Netflix, Inc. (NFLX) Earnings Call Transcript & Summary

Yes. It is. And you're right, there are several factors, which, frankly, is one of the reasons we're moving away from some of that paid membership in ARM line, which I'm sure you will ask us questions about on the call. But I would say a couple of factors. One, in APAC, many markets haven't had a price change in a while a year plus. And we also have had several countries where about a year or so ago, we actually lowered price. So that's been one factor. Secondly, another factor is country mix. So if you looked at APAC 5, 6 years ago, it was practically almost all Australia. So that's a higher income market and a higher price market. So the good news is we're growing quite quickly in other markets and countries like India, but the Netflix is lower price there. So that drags down the average. We view that as actually a good thing, not a bad thing. So I would say those are probably the most prevalent.

Okay. It's a good segue, next question.

Yes. I mean we were going to ask you about India because there's been some recent developments in the market where Disney has decided to partner with Reliance. So just maybe curious, as you think about the Indian opportunity, specifically, if you want to comment about how that might impact it. But what do you see as like the future for India for Netflix?

Sure. So I can't speak much to the Reliance and Disney of it all. You probably have to ask them. But I would say India is an important country for us. It is very competitive. But again, it's competitive everywhere. And in a way, it's good for the market in the sense that consumers just have more and more choice and different options. And our job is to just improve our offering. So it resonates with the Indian consumer, so we can grow faster there. So I would say we don't have any sort of differential insight there in terms of what the competitors may or may not do. And we can't control it. So again, we're just going to focus on what we do.

I think there was comments this was going to be the next $100 million in terms of subscribers. So...

It may.

Where are we on that path?

I would say what I can tell you is that India is one of our fastest-growing countries. So I think we're on the right track there. But again, it's still a lot of hard work. And by no means are we declaring victory. We know we still need to improve a lot there to get to that size that you talked about or that we talked about.

[indiscernible] So when you've been realistic as you are on the stage today about the near-term impact of the advertising opportunity, it takes some time. What are the gating factors to scaling that business in the U.S. and international?

Sure. Let me first start by saying we're generally very optimistic about advertising in the ads business. So I want to make that clear. And TV advertising is a very proven business. We're not reinventing the wheel here. So it's very -- it's been a core part of the entertainment and the media business for a long time. And I think we're really well positioned because we have high-quality premium programming. We have a big growing reach. We have very deep engagement on a per member household basis. So I think we have all the right ingredients. But you're right, it's not yet material for our business, partly because our subscription business is so big. So it's -- so that's one factor. And secondly, we got to do 2 things: number one, grow our ad membership basis as mentioned earlier. And secondly, we need to continue to develop our capabilities for advertising -- advertisers specifically measurement, verification, all those different factors. We also have to improve our go-to-market sales approach as well. So lots of blocking and tackling, but all doable fullness.

Yes. So one of our bigger surprises over the years is despite continued price increases at Netflix, but we usually see limited negative reaction to that, which, again, speaks to how you guys continue to add value to the service and program appropriately. So curious if you can kind of take us behind the scenes in terms of how you decide and when you decide to raise pricing, given all of that. Do you factor in macroeconomic issues and like just really help us better understand the price raising strategy?

Sure. We think about all those things in general. So we have lots of big brains thinking about all those factors. So we look at on a country-by-country basis, our current trends in retention and acquisition and engagement, we think about the competitive landscape. We do think about macro factors like disposable income. Inflation, obviously, has been a big factor in parts of [indiscernible]. Well, so we taking into all those -- taking into account all those factors, but I would say the primary factor is engagement for us because, again, that is our best proxy or a sense of how much value we're delivering to our members. And if we're growing that, that's a signal to us that we are delivering more value. And in general, we want to price a little bit behind that value, so that consumers continue to think of us as a good value for them. And then if we can adjust prices effectively, what we then want to do is reinvest a bunch of that back into the service, improve the programming, to improve the discovery so we can continue to drive that virtuous cycle.

Take it back to advertising for a second. This is upfront week. You guys have a presentation tomorrow. It's increasingly competitive market because of YouTube and Amazon and there. So when you think about your chief differentiators. What's the go-to-market messaging that you think differentiates you from other people who are chasing CTV and...

The way it till tomorrow, Michael.

So I would say, in general, it's a lot of what I talked about earlier. I think we have great programming that advertisers want to be adjacent to and a part of. I think they want to be part of the conversation around things like the Tom Brady roast or Wednesday or Squid game. I think that's going to be really exciting. And that's our depth of engagement, I think, is also what really separates us from the package, you can see from the Nielsen Gauge data.

Yes. So as Craig Moffett, Front row right there. As you will tell you all too well that there's an upper bound in his industry's ability take price and take price increases.

Professor Moffett [indiscernible] and pricing.

He has [indiscernible] pricing. We have a case studies on that. But -- so to that point, can you talk about the arm lift that may be available to you as your advertising initiatives roll out. So think about just the balance between driving ARM through advertising versus any kind of upper band on pricing power?

So I think when it comes to pricing, again, we really think of engagement as the best way to measure our ability to grow pricing. And I think Craig is right, if you're not growing the value of your service, there's a limit to how much you can charge folks for to be honest. But if you have a really valuable product that is really critical to people, then I think your customer base will pay for it. So I think that's why we're focused on improving the engagement, improving the value to our members. And beyond that, I would say advertising, I think, is a nice option. Because it does allow us to segment demand better because there are a range of incomes and a range of needs amongst the population. And I think it's a great option for folks that don't want to necessarily pay that much in our advertising tolerate. So that's sort of a little bit of the trade-off there. And so it's a nice sort of, I think, optimization of our pricing right.

So maybe taking that and again, like before all these recent initiatives have taken effect, the market was pretty comfortable assuming long-term ARM growth in, call it, the mid-single-digit range. So as we think about these new initiatives and everything back to our models, any way you can help us think about like the reasonable assumption going forward as we think about is going out?

I'm not going to give guidance on ARM specifically. Again, we're trying to orient investors around the 3 variables that we focus on engagement, revenue and profit. I would say we're on a good track this year. So we guided to about 13% to 15% revenue growth for the year. We want to continue to sustain that healthy revenue growth beyond this year. And we're not overly religious about how much of it comes from ARM versus, volume versus, advertising versus other factors. We care about revenue growth, and we care about profitable revenue growth.

So Spencer back when you're an analyst, you may have had a chart, which looks at the correlation on affiliate fees versus ratings. And what you saw in that correlation that there was no correlation.

Right.

And so the question is, as you move into more live sports, is there a subtle hint that, look, we think this can drive higher ARM because live may be worth more to people like us and just rerunning Friends or [indiscernible]?

Well, I'm not sure it's specifically live. I think it's impactful programming. So Squid Game for a lot of people is really impactable. And for me, I really like beef as an example. So I think we need to have all those things for all 270-million-member households. But to your point, not every hour of engagement is spread equal, which is why there is no correlation in that scatter plot that you talked about. And so I do think the more that we're going to sort of break through moments like that, I think that's good for the business. So but really early days, but it doesn't have to be live. Again, when we have a great movie to like Barabbas, that's also really impactful too. So again, I don't think it's just live, but I think live can be a big part of it.

So obviously, one of the big news items that came out of last quarter was just not specific to any business, but just in terms of disclosure. So here we go. So in terms of the quarterly membership numbers, and clearly, we understand the focus on revenue. You just hit on it, but curious what -- going back to analyst, Spencer, would say about this change. And just really how the investment community should think about the evolution of the business given the disclosure?

Sure. Totally fair question. I think the analysts -- the former analyst in me would like it because it makes updating my model easier. 1 less variable, 2 less variables to worry about across 4 regions. No, but in all seriousness, we're not trying to obfuscate anything, frankly. And we fully intend to grow subscribers, and we'll continue to report subscribers as we pass certain milestones. So let me lead with that. Beyond that, though, I think it's really a reflection of the evolution of our business. So we have added new revenue streams like advertising like extra member, which isn't directly tied to a paid net add, as I mentioned earlier, we have increasingly segmented our pricing, not just across countries, but even within countries, right? So the business impact of any one given net add can vary quite a bit depending on what plan we're talking about in which country. So for all those reasons, that traditional P times Q equation, I think it's just less insightful in terms of what's happening within the business. I would say from a strict IR perspective, I personally feel that there's an overfocus on our quarterly pay net adds that probably adds unnecessary volatility to the stock. We're a subscription business primarily, which is recurring in nature, generally speaking. So we are very rarely off on revenue by more than plus or minus 1%. But if you look at the stock trading, it's obviously much more volatile than that. So I think this is a healthy evolution of the business. So we'll take it from there. But again, we're always evaluating what's most helpful to the investment community in terms of external metrics. So we're open minded to that. We did say we will provide more engagement data over time as well to add on to what I would consider industry-leading transparency on engagement in terms of what we share today. So we'll continue to build on that for you all, and then we'll go from there.

Should we expect more disclosure or maybe just more milestone announcements in terms of what advertising revenue is contributing or consumer products or even video games as you continue to build this out?

That's a potentially natural progression, right? Obviously, they're all quite small today, but as they become hopefully more and more material to the business. That would be in the natural evolution to the business. So I don't want to speculate us yet, but I think that's certainly something we're contemplating to consider.

It's about margins. The margin expansion in the past year has been extraordinary. How should we think about continued margin expansion? I know Spencer talked about this back in the fall, but how do we on the outside dimension potential for the margin expansion?

Sure. So I would say we I think done a good job proving that streaming at scale can be a good business and quite a profitable business. And we're trying to balance long-term investment and sustain growth with also delivering improving profitability. So again, we'll -- our target this year is to deliver about 4 percentage points of margin expansion. And beyond 2024, we talked about growing our operating margin every year. It will probably vary a little bit. It won't be the sort of consistent 3 percentage point thing that we had several years ago. But our intent is to gradually grow it and grow the business at the same time. So nothing more specific at this point, but our intent is to grow the margins.

If I can follow-up on that, and again, given the news this morning, how do you think about the allocation of U.S. content spend versus the global spend, right? So clearly, NFL is a specific item. But as we think about just the allocation of that and as you think about that balance on margins, is it just always mostly from a global perspective? Or is there specific budgets by region?

No. There are definitely specific budgets by region, by content vertical or category and our team, I think, in the content team does a really nice job portfolio managing as an example. So I would say for us, it -- every piece of programming we've learned needs to be most impactful in the home territory or home country. And so the NFL is a good example of something that we expect to be very impactful in the U.S. And to the extent that it also takes off in other countries, that sort of extra or gravy for both of us as well as the creator or in this case, the NFL. So that's how we sort of think about it. Again, we're trying to figure out each year what is the best way to allocate all that $17 billion to be most impactful. And so it is really like a portfolio.

Asking about another one of your jobs, which is corporate finance and looking at business development, can you discuss how Netflix weighs potential M&A opportunities and maybe the buy versus build decisions in some new categories?

Sure. I think going back to my analyst days, and Michael, I don't know if you agree, I think you do, but M&A is hard. And the track record of it is, I would characterize at least large-scale M&A pretty spotty. So we're very cognizant of that and having lived through a couple of deals at Netflix, it is indeed hard. So I would say the way we think about M&A is really as a tool for us to help advance our business and our strategy. So the primary focus on any M&A opportunity is how does this help the business relative to similar sized opportunities and the distraction tax. So we weigh those things together to just the idea if this is the best approach buy versus build. We do all the other stuff that you sort of alluded to, the accretion dilution of it all, the ROI of it all. But as you know, I can make my spreadsheet kind of say whatever I wanted to say, right? And really, it is about why are we doing this, again, relative to the other ways to do it, this is the best path forward relative to the distraction tax and the money you're spending.

Yes. But given the long-term focus about video games, curious how all of that plays into build versus buy on video games. Like is there an opportunity to accelerate that with potential M&A?

Yes. So we've actually done a series of small game studio acquisitions in our first few years of games. And I would say we're feeling our way along. So really early days for games. We've had some positive signals, Grand Theft Auto in Q4 as an example of a game that well for us. But again, I would say too early to tell. And in terms of M&A, we'll always be open minded, but there's nothing sort of imminent destiny.

You're reaching the 9-year mark within Netflix, and I wondered if we had asked you when you started would it develop this way. So this is a tough question, which is the next few years, 3 to 5 years out, how different will this company look? I'm not sure if you would be able to predict it. If I ask you when you started, but when we see like all the pieces that are coming together, how is Netflix changed 3 to 5-year?

It's a really good question. I would say one of the things I've learned at Netflix and frankly, in life is changes being in constant and I shall think change is a good thing. When I was younger, a change, it would be kind of scary or stressful, but I've actually certainly at Netflix, learn to sort of embrace change. I have a couple of colleagues here. I think the relates to the change, everything that happens. And in a way, it's kind of exciting and thrilling because I think it's a signal, we're trying to be bold, entrepreneurial, which is true to our heritage and our culture, and we'll try to move the business forward. So I think -- the whole world is changing every day across every dimension. So of course, we have to change, right? And we were static, that's probably not a good thing. So it's hard to predict where we're going to go. I would say, in general, our to North Stars as a company are, number one, we want to please our members. And secondly, we want to grow our profitability. Beyond that, most of the other things are pretty tactical, like getting into advertise or getting into games or things like that. I think we strive to be the best entertainment company in the world, and to do great things as a company and that's what we're sort of marching towards. And my guess is it will be pretty different because who would have predicted where we are today. We're -- and we started as a DVD company, mailing discs in the mail Right? And now we're doing Christmas Day NFL games, like that's kind of nuts if you think about it.

So I guess someone that [indiscernible] said back 2 years ago, when you asked about advertising Morgan Stanley conference, never say never. And I think what I've observed from you is never see never anymore. Like never say never, everything is an opportunity...

That's right.

Because you can't just say, no, we'll never do this?

That's right. And I think we've tried to sort of communicate that to you all, which is never say never in the sense like we're always evaluating things. That's part of our job is to pay attention to what's going on in the world, and we need to adjust as circumstances change. I think that's actually a healthy thing. And so we're very open-minded to change. And honestly, that's why the culture is the way it is. If you go back to the original culture deck from 2007, we talked about the ability to be adaptable because most companies are very good at this one thing that they do, but business environments are never constant, right. It may take 10 years, it may take 20 years, it may take 100 years, but things inevitably change. And we want to build a company that can adapt to those changes and thrive regardless of the circumstances. So -- but again, we don't -- we also value focus, too. So I know these things sound like they're in conflict or intention, but I think that intention is actually healthy, right? So we're always trying to figure out, where do we need to sort of focus but also where do we need to adapt. And I think that was 1 of the great learnings in 2022 when the business slowed down is that we do have to adapt as circumstances change.

And there's having 2 CEOs with very different responsibilities and almost approaches to things, does that help in the ability to adapt quickly?

Look, I don't know if it helps in that dimension. I would say I think it's working really well, partially because I think there's a lot of great trust between Ted and Greg, and they were together for so many years. So they're very familiar with each other. They obviously both bring their own strengths to the table. And so I think it's working well, but I think it goes beyond that Co-CEO structure. Again, as I talked about, the culture, again, if you go back to our culture memo or culture deck, is really about excellence and how do we do that and building a culture that allows us adaptable and very durable.

Maybe just last question, big picture for you. Anything that you want to leave for investors that...

Well, I did get to say one thing about the NFL. How about the Cowboys. I always want to say that a lot audience [indiscernible] Sam, as you can tell. But no, I would say, first of all, we thank you all for taking time out of your busy day to join us today. We thank our shareholders for going with us on this journey to create, hopefully, a great entertainment company. And we're excited and optimistic about the business. But we also know we got a ton of hard work to do to more deeply penetrate that $600 million TAM that we talked about. So again, we don't do these conferences too often because we're mostly just sort of heads down focused on executing the best we can, and just I know that that's what we're doing and we're working hard. And half of Netflix is here in New York City this week, I think, for the upfront because -- it's a really important initiative, and we're eager to get that going here.

Well, Spencer, thank you. behave Craig, Robert and I, we thank you talk for being here. We appreciate it.

Thanks all.