Q2 2022 Netflix Inc Earnings Call
With development joining me today are co CEO Reed Hastings co CEO , and Chief content Officer, Ted Surrenders, COO, and Chief product Officer, Greg Peters CFO Spence Neumann our interviewer. This quarter is Doug Anmuth from Jpmorgan. As a reminder, we will be making forward looking statements and actual results may vary with that I'll turn it over to Doug now for his first quest.
Chairman.
Great. Thanks, Spencer great to see all of you and thanks for having me host again today. So there's clearly a lot to talk about on advertising and new initiatives, but let's start.
We're talking about recent trends so you're expected to lose about 2 million subscribers in the quarter and you did a little bit better at a loss of 970000.
What drove the slightly better than expected results in the quarter.
Looking at the quarter, Doug, we're executing really well on the content side obviously.
Ozark Stranger.
Stranger things lots of titles lots of viewing we're improving.
Everything we do around marketing and improving the service that merchandising and all of that slowly pays off if there was a single thing we might say a stranger things, but again, we're talking about losing 1 million instead of losing $2 million. So.
Titan is tempered by.
The less less bad results.
But you know looking forward screaming is working everywhere.
Everyone is pouring in.
Definitely the end of linear television over the next 510 years, so very bullish on streaming.
And then our core drivers are just continuing to improve.
And then of course, we'll talk later on the call about monetization and how that's improving so yeah tough and in some ways, losing a million in calling a success, but you know really where we're set up very well for the next year.
And Doug I'd, just add to that I mean, the business days is remains really resilient and basically what you see in the quarter as it played out generally as expected as Reed said so.
Minus $1 million versus minus 2 million slightly better in terms of member growth and then on revenue operating income cash flow other than the strengthening U S dollar, which I'm sure we'll talk about in effects multinationals around the world. Our revenue was in line with guidance. If you adjust for that in our restructuring costs. Our operating income was above guidance, our EPS was <unk>.
<unk> guidance and our cash flow remains strong so overall generally delivering on as expected.
So almost all of the subscriber base has seen a pricing change over the past year.
How do you think about that in terms of a factor.
Perhaps in <unk> and maybe even going forward just in terms of gross adds or churn I think you still have.
Perhaps some rollout in UK, and Ireland, and maybe the tail, perhaps in <unk> in the U S.
Oh go ahead go ahead, Greg and then I'll turn it I'll.
I'll kick it off and then you can you can take advantage of it I would say most of what we've seen in the countries that you mentioned and the big ones that we've done so far this this year U S U K, Ireland, we've seen pretty much the <unk>.
Standard response that we've seen historically over the last five years or so which is that we typically have this adjustment period, where theres slightly higher churn.
Post the price change and that's certainly what we've seen in those countries, but then if we do a good job basically taking those price changes, which are significantly net revenue positive and investing those into more great content and product experiences and marketing and magnifying the converse.
Our titles then.
No that will deliver more entertainment value won't be able to return those metrics and thats certainly what were seeing.
In the United States for example, where we're seeing those like the churn for example that you mentioned returned to pre price change levels. So largely that performances as we've seen historically and what we would expect.
Greg you hit on it and at the end in terms of the it's part of what you see in the Q2 performance in the Q3 guide is that we're getting further away from some of those price changes, we always expect to see some slight elevated churn after a price increase as Greg said highly kind of revenue positive and so we had some elevated churn.
<unk> early in the quarter, because we had some big price changes big markets that had price increases like U S U K, Ireland and some other parts of EMEA.
Early in both Q1 and rolling through Q2, but then as we get further past that that's part of why you see positive pay net adds guidance in Q3.
Okay. So when you when you think about the back half and Spence you just mentioned some of them, but some of these factors seemingly improve just as you get perhaps greater distance from some of the pandemic pull forward you mentioned greater distance from pricing better seasonality I think the content slate builds through the year I guess the question is why.
1 million net adds in <unk> and how do you think about subscriber growth for the for the back half overall and for the entire year.
Well, you kind of hit out and we talked about some of the things that we're near term kind of headwinds to the at least the subscriber growth numbers as well as revenue growth in our business whether it's.
The combination of.
Growth in connected TV homes around the world.
That it's a little bit of paid sharing its competition in some of these macroeconomic factors like higher inflation as well as the invasion of Ukraine, and the knock on effects around EMEA and other parts of the world. So so we still kind of working through that but exactly as you say, we get further away from price increases we get to a stronger seasonal period, we get to the strength of slate.
And we're working to address all of these things some of them take a little bit more time to address like what we talked about with paid sharing which would talk about in the letter and I'm sure you'll get to that but some of these we actually have to take action to further address.
Okay.
The business was very different clearly in 2008 and 2009.
But in a recession and just tougher macro in general how do you think Netflix and streaming more broadly would hold up.
You want me to take it or do you want somebody else.
Is that real quick I think it's really important that particularly in tough economic times that consumers see Netflix is a tremendous value so adding great content that they love and they can't.
Can't wait for the new season.
Add tremendous value in the form of this Friday, what do you see this movie Gray man, that's going to be premiering on Netflix. This is an enormous big budget action film that normally people would have to go out and spend an enormous amount of money to take steps to go see and theyre going to from a premier on Netflix and then we've got a steady drumbeat for movies like meantime, with Ken.
Hard Mark Wahlberg coming up and the New addition of $3 65 next week experienced 65 days, a big franchise new season of Cobra Kai.
Obviously, we saw the impact from Stranger things this quarter, but that's just the tip of the iceberg for the value that we're bringing to the consumer and I think that consumer.
Embraced that even more so in tougher economic times.
Okay great.
Extend that just to touch on maybe than we.
I think Netflix is a great entertainment value, we want to keep make sure that it is a great entertainment value. We tried to provide a range of price points to consumers around the world to make sure that that services accessible even.
The current environment and I would say I'm sure, we'll get to this in a little bit, but I think that.
Our AD supported offering is an extension of that sort of pro consumer wide range of prices that will increase the accessibility of the service, especially in the years to come.
And just to build on lastly, just the risk of beating Spencer go ahead Youll head on it go forth Oh, sorry, Doug I was just going to add if you zoom out a bit and look at past economic cycles at least in the U S. Most forms of entertainment have been fairly resilient to a downturn. If there is a level of escape is am I think that.
And provides also if you look at the pay TV business over economic cycle, it tends to be a bit more resilient as well just because of the value of in home entertainment increases as folks perhaps don't go out as much and also as a subscription business it tends to be a little bit stickier I don't obviously every recession cycle is different so we don't want to take that.
For granted and we're monitoring pretty closely.
Hopefully a little bit of helpful context for you.
That's helpful. Thank you.
So let's shift gears talk about advertising clearly on everybody's minds.
You've talked about making the Netflix ads, you're a better AD experience than what's available on television today.
Can you give us an update on what the products will look like some early thoughts there and then also about more around timing, which I think you said early 2023.
That's a quick question for Greg here.
Yes, I think we're looking at this as an extension of key things that we think that we've historically done which is what would be very consumer centric and think about the customer experience and then also just taking an innovation oriented view, whether it's sort of how we started and streaming to how we think about great quality of experience and the innovations we have.
And I think in the discovery and choosing side. So we think that we have a real opportunity here too.
Through a period of years and iteratively.
Expectations at the onset we're going to take an iterative approach is what we call. The crawl walk run model. So at the beginning it will look what youre familiar with but over time, we think there's a tremendous opportunity to leverage that innovation DNA that we have as well as a bunch of sort of enabling characteristics around addressable city and measure ability and things like that to <unk>.
<unk> provide an incredible experience for consumers those who choose to take the AD supported offering but also provide an incredible experience for our brands and advertisers who want to work with us to make sure that we're doing a good job of elevating what that looks like for them.
So theres a bunch of lines of inquiry lines of innovation that we're going after that sort of support all of that piece and I think we'll get into that iteratively as we go.
But I think when you look at the scale of our offering technical DNA. We have the partners that we've got lined up I'm pretty optimistic that over a couple of years.
We can deliver an experience which is fundamentally different from the AD experience on linear in a way that supports all of the stakeholders.
And Greg when you say the partners that you have lined up.
Microsoft Obviously, a key one were you referring to advertisers here as well there already.
Taking a lot of interest maybe you could talk more about what that looks like at this early stage.
Yes, we've seen a lot of excitement in our early discussions with brands holding agency holding companies and the agencies because I think for them.
They've wanted to connect with the titles incredible content that Ted's team is putting out there.
And I think we also share.
And our perspective on what is a great experience for consumers and for advertisers. When we think about the kind of advertising, we see frequency caps, what's a great AD experience, we're noticing a high degree of alignment there so that enthusiasm that alignment is.
As increasing sort of my optimism and excitement that I have got to basically get this out there because I think it's going to be a win win win for all parties involved.
So.
In terms of the Microsoft deal will add to be sold early on exclusively by Microsoft and how do you think about your desire to build out more of your own sales force over time.
Yes, so all of the ads that are served on our AD supported offering will come through Microsoft sets, an exclusive arrangement with them.
But one of the reasons that we're partnering with Microsoft There's a bunch of fundamentals they have got the technical capacity, which is <unk>.
Complementary to ours and go to market capacity, which we need to leverage and it will be very important for us, but a key component of what we liked about this partnership was that there was sort of a flexibility.
That innovation orientation that I mentioned before and so they very much I think are approaching this.
As an opportunity to work together to collaborate and to sort of evolve both the technical capacity and also sort of what the experience is and what the go to market approach. It. So we've got lots of flexibility to work together, there and evolve that over time.
Okay.
You already have tiers across a range of prices.
But what do you anticipate will happen in terms of members switching plans and perhaps trading down to the AD supported.
<unk> and <unk>.
A view kind of long term what percentage of subscribers might be on the AD supported tier.
Yes, I would say in general we know that there is price sensitivity around consumers in some of those consumers are folks that have never actually ever signed up for Netflix. Some of them are folks that were members for us for a period of time and they they decided to cancel for a variety of reasons. Some of those are folks that are <unk>.
Currently watching Netflix, but theyre using another paying members account credentials right. So theres all I think represent opportunities for us because we are bringing a wider range of prices through the AD supported offering a lower consumer facing price to be able to attract a broader set of members. So that's sort of very consistent with our wide range of pricing.
Our general goals there we think that's that's.
Great for consumers, it's good for us obviously.
And when we run the models and in talking to brands advertisers to Microsoft.
We look at the monetization that as a complement to that sort of subscription part of the AD supported offerings and we're quite optimistic that the sort of unit economics work to make that monetization sort of equal or maybe even better than what we would see on the comparable side for them for the <unk>.
Non AD subscription only kind of plans. So we think that this is again expansive from from a member reach perspective, but also neutral to positive on the unit economics of monetization. So that's great for us obviously from a business perspective.
Yeah.
And should we be thinking about this as a single tier essentially below the basic plan.
I would say over a period of time.
Think that this is sort of one of the dimensions that will inform sort of our plan structure.
I would say generally our thinking of going from our good better best model that has been sort of.
The core offering that we've had into making that slightly more complicated because we're going to have more sort.
Sort of discrimination features that would inform what.
Offering.
Consumers ultimately choose to get to so we will be a little bit more complexity. There in ads no ads will be one of those dimensions, but we want to work into that model and obviously, while we are.
Thinking about sort of the right pricing model there and we also want to keep it as simple as we can from a consumer facing perspective. So in terms of the on ramp the plan selection, how upsells happen you wanted to sort of work those flows iteratively over time, so we build into that complexity without making an overwhelming for Kentucky consumers.
Sure Okay.
And you talked about advertising monetization essentially.
Helping claw.
Those are the gap, perhaps with current arm or getting above that level.
How long how do you think about timing and perhaps how long it could take two.
To get to kind of current arm levels on the AD tier I.
I think about the timing more of sort of how we roll this out and how we sort of build.
More subscribers on those AD supported offerings.
A component of this is on countries. So obviously, we're launching first in the countries that have sort of the more mature ad markets.
And we feel more confident in the AD monetization than most sort of explore next year's of countries over time, So that's a dimension of growth.
But I would say the <unk>.
Initial response that we're getting from our brand and Advertiser perspective is quite strong. So we feel quite confident that as we sort of grow into this and we have more subscribers over time on these plans that at least initially the unit economics are going to be and are quite good. So we don't sort of see this as sort of <unk>.
Building.
In that call. It CPM side. So much more is that we're actually building the total amount.
Volume on those plans and then the total amount of revenue and again this is going to start small relative to our total revenue mix, but we think we can grow it to be substantial over a period of time.
I think that's key Doug is that this is going to build over time, it's not like all of a sudden all folks on AD free Netflix, they're going to join advertising Netflix and so supply demand think probably works in our favor between both geography as well as opening up the aperture to our members.
Okay.
You've talked in the letter certainly about the AD product as having the potential and likelihood to drive overall member growth and then certainly overall profitability, but maybe you could talk a little bit about what it means for for margins and some of the puts and takes there versus the current business.
Yeah.
I'd say overall Doug. These are this is our focus is as we've talked about.
These initiatives across paid sharing as well as advertising as ways to better.
Monetize our viewing and grow members as Greg said advertising as an example that can do both and.
And we believe we can do this both in a revenue accretive way as well as a profit accretive way.
And as we rollout our solution for prepaid sharing that probably has a more near term impact once we get to a solution that works and there's not a lot of incremental expense to that and then on the advertising side.
We have some obviously some incremental costs that go against that business, but as Greg said, there's incremental revenue we believe that the unit economic levels. So we think we can manage that.
Pretty too.
And operating income neutral to positive pretty soon out of the gate, so, but it's a it's a slower build over multiple years to have a material impact on the business, but our focus across 2023 and 24 is to build out to kind of return to a more accelerated revenue trajectory for the business.
Okay, along those lines, there's been a lot of discussion around the Netflix needs to renegotiate deals, perhaps with with content providers to monetize through advertising, but also a lot of your viewing clearly comes through original content.
Maybe you can help us understand what needs to be done on the licensing side and how to think about some of those incremental costs. So that'd be one thing.
Yet today, the vast majority of what people watch on Netflix. We can include in the AD supported tier today.
So there are some things that don't that we are in constant conversation with the studios on but if we launch the product today.
Members in the attitude, we have a great experience and we will clear some additional content, but certainly not all of it if we so we're looking at but I don't think it's a material hold back to the business.
Certainly a nice to have Doug, but it's not a must have with Ted says, we can launch today without any additional content clearance rates in.
Hopefully, we can supplement that but.
We'll be disciplined in what we do.
Got it okay.
Why did you choose Microsoft over other potential AD partners.
Yeah.
Some basic levels, they've got the technical components, we need they've got to go to market components, we need they met a bunch of sort of fundamental what I'd characterize as table Stakes pieces, which is.
Strong commitment.
Privacy data protection for because there were things that we cared a lot about and were fundamental to us, but I would say.
Beyond those things it was really what I mentioned before which is that we saw a high degree of strategic alignment in their interest in innovating in this space and really working with us over the next several years to basically try and create.
New ads ecosystem around premium TV connected TV ads and so both from the consumer perspective, because that's a really important and I think we've seen this sort of long arc of advertising towards very pro consumer, let's make that lets make advertising part of the quality of the experience.
Rather than detracting from it as well as having a really strong brand and advertiser kind of focus on what do they need to support their goals from there and so we saw that as being a lot of alignment out of that and we're just excited to sort of work with them iteratively on making that happen.
And is it fair to think that there are some significant.
Guaranteed revenue commitments here over the next few years I.
I would say, we're not going to go into the specifics of any of the deal and the terms of the deal.
Okay.
<unk>.
I will try one more I'm not sure what I'll get but.
<unk>.
Microsoft look.
Is the deal cannot be broader and can it be a more strategic partnership beyond advertising, Canada involve elements of cloud gaming, perhaps other things over time.
Yes, so a couple of things there first of all we picked Microsoft as a partner because we think theyre going to be great as in as partners. So that was really the criteria that was used to inform how we thought about the choice.
On you mentioned cloud, we're super excited about Amazon and our partnership with them and we don't Havent changed that relationship we haven't changed our focus on.
AWS is essentially our cloud infrastructure.
Partner there. So we also have we've done other stuff with Microsoft we continue to do work with them on.
One sort of go to market partnerships things like that we'll look for those opportunities as they exist with Microsoft and with other companies as well. So I would say this doesn't foreclose on anything like that but you should think about this is this was a great ads partnership deal at the end of the day.
Okay, great. So let's shift gears talk about account sharing a little bit you put out a blog post yesterday kind of expanding your efforts to monetize account sharing in Latam across five new markets, but a slightly different implementation than in the first three countries that you announced in March.
I'm just curious what you what you've learned here early on over these last few months and just how youre thinking about these different <unk>.
Implementations going forward.
Yes, I mean first of all it's excited I'm excited to get to this stage, we've been sort of working behind the scenes for almost two years in building the technical capabilities to get the stuff rolled out and now we actually get to put something in front of consumers and see how they react and this is sort of where the rubber meets the road. So we've got the two models as you expressed.
Essentially both of them are similar in that they ask consumers not to stop sharing so much but just to pay a little bit more for different forms of sharing in the first model that we deployed it pay a little bit more too.
Adam member and share with those additional members. The second model, we're trying as pay a little bit more to add additional home and share the account with the additional homes.
So really at this point, we'll sort of see.
What works for consumers. That's obviously the reason we're trying these different approaches as to learn more we're learning a lot on everyday on a daily basis at this point in time based on what we've deployed.
And I would say while it's early.
Call. It obviously, we're just.
Getting going on the second approach. So we'll learn more from that I would say, we're tracking quite well to sort of the plan that we had in place and I.
Hi, I'm increasingly confident that based on what we're seeing that it will have something that we can deploy next year as we were planning.
Okay and can you talk about some of the technology that you're using here.
To ensure that you're not limiting access for legitimately paying members, who are traveling or perhaps away from home, whether that's IP addresses or device Ids or other things.
Yes, one of the reasons, we've been working on this quite some time is because we were building those capacities in the background. So and these are mostly technical implementations I understand through a variety of network signals and stuff.
What is happening, but then we'd sort of putting it through the lens of the consumer facing model and so in each of these two approaches have slightly different characteristics, but generally we're trying to lean into.
Sumer friendly model that supports legitimate use cases and travel is a good example of that personal device used using your mobile phone as you go around the world Your PC things like that.
So supporting those legitimate use cases, but also making sure that we're doing a good job at.
Getting paid as a business when we're delivering entertainment to folks outside that household or that home.
Wei.
Is reasonable where we're asking for a little bit of extra monetization to make that happen make it a smooth transition as we can for users and really trying to balance that sort of very consumer pro consumer a consumer choice model with what we think are practical considerations as business. So does it.
Approaches are different and that's obviously why we're trying to do everything to figure out sort of which is going to work better in managing that balance point.
Okay and timing here I think you said it also.
2023.
Does do you need to have account sharing and kind of lining up with the advertising to your rollout or are there some benefits in doing that or is it not kind of strategically important to you.
We're pursuing both independently because we think that there is value to the business and value to consumers frankly, especially on the ads plan with a wide range of prices.
We're pursuing them independently now there's a great synergy that happens when as we think about on sharing and paid sharing.
Part of this is being able to offer to a range of folks who maybe borrowing Netflix because they didn't quite see as much value from the entertainment and the viewing.
To sort of motivate getting their own plan. That's part of that segment part of the segment. We just have to encourage that and push them a nudge them to get to that point, but.
Part of what's great about ads is that obviously, we get to give.
Folks that are seeing a little bit less value.
Lower price and be able to convince more of them to sign up through that plan.
Okay.
Ted when you talk about content I promise.
Alright, So maybe you can talk a little bit about about how content performed in <unk> and and how youre thinking about it into the into the back half Stranger things. Obviously your best English series debut of all time sort of things for but go.
Go ahead, Yeah look I think these titles continue to hit New Heights, which is really.
Fantastic that we can still be doing this back to back and delivering hits on top of hits and I think that really belongs to the content teams that do such a phenomenal job around the world.
<unk> television group and to keep surpassing records like we have been able to do with stranger things and Bridger tendon squid game and our biggest hits have all come out in the last 12 months.
Which is it really kind of a phenomenal sign of progress Scott Stuever in his film team really killing it again I'm going to call back to the Friday it relates to <unk>, because I think it's unbelievable proof point of what kind of films that this team can put out.
I think that this is a.
And again this is kind of back to back to back, but I think <unk> will join Red noticed and Adam project would be and don't look up.
Among the most popular movies of the year.
Not just on Netflix but period.
And I think that really is a testimony to these teams and the teams around the world working great with creators to create a platform for them to do the best work of their lives. So we've been really pleased with the.
The output we've been pleased with the performance.
35 of our original shows are nominated for Emmys, This year, which says a lot about the work that's coming out, including three best drama nominees, which happen to be among our most watched shows on Netflix ever. So the fact that they could be crowd pleasing and award winning is a pretty tough and pretty gratifying.
<unk>.
And to kind of.
Ted and the team's horn driving engagement, which is really the north star driving viewing because then we can drive member growth and monetization around it and as we referenced in the letter using the U S market. As an example, Nielsen is going to be reporting later this week seven 7% screen.
Screen time share for Netflix, which is the highest we've ever been which is again testament to the team and the quality and engagement of what they're delivering.
Alright, hopefully they won't mind that you.
I gave that number of the world Okay.
Let's go back to <unk> for a minute.
How are you approaching the marketing differently, perhaps for this title versus some of the other big movies that you've had in the past.
Well I think you've seen a lot of it out there I think we've done.
Based on the marketability of the projects themselves. This is why our marketing spend is a bit lumpy.
Because it really trying to focus on the titles that means a lot to our members and.
And that created a lot of excitement and conversation around the world <unk> is certainly one of those movies, that's going to attract a very broad audience. So you'll see the marketing spend out there pretty aggressively.
I would think I wanted to point out.
Maryann <unk>, our new CMO is doing a phenomenal job sheep.
From inside of Netflix he was running the U S. She hit the ground running with that remarkable stranger things campaign I think our best campaign to date, one of the strongest marketing campaigns I've ever seen.
She has been there.
Straight up with Great man. So I think these campaigns are really doing a ton to bolster conversation around the world around these projects.
So it's not enough just to watch, but also to get your friends to watch with you too. So it helps bring bring folks along into the conversation.
So with stranger things for.
Yeah.
Your best thing with series debut of all time, which we talked about are there ways that you can leverage that record breaking viewing to drive engagement with other shows and learnings that you can take to build out additional franchise content.
Yeah look I think that time spent is such an engagement is such an important metric because the time spent on Netflix and you've made you come in and Youre exposed to everything else, we're doing as well and Greg and the product team did such a phenomenal job of audience matching to put the most relevant thing in front of you and when you come to Netflix that you are bound to be exposed to something youre going to.
You'll also see it in the kind of that that targeted post play mechanism. So once you get through that last episode and you're getting that one second of anxiety about what am I Gonna Watch next and you've got a couple of great choices in front of you and folks use that use that.
That tool all the time to find the next great thing to watch on Netflix. So it's a pretty great audience, where I think it's rewarded and that wasn't the more you watch the more you'll find great things.
I think we.
We get a stranger things that really pays off we get a great man that really pays off we just got to do that constantly Doug. The idea is is that not only can we deliver on that but people should expect it back to back.
And how do you balance out driving both that high quality content and the significant scale because there are clearly releasing a lot of content on an annual basis.
Does anything change in your process around content going forward.
I think the focus on quality has always been there and it has intensified as competition intensified. So I think we've got to really focus on working tightly with the great. I think the output of great content is generally the result of a 1000, great decisions and the most important one is the creative that youre working with and picking people who really.
To win for the audience and working with our teams to create great television shows. It can go on for multiple seasons are great movies that spawn sequels or just great content that comes in and lived through its life an episode and makes people feel great. So I do think that the focus on quality and the thing that I've always said from the beginning.
Is scale scales. The thing that we're doing them to do that no one else has ever done yet and the way that we're doing it today is that kind of distributed decision, making among the teams the decision making in Terry on the ground in country for our team is making original content.
Is what enables this thing to scale if it all bottleneck behind one or two or three district decision makers in California, we wouldn't be able to do what we're doing today for sure.
Okay, so to support that that content.
You've talked in the past about kind of $17 billion to $18 billion.
Spending for this year.
Maybe you can update kind of how youre thinking about it.
For 'twenty, two and as we talk to investors, there's probably about half of them that actually want content spending to come down some and to be kind of reined in a little bit and then the other half once that to continue to grow and find more heads and go more globally.
More than half less than half.
Welcome to our lives.
How do you think about that content spending going forward.
Oh sure I can take it and maybe Ted you chime in.
We're expecting to spend on cash content spend about $17 billion this year Doug.
As we look forward.
2023 next couple few years say, we're probably in about the right ZIP code so cash count we've come through the <unk>.
Pretty big business transition for us and the most cash intensive.
A portion of that transition over the last five to 10 years will remove two original.
Netflix original predominantly in producing our own content largely it's about.
60% of our content assets on the balance sheet, our produced content. So that's been a pretty big transition we've come through that.
And then also cash content spend a little bit choppy. So we went through a bit of that Covid way, we were coming out of Covid. We've got into production when we could as quickly as we could in some things, including with talent was available so that pulled forward some cash content spend in 'twenty. One 'twenty two so I'd say just generally when we look out. The next couple of few years will be probably right around in.
ZIP code, which puts us in a good place. It also as we said we were trying to work through moderating our growth and content expense our content expense will continue to grow but it's more moderated as we adjusted for the growth in our revenue and we think we've gotten a lot smarter over the last decade, or so being in the original business as to where we can direct.
Our spend for most impact highest impact and highest satisfaction for our members. So that's about roughly how we're thinking about it.
I don't know who that makes happy by the way no I don't know if one of them.
I would say that we spent the way we've spent to get to where we are today and we think that we're about in the right ZIP code and it's been said that that Covid distortion in the last two years are going to make it a little murky, but in general I think that we're kind of in the right ZIP code I agree.
Doug just to give you a sense we have about a time for two more questions, but Brian I think you want to add something called maybe just talk about stranger things for as an example, how much did COVID-19 inflate the production costs in your view well the Coke that particular show was probably affected as much as any because of the young cast and the size and scope of the production.
And the multiple locations we shot in.
So it was it was a very expensive burden on the show to make sure that we can deliver at one of the catalyst of splitting the season have was how long it took to produce that show a lot of that was stalled because of.
Early shutdown because of the production and restarting production and.
Being extremely careful with the cast of the show early in the day early on in Covid. So it was it was more financially impacted than a lot of other projects were.
But again I think if you did it all again it took that off the top you might even get a couple of extra episodes out of it.
And more broadly maybe the way to think about is throughout Covid, we were at various times, 5% to 10%.
Of our overall spend was kind of COVID-19 related costs.
Started higher worked down lower so on these kind of numbers, that's significant and its obviously much smaller now, but but that was a big.
Kind of drag on our overall efficiency of spend and that wasn't an overall, 5% across all production some of them impacted a lot more than others.
Okay I want to make sure we talk about operating margins and of course free cash flow. So operating margins Spence I think youre talking about 19% to 20%.
For this year, but ex restructuring and then also I think the FX.
As from January when that when those numbers were first provided so maybe you can just provide a little more context there.
Yes, so when.
We had our call we basically are holding to our margin guidance. So at the beginning of the year on the Q4 'twenty one call. So as we start launched and started this year. We said we already saw kind of slowing revenue growth and we said given the slowing revenue growth.
We're going to maintain we're going to manage to a 19% to 20% operating margin before any impact of major swings in FX and that's what we're still holding to so this year.
We've got the FX moves and we also mentioned that the $150 million of restructuring, we're not expecting more restructuring costs throughout the year. So that's what's baked into it and we're holding to our margin guidance. Similarly, holding to it for 23, so basically we're saying until we reignite revenue growth, we're holding flat to the margin guide so.
Overall underlying very healthy operating metrics I mean, when you look at the revenue side, it's we're tracking 13% content constant currency revenue growth. This quarter, we're guiding at 12% next quarter can see the read throughs in a kind of a similar range for the full year and 2019% to 20%.
Operating margins for this year and next but obviously the strengthening of the U S. Dollar is a is a major outlier and we just need to kind of work through that and operate.
As best we can on what we can control in the meantime.
Okay and on and on free cash flow. So 2022 really your first year of sustainable kind of strong free cash flow, you're talking about $1 billion or so for the year. How are you thinking about some of the key puts and takes around that and what is substantial growth mean in 'twenty three.
Well it'll be it'll be more than the roughly $1 billion. So again the numbers. We provided are are again.
Assuming no major additional kind of big swings in FX. So hopefully we've seen the most and most of that given the extraordinary moves in the last three to six months more than we've seen in the last 20 years.
But as you say, we're guiding to $1 billion, plus or minus a few hundred million dollars of positive free cash flow in 'twenty. Two we think that will continue to grow substantially next year. It's a combination of what we said before we're through that kind of cash intensive transition of our business. We were also operating about kind of roughly.
Similar levels of cash content spend next year as this year.
In fact, we as we said we pulled forward a little bit of cash spend into 'twenty. One 'twenty. Two so those things are kind of working in our favor as we continue to scale. The business. So I don't want to put a specific number out there, but assume it'll be kind of meaningfully more and then and then obviously as we.
Kind of work through what we expect to do in terms of accelerating our revenue growth and then start ramping up operating margins again, and hopefully there is a little bit of a reversion on on these various global currencies, all those things accelerated cash flow generation down the road.
Okay, and then just wanted to maybe close out with what content. Each of you are most excited about.
In the back half.
I don't know if it's great man for everybody or not but I'm sure. There's a lot of other good things.
Yeah.
Well, great minds as of recently that that's for sure because it's coming out of this Friday and it is mind blowing.
Okay.
I think a reason.
For me Doug.
Excited for knives out too I've heard great things from our content executive on that one zone.
Anticipating that one for me.
You beat me to the Pines there.
But I'll I'll flip back to what I'm currently watching which is umbrella academy, which is a great currencies.
I'll I'll jump in let me close it out I, just I've been going through stranger things to catch up I, just finish that and I am really looking forward to an extraordinary attorney will I'm hearing great things from everyone throughout the hallways and I am excited to watch it soon.
I'm going to be in trouble.
We just bought stop Michael Pollan about holders synthetics, and Oh, great a great documentary series.
Changing over my head.
Thanks, Thanks, a lot, Doug Hey, billions of people around the World Love streaming TV and film and we only serve a few hundred million of them. So the opportunity for growth there is enormous.
We have some headwinds right now and we are navigating through them.
Remember this company and this team has navigated through a lot of change in the last 20 plus years.
Seen entertainment formats come and go we've seen entertainment business models come and go and we have managed to grow through all of them.
Through all kinds of economic conditions and through all levels of competition. So we're super confident that as long as we make the films and TV series and the games that people love.
We're going to continue to lead this exciting and young industry. Thanks, I got it thanks, a lot Doug.
Yeah.