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Netflix rides 'Squid Game' success in earnings

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Santosh Rao, head of research at Manhattan Venture Partners, talks why the streaming giant found success with the South Korean thriller series.

Video Transcript

SEANA SMITH: Netflix out with its earnings just a few minutes ago beat the street's expectations when it comes to earning. New subscriber adds also topping what the street was looking for, coming in at 4.4 million. So here to talk a little bit more about what we're seeing as we're looking at Netflix shares up just over 1%, we want to bring in Santosh Rao. He's the head of research at Manhattan Venture Partners. And Santosh, going through some of the numbers that we're getting, EPS coming in $3.19 cents revenue, just around $7 and 1/2 billion.

We know the success of "Squid Game" is helping to boost, or did help boost some of Netflix's results. But what's your big takeaway from the numbers that we're seeing right now?

SANTOSH RAO: [INAUDIBLE] which is great. But what's much more impressive is the guidance for the fourth quarter. From what I read and from what I see is it's really the fourth time that they've really had a number of more than seven million. So this is eight million now, 8.5 million subs, net dds for the fourth quarter, which is great. Considering that there is so much competition out there and there's so much going on, for them to act [INAUDIBLE] very impressive.

So I think that Netflix continues to roll on. I mean, it's a juggernaut right now. Yes, their competition is nipping at their heels. But they are executing. [INAUDIBLE] the pipeline is strong, and they are succeeding in their strategy.

ADAM SHAPIRO: Santosh, they're going to change the way they report though in future quarters. They're going to share with us the hours viewed for a title rather than the number of accounts that choose to watch. Why is that going to be important? What does that mean for people like you who have to make heads or tails of how they're performing?

SANTOSH RAO: Yeah, I think engagement is a big part of this whole thing. I mean, right now, there are subs of course. I think you're-- it's going to hit a lot of large numbers. And the subcount is going to look smaller and smaller at some point. And it's going to be deceiving. I think everything boils down to engagement level. So the hours watched I think is a good metric that'll help you analyze who's going where and who's spending time on this. So I think that's a good metric. It's a good change. I have no problem with that.

SEANA SMITH: And Santosh, I know you were very closely watching the international subscriber growth number. And we know international has really been a standout here for Netflix over the past couple of quarters. Do you expect that trend to continue going forward?

SANTOSH RAO: Absolutely. I think one thing that Netflix has done and has been doing is really localizing content. So there, they have hit series in Latin America, and India, and the local markets. They are the undisputed. They have the mindshare and market share in those areas. So what they're doing now is really globalizing local content, which we saw with "Squid Game". And we had some Latin shows, some French shows. So they have been good. They have become good at taking shows from the local and really taking it to the global market.

And that's also because now the technology has improved, you're not really limited to Hollywood to really produce good shows. The technology is all over. So you can really produce quality content outside the country at a lower cost and then bring it here. So that's a great thing. Plus, international markets are only 10% penetrated. So there's a long runway ahead for Netflix. And they're tapping right into it. And they're leading that charge there.

ADAM SHAPIRO: Does this mean that those of us who like content on Netflix should get ready for more dubbed content, or more the words at the bottom stream? I'm blanking on what they call it. Subtitles. That we should get ready for that? Because if they can do it cheaper and better outside of the United States, I would think Hollywood's in trouble.

SANTOSH RAO: It is. So I think there's a good competition for that. So if "Squid Game" is any indication, people have no problem with subtitles as long as the content is good and engaging. So I think that's-- and it's happening. It's been happening for a long time. So you see a lot of Indian shows, for instance, they are subtitled here. And they're very popular all over the world. And that's all because of subtitles. They've become very sophisticated. They're very relevant and very timely. So they become good at that. Yes. There's nothing like not having that and watching the original speech. But hey, if that's the way it is, and if that's engaging, and if people like it, you're going to see a lot more of that.

SEANA SMITH: Santosh, another interesting thing here in this earnings release. Netflix is talking about the fact that it's already started testing games in some select countries. I know we've talked to you about this decision in the past. But from your perspective now, and I guess what Netflix is planning to do with this going forward, how big of an opportunity do you see this being for the company?

SANTOSH RAO: Yes. In terms of "Squid Pro" and "Squid Game" and everything else, I think what you're going to see is-- see the whole issue about you can have a hit game, but you need to come back with more. How long is this sustainable? So you need to keep on coming on with hits after hits. So this is not just a done deal where you have one hit and let's stay on it for two or three years. Yes, there are a lot of other-- there's competition, a lot of channels. The people have choices. So you need to keep them engaged. And that's their strategy. They're getting into gaming, they're getting into other things.

So you're going to see Netflix just kind of broaden their offering and keep every demographic and every country engaged in their content. So they have a big opportunity. The competition is there. There's no way it's not a done deal that they are just a leader and they can stay quiet. They have to keep on innovating, they keep on investing. I mean, they invested $17 billion in content. And they need to keep ramping up, ramping that up. I need to see their cash flow, free cash flow number. I'm hoping it's going up. So it's expected to break even this year then go positive next year.

So that would be great if they can continue on that ramp so they'll have enough funding behind the new content that they are planning to do. So they have a long runway, they're well positioned at this point. But they need to keep on. They need more "Squid Game" and more other stuff like this to keep on leading the charge.

ADAM SHAPIRO: Would it be in their interest right now, given how strong they're performing, and with all of us getting used to prices going up? I realize they just did a price increase for the subscription this year. But would it be time to maybe do one more before they miss the opportunity? Because we all expect everything to go up in price anyway.

SANTOSH RAO: Yeah. So I think there is a cap now because there is competition. So we'll see how much it'll stick, how much they can raise, how price is insensitive, sensitive, whatever that is, how elastic it is. So let's see how that goes. There's a limit to how much they can raise. But if the content is good, people will come to it. I mean, over in a number of surveys, we found that Netflix is the number one go to place for streaming services. So they have the most hit shows, they're doing very well. Apple and all is still just coming up. But Netflix is well on their way.

So they have the lead. I'm not saying that. But they have to maintain that. And in order to do that, you have a number of competitors coming. And they need more hit shows. Their pipeline needs to remain strong.

SEANA SMITH: Well one thing that we have seen that has been a little bit of a challenge for Netflix, at least over the past week or so, has been this Dave Chappelle special. We certainly have seen some backlash already. From your perspective, from an investor's perspective, when we see the response that something like Dave Chappelle's special has gotten, how big of a worry is that for Netflix?

SANTOSH RAO: I think they have to be sensitive to this. And social media is big. Just the sentiment is big. So I think you need to manage that well. I don't think they have done a very good job in really addressing that issue. It is a big issue. I mean, you don't want people leaving just because of that. And if there's a organized, sustained campaign, it can hurt them. So hopefully, they can address it well. They have not done it so far. So we'll wait and see. But they don't need any more incidents like that. That's for sure.

SEANA SMITH: Santosh Rao, head of research at Manhattan Venture, Venture Partners. Thanks so much for taking the time to join us again. Netflix shares moving to the upside on the heels of its earnings.