Q2 2020 Netflix Inc Earnings Call
Binder, we'll be making forward looking statements and actual results may vary now let me turn it over to can on for its first question.
Thank you Spencer and you've nailed might last name so congratulations for that I practiced.
Okay.
Thanks for having me here and I guess, the best place to start here, instead and Greg Congratulations on your new Roe.
And reviewed to I guess, you can relax a little bit more.
So maybe you could just start off weight.
Your priorities, Ted and maybe followed by Greg just in terms of.
How you see the world evolving what's your priorities out and of course, we are in the middle of a lot of change. So how you see the world. So maybe you could just start there.
We should start by saying that the chances that we'd get to relax a little more very low.
Well I'll just.
We should know they've read have worked together for more than 20 years.
He has been an unbelievable role model it sorts of inspiration for me.
Again, it some of the toughest decisions that company has made over those years from mainly Dvds around the U.S. to streaming around the world and my focus is day continue the successful train we've been on a for the next 200 million subs around the world.
And Greg I'm thrilled to edge third over to you. Thank you Ted.
From my perspective, when I think about what our feature is and I think it's just a tremendous next stage of group that we will see mostly coming from outside the United States. So think of more and more employees outside the United States more productions more operations happening outside the U.S. and hopefully many many more members outside the U.S.
No. This is an opportunity to lean in just a little bit more be proactive and drive a little bit more alignment across those activities, where we think alignment will benefit the business and no push the optimization of those activities a little bit more.
Can I knew you might not know, but many years ago now it feels I was able to spend a couple of years in Japan watching the service there and I got a chance to work with the local teams that we were hiring in growing there as well as our global teams to really look at every aspect of the service and try and improve it for our Japanese members and grow our membership base nurse.
I think of that is sort of like a mini version.
Trial or test out for what I anticipate I'll be doing more his role.
And just as small little fun fact, part listeners and shareholders, who may not know, but Greg actually speaks five languages. So I think as we become more global service that that's skills that will really benefit the company notices and say, how well job C plus plows.
[laughter] like.
Yes.
How do you find time, Greg do all that is pretty high. We're so excited about the next decade of Netflix growth, we definitely got a good start.
But the opportunity across the next decade, it's just amazing for US it's a lot international as Greg was referring to but.
But I couldn't be more excited about it and it will be great absent help.
Span the globe and.
I'm looking forward to that and to be totally clear I'm in for a decade. So it really clear on that Ive infer that go.
Okay.
And as co CEO its two of US full time, it's not like a part time deal.
So it's definitely broadening mednet management team and helping us grow even faster over the next 10 years.
Great.
Maybe you read from your perspective, now that you would have.
I didn't mean, you set up is there any kind of.
Growth plans, maybe that's out of the oddity that you might be thinking about I mean, its netflix that makes 10 years the theme that compared to the Netflix in the last 10 years. So if you could just help us think through what's your priorities are potentially now that you're getting a job with them.
You know the three of us been working together so long there's essentially no difference next quarter I mean tests cut some increased external stature and you could put bigger deals together for us and that's really cool.
Greg will start to spend more time around the world for us.
But think of it as much more consistent with past the different and then the beautiful thing about the next 10 years is we've got a good model, we just need to make it better every day, we work looking or service better trying to make it. So you know the Billboard on the front as you why you could just click and watch it and just like try.
US that result.
And then of course, having amazing breadth content, which we've been expanding you know couple of years ago, We only had premium TV.
Now to be really good movies to be really good and then scripted converging in animation very strong and local language shows and series I mean, it's just it's incredible the expansion it's pulled off over the last five years, so thinking about its just us doing more of that at higher scale than pleasing more Pete.
So no change in the focus or the execution [laughter] caring for greater scale.
Correct.
We have to make the shows in the films.
That people love and the stars that they want to spend more time with and being able to launch those brands whatever your taste as all around the world is such a monumental job on I'm just throw the we have such a strong team to do it together.
That's great.
Maybe you could just.
Start with.
The environment, given the middle off right now.
Seem to be as seems to be opening up Mount looks like things might go back again it anyway.
When you think about the environment around you.
A lot around have has seen the way we work.
The workflows around different organizations. So when you think about.
Your plans for Netflix going forward.
How has covered and back to your plans in what instances are these plan changes permanent and can you actually benefit either from a cost perspective overflow perspective in some ways that might be here to stay for much longer.
You want to start fence.
Right.
Sure I mean generally can on it it doesn't change too much I mean, what we've learned is that the internet as you read said, even last quarter. We know that's a more important part of our lives and Thats kind of here to stay and also the people of film and television shows. So that's our strategy is just to get better and better every day with that content with that product because we.
Talked about.
You can see into business and we can talk about it here at some point you obviously, we've seen some pull forward and in our member growth, if you will but but frankly, our strategy hasn't fundamentally changed theres things on the margin in terms of things around real estate strategy in.
No.
How much content, we acquire or commission in certain parts of the world, but fundamentally our strategy remain the same and the growth opportunities as big as ever.
I could jump in on the production side I mean, it's been bend remarkable how nimble the teams have been.
Going from full blown production to completely shut down to ramping back up all over the world into space with a few months.
I think some of the things like the safety protocols that we're putting into place around the world will become a permanent part of production, which is a good thing I think this time in between.
The shutdown and ramping back up the extra time that was spent on scripts and development and preparedness will make the the shoe, it's actually more efficient, which I think we'll stick around.
I think when it comes time to releasing the programming and the content to the world and working with the press on how we do that we've done this remarkable virtual press junkets with our publicity teams that have put talent in front of the best writers in the world.
Almost uninterrupted just from their living room, instead of a hotel room.
It's been the pickup in the efficiency of that there's been some some parts of that I think we'll probably last a long time.
Different marketing functions, how do you backfill not being able to host of screening.
All of those things are are being learned and I think some of those things are going to be appropriate for certain content.
Today on.
And but I think we'll just be better and smarter the way that we've come out of many tragic things in our history.
It's a pile on and I think it's been an opportunity to accelerate things that we were already excited about now when I see Great example is.
Creating its or technical infrastructure that allows distributed.
Content creators artist things might visual effects artist animating artist to be effective when their home you know and.
Collaborate collectively on assets, we think that was in the plan before this all happened, but it's the opportunity to accelerate that and make sure that were incrementally more effective during this period. It's been great. We'll learn a bunch from and I think will serve as quite well as we go back to a more normal working.
Yes.
That's great and when you get a first half in terms of the subscriber numbers. Obviously, you guys did close to the numbers that.
All of 2019 bid.
And so when you think about your guidance conduct unfixed. It does seem to embed and expecting kind of an order going forward of growth.
But over this period Weve also seen cord cutting reached record levels and that doesn't seem to be slowing down and some parts of the world again seem to be shutting down the.
Right now so if you could just help us think through the framework for growth for the next quarter and the guidance that would be great.
Sure I'll take that one.
Okay. So can you really now that I mean.
When we think about the guidance for Q3 were not thinking about Q3 just in of itself. We have to look at it in the context of what just happened in Q2, and we just added 10 million members, which has the largest growth we've ever had in a second quarter and.
And if you look at the so we kind of look at the totality across the Q2 in Q3 period and and if we look at that.
That quarterly period in two quarters in a row the best we've ever done in that period is actually two years ago in 2018, where we grew by 11 and a half million members. So if we this year deliver on that Q3 guidance I mean for growing 12, and a half million members in that same time period, which is a million more than we've ever done.
Which as you think they growth on top of what was already a very big Q1. So the nice thing is that those those newer members are actually highly engaged for sticking around with us actually as well is better than than pre covidien. Our service keeps getting better. So Netflix 2021 is going to be a much better service the Netflix 2020.
Which give those those newer members and existing members even more reason to stay highly engaged stick around and also to entice.
Future members to join so we think that the growth opportunities as big as ever there is just that kind of near term forward that you're seeing.
Okay.
And when you think about.
On the components of guidance.
Obviously, what stands out as the margin and marketing spend as a proportion of revenues is 7%, which is obviously extraordinary.
So when you think about and also the guidance with respect to content being more backend.
Next year versus this year.
I would suggest that as you go into the second half of this yet in first half of next year, you're marketing spend should continue to be.
No. Other unusual so first of all is that if that's the right way to reader.
And structurally does this also means that the amount you need to spend on marketing.
As it has both of the kind of engagement growth.
Youre going forward.
What are the things this unique about our services our member spend a lot of time on Netflix everyday so it turns out the best place to talk to them about Netflix is on Netflix and our investment in time energy and dollars goes into kind of building. The the conversation the zeit guys. The buzz around our shows in our stars and how.
Do we.
Make sure it would give amplify that even when you're out on Netflix, but in terms of the March towards less traditional media, we've been on that for some time.
Meaning that it's just a more efficient more impactful than more global way to talk to our members is not through always through the most traditional channels. So yes, you, whereas you're spending less but doing more.
They tried to attract buzz and attention to our shows trying to cut through a world where there's a lot of choices.
And maybe the only thing I'd just add is a little bit of whats had touched on earlier, which as we assume marketing in general would be about flat. This year, which is still about $2 billion spend which is a tremendous amount of spend across our marketing channels, but it does look like there will be lower because of some of those things were now in this in this kind of new world in terms of.
More virtual junkets, and PR and actually not doing as much awards marketing and those sorts of things now some of that is temporary in nature. Some of that is permanent learnings as to how we can be more effective going forward, but I think you're right that as a result.
Most of this is just consistent with our strategic shifts and some of it is some near term I.
I guess cost benefit from what's happening in the oil.
And so.
Leasing can on that.
The service, it's just been able to generate amazing viewing.
So as a service gets better and better.
We're able to take advantage in that.
Right.
And when we think about your margin guidance for next year in that context, you have been improving margins about 300 basis points every year, but looks like that as incremental opportunity now, but the guidance for next year, that's consistent more or less with a broader framework. So is that just conservativeness or is there something guiding that as we go into next year that's called.
Tamping down the expectations.
[laughter].
No great growth opportunity for us so any revenue upside we would tend to put into more content for our members.
Which generates more growth overtime so.
We've been pretty good about that would you taken that upside and then converting into more and more growth through surface quality, so that would be the plant.
And I was just said yes.
We tend to read point, we're always looking to spend strategically invest strategically in the service. So we did signal that in a very near term there may be some margin upside. This year in 2020, but we're really kind of trying to manage to that multi year continuing to increase our margins, which is why I wanted to let folks know that were at this point Matt.
Surging still two way another 300 basis points increase next year, which would get us to that.
Margin and worth reiterating in an environment, where Netflix 2021 is better than Eplex 20 Yep.
That's great and so just to follow up on that comment when you say, it's better and 21 versus 20.
Are we talking about.
Subscribers are we talking about.
The amount of confidence to how should be for him back.
I'm talking about the forward trajectory of the of the re leasing of the concept that's coming out coming your way I mean think about a right now at a time, where most of the world is that a standstill.
The rest of this month, you're gonna see from from Netflix.
A brand new series the start gather lankford from search and reasons why called Curse, a big large scale movie that kind of re imagined that king Arthur legend.
We have a sequel to one of our biggest movies kissing but to the the original that kind of birth romcom movement on Netflix.
Joey King Jacob already we have a new season umbrella Academy one of our most global and most successful series on Netflix said it was a big hit for US where that came out in that first season and 19.
And go rolling right into it a big high octane action thriller on a project power with Jamie Jamie Fox and just have Gordon love. It. So it's that kind of ongoing feet of content in programming thinking about this it last year. We are we have we had barely dabbled in competition and reality programming this quarter alone with floors law.
And.
Too hot to handle we had two of our biggest hits ever in that in that not just in that genre, but in all of our programming.
Two had to handle as a percentage of watching was is big in Japan as it was in the U.S., which is a wild phenomenon. So that that to me is all those learnings that keep compounding and keep compounding and expanding across programming genres that make it a great value for consumers.
That's great So I guess.
Sticking on that seems sort of Baird. When you think about the content mix, obviously, that's changed quite a bit over the last few years.
With the gallery shovels and now animation and so on so when you think about this particular mixed reality shows do seem to be a better return on investments in some ways because none of them have shown that make too hard to handle isn't that dropdown list was there for some time.
So when you think about this mix.
Fair to think about reality shows or maybe documentary programming as being.
Thank you better done and therefore, the mix shifting facing more than they would have that and is this even a framework that you consider which is you know when you invest in something that are done better works with the engagement.
The big motivation to invest in reality and unscripted is not the cost savings or production, but the love that people have for this programming and how important it becomes in People's lives. So if we're trying to be more and more.
Your go to destination for entertainment not to ignore.
An area of programming is kind of dominates broadcast would be so they have us. So we've been dabbling in non scripted and reality.
Kind of got very very.
Accomplished and the documentary space, and then have moved that over into to expand that to unscripted and the now the competition space, which is only are there was only our third or fourth show really in the in the competition space, we've dialed into but the motivation really as consumer love for the programming not marginals cost savings.
Got it.
And Greg just do you think.
Think about the word from a distribution perspective, there's a lot going on right now in terms of disputes.
Coffin, each field and not getting counted on roku and of course, they are having problems with Amazon as well.
Normally when you think about this I mean, it almost seems like the legacy cable network MPPD disputes over the past.
Where the aggregate those that essentially becoming gate keepers.
How do you see this playing out and is this a risk in the future for Netflix.
First of all I think it's just really unfortunate when those negotiations between a device manufacturer and entertainment service refinery get to this point, where it really impact consumers. They can't watch the shows that they're thrilled to watch on the device that they have.
We've been lucky.
The working investing alongside collaborating with a wide wide range of device manufacturing partners around the world and really working together to create better Netflix experiences on those devices and that's that's really a very positive model. It's really a win win win right. It's great for us.
We get to reach more of our members with better experiences its great for the device manufacturers because those experiences make their devices more valuable more attractive and most importantly, and ultimately it's a win for consumers to sort of the benefactors of those better experiences. So we're going to keep investing.
In that model, we have a whole teams that basically do nothing but work to make that whole process better to make it easier for our manufacturing partners.
Indeed, ingest the technology that we produce for those better experiences the thinking about how do we leveraged.
The qualities and features of the devices that those manufacturers are investing in their side, you're really show up on those benefits and I think we're hopeful than we expected that positive model will be able to continue.
Okay.
And then I guess.
Other model for distribution is just one deals with NBP. These as well as wireless companies and you have a number of these deals globally. So when you think about.
A mature markets like the us where some of the rest of the world.
Your guidance for next quarter as well as a broader growth between book would suggest that marginally these become a bit more important than the organic growth channels. So how you're thinking about.
These wholesale distribution deals what kind of or or do they have going forward and what's the objective youre trying to solve for when you will get into a deal with these days.
Yes.
I think you havent rank, which is that we think the diesel growing importance, but I think it's also important to note that date rain remain a relatively small percentage of our total acquisition and really what we call. The organic channel people signing up with US directly is still very much the dominant node, we sort of think about.
The the criteria, which we sort of are evaluating these partnerships on Q2 for US obviously, we're looking at it as how much growth acceleration, which membership acceleration do we get by adding a channel like that but then wanting to understand sort of what writ large or the revenue impacts rate or some cannibalization or it might be different.
Phenomics involved so we want to evaluate that and make sure that we're doing these on a positive our revenue basis and then the other very important lenses, we actually sort of look at it from one of the consumer experience, what's the member experience and so we're looking at qualitatively to sort of understanding with that member journey. It isn't working with those partners to make sure that that is.
Positives as friction free as we possibly can and we all obviously backing up with the metrics to right. So we're looking at engagement to how frequently people use the service churn characteristics to really make sure that we're delivering a high quality experience to our members through this channel and I would say that were very positive on both of those fronts. So.
To your point, we expect to continue to do these deals to expand the silver working multiple partners both in.
To your point territories that worked through.
Further penetrated in but it's also agreed accelerant to territories that we're still in earlier is and so we think both are great places to do that kind of.
Okay.
That's great and then I guess.
Looking at pricing, which is also fighting.
Linked to the distribution discussion, but some extent, but when you think about the pricing algorithm we've come to expect.
It's being in that mid single digit growth range over time for Netflix, but more recently I think when you strip out the effect of the price increases its trending a little bit lower than that because of some of the newer plans.
And we'll think about the pricing algorithm.
How are you thinking about that going forward and this is it's still the theme mid single digit kind of a growth profile that you're thinking about or has that.
We haven't changed.
Yes, I think it's important to start with just reiterating what we mentioned last time that really flow through the last several months weve been principally focused on just making sure that the service has been there for our members when they turn to us for a moment of escape.
Entertainment and so we're very much enthusiastic about being able to serve in that role.
You know and actually we've invested in making the service more valuable through that period of time, adding more content anywhere service features onto that period as well, but we look forward I would say every country is in a different mode.
And so we're going to extra continue to assess a bunch of different factors over time, we'll look at macro factors country by country. We'll also look very closely at on our specific metrics and siometrics like engagement like churn and those are the signals that we have.
We're indicating when we have created more value for our members. So back to your plan and it's not so much sort of a an off priore plan that we have that really more using those signs that we've done a good job building more value for our members, which indicate to us it might be time to go back to them and asked them for a little bit more so that we can then.
Invest that further into the amazing stories, great content, better partner experiences and create even more value for them.
And can on just to remind you we don't narrowly manage tours in ARPU number one ARPU growth numbers are orientation is really optimizing for revenue.
Great and so.
When do you think about the way you manage this whole dynamic on AG, which is revenue maximization, obviously units that have particleboard pricing is a part of it but the other important component of this is Chuck.
And back.
Given the scale that you have right now even small movements in China can have a massive impact.
Broadly on the Internet income statement.
So when you think about.
John given the covert bdcs and the increase in engagement.
Is that structure, the leading to better churn performance in cohorts that potentially new where where says cohorts that came in earlier. If you could just help us think through consumer behavior.
Caused us be viewed as engagement has gone up that would be great.
Spend humanistic.
Sure I can start I mean, the short story can on is that.
These newer these newer members look very much like the.
The members our pre existing members of the business. So it's very broad based and you can see these numbers are coming in from everywhere in the world in a few million each and in APAC and EMEA and you can and then a couple million and let them.
They are highly engaged.
Actually the retention across every cohort is as good or better than pre covance. So.
Not surprisingly the.
Membership.
Base, both new and older loves film and TV content, as we said and they look pretty similar I don't know krager, Ted or other suggests that.
Maybe the one thing as of this sort of big structural engagement change, which was sort of really a result of people being.
And lock down in quarantine and in turn if not for for some escape I would see dispenses point backing up the high level turn pieces and we look at other sort of metrics that inform how they're engaging with the service we see it seeing very very similar to remember we added creek of it.
Okay, that's going to say can on its a little over simplified, but I think of it as when someone churns, it's always temporary.
They are going to come back it's just a matter of timing as our service gets better as maybe their income increases as the internet gets faster so we'd love people to get a taste and thats like we hope they state.
For 50 years.
But if they drop out we think it was always temporary and we're going to work hard to get to prove to surface enough that they want to spend money with us.
It's been interesting to see the evolution of our relationship with that member.
Where they used to think of us as the place to watch the reruns of the shows that they missed on other networks all the way to now to where they come to us to be their favorite show and now for Friday night at the movies, where you have Netflix premiering the biggest movies and the world on Netflix so it though it's an evolving relationship constantly but.
Nothing unique and discuss this subset of folks in terms of they're watching and their trend there term behaviors arts exciting.
That's great and then I guess.
I think about.
The product itself one of the big discussion points have been content discovery, because there's an enormous amount of content and that out an enormous number of streaming services now.
And so if you've got to sort through all of that.
In order to figure out work to watch so.
When you think about content discovery I mean, Greg I know you've done a lot of a beat this.
The year to one hundreds of them. So what are the kind of things youre thinking about in terms of improving the expedience you have the top 10 list how has that down if you could just give us some sense or how you're looking at that issue yes.
Well I'll just I'll talk about the top 10 listening get to the Big macro question, which is one of my favorite questions of course for thanks for asking that one but.
The inflow of.
A nice little positive lift in overall engagement if not.
Game, changing but more importantly, it actually speaks to what we think is a real member needs at some of our members not all have where they want to know what shows are popular so they can watch goods easily and then participated in the in the broader social conversation that's happening around that shows, but I think it's indicative.
Of the kind of work that we need to go do right and I think that.
We have created literally the most incredible collection of entertainment options that has ever existed available to consumer at a click of a button and his team is producing more and more fantastic content enters accelerating rate and that is for our members simply wonderful.
Creates.
Well challenges and opportunities for us as a product team to think about the experiences that we evolved to make the process of choosing and finding a great story and not.
His delightful and diseases, we possibly can and now the way we think about it is actually that we have to Nick almost every aspect of that experienced banner and it's not going to be one thing that's going to be sort of like suddenly.
Make a perfect choosy experience. So we have teams that think about you know exactly how what titles are perfect for each member how do we depict those recommendations make those better every single day, how do we present those titles in a more compelling way a weighted specific to what we think the member's interest is we're thinking about how.
Our user experiences work and the features and now that are included in there we want us to adapt and evolve so that they can be responsive to the specific needs.
Growing number of members around the world had rowing in diverse needs from our experiences. So the perhaps sort of unhelpful answer is it's going to be like literally hundreds of themes that are gonna have to change, but when you aggregate all those changes there transformative and I would invite you to go back and sort of looking to Netflix experienced from.
Five years ago compared to today and it's just stunning how much progress we can make through that process and we are we're committed to making even more progress sort of in the next five years succumb to make that well have content.
Our joint for our members around the world.
And so read I guess, one other questions at this raises is that given the amount of content I'm going to common that you had me I think this was in 2017.
Was there Ed was not feeling enough when it came to.
The success trader Joe's and here.
[music].
Do you think you're at a point, where there is enough balance in the portfolio of content that you have or do you will see like Netflix has to take more risk in terms of the portfolio where are we in terms of that mix in content.
I feel excellent about the number of big bets.
The Ted has coming up.
On Privy to stuff that we're doing now that will come out of the two or three years.
No. It's a little like Amazing I mean, you know and some of it will turn out truly great and I'll be so proud of it so I.
Cited that were taken those risks.
We want to have so many hits that when you come to Netflix you can just go from head to head to head and never have to think about any of those other service.
You know we want to be like your primary your best friend, the one turn to and of course occasionally there's Hamilton and you're going to go to someone else is service for the extraordinary bill, but hopefully the most part we want to be the one Nick just always please.
Minions simple easy Joe's.
That's great and debt from your perspective, and you think about production worldwide, obviously vs. Tim in a shutdown mode.
And that are still issues around the world.
And where things are betting getting better once you see it seems like they would be some impact of the 21 landscape given your comments about it being more backend weighted.
But then on the other side you also have content that the studios are not even put it means.
For Ed recurring right. So when you think about this.
Does it make you think about the mix slightly differently, maybe do we get a bit more movie heavy initially compared to what is most maybe later than the year and.
What else can be expect because of the kind of disruption going on right now well as I mentioned last quarter, one of the benefits of releasing our series all at once is that we work very far ahead.
Of our release cycle. So that's how we're able to continue to release this ongoing steady flow. So even during the shutdown were partially shot on a lot of shows so we picking back up because I like starting from scratch again.
So.
Outside of North America.
Parts of India, and Brazil, we're running pretty.
Pretty much on in a normal for a normal fashion in terms of our volume and there around the world and its ramping up in different various stages, a pre production and we've got a couple of shooting days and Kelly in Los Angeles. This week that we're really excited about that's coming back around so I do think that.
Ability to keep up with that is a lot to do with our kind of unique offer to the consumer that turned out to be.
Hidden benefit at a time when things would be shut down and the other one was they kind of nimble nature of our creators who could on a dime pickup post production remotely on shows that were already running.
And as far as film to TV. They both require a lot of prep work a lot of creative at the beginning.
Production and then a big along with production cycle simply very similar in terms of the work cycles I don't see us pivoting to that I do see that theres opportunities use we did a few with the studios to pick up some movies that they were having a hard time releasing.
And then we've also picked up a couple of nearly finished seasons of television with the brand New show called Emily in Paris, and we've got coming up later this year.
Like Collins that we really love and Cobra tie that we picked up from Youtube not just the first two seasons, but a brand new yet to air third season that we're finishing right now.
And that by the way it was a show that was super competitive three years ago and they brought to market.
We were we were devastated not to get it to get to start with so we're excited that have cobra guiding that ethics family. So there's all kinds of adjustments our ability to license and produce create very long lead and very fast like you saw us due at the Tiger King finale episode that every couple of months ago.
It gets our ability to do all those things that.
Make me really excited to jump better been come to work in Netflix in the morning.
Great I'm going to think about different pieces of content movies were such TV shows or even but then TV chose different genres.
It did any difference in what is your nation with as retention characteristics of different pieces of content. The movies, but as you may impact on anything better worse as TV shows I mean is there anything you can tell us about that.
Both films and TV can have the same exact attraction to consumers in terms of what gets me excited how they behave after how they retain afterwards.
How they tell friends all those things are really great experiences, what they're looking for and if it does the chances are there going to have that are higher on Netflix in anywhere in the world going through the thing you're talking about earlier about having so many great choices to make.
But I think a a film when it's usually successful can be very acquisitive can be attention it could be retention driving.
And also could be bring a lot of joy to our members.
Serious can do that as well as I just depends on which are in the mood for.
We have time for one or two more questions sure.
Maybe spend a couple of questions.
In terms the guidance in the financial then one other things that came out was.
The free cash flow margin was 15% and.
Your EBITDA margin operating income margin was obviously, 22%. So could you just help us to bridge the gap on how do we think about cash flows.
Going forward sure. Thanks for noticing the positive free cash flow margin cannot.
I'd say.
Q2 things explained that variance.
Number one is obviously capex.
So that was about 200 basis points of the difference between the free cash flow margin and the operating margin. The second Ics expense item was interest expense, which obviously falls below operating income, but also reduces free cash flow and they're just keep in mind that while we accrue our interest expense quarterly we pay cash interest primarily semi annually. So you actually have about.
Roughly two quarters of cash interest expense in Q2.
Yes, I just add assets trade sensor and I'd, just add dispensers pointed to think about cash flow going forward.
You know it was sort of a bit of a unique window into that forward looking cash generation.
Turning to Europe or potential for our business because of the pandemic. So.
We generally our forward investing into the growth of our business and into content. So our content cash spend is in excess of our of our content expense in the given year, but because of the pause in production you can see that.
Basically that cash spend an expense in content, where the same this quarter essentially at a one to one ratio and as a result, as we said in letter, resulting in a 15% cash flow free cash flow margin.
Going forward, we do expect to turn cash flow negative began in 2021 as our business and our production ramps up but we're still on that multi year path to being cash flow positive and and when we are sustained cash flow positive, we expect to be a much bigger and more profitable business. So hopefully that 15% cash will mark.
Just to start.
That's great.
So I guess.
Since we have time for maybe one last question.
We could just.
Think about the word going forward longer gum read from your perspective, a lot of the franchise with better getting creator in today's world seems to be coming from the video gaming site.
A lot of shows that you have which have been very successful have been from that side and obviously some of your shows have become video games.
In some some instances.
So when you think about.
And even the interactive video some of your show makes them feel like when you again. So when you think about the we have learned as evolving it just seems like these two sites of the world are starting to converge to some extent both in terms of the kind of content as well it be experiences.
So why not think about video games as an extension of been Netflix is today. If you could just tend to think through that framework and how you consider that going forward.
Sure. Okay, let's think about franchise IP development and Harry Potter and then there's hundreds of enormous.
Come out of.
Well like books.
Then there is Marvel and our own the old guard.
Come out a comic book World.
And then you know there may be a few coming out of video games, but thats like pretty small so really think of it as the big franchises.
Have come out of books and comic books.
Now video games that you know greatly interesting area. You know, it's got a number of aspects in terms of multi players that are changing E sports that are changing PC based gaming.
So it remains a very interesting area, but tests got big plans to spend future billions and our movies in theory at an Asian and then.
So you know we've got we've got lots of places to put the money.
And we're definitely.
Focused on creating franchises and maybe Ted.
In your co CEO role.
Ill wrap us out here with final comments and a about upcoming franchises.
Yeah look I think franchise is a success the active successfully successful well building and video games, obviously you have world.
All building aspect to them.
But soda books, and so it a graphic novels and sort of comic books and sodas original IP.
And really just as a matter of how well its executed.
We were really unbelievably encouraged by the the first.
Attempt at here with.
The old guard, which is kind of a new flavor of that kind of storytelling that I think has got a world and store areas to be told for sometime to comp.
I look to other things that were more original IP like like Casa de Pops out which in this quarter. The gossip about was the most watched new season of television on Netflix hard stop not just not English English and that and second its fourth season.
And it didn't become an incredible world that we're going to keep building on if the keep building on so IP.
Is is a great place to start, but it's like everything else in the world, It's hugely execution dependent and if you do it well people want to come back for more and you don't disappoint them you can keep doing it. So we're really thrilled about it and thrilled about doing it from a variety of sources.
That's great.
Thank you all.
Thanks.
Thank you.