Q3 2022 Netflix Inc Earnings Call

October 18, 2022

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.

Yes, 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.

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 enrolling 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.

The content slate builds through the year I guess the question is why only 1 million net adds in <unk> and how do you think about subscriber growth for the for the back half overall for the entire year.

Well, you kind of hit out and we've 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.

It's 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 strength of slate.

We are 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 holdup.

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 that they can.

Wait for the new season to 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 lead time, with Kevin Hart, and Mark Wahlberg coming up and a New addition of $3 65 next week's 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 will embrace that even more so in tougher economic times.

Okay great.

Extend that just to touch on <unk>.

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.

In 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 will increase accessibility of the service, especially in the years to come.

And just to build on lastly, just.

The risk of opinion Spencer go ahead Youll hit on it go forth.

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. There's a level of escapism I think that entertainment provides also if you look at the pay TV business over economic cycle, it tends to be a bit more resilient as well.

Because 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 but that's 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 two things that we think that.

Historically done which is one be very consumer centric and think about the customer experience and then also just taking an innovation oriented view, whether it's you know sort of how we started streaming to how we think about great quality of experience.

The innovations, we've led 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 so.

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 address ability and measure ability and things like that too.

One 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 the 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 been 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.

A high degree of alignment there so that enthusiasm that alignment.

Increasing sort of my optimism and excitement that I have got to basically get this out there because I think it is going to be a win win win for all parties involved.

So in.

In terms of the Microsoft deal will add 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 complementary to ours and go to market capacity, which we need to leverage and it'll be very important for us, but a key component of what we liked about this partnership was that there was sort of a flexibility in 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 approaches. 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.

Sure.

And do you have 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.

Of equal or maybe even better than what we would see on the comparable side for them for the 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 that's great for us obviously from a business perspective.

And should we be thinking about this as a single tier essentially below the basic plan.

I would say over a period of time.

We 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 of discrimination features that that would inform what.

Offering.

Consumers ultimately choose to get to so we will be a little bit more complexity, there and add 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. 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 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 then we'll sort of explore next year's of countries over time, so that's a dimension of growth.

But I would say the.

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.

Building.

In that call. It CPM side. So much more is that we're actually building. The total amount of 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 is having.

Joining me today are co CEO Reed Hastings, co CEO and Chief content Officer, Ted surrenders.

Oh, and Chief product Officer, Greg Peters, and 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 let's jump into it Doug over to you for your first question.

Thanks, Spencer and great to see all of you and thanks for having me join you again today.

So let's jump in with advertising, obviously, a lot of discussion here heading into the launch.

Announced details for the new basic with adds to your last week launching in the U S and 11 other markets can you help us understand how you arrived at the price point and the product features for basic with ads.

Yeah, Doug So a lot of what we're thinking in terms of setting pricing for basic with ads and how do we think about pricing in general anchors on whats the value that we're delivering consumers. We're trying to work very hard to translate the dollars that they gave US an incredible shows and you can see sort of in Q3. Some are great. Examples of this series that we're delivering.

<unk> there that films were delivering their end of the Q4 slate looks incredible as well.

And then with specifically with regard to ads, we modeled out essentially what we think the expected revenue is on a variety of different countries that we're launching in to make sure that you know in.

A combination of the subscription price that we're charging for basic with ads plus that anticipated monetization, we'd be roughly call. It unit economics wise revenue positive to neutral.

And then when we look at that and the fact that we think that this lower price.

Consumer facing price will bring in a lot more members than we're quite confident in the long term that this will lead to a significant.

Incremental revenue and profit stream.

Okay, and I guess just to clarify there when you.

Talk about kind of getting neutral.

Perhaps more accretive over time.

What are you comparing that to on a unit economic basis, that's essentially more to the basic tier.

Yes may be relevant to note that we don't see a lot of members switching plans. So oftentimes when they come in and they select a plan for a given future, let's say that's the <unk> resolution.

We see that to be a pretty sticky choice.

And so when we're thinking about unit economics being neutral to positive we're really comparing to the like feature set in the basic without it.

Okay.

Okay, great. So maybe you could talk a little bit about what gives you confidence in that advertising arm and how would you frame advertiser demand. Thus far I know Jeremy last week talked about having hundreds of advertisers onboard and add inventory almost sold out.

Yes, we started with a bunch of models that we're informed by obviously.

The.

Ads activities in those different countries around the world, but now we're in the point, where we get to take those models when we get to bring them actually to advertisers and sort of see what's working in practice.

And it's been great to see both our partner and Microsoft and their sales team as well as our small but crack ad.

AD sales team in an actual action with brands and with agencies working through that and I would say that the initial demand that we're seeing is very strong.

People are very excited about the proposition of bringing their brands and their ads to a bunch of <unk>.

Tumors around the world that are watching our shows they are excited about the positioning against the incredible content and the titles that we have and so that demand has been very very strong and so we're seeing sort of a lot of the expectations that we built into our models come through in that actual sales process.

Great I think it's also worth noting though that we're very much in.

Walk crawl walk run kind of model that we talked about before we're sort of iteratively improving and so we're building in a lot of capabilities over the next couple of quarters that we think are important to advertisers to make that advertising offering increasingly attractive and sort of check a bunch of boxes. They have you may have seen the verification partners that we announced.

<unk>, that's a pretty good example of that but we got a lot more on that roadmap to go do that we're excited about delivering four brands.

Okay. So so in terms of those capabilities targeting obviously very important here as well I think you've talked about having broad targeting by country and genre and I think within the top 10 shows.

I believe you also asked for age and gender at the time of sign up as well.

Early feedback from marketers and agencies has been that the targeting options at launch are fairly limited.

What's your view on that and how will that targeting evolve over time.

Yeah again, I think we're starting part of what we wanted to do is actually get this out to market quickly and you can see we went from basically the point, we announced it to delivering it in about six months, which has been a testament to a lot of hard work on internal teams into Microsoft, but we do have relatively basic targeting capabilities in terms of contextual targeting genre et cetera, but.

It's sort of consistent with what we see with TV as well right and obviously now our job is to move from that into more of what we expect from a digital world, where we have 100% signed an audience fully addressable fully carnival and so we can start to layer in additional targeting capabilities over time.

It's also worth noting when we talk about that that we're very cognizant of privacy and we want to make that Paramount and how we should think about this offering and all of the data that we use will just be used to basically deliver a more relevant ads offering on Netflix and we're not using that data in any way shape or form for profile building off Netflix or anything like that.

Okay.

There's been a lot of discussion in the press about Cps.

There are really two to three X those of <unk>.

CTV or are other Avon players.

That accurate and what justifies the much higher pricing for Netflix.

I'm not going to comment on any specific pricing, but I would just say that I think we've got a very attractive offering and thats a combination of the audience that we have that we're delivering to that oftentimes. It was hard to access in other ways, certainly harder to access and traditional TV in many cases.

And it's a result of the incredible content that we've got that Ted's team is doing an amazing job of producing titles that advertisers want to be next to and so that's I think what you see is driving the demand and the pricing that we can get.

Okay.

You've talked in the past about wanting the AD offerings to be innovative and somewhat different overtime if.

If we think about the range of four to five minutes of ads per hour, it's certainly lower.

You've talked about tight frequency capping what else do you think is innovative at least in the initial offering and then how does that.

Evolve more overtime.

Yes, as you noted we want to start with a experienced that's very pro consumer consumer centric and so thats definitely inform both our ad load.

And thinking about the frequency capping what I love about those things as the more we talk to brands and advertisers, there's actually a high degree of alignment between sort of what their desires are and what we think is great for consumers. So theyre enthusiastic about not having high frequency caps and having sort of a.

Sort of more unique offering there and also limited to AD loads.

That's their ads apart.

More distinctly so I think I love that alignment to.

To begin with and then over time, we're going to access a bunch of the capabilities that you've seen us leverage over the last 10 years to think about innovation in this space. So personalization I think is a great example, where we don't need to think about the ads experiences being uniform across all of our members and we think about.

We can leverage the personalization capability that we've built in terms of titles and how we present titles and also in terms of how we present ads. So I think thats, an exciting dimension that we're going to work on this and Additionally, we're also excited to work with partners and our advertisers to think about what is that adds experience the ad format.

That is really best suited for premium connected TV and we're starting with meeting the market where it's at today, that's important to access sort of all the capabilities they've got but we don't need to stay there and I think we're looking forward to over a couple of years understanding what is the.

Native format for premium in connected TV and figuring out what that looks like.

Hey, Doug I might just add also just part of the innovation was just for us the business innovation and speed to market.

Gregg said getting from announced to launch within six months and to doing so in every region in which we operate so 12 markets that represent.

Well over half of our revenue today. So part of it is just that nimbleness and speed, which hopefully will bring to our innovation pads going forward as well.

Okay.

In terms of subscribers. How do you think about just this concept of kind of new net adds versus trade down from existing subs.

The basic with ads tier, it's obviously, a pretty frequent discussion with investors.

Yes, again I think it's important just to reiterate that we don't see a lot of plan switching on the existing plan set. So that's I think a worthwhile point to note and then obviously as we stated.

As stated before were not really trying to steer our members to one plan or another we're trying to take a broken tumor approach and sort of let them fine and land on the right plan for them and as we stated we modeled out that expected performance on ads monetization and factored that into our thinking around price point for the basic with that.

And so we really anticipate that this is going to be a pro consumer model that'll be more attractive bring more members and because the consumer pricing prices low, but then again the economics in their revenue will be fine as a result, even if some of those consumers switch plans.

And again just to restate. This when you factor in those extra remembers.

This leads to a significant incremental revenue and profit stream.

And how do you think about the impact in terms of reducing churn and perhaps how that plays out across some of the different markets given different characteristics and levels of penetration.

Yeah, I think generally what we've seen is that obviously a lower price.

<unk> churn and so we think that there'll be some positive dynamics there, but again, we really were in early days now and we've got a launch this thing and we will learn so much more over the months to come.

So again so much of that is tied to engagement I mean, the best way to reduce churn is to keep them entertained alright.

Alright, alright.

Clearly.

Shown in this past quarter, and we'll talk more about that in a minute.

At at the Code Conference last month.

Sundar.

Said that the Netflix Microsoft add deal is one of the biggest AD deals ever.

Are there any particular components of the deal that gives you confidence in.

The advertising revenue outlook here and how it compares to subscription over time.

Well one of the big factors for us in picking Microsoft is that we felt like we were highly strategically aligned they had an approach.

With similar to ours, which is that we want to.

Launch and then learn quickly and iterate quickly and that there was a lot of effects ability both in terms of innovation around the formats and <unk>.

<unk> that we just talked about partly it was a lot of flexibility and thinking about.

How do we leverage the combined go to market capability that Microsoft has a lot of right now and then we have very little but we're going to build over time and frankly, when I see the demand that we're in right now we're stretched between the two teams to really support all of that so I'm actually excited about our ability to grow that capacity on the <unk>.

Croissant side, they think theyre going to do some hiring and building and we're going to do some hiring and building and then through that joint capacity growth be able to better serve more advertisers, which we can't even I can't even actually returning some folks away right now because we just don't have the go to market capacity to serve everyone.

Doug at that same conference Bob Iger said that linear TV was going off a cliff he did and what we under what I under appreciated was just the impact on advertisers Theyre, just being able to reach fewer people and then the 18 to 49 demographic is even faster than the decline in pay TV.

This is what is really fueling the cycle is that really collapse of linear TV as an advertising vehicle outside of a few properties like sports.

The reason maybe that just brings up the question.

And for you as well, Greg I mean.

When you are.

Going out to agencies and marketers do you really do you feel like Youre going after a linear TV dollars are you going after digital dollars right now.

Yeah, I'd say when you look at the capabilities of our current offering that we have as a publisher I think we're mostly competitive with linear right. Now obviously I think that will build into that over time and a lot of what makes digital attractive will be part of our offering as we go obviously I think when you think about sort of demand capture in those.

Direct response ads versus sort of the more brand side, we're probably going to be leaning for some time more into that brand side of things, where we can be more competitive, but I think those rules are going to blur overtime realistically and our job is to be highly competitive with the components. The technical components that we can add and in terms of targeting et cetera, but.

So then be very competitive because we have really incredible content, an incredible audience that advertisers want to connect with.

Okay.

Spence in terms of AD revenue it feels like it should be very high margin. Maybe you can just talk about some of the key costs or investments and running the AD business given that Microsoft is responsible for the bulk of that sales for now.

Yeah, Yeah, I would agree with you Doug again, we need to build this out over time as as Greg said on a unit economic basis, we feel good that this will be kind of net neutral to positive out of the gate and then when you add in the the increments on subscribers. We think we can build a big incremental revenue and profit stream.

So there are some there are some some costs obviously, there's some cost to our partnership with Microsoft There's some cost of building out our side of the internal team.

To kind of build out our capabilities with Jeremy and Peter.

And then obviously.

Some other some other costs here and there, but overall I'm not going to get into specifics, but we believe this can be margin accretive.

Margin accretive over time.

Is going to be pretty small out of the gates.

Kind of reflected in our Q4 guidance as you can see.

It's an intra quarter launch, we're not expecting a material financial impact in this first kind of partial quarter, but we will we will build over time and it will be additive to the business.

Okay, great alright, so for the record, we're not hitting subscriber numbers until about 15 minutes in here. So.

Got you, but you added $2 4 million subs in the third quarter.

<unk> $4 5 million in <unk>.

Maybe you can just kind of walk us through how you are feeling about core subscriber growth before you kind of get into that the dynamics in 'twenty three around advertising and paid sharing.

Well, thank God, we are done with shrinking quarter.

It's a big feeling.

We're back to the positivity.

Obviously this quarter and the guidance for Q4.

Our reasonable not fantastic, but reasonable.

And then we've got to pick up the momentum everything the company is focused on whether that's on the content side on marketing.

Lowering prices to the AD supported the paid sharing.

<unk> approach, we're doing their lines us up.

For a good next year.

We still got FX, so that's a huge hit.

As we've explained so.

Is that going to go away, but other than that all the stars are lining up very well for us Spence you want to add to that.

Yes.

You're doing my job for me, which is great I appreciate that.

But yes, we are.

We're not we're still growing as fast as we'd like so we're building momentum we're pleased with our progress, but we know we've got a lot more work to do we're pleased with Q3, we saw acquisition growth a bit more than we had been the past few quarters, which is great across every region churn remained slightly elevated kind of similar to where we were.

At the end of Q2.

But overall when you combine those two things we delivered paid net adds of $2 4 million, which was a little bit above our guide. So we kind of under forecast. There obviously and then for Q4 as we talked about and as we talked about you mentioned, we're guiding to $4 5 million paid net adds are rich.

<unk> in that guide as well.

What we've talked about we're off to a nice start I'm sure. We'll talk about the strength of the content slate, we started with monster Jeffrey Dahmer story into the washer and others that are building so its a strong seasonal quarter.

But some of those revenue accelerators that we know we're focused on in the near term whether it's adds we just talked a bunch about that theres not going to be.

Don't expect at least a big financial impact in his first launch quarter.

And we're also as we've talked about in the letter we have a solution that will be rolling out in 'twenty three for paid sharing and monetizing all of that unpaid viewing we've been talking about but again that doesn't even start rolling out until until early 'twenty. Three there is some other near term limiters to our growth.

On the call.

Take currency out we still have you know penetrating the connected TV market and the sales cycle. There. We've got competition, we've got some macro strained whether it's higher inflation energy prices and some of the geopolitical strain around the world. So all of those things are factored into our guide its a little bit less visibility than we typically would see but <unk>.

Overall, we feel really good that we're we're building that momentum we've set a path to growth you're seeing growth in paid net adds both on actuals for Q3 and into the guide to Q4, and most importantly, a path to accelerate revenue growth and hit the ground running in 'twenty three.

Okay great.

You had your two biggest English language series ever I think in the span of three to four months with stranger things for and Dumber.

Do you believe the content cadence is becoming more normalized here post pandemic and how much of a factor where those titles and driving <unk> subs and now more momentum into the fourth quarter.

The big Big Big chose it folks engage with and talk about it drives a lot of growth I do think it's the peak.

People come to value that and for US. Our goal is we've got to get them to come to expect it. So right. After they finished something great that they loved that there was an expectation that theres something ready right behind it. So you described it pretty nicely and come out of Stranger things season for you we're already right into a big movie like Gray man.

Ruby they can fall in love with like Purple Hearts are a great animated feature like <unk>.

With that in your ROE right into Monster that get Jeffrey Dahmer story, and then right out of that I mean back to back kids from from Orion going right into the Watcher. So I think that cadence is something that I do think we're getting better at.

As you know as we get more and more mature and our creation of original content number Doug we've only been at it for 10 years.

And the other thing is just Oh.

Oh go ahead sorry.

Ted maybe just talk a little about the smoothing of content monthly kind of what state. We're at this year. What you think we can get through next year.

Anything out of that Covid concentration.

They've got a lot of content jammed up in the later parts of the year, and then that impact rolls out and rolls out because even when people are getting back to normal work that we're all working on those projects. During COVID-19. So it takes it will take several years to completely unwind the COVID-19 logjam.

And historically Q4 tends to be a little heavier than Q1, and Q2, mostly because of the.

Historical legacy of the fall television series in the fall film cycles with film festivals and award cycles and all of those things that are kind of unnatural to viewers watching so.

Trying to be more and more aggressive about smoothing that out to make sure that the content is available when people are ready to watch it.

And just to add to that it's really kind of smoothing it out across all of our content categories. So theres always something great to watch whatever your mood or taste and even just.

To build on Ted pointed its not just kind of English language titles and I'm, sorry, if I missed some of what he said, but even if you think of the last this last quarter or whether it's every region syntony in Brazil, It's the Empress in Germany high water in Poland Narcos Saints in Korea, more and more of those big local titles with big local impact as well that can.

It also have the ability to travel so it's really kind of getting that cadence in every country and region around the world and probably none was a better example of this go around than extraordinary attorney Woo from Korea.

<unk> 400 million hours of watching around around the world just a real phenomenon that we can take a show that other folks would view as being extraordinarily Korean.

And make it work around the world.

Okay.

Chad.

Discussion just around the philosophy around around content and I guess the question is is there a process or selectivity changing at all in terms of the green lighting of content does it need to.

Uh huh.

Go back to what I was saying earlier, we started this about 10 years ago, We had no IP, we had no library.

We moved as quickly as we could to build a library of our own IP and to build our own library and in that is 10 years that library now gets more viewing more revenue and more profit than all of our competitors who have been at it for over 100. So when I look at that and think okay. Along the way, we've probably made a lot of mistakes and.

And we learned a lot. So today when I think about what we've learned today, we've kind of developed.

A lot stronger skill sets and partnerships and processes to ensure quality of delivery and working with our creators and to give them the tools to deliver for the audience. Some things that are fairly proprietary and some things that just benefit from the scale of our business. So that they can really do what we want to do which is please audiences.

Hum.

I know you got to remember as we go.

To do that it isn't just making prestige shows in English.

It's also making a very kind of pop culture television across every genre across every format imaginable.

And in doing that.

That's the thing that I think we can bring scale and creativity and audience connectivity that others can't compete with so for me. That's the biggest thing that when you say are we sharpening our tools and we're getting better.

We're definitely getting more mature about the process and then if you go all the way back to the beginning of time.

We didn't have a staff who'd had any experiencing creating original anything on Netflix so we.

Build that up to where we're at today, which as you know in the last quarter. We released seven of our most popular releases of all time just in this last quarter.

Okay great.

You've talked last quarter about content spend staying kind of flattish around $17 billion or so number in annual cash spending.

So I realize that that's up this year when you kind of take out the incremental COVID-19 costs from from last year, but.

Does the discipline around content spending push you to do anything differently.

And I guess, what's your confidence that you can deliver both the quantity and also the quality of content that you won within that number across all regions.

Look I think what we're seeing Doug is that the both the scope and scale as well as the range in the cadence of hits is improving so that.

I feel better and better about that $17 billion of content spend.

But we have to do is the better and better at getting more impact per $1 billion spend than anybody else and thats, how we're focusing on it. So I think we're about the right we're spending at about the right level.

And as we Reaccelerate revenue, we'll revisit that number of course, but we are.

Disciplined bunch about that.

Okay.

The knives out sequel glass onion, so pretty highly anticipated youre going to release it in a limited number of theaters I think for a week around Thanksgiving before hitting Netflix I believe on December 23rd.

But there also seems to have been a push to perhaps run it for a longer period of time in theaters. So maybe you can just talk about some of the debate there what the rationale is to just do it for one week.

And how do you think that.

Is that kind of a release will drive viewership on Netflix.

First I'd say, we're in the business of entertaining our members with Netflix movies on Netflix.

So that's where we focus all of our energy and most of our spend.

Our films are always heavily featured in film festivals around the world because they are in demand made by the greatest filmmakers on the planet.

And for all those folks who can't get to a city, where our festival is this one week release on 600 screens as a way of creating access to the film in building Buzz. The same thing we're doing in those festivals. So I would look at this as just.

Another way to build anticipation for the film and build Buzz and reputation for the film ahead of its Netflix release.

There's all kinds of debates all the time back and forth, but theres no question internally that we make our movies for our members and we really want them to watch on Netflix and of course with one week of released in theaters. Most people will see them on Netflix just like they see all movies. Most people watch most movies at home. So we think that there is plenty of it.

And I think this particular release sits somewhere between that week, we have to run movies to qualify for awards in the time that we run them at a film festival and the time that we travel them around but it's a way of condensing that into a louder event.

Got it okay pretty clear let's.

Let's shift gears a little bit.

Talk about paid sharing you announced profile transfer yesterday, which facilitates nonpaying members shifting their recommendations and history and.

In other settings to a new accounts, maybe you can talk about how this is a potential precursor.

So having borrowers.

Kind of become either having their own accounts or adding to an existing member and just how we should think about timing of the rollout there.

Sure.

File transfer I mean supports a couple of different use cases, right. I mean, there's obviously situations where you can imagine like you know you advocate at home, who is going to go off and become an adult and get their own account and it supports those ones, but it does enable a key thing that we learned around how we think about paid sharing and we've been working really hard to try and find essentially a balanced position.

<unk>.

<unk> approach towards this one that supports customer choice and frankly.

Long history of customer Centricity that we think has informed how we think about establishing our service, but balancing that with making sure that as a business, we're sort of getting paid when we're delivering entertainment value to consumers.

And as we tried to do with pretty much all of our product changes, where we can we try and try different approaches and listen to our members and their reactions to help us understand what's working.

And what's not working so we've tried a couple different approaches in different countries, you saw that and based on the customer feedback that we're getting we sort of landed on an approach towards paid sharing that we think strikes that balance and a key component of that is the ability for borrowers people that are using somebody else's account right now to access Netflix to.

We're able to create their own separate account and part of that is transferring their profile and their viewing history and all the great information that basically informs hopefully great recommendations for them and we think that that sort of separate account path will be especially attractive in countries, where we are launching that lower priced basic with ads plan that lower.

This obviously makes that more attractive another component of this though is allowing account owners to be able to pay for.

For Netflix for some a friend or family something they want to share the service with and so they are able to create a sub account, which we're calling extra member to enable that model too. So we're trying to come up with a range of options that supports customer choice balances those considerations, but also ensures that we've got a sustainable business model that allows us to invest.

And more of that Great Entertainment that Ted's team is always focused on for all of our members. So we're looking forward to getting that out in early 'twenty three.

And do you think do you think extra member.

And kind of new new accounts could could that be bigger than advertising in 2023 for Netflix.

I don't I wouldn't say.

Which is to be bigger or better I think they're complementary in many ways and what we're seeing is that there's a number of different consumer needs right.

Paying for Netflix for somebody that you want to share that service with that's a legitimate need.

Creating a lower price.

It balances out for us as a business with monetization from AD, that's a legitimate need to get to all the great content that we're making so I just think of this as a range of options that try to speak to a range of different consumer needs. The right price points. The right feature set and we're really just trying to do a better job of it.

At expanding that range. So that we can serve more consumers on the planet and the right way.

Okay.

Expense, maybe you could talk a little bit just about the decision to no longer provide guidance on subscribers starting next quarter.

Sure Spencer do you want to take that one or sure happy to take it I appreciate the question Doug So.

Maybe just to start focusing on subscribers in our early days was helpful. But now that we have such a wide range of price points different partnerships all over the world.

The economic impact of any given subscriber can be quite different and that's particularly true if youre trying to compare our business with other streaming services. So that's why we've been increasingly focus on revenue as our primary topline metric as you've heard us talk about over the last several years and this is going to be I think even more important as we head into 2023, and we develop new revenue streams.

Like advertising and paid sharing where membership growth is only one aspect of the revenue picture.

So just to be clear, we will continue to report on our global membership every quarter when we release earnings as well as the peanut ads. We will also continue to disclose our regional membership as.

As we do today and in terms of our revenue guidance you should expect that we will give you some color on the underlying drivers of the revenue forecast, but we just won't provide a pinpoint paid net adds figure per se and then lastly, we will continue to provide guidance for all the other metrics Doug that we do today, namely revenue operating income operating.

<unk> net income EPS and share count so in the Grand scheme of things pretty.

Pretty minor change.

Okay. That's great that's helpful.

If we look at the <unk> guide.

4% operating margin, it's heavily impacted by FX pressures I think it's 10% ex FX and I guess on a year over year basis kind of up from 8%. Maybe you can just talk about some of the factors there is there anything.

Fundamental in terms of the business, that's kind of perhaps weighing there a little bit more on <unk> margins or is it kind of all FX.

It's really all FX, Doug as you said I mean year over year.

FX neutral constant currency, we're actually up it would be a 10% margin versus 8% prior <unk>.

So it's the FX drag is significant we mentioned in the letter if we if we look at our you can do the math on our four quarters now and you kind of roll it out to a full year number we're still holding to what we're calling FX neutral to the beginning of the year January one of this year to that 19% to 20 <unk>.

<unk>.

Margin range FX neutral you can you'll see it.

Actually is in the mid to higher end of that range, but on a reported basis. It's just a little over 17%. So there is about two five points of FX drag in our margin that equates to about it's about $1 billion of revenue drag about $800 million of a margin drag.

And the bulk of that is being felt in the fourth quarter as it's built up through the year.

Okay.

And then I guess, maybe you can just talk about cash content spending just to confirm it sounds like youre kind of reiterating the same thing around the $17 billion.

<unk> level going forward.

What does that mean for free cash flow generation over these next few years.

Yeah. So as you said, it's a we're kind of maintaining the guidance that we had we think the $17 billion is about the right Zip code plus or minus to spend.

Based on our current revenue trajectory.

As Ted said as we hope and expect to Reaccelerate revenue, we will revisit those spend levels, but for now given all of those learnings that Ted mentioned, we think we can deliver more member value per dollar of content spend than we have in the past. So we expect our content slate to get better and better each quarter.

And each year over the next couple of years and the way that then translates to cash flow for this year, we're maintaining our roughly $1 billion of free cash flow guide plus or minus a couple hundred million dollars. There's always movement at the end of the year for timing and then next year for that free cash flow to.

This substantially improve beyond that so we expect it to be.

Hopefully.

Materially above the roughly $1 billion. This year, we won't put a specific guide out now, but it will be significantly larger.

So we have time for about two two last questions. Please okay.

Okay.

Reed.

So you talked about according to Nielsen writes streaming time now surpasses, both broadcast and cable and of course Netflix has played a major role here and driving that transition. What does this next period of streaming look like in your view clearly more competitive more AD supported but how else do you think it evolves.

That's a great question Doug.

Clearly us and Disney.

Investing heavily in.

It will be two big brands in.

Premium space.

Youtube is very strong on connected Tvs.

So that will continue to grow.

I think depending on how Sunday ticket lands.

Some.

<unk> Amazon somewhere else Youll start to see a bunch of people focus on sports.

And bringing that over to on demand.

And then think of.

No.

Mobile telephony just slowly replaced fixed line telephony and that was even before before smartphones right just in the convenience and you're just going to see it grow every year for many years ahead.

And it makes television and a lot more convenient more enjoyable.

And smart TV now cost less in the mobile phone.

It doesn't have a battery it's got a smaller processor.

It's easier to manufacture.

So smart Tvs are getting ubiquitous and lower cost there was the supply chain slowdowns, but generally I think you'll see around the world Smart Tvs continuing to get to every home in the world that has the television.

So that's all very positive vectors. So again think of it on basically pretty steady every year climbing share.

And then a lot of us battling it out forward do we have the best content in the world that we have the best suggestions in the world although as prices.

All of the classic competitive dynamics. So we're pretty excited about this next phase which is competitive excellence.

And.

It's Steve.

Straight ahead execution, if we can just be better than everybody else and we're pretty driven at that.

Okay.

To close out im not going to ask you about towards content, but.

But I'd like to ask each of you. The single most important thing for you and your teams to accomplish in your respective roles over the next 12 to 24 months.

And I'll leave it to you guys to for whatever order you'd like.

I'll go first I mean for me, it's the overall direction of what we're doing.

And that there's clear context for everyone that if we execute down this particular path well then.

And then we're going to win.

So that's a very exciting and we're on target for that.

And we have to continue to deliver enormous quality at scale the.

The volume of releasing that we're doing it's not that we're putting out so much kind of just dumping the content into the world where actually we are trying to serve super serve hundreds of millions of people with individual taste and individual relationships with content and to do that at scale is something that's never been done before and we continue to kind of sharpen the tools.

To deliver on that every every not just for the next 12 to 24 months, but for the foreseeable future.

But I think this time right now is is just as important as ever has been.

Doug for me.

Two suggestions. So one is as you've heard us say, we want to build a really big but also very profitable business. So.

And our role in corporate strategy and planning, we want to help the company build and refine the muscle around big profits over time, and then secondly, we've been doing more M&A over the last year or so so again, just getting better and better at that in terms of integration and making sure those deals live up to the expectation.

Yes.

I can just add.

Add to Spencer's point, we're really in kind of that support role and in finance and operations across the company, so helping to really scale and mature that combination of of creative excellence and operational excellence and our support roles in and support our ability to become a truly an increasingly global company around the <unk>.

World with.

With increasing kind of financial discipline to get more and more of that dollar spend onto the screen for the enjoyment of our members.

Doug I'll cheat and give you two I mean tactically we are sprinting at ads and it's been Super fun to see teams engaged in doing incredible work to make that happen in such a short time, but behind the scenes, we're doing amazing stuff on improving what we call the choosing experience, which is a content discovery and recommendations and all the things that essentially I think.

It takes all the work that Ted's team is due and tries to magnify the value of that for the users we have around the world and sometimes those things are subtle because they sort of happened behind the covers if you will but every quarter that we see improvements there I know we're doing a good job for our members around the world.

Okay, great. Thanks, Doug and since you Didnt ask I'm going to take another couple of seconds to tell you that Q4 anyway.

Wassa is already turning out to be an enormous returning season Crown Emily and Paris manifest dead to me Firefly Lane Ginny in Georgia and origin story from the world of which or we have an incredible new action series, starring Noah sent an E O called the recruit we have Tim Burton's TV directorial debut with wins.

We have a new series from Guillermo del Toro called cabinet of curiosities.

And from around the World are some of our most successful shows like Allison Borderlands and Barbarians at El <unk> are back for new seasons do I'll just in Q4. So let me say first and foremost we have a lot of work to do to continue to Reaccelerate revenue.

Really happy with our levels of engagement the number of hit series and films that were able to put through our members at prices that they think are phenomenal value.

These strained economic times, and we are growing even in those strained economic times and with the extraordinary levels of competition out there for streaming dollars and for hours of viewing.

We stood up an AD product in six months with this.

The tremendous demand on that product and with the great partnership with Microsoft and with Greg Peters and this phenomenal team that runs that effort our basic with ads tier is going to help us open up Netflix to a whole new audience of folks who are attracted to all that great content at an even lower price point.

In Q4, and we look forward to bringing this incredible slate to everybody.

It continues to grow.

In this world of film and television and games, which we believe that the future of TV of films and the games streaming and we're working hard to continue to grow our lead in this area. While we continue to bring healthy returns. We can only do that by bringing this shows the films and games that people love, So where do you see Gladstone mystery.

And where do you see the new season of the Crown and you'll know just I've been talking about thanks, Doug.

Good afternoon, and welcome to the Netflix.

<unk> Q2, 2022 earnings interview I'm Spencer Wang VP of IR and corporate development. Joining me today are co CEO Reed Hastings co CEO and Chief content Officer, Ted Surrenders, CLO 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 question.

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 with.

We're talking about recent trends. So you expect 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 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 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 screaming.

And then R.

Core drivers are just continuing to improve.

And then of course, we'll talk later on the call about monetization and how that some clothing, so yeah tough and in some ways, losing 1 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 remains really resilient I mean, 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.

Maybe that's right Oh go ahead go ahead Greg.

Yes, 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 standard response that we've seen historically over the last five years or so which is that we typically have this adjustment period, where there is slightly higher.

<unk> 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 and taking those price changes which are <unk>.

Significantly net revenue positive and investing those into more great content.

Alex experiences and marketing and magnifying the conversation around our titles then we know that will deliver more entertainment value won't be able to return those metrics and that's certainly what we're seeing on the <unk>.

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.

Yeah, Greg you hit on it 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.

<unk> early in the quarter, because we had some big price changes your big markets that had price increases like U S U K, Ireland and some other parts of EMEA.

Early in both Q1 enrolling through Q2, but then as we get further past that that's part of why you see positive pay net adds guidance in Q3.

<unk> 1 million net adds in <unk> and how do you think about subscriber growth for the for the back half overall for the entire year.

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 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 you'll 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 holdup.

You want me to take it or do you want somebody else I can say 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 to 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 steroids to go see and theyre going to from a premier on Netflix and then we've got a steady drumbeat.

For movies like lead time, with Kevin Hart, and Mark Wahlberg coming up and a New addition of 365 next three experienced 65 days, a big franchise, a new season of Cobra Kai.

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 the consumer will embrace that even more so in tougher economic times.

Okay great.

Extend that just attach I mean, we think you know 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.

In 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.

On a 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.

Risk of Spencer go ahead, you'll hit 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. There's a level of escapism I think that entertainment provides also if you look at the pay TV business over.

<unk> cycle, it tends to be a bit more resilient as well just because the value of in home entertainment increases as you know 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 and cycle is different so we don't want to take that for granted and we're monitoring pretty closely.

That's 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 add to your 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 great question for Greg here.

I think we're looking at this as an extension of two things that we think that we have.

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 you know sort of how we started and streaming to how we think about you know a great quality of experience and the innovations we've led 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. So you don't want to set expectations at the onset.

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 and measure ability and things like that to one 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.

There's 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 the 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 wind 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 it's been.

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.

A high degree of alignment Dara, so that enthusiasm that alignment.

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 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's us 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 a technical capacity, which is <unk>.

Complementary to ours that go to market capacity, which we need to leverage and it'll 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 you know sort of what the experience is and what the go to market approaches. 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.

Currently watching Netflix, but theyre using another paying members account credentials right. So theres all I think represent opportunities for us because we're 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.

And our general goals, there, we think thats, yes.

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.

Okay.

And should we be thinking about this as a single tier essentially below the basic plan.

I would say over a period of time.

I think that this is sort of one of the dimensions that will inform sort of our plan structure.

Sort of discrimination features that that would inform what.

Offering.

Consumers ultimately choose to get to so will it 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.

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>.

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 thing probably works in our favor between both geography as well as opening up the aperture to our members.

Okay.

You 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 as 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 yeah.

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 while we're in constant conversation with the studios on but if we launch the product today the members and the attitude we have a great experience and we will clear some additional content, but it's certain.

Not all of it if we so we're looking for it but I don't think its 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.

Our strong commitment.

Privacy data protection for consumers, saying there'll be 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.

Yeah.

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.

I will try one more I'm not sure what I'll get but.

Microsoft is the deal cannot be broader and can it be a more strategic partnership beyond advertising candidate involve elements of cloud gaming, perhaps other things over time.

So a couple of things there first of all we picked Microsoft as our as partner because we think theyre going to be great at and as partners. So that was really the criteria that was used to inform how we thought about the choice.

You mentioned cloud, we're super excited about Amazon and our partnership with them and you know we don't haven't changed that relationship we haven't changed our focus on <unk>.

Ws's essentially our cloud infrastructure.

On partner there. So we also have we've done other stuff with Microsoft We continue to do work with them on on 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 about a great ads partnership deal at the end of the day.

Yeah.

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 it's slightly different implementation than in the first three countries that you announced in March just curious.

What you what you've learned here early on over these last few months and just how youre thinking about these different implementations going forward.

Yeah, 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 that the technical capabilities to get this 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 shared the account with the additional homes.

So really at this point, we'll sort of see.

What works for consumers that 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.

To call. It obviously, we just.

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.

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 technologies 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.

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 that 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 a consumer friendly model that supports legitimate use cases and travel is a good example of that personal.

Nice 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.

Way that 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 consumer choice model with what we think are practical considerations of the business. So those approaches are different and that's obviously why we're trying to predict a figure.

And 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.

So we're pursuing them independently now there is a great synergy that happens when as we think about <unk>.

On sharing and paid sharing.

Part of this is being able to offer to a range of folks who may be borrowing Netflix because they didn't quite see as much value from the entertainment and the viewing.

And sort of motivate getting their own plan. That's part of that segment part of the segment. We just have to encourage them push them, a nudge them to get to that point.

Part of what's great about ads is that obviously, we get to give.

Folks that are seeing a little bit less value.

A 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.

So your best English series debut of all time sort of things for but.

Go ahead, Yeah look I think these titles continue to hit New Heights, which is really.

Fantastic that we could 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>, who heads that television group and they keep surpassing records like we had been able to do with stranger things Enbridge attendants squid game and our biggest hits have all come out in the last 12 months.

Which is a really kind of a phenomenon sign of progress Scott Stuever in his film team.

Really killing it again I'm going to call back to the Friday 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 where I think Gray man will join Red noticed an atom project <unk> and don't look up as 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 with the output we have 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 happened 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.

Gave that number of the world Okay.

Let's go back to <unk> for a minute.

Ted 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 it.

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 may not mean, 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 say I wonder as you pointed out.

<unk>, our new CMO is doing a phenomenal job she.

It came from inside of Netflix she was running in the U S. She hit the ground running with that remarkable stranger things campaign.

Our best campaign to date, one of the strongest marketing campaigns I've ever seen.

And she is in the.

Back to 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.

Your best Angler series debut of all time, which we've 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 up to the engagement is such an important metric because the time spent on Netflix and then 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 when you come to Netflix that you're 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 Youre 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 in that one of the more you watch the more you'll find great things So I think.

We get a stranger things that really pays off we get a great man it 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 Ted how do you balance out driving both that high quality content and the significant scale because there 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 want.

To win for the audience and working with our teams to create great television shows that can go on for multiple seasons are great movies that spawned 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 put the focus on quality and the thing that I've always said from the beginning.

Is scale scales. The thing that we're doing you're going 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 teams 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.

To support that that content.

You've talked in the past about kind of $17 billion to $18 billion.

Spending for this year.

<unk>, 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 one 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.

Said, 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 rates ZIP code. So cash count we've come through the 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 there.

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. So 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.

We don't know who that makes happy by the way I don't know if one of them.

I would say look 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 shut down because of the production and restarting production and being extremely careful with the cast of the show early.

And the early on and covered 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 its been 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 that it started higher worked down lower so on these kind of numbers that significant and its obviously much smaller now, but but that was a big.

Kind of a drag on our overall efficiency of spending 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 <unk>.

<unk> from January .

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 sell this year.

We've got the FX moves and we also mentioned 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 that 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 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 or is it.

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'll 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.

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 can.

Worked through.

We expect to do in terms of accelerating our revenue growth and then start ramping up operating margins again, and hopefully there's 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 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 im sure Theres a lot of other good things.

Well, great minds as a recently vantage for sure because it's coming on this Friday and it is mind blowing.

Okay.

For me Doug.

We are very excited for knives out too I've heard great things from our content executive on that one zone definitely anticipating that one for me.

Spencer you beat me to the buy ins there.

I do 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 and let me close it out I, just I've been going through stranger things to catch up I, just finished 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 travel.

We just <unk>, Michael Pollan about hallucinogenic and.

A great documentary series.

Changing in my head [laughter].

Thanks, Thanks, a lot Doug.

Billions of people around the World Love streaming TV and film and we only serve a few hundred million dollars 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 have 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.

And then they say Oh, good afternoon, and welcome to the <unk>.

<unk> Q3, 2021 earnings interview I'm Spencer Wang VP of IR and corporate development. Joining me today are co CEO Reed Hastings co CEO and Chief content Officer tensor handouts.

Product officer, Greg Peters, and CFO Spence Neumann our interviewer. This quarter is maybe you could tell from fidelity as a reminder, we will be making forward looking statements and actual results may vary Nitty, you now have the green light to the ask your first question.

Thank you Spencer great to be with you all again.

I wanted to say congratulations on all your success in the partner 44 in a amazing viewership is quite game my children, well never played Red light Green light again, [laughter] and your.

<unk> nights called studio and the announced acquisition of <unk>.

Volatile story company and we have a lot to talk about this quarter.

Q3 2022 Netflix Inc Earnings Call

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