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Netflix's earnings beat and subscriber growth show 'everything is working': Analyst

Manhattan Venture Partners Head of Research Santosh Rao assesses Netflix'x latest earnings beat and reported subscriber growth figures, while also examining the streaming platform's plans for ad-tier subscription services and content programming.

Video Transcript

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DAVE BRIGGS: Netflix shares soaring-- look at that-- up 14% after hours following its quarterly earnings beat. Here to break it down further is Santosh Rao, Manhattan Venture Partners Head of Research. Santosh, I'm old enough to remember when we graded films two thumbs up, Siskel and Ebert. But let's just go-- no one knows what that is because Seana is too young. So is Rachelle. 1 to 10, based on your expectations, what do you-- what do you grade this Netflix earnings report?

SANTOSH RAO: I would say an A-plus from where it was coming from. I think it's back to growth. It's doing everything from a position of strength now. Because the big concern was, are they rushing into this add to your model from a position of weakness? Is their whole business model not working?

I think this shows that everything's working. They're just layering on another layer of revenue, a revenue source. So I think this is a good quarter across the board, good in terms of growing-- revenue growth-- I mean, subscriber growth. And even the numbers, the top line, bottom line, everything seems to be on track, doing well. I think Netflix is back in its-- back in the saddle, so to speak.

RACHELLE AKUFFO: So, Santosh, as we dig down into what Netflix has done differently over this past quarter to really get these sorts of results, what do you attribute that to?

SANTOSH RAO: Well, I think one thing is, Netflix was never out. I think what happened was, there was this pre-pandemic-- this pandemic pull forward, and it was adjusting to all that. So I think there was a lot of moving parts, and it had to adjust to this post-pandemic world. And then it's the new competitive landscape. I think it's got all its strategy together at this point. It's executing. They had good content slate this quarter. They have good coming up also.

So I think that's the beauty of Netflix. They have good content, good stickiness. The churn is low. It was pretty high for some time, I think, last quarter. But I think that's kind of moderating. It's coming down to reasonable levels. And that's the thing. It's just keep on producing good content and keep the stickiness going, and be aware that competition is nipping away at your heels. So you just need to keep on keeping on. And that's what Netflix is doing very well.

SEANA SMITH: Santosh, one thing sticking out to me in this report-- Netflix is not going to provide guidance for paid memberships as of next quarter, their fourth quarter letter. Just from an analyst's perspective, what's your reaction to this? And of course, do you think that this is just because of the slowing growth that we have simply seen from Netflix over the most recent quarters?

SANTOSH RAO: No, I think that-- it makes it a little difficult. But I think right now, there are some unknowns. We don't know how many people will get-- take the tier-- add tier. We don't know. There's going to be a lot of movement within their subscriber base. We don't know where the chips are going to fall. We think it's just going to be incrementally positive, adding on this ad tier.

So-- and it's going to be a good backstop for people who want to leave the platform. They can just come back to a lower tier so they can, like Comcast does, kind of entice them to stay on with a lower price point. So there are a lot of good advantages to having the ad tier in their whole revenue mix. So I think that's the thing. It's-- overall, I would say it's on the right track.

DAVE BRIGGS: Do you expect there be-- I don't know the number. Do you have an expectation on people trading down their subscription to the ad tier from, say, the 20 bucks a month that a lot of people do pay? And what do we know about the password sharing that they're tweaking in Latin America? How significant a revenue generator do you expect it to be?

SANTOSH RAO: Yeah, I think it's going to be definitely a net additive down the road. We still don't know how well it's going to be. They're still trying out in various markets. Overall, I think at least 15% to 20% will-- of their base of the 100 million nonpaying password-sharing base will come on immediately by next-- up to 15 million new subscribers will come on by next year and more later on.

So that's the big unknown. I think it's they're playing around. They need to do different things, tweak different. It's a lot of permutation combination to get it all right. So-- but overall, there are options. They're creating options. And we will wait and see. I think at this point, my estimate is about 7 million next year. By next year, we'll have 7 million in the North American base, and then overall about 15 million overall in the ad tier market. That's what I'm talking about, so ad tier layer. I think that's what.

So it's a lot of numbers, 15 million here, 20 million there. We don't know yet. There's no precise number because we still haven't seen the full rollout yet. But net net, it will be additive. But let's wait and see what the uptake rate is. Hopefully, it will be very good because the content is good. Content should be good and will be good, I'm sure. And they need to be good, rather. So-- and they'll do it. I mean, Netflix executes properly very well, and they know what the downfall is. There is competition. They need to execute. They need good content. They invest $17 to $18 billion content. So I think they'll get it right.

RACHELLE AKUFFO: And, Santosh, I want to ask you about the international markets because they said, excluding the foreign exchange impact, that revenue grew 13% year over year and average revenue per membership grew 8%. Talk about the impact of the foreign exchange-- the foreign exchange impact, and also what lies ahead in terms of international growth for Netflix.

SANTOSH RAO: Well, international growth is a key aspect of its whole growth story. They need that base to grow. I mean, North America is pretty much saturated. So it's now about taking market share from other people. Other bases are adding on from the linear TV people. But overall, international is where the growth is. And the FX impact is going to be huge. And if there is a slight miss on the 4Q number, it's probably because of the FX impact and a few other things.

So I think probably they want to be conservative in terms of projecting their 4Q estimates, 4Q guidance. But overall, I think the strong dollar is a big negative. It weighs on their numbers. And it'll be on. But that's where the growth is. That's where the next leg up is, international markets. And they'll continue to do that. They have the mindshare and the market share outside the US.

SEANA SMITH: Santosh, the earnings call is going to get underway here pretty soon. A lot of the focus is going to be on that ad tier that you all-- that you have already mentioned. What else are you looking to hear from executives this afternoon?

SANTOSH RAO: Yeah, I want to see how their expense management, cost management is going. That's what they said they're going to focus on, the free cash flow. We'll hear about that. And basically, the whole focus is going to be on the ad tier, what their projections are, how they think it'll roll out, and what they expect, and also the password sharing. So there's more color on those two aspects. And other than that, let's see if they can throw some more light on the slate-- content slate coming up and what their plan is for 2023. And if this momentum will continue, how confident they are about the future. I think that's the tone we want to hear. And I think we'll see that.

RACHELLE AKUFFO: They can certainly be confident today based on what we're seeing with the share price. A big thank you to Santosh Rao for joining us this afternoon.