Naveen Sarma, S&P Global Ratings senior director and U.S. sector lead, joins Yahoo Finance Live to discuss Netflix earnings expectations, investors pivoting their focus from subscribers to profitability, streaming competition, and more.
RACHELLE AKUFFO: Are you still watching? Netflix coming in hot with earnings this week after Reed Hastings stepping back as CEO. This as streaming becomes more competitive. Linear TV sees more cord cutters, and everyone from advertisers to studios tries to reckon with changing profit models.
Well, joining us with more on the landscape of media and entertainment, Naveen Sarma, senior director of US media and telecom at S&P Global Ratings. Good to see you, Naveen. So I first want to ask you starting with Netflix, of course, what are some of the upsides that you see for Netflix after they really blew people out of the water with their results?
NAVEEN SARMA: Sure. They had very good results in the quarter. I think what we look at from a credit standpoint is the ability to continue to grow, to continue to generate cash flow and grow margins, which if you look at the company's guidance for 2023, they expect over $3 billion of free cash flow, which is a huge positive. And they're also able to do all of this while also controlling costs, especially the programming costs. And so all of those things from a credit standpoint are important for Netflix, and they continue to do that.
RACHELLE AKUFFO: And we know that there's always been that focus on subscribers. That was the benchmark when these streaming wars first started. How has that changed as you look at some of the new entrants who've come into this space as well?
NAVEEN SARMA: Sure. We're finally are getting away from and we've always pushed for a focus on profitability and for margins and free cash flow. I think you're seeing a pivot away from the focus on subscriber growth. You're seeing a lot of companies this year, whether it's Warner's, which you talked about HBO Max as well as Paramount as well as the other peers all talk about getting to profitability.
This year will be an important year, especially for Disney as they are the closest to achieving profitability sometime in 2024 for Disney Plus. And so I think that focus from a credit standpoint is much better than the unsustainable unprofitable growth that we've seen in the past as they chase subscribers.
RACHELLE AKUFFO: And how does Disney stack up against Netflix? Obviously, Disney has a lot more in their portfolio than Netflix does because they have the parks, they have other streams of income coming in.
NAVEEN SARMA: Yeah. Sure. So I mean, from a streaming standpoint you know Disney's only been doing this for a couple of years while Netflix has been doing this for about 10 years. So at least Netflix has set a path that others could try to follow. Let's see how Disney performs. They've got a lot of subscribers, but their costs have been higher.
And they, as you look at the last couple of quarters, have been very unprofitable when it comes to their streaming service. We'll see what that path looks like going this year. We expect to see them cut their losses at the streaming business and that they will achieve cash flow break sometime in 2024.
RACHELLE AKUFFO: And Naveen, I know you guys have laid out your industry themes and concerns for this space. Talk about some of the ones that are really standing out to you, and who is in the best position among these media companies to really benefit from them.
NAVEEN SARMA: Sure. So interestingly enough, this year is going to be quite a challenge for the media sector. We've got secular trends that we've all been looking at for the past couple of years. You've got the pay TV ecosystem in decline as people are cutting the cord, as audience ratings are declining.
You've got a studio business, which is not profitable anymore as more content is being moved from theatrical release directly to the streamers. And then on top of that, you've got unprofitability at streaming as well as the potential for a recession, which will hurt advertising and potentially hurt cord-cutting as well as streaming growth.
So this is going to be quite a challenging year. We look for cash flow, which is the key driver in a lot of our credit metrics, to weaken this year. And we look for leverage to remain elevated. And by the end of this year, we think we'll have a good shot at figuring out who are going to be the winners and losers in the streaming wars.
RACHELLE AKUFFO: And to that point, I want to talk about ad spend. A lot of people were thinking with cord-cutting, linear TV did. Sports though, a very big lynch pin there when it comes to linear channeling versus what we see with streaming. How do you see that playing out when it comes to ad spend?
NAVEEN SARMA: Sure. So you're right. Advertisers continue to chase sports because it's really the only place that you can get audiences, large audiences, and live audiences. And so advertising is held up very well at least thus far for the networks that are oriented towards sports, in particular, the NFL.
How that plays out over the next 10 years or so will be interesting to watch, especially as consumers get more options to watch sports on streaming services, for example, Peacock. And Paramount both offer their broadcasts of the NFL on their streaming services. That weakens the pay TV bundle.
And we'll see if other networks or other media companies follow suit and start offering their sports programming on their streaming services. Clearly, the biggest one there is ESPN. And as Disney eventually move its sports programming onto its streaming service, and so it becomes a cannibalistic service rather than a complementary service.
RACHELLE AKUFFO: Definitely one to watch, a curious one. Naveen Sarma, the senior director of US media and telecom at S&P Global Ratings, thank you so much.