I am an F1 fanatic. I have been following the sport for more than 10 years. I also wrote about it multiple times on this blog. Personally, Formula 1 appeals to me with its unpredictability and its “nerdiness”. A lot of elements go into a race weekend, including top class engineering, data analytics that powers strategy and a split-second decision to deal with the changing elements in a race. Despite having races in 21 countries in the world, I feel that somehow it’s still a foreign sport to many. Not a whole lot of folks that I know follow the sport. Those who do developed a strong love for it like I do.
That’s why I was pretty excited about Drive To Survive Series – Season 2 by Netflix. To be honest, I didn’t watch the first season because my favorite team, Ferrari, and its rival- Mercedes, weren’t featured. The 2nd season showed that the streamer was given an unprecedented access to the paddock and teams. Cameramen followed drivers and team principals to their personal homes. Behind the scene footage where access was normally restricted was available. Folks who were interviewed gave answers that would have made significant headlines had they been published at the time. Watching it made me miss F1 even more than I do now. Like all other sports, F1 has been put on hold because of COVID-19
I do think that the series will bolster the popularity of F1 globally. I have seen positive reviews on Twitter regarding the 2nd season. If you run out of favorite shows to watch, I highly recommend it.
This week, Netflix dropped its latest earnings report. There are a lot of positive announcements from Netflix and kudos to them for weathering the rising competition from a plethora of streamers, so far. Nonetheless, there are a couple of notable points that I am either intrigued by or in disagreement with.
How a view is counted
Netflix used to register a view whenever a user passed a 70% of a show or a movie. Recently, the company changed that policy. According to the latest earnings report, whenever a viewer reaches a two-minute mark, it counts a view.
Netflix communicated the change in a tricky and inconspicuous manner. The explanation on the two-minute mark only came in the footer; which certainly isn’t where readers’ attention focuses on.
As you can see in the last sentence in the screenshot above, the change in the view accounting usually results in an increase in view because of obvious reasons. I don’t believe two minutes is enough to determine the intention of the audience. It is not uncommon that viewers watch 20 minutes of a show or a movie before leaving. If Netflix thinks that 70% is too high a standard, 40% or 50% would make more sense than the new implemented policy.
Using Google Trends to compare The Witcher with Mandalorian
In the Competition section of the report, Netflix dropped a Google Trends screenshot that showed interest in its currently flagship show The Witcher, Mandalorian, Jack Ryan and The Morning Show in the last 90 days worldwide
First of all, I am not sure this is an apple-to-apple comparison due to the difference in availability. Disney Plus is only available in US, CA, Australia, New Zealand and Netherlands. Even though Prime Video is supposedly accessible worldwide, while I was in Vietnam, I couldn’t watch many shows on the platform despite my membership.
Netflix said that even if Disney+ were global, the results wouldn’t be much different, citing the following result on Google Trends
I wouldn’t make that claim with such a degree of certainty. Netherlands is just a small country in Europe with about 17 millions in population. The viewership and interest in that country doesn’t equal to those worldwide.
Furthermore, the shakiness of the comparison can also come from the selection of keywords. Since The Witcher or Witcher is the name of a video game released in 2017, neither of the two keywords isn’t exclusive to the show on Netflix. Unfortunately, Google Trends doesn’t offer a feature that can clearly separate the show and the video game. The best that we can do is to filter the results by categories. I tested it out by comparing the keywords: Witcher, The Witcher,
As the screenshot shows, there is a big different between “Witcher” and “The Witcher”. The gap is even starker when “Netflix” is added to the search terms. If we set “Art and Entertainment” as the category, the picture will look a bit different
The Witcher/Witcher keywords had a spike on 21st December 2019, one day after the launch of the Netflix show while Mandalorian hit its peak on 28th December 2019, one day after the season finale. The difference between the yellow line and the red line is closer when we look at “Art & Entertainment” alone than when we look at “All categories” which may likely include the effect from The Witcher video game.
Now, the result above still doesn’t offer the full picture thanks to the difference in geographical availability, Let’s look at the US, two markets where every show is available
If we look at the United States alone for All Categories, it looks more favorable for Mandalorian. When “Art & Entertainment” is applied, it fares even better for Mandalorian
Here are the results for Canada
What about Australia?
My point is that there are several factors that affect how the search terms are presented on Google Trends and how results should be interpreted. I don’t have an idea on how the competing shows actually fare. I do believe that the way Netflix presented the information and data in its report is misleading at best.
Disclosure: I have Disney and Apple stocks in my portfolio.
Netflix released its earnings yesterday. There are causes for optimism and concern from what I have seen.
Important metrics improved YoY significantly
This quarter, Netflix added 517,000 domestic paid subscribers and more than 6.2 million international paid members, bringing the total subscriber count domestically and internationally to more than 60.6 million and 97.7 million approximately.
Contribution margin for domestic and international streaming is 41% and 20% respectively, resulting in the margin for streaming to be around 30%. Contribution margin of Domestic DVD is around 61%. Contribution margin represents what is left of revenue after all the variable costs to pay for fixed costs and to generate profit.
On a year over year basis, revenue, operating income and paid memberships saw remarkable growth for a company this size
Cause for concerns
Even though domestic paid memberships increased, Netflix missed its own expectation by almost 300,000, making it the second consecutive quarter that it did so. The company blamed the miss on the higher pricing elasticity than expected
That’s really on the back of the price increase. There is a little more sensitivity. We’re starting to see the – a little touch of that. What we have to do is just really focus on the service quality, make us must-have. I mean we’re incredibly low priced compared to cable. We’re winning more and more viewings. And we think we have a lot of room there.
But this year, that’s what’s hit us. And we’ll just stay focused on just providing amazing value to our members in the U.S. And I think that gives us a real shot at continuing to grow net — long-term net adds on an annual basis. But we’re going to be a little cautious on that guidance and feel our way through here.
I saw a sentiment floating around on Twitter a while back that argued that Apple TV+ and Disney+ aren’t really competitors to Netflix. I mean, to some extent, they may differ a bit from Netflix, but if we want to talk about competing for viewers’ attention, time and disposable income, how can they not be? Sure, boats move different from trains, but if patrons can choose either to go from point A to point B, how can they not compete with each other? Now Reed Hasting admitted the challenge from other streamers, especially Disney+
From when we began in streaming, Hulu and YouTube and Amazon Prime back in 2007, 2008, we’re all in the market. All 4 of us have been competing heavily, including with linear TV for the last 12 years. So fundamentally, there’s not a big change here. It is interesting that we see both Apple and Disney launching basically in the same week after 12 years of not being in the market. And I was being a little playful with a whole new world in the sense of the drama of it coming. But fundamentally, it’s more of the same, and Disney is going to be a great competitor. Apple is just beginning, but they’ll probably have some great shows, too.
But again, all of us are competing with linear TV. We’re all relatively small to linear TV. So just like in the letter we put about the multiple cable networks over the last 30 years not really competing with each other fundamentally but competing with broadcast, I think it’s the same kind of dynamic here.
Chief Product Officer Gregory Peters made an important point below
I would say our job and then what we think our pricing for a long-term perspective is continue to take the revenue that we have that our subscribers give us every month, judiciously and smartly invest it into increasing variety and diversity of content where we really want to be best-in-class across every single genre.
And if we do that and we’re successful in making those investments smartly, we’ll be able to continue to deliver more value to our members. And that really will enable us to, from time to time, ask for more revenues so that we can continue that virtuous cycle going
Quite an important “if” condition there. In short, Netflix borrows capital to invest in content to the tune of billions of dollars every year and hopes that their subscriber base growth and revenue will keep enabling them to do so. In essence, every streamer will do that. Every single one of them needs to churn out quality content to convince viewers to choose their service. Failure to produce quality content to justify expensive investments will be costly for these streamers.
For Netflix, the stakes seem to higher. Other competitors have additional revenue streams apart from their streaming service. Netflix essentially relies on their subscription revenue. As this quarter shows, the price elasticity already has some negative effect, and it’s BEFORE other heavy-marketed competitors such as Apple TV+ and Disney+ debut in 2-4 weeks. The new challengers price their services at much lower points than Netflix. The room to increase price to recoup their investments faster is getting smaller. I do think a price hike will negatively affect Netflix.
Some may say: oh Amazon kept investing heavily in their early days as well and Netflix can be the same. They are not, as I wrote here. Their free cash flow continues to be in the red while Amazon was in the black for years.
The expensive bidding war for content may play into Netflix’s favor. Their huge subscriber base enables them to spread the cost much better than competitors, especially new ones that have to acquire subscribers from scratch. Hence, it can be argued that Netflix will be one of the only few standing after the dust settles. It does make sense to think about the streaming war’s future that way. As does it make sense to think that there is a possibility that the game Netflix is playing may not work out for them, given the intense competition, the decreased price inelasticity, the huge debt they have incurred and the continuous negative free cash flow.
I think that we will have more clues around the next earning call or two as we’ll see how Netflix will fare after the arrival of Apple TV+ and Disney+. Even then, we won’t know definitively who will win in the end. Fascinating times ahead.
Retailer Adoption of Apple Pay Quickens. Since I was able to use Apple Pay on my phone, I have been using it as the first payment method, even in a city as small as Omaha. I have been a pretty happy user ever since.
I came across Jiro Ono when I was reading the latest book by Bob Iger, which I wrote about here. I decided to restart my Netflix membership to watch this and it’s worth it.
Jiro Ono lived on his own at the age of 9 without his parents. For almost 75 years, he has been making sushi and doesn’t show any signs of abating. He is still working day and night; and he shows energy of a guy much younger than his age. His dedication to make the perfect sushi and improve every day is so inspiring. Watching him find the perfect suppliers for fish, wasabi and rice as well as prioritize simplicity in his sushi making is exciting.
He is the oldest 3-star Michelin chef in the world and Michelin said that 3 star is the only rating adequate to Jiro’s restaurant. If you are looking for something great to watch on Netflix, I highly recommend it
A bullish argument for money-losing companies (companies that have negative operating income) I have seen so far is that they are following the footsteps of Amazon in the early 2000s before the juggernaut became what it is today. Set aside the differences in business environments, the nature of industries and technological advances, there is one important caveat; even though Amazon reported negative net income for a few years before turning profitable, it had POSITIVE free cash flow during that time.
Per corporatefinanceinstitute, Free Cash Flow (FCF) “represents the amount of cash generated by a business, after accounting for reinvestment in non-current capital assets by the company”. It’s equal to, simply speaking, cash generated from operations minus Capital Expenditure (CAPEX). It is a metric to show investors how efficient a company is generating cash and whether the company at hand has enough to pay investors after operational needs and capital expenditures.
This is what Amazon’s annual and quarterly free cash flow looks like over the years. Data is from macrotrends:
Over the years, free cash flow noticeably grew bigger for Amazon, but it was positive even before the introduction of AWS in 2006, which has been the margin maker for Amazon recently. Hence, if a company has negative operating income and still makes capital expenditures to grow, they are NOT similar to Amazon.
A particularly intriguing case is Netflix. The streaming king debuted its streaming service in 2007 and has grown to become the de facto leader in the market. It has had positive operating income, but increasingly invested a massive amount of money in original content, much more than the cash it generates from operations every year.
Since Q3 2014, Netflix hasn’t had a single quarter with positive FCF. The challenge Netflix is facing compared to its competitors is that Netflix has only one source of revenue. Disney, Amazon and Apple, to name just three competitors, have different sources of income. In the case of Amazon and Apple, their streaming services can be argued to be add-on services that function to lock in customers. It is true that given its almost 150 million subscribers, Netflix can spread its content costs across more subscribers than its competitors. Nonetheless, it has to keep investing every year in original content to appeal to consumers. If there is no change in how Netflix can generate revenue besides subscription, I struggle to see how its FCF outlook will differ. Hence, Netflix’s story is NOT similar to Amazon’s in the early 2000s.
Today, Disney released their 2019 Q3 result. Below are a few points that stood out for me
Hulu got 28 million paid subscribers while the figure for ESPN+ stood at 2.4 million
The integration of 21 Century Fox had negative impact on Disney’s earning, including the subpar performance of movies such as Dark Phoenix
Direct-to-Consumer & International segment expected to make $900 million loss in the next quarter, due to investment in the launch of Disney + and support for Hulu, ESPN+
Fantastic results for the studio as per Bob Iger
The studio has generated $8 billion in global Box Office in 2019, a new industry record. And we still have five months left in the calendar year with movies like Maleficent: Mistress of Evil, Frozen 2 and Star Wars: The Rise of Skywalker still to come. So far this year, we’ve released 5 of the top 6 movies including four that have generated more than $1 billion in global Box Office. Avengers: Endgame is now the highest grossing film in history with almost $2.8 billion worldwide. Captain Marvel, Aladdin and The Lion King have each surpassed $1 billion. And with more than $960 million in Box Office to date, Toy Story 4 will likely cross that threshold in the coming weeks. And all of these movies will be on Disney+ in the first year of launch.
The leadership behind the studio will manage the film strategy for 21 CF as well
Deadpool, Fantastic 4 and X-Men will be part of Marvel Studios
Come this November, users can have access to Disney+, Hulu (ads-supported) and ESPN+ as a bundle for $12.99 a month, well below the total sum of all threes, if subscribed separately
“Hotstar had more than 300 million average monthly users, served an unprecedented 100 million daily users and delivered a high-quality streaming experience to 25.3 million simultaneous users, which is a new world record”
Disney is discussing deals with Apple, Amazon and Google as distribution partners, deals that are expected to close
Focus on marketing for Disney+, per Bob Iger
Disney+ marketing is going to start to hit in later this month, later in August. We’re actually going to allow members of D23 to be the first to subscribe. I’m actually going through a comprehensive marketing plan with the team next week. Comprehensive probably is an understatement. It is going to be treated as the most important product that the company has launched in, I don’t know, certainly during my tenure in the job, which is quite a long time. And you will see marketing both in traditional and nontraditional directions basically digital and analog also significant amount of support within the company on basically company platforms. And then of course all of the touch points that the company has, whether it’s people staying in our hotels, people that have our co-branded credit card, people who are members of D23, annual passholders, I could go on and on. But the opportunities are tremendous to market this. And I feel good about some of the creative that I’ve already seen. But you won’t start to see it until later this month.
I cannot wait to see the battle of the streamers and how well Disney+ will fare. As a student of business, I am fascinated to see the strategies and execution of Disney+ vs Netflix. Netflix has a huge subscriber base as advantage over Disney+, in addition to a household name (ever heard of “Netflix and chill”?) and some great original content. But Disney has its own strengths as well, including marketing expertise, household name, a great content library and additional revenue streams.
I am thrilled to see how fast Disney+ will be able to sign up folks. The emphasis on marketing, the aggressive pricing of the streaming service, the bundle and the focus on exclusive content in spite of loss from licensed deals show that Disney is dead serious. It will be interesting to see how viewers will react and whether there will be some market share loss by Netflix at the hands of Disney+ and other upcoming streamers.
I honestly don’t know how it will go. As a fan and a consumer, I cannot wait to see.
Netflix’s earning gave the bears something to boast about as the streamer reported the first domestic subscriber decline in years and also the biggest miss against forecast ever. Though the missed forecast was felt in all regions, it was even more so where there was a price hike. It begs the question: how much wriggle room does Netflix have to increase its prices?
As the company invested so much money in original content and gave significant discounts to sign up users in markets such as India, squeezing out users in established and lucrative markets can be a solution. Yet, if anything, this quarter showed that it might not be a straightforward solution for the household brand.
Throw in the future fierce competition in Disney, HBO or NBC and the loss of staples such as Friends, The Office or Future Marvel Blockbusters. It’s not unreasonable to cast some doubts over Netflix’s future.
With that being said, it’s not really certain that Netflix’s doom is under way. It is still the biggest streamer out there with 151 million paid memberships worldwide. It is a household name that is familiar with consumers around the globe.
Thought the growth slowed this quarter, adding net 2 million subscribers in 90 days with improved Operating Margin and Contribution Margin is not bad at all.
The huge subscriber base will play to Netflix’s advantages as the more users it has, the more its costs, especially fixed ones such as licensing fees, production or infrastructure, are spread. Netflix’s future competitors such as Comcast, Warner Media or Disney will have to build up their user base from scratch and the cost per user in the beginning will be much higher than that of Netflix.
As the streaming war drags on, will the new services have enough resources or stomach to be in the game? Especially given the expensive investment in releasing quality content regularly and the risk of losing subscribers from price hikes. Of course, one can argue that Netflix can just be patient and play the long game, but on the other side, most of its competitors have resources to spare and other revenue streams to chip in.
I honestly don’t know how Netflix will fare in the future. There is merit on both the bears and the bulls. Because of that, it’s interesting to follow the company.
The cybersecurity firm achieved 100% YoY growth in revenue this quarter. Gross margin increased to 70% in Q1 2020 from 59% in Q1 2019. Subscription revenue, as the more profitable segment, made up 90% of total revenue this quarter, compared to 85% one year ago. Operating loss as % of revenue was -27% in Q1 2020, compared to -70% in Q1 2019.
The company’s annual recurring revenue and subscription count growth are still in the 3-digit territory. Operating cash flow is already positive. One concern is that free cash flow is still negative, though it can be attributed to the investment in equipment
A few notable points from their earning call
Next, I will highlight a win that represents our tremendous opportunity to expand within our customer base. This customer is in the public sector, which also speaks to our growing success in that segment of the market. We initially engaged with this large U.S. city back in 2016 on a small deployment of 15,000 endpoints to replace a fossilized AV vendor that was failing to provide protection and value. We replaced that vendor with our combined EDR next-gen AV offering plus OverWatch.
Based on the success of the initial deployment, we expanded our footprint to over 250,000 endpoints the following year. And I’m pleased to report that in Q1 of this year, we have increased coverage to 400,000 endpoints and sold additional cloud modules, including Falcon Discover for IT hygiene, Falcon Device Control, Falcon Spotlight for vulnerability management, and Falcon X for integrated threat intelligence. This is a great example of how we can land a new customer and expand that relationship by adding endpoints and modules over time. Our Falcon platform is one of the most strategic security purchases they have made in many years.
In addition to winning new customers at a rapid pace, we’re also focused on expanding our relationship with existing subscription customers by deploying additional cloud modules and protecting more of their endpoints. Our dollar-based net retention rate speaks to the efficacy of our solution in our successful land and expand sales model. As of January 31, 2019, we had a dollar-based net retention rate of 147%. While this metric can fluctuate quarter-to-quarter, our benchmark is 120% or above, which we again exceeded in Q1.
While professional services carry a lower gross margin that our corporate average, it is a small portion of our revenue base and we view it as strategic. We have been able to derive an average of about $3 of subscription ARR for every $1 spent on an initial incident response for proactive services engagement. To be clear, these are customers that are new to CrowdStrike.
In terms of geographic breakdown, approximately 75% of first quarter revenue was derived from customers in the U.S. and 25% from international markets.