25624 Financial Metrics for Decision Making

Business Case 25624 Financial Metrics for Decision Making Spring session 2022

General information and instructions

• This business case accounts for 40% of your final grade. • You must complete this assignment on an individual basis. • Deadline: Friday 14th October 2022, 11.59pm AEST (Sydney time) • You need to submit via Canvas: o A written report ▪ .pdf format only ▪ The report should answer each of the questions o An Excel spreadsheet ▪ .xlsx format only ▪ The spreadsheet must contain all calculations you perform in the Revenue worksheet. ▪ Aim to structure and format your Excel solution in the most efficient way possible and use financial modelling best practices. • This task includes a milestone assessment component that evaluates academic English language proficiency. You may be guided to further language support after the completion of this subject if your results in this milestone task indicate you need more help with your language skills. • All assignment-related queries must be posted on the Canvas discussion board. E-mail queries related to the assignment will not be entertained. From prior experience, technical difficulties often can be traced back to students trying to upload their work a few minutes prior to the deadline. Tip: do not wait until 11.55pm on 14th Oct to submit your work via Canvas. Late submissions will receive zero credit unless a special consideration with valid reasons and documentation is filed.

Grading • Both components (the written report and the Excel spreadsheet) will be graded. • The written report will be marked based on the • The Excel spreadsheet will be marked based on the efficiency and clarity with which solutions are produced. • Late submissions will receive zero credit unless a special consideration with valid rea- sons and documentation is filed.

Data • In the Assignment page on Canvas, you will find the workbook Netflix Revenue Model.xlsx. The workbook contains quarterly revenue and subscriptions data from September 2018 to June 2022. • Perform your calculations based on the data in these spreadsheets. • Search for additional data as required.

Netflix’s Latest Pivot

Netflix success is largely attributed to the company’s ability to pivot their business model. The first pivot was when the company shifted their DVD home delivery service to becoming the leading online streaming platform. More recently, the second pivot was in response to the inherent risk of being a content distribution platform: content producers could refuse to deliver their content via Netflix (Disney, Paramount, etc.). Netflix response was to become a content creation business themselves1 . Both pivots were successfully landed, providing Netflix with a sustained increase in subscriptions. The company’s reflexes are now being put to the test once again, this time as a more mature business. In the first quarter of 2022, Netflix lost subscribers for the first time in 10 years. The drop came after the growth experienced throughout the pandemic, gaining millions of users per quarter through 2021.

The decline in number of subscribers adds to the trouble the company faces because of the large number of households sharing their accounts with families and friends. In response, Netflix began experimenting with a feature that monitors whether someone accesses an account from outside the home and offers the ability to raise the price by adding ‘sub-accounts’ for other people. During the Q1 2022 earnings call, Netflix’s management unveiled that they were considering rolling out an ad-supported tier to re-ignite subscription growth – especially in UCAN (USA and Canada). The market feels much more penetrated given the COVID pulled-forward bump2 . Instead of paying the full subscription, Netflix will offer the possibility of paying less in exchange for watching ads, thus eliminating one of the great advantages of the streaming service over traditional television. The timeline to introduce this new subscription tier has been brought forward a couple of times.

Netflix is the most expensive streaming service, compared to rivals from giants like Disney and Amazon, especially if we want the full experience with the best video and sound quality. So-called ‘sub-accounts’ and new ad-supported subscriptions will become the cheapest way to use Netflix3 . In addition to these measures, Netflix executives want to increase their presence in markets outside the United States, where growth is stronger, producing more local content and improving the quality of its series. The company faces several potential ways forward: • Remaining a pure Subscription video-on-demand (SVOD) player • Introducing a second subscription tier with the Advertising video-on-demand (AVOD) model • Opening sub-accounts to monetise the large segment of password-sharing users In this context, it is worth evaluating the potential impacts each combination of products will have on the company’s revenue stream. Please use the Excel workbook provided to do a quarterly revenue forecast for Netflix from September 2022 to June 2025 under each scenario described in the questions. In each scenario, you can search for data to support your assumptions. This Wells Fargo Equity Research report could be of great use.

Please make you to reference your sources and to form your own views and not to simply “copy and paste” from reports.

QUESTION 1. DISCUSSION ON FORECASTING TECHNICS [4 marks]

Before you build your own Revenue forecasts, please watch these two videos created by a tutor who used Netflix to teach forecasting using: • Holt’s Method https://youtu.be/55_vmSIba3A, and • Regression model https://youtu.be/089eZCuBhtg In the written report, use bullet points to: • highlight the main limitations in using these technics • propose amendments to the methods to make them more appropriate to forecast Netflix’s revenue • This question does not have a spreadsheet component.

QUESTION 2. FORECAST REVENUE | PURE SVOD PLAYER [6 marks] • Assuming Netflix decides to add maintain their current business model as is, please use the “Question 2” section in the Revenue worksheet to do a quarterly revenue forecast for Netflix from September 2022 to June 2025. • Include any inputs and assumptions in the Inputs worksheet • This question does not have a written report component.

QUESTION 3. FORECAST REVENUE | SVOD and AVOD [8 marks] • Assuming Netflix decides to add a second subscription tier with the Advertising video-ondemand (AVOD) model, please use the “Question 3” section in the Revenue worksheet to do a quarterly revenue forecast for Netflix from September 2022 to June 2025. • Include any inputs and assumptions in the Inputs worksheet. • Make sure you at least account for: o cannibalisation across products, o new potential customers and o different attrition rates by product o advertising revenue • This question does not have a written report component.

QUESTION 4. FORECAST REVENUE | SVOD, AVOD AND SUB-ACCOUNTS [8 marks] • Assuming Netflix decides to: o add a second subscription tier with the Advertising video-on-demand (AVOD) model, o add sub-accounts for “sharing-password” customers please use the “Question 4” section in the Revenue worksheet to do a quarterly revenue forecast for Netflix from September 2022 to June 2025. • Include any inputs and assumptions in the Inputs worksheet. • Make sure you at least account for: o cannibalisation across products, o new potential customers and o different attrition rates by product o advertising revenue • This question does not have a written report component.

QUESTION 5. OUTPUTS [6 marks] • In the Outputs worksheet, please use tables and charts to report the key results of your analysis. • Please include any sensitivity analysis you judge relevant • This question does not have a written report component.

QUESTION 6. DISCUSS YOUR FINDINGS [6 marks] In the written report, use bullet points to: • Discuss your main findings • Propose a way forward to the Netflix management

QUESTION 7. FINANCIAL MODELLING BEST PRACTICES [2 marks] The use of financial modelling best practices in the revenue model, inputs and outputs will be marked in this question.