Netflix (NFLX) reports earnings after the market close on Wednesday, July 20. The conference call after the Q2 release should at least trigger a pause for all investors, even NFLX longs.
That said, I concede that maybe there's some positive in the company's chosen format after all. Then, I detail the questions I intend to submit, noting why they should matter to investors. I conclude by giving Seeking Alpha readers the opportunity to leave a question they would like answered in the comments section of this article.
First, here's some of what I had to say about the format in early April, ahead of the Q1 call:
It does not occur in real-time with analysts on board. While other companies use similar methods, Netflix use of a Q&A session only, conducted via email, smacks as curious, at the very least. The protocol appears to give the company the ability to preselect questions and craft ideal answers only to the ones they choose, as opposed to having to answer potentially tough questions exposed and on the fly. Regulators ought to banish this approach, as it provides little value to investors. Netflix's last call amounted to nothing but a dog and pony show.
What's even worse is how they attempt to make what, for all intents and purposes, is a canned Q&A session appear live. In Netflix's earnings press release, the company notes that it "will host a live Q&A session" where VP of investor relations, Deborah Crawford, "will read the questions aloud on the call and" CEO Reed Hastings and CFO David Wells will "respond to as many questions as possible."
I submitted two questions to that call, the second of which made the cut. Here it is, as asked by Crawford's replacement, Ellie Mertz, and answered by Netflix CEO Reed Hastings and CFO David Wells:
[Click all to enlarge]
If Netflix used a traditional conference call format with analysts from big brokerages on the line, firing off questions, getting on-the-spot answers and throwing Hastings and Wells unanticipated follow-ups, we might get more color into the company's business, particularly its mysterious balance sheet. On the other hand, questions from relative hacks such as myself and individual investors that do make it to Netflix's calls probably would not receive air time.
With that mind, here are the two questions I plan on submitting at this point. I urge readers to leave questions they would like asked in the comments section of the article. Not only does a snowball's chance in Los Gatos exist that Hastings and Wells might answer some of them, but I reckon it will make for a lively and markedly different discussion than seen on past NFLX articles.
Question #1: On its recent conference call, CBS (CBS) noted that it will see a "significant portion" of revenue from its content deal with Netflix hit its balance sheet in Q2. I presume this Q2 revenue for CBS hits Netflix's balance sheet in Q2 as an expense. First, is this so? And, second, using the CBS deal as an example, could you put some color to "significant portion," preferably with a number? It's tough to gauge future expenses without having an idea of the magnitude of the hit to the content acquisition column.
Question #2: In your Q1 letter to shareholders, you noted that Netflix will cease reporting gross subscriber additions, subscriber acquisition costs, and churn immediately for international and beginning in 2012 for domestic. Can you please explain why the company has decided to take this route? What metrics should investors use to gauge international progress and model revenue and earnings growth going forward without company-supplied numbers and guidance for subscriber growth, retention and the associated costs?
Those two questions relate to one another in terms of their importance. Consider this clip from an article I wrote about Netflix in May:
... [A]s Wedbush analyst Michael Pachter told me, in the "black box" that is Netflix's convenient bookkeeping, these and all other previously deferred and otherwise tucked away expenses "will work [their] way through the income statement eventually, certainly within five years."
Based on what CBS tells us (and this cannot be unique to it), a "significant portion" of the money Netflix spends on content with it is hitting the respective income statements now. In fact, Q2 is in the books, so it already has. As investors, how can we get a read on anything beyond the near-term guidance Netflix provides without better color on what "significant" actually means?
Netflix executives pound home a mantra: Subscriber growth fuels revenue growth, which fuels content acquisition. By not reporting key subscriber metrics, investors lose another tool to model the company's financial future. Simply put, Netflix already tells us very little. We have no idea what it means when a "significant portion" of revenue from a CBS content deal hits Netflix's books as an expense. And now, by not reporting certain subscriber statistics, the picture gets even cloudier.
I have a million other questions I would like to ask, which is why I will continue to privately and publicly ask Hastings for an interview. I want to ask the follow up questions Kara Swisher of All Things D did not ask when she had the CEO sitting in front of her for a half-hour. With all due respect to Swisher, who I generally think does an excellent job, she simply let Hastings go on so many counts. She did not question the notion that Netflix has yet to "figure out" social. And, somehow, she let this doozy slip by:
It's not possible to follow up during a Netflix earnings conference call, but it is doable in the flow of a live interview. Exactly what does Hastings base the projection that "It takes us one to three years to get a new country profitable for us" upon? Really, he can only base this on the United States and the Canadian forecast. Netflix has absolutely no track record that supports a statement such as that from its CEO.
As the stock rises on air, I have provided a sampling of the types of questions Netflix has not answered sufficiently, if it's even been pressed to answer them in the first place. To its credit, Netflix does accept and might even read questions from anybody who can string a sentence together -- ranging from me to big shots at firms like Morgan Stanley (MS). It makes perfect sense, then, to do what we can to take advantage of this opportunity. Leave what you would like to know in the comments. From the comments, you can even email your questions to Netflix yourself. It really does consider them, time permitting, as clearly noted in the company's Q1 earnings press release.