00:00Let's start with that overhang, I guess. One of the reasons that the first quarter results look
00:04good is that they got to pay a breakup fee from Paramount. So factor that in. But I think that
00:11that is the story. There's just this overhang of what life looked like after walking away from
00:16the Warner Brothers Discovery deal. Well, walking away from the deal has, in the short term, up
00:20until earnings, been really good for the stock, right? The stock was up quite a bit over the last
00:25few weeks. Investors did not like the Warner Brothers deal. They were worried about how much
00:29Netflix was paying. They were worried about what it would mean for the company. But it also fed sort
00:36of, I think, expectations that the forecast for this year would be revised in a positive way.
00:41And instead, even though Netflix had a better first quarter than they expected in terms of
00:45subscriber growth and revenue, they maintained the estimates and they warned that actually profit
00:50and margin would be down a little bit in the second quarter because of increased spending on
00:54programming. So maybe the market got ahead of itself. Where did they get impacted by Reed
01:01Hastings? How much is that a concern that this looming large figure co-founder is going to be
01:08stepping and looking more at philanthropy? Yeah, hard to quantify, of course, because it's not like
01:13the investors are saying, well, I sold for this reason and I sold for that reason. But look,
01:18it has to be a factor. On the one hand, Reed Hastings has been telegraphing his departure for a long
01:22time. In 2020, he names Ted Sarandos as co-CEO. In 2023, he steps down as CEO and becomes executive
01:28chairman. Then he becomes just chairman. He's been signaling that he's going to withdraw from
01:33this business because he feels like he's done his job. At the same time, this is the guy who led
01:37the
01:38company for most of its existence, did a tremendous job. And so his departure is going to worry people.
01:43Just to point out that Reed Hastings is also a board member of Bloomberg Inc and Bloomberg LP,
01:50the parent company of Bloomberg Media, the parent company of this network. Lucas, there's a lot of
01:55choice right now. I watch Netflix. I'm watching The Night Agent. I think it's very good. You might
02:00watch HBO Max. You might be Disney Plus or Hulu. Did we learn anything about Netflix's content
02:07slate strategy? You know, they've been pushing into live, pushing into games. It's not really clear to me
02:12like what happens next on that front. They're staying the course for the time being, at least.
02:17They're sort of reiterating we're confident in what we're doing. Yes, they are moving into some
02:22new areas. Video podcasting, live programming, and gaming were the three that they signaled both in
02:27their letter to shareholders and in the call. I don't think those have immediate or dramatic
02:33impacts on the business. Podcasting is not registering in a big way yet. Live is probably the
02:38most significant, but they are being very selective about what live programming that they do.
02:43And video gaming, they would acknowledge, has been a miss so far, but they feel like they're
02:47starting to develop a more comprehensive strategy. For the most part, you look at the $20 billion,
02:52$19 billion they're going to spend this year, and it's on the same kind of scripted programming
02:56they've done for a long time now.
02:58Lucas Shaw, as always, brilliant to have you. Leader of Screen Time, we appreciate it.
03:02Let's get more on Netflix with Alicia LeRis, Redbush Security, Senior Vice President of
03:08Equity Research. You've actually got an outperform rating on the stock, $118 to a month price
03:12target, actually raised a little bit from $115. So the confidence, Alicia, talk to us about
03:17where the confidence comes from.
03:20Yeah, I think the ads strategy is what is being underappreciated here. Domestically, I think
03:26they had to put a lot into content in the second quarter to offset or, you know, just give the
03:31user reason for resilience on the subscriber, the premium tiers. But those who are not convinced
03:44could easily go to the ad tier. And we've seen with our survey work over the years, a
03:48lot of resilience around that since they introduced the ad tier. I think there's a lot of reason
03:53for people to stay when they give, when they post all of that content. And, you know, to
04:00Lucas's point, you know, podcasting hasn't been a huge mark so far. But, you know, Netflix
04:05did point out that a lot of their users are coming on during the day when they wouldn't
04:09normally come on. And so that is incremental engagement. I think it's useful to have as
04:15much incremental engagement as they possibly can as they raise price. I do think it will
04:20be incremental here with the price increases domestically. Perhaps not in Europe. There is
04:27some legal pushback right now on the price increases in a few countries and could potentially
04:32be in the continent. I think, you know, the ad tier is really, you know, the piece that
04:38is underappreciated here. There's so much opportunity for them to expand. And as they increase price,
04:45some people and quite a few people tend to get pushed over to the ad tier. And with Netflix's
04:50low ad load and higher CPMs and potentially growing CPMs, they can benefit pretty handsomely in
04:56the back half of the year. Alicia, can you go sort of geographically for us a little bit? Because
05:01perhaps we're underwhelmed in terms of first quarter and pushing forward. First quarter,
05:05US Canada was actually a slightly slower growth than anticipated. But Asia doing well, Europe doing
05:10well, Latin America doing well. Is there still the growth areas? Yeah, I think it's really important
05:16to note that, you know, because of the geographic diversity, their results are, you know, pretty
05:22steady overall. The world baseball classic was a huge hit in Japan. But it didn't seem like there
05:29was a lot of churn soon after. There was a lot of content that people in the region found really
05:36favorable. And so they kept on the service. And Netflix noted their ad tier being, you know,
05:41having a little bit more heft in the region because of that increased subscriber growth.
05:46So that's something that we had not factored in. The average revenue per member is quite low
05:51in APAC. And I think advertising in Japan and elsewhere in the region could really boost results.
05:58UCAN wasn't as strong as we had expected it to be in the first quarter. But, you know, there was
06:04a range
06:04and it was really within the range. Our survey work, you know, just suggested that it was pretty
06:09standard, par for the course, nothing, you know, hugely a miss or a beat. But, you know, you do have
06:16some decent trends in Europe, you know, absent the price increases as well. So I think, you know,
06:22overall, regionally, they're quite healthy and they'll continue to be. But there was, you know,
06:28nothing domestically that helped them hit it out of the park this quarter.
06:32There's a line in the Bloomberg story, Alicia, Wall Street is looking for signs Netflix can keep
06:37subscribers engaged. And Netflix has not disclosed subscribers since the first quarter of 2025.
06:43It focuses on engagement, time spent. And so you've gone over a number of interesting telltale
06:51signs of how you assess the health of the company. Going forward, what is the metric that proves
06:57definitively that Netflix is taking time and eyeballs in a world where you have a lot of choice and it's
07:04not just about streaming platforms in that battle? Well, it doesn't matter whether they're on the
07:10premium tier or the ad tier so long as, you know, Netflix is extracting increasing revenue off of
07:17these users. And engagement is clearly an important sign. But so you're looking at a combination of
07:24revenue, whether they're getting, you know, the highest subscription price or whether they're on the
07:29ad tier and engaging significantly with the content and providing a lot more value to advertisers and
07:36therefore revenue to Netflix. And if they're able to do that at a reasonable cost of content,
07:41the profitability will continue to climb and free cash flow will continue to climb. And that's what
07:46we've been seeing. And so for us, that's a huge positive. In the second quarter, surely there's going
07:51to be a lot of content amortization, a lot more content on the service. But in the back half,
07:56that's going to even out and they'll be able to hit those full year targets and probably exceed them.
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