Netflix 3Q17 Earnings Call Notes

Reed Hastings – Founder and CEO
David Wells – CFO

Ted Sarandos – Chief Content Officer

No correlation between spending and price increases

I shouldn’t let that go without addressing that there’s no timing correlation between our intent to grow content and to grow content spending, and the price increases. I mean, this has been planned for a long time and so we’re sort of growing and slowly growing and planning the business steadily. So we’ve assumed that we’re going to grow ASP slowly over time and we’re taking the content up with that as well.
Happy with competition

I think everyone is going to have their own strategies and it’s exciting that everyone is trying to make over-the-top television better and better. I think that is good for all of us and we just have to focus on creating content that our members can’t live without and get excited about it every month. So that’s really the — and not get too distracted by the competitive landscape around us and whether or not one of our partners decide to produce for us or to compete with us, that’s really a choice that they have to make based on their own business. And we’re thrilled that more people are doing it, because I think it’s great for the — for innovation. I think it’s great for consumers to have a lot of choice, and that we just have to be the best choice out there.

Netflix at Goldman Sachs Conference Notes

David Wells – CFO

Content spend going to continue to grow

“it took us about a decade to get to where we are, over 100 million global subscribers, so we’re super excited about the potential for what the next decade might hold for us. We’ve got about 5 billion to 6 billion content spend growing beyond that, Ted I think mentioned $7 billion number lately, that’s going to continue to grow if we’re able to continue to grow our global subscriber base like we think we can.”

There is diminishing marginal return to content spend at some point

“What I think that there is generally strong belief that there is diminishing marginal returns to content spend. And certainly, at some point, that has to become true whether you believe that there is a growing body, a library of content that’s already been paid for, or whether you feel like there is so much content on the site you’re starting to cannibalize your own content and there is sort of no point to adding more.”

Netflix 2Q17 Earnings Call Notes

Reed Hastings – Founder and CEO

Rewards of great content

“I think we’re just seeing that the rewards of doing great content focused on the quality of the service are paying off.”

It’s not us vs Amazon

“Amazon is super successful around the world if you look at U.S. with Prime, incredibly successful. It just doesn’t seem to take away from us, so I wouldn’t characterize it as us versus Amazon in Germany. I would really characterize it as can we have a service that’s so great that Germans find it worthwhile paying for. And clearly we’re succeeding at that making our service better and better.”

We add where we see success

” You ask about how we prioritize? Generally, when we see success, we try to add on to that until we reach a point of diminishing returns. And so, if we’re going to see success in some markets, we may up the content budget in those markets.”

We’re still a small player compared to linear TV and YouTube

“we’re such a small player in our viewing compared to linear TV, compared to YouTube. So we’ve got a long way to go to have more and more content to please more and more members and continue to grow.”

Ted Sarandos

Have to match local tastes

Yes, as Reed mentioned, matching the program into local taste is really the key and we’ve seen it in our expansion through Latin America, our expansion into Europe. And as we look to Asia, we have to get better and better matching those tastes. And those tastes are not as easily aligned with Western tastes. So we’ll invest more time and energy in Asia putting some people on the ground in Asia that we haven’t historically, but well within how we’ve looked at the size of the teams generally but locating them more likely outside of the U.S. as we continue to grow for local audiences in Asia and throughout the rest of Europe.

If you’re not failing maybe you’re not trying hard enough

“we look at a lot of things like failure is not such a bad thing and if you’re not failing maybe you’re not trying hard enough. So when we have a good hit rate and even with the recent cancelations, 93% of our shows have been renewed. So you want to be introspective and look at that and say, are we being adventurous enough, Daredevil, we’re trying new things. And I think when you think of things – when you have a very high hit ratio, you definitely want to keep second guessing yourself even though you do.”

Shows get cancelled on networks all the time

“the more shows we add, the more likely in absolute numbers that you’ll see cancelations of course. But that’s only novel Netflix and it’s still novel because you see on network television about two-thirds – about a third of the content gets cut in the first season versus our content which is mostly renewed. And it’s not because we’re less careful about it, it’s because we can more efficiently build it and not a 100% of the time. So we want to launch shows. We love when there’s a deep passion fan base for a show. We just need it to be big enough to support the economics of that show so we don’t create opportunity cost for future fans of new shows.”

Internet TV is an enormous space and there’s going to be lots of competition

“I think Internet television is an enormous space and there’s going to be lots of competition. And as they come in, they’re going to bid up the cost of the best stuff which is great. It’s great for consumers, because more things get made. And it’s great for creators because they’re more buyers at the table. So we expect the content cost to go up on the top premium things, but I think, as I said, I think that’s a good result for everybody.”

Netflix FY 1Q17 Earnings Call Notes

Reed Hastings – Founder and Chief Executive Officer

YouTube has a billion users

“Well, I’m – we’re super excited expecting to cross 100 million this weekend, that’s a big accomplishment. But it’s really just the beginning. When you look at YouTube having a billion active users and a billion hours every day. When you look at Facebook’s, multi-billion numbers. We see that the Internet is just a phenomenal opportunity, of course, we’re pay service, not ad supported. We’re not as deep in international as those companies. But we definitely see a big opportunity around the world to just continue to do what we’ve been doing, which is make fantastic content, get people really excited about that content, and then we’re just continuing to grow.”

Viewing is nowhere near as big as YouTube

“Yes, viewing is very large and growing, but nowhere near as big as YouTube. So we definitely got YouTube envy and we’ve got a lot a room to go. And some of the new shows like Ted was talking about, our movie out of Korea [indiscernible] has great global potential. So, we’re finding great talent around the world and that’s what drives up the viewing.”

We don’t see a wall that’s going to stop us from getting most people in the US

“A couple of years ago, Doug, there was a bunch of fear about the 30 million sub wall, with AOL had hit that and HBO would hit that. And the thing is everybody watches TV and nearly everybody has the Internet. So I don’t see anything that’s going to stop Netflix from getting to most people in the United States and then eventually hopefully most people around the world. But we’re not – we’re just going to focus on the everyday of making the services better and better.”

Competition doesn’t affect us

“Like at one level, Amazon is an amazing company and doing so many different things, it’s really incredible. And then you think of Jeff Bezos in addition to all of Amazon doing a Washington Post and Blue Origin Rocket. So, I will say, we do think about all of that and their tremendous track record. On the other hand, they’re doing great programming and they’ll continue to do that. But I’m not sure if it will really affect us very much, because the market is just so vast. Think about it when you watch a show from Netflix and you get addicted to it, you stay up late at night. You’re really – we’re competing with sleep on the margin. And so it’s a very large pool of time. And a way to see that numerically is that, we’re a competitor to HBOs and yet over 10 years we’ve grown to 50 million, and they’ve continued modestly growing, they haven’t trunk. And so if you think about it as we’re not really affecting them, the answer is, well, why? And that’s because we’re like two drops of water in the ocean of both time and spending for people. And so Amazon can do great work and it would be very hard for it to directly affect us. It’s just home entertainment is not a zero sum game. And again, HBO success, despite our tremendous success is a good way to illustrate that.”

Netflix 4Q16 Earnings Call Notes

Netflix’s (NFLX) CEO Reed Hastings on Q4 2016 Results

No plans to change pricing

“You should expect us to continue to invest in the consumer experience, making the content incredible and we don’t have any plans for any near-term changes. So, I would just continue to look at as a model us as expanding the membership base at these terrific rates.”

Planning to grow profits bit by bit from here

‘Yes, we don’t really believe in hockey-stick kind of businesses, like suddenly we’ll turn significantly profitable at 200 million members. We think it’s much smarter to grow into that bit-by-bit. So, expect us to modestly move up operating income and operating margins as we have from 4% to 7% and continue a slow and growing into that as we grow larger.”

Provide incredible value to the consumer

“I think that’s perfect David. Our North Star is providing an incredible value to consumer because upon that you can build a very large and very profitable franchise. But it starts with an amazing value for consumers which is a great service and amazing content behind that.”

You never want an ultimate vision because when you get there there’s more to do

“You never want to characterize something as an ultimate vision because when you get there, there’s always more that you want to do. And so we’re taking it year-by-year, we’re growing around the world, we’re thrilled with our global expansion, ex-China we’re really focused on all the different markets, Asia still doing work, in Europe we’re building up our content production, muscle, we’re able to produce shows now in many countries around the world. So, think of us just continuing to iterate on the basic cycle of more content, better product that combines as a great service with a great price and hopefully with that, we can attract many more people to join Netflix and then that fuels the whole cycle. So, we’re just going to lather, rinse, repeat again and again for the next couple years and expand that. We have a long way to go. When you think about how many movies and TV shows we don’t have.”

David Wells

You’re starting to see the benefit of multiple years of original content

Yes, Doug, I would just add to that that we’re — you’re now seeing the benefit of Netflix having sort of its third, fourth year of original slates. So, we’re now getting — as Ted mentioned Narcos season two comes out, but we’ve got new seasons as well. So, you’re getting the benefit of shows that might take hold in their second or third season, but some new shows as well, like Stranger Things did for us in the third quarter and continue to be popular through the fourth quarter as well.

Planning to spend 6 billion on content

“Sure Doug and we updated our long-term letter a little bit in this respect as well. So, think about 6 billion in content, a billion in tech and dev, somewhere around a billion in G&A to sort of round out the operating profit expense lines and that should get you there.”

Netflix at UBS Conference Notes

Ted Sarandos – Chief Content Officer

30 original series

“We have 30 original scripted series now in different stages of production, which is a doubling on last year, which is a doubling on the year before.”

Going to grow to 1000 hours

“Well we said we’re going to grow out to a 1000 hours. I think that’s a conservative measure as of right now. You see we’re another doubling of our series output and very high profit shows. In January we’re releasing Lemony Snicket in The Unfortunate Series Of Events, which is also produced in Netflix Studio from a right sale that we purchased from the book series, and are doing are great series based on with Neil Patrick Harris in lead, and it’s this is the kind of – and if it was a movie, it’d be a big movie. One of those kinds of projects.”

Take measured swings for the fences

“I think people try to hedge their bets a little bit by going, swinging for the fences every time. What we try to do is take really measured swings for the fences if that’s possible, which is with known creators with a great idea, in many cases with a great script. So in the case of The Crown, I think betting on Stephen Daldry and Peter Morgan to make a story about the royal family was a pretty proven bet. And the fact that we would do it on the scale that we are able to actually increased the odds of success versus raise the risk on that.”

Unscripted TV is interesting

” I think that unscripted television is a very interesting business. The content itself appears to be largely interchangeable, meaning that if you want to watch a show about hoarding, there’s three different shows about hoarding that you can watch, and people watch it with seemingly equal passion when you swamp them out. And what we could do by producing our own is focus on the shows that are more likely to travel internationally because we have seen that from the thing that we licensed.”

Partnering with networks on shows

“we’re following a path that we set out on a few years ago, which is to kind of move up the food chain in those productions. So be less likely to be an aftermarket buyer at many screening and more likely to be a co-production partner with the networks. Again when Les comes up in a few minutes, he can talk to you about the Star Trek series that he is premiering – they’re producing, they’re going to have the first one on CBS and then the show will air on all access in the US only and then it will premiere on Netflix everywhere else in the world. And our co-production dollars help make that a much bigger and better show for us and for CBS.”

Netflix 3Q16 Earnings Call Notes

Netflix’s (NFLX) CEO Reed Hastings on Q3 2016 Results

Sorry for the volatility

“I’m not particularly, I think we can all see that it’s time for me to apologize for the volatility again, this time it’s in a good direction, but I think more investors are able to look at the multiyear picture and they see the patterns emerging and so then it will be less and less about our guidance. I think the main thing about one year guidance is we probably don’t have any more insights than investors do, whereas in the current quarter when we’re two or three weeks into it we do have a little bit of an advantage, so that’s why we do the current quarter guidance.”

No plans to make any changes on password sharing

“No plans on making any changes there. Password sharing is something you have to learn to live with because there’s so much legitimate password sharing, like with sharing with your spouse, with your kids. So there’s no bright line and we’re doing fine as is.”

We see an ability to continue to please customers

“No, we’ll keep investing in growing the content spend even domestically for quite a long time. We see an ability to continue to please consumers with a wide range of content. And so I think if you’re trying to model the business long-term, you should think of content and how it’s viewed and brand love always continuing up in the U.S. and internationally for a long time.”

Eventually movies and TV shows will be global and ubiquitous

“Well we generally think of the growth of Internet TV like the growth of the mobile phone, that is fixed line telephony was an amazing invention, 100 years of development and broad, incredible benefits to society and the same thing is true with linear TV. It’s been an amazing innovation, but the age of linear is starting to fade and it’s going to be replaced by Internet. And those firms like the BBC or CBS, that’s doing all access that’s invest heavily, I think will move into the future on Internet consumption. I think you’ll see Internet growth generally more broadband kind of fiber optic to every village and town. Those general trend lines, the growth both of YouTube-type advertising supported services, Facebook video, Snapchat. So you’re just going to see these new scenarios everywhere. And eventually, movies and TV shows will be global, ubiquitous, some amazing budgets. So I think you have to think big about the future.”

It’s tremendous fun inventing the future

“So there’s a lot out there. But we only just have to take it year by year, and it’s tremendous fun inventing the future.”

David Wells

Content is travelling well internationally

I’ll just add on quick, the one of the really encouraging points was our big series that we had going on in the quarter, Luke Cage, Stranger Things, The Get Down, Narcos of course. The great thing is they performed proportionally well globally. So the content is traveling in a way that would helped. Scott and Ben I would say it wasn’t any one market, it’s okay to talk about the fact that it was a very broad-based performance across multiple international markets so very broad.

Negative free cash flow expected to be 1.5B next year

“Yes a little bit right, correct, a few points in there, but I would say our former sort of guidance for free cash flow was around a negative $1 billion, $1.2 billion. Now we’re saying $1.5 billion for this year. It’s a little -it’s uncertain next year what that number might be. But I’d be surprised if it grows on a quarterly basis. So I would say as we’re able to raise operating income, we’ll be able to fund more of that organically.”

We can expand our content even more if we’re successful

“If we’re successful and if we grow faster than we expect, then we could expand our content even more than what we consider we would do today. So there’s a little bit of matching that to the scale growth of the business. How successful we are, how big the business we are growing internationally. ”

We don’t have a magic target for mix of originals vs licensed content

“what we see in terms of the engagement on our originals so we’re continuing to expand them. And so we’re going to keep growing that. We don’t have a magic target there that we’re trying to hit. It’s more about continued expansion and that mix of our content, being more of originals and less of licensing, but we’re still expanding both licensing content is still expanding. ”

Ted Sarandos

There’s always been a frenemy model in media

Like I said in previous quarters, this kind of frenemy model has existed for decades in television where competing studios produce for one another constantly. And it’s really the question I think that our suppliers want to make when they’re making decisions around their expansion over the top is, can they make better returns selling to Netflix or building their own thing? And that’s both a long-term and a short-term question and currently hypothetical.

Netflix 2Q16 Earnings Call Notes

Netflix’s (NFLX) CEO Reed Hastings on Q2 2015 Results

Pretty confident that it’s not competition it’s churn

“we’re pretty confident it’s not competition and then again if it was saturation, what we would be seeing is hit to gross ads more than we would in terms of churn. So, other possible explanations were that we did something on our service, around that week, but we’ve looked at everything and the fact that its coincident with the group of trend data we included really indicates that people don’t like price increases, we know that.”

Netflix originals have licensing value

“And I would just add real quick, one of the most positive developments from our original programming has been today an original show from Netflix can be just as attractive as a show from any network in the United States, when licensing for territories around the world.”

Hastings kind of dodges a question about overall viewing

“Viewing overall is pretty seasonal. So you have to look at it on a year-over-year basis. But on a year-over-year basis, total viewing which is the fact that we sometimes releases up, forget you have the good numbers, but think of it as we were I think it was 13 million a quarter ago and it was maybe 10 million a year ago.”

We’ve had down quarters before

“And you have to remember Scott, that when we look at it we’ve been doing this a long time. We’ve had these short quarters before. Nine years ago in 2007 we actually went down in subscriber. So, this quarter we’re growing, but not as much as we want, but in 2007 we went down from 6.8 million to 6.7 million in this Q2, which is a generally seasonally tight quarter for us. And it didn’t feel great going down, but now here we are at over $80 million. So, you just got to take a long term perspective and Internet TV is going to be an enormous market”

Payment systems unequally developed around the world

” around the world eCommerce is unequally well developed. So in some markets there is very strong eCommerce payment platforms like the Netherlands. In other markets like Cambodia or Vietnam, it’s challenging today we only accept international credit cards.”

Ted Sarandos

Original content has proven to be a capital efficient investment

“Long term, I think that’s certainly a probable mix may be even a conservative one, but I think the growth of those original films, series, series for kids, documentaries, have proven to be great investments in terms of their efficiency relative to other high profile content that we license, which is encouraging us. I think it’s made our rest of world launch possible by having content that people want to see in markets where we haven’t yet operated.”

Appetite for licensing slows as originals volume increases

“Yeah definitely. I think as we — our appetite for licensing off net decreases with our appetite to increase our originals volume and as long as the customers are happy with the transition it encourages us to being aggressive in that space.”

Our relationship with content vendors remains strong

“Well the relationship remain very strong. We continue to do business with every studio, every network in every territory. They’re in the business of selling their content to the highest bidder. So I don’t — I’m not concerned that they would sell it for less to Hulu than they would to us because they have participation problems with the talent that they have to work through.”

Content cost is like player personnel costs

“Yes, you had mentioned also pricing and I’ve mentioned this before and I think it still holds true. You should think about content cost like player personnel cost. At any given season, a super star goes free agent and that particular player’s prices goes to the roof, but player personnel cost, they remain pretty flat and that’s the case here. Every one’s in a while there is a breakout very competitive title, and the price for that goes up, but the overall spend you have baked into our business model.”

Netflix 1Q16 Earnings Call Notes

Reed Hastings – Founder and CEO

Plenty of competition, expanding into original movies

“Hulu is doing some great work. Amazon is, HBO, Showtime. There are so many competitors, and everyone is working hard to build the best content. And so, we’re seeing growth in the overall Internet TV market. Of course, that’s displacing linear TV, and it’s natural that everybody is coming in as they realize that the future is Internet TV. And in terms of our shows, we’re very excited about what we’re doing. Not only are we expanding the number of original series we’re doing, but we’re also expanding into original movies.

No interest in buying Paramount

“It’s been 15 years we’ve been public, and 20 years existing, and we’ve done no M&A. So I think that probably speaks for itself”

Payment infrastructure is hurdle to international distribution

One of the major things I think is eCommerce and payment systems to the degree that there’s a convenient way to pay for airline tickets, for example, online. That’s really helpful. But we’re continuing to work with all the different ISPs, phone billing solutions, other things, and we’ll grow as the payment infrastructure or the eCommerce infrastructure grows”

VR will likely be primarily a gaming format for the next couple of years

“I think it’s mostly going to be an intense gaming format for a couple of years due to the price of the consoles. So think of it like the PlayStation 5 or the XBox 2 or something, it’s heritage to console gaming, will be a lot of that market. And then, everybody hopes that it matures into something that’s lower cost and more ubiquitous. So I don’t think it will have a direct effect on us in the next couple of years, because I think the center point for VR will be other sorts of things than watching a TV show in a VR headset. I don’t think that’ll be very popular

We’re serving elites right now internationally, so price isn’t as much of an issue

“We really haven’t seen price be much of an issue. But then today, we’re serving English language speaking elites around in these countries. So in the model of what we’re doing, in targeting the high end, the price is fine. We’ll see over the coming years and we expand, and we may need some flexibility eventuality, but nothing in the short term. Why don’t we do the last two questions here?”

Theodore A. Sarandos – Chief Content Officer

Somewhat of a dodge of a response to a question about competition with suppliers of content

Sure, so I mean these have always been relatively complex relationships where you are both supplier and sometimes competitor. So in the case of Disney, they’re a major supplier and they’re a producing partner where they produce our Marvel Defenders series. We just kicked off our fifth season of production on the show. It’s a very lucrative piece of business for Disney, obviously and a great partnership in that way. And there’s no way to kind of isolate the two sets of businesses completely.

It’s tough to anticipate, so be good at fast learning and improvement

And I think five years ago when we were first launching the markets, we thought maybe we could anticipate most things. But every time we’ve launched, there’s been one or two things that we haven’t anticipated. What we have gotten good at as a company is fast learning and fast improvement. And so, I think that gives us some confidence as well that as things come up, we’ll be able to address them quickly.

David B. Wells – Chief Financial Officer

Weakening dollar has helped margins a bit

Sure. So we did highlight this in the letter and you live by the currency, die by the currency, in terms of the fluctuations. Last year, we had a lot of headwinds, especially on the international revenue line. We had to explain sort of why our international average subscription price was flat in certain quarters when it still was growing. This year, we’re seeing the reverse of that with the weakening of the dollar at least in the first part of the year here where our International contribution margin is benefiting from that. So we did highlight that for you in the letter. Thanks for pointing that out

Miscellaneous Notes 4.14.16


Source: Amazon 2015 Annual Report

Amazon (AMZN) CEO Jeff Bezos says their success due in part to both luck and their differentiated culture

“This year, Amazon became the fastest company ever to reach $100 billion in annual sales. Luck plays an outsized role in every endeavor, and I can assure you we’ve had a bountiful supply. But beyond that, there is a connection between these two businesses. Under the surface, the two are not so different after all. They share a distinctive organizational culture that cares deeply about and acts with conviction on a small number of principles. I’m talking about customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long-term, and the taking of professional pride in operational excellence.”

Amazon (AMZN) CEO Jeff Bezos says cultures take years to reinforce

“A word about corporate cultures: for better or for worse, they are enduring, stable, hard to change. They can be a source of advantage or disadvantage. You can write down your corporate culture, but when you do so, you’re discovering it, uncovering it – not creating it. It is created slowly over time by the people and by events – by the stories of past success and failure that become a deep part of the company lore. If it’s a distinctive culture, it will fit certain people like a custom-made glove. The reason cultures are so stable in time is because people self-select. Someone energized by competitive zeal may select and be happy in one culture, while someone who loves to pioneer and invent may choose another. The world, thankfully, is full of many high-performing, highly distinctive corporate cultures. We never claim that our approach is the right one – just that it’s ours – and over the last two decades, we’ve collected a large group of like-minded people. Folks who find our approach energizing and meaningful.”

Amazon culture embraces failure

“One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”

Amazon getting into the finance business

“We also created the Amazon Lending program to help sellers grow. Since the program launched, we’ve provided aggregate funding of over $1.5 billion to micro, small and medium businesses across the U.S., U.K. and Japan through short-term loans, with a total outstanding loan balance of about $400 million. Click-to-cash access to capital helps these small enterprises grow, benefits customers with greater selection, and benefits Amazon since our marketplace revenue grows along with the sellers’ sales. We hope to expand Amazon Lending and are now working on ways to partner with banks so they can use their expertise to take and manage the bulk of the credit risk.”


Source: New York Times Interview https://www.youtube.com/watch?v=ru995JyegDc

Dupont (DD) Former CEO Ellen Kulman

“The world is a more competitive place, it is getting more competitive not less competitive. So what that means is that you have to be really clear about what you’re doing,where you’re going, and how you’re going to get there.”


Source: CSX 2015 Annual Report

CSX CEO Michael Ward emphasized cost reduction in his annual report, much like many of the other Fortune 500 CEO’s

“Over the past decade, CSX has consistently delivered significant gains in productivity, even during the tough years of the most recent recession. 2015 was no different, with efficiency initiatives and cost reductions driving more than $180 million in productivity despite declines in some of the most profitable markets. The initiatives behind those savings are designed to create sustainable changes such as improving fuel efficiency and increasing the use of technology automation. What’s more, CSX delivered a total cost reduction of nearly $375 million, which includes savings from right- sizing resources to match demand. We have demonstrated repeatedly that we can aggressively manage costs in what is often considered a high fixed-cost business.”

Doesn’t expect coal markets to recover anytime soon

“The baseline coal market, which generated $3.7 billion in revenue in 2011, declined to $2.3 billion in 2015, and will continue to decline in 2016 and beyond. While this market remains important, it has given way to more consumer-oriented markets that demand premium, and ever more cost-effective, service. In an era in which the $1.4 billion in coal revenue declines over the past five years will continue to accelerate, the status quo is no longer an option.”


Source: Schwab 2015 Annual Report

Schwab (SCHW) CEO Walt Bettinger tries to be as candid as possible in his annual letter to shareholders about the state of the business

“Each year it is an honor to sit down and craft a letter to share my thoughts on Schwab with you, our valued stockholders. I strive to write this letter with a minimum of jargon, corporate speak and trendy business buzzwords. It isn’t written to compete with the latest bestseller on business strategy or how to be a better leader in changing times; it is written with the goal of simply discussing the current state of our company and the future we face together. The litmus test for this letter is: “Does it read as if I were corresponding with a business partner who has been out of touch for the past year?” As always, my hope is that you will share with me your feedback on whether this goal has been achieved.”

Schwab (SCHW) CEO Walt Bettinger said humans will continue to seek a human relationship in some form when seeking investment or financial advice

“One of the most over-hyped aspects of investing in the past year is the concept of “robo-advice.” A “robo-advisor” offers a user-friendly website and mobile experience where an investor can answer a few questions, have a complete investment portfolio built, and receive ongoing management with rebalancing and, in some cases, tax-loss harvesting. Now, I say over-hyped because the press has speculated that growth in “robo-advice” could jeopardize the desire for investors to want an in-person relationship–a suggestion that we see as folly. That said, there are real benefits to the concept of automated investment advice if it is combined with the availability of live professionals by phone, chat or in person.”

Schwab (SCHW) CEO Walt Bettinger says they are disrupting themselves in order to create a better client experience

“Today, despite what you might hear in the press about “Silicon Valley disruptors” and “fintech,” Schwab remains the consummate challenger in the investment industry. Each day we ask ourselves a question consistent with our “Through Clients’ Eyes” strategy: “How can we use our deep knowledge of investing to help our clients be better investors, to deliver services to clients at a lower cost, and to ultimately help them achieve better outcomes and take ownership of their financial futures?”

Federal Reserve’s low interest rate policy is hurting their business results

“Punishing. There is no other way to describe the financial impact on our company from the unprecedented experiments taken by the Federal Reserve since 2008. While the Fed experimented with zero interest rates and printing money under the guise of a fancy term–quantitative easing–savers suffered, responsible people who had avoided large debt suffered, and our company suffered as well. In 2008, when client assets at Schwab were slightly in excess of $1 trillion, we generated revenue of just over $5 billion. In 2015, when client assets were in excess of $2.5 trillion, we generated revenue of just over $6 billion. Put more succinctly, during that period total client assets grew by about 120% while revenues grew just 24%. Punishing. And you can attribute virtually this entire scenario to the interest rate policies of the Fed.”

Schwab (SCHW) CFO Joe Martinetto said they are assuming one Federal Reserve rate hike this year for their internal budgeting

“With that crucial first Fed rate move behind us, the path forward could be a bit brighter. As we finalized our annual planning at the beginning of 2016, the forward rate curve implied that, despite some global market jitters, the U.S. economy was strong enough to support expectations for at least one more Fed move in 2016, and we developed our baseline scenario with that in mind. Our baseline scenario also includes relatively flat long-term rates and a 6.5% improvement in the S&P 500 Index relative to year-end 2015, as well as a potential decline in revenue trades as average portfolio turnover continues to slow.”


Source: October 2015 Stanford Interview https://www.youtube.com/watch?v=hcRxFRgNpns&list=PLnsTB8Q5VgnVzh1S-VMCXiuwJglk5AV–&index=8

Alphabet (GOOGL) Chairman Eric Schmidt

“The ideal business is the Microsoft business. A monopoly software business with hardware competitors who are competing for good treatment by you in a global and growing industry. Let’s use Uber as an example. Uber spends an awful lot of time saying that the drivers don’t work for them and they don’t own the cars. There’s a reason and it’s not legal or liability reasons. It’s because if you think of them as a software infrastructure company that helps assemble this thing, they have very different economics. In that sense, it’s the modern version of a franchisee. Why do people own McDonald’s franchises rather than McDonald’s owning them? Well, it’s because McDonald’s couldn’t get the capital to own them all themselves.”


Source: November 2015 Stanford Interview https://www.youtube.com/watch?v=jYhP08uuffs&index=16&list=PLnsTB8Q5VgnVzh1S-VMCXiuwJglk5AV–

Netflix (NFLX) CEO Reed Hastings says you can never know anything for sure

“Maintaining a reservoir of doubt is extremely important.
“We often do an exercise, every year or so, what would be different at Netflix if you were CEO? It’s a way for me to gather all the different strategies. Would you change the pricing? Would we be in the ad business? And I really try to think through all the different methods, We call it farming for dissent. You can never be confident of anything, you always have to be curious. Yet you have to be executing really firmly. Simultaneously, knowing there is no certainty yet working really hard to know what you think.”

They don’t do company acquisitions

“In 17 years, we’ve never done an acquisition. People have tried to acquire us, but it never worked.”


Source: McCormick 2015 Annual Report

McCormick (MKC) CEO Alan Wilson said they are accelerating their shift to digital advertising

“Across all of our markets, we increased brand marketing support by 6% in 2015. Increasingly, we are shifting toward digital marketing, which comprised 38% of our advertising, up from 11% in 2011. Digital marketing creates a direct connection to consumers, including Millennials, who view the McCormick brand positively. As an example, our mccormick.com site has become a top 50 most visited food/lifestyle site.”


Source: Morningstar 2015 Annual Report

Morningstar (MORN) CEO Joe Mansueto says the company benefits from key tailwinds

“We benefit from some important industrywide trends, such as outsourced investment management, the convergence of the advisor and workplace/retirement spaces, the shift to passive investing and strategic- beta strategies, and growing market acceptance of new credit-ratings entrants.

Morningstar (MORN) CEO Joe Mansueto says asset management clients remain cautious about spending

“Low interest rates and the industrywide shift to passive investment manage- ment continued to put pressure on spending for many of our asset management clients.”