Macquarie Media Tech Analyst Tim Nollen joins Yahoo Finance Live to discuss first quarter earnings for Netflix, subscriber growth, and the outlook for streaming.

Video Transcript

JULIE HYMAN: Netflix's shares likely on track for their worst day ever-- 32% is the current drop. It's a sell-off for the streaming service after a loss in subscribers-- it was the first in a long time for the company. Joining us with more on the rocky quarter is Macquarie Group Senior US Media Tech Analyst Tim Nollen.

I want to make sure I say Tim Nollen, because I've been saying it incorrectly. I apologize, Tim. But I mean, you should be doing a victory lap, bitter for Netflix as it may be, because you did downgrade the shares to an underperform after the last earnings report. What surprised you most, though, about these numbers?

TIM NOLLEN: Well, the numbers were worse than expected for the second quarter in a row. The real surprise was the announcement of the ad-supported tier, which I can get to in a second. But firstly on the numbers-- you know, this was a worse mess than it was last quarter. And the guidance for the next quarter is quite a bit worse than the guidance was coming into the previous quarter.

So the numbers overall are worse. We downgraded Netflix-- well, first, from an outperform to a neutral 2 and 1/2 years ago when the streaming wars got underway with Disney+ launching. We then downgraded from neutral to underperform on the prior quarter's numbers, the Q4 numbers three months ago, understanding that the competition had, indeed, heated up, the content costs are absolutely not going down, and, therefore, the near-term path for Netflix is much more difficult.

The exciting news, really, is the ad-supported tier, which we can get to. But the combination of trying to get users to get off of their free-riding borrowing their cousin's, you know, Netflix subscriptions and getting their own combined with an ad-supported tier at a lower price to consumers is really what is going to have to be the long-term plan for Netflix to actually reaccelerate growth. Until then, it's much slower sub growth, much slower revenue growth, and actually, ultimately, most importantly, much slower operating earnings growth.

They've guided down now to flat earnings margin in 2023. So all of this upside potential from these things are even at least a year or two out.

BRIAN SOZZI: Tim, we like to say here, not all heroes wear wings. So I'm going to give you that award because you saved folks a hell of a lot of money here today. Because these losses here on Netflix are absolutely bone-crushing. So as a former analyst, I salute you on this call here. But let me ask you this-- do you think after this quarter that Netflix's best days are behind it?

TIM NOLLEN: Yes. I think its best days are behind it. But, look, the stock from 2012 to 2021, whatever those dates are, rose, what was it, 75-fold or some crazy number like that. So, yes, its best days are behind it. But that doesn't mean you know it's broken forever.

I mean, we certainly are avoiding the stock and selling the stock for now. Eventually, if they can turn this around, there is still a good growth opportunity for them, particularly internationally. You know, in the US and Canada, I have to say they're fully penetrated. We have zero subscriber growth in US and Canada forever.

And that may be a negative number, in fact, depending on what the ad-supported tier can do for them. Internationally, particularly in Asia Pac, there is still a lot of potential upside. The issue is a lot of their competitors are also aggressively entering these markets-- Disney+ and now Warner Brothers Discovery, now that they have merged with HBO Max and with Discovery+, those are all very well recognized brands internationally. And I think they've got a lot of upside potential as well.

So the next battleground is international. Netflix does have a big head start. They do have a lot of great content. They've got a good brand recognition. There is growth for Netflix, particularly internationally, over the long-term. But I just don't see it being anywhere near what it was over the prior 10 years.

JULIE HYMAN: Tim, I was pretty staggered by the number of households that Netflix says are password-sharing. I think they put the number at 100 million households. How do they stop people from doing that? Do they have the technology in place to be able to do that?

And then, of course, the gamble is those people don't sign up for their own accounts. So do you think that happens?

TIM NOLLEN: Yeah. Well, I mean, look, I don't know what that 100 million number converts to. I'm not even going to hazard a guess. And I don't know how they got to that number. I guess they see the multiple log-ins on the user accounts, so I guess they can understand what that number is. Netflix could have done this a long time ago.

You know, we've written in the past about their ability to crack down on that. You know, historically, what Netflix has always done is they wanted, especially starting, well, 15 years ago when they launched their streaming service, they wanted to be recognized, they wanted to be acknowledged and understood as this great streaming service. They had to grow subscribers. They made all the right calls, all the right moves for 15-- for 10 years-- since 2011, or '12, or so.

And I think they were initially intent on growing that subscriber base. Over the last few years, and particularly the last maybe a year or two, they've shifted their focus from raw sub numbers to what I like to call quality revenue and earnings growth. So they've raised prices multiple times in many countries, so they're trying to raise RPU.

They're really focused much more on revenue than on subs. And ultimately, they're focused on earnings. Now, that takes a step back, of course, for the next year or two. But I think they are the right focuses to make. And I think it's just a matter of understanding that consumers are completely overwhelmed by the number of streaming services available to them. Just take all the major media network groups, they all have their own direct to consumer services.

Netflix is, I still believe, head and shoulders above most of those. But they've got a lot of competition coming now. So the way forward is to introduce an ad-supported streaming tier. It makes a lot of sense, but it takes some time to get right and there still is a lot of competition ahead.

So a lower price point can convert some of those consumers to getting their own accounts. Let's say if you get a Netflix for $5 or $10 instead of $10 or $20, you may be enticed to actually do that. I don't know what the conversion number might end up being. But we've seen with other companies, like Discovery+ that has had good success with this, like Hulu that's had good success with this, there is a good opportunity to grow subscribers and grow revenues and earnings incrementally.

BRIAN SOZZI: Tim, one takeaway from the earnings call, at least for me, is that Netflix is in a mode. They're looking for growth. They're trying to find different avenues to jumpstart growth. Why are they not in sports in some form of big way? And I bring that up because they've essentially ceded an entire market to Amazon, of course, Disney with ESPN, and many others.

TIM NOLLEN: That's a trickier question, I think. You know, sports-- so they have some sports-related themed programming, but it's not really live sports. You know, live sports requires a whole new set of logistics.

It basically requires advertising, which now, eventually, will be coming. It's a whole different business model from on-demand, watch what you want, binge when you want when you want it business model. So there are a whole new realm of questions involved with that. I suppose with an ad business model now coming into shape, let's say in two years they have that up and running, perhaps then they could look at pursuing some live sports.

JULIE HYMAN: And, Tim, finally, I want to take a little bit of a detour and ask you about what's going on over at Warner Discovery, in particular with CNN+, which, of course, we in the media have been tracking closely. But I wonder from an analysis and a financial point of view if CNN+ and some of the reported issues there could end up being a hit to the bottom line over there.

TIM NOLLEN: At Warner Brothers Discovery-- yeah. Yeah, I've seen the number where CNN+ looks to have some very, very, very small subscriber numbers. Well, again, this is a crowded space. Other groups like Fox Nation, for example, launched a year or two ago. So it's already quite a busy space.

You know, news-- a lot of news is quite free, you know? I mean, a lot of Americans still have their pay TV subscription service. And so paying extra for news, we can get a lot of that for free. I don't know. I don't have a specific comment on CNN+.

I would say, though, that-- and we've published on this-- we think Warner Brothers Discovery overall has a very good opportunity to add subscribers, given the brand recognition and the rather large base already in place at both HBO Max and growing now at Discovery+, both in the US and internationally.

BRIAN SOZZI: Tim, I got four seconds left. Still sell rating on Netflix, right?

TIM NOLLEN: Yes.

BRIAN SOZZI: All right, there we go-- under budget. Macquarie Group Senior US Media Tech Analyst Tim Nollen, good to see you. Good call here.