Netflix Shakes Up the Earnings Call

The "earnings call" has been a typical part of Wall Street life for some time. On the day that a company reports earnings (or occasionally, the following day), it will host a conference call for senior executives to discuss the quarter's results and outlook and take questions from Wall Street analysts.

However, Netflix (NASDAQ: NFLX  ) has never liked to follow standard procedure. Several years ago, the company began taking questions from analysts by email, with the director of investor relations then posing those questions to management on a live call. Netflix later began to take questions from individual investors as well, and beginning in 2011 it allowed a few follow-up questions from analysts live over the phone.

For the most recent "earnings call," Netflix decided to adopt yet another new format. On Monday evening, the company streamed a Google Hangout over YouTube for investors, featuring financial news anchor Julia Boorstin, BTIG analyst Rich Greenfield, and Netflix senior executives. The interlocutors collected questions via email and social media from financial analysts, journalists, and regular investors.

This format was supposed to mimic a fireside chat and allow for better dialogue. Yet many investors were extremely concerned about the new interview format, especially because one of the moderators, Greenfield, was an analyst who has been extremely bullish on Netflix, raising conflict-of-interest questions.

Mixed emotions
All things considered, I think the earnings "hangout" worked better than many people feared. While Greenfield has been a big supporter of Netflix, he did not seem to be asking "softball" questions. Boorstin and Greenfield both asked some tough questions about issues such as subscriber churn and originals viewership.

On the other hand, there were other aspects of the format that left a lot to be desired. Since the five participants weren't in the same room, on several occasions people were talking over each other, making it difficult to understand what was going on. Businessweek complained that the whole setup looked amateurish, but, more importantly, that the exclusion of other analysts made the follow-up questions less effective.

Indeed, while Boorstin and Greenfield asked "tough" questions, they didn't get many answers. We still don't know anything about absolute churn rates or the churn effect from recent content changes such as the addition of originals and the loss of children's shows from Viacom, including Dora the Explorer and SpongeBob SquarePants. We also don't know anything new about how many people are watching Netflix's new original shows.

Of course, it's quite possible that Netflix executives wouldn't have revealed anything useful on those subjects under any circumstances. However, giving analysts open access to ask questions on a call gives them a better chance to pose a question that will elicit useful information, however limited that might be.

Simple might be better
It's hard to know why Netflix refuses to hold a traditional earnings call. Perhaps the company's motives are good, and executives want to try these other formats to find something that's better than the traditional model. However, so far, the effect has been to help Netflix executives avoid answering the really tough questions about its new business model.

Netflix's high valuation is almost entirely driven by long-term projections of the company's market potential. Hard data such as current earnings and current subscriber growth can't do very much to confirm or deny Netflix's ultimate growth potential. Unfortunately, Netflix's recent "earnings calls" haven't been set up in a manner conducive to learning about underlying trends in churn and originals viewership. Without that data, it's hard to have very much confidence at all that Netflix's earnings will grow into the stock price.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 23, 2013, at 7:20 PM, 123spot wrote:

    I heartily disagree with you Adam, though I respect your opinion. I loved the format. It made me feel as if I were in the room.

    The analysts would have gotten no more specific trade secrets of this business model in a crowded room of waving hands. I understand your disappointment.

    For my part, I am thrilled. Some of the "analytical" questions ( cash flow, accounting changes, content costs) were excellent and I think the questioners had a hard job consolidating so many questions and trying to appropriately weight them in time used. But they wanted the secrets and couldn't get them.

    Makes me happy as a shareholder.

    I got the subtle answers that were given and understand why giving the actual game away could be counterproductive . ( Watch who they renew or extend, don't expect them to throw partners under the bus with ratings.

    NFLX seems to know its shareholders as well as its customers; in fact, I think a lot of them are the same.

    That's the secret.

    Spot

  • Report this Comment On July 23, 2013, at 9:59 PM, MKArch wrote:

    Propaganda control the message pure and simple. I find it unbelievable that anyone would have trouble understanding this. They don't do the traditional format because Hastings wants to answer the questions he is prepared for and doesn't want any pesky follow up questions when he does the aztek two step around the tough but important questions.

    Earnings and NFLX stock implode a year after Hastings brags endlessly about some mythical virtuous circle of growth funding content funding growth. He also ends up doing a secondary at 1/3 the price he was buying stock back for months earlier and somehow this puppeteer still gets away with this nonsense. He's playing the same game again delaying the recognition of content cost to goose earnings for a couple of quarters to stroke his massive ego. Implosion part II will be the end result.

  • Report this Comment On July 23, 2013, at 10:18 PM, TMFGemHunter wrote:

    @Spot: thanks for the comment. I understand that there may be competitive reasons not to offer certain information. However, not offering the information is basically equivalent to saying "trust me". If the 2011 implosion has any long-term implication, it's that you should not just "trust" this management team.

    That's not to say that Reed & co. can't or won't do a good job. But the fact of the matter is that TV companies release ratings, which serves as a check on management. When NBC has horrible ratings, everybody knows. In Netflix's case, if one of the originals is underperforming, nobody would know unless management non-renewed it. But that also makes it very easy to cover up an underperforming show (just renew it anyway). Maybe the originals really are all great, but it's going to take a couple of years to really know whether that's the case.

    Adam

  • Report this Comment On July 24, 2013, at 8:15 AM, MKArch wrote:

    I forgot to add less than a year after touting the wonderous virtuous circle Hastings had to raise prices 60% ( cut service to reduce it's cost in reality) to save a model that was headed for BK. Sure just trust ole Reed he's got it all figured out.

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