By Therese Poletti, MarketWatch
Netflix Inc., which forced the Securities and Exchange Commission to create “the Reed Hastings Rule” for disclosing material corporate information over social media, is pushing the envelope again.
The video-on-demand giant /zigman2/quotes/202353025/composite NFLX -6.15% has said that its earnings “video interview” with two handpicked analysts will be recorded ahead of time to “improve audio video quality,” and then made available an hour later than with previous earnings reports, at 6 p.m. Eastern time on Monday. Investors will still be asked to submit questions in advance for possible inclusion in the interview with Netflix Chief Executive Hastings, Chief Financial Officer David Wells and Chief Content Officer Ted Sarandos, and they are selected by the analysts, supposedly with no Netflix insight.
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Already, the Netflix video interview has a very canned feel, since it lacks a live give-and-take between many analysts asking their own questions of management, and the letter it uses to disseminate earnings is annoying. It is released as a link on the company’s website, which invariably crashes under the strain of so many reporters and investors trying to click on it at the same time, as MarketWatch has reported. This move will likely result in an even stiffer, more contrived discussion of Netflix’s finances with fewer immediate viewers, especially on the East Coast. However, entertainment value is not the concern here in the way that it is with other Netflix streaming offerings.
At the very least, this is the start of a potentially very slippery slope toward completely managed earnings calls, in which executives know what questions are coming and can avoid bombshells that could lead to dissemination of actual information that investors want. In a worst-case scenario, Netflix could face scrutiny from the SEC for failing to disclose material information to all investors at the same time, which would violate the Regulation Fair Disclosure rule, commonly referred to as Reg FD.
“I have to assume there is no intent to make an actual disclosure [on the earnings video],” said Stephen Diamond, an associate professor of law at Santa Clara University who is an expert in securities law and corporate governance. “This is obviously an intent to manage their earnings call.”
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Anne Marie Squeo, a Netflix spokeswoman, said that all investors will receive the company’s shareholder letter at the same time, and that the company is ensuring it will follow the rules with its tape-delayed earnings call.
“We are taking appropriate steps to ensure our earnings call format is compliant with Reg FD,” Squeo said in an emailed statement.
Netflix clearly loves to be in complete control of its messaging, and is willing to take the chances of SEC scorn to speak to customers and investors in its own way. In 2012, the company got in hot water when Hastings congratulated his team on Facebook as Netflix passed the milestone of one billion hours in streamed video in a month. The SEC gave the company a Wells notice , a warning that it considered filing a civil claim against Netflix for violating Reg FD, and eventually issued a report that confirmed that Reg FD applied to “social media,” but companies could use those platforms as long as they warned investors ahead of time that they might.
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That rule has led other companies to occasionally release important info on different social channels, which favors investors (and algorithms) that can constantly scan those media. Now, if Netflix avoids scrutiny and scorn for a more managed earnings call, we should expect the practice to spread to other companies in the same manner.
Analysts spend hours modeling company finances, and when the stated results differ, are expected to seek answers so that investors have greater insight into unexpected results. In the current live format, companies can avoid analysts who tend to be critical, but can still face tough questions that force them to either publicly avoid an answer and face investor wrath or divulge insight that was not in the earnings release.
If companies begin to pick the actual questions they answer, or only broadcast the questions and answers they choose, investors lose a critical check on earnings results. While Netflix says it is avoiding that path for now, it is completely conceivable that it, or another company that chooses this route, could try to further manage its earnings calls in this manner.
Netflix has profited from producing its own original content and streaming it on-demand to consumers, and other companies have followed suit to the delight of viewers. If canned earnings calls follow the same trend, it won’t be to the benefit of investors.
Netflix shares have gained 17.5% in 2017, while the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.39% has gained 4.3%.