Netflix earnings outlook: 'we've never seen numbers this high: Rosenblatt's McTernan

Yahoo Finance’s Brian Sozzi, Myles Udland, and Julie Hyman preview Netflix’s earnings report with Bernie McTernan, Rosenblatt Securities Director.

Video Transcript

MYLES UDLAND: Let's talk a bit about Netflix. The company is set to report its results next Tuesday after the market close and it's been an interesting year and it gets more interesting for Netflix given some of the changes with what's available on the platform we've seen in the last couple of weeks. Joining us now to discuss is Bernie McTernan, he's a director over at Rosenblatt Securities, analyst covering Netflix as well. So, Bernie, let's start with the conversation that we were just having in the break which is about the removal of Office from Netflix and how much that, it's one sitcom, it's one show and it really seems like it might be a needle mover for Netflix, especially based on some work you guys did with surveying customers.

BERNIE MCTERNAN: Yes, certainly and thanks again for having me on. Happy new year. There's a Nielsen study that came out earlier this week that said that people watched The Office in the US for 57 billion minutes. That's just an enormous number and one of the reasons that actually drove us to do a streaming video survey, it was our eighth streaming video survey, we really focused on Netflix.

And the key takeaway was that the company's going to have churn concerns for the first quarter. And so 32% of respondents indicated they are very likely or likely to cancel Netflix in the next three months, that's an uptick from 13% over the past four surveys and it makes sense because the service is getting a little worse. We talked about the Office leaving, the company has spoken about how the content state's going to be second half weighted.

What's interesting is that half of respondents indicated that they watch The Office, 24% plan on actually subscribing or canceling the service because The Office leaving, which is an opportunity for Peacock, especially as the AVOD content wars pick up, but then so if one is The Office, number two is the price increase that's coming. We lowered our net adds and actually now we have a contraction sequentially in 1Q in US and Canada. We're below consensus.

And then three, and this is something the whole industry is going to have to deal with, but just being on the other side of the pull forward of demand that's happening in streaming, 65% of respondents indicate that they plan on canceling some streaming service post pandemic. Obviously, Netflix is the largest in the US. So I would think that they would feel the brunt of that.

JULIE HYMAN: So, Bernie, it's Julie here, hi. So 32% you said, said that they were likely to cancel Netflix. How does the survey since you've been doing it, how does it usually translate into people actually then canceling the service? And when's the last time we would have seen churn that high for Netflix?

BERNIE MCTERNAN: Yeah. I mean, that's what really blew us away. And certainly the pandemic changed how people think about likelihood or intent on canceling the service but we've never seen numbers this high. And frankly, because we're able to show this large data set of eight surveys now, we've never engaged with the amount of clients that we are on this. And really we're talking to holders of Netflix who are getting nervous about owning the stock here. This is a company where we're looking at mid teens revenue growth, which is relatively low for the company, but it's trading at an eight times revenue multiple, which is high for the company. So there's just a disconnect here.

We're neutral on shares of $425 price target. We don't take making a valuation call on a stock like this lightly. But certainly we would be nervous owning the stock into the 4Q print next week and what we're really looking for is subscribers. We already have the operating margin guide for the year of 19%, the company's already guided to what the free cash flow outlook is supposed to be. That's break even to losing a billion dollars. So really consensus is going to be really focused on subs and we're going to get the global subscriber guide and what we're going to be trying to do is discern what's that implying for the US. Remember, the US was a bright spot last quarter, but Lat Am and EMEA both were lower than expectations.

BRIAN SOZZI: Bernie, I just talked to ViacomCBS' new CFO and he, to me, he sounded as if they're ready to go all in on Paramount+ in terms of a new streaming service, really ramp up the content and the distribution there. You have Disney+ really on fire. What point do these new competitors, which are growing very aggressively, at what point do their results start to dent the stock and impact that Netflix longer term story?

BERNIE MCTERNAN: Yeah, I think that what's going to happen with streaming competition and we're seeing this from Discovery too, one of the other takeaways from our survey is just the intent on subscribing to Discovery Plus, was just a lot more than we expected. And if you compare awareness of the service relative to our prior survey when we launched right before the launch of Disney+, 46% of respondents currently aware of Discovery plus, versus 63% for Disney+. Intent on subscribing, 24% of respondents indicate they plan on subscribing to Discovery Plus, that was relative to 38% for Disney+. So certainly more competition hitting the SVOD space.

What I think that's going to drive, though ultimately is more cord cutting. And so that's why if we look at an operator like Fox for example, that because they sold all their content to Disney, they own Tubi, but really streaming is a smaller portion of their total asset base. We think that moving to streaming is going to be more difficult for them. And what's interesting about Discovery Plus in particular, they're kind of fighting a different battle than a Paramount+, which is competing with Netflix, Apple TV+, HBO Max and the like for all the same scripts, all the same content.

That's why we like Disney+ for example, where if you have a Star Wars show, it almost doesn't matter-- in The Mandalorian, it doesn't matter who the Mandalorian is, we didn't even see Pedro Pascal's face until the second to last episode. So it's just different when you're inserting people and actors and scripts into high known brands and quality IP and that we think sets Disney+, apart. Disney is our top pick in the traditional media space.

MYLES UDLAND: Spoiler alert there, Bernie. Man, no warning. No warning on that one. But I do think statute of limitations passed on that. Bernie, really quick before we let you go, we started the conversation with The Office as it relates to Netflix and just going through your note, as you size this space up, is it really a two horse race, Disney+ versus Netflix? I mean the Disney+ numbers are just outrageous with in terms of how many people want to subscribe, the number they would pay for it. And are these other kind of subscription services just filling it in around the edges and really it's just these two at the front?

BERNIE MCTERNAN: I think that's exactly it. And really our key takeaway from the Disney investor day that was roughly a month ago at this point, it's really amazing how much new content is going to be hitting the service and the amount of scale that they were able to gain in Disney+ really with just library content. And starting tomorrow with WandaVision hitting Disney+, this is their foray into putting a lot of original content on the service and that's just going to supercharge it. And so it'll be interesting, Netflix is going to win the race to 200 million subscribers globally. I'm interested to see who wins the race, the first to 300 million because I think Disney has a shot.

MYLES UDLAND: All right, Bernie McTernan, an analyst over at Rosenblatt Securities. Bernie, always great to get your thoughts. Thanks so much for joining the program this morning.

BERNIE MCTERNAN: Yeah, thanks for having me on.