Q4 2021 Netflix Inc Earnings Call
Joining me today are co CEO Reed Hastings co CEO, and Chief content Officer, Ted Surrenders, COO, and Chief product Officer, Greg Peters and CFO Spence Neumann our interviewer. This quarter is nearly Goethe from fidelity as a reminder, we will be making forward looking statements and actual results may vary <unk>.
<unk> over to you now to kick off the Q&A.
Thank you Spencer good to be with you all again, great to see all the new content over the quarter has been a little less productive. So I think I can blame you for that.
As usual I'd like to start with net adds during the quarter, which came in a little bit lighter than you expected just help us understand the underperformance there.
$8 three versus eight five.
Yes.
<unk> hundred $42 million.
In fairness it is that it was a little shy so I'll take it.
Instead, we delivered.
First we're quite pleased with how the quarter.
Played out we delivered $8 3 million paid net adds so it was just a bit shy about a 10th of a percent on roughly.
Roughly 222 million paying members.
Overall, we're quite pleased with how our titles performed we had big viewing we started the quarter with squid game, becoming a global phenomenon and we ended the quarter in December with Big television series like the finality of the cost of the power of Big returning show in the which are our two biggest movie releases of all time so overall.
The business was healthy.
Tension with strong churn was down viewing was up.
But on the margin we just we didn't grow acquisition quite as fast as we would like to see in our large subscriber.
Our subscriber base a small.
Change in acquisition can have a pretty big flow through in paid net adds in and again our acquisition was growing just not growing quite as fast as we were perhaps hoping or forecasting.
Great and as we look ahead.
To Q1.
<unk> was a bit below.
Kind of what was expected and what you've done in previous Q1.
Maybe just help us understand what some of the key considerations were that went into the guidance and.
Does it raise any concerns for you about anything structural whether it's competition or saturation.
Does it give you any pause in terms of starting your return on content spend.
Sure no no structural change in the business that we see whats reflected in the guidance, we guided to $2 5 million paid net adds in Q1 and what's reflected there is pretty much. The same trends we saw in Q4, so healthy retention with churn down.
The viewing and engagement with viewing up an acquisition just growing but a bit slower than pre COVID-19 levels, just hasnt fully recovered and we're trying to pinpoint what that is it's tough to say exactly why our acquisition Hasnt.
Kind of recovered to pre COVID-19 levels.
It's probably a bit of just overall COVID-19 overhang thats still.
Happening after two years of a global pandemic that we're still unfortunately, not fully out of some macroeconomic strain in some parts of the world like Latin America in particular.
While we can't pinpoint it or point of straight line using <unk>. When we look at the data on a competitive impact there may be some kind of more on the on the marginal side of our growth some impact from competition, but but again, we just don't see it specifically.
So overall, that's what's reflected in the guide I'd say, we are big titles are also landing. These are known B titles, a little bit later in the quarter with season two of Bridger tune in March the atom project also in March.
We also while we are taking changing prices in countries every quarter.
In Q1 of this year it happens to be our largest country as we announced last week and actually our largest region with Canada as well, so that's probably a little bit more impact than a typical quarter.
But youre.
Youre right to reflect on two years ago, we were $10 million above plan, which was a shock.
Last year, we were $10 million below $9 million.
And so the pull forward.
It makes it hard to read in the prior years, we are very steady so we get our confidence on incremental trends.
But as Vince said.
We reflect of course, that's all.
<unk> died.
And we think it will be accurate.
<unk> at all.
What's going on.
There's a number of potential explanations with Covid, but then we worry about having too much on that.
There is more competition than there has ever been.
Hulu Amazon for 14 years, so I don't feel like any qualitative change there and.
And overall confidence in streaming becomes all of entertainment linear dissipates over.
The next 10 to 20 years very high confidence in that thesis because everyone's coming industry.
So like market size very large.
Execution steady I think better so for now we're just staying calm and trying to figure out again, the COVID-19 has introduced so much noise.
It just wants us to give us some pause as we work on everything we've always worked on.
Yes.
I'd say, we took a.
Big Bad years ago on this that people would move onto Netflix and Netflix type offerings to consume movies in film that was a big Big bet that we've seen continue to go through it we have no change in our confidence in that and I think what's really been great about 2021, even through all of those conditions.
April to kind of prove out to other thesis that we've bet on starting years ago, one big one around our investment in international programing.
Glad that we started that seven years ago with <unk>.
And now we were betting that you can take films and series from anywhere in the world and entertain the entire world and we were getting more bigger and bigger milestones against that goal and now we have proven to have kind of global sensations from France with Blue bar.
From Spain with like I said up about a leap day and then in the biggest way possible.
2021, with good game, which has become our biggest series ever and it is unapologetically and perfectly Korea. So it's not built to be this kind of global thing, it's proving that great storytelling from anywhere in the world can entertain the world and our other big that was our investment in big budget feature films and our bad debt, we could effectively.
We released them and compete with big theatrical releases for audience for attention and Red notice.
This year of course, and don't look up or become our number one and number two most watched movies ever on Netflix and if you look at the hours that we publish out you could do the math and back into it they may be the most watched movies anywhere in the world This year.
So I think those two that's coming through it kind of strengthens our confidence in the overall bet in the service and pleasing customers are leaning into consumer first business models.
Could succeed there.
Yeah, No and I think I think that's part of the question right. I mean, this was probably the best content in coronary you had.
And looking at sort of flattish subs versus previous Q4, obviously, a great number but kind of in line with what you've done in the last few Q4 s.
What do you read from that.
The customers tornadoes.
Hurdle just higher in terms of.
The amount and quality of content that you need to that you need to deliver to get the same <unk>.
Number of net adds.
Well I think it's been sort of thing if we didn't see it in engage we didn't see it get a hit to our engagement we didn't see it hit the retention all those things that we would classically lead you to looking at competition, but it has to have all of those things where not only are we in a pandemic, we've kind of come in and out of COVID-19 at different levels in 2020 one, particularly.
The back half of 2021, so it's created a lot of a bumping is certainly not a steady linear growth, which makes it a little tougher to predict but all the funds all defense funding vessels of the business are pretty solid.
Got it.
You announced a U S price increase last week.
Maybe just help us understand kind of over what timeframe do you think that's all flow through what kind of churn you might expect.
Yes, I'd say you can anticipate it flowing through over the next quarter to quarter that we're in right. After you won and.
We largely are seeing in the pricing as we've done most recently and for the earliest indications that we have and you guys would still premature because we actually haven't actually roll it out to any customers yet.
What we've seen over the last couple of years, which you know is that sort of core theory that we have that if we've done a good job of investing.
The members a subscription fee that they paid us into better stories more great storytelling bigger movies more variety than when we come back and asked them occasionally for a little bit more to keep that sort of cycle going then they are generally willing to do that and we don't see any significant disruption to the business otherwise in that regard.
And I would say.
Generally when we look at that sort of core theory, and we look at also the competitors. If you look at Disney plus is an example of other streaming services out there as well and their ability to grow EBIT as we've been growing as well I think it's really strong endorsement for the core idea that consumers around the world are willing to pay for a great entertainment and encourages us.
As to to continue that investment.
Hi, and deliver more entertainment value and earn more of that share.
Yes. It is.
A good point about your streaming competitors.
I look at sort of your steady price increases in the U S. It doesn't seem like you feel too constrained by where those competitors are priced.
So is that a true statement.
And I guess as long as you're viewing share sort of multiples of any other streaming service in the U S. Should we think about your price relative to cable actually as as we sort of think about your runway not that youll get there overnight, but as we think about your runway at that really started in the comparison, we should be.
Thinking about it as opposed to other streaming services.
Yes, we don't have.
A priori sort of price target in any given country that we're tracking to mostly we're listening to our members and sort of iteratively doing this work where the metrics that we see in terms of engagement in churn and acquisition and those kinds of things are really our signal that we've done a good job.
Creating more value and it's the right time to ask for a little bit more to keep that going so.
Yes, so the previous comments around competition and things like that we don't think that.
Immediately replaceable or Substitutable, good, let's say right and so if we have incredible stories of movies that you can only see on Netflix on great television shows unscripted now games coming than that really.
The value equation for any given remember remember to be in a market. As you know are they getting good value for what they're paying as long as we do a good job there we feel like we're fulfilling that need.
Great.
You also made a price change in India in the other direction.
Maybe just help us understand what you are trying to achieve with that price change yes.
I think it follows a whole set of activities that we've been doing in India over the years that we've been operating there and learning more about Indian consumers' tastes et cetera, that's broadening the offering and the service across many many different dimensions. So it's obviously at the core is the content and the programming and seeking to.
Spanned that and provide increased variety and a range of programming that appeals since attractive to more and more people in India. While we're thinking about go to market and the partnerships that we have and making sure that were available with those partners at that place where more people in India will find us and it gets to payments.
And many many many things and when we looked at it and we saw sort of the sum total of all those activities. We felt it was the right time to decrease our prices there to increase the accessibility to all of that sort of incremental value or features that we've been to try to deliver to the market to more more Indian consumers.
And we also wanted to do it not just like we did with mobile which is.
A good lower entry price point, but do it across the range of plans that we had under the theory that some of those features like the ability to watch on TV with a basic plan really unlocks more value in the service and therefore would create.
More retention more attractiveness to those plan types for those Indian consumers and again, we're doing this through the lens of.
What's the long term sort of revenue maximization of our best guess at that.
That exchange and so in this case where basic.
Basically anticipated that while we decrease.
Average revenue per member as a result of the price decreases were going to make it up.
In more subscriber adds and I would say, it's still very early and looking at India and some of these effects like retention. It takes a couple of months to get a very clean read on it but the early data that we're seeing very much supports a positive read on that lens of revenue maximization through these changes.
And maybe as you well know, but not all viewers, Mike what's unique about India as cable is about $3 per month per household so radically different pricing than the rest of the world, which does impact consumer expectations.
Right.
If this approach doesn't give you the desired results and it sounds like it has so far but fast forward six months or 12 months from now and I think it can be either the desired result would you consider sort of right sizing your content spend in India or maybe consider an AD supported model I guess in other words.
How hard do you want to push for India and are there examples of success you see either in the media industry or outside of it that gives you the confidence that you can make money in this market long term.
No I think it would be a long time before we adjusted materially because in our experience.
Brazil was brutal for the first couple of years, we thought we'd never breakeven.
Now we've got this great business.
And then Craig once you talk about the experience in Japan.
We used the word brutal and my my mind my back to that and obviously, it's a <unk>.
Different countries different characteristics in terms of affluence things like that but it took us quite a while to unlock all of these components product market fit get the right content. All of these different pieces, but then once you get that sort of flywheel spinning.
It's been it's been an incredible market for us and a source of tremendous growth.
In membership and revenue in the region. So I think we're quite bullish that India isn't fundamentally different in some way that we can't figure out how to tailor our service offering to be attractive to India and consumers, who love Entertainment, we know that for sure and so that that I think gives us a lot of optum.
Ism to state to continue to work away at it.
I would just add.
Sorry go ahead.
Great News is in every single other major market, we've got the flywheel spinning.
The thing that frustrates us.
Why haven't we been successful in India, but we're definitely leaning in there and there wasn't and there wasn't an easy one in the bunch.
Well, that's kind of what I was going to say like with Ted to it sounds like for as much as we have what we believe is a terrific business and terrific business model that scales, so well with content that can be created anywhere and travel everywhere and you see that with her.
More than 222, basically a million paying members around the world. It's also a super hard its hard in every country in every countries on a different adoption curve in and we talk about product market fit, but it's even though everyone loves film and television and even games. It is very specific and entertainment is still fundamentally pretty local.
Around the world, So, it's global and local and we need to figure that out. So that's that is actually a good thing about our business is that it scales well, but its also super difficult otherwise it would be really easy for everybody to be replicated.
Seem going into producing original content in India being pretty almost impossible. We first started looking at it and then this quarter alone. We've got original content coming out from Turkey when production in Russia.
Argentina from Mexico from Sweden from Denmark. So we've got original content from all corners of the World with 20 original is coming out of Korea. This year. So the idea of the vested in this early in a built up on it and then it really is going to be something that is going to start to we think it will start flowering and India for all the same reasons, a good product market fit content.
Love value that fits with their life and product they can't live without.
All triple down on that that point as well as high because we're I mean, we're still learning even now as we have these incredible stories from all these in place around the world.
To bring them to that global audience and increasingly effective ways and it's simple things, obviously like sub titling and dubbing and subtitled 7 billion in run time minutes in 'twenty, one and <unk> 5 million runtime minutes, but at that scale, we're learning actually how to do that better and how to make that localization more compelling to our.
Members, but also get to even like things that you wouldn't even anticipate language. How you present. These titles in an emotionally evocative way we describe it story, maybe as a soldier or area that means something to us, but you can't just literally translate that you have to find out in every culture and language around the world what is that similarly emotionally evocative descriptor.
That is going to communicate really easily and quickly what our story means there's just there's so much work in an incredibly fascinating things that we're learning about how to do that every day and in many of those places where we built that out there was zero infrastructure for subtitles or dubbing.
Well speaking of our content that travels well.
South Korea as you mentioned has been a really bright spot for you.
If you sat here.
<unk> 20 over 20, new shows there this year.
The unique factors that drove your success in South Korea, and more importantly, what do you think the adoption curves can look like here relative to maybe what you've seen in other markets I'd say first and foremost we've developed over the years an incredible team in Korea in South Korea that is.
<unk> worked with the talent community that recognize the storytelling that really works in Korea that didn't try to make it different.
So it would travel, but really tried to find all the things about Korean cinema.
Rama.
And build them up in a way that people can see kind of a new levels of production value, but it sounds like we had to go in and teach anyone in South Korea to make great content, it's an incredible market for that and Theres always been curiosity around the world. The K drama market has always had little pockets of success all over the place, but I think the ease of delivery that we've offered.
Has kind of pushed that into the mainstream.
Yes, there was a kind of a turning point with.
Parasite and Bong Joon Ho as Oscar last year that kind of opens up people's minds to it but we saw that even way before that with Oprah working with director bonds.
That there was this incredible storytelling culture that we could tap into and that people would love K dramas.
And watch them all over the world. It just wasn't that easy to find them and a Netflix we've been able to kind of put together the great storytelling and great delivery and a great value proposition that has grown.
Watching a korean content in the U S. The numbers I would have never believed three years ago. So a 100% growth in 2021 over 2020.
Well, we get a second season, it's quite game absolutely.
The squid game Universe has just begun.
Great looking forward to that.
Shifting gears to Latin America this region feels like it's maturing.
Lower level of penetration than you've seen in the U S.
Is that due to competition affordability account sharing or something else or maybe you disagree with the statement that it is actually maturing, but help us understand if theres anything you can do differently to sort of.
Drive penetration levels are higher.
Well first I, just I, just wouldn't necessarily read through that that it's maturing faster Nitty I mean.
So again I, just don't want to understate the impact of what we've been going through for the last two years and in Latin America. In particular has been more strained it has less.
Kind of government funding and subsidization relative to many parts of the world to fuel their economy on top of that we also.
For you to increase prices in that market last year across some big big countries for Us Mexico, Brazil, Argentina, so between macro economic factors.
In general strain.
The business is still growing there we grew by about two and a half million members last year, so under the kind of pre COVID-19 growth rates, but still growing.
And it is a market where ptv is healthy folks love film and television.
So I think there's a long runway of growth. There. It's also been a great market for us for Spanish language content that we're creating for the rest of the world. So.
We don't we don't see and others can chime in need to change strategy. We continue like we talked about with India, We're getting better everywhere every year, we're getting better with our local content in Brazil, and Mexico, and so forth. So.
There's a lot more to come but it's not a fundamental change in strategy.
Great.
And maybe just stepping back you've talked about 800 to 900 million homes globally outside of China, that's sort of hear your Tam your call it 25% penetrated into that.
As youre seeing how various markets are playing out in terms of penetration level, some higher some lower obviously, they're all.
They're all still growing.
Has your thought process changed at all on.
How many of these 800 to 900 million homes, you can have ultimately or sort of the timeframe to get there whether whether it's higher than you expected or lower than you expected and how might you actually evolve.
Our content strategy or your pricing strategy to get the next 200 million subscribers.
Yes, I'd say, many we on that pay TV comparison.
We look at it were in the U S.
What about two thirds of the pay TV high watermark.
And so the Baxter is definitely going to be harder than the first two thirds in terms of appealing.
More on scripted.
More Super hero.
We're working on all of that.
Because we don't have sports and news.
You might say well.
We get to 80% or something.
<unk>, that's a good accomplishment, but also.
Streaming TV, such a better experience than the OLED TV.
In some ways, we think to ourselves we should be higher than <unk>.
TV.
A combination of lower pricing and better experience.
So definitely frustrating for us the current slower growth is y.
Well he kind of just prove it effects.
Or it could be as you're pushing on smaller market than we thought but I'm not sure why so we try to be really rigorous.
Thinking about the long term, it's possible that we will get there, but slower than we thought smart TV adoption.
Complexity in those kinds of things but.
We're still focused on the original thesis.
Become incredibly compelling everyone's going to want to be.
So Netflix number.
And I know it feels like we've been saying it for a long time, but it's early days.
It really is and I think about the evolving value proposition and how it's still maturing the idea that big ticket movies that people really care about premiering a being part of your Netflix subscription is actually taking the value proposition to a new level than it was just a couple of years ago. So I do think like I said, it's a it's a dynamic market for sure.
Not be as big as steady as people can think about it in terms of if we're going to add X number every month every quarter every week, but it's going to but there's no question that that's the direction the business is going in.
Yes and.
Ted that's a good segue into where I wanted to go next SKU had incredible lineup of films in Q4, whereas a lot of viewing.
I'm curious what did having a strong film slate in the quarter due for you relative to periods, where you didn't have that did you see more aggregate engagement lower churn more conversation just.
It's sort of unique about delighting, our customers with a film versus a shallow in terms of kind of the benefits that you see theres, a big theory, which is that people.
Differently value movies, because they always have to pay for it and you have to buy a movie ticket you have to buy a pay per view transaction or DVD theres always a kind of a transactional and a pretty big one from what for some people to see a big movie premiere in your home.
So there was this kind of temporary effect that some other folks were doing but this is our it's in.
Our premium model to Premier Big movies on the service and I think people.
Even if you really watch mostly television you have a movie night and we can service you on movie night, and I think that's a very big important value proposition that we have that's different from everybody else and that these are the movies that people really love and care about and you start seeing them at the scale of don't look up a red notice in Q4 and it gets you to a super excited as to what could be next.
When.
What's coming next and for that we have things like the atom project coming up with Ryan Ryan rentals, and John maybe directed coming up in Q1, it's a phenomenal movie for the whole family with Big action movie from the Russo Brothers like re man with Ryan Gosling Nice out two in Oklahoma too.
So we just movie lineup that would be that any one studio would kill for any one season, we've got new movies every week on Netflix and their big movies that people care about and we think once that expectation is set and we keep delivering on it.
People will react to that too.
Okay.
Yeah, I'd just add that at.
At the core what our members.
Love and they tell us they love is a great variety of high quality content.
And that means across television film and hopefully games over time in a much broader way. So films are having a great film offering is is for US a key part of that equation and so I think we're just starting to fulfill more and more of that.
Our member needs and wants and satisfaction and that's what we're seeing but it's not like it's just so differentials and something else as part of that overall quality and variety of entertainment offering I also think it differentially serves people watching together, it's much easier to watch a movie together then to make sure you are all tracking on the same episode every week all over that.
If you travel or whatever you do so that kind of together experience well, we can deliver on every weekend on Netflix it's pretty great.
And I think about even just in the upcoming quarter alone.
Talk about variety everyone is very different taste. So anyone movie is only going to serve a segment of the audience that you get big exciting thing like like don't look up in Red notice you can get to a big chunk of the base, but you still don't they're getting it about 60% so to do that to serve everyone. You have to have a big variety of out but so it does seem like a lot of volume, but it's not.
All for you.
So in Q1, along with the item projects I mentioned, we have Munich from Germany, Texas Chainsaw massacre, which.
Which is kind of a reinvention of that franchise tall girl, two which is the sequel to one of our big Y a wrong gums.
The home team, which kept with Kevin James that advertising will be the bubble that's all in Q1.
And plus you know original local language films from all over the world as well so to meet the kind of variety of taste.
Well to really step up and deliver no matter what that takes this.
Yes, yes that makes sense.
You talked on the Q3 call about sort of.
Over time building out the whole experience.
<unk> consumer products live events et cetera around some beer.
And then it obviously starts with great IP and great storytelling, but what else do you have to get right operationally and strategically to really build a franchise and do you feel like you have the pieces in place now.
We're building those muscles steadily with our consumer products, both like the squid game track suits, and then we're making a big push on experiences.
Our mobile and portable and people if we can set them up quickly in developing that muscle obviously, the Canadian muscle we're very young.
Building. So if you think of a world in a few years, where those are strong.
And then you think of the next bridge to the squid gave coming through.
That's what we hope to be able to really put those pieces together.
And people talk about franchise like it's zero or one but of course, there is a complete continuum that will add value in the short term to our various titles.
And we're doing that already through the consumer products world.
People feel a bigger connection.
Does the franchise so it's already working but it's probably 20% of what it will be in a couple of years in terms of the CLO boost beyond just the title.
Scott and I had said on that continuum right, you've got stranger things, which I'd say is as valuable a franchise as exists today and entertainment around the world.
Certainly have things that are in their early stages of becoming a franchise like Richardson, which we launched our second season of this our second most populous however in Q1 and we're also this year, you'll see an origin story on Queen Charlotte and there's incredible Richardson live experiences around the country and around the world are the people that fans will flock to infill.
There are social media feeds with.
And there's a consumer products that go along with that as well. So it's all of those kind of making the franchise.
I'm trying to tapping into one that's been building for 50 years can you build it from whole cloth anything stranger things as a proof point that you can.
Hum.
You touched on gaming a little bad it's very exciting to see worldwide launches during the quarter, Greg I know, it's early days, but what has sort of the reception and engagement and subscriber base and what have your learnings been as well.
Yes, as you say, it's tremendously excited to get to this point because we basically have been building the plumbing into all the technical infrastructure just to get to the point, where we can do this which is consistently launch games globally to all of our members and it's great to do that and now as you point out we're now really getting to learn from all of those games what are the discovery patterns worthy.
Gage and patterns how are they performing what are what our members want from games on the service and it's still very early days, but generally what we're seeing is not surprisingly we have a growing number of.
Monthly active users daily active users on these games and so were generally seeing good growth in that regard, but really the as.
As we're doing this we have been building in parallel what what I'm Super excited about it which is sort of internal development capacity our own game studio we've been hiring some.
Incredible talent that brings a set of experience to this process. We've done an acquisition in this space and that now allows us to incrementally gradually over a period of time.
Get to that sort of the value that you wouldn't read we're talking about where we get to deliver now interactive experiences that are tied to the IP that we're excited about that are timed with that and that I think is really when youre going to see a next level of unlock.
Around the value we can deliver to members.
Given that that gamers tend to sort of consolidate their time around a smaller number of titles comparison video aware.
Tend to consume a wider variety of content.
Does it would it would it be more efficient to sort of buy your way into some well known titles to start an anchor product.
Just the last couple of weeks, we've obviously seen a.
A couple of major companies May think.
Acquisitions or at least announced big acquisition because this is obviously something that's difficult to build organically.
I'm just curious what your reaction to that is and why.
Why isn't Netflix participating in bank acquisitions, given your aspirations in gaming.
Well, it's I mean, it was exciting to see the activity in the space that I think to some degree it's an endorsement of the core thesis that we have around subscription being a great model to connect consumers around the world with games and game experiences and we were open to licensing accessing.
Large game IP.
People will recognize that I think youll see some of that happen.
Over the year to come but we also see back to Ted's like building out of whole cloth and the ability to sort of take the franchises are the big titles, let's call. It that we are excited about and actually develop interactive experiences that are connected to those we see a huge long term multi year opportunity in that.
Two so yes, we're very open and we're gonna be experimental and try a bunch of things, but I would say is that we have on the long term prize really centered more around our ability to create properties that are connected to the universe is the characters and stories that we're building in other places.
Magnify that value for the fans of those stories.
Committee, we have time for two more questions. Okay.
Maybe just a bigger picture question.
Sorry, I might have more than a couple of questions but.
Can you have this global subscription product that's inside.
Hundreds of millions of households around the world and you really nailed to the lean back content, but there is this.
A whole world of interactive or semi interactive content, whether it's gaming or fitness or education and at the more extreme Anders VR content and now everyone is talking about the numbers.
You've obviously already gotten going on gaming, but as you look at sort of the broad spectrum of content.
How much of it do you want to sort of wrap your subscription around thinking about the long term.
When you say how much do you want to.
That would be a high number but.
We have to be differentially grade that we use there is no point of just being in it that's very dilutive.
All proposition.
And so it took us several years to get great at English original series and you saw the letter Google search trends, how well we did there.
We built with a lot of effort.
Strong film franchise, and Thats, you know Ted cost with just the third inning. It's like we're really just getting going into what we think we're going to be able to do there and of course, we've got all the international content scripted documentaries, and then gaming, which initially we're focused on the mobile gaming is a big one so I would say.
When mobile gaming is world, leading and where some of the best producers.
Like where we arent selling today two of the top 10.
For our gaming then you should ask okay. What's next because we're definitely crawl walk run like let's nail the thing and not just for the sake of being in it or a press release, but we.
These are members by having the absolute best in the category.
Ted and Greg has been doing a terrific job on that.
Just continue to work on that so kudos for that.
We're winning in games.
Thanks for that question.
Just turning over to you on margins.
Does the guidance for a lower level of margin.
Gave a lot of explanation around that.
Letter, but outside of sort of the FX impact.
Does it have more to do with some of these incremental investments we are talking about like games and perhaps consumer products.
Or does it have more to do with sort of the lower level.
Revenue growth that you're expecting.
No. It's really just FX duty so as we said in the letter we we lost about $1 billion of expected revenue in 'twenty two through FX. That's about two points of margin. So if you just kind of look at our guide and add that back on we're right on our pace of adding about three points of margin.
<unk> per year and can forget we're over delivering on margin in the last couple of years. So.
So that's really all that's happening here in the FX move happened in really the last six months of last year. So we've always said is we don't want to swing the business unnecessarily fast we want to be able to invest in a healthy way into our growth opportunity. So and over time. We will then right size are.
Appropriately our investment levels or cost structure of our pricing in order to to right size for where it is.
Currencies are coming in and so this gives us some time to do it. So so it gives us a little time, we will catch back up we're still committed to roughly three three average of three points of margin increase over any few year period, but theres no change there and we've been factoring in our content investment or games investments all along and.
And I just wanted to say our growth to you know we talk a lot about.
This deceleration obviously, we'd like to grow faster, but there is still very healthy growth of this business.
What youre seeing.
We ended the year last year with 19% growth year over year, where you've seen the guide is 10% revenue growth for Q1, but that's a bit misleading again because of FX. There is about four points of drag in our revenue in Q1, so the underlying what I would argue FX adjusted constant currency.
For Q1 year over year is about 14%.
Growth.
It's also a tough comp year over year in Q1, because you may remember we increased prices in the U S. In Q4 of 'twenty, which flowed through to Q1 of 'twenty. One is when it was really materialized. So the year over year comp is tough so the underlying organic revenue growth in the business is right now at least in Q1, more like 15% plus $50 $60 17.
So that's that's it now.
That's always just in the quarter and that's still very healthy underlying growth in the business and I don't want to dismiss that we'd love to be growing faster, we'd love to not have the negative FX swings, but there is still very healthy growth in the business since.
Since your last earnings interview I will grant you won.
Oh my.
I have one last question that will be the last one but it's also firsthand.
It's very exciting that you'll become sustainably free cash flow positive this year.
Gratulation on reaching this milestone I feel like I've been waiting 10 years to ask this question, but how will you balance M&A and buybacks with your free cash flow and maybe Chuck related to that have we peaked in terms of that ratio.
Cash content spend amortization and how long will it take for earnings and free cash flow to kind of converge.
And I believe you wanted to and we mean it either has so many more exciting people to speak with him on the call.
So so we appreciate it.
You said there is a big milestone for us to be cash flow positive going forward. We're excited for that business model has been proving out. So that's create in terms of our increasing profits profit margins over time as well as as cash in terms of use of cash in and Spencer you can chime in too, but as we've talked about in prior calls our.
Our top priority is to be responsible stewards of the business and our cash but to invest in the healthy growth of our business and strategically invest in the business first organically if theres been opportunistically M&A that M&A is not the strategy for us per say M&A is a tactic to accelerate our strategy whether it's too.
Accelerate our.
Content capabilities and capacity or just acquisition of IP like all across film television and games as you've seen.
And what's left over after that.
We're not going to sit on excess cash if we as we've said our capital allocation plan is as it's been which is to have roughly two months of revenue in the form of cash on our balance sheet in excess beyond that we'll return to shareholders Opportunistically as we have done we did that to the tune of about $600 million.
Last year in share repurchase and and we're authorized up to $5 billion share repurchase. So that's still our plan in terms of when the.
Those ratios converge in earnings and cash flow, saying I don't want to put a prediction out there we're still in very much in growth mode. As a business. So it will continue to converge over time, but I don't want to declare a specific peak, it's been going in the right direction over a multiyear period and it'll continue to do so.
The only thing I would add to that maybe is just on the capital allocation part just to remind you.
Our balance sheet target is for gross debt of about 10% to $15 billion. We ended the quarter slightly above the $15 billion Mark. So as we said in the letter we will be paying down about $700 million in Q1.
But obviously delevering a bit.
It's something you should anticipate in terms of use of cash and then just last thing on the EPS free cash flow question.
To remind you there are some below the line items.
Mike the noncash remeasurement of our euro bonds that.
Can skew EPS in any sort of given quarter. So just a call out there.
But thank you for your questions I'm going to turn it over to Ted now to Bruce.
Closing remarks into took us home.
Thank you so much for these and thanks them for it for today.
The film and television and games has built big businesses for people, who can figure out what people love build a creative environment that creators know how to feed it and then deliver it to fans with a value proposition that they appreciate.
I think those fans are positively moving from old linear models and transactional models to more a fan friendly subscription services that are with high quality programming delivered well, Greg with great value, that's absolutely happening and it's happening all over the world.
Pace of the of the of the migration, maybe a little hard to call from time to time, when there are kind of varied global events or even local conditions, but it's absolutely happening. There is no question of that.
Films that you Love and series that you define yourself by and games, it's really that's a pretty great business, we're thrilled to be in it.
We also plan to continue to improve what we have what we're doing.
And to grow this by growing revenue by growing profits and by growing audience affinity around the world. So once again many of you if I could see you in person and I gave you. This.
I've got two of them, whereas the other one that I found one for you.
Thank you Nick.