Get me excited about reporting season

Sascha: [00:00:02] From Equity Mates Media. Welcome to the dive. I'm your host, Sascha Kelly. It's reporting season. Christmas may only come once a year, but reporting season seems like it never ends. And for anyone who's wondering what reporting season is, it's the time when public companies released their most recent quarters financial information in, you guessed it, a report. It's like a school report card for companies. When you do well, the market loves you. And when you're not doing great. Well, we all know that feeling. Here at Equity Mates, my colleagues love reporting season because it's a time of endless content. You know the headlines. We're back positive on the session coming off of three straight weeks of gains.

Audio clip: [00:00:45] Rick, so let's talk about the yield picture today. Clearly quite a big move higher in the ten year. Now it's let's say it's trading at 110. You wanted to buy that one was. 

Sascha: [00:00:53] Too much jargon. Personally, I'm not into reporting season. I mean, it's boring and what actually matters long term. So because they're always up for a challenge, that's what my colleagues at Equity Mates are trying to do today. Make me care. It's Wednesday, the 11th of May. And today I want to know why should I be excited about reporting season? It's a dive. First, I've got all three team members in the studio with me today. Hi, guys. 

Audio clip: [00:01:24] Hey, Sascha. Hey, Sascha. Hi, Sascha.

Sascha: [00:01:26] Now, each of you have brought one story that you hope will get me excited about reporting season today. Before we get into that, Alec, can you just quickly give me a rundown on what reporting season is? 

Audio clip: [00:01:37] The reporting season takes place twice a year and it's a time when. 

Alec: [00:01:40] Yes. So, Sascha, reporting season as it's known in Australia, earnings season in the U.S., these terms can be used interchangeably. Whichever you hear. They mean the same thing. It's when public companies tell their owners how they've been going, assess shareholders. The shares that we own are ownership stakes in these companies. And we have the right to know as owners how the company's going, how it's spending our money. And so this is the time when the company fronts up to us and tells us what it's been doing, how it's been going, and what it wants to do in the future. So as you said in your intro, it's the time you get your school report card.

Sascha: [00:02:14] We all know that moment when you're sitting there and you've got the butterflies in your stomach because, you know, you just haven't done as well on the maths exam as you thought. And it's all about managing those expectations, just massaging people's thoughts about how you should be going. 

Alec: [00:02:28] You mentioned expectations there and a lot of reporting around reporting season is about expectations. 

Sascha: [00:02:35] I do think the market was possibly even expecting a worse read than we got today. So I think we saw a little bit of a relief rally. 

Alec: [00:02:42] There's a whole industry in the investing community around setting expectations for these companies, making forecasts. And then a lot of the reporting is about whether the company met expectations, whether they beat expectations, whether they didn't beat expectations. A lot of it is just noise, though, because the expectations are just things that Wall Street banks create. But what we actually should care about is how the companies are going, not about what Wall Street was hoping to say this quarter. 

Sascha: [00:03:08] Well, I've got a lot of expectations for your performance today, so let's get started. First cab off the rank is going to be Darcy. We've heard what reporting season is. I'm geared up. Hit me with your best reporting season story.

Darcy: [00:03:23] I've got a company that I really love myself and that is Airbnb. 

Sascha: [00:03:27] Oh, I love Airbnb it is the best time waster. Not that I waste time in the office, but it is the best time waste to go and imagine where you might travel if you had a week off. 

Darcy: [00:03:44] I completely agree. Every time I want to go on a holiday, Airbnb is always the first place I look. There's just so many amazing places on there and it's such an easy site to use. 

Sascha: [00:03:54] I can't agree more. So what's the story here? 

Darcy: [00:03:58] So we're talking about Airbnb because they released their earnings from the first quarter of 2022 last week. So that's the first three months of the year. I'm going to tell you some of the highlights from the report, Sascha, and then we're going to play a little game. I want you to guess what has happened to Airbnb's share price since they released these results. 

Sascha: [00:04:16] Okay. So in the intro, I used the hypothetical of your student report card. We're sitting there at the desk, the teacher is about to give us the results, and we're going to see whether I feel happy or sad about my company Airbnb based performance. 

Darcy: [00:04:32] That's right. Let's see how we go. Okay. Okay. Over the first three months of the year, Airbnb reported 102 million nights booked. Higher than before the pandemic. 

Sascha: [00:04:43] That sounds good. 

Darcy: [00:04:43] Their total booking value. So this includes all of the host phase, cleaning phase, etc. The total booking value of that was $17 billion and that's up almost 70% on this time last year. Total revenue increased 70% from this. Last year, they reported a net loss of $19 million. But this is compared to last year where they lost $1.2 billion. Whoa. And they also recorded a loss per share of $0.03. But this is compared to analysts expectations of $0.29. So hearing all of that. How do you think the share price fared? 

Sascha: [00:05:19] I'm pretty impressed with that. It sounds like they're moving in the right direction and I'm pretty proud of the achievements of Airbnb for the last quarter. 

Darcy: [00:05:26] I thought the exact same thing, but unbelievably the share price is down 25% since those results were released. There was a little short term bump on the day of the results, but it's been all red since then. 

Sascha: [00:05:40] Oh, my gosh. Okay, so, Darcy, hold up. You're going to have to walk me through why on earth that has happened. That makes no sense to me. 

Darcy: [00:05:48] The thing that's fascinated me is that the market has just become more and more brutal in recent times. This is a pretty good result, I think, from Airbnb. But after such a big bull run in markets over the last few years, investors have become a little bit complacent. I feel many companies that have actually outperformed analysts expectations are still taking a massive hit. And for those that actually underperform, look out, the bleeding is even worse. 

Sascha: [00:06:15] That sounds so brutal. So what are the factors that have kind of changed the sentiment in the market at the moment? 

Darcy: [00:06:21] There's a range of things. Obviously, interest rates are on the up, which we've spoken about. High inflation, the Russia-Ukraine war is ongoing. There are supply chain shortages. And just in general, global sentiment is pretty negative at the moment. 

Sascha: [00:06:36] All right. So those are the headlines and the financials. So is there other information in the report that adds value or gives you another piece of the story? 

Darcy: [00:06:45] In this report we learnt that Airbnb is going to let its employees work from wherever they want in the US starting from September and they can also live for up to 90 days a year anywhere around the world. It's a pretty cool perk. They also said a few interesting things about long term stays. 28 day or more stays are really growing and I think they accounted for over 20% of total nights booked in this first quarter of the season. Wow. 

Sascha: [00:07:10] So that's a real trend that people are just deciding to do the digital nomad life or just nomad life, I should say. 

Darcy: [00:07:17] It's not a bad life. I think I could see myself doing it.

Sascha: [00:07:20] I did it at the beginning of the year. And, you know, I'm not sure I should be giving life advice on this business podcast, but it was pretty fun, so I highly recommend it. 

Darcy: [00:07:29] I'll keep that in mind. Thanks. 

Sascha: [00:07:30] So what are your takeaway thoughts about Airbnb? 

Darcy: [00:07:33] I think to sum it up, I can't say Airbnb going anywhere anytime soon. I mean, I'm still looking to book places every couple of weeks and the CEO is not concerned either with these results. Airbnb is stronger than ever before. Despite the share market volatility. I can still see Airbnb as a strong company moving forward. 

Sascha: [00:07:53] Excellent as well. I think that was a brilliant place to start. I'm definitely intrigued by these lessons that you can be learning during reporting season, but you're not the only one who has stepped up to the challenge. Alec has also put his hat in the ring. Sir Alec, it's your turn to convince me that earnings season matters. What are you going to talk about? 

Alec: [00:08:14] Well, Sascha, the company I'm going to talk to you about today is Snap, a.k.a Snapchat. 

Sascha: [00:08:22] You got a real challenge on your hands because I have never used Snapchat and I think it's really boring. And the only thing I know about it is that Miranda Kerr is married to Evan Spiegel, who's the CEO. How is married life? I'm so happy. I mean, we really complement each other, you know?

Alec: [00:08:37] It's just so nice. Yeah. Well, look, for a lot of people listening, they would say, I haven't been interested in Snapchat since 2012, but I'm going to convince you that it's earnings season is interesting by talking about Snapchat because I'm the same. I was a big Snapchat user at uni, but I haven't really used it since. And I'll tell you what, Sascha. Snapchat isn't dead. Snapchat is going from strength to strength. 

Sascha: [00:08:59] Well, that's the first perception I had with Snapchat was dead and buried in the ground. Someone's revived it. But you're telling me that it's been ticking away all these years and not just ticking away, doing brilliantly? 

Alec: [00:09:11] Yeah. Now, look, the headlines about Snapchat this quarter were pretty negative. Snapchat missed investor expectations for profit and for revenue. But as I said, don't worry about expectations. Expectations are noise. What we should worry about is how the company is actually going.

Sascha: [00:09:27] So actually going, why am I excited then if all the expectations are wrong? 

Alec: [00:09:32] So Snapchat now does $1,000,000,000 in revenue in a quarter, in a quarter and every three months they do $1,000,000,000. The last three quarters they've done $1,000,000,000 in revenue. But I've looked back in the last five years, they were doing about 40 million a quarter and it hasn't been a straight line up, but it's been a pretty strong line up. But here's the number that changed how I thought about SNAP Daily Active users, the amount of people that use SNAP. Every day, 332 million people.

Sascha: [00:10:05] What are they doing? I just don't understand. 

Alec: [00:10:09] Their snapping each other. 

Sascha: [00:10:11] Okay, so $1,000,000,000 in revenue in a quarter. Maybe this is another episode, but how do you make money off sending each other photos over the internet on your phones? Like I don't understand where this revenue is coming from.

Alec: [00:10:26] Satellite photos on the Internet is big business. Have you seen Instagram and Facebook revenue numbers?

Sascha: [00:10:32] I mean, like messaging photos. I sorry, I'm sounding very dim there, but the concept to me, there's so much competition. How do you actually make revenue from a messaging service? 

Alec: [00:10:43] In a word, advertising, they don't put ads on snaps themselves, but they have all those news organisations and content creators that have not like person to person, message snap spot snaps that are available to the world to watch. And they put ads on those kind of like Instagram stories. Instagram stories literally was a rip off of Snapchat. So that's how they make a lot of their revenue. But Sascha, like so many of these tech companies, they're still not profitable. They lost $360 million in the quarter. So if you're a snapshot user, probably expect more ads in the future. 

Sascha: [00:11:16] Oh, that's not going to affect me because obviously I didn't even know they were still relevant. So I know I keep hammering this point home, but how are they achieving this relevance when so many people aren't using SNAP or didn't even realise that it was still a relevant company?

Alec: [00:11:31] Yeah. Well, Sascha, this is why earnings season is so exciting because we're saying that so many people aren't using it, but that's our own bias. The daily active users number 332 million, that was up 18% from this time a year ago. So more and more people are using it. But I think the real underlying story about SNAP, the reason that people get excited about a company that you don't often think about is augmented reality. Did you ever play Pokemon Go? 

Sascha: [00:12:00] I didn't because I blame, but I saw so many people playing it, I felt very left out. 

Alec: [00:12:06] How about Google Glass? Have you heard about those? 

Sascha: [00:12:09] I've heard about them. You know, I'm not in a complete time, Wolf. I just haven't been I haven't been as engaged with augmented reality, I've got to say. 

Alec: [00:12:18] Well, so those were probably the two most famous early iterations of augmented reality, where you use a camera to put digital images over the real world, I guess is how you would describe it. But Snapchat now are the real leaders in augmented reality 250 million snapchatters engaged with augmented reality every day. And that's really in the form of filters, you know, like the different lenses and stuff you put over yourself when you're taking a photo or a video. Snapchat leaps and bounds ahead of everyone else in that space, and that's becoming a real competitive advantage for them and I guess a real drawcard for that users. 

Sascha: [00:12:55] So without revealing my age, Alec, I'm still fairly young. Are they targeting people who are younger than us? How they achieving this growth in users? 

Alec: [00:13:04] The short answer is yes. Like they are heavily skew young. They skew younger than most of the other social platforms. But the total daily time spent on the app by people 25 and older did increase 25%. So it's increasing slowly. But this is an app that is very much aimed at Gen Z. And you know, Sascha, I'm desperately clinging onto my twenties, but I also am not a user. But although out of this story, I might download it again. 

Sascha: [00:13:32] So you're thinking about diving back into the world of Snapchat. Was there other headlines from the earnings season that got you curious about it? 

Alec: [00:13:39] A number of things stood out for me. So Sascha, I'm going to rattle off a list. Snapchat now have daily social fitness experiences and Peloton and all of those are fitness apps sort of pioneered this space. But maybe Snapchat is going to be the winner with their augmented reality technology. They have augmented reality shopping capabilities, which I think is something that we used to speak about when I was in the retail world before this. You know, where like when you're online shopping, you never know if something will fit. Imagine if they could invent augmented reality where you hold your camera up to yourself and it shows you what it will look like on you. Like is the sizing right and all of that stuff. That's pretty cool.

Sascha: [00:14:18] But then I can't live in denial that it's definitely going to fit and it doesn't. And the whole process.

Alec: [00:14:23] They have also announced a new flying camera, a new drone that will take photos of you pixie. 

Sascha: [00:14:29] It sounds like surveillance now.

Alec: [00:14:32] I think it's designed to follow you, but don't quote me on that. And then such a final thing. Like every other tech company they are in the content game SNAP produced an episodic show Breakwater, about a dystopian future caused by climate change. 

Sascha: [00:14:48] Well, Alec, you've laid a pretty good groundwork. I'm going to keep you in suspense. I'm not going to tell you whether that was interesting enough for me. We're going to take a quick break and then I'm going to give Bryce another. A shot and trying to get me interested about earnings season not. Welcome back to the dive today. We're talking about reporting season and to start the episode I set the team a challenge. Get me excited about this time of year that feels it comes around all too often. All right. Bryce, Alec and Darcy have had their best crack at getting me excited. Look, I'm still lukewarm. I don't want to. I don't want to devastate them, but I'm not convinced yet. What's the story that you're bringing for me today to get me excited about reporting season? 

Bryce: [00:15:34] Well, Sascha, I'm not sure if this is going to excite you, but it's definitely one that will interest you. It's about a company that is very close to home for you and one that I'm sure many of our listeners also have engaged with a lot. And that is the story of Netflix. 

Sascha: [00:15:49] The story of Netflix? Well, I think it just goes from good to great to better. That's my story for them because they've just got so much content I love to watch. But what actually what's happened, what's been revealed in the recent reporting season? 

Bryce: [00:16:03] Well, you're right. It has been a story of good to great for Netflix over the last ten years. However, the story of continued subscriber growth is now over. In late 2021, they forecast subscriber growth was going to slow in 2022. But the big news that hit investors hard in early 2022 was that their subscriber growth actually went backwards for the first time in ten years. So Netflix reported a net loss of 200,000 subscribers for the first quarter of 2022. And this was against expectation from investors. They expected an increase of subscribers of 2.6 million. So a massive turnaround for Netflix. 

Sascha: [00:16:46] It can't be because of the content. I know they've just renewed for Drive to Survive for Seasons five and six. 

Alec: [00:16:51] These guys have an almost fighter pilot mentality. 

Sascha: [00:16:55] Is it because we had false expectations of how many new subscribers they could get, or is it because people are turning away from Netflix and competition? Like, why is this happening? 

Bryce: [00:17:05] Yes. So there are a number of key factors that have led to this. Firstly, you're right, competition is a big part of it. Netflix have admitted that in their biggest markets, you know, North America and parts of Europe, saturation is is massive at the moment. There's there's more competition. We did an episode on the war for attention and we know that some of their main competitors, Disney, Warner Brothers, Discovery, Paramount, Apple, Amazon, they're all now spending billions of dollars in the streaming space. And so what was once a market where, you know, Netflix really dominated, there's now more competition taking our eyeballs elsewhere. Secondly, Netflix have changed their pricing structure over in the US and Canada, one of their biggest markets. They raised the prices for their subscriptions, which lost them 600,000 subscribers in the early part of 2022. Additionally, they quit streaming in Russia after the invasion of Ukraine, which lost them an additional 700,000. So I just want to do the maths there. That's actually a loss of 1.3 million subscribers over the first three months of 2022. Where they did make up though was in Asia. It was one of their only growing markets for the quarter, adding over a million subscribers, which is why there's a net loss of 200,000. An interesting stat, Sascha, and I'm not sure how you access your Netflix account, but I was living in a share house and I know that we didn't always pay for it. Netflix have 220 million total subscribers, but it came out in their reporting season that they anticipate that there's 100 million households that are using Netflix that don't actually pay for it. 

Sascha: [00:18:42] That's huge. And you know, when people talked about streaming as being the solution for piracy, it just looks like wherever humans are, they're always looking for an opportunity to get content for free. 

Bryce: [00:18:52] That's it. That's it. Well, with everyone thought that Netflix would solve that, but people are still getting it for free. 

Sascha: [00:18:57] Okay. So I like at the beginning the episode said that a lot of earnings season is about expectations. You know, we've all had those bad report cards and sat there anxiously thinking, I know people aren't going to like this. So how did the market and shareholders react to this news? 

Bryce: [00:19:14] Well, you're right. This was a story of Netflix absolutely missing the market's expectations and the share price got smashed. It was down over 25% on the day of reporting and is subsequently down over 70% since since the start of the year. And the worst news, I guess, is that this isn't the end. Netflix have forecast that they are likely to lose an additional 2 million subscribers this coming quarter. So the market is also really concerned with the cost of the streaming wars. Netflix plans to spend about $19 billion on content this year, but the big question is how sustainable that is and how profitable that is in the long run. 

Sascha: [00:19:53] Is it over for Netflix? Like, what's your thoughts on this? 

Bryce: [00:19:56] It's definitely not over for Netflix, but the glory days of constant growth and dominating market share might be behind them. If you look at their fundamentals, they certainly. Or growing sales. They did 20 billion in sales in 2020. They're expected to do 33 billion this year. On top of that, they did 2.6 billion in profit and they're expected to do 8 billion in operating profit this year. So fundamentals of the company still growing. We know that they're facing more competition. They are trying to change their revenue model and potentially offer an ad supported streaming service. So if you're happy to watch ads, you might not need to pay as much for the company. And of course, they're in markets that are still growing, as I mentioned, Asia. Big opportunity for them if they can get it right and continue to grow there. So not over for Netflix, but definitely the glory days may be slowing down. 

Sascha: [00:20:41] I've just heard that they've renewed call my agent, so I really hope it's not over for Netflix because I am sorry. Eagerly awaiting that to drop. I'm glad to know that you don't think it's all over for Netflix just yet. 

Bryce: [00:20:54] That's it, Sascha. Don't worry. The content train continues for Netflix and for you. But look, we set out at the start of this episode, Sascha, to get you excited about reporting season. So I guess the question is, what's the verdict?

Sascha: [00:21:05] Look, I'm not going to lie Bryce I don't like looking through those numbers, but I really enjoy getting you three to decipher it for me. So I think that this is just a winning episode for me. So let's do it again, shall we? I'll see you in three months. 

Bryce: [00:21:18] I would love to. 

Sascha: [00:21:19] And let's leave it there for today. If there's a story that you want us to talk about, then contact us at the dive at Equity Mates dot com or shoot us a message on social media. I want to say thanks to our listener who pointed out that that email address might not have been working. We fixed it now, so feel free to contact us. We'll be back in your feed on Friday. Thanks for all three team members for joining me today. Darcy, Alec and Bryce. Until next time