeah. Yeah. The free cash flow is so impressive.

02:18They pulled back on the content spend just a little bit. I think they didn't need to spend quite as much

02:23and they don't need to in the fourth quarter, just given the slate that they already have and how sticky

02:27it already is. I think the most important thing, though, is to really dig into the advertising

02:33opportunity. Right now in the third quarter, I think the thing that made the UCAN region not quite

02:40as exciting as it typically would be is that Netflix, while they're getting a lot of advertisers

02:46and they're getting all the bookings and their CPMs have probably leveled off from all the data we've

02:51gathered, what it looks like is that their ad delivery rates are just so incredibly low that they're not

02:56booking all of it. You have a lot of people on the ad tier. You just need to give them a little bit more

03:00ads to really get that revenue to ramp up. In the fourth quarter, you have more live events

03:06and they can issue ads across all tiers. And so they'll start to pick up on that in the fourth

03:12quarter and certainly through 2026. You know, the generation, the last generation where you had to

03:19have ads when you watch shows on television. So, you know, trying to process that. Look, Bloomberg and

03:25others reported that Netflix is one of the companies circling for a part of Warner Brothers

03:32Discovery. Ted Sarandos addressed this idea of M&A on the call. Listen to what he said.

03:38We've been very clear in the past that we have no interest in owning legacy media networks,

03:43so there is no change there. But in general, we believe that we can be and we will be choosy.

03:49We have a great business. We're predominantly focused on growing organically, investing aggressively

03:53and responsibly into the growth and returning access cash flow to shareholders through our

03:58share repurchase.

04:02Your interpretation of what Ted Sarandos was saying.

04:06Look, 10 years ago, HBO was the top content that everyone wanted. And Netflix did not shy away.

04:15Reed Hastings did not shy away from saying that that was what they were shooting for. Netflix was

04:20shooting to be like HBO Max or HBO at the time. They've since surpassed them.

04:25They're leagues ahead now. That being said, you know, Warner Brothers still has some really

04:31excellent content. And if Netflix has an opportunity to kick the tires and see if they can get a piece

04:37of that and not the legacy media piece, sure, of course, they're going to look at it. And if they

04:42can get it for a good price, of course they will. However, they're not the only ones looking at it.

04:48And they're certainly the only one who's looking at it just piecemeal and trying to take the best

04:53bits and not the rest of it. So I don't think they're going to be as competitive as the other

04:59bidders in, you know, looking at this. Ultimately, you know, what Ted also said that was really

05:07important is that they don't need to use M&A to reach their targets. They don't need to do that

05:15to reach all of their, you know, their growth goals. And so, you know, it would be a nice,

05:20it's a nice to have, not a must have for Netflix.

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