the bull vs. bear case for netflix

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Read the whole story here: http://mot.ly/13uO1LB -- With the stock price now around $100 per share, some investors are hoping that Netflix can return to its former glory. Others believe Netflix is playing a losing hand, and will never achieve the profitability it once enjoyed.

TRANSCRIPT

Page 1: The Bull vs. Bear Case for Netflix
Page 2: The Bull vs. Bear Case for Netflix

The Bull Case for Netflix

Photo: istockphoto.com

Page 3: The Bull vs. Bear Case for Netflix

• Management has proved its vision and adaptability.

• Superior technology with a huge database of viewing histories and preferences.

• Improving content selection with an emphasis on exclusivity.

• A compelling model that appears to be working.

• Creating a niche with children’s programming.

• Brand still has tremendous power.

Page 4: The Bull vs. Bear Case for Netflix

“I believe that he is the smartest guy in the room of his own industry – and it is a HUGE industry.”

-- David Gardner, co-founder, The Motley Fool, on Reed Hastings, CEO, Netflix

Management has proved its vision and adaptability.

Page 5: The Bull vs. Bear Case for Netflix

In 1998, management disrupted the VHS business with its DVD delivery model.

By 2010, its DVD-by-mail business drove $2 billion in sales.

Its DVD library is now the world’s largest with more than 200,000 titles.

Management has proved its vision and adaptability.

Page 6: The Bull vs. Bear Case for Netflix

Management envisioned “digital delivery” in 1999, and launched

streaming in 2007.

It’s now the world’s largest Internet movie subscription service.

Management has proved its vision and adaptability.

Page 7: The Bull vs. Bear Case for Netflix

Management powered ahead with international expansion even though domestic streaming was still thriving.

• Canada• Latin America• UK and Ireland• Sweden, Denmark, Norway, Finland

Management has proved its vision and adaptability.

Page 8: The Bull vs. Bear Case for Netflix

• Management has proved its vision and adaptability.

• Superior technology with a huge database of viewing histories and preferences.

• Improving content selection with an emphasis on exclusivity.

• A compelling model that appears to be working.

• Creating a niche with children’s programming.

• Brand still has tremendous power.

Page 9: The Bull vs. Bear Case for Netflix

“The Netflix website is essentially a highly instrumented market research

platform that has allowed the company to track, analyze and project consumer

behavior around entertainment consumption for 15 years.”

-- Gina Keating, author of Netflixed

Superior technology with a huge database of viewing histories and preferences.

Page 10: The Bull vs. Bear Case for Netflix

• As of June 2012, it had more than 25 million users.

• About 30 million plays per day.• 4 million ratings per day.• 3 million searches per day.• More than 2 billion hours of streaming video

watched during last 3 months of 2011.

Superior technology with a huge database of viewing histories and preferences.

Source: http://gigaom.com/2012/06/14/netflix-analyzes-a-lot-of-data-about-your-viewing-habits/

Page 11: The Bull vs. Bear Case for Netflix

75% of Netflix’s customers select movies based on the company’s recommendations. Netflix

aims to increase that number.

Superior technology with a huge database of viewing histories and preferences.

Page 12: The Bull vs. Bear Case for Netflix

Netflix’s Asgard streaming technology is considered the best in the business.

Asgard is a web interface for application deployments and cloud management.

Superior technology with a huge database of viewing histories and preferences.

Page 13: The Bull vs. Bear Case for Netflix

• Management has proved its vision and adaptability.

• Superior technology with a huge database of viewing histories and preferences.

• Improving content selection with an emphasis on exclusivity.

• A compelling model that appears to be working.

• Creating a niche with children’s programming.

• Brand still has tremendous power.

Page 14: The Bull vs. Bear Case for Netflix

Netflix maintains a DVD library of more than 200,000 titles for its

subscribers.

Improving content selection with an emphasis on exclusivity.

Page 15: The Bull vs. Bear Case for Netflix

Has the most streaming titles

60,000 (est.)

Improving content selection with an emphasis on exclusivity.

Page 16: The Bull vs. Bear Case for Netflix

The recent deal with Disney dramatically improves its content

selection going forward.

Improving content selection with an emphasis on exclusivity.

Page 17: The Bull vs. Bear Case for Netflix

• Management has proved its vision and adaptability.

• Superior technology with a huge database of viewing histories and preferences.

• Improving content selection with an emphasis on exclusivity.

• A compelling model that appears to be working.

• Creating a niche with children’s programming.

• Brand still has tremendous power.

Page 18: The Bull vs. Bear Case for Netflix

It is the unseen aspects of Netflix’s business model, and its long head start,

which differentiate it from the competition…

-- Mario Cibelli, Marathon Partners

A compelling model that appears to be working.

Page 19: The Bull vs. Bear Case for Netflix

In FY 2012, domestic subscriptionsexpected to grow 23%.

A compelling model that appears to be working.

Page 20: The Bull vs. Bear Case for Netflix

So, a marginal streaming subscriber is almost pure contribution margin. There is a little bit for credit card, CS, and CD end fees, but it is pretty modest.

A marginal DVD subscriber has a number of variable costs -- the postage and DVD fees, in particular. So,

actually it is the opposite, which is the profitability of a new streaming subscriber, the contribution margin

is almost twice what it is for a DVD subscriber.

-- Ellie Mertz, CFO, Netflix, on streaming subscribers

A compelling model that appears to be working.

Page 21: The Bull vs. Bear Case for Netflix

The more subs, the more content Netflix can buy, attracting more subs.

A compelling model that appears to be working.

Page 22: The Bull vs. Bear Case for Netflix

Since it introduced streaming in 2007, acquisition cost/sub dropped from

$40.86 to $15.04 in 2011.

A compelling model that appears to be working.

Page 23: The Bull vs. Bear Case for Netflix

• Management has proved its vision and adaptability.

• Superior technology with a huge database of viewing histories and preferences.

• Improving content selection with an emphasis on exclusivity.

• A compelling model that appears to be working.

• Creating a niche with children’s programming.

• Brand still has tremendous power.

Page 24: The Bull vs. Bear Case for Netflix

Netflix found the most popular Starz content was animated.

Creating a niche with children’s programming.

Page 25: The Bull vs. Bear Case for Netflix

Kids now have own profiles with history, ratings, queues and recommendations.

Creating a niche with children’s programming.

Page 26: The Bull vs. Bear Case for Netflix

Access to Disney library will increase attractiveness vs. competitors.

Creating a niche with children’s programming.

Page 27: The Bull vs. Bear Case for Netflix

• Management has proved its vision and adaptability.

• Superior technology with a huge database of viewing histories and preferences.

• Improving content selection with an emphasis on exclusivity.

• A compelling model that appears to be working.

• Creating a niche with children’s programming.

• Brand still has tremendous power.

Page 28: The Bull vs. Bear Case for Netflix

Netflix's 2010 entry into Canada was successful and is already profitable.

Brand still has tremendous power.

Page 29: The Bull vs. Bear Case for Netflix

Entered UK and Ireland in Jan. 2012 and gained 1 million subs in just 7 months.

Brand still has tremendous power.

Page 30: The Bull vs. Bear Case for Netflix

The Bear Case for Netflix

Photo: istockphoto.com

Page 31: The Bull vs. Bear Case for Netflix

• Netflix’s customers are very price sensitive.

• Streaming will never be as profitable as DVDs.

• Netflix’s financials are weakening.

• International expansion poses enormous challenges.

• Revenue growth not keeping up with content costs.

• Other threats to streaming.

Page 32: The Bull vs. Bear Case for Netflix

Netflix’s price hike in the 3rd quarter of 2011 resulted in 805,000 paid

subscribers jumping ship.

Netflix’s share price

Netflix’s customers are very price sensitive.

Page 33: The Bull vs. Bear Case for Netflix

If Netflix raises streaming prices, it’ll lose customers. That makes it

difficult to pay for content.

Netflix’s customers are very price sensitive.

Page 34: The Bull vs. Bear Case for Netflix

Date Old Price Std. 3 DVD

Plan

New Price Std. 3 DVD

Plan

Churn Previous Qtr.

Churn This Qtr.

Churn Subsequent

Qtr.

Reaction

6/15/04 $19.95 $21.99 4.7 5.6 5.6 Blockbuster mail service began 8/04. Lowered price to $17.99 effective Nov. 1.

6/30/05 $17.99 $17.99 5.0 4.7 4.3 Introduced lower price options.

9/30/06 $17.99 $17.99 4.3 4.2 3.9 Churn in Q2 dropped from 4.7% yr. ago due to price parity and less aggressive competition from Blockbuster.

3/31/07 $17.99 $17.99 3.9 4.4 4.6 Up from 4.1% yr. ago. Lowered price of entry plan from $5.99 to $4.99 in Q1 2007. Increase in churn in Q2 2007 attributed to increased competition.

7/22/07 $17.99 $16.99 4.4 4.6 4.3 Dropped price on two most popular plans.

9/30/10 $16.99 $16.99 4.0 3.8 3.7 Low churn prompts price hike in November.

11/22/10 $16.99 $19.99 3.8 3.7 3.9 Introduced unlimited streaming only for $7.99. Raised prices on 1 and 2 DVDs $1 to $9.99 and $14.99.

3/31/11 $19.99 $19.99 3.7 3.9 4.2

7/12/11 $19.99 $23.98 4.2 6.3 4.9 Unbundled DVD and streaming, charging $15.98 for 1 DVD + unlimited streaming

9/30/11 $19.99 $23.98 4.2 6.3 4.9 Lost 11.3% of domestic subs in Q3 2011. Churn in Q3 2010 was 3.8%.

2012 $19.99 $23.98 4.9 Stopped talking about churn. No longer a key metric?

Netflix’s customers are very price sensitive.

Page 35: The Bull vs. Bear Case for Netflix

• Netflix’s customers are very price sensitive.

• Streaming will never be as profitable as DVDs.

• Netflix’s financials are weakening.

• International expansion poses enormous challenges.

• Revenue growth not keeping up with content costs.

• Other threats to streaming.

Page 36: The Bull vs. Bear Case for Netflix

Comparing profit contribution for first 4 quarters after it turned positive for

DVDs vs. first 4 quarters for streaming shows DVDs more profitable.

Streaming will never be as profitable as DVDs.

Page 37: The Bull vs. Bear Case for Netflix

To equal DVD profit, monthly price for streaming would have to more than

double to $17.60.

Streaming will never be as profitable as DVDs.

Page 38: The Bull vs. Bear Case for Netflix

Alternatively, Netflix would need 30 million more subs.

Streaming will never be as profitable as DVDs.

Page 39: The Bull vs. Bear Case for Netflix

Streaming will never reach peak DVD Profit Contribution per sub

of $26.19 in 2004.

Streaming will never be as profitable as DVDs.

Page 40: The Bull vs. Bear Case for Netflix

• Netflix’s customers are very price sensitive.

• Streaming will never be as profitable as DVDs.

• Netflix’s financials are weakening.

• International expansion poses enormous challenges.

• Revenue growth not keeping up with content costs.

• Other threats to streaming.

Page 41: The Bull vs. Bear Case for Netflix

Quick ratio has been declining, but was helped somewhat by convertible bond issued in Nov. 2011.

Netflix’s financials are weakening.

Page 42: The Bull vs. Bear Case for Netflix

TTM cash flow from operations has decreasedin each of the last 4 quarters.

Netflix’s financials are weakening.

Page 43: The Bull vs. Bear Case for Netflix

TTM free cash flow plunged in Q3 2012 due to slowing growth and increasing content costs to support international

expansion.

Netflix’s financials are weakening.

Page 44: The Bull vs. Bear Case for Netflix

• Netflix’s customers are very price sensitive.

• Streaming will never be as profitable as DVDs.

• Netflix’s financials are weakening.

• International expansion poses enormous challenges.

• Revenue growth not keeping up with content costs.

• Other threats to streaming.

Page 45: The Bull vs. Bear Case for Netflix

Q1 2012 Letter to Shareholders:

"Latin America presents unique challenges relative to our other markets; namely, low device penetration, high piracy, varying preferences for subtitles, and relatively low credit card usage for ecommerce. We are quickly learning what content works best in the region, and are adjusting our content library accordingly. We have already nearly doubled our content library since launch... Finally, as expected upon launch, we’ve found that processing ecommerce consumer payments is quite challenging as compared with North America and Europe.”

International expansion poses enormous challenges.

Page 46: The Bull vs. Bear Case for Netflix

Q1 2011 Letter to Shareholders:

"We are still learning the seasonality curve and nuances specific to Canada, however, and we slightly over-forecast the quarter."

International expansion poses enormous challenges.

Page 47: The Bull vs. Bear Case for Netflix

• Netflix’s customers are very price sensitive.

• Streaming will never be as profitable as DVDs.

• Netflix’s financials are weakening.

• International expansion poses enormous challenges.

• Revenue growth not keeping up with content costs.

• Other threats to streaming.

Page 48: The Bull vs. Bear Case for Netflix

Revenue growth not keeping up with content costs.

Page 49: The Bull vs. Bear Case for Netflix

• Netflix’s customers are very price sensitive.

• Streaming will never be as profitable as DVDs.

• Netflix’s financials are weakening.

• International expansion poses enormous challenges.

• Revenue growth not keeping up with content costs.

• Other threats to streaming.

Page 50: The Bull vs. Bear Case for Netflix

• Increasing domestic competition from Hulu Plus, Amazon Prime and Redbox/Verizon.

• Carlos Slim's launch of Clarovideo in Mexico and other Latin American countries for $5/month undercutting Netflix by 37%. Collection simplified by adding to phone bill.

• HBO's coming entry in Scandinavia.

• Data caps imposed by broadband providers.

Other threats to streaming.

Page 51: The Bull vs. Bear Case for Netflix

• Superior technology is a real advantage.

• Deal with Disney is a big step in the right direction and shows Disney's confidence in Netflix's future.

• It’ll be very challenging to grow sales enough to cover content investments needed to attract customers.

Page 52: The Bull vs. Bear Case for Netflix

• Current inability to raise prices without losing subs hinders sales growth.

• Lack of affordable access to broadband and data caps may slow growth.

• Keep an eye on the rates of domestic and international streaming sub growth.