Q4 2022 Netflix Inc Earnings Call

Our development joining me today are executive Chairman Reed Hastings co Ceos tests around dosing, Greg Peters CFO Spence Neumann our interviewer. This quarter is Jessica Reif Ehrlich from Bank of America. As a reminder, we will be making forward looking statements and actual results may vary.

Development joining me today are executive Chairman Reed Hastings, co Ceos, pet surrenders, and Greg Peters and CFO Spence Neumann our interviewer. This quarter is Jessica Reif Ehrlich from Bank of America. As a reminder, we will be making forward looking statements and actual results may vary, but that Jessica over to you for your first question.

Thank you and thank you so much for having me today.

We just had a big announcement about the management changes can you give us some more color on the process and how you came to this decision.

You know Jessica at feels like yesterday was our IPO.

We were covered in red envelopes we.

We IPO Ed at about a dollar hopefully some of you have held the stock for 21 years.

And when I think of the evolution, the three of us and so many other incredible Netflix.

Employees to go from D V D service to streaming leader in films and TV and emerging player in games and now have over 230 million members. It's just well Jim Collins, probably set a best he called that a good start.

We've had a good start but you know honestly, we dream of a whole world finding their favorite entertainment on Netflix and we shorthand that as entertain the world.

And the three of US have been working together for 15 years now trying to figure out how do we get through this issue that issue how do we grow it.

And I couldn't be happier to complete our succession process. It really started about 10 years ago with the board I'm trying to think through.

How could this work they both have such amazing talents and gifts and defined a platform where they've been able to contribute is fantastic about two and a half years ago. We took a partial step Ted as co CEO , Greg as COO, we continue to just make a super progress and yeah Frank.

More and more of they've been leading the company and this is acknowledging really.

Foremost terms well, how we've been operating for at least the last few quarters.

You know, it's just a great feeling and when I think about the stock appreciation over the last decade.

I know that they want to beat that record.

And I'm all for that I'll be executive chairman and helping them everywhere I can.

But it's really they're still leads and to do that energy and hustle and intensity that we've been doing they're very ready that's what's driving the timing.

And so I could not be happier.

So back over to you. Thank you subjectively I'll just add that there is maybe the smoothest transition we've seen in media for quite a while now.

Now for Tennant and grabbed what does this mean for Netflix does this signal a change in strategy or approach.

Jessica let me start with the first and foremost to think read personally and professionally.

He has been and I Trust will continue to be a role model a mentor a friend in 'twenty two plus years Reed has positively changed my life in every way imaginable.

And he leaves some big shoes for Greg and I to fill a unfortunately, we have four feet to do it with so that's a good thing.

In so many ways the way it reads, but able to see around quarters. That's why he's been thinking about the succession for the last decade.

He generously.

Opened up more of a co leadership model over a decade ago for the heat for Eni and like you said you would have years ago made it a little more formal and in that time delegating a lot of the day to day to Greg and I and at that time and those two and a half years, we've been working at it and we've been working together for 15 years, Greg and I, but in the last two and a half years, particularly you know we've been able to build a really truck.

Being respectful and complementary partnership.

In many ways to stay way I would read over the years.

And I really do believe that this kind of share leadership model is going to help us to move fast and the challenge each other to challenge the company the race to new Heights, and I'm, just incredible, but we're able to do it to your point. This is the leadership team, it's been pretty stable and that's why that this steady transition feel so steady.

This ability of this team has helped us build a great Foundation.

And at a culture that can absorb complexity and change.

And as you saw in this last quarter can rise to any occasion.

Greg I, just want to say I'm thrilled to be honest with you and read we can't thank you enough.

Thanks, Ted it's a real honor to be asked to take on this responsibility and join you as co CEO and and frankly, a pleasure to be able to compete or working with some of the most amazing leaders that I've ever had the pleasure of working with and frankly my opinion. The best leadership team in Netflix has ever had so I'll just echo Ted's comments, it's been a real.

Fun and rewarding experience to work closely with him over the last couple of years, especially in I'm tremendously proud of the partnership that we've developed in the shorthand and and really how we have been able to take what are sort of a complementary set of skills and perspectives and seeing different angles.

The different situations, but basically you know at the end of the day, we are I've always found or ultimately motivated by the same things, which is that we want to serve our members and we want to grow our business and that is an incredible and powerful lining process to those different perspective. So.

Im proud of the work that we've done over 22 in the latter half, especially to get some more momentum into the business, but I'm even more excited about.

Continuing to push that into 'twenty, three and follow the model that read has always had of continually seeking excellence and always striving to be better. So looking forward to that and then to your specific question Jessica.

There is no big strategy shift or a big cultural shifts you know Ted Reed and I've been working in sort of grinding through our individual perspective on this for a long time and so really we look forward to taking things forward as we have been for the last little bit and responding to a dynamic industry and doing the changes that we think are appropriate, but we're not we don't have a bank of changes that were that had been holding.

For this moment, so mostly its continuity and move forward.

Sure.

This was originally for me now that given the change in leadership structure, maybe for all three of you for Ted and Greg One of the best quotes recently was from John Malone, who said shareholder should build monuments for Reed Hastings.

Rupert Murdoch win the dominant global media companies in prior decades, and we're one of the few media executives who've been able to see around corners.

Apparently they both felt the bulk of their assets. That's just now one of the most dominant global media companies. It's not the dominant what is your view of the next five plus years do you need to consider and stay the course.

Well the one thing I'd point out is that what's happening now and what's going to be happening over the next couple of years is that the consumer is moving to streaming so the way that they watch content at home are delivered to them on internet on demand of free of the linear schedule at all of those things that is a change a fundamental shift in the business and you've got to be where the consumer is and that's what we've been.

Focused on since we started streaming 10 doing original cuts at 10 years ago.

But being really realizing that where we really have benefited from being a customer first company and meeting the customers where they are and we've also had this let's say about having to unwind our tradition of traditional media business as we built into this one.

So we've always been focused on the future and where the consumers are going and I think our ability to continue to stay focused on that because.

This is really I know, we've been talking about it for a long time, Jessica but this is really at a different fee.

Think about as big as we become and all of these things that are happening and in the U S were about 8% of T. V times still so it's an enormous amount of growth ahead, even in markets, where we are very well established so that's the key for us and I think being able to focus on consumers first.

And it's been really been our biggest benefit and I think it's what led us to.

Those milestones that you just referred to great Yeah, and just I would say I think that that translates into being bigger and I think I mean, it's being bigger in terms of touching more members around the world delivering them incredible entertainment, we will see that in terms of being bigger in terms of the amount of engagement that we can drive the amount of hours that we're satisfying them I'd be bigger in terms of the cultural impact as to I mean, you've seen.

I mean, just incredible cultural impact in terms of Wednesday Stranger things there.

The ramifications that these shows have in terms of the popular culture are significant and that's going to get bigger to it also means bigger in terms of revenue and profit streams, we're looking forward to those as well.

Right.

So losing subs in 2022, and the market reaction or valuation means that it can to August 2015, when Bob Iger called out the early decline of pension decides and the impact for Disney's ESPN and we'll talk.

While for Disney to build ESPN, plus interest sports streaming Giants and actually they may they may never replace the profitability of the ESPN at that point in time, you have to have it seems broad based by extending genres and going to new areas, whether its games fitness live et cetera.

Do you see any similarities or differences to that momentum. This inflection point, which has certainly shifted wall street's view from subs to profits.

I'll take a shot at that and then Ted maybe weigh in but I think it's a fundamentally different situation and if you look at where we're at.

Significant part of what we need to go do is essentially take the core model that we've been operating since we've been starting in streaming and just execute it better in all dimensions and so whether it's you know the incredible content that Bella and Scott's teams are producing constantly how we're talking about that content to the marketing and <unk>.

Conversation that we do the product experiences and business model innovations that we're doing but a lot of it really fundamentally is about executing that core model better. We're not you know there's not a lot of massive pivots away from our traditional legacy business model that we have to go figure out where planting some seeds you now in terms of games and things like.

That that you know.

If we execute well and we're excited about the progress we're seeing so far will represent the.

The future potential for us in terms of growth and more profit opportunities. So that's exciting but essentially a lot of this is just you know continue to execute the play that we've got and do it better and better.

And I don't know about the put the similarities but I would say that this business is really completely about our.

Engagement profit and revenue so we've got to grow all of those things that all of those things are really are tied to executing on that on the content. When the contents working the business is working to grow engagement, we grow revenue and grow profit.

The interesting thing starting in July .

And you think about from Stranger things season for from the phenomenon that became and what we've been able to offer up to our members from that day forward. So they went from stranger things two extraordinary attorney wound, which is a was a phenomenal success in throughout Asia and in South Korea, but also build a big called fan base in the U S straight into the CBS , which is our biggest that I made it.

Film ever straight into purple Hearts and greater than two of our most watched films ever on Netflix and then August Sandman and never have I ever season, three September Cobra Kai season, five Empress Cyberpunk is this animated.

Adaptation of a video game, that's been hailed as one of the greatest of all time Narco say another monster hit for Lord from North Korea, The Jeffrey Dahmer story.

Monster straight into watch or if you go back to back kids from Ryan Murphy, all quiet on the Western front, which just today became the most nominated non English film in the history of Baptists, only Gondi has gotten more more nominations in the history of the Baptist and that's from Germany with the Great Ed Burger and then straight out of there into another one.

Two a big Monster success sequel to with Billy Bobbi Brown and you look at all of these things that I go back in for it and they go all the way into January now as well in the month with you people, Eddie Murphy and Jonah Hill any any other outlet would kill to have any one of those months as their entire year and it's our ability to put to fire on those cylinders.

And create hits, but more than that create the expectation that as soon as you're done with this one there's another one waiting for it.

Yes.

Just one thing to add I know, but.

Because I just think the analogy is kind of fundamentally different so with ESPN. In the example, you gave that that was a fundamental kind of shift in the industry from 100 plus million pay TV connected homes to cord cutting that's on a path down to mid to high single digit reductions in that distribution.

Platform each year and that's in moving in that direction. So it's kind of a shrinking.

Core distribution platform, where you've seen our earnings letter the world is shifting from linear to streaming even in the largest there's there's no country, where streaming has more than 40% of share of T V time and in many big countries that you saw its less than 5%. So it's a pipe work less than 5% is less than 10%. So if there's an.

Treadle runway still in the shift from linear to streaming and so for us it's about growing into that shift and also obviously competing well and continuously innovating and improving and what you saw or what we saw and felt when we had that decline in subscribers was really near term limiters and growing into that big market.

Big market is still growing as opposed to fundamentally long term limiters and that ESPN shifts that you you described.

Right.

Some of the lines of some of the drivers of growth plus near and medium term and start with advertising. So your advertising platform. It's been open only two months.

Amazingly given somebody back to advertisers, indicating in one way and the demand is exceeding supply.

The company is you guys have consistently said youre going to crawl walk and run how long is the trial stage going relative to your expectations.

Like you say, it's two months and I think the hardest part is actually that first step when you're crawling because you don't really know what exactly to expect as you get it going and now with two months now.

Ridiculously early but.

Earned a bunch already I would say so yeah, just taking through this I mean, I'd say first and foremost is that we were able to launch.

This very very quickly and the tech is all working the product experience is good and that's really a testament to lots of hard work for both Microsoft and Netflix teams, who you know who worked very hard to make that happen and it's really rewarding to that to see.

The other lifestyle pretty significantly fundamental thing is around engagement and we see that engagement from ads plans users.

Is comparable to sort of similar users on our non at plants. So that's really a promising indication that means we're delivering.

Solid experience and it's better than we modeled and that's a great sort of fundamental starting point for us to work with.

Furthermore, now we're seeing take rate and growth on that adds plan is solid it's great because partly that take rate and that growth is due to incremental subscribers are coming into the service because we have a lower price point, that's a 699 in the U S. A four.

For 99 euros in Germany, just to give you two examples and so that elasticity is a real.

Not only a benefit to sort of growing our AD scale and sustainability, but also to the general business I expect to see that continue to actually grow over the year not take rate fits sort of within the middle of our other plans, which is another really healthy sign it means that we've got a complementary set of offerings.

That are working to sort of satisfy different needs for different consumers at the right mix of features and price points. So that's quite good.

Other important one I think for the Investor community because it came up a lot before we launched was planned switching we arent seeing as expected much switching from high arms subscription plans like premium into our ads plan. So the unit economics remain very good as we modeled so so these are all really good.

Initial sort of progress points, but I think it's important to reiterate that you know as you mentioned, we're crawling and we'd like to get to sort of move to the walking phase. We've got a lot to do to get there. So there's a bunch of technical improvements in terms of you know.

AD delivery validation measurement, we've got progress already on that more to do in the next quarter or two targeting improvements, which will be better for consumers more relevant advertising better for advertisers in terms of more value delivered a better set of offerings on products for advertisers to buy.

A long list of experience improvements that we.

We know we can deliver that deliver more value to both subscribers and advertisers and Theres also some nuts and bolts stuff that we are learning and improving things like how do we do a better job with Microsoft at the AD sales and operations processes. There's so much that we need to do both companies need to do to better serve advertisers sort of an increasing number of adverse.

Kaiser's and meet that demand. So we're just getting started we're constantly improving and we see that trajectory ahead of us and really our aspirations are.

<unk> successively over a period of years to basically build just like we have essentially in terms of the streaming experience.

The best most effective a highest quality premium connected TV ads experience as a win for consumers and advertisers and for us as a business.

He spent some Greg sorry, Jessica Spencer can you maybe give a little context on Hulu.

What we know about our who lose advertising they've got a 10 year head start and sort of how many years will it take us to sort of.

Pass them and all of these key dynamics.

Greg do you want to go first to Amit I'll hand, it over to you.

[laughter] alright.

Let's see I mean, Hulu, it's at you yesterday, they've had a long head start they started in the ads business. They have yeah. We would estimate reason, we obviously don't know exactly but.

Roughly half of their membership is on the ads tier it's.

A multibillion dollar business for them already and that's a domestic business U S. Only.

So lower reach lower engagement than us.

So you know that.

I guess the short story there is we have given what we've seen and what what Greg just outlined in terms of the engagement on our AD plan.

The strength of the the the.

<unk> in terms of the monetization kind of unit economics in our ability to kind of scale and in a way that is even better than the kind of comparable AD free plan plus providing clearly choice that our members are consumers.

Are seeking out because of the sign up flow that we would expect to be as large or larger over time, certainly in just our U S market and more from there, but it's a it's a more I just want to emphasize it's a multi year path. So we're not going to be larger than Hulu in year, one, but hopefully over the next several years.

We can be at least as large and we wouldn't be getting into this business. Obviously read it as you know if it couldn't be a meaningful portion of our business. So were were over $30 billion of revenue 30, almost $32 billion of revenue in 2022.

And we wouldn't get into a business like this if we didn't believe it could be bigger than at least 10% of our revenue and hopefully much more overtime in that mix as we grow so that's kind of how I see it without putting a specific guide on it.

You've committed to in upfront market spot kicking cbs's prime responses against now Paramount spot, which really indicates no long term advertising goals of being a major advertising platform.

Given this is a prime spot on a critical link for advertisers and premium video like it's just it is it's amazing how quickly you just since that's a lot of way.

Once the one stage and it does.

How would you.

And what's the timeframe to get there.

Well I think it's spent has talked about it it will be an iterative process.

To your point it does signal will be a big aspirations here and we think there's a big potential opportunity and so we're committed to incrementally execute against that opportunity but.

Just back to Spencer's point, we are starting from a zero base essentially.

And also we're also starting from a history of whereas our non ads platform. We had a lot of folks are basically join Netflix you know fully as non add subscribers. So I think that that will be working through that over a period of time, but again you know our goal an aspiration is that this is a very meaningful and significant source of revenue.

Profit for us over many years ago.

So I mean, when you think about the pool of money that you are targeting linear let's call. It 50 60 billion dollar business seem to think that you like the easy money.

You've mentioned the right deals are shifting from streaming to streaming from from linear honestly, we've seen all of that kind of eyeball hospitals and so now you have like.

Basically more scaffold where rates, but the digital pool is much larger.

But in the past you've said that you've made comments the companies make content you can't compete with Google and meta.

Well it would be incredibly difficult to compete with them has this changed has your view changed.

Not really I would say that initially we are competing mostly with that sort of traditional TV advertising pool.

Now I think we can layer into that over time components of what has made digital advertising. So effective. So you think about the targeting capability. The fact that we're 100% signed in fully addressable. If you think about the growing relevance of first party data and how we do that those are real big advantages that we can bring relative to <unk>.

To the traditional television world, but again the form that we have at least for the next couple of years will still be in that sort of lean back primarily in that lean back experience and so that lends itself to certain kinds of advertising and certain kinds of advertising goal and a lot of that demand collection component that.

Google or Facebook is really good at we won't be well suited to compete with that for at least some time to come.

And Jessica just to add to that the good news as you saw on the letter is that that branded video AD market that.

Greg talked about is focusing on is about $180 billion.

Globally, ex China, and Russia, So we have plenty to do.

You know a lot of opportunity just in that area alone Yeah, no. It's an enormous opportunity, but there's also that besides advertising.

And enormous opportunity in incremental subscribers. As you you had mentioned you had the lowest priced surface at least now you have the loan, especially about can you frame the opportunity in terms of sub growth.

And how you're thinking about them sure and just to comment on lowest price I mean again, we don't really think about the pricing question from a competitive perspective again, we think of ourselves as a non substitutable. Good. When you are you know when we think about Wednesday or do you think by class on you and these are titles you can only see on Netflix.

That's extremely powerful you know Scott and Bell are delivering more incredible titles that are that are non substitutable in that regard and so really we think about the pricing question is how do we.

Offer a wide range of options for a wide range of consumer needs, we want to make that spectrum, even wider as we seek to serve more members around the world and trying to deliver appropriate value at those different price points and we're doing a good job of expanding that range and so then you think about so there's two pools then of incremental subscribers.

A bunch of people around the world in countries, where we're not deeply penetrated and we have more opportunity to go attract them.

Component of that is we've got folks that are watching Netflix who arent paying US you know as part of basically borrowing somebody else's credentials and our goal is over the this year to basically work through that situation and convert many of those folks to be paid accounts or to have the account owner pay.

For them to get Netflix subscription, but either way, we're seeking to sort of monetize that viewing value that we're delivering and then beyond that it's back to <unk> comment even our most penetrated market were 8% of total TV time, which is potentially a relatively narrow lens to think about the broad competitive entertainment offering so we have.

A huge opportunity to grow the engagement component of that several X. You know we feel like we can get to if we do a great job of executing across all fronts and that represents a tremendous opportunity for more entertainment value delivered and we believe that the revenue flows from that in time.

While we can surpass return just one left the advertising question you now have roughly a decade, producing your own IP and he's thoughts on offering a fast surface overtime free advertising supported something.

Ted do you want to take this one.

Yeah look we are open to all these different models that are out there right now, but we've got a lot on our plate. This year, both with the paid sharing and with the launch of advertising and continuing to this slate of content that we're trying to drive to our members. So we are keeping eye on that on that segment for sure.

On the password sharing what will drive consumers to pay three or $4 for sharing versus kind of an established their own profile is it affordability is there something else. What do you expect yeah, I think there's a range of motivations for four different borrowers. So some of it is economically driven and so part of what.

We're trying to do is make sure that we are being responsive to that and finding the right price points, whether in terms of a individual account or an extra member importance and obviously you know the AD supported plans give us the opportunity to do present, a lower consumer faced pricing in those countries, where we have advertising.

Part of it is just when we called casual sharing which is.

People could pay but they don't need to and so theyre borrowing somebody's account and so our job is to give them a little bit of a nudge and to create features that make transitioning to their own account easy and symbols. We have this basically you know profile.

Export feature which allows you to take your viewing history and all the great recommendations with you so.

To your point, there's a range of motivations and I think a range of solutions that will be able to offer to land people in different places.

Can you provide any details, including the timeframe for converting borrowers paying accounts.

Yeah. So we've been working hard at this and trying to do some.

Sort of thoughtful experimentation and let our members really speak to us in terms of what set of solutions.

For them. So that's the testing that you've seen us do over the last couple of quarters, we feel like we have gotten to a good set of features it's the profile export that I mentioned, but there's also a bunch of account management features that we think are important to making this experience work for folks and so we're ready to roll those out later this quarter.

We will stagger that a bit as we work sort of worked through sets of countries, but we'll really see that happen over the next couple of quarters and I think it's worth noting that this will not be a universally popular moves. So there will be current members that are unhappy with this move we will see a bit of a cancel relax reaction to that.

We think of this as similar to what we see when we raised prices.

Some some increased churn associated with that for a period of time, but then generally what happens is both from the specific.

Changes that we make will see folks come on as new subscribers, essentially borrowers credit narrow accounts or incremental monetization through the extra member that'll happen. Shortly thereafter, and then clearly our job is to continue to grow value right to have more amazing titles that people cannot wait to see and so whether that's satisfying those members who make.

Those transitions or.

Winning back essentially folks who have turned off the service and bringing them back on the service over the months and years to come.

And then yes.

Alright, I just made there maybe just because we touched on it a little bit in the letter, but just to kind of reinforce a little bit of what that looks like in terms of timing and guidance. So.

The dynamics that Greg just walk through because of that as we kind of start to roll. This out later in Q1 based on the timing when we talked about is that we will have modest growth. We expect in paid net adds in Q1, but.

Kind of a typical seasonality, where typically Q2 would be a software paid net add quarter.

It'll probably be a larger paid net add quarter and most importantly, what we're most focused on is obviously revenue that is our primary primary metric and what you see is in the guide these revenue initiatives between paid sharing.

Rolling out and then scaling ads.

You don't see much of that in Q1, which is why we're forecasting 8% growth FX neutral in Q1 revenue, but throughout the course of the year, we would expect to see accelerating revenue growth as we rollout our paid sharing.

You know broadly across our business and then obviously scale ads throughout the year, which is a more a more gradual build so I just want to kind of highlight that and that's kind of what you're seeing in the guidance.

And given the revenue drivers paid sharing and advertising.

How are you thinking about price increases in the current year and it's just too complicated is how are you thinking about well I would say that the two initiatives that you described represent the bulk of our pricing strategy in 'twenty three.

We anticipate that they'll both be.

Revenue positive revenue accretive significantly so.

Regarding the details it's been it's just offered now having said that our core sort of pricing approach in theory remains the same and so we're going to look at the metrics.

Our members are giving us and telling us and look for opportunities, where we've I think we've done a good job of creating more value for them and for a certain.

Customer segment in a certain tier in a certain country, we think we've.

Done a good job of delivering more entertainment for them and then we'll go back and you know opportunistically ask for them to pay a little bit more so that we can sort of keep this virtuous cycle going and really invest that back into incredible content and stories and maybe I don't know if you want to highlight anything that you see coming on that side no I would just say.

It's the must seen this of the content that will make the pace sharing initiative, where it gets the that'll make the advertising launch work that will make continuing to grow our revenue work and so it's that cross sell them across TV. It's the content that people must see and then it's on Netflix It gives us the ability to do that are super proud of the team and their ability.

To keep delivering on that month in month out a quarter in quarter out and continuing to grow in all of these different market segments that are consumers really care about so that to me is a core to all of these initiatives working and we've got a we've got the wind at our back on that right now.

Amazingly continue to expand the genres of content, which you guys have mentioned clearly drives engagement, but the most recent new genre, but you introduced on your platform and you know at the end of last very end of last month is fitness.

Your new year's resolution yeah.

One class online could be could be the pace of indefinitely subscription so while many of the work at our bite size I mean, some are longer they're simple, but just seasonally affective.

Can you talk about what your plans are in this area and you know it's there.

Once you develop more content it really as I said it drives value for anyone who would work out anywhere else. So how do you define success and is there anything you can say about partner economics with Nike Yep, Oh can't come into the partner economics, but I would tell you that we've historically stayed away from the fitness category, because it's abundantly available online.

In many cases for free as you know, but we thought if we could partner with a great brand and Nike is certainly a leading brand and fitness with really well produce content, which this content is and then let's go out to our members and see if it's something that they value and will see that in the engagement and see where they where we can take it from there so.

So I think in that way you know get working with a great partner and a high quality to your point of the content itself.

Put it at really good test do people want to use Netflix to get back to get in shape or do you get back in shape and if they do we like to keep serving that and if they don't we'll keep poking around so it is the way we kind of were able to test the market. The very high end with a premium brand partner.

This constant speculation you will experiment with sports, which is an expensive rental business you know for fair enough money.

Having an advertising offering change your views and offering sports and any thoughts that you you know on WWE, which is for sale that could be potentially.

It just seemed that couldn't be honest content like any views on sports yeah.

Say you know what sports our position has been the same which is where we really are we're not anti sports where pro profits and we've not been able to figure out how to deliver profits and renting Big League sports in a subscription model not to say that that wont change would be open to it but that's where it's at today and WWE. We look at it we have a lot of M&A activity. All the time, we look at all of them, but no.

We can comment on that.

Just in this term play a role in your investments into live events.

Long live comedy specials seem to have the value outside of the live window. Other events like you just announced that you can do.

Hostess saga warrants.

Sports. Obviously these are fairly short useful lives. So how do you balance the investment in line versus the potential to drive advertising dollars.

Look at this as part of just like our other crawl walk run scenarios, where we are really looking at our content that would benefit creatively for being alive. So the results show for one of our competition series that we have or a reunion show that that drives the news or like the Sag awards that opportunity to engage audiences lives and because we've got the shelf space.

We can do hours of shoulder programming around the live events at all of those things that are members may enjoy so thinking there's.

There's nothing particularly novel about live TV as you know.

But we are dabbling in that starting with our Chris Rock live concert to try to create the excitement around live for those things that are uniquely more exciting to be alive.

And since the actual release of glass onion was incredibly successful and it's limited release, but so for some that it looks like you left a lot of money on the table by not continuing beyond the first one week.

Any regrets or can you give us your thoughts on your evolving film strategy well.

Thrilled with every aspect of the release of glass I and you know starting with Ryan Johnson and he's a great film and Scott Super in the film team for bringing it to the table and and I think what you saw was a lot of excitement we drove a ton of buzz with that theatrical release and we created a bunch of demand.

And that demand and we fulfilled on a subscription service or our core business is making movies for our members to watch on Netflix and that's what we're really focused and everything else is a really a tactic to drive excitement and around those cells.

So you know what it was like a massive global head like on Wednesday.

You know there seems to be so many ways you can drive monetization I know like for instance, just stay with much if it's looking like like.

The Wednesday makeup a sell down in every store in New York City, you could not buy it anywhere.

You participate in these times it types of seats keto consumer products or is it just a way to if you will pay ons fuel engagement, it's a little bit most of the fuel engagement if youll found and we actually we do participate in it are our owned content, we do drive a lot of <unk>.

Revenue in our consumer products business, but most of them. The motivation is that is to drive fandom and Greg alluded to this earlier, but this impact on the culture that this content can have on our platform.

And the earnings that I mentioned, the Lady Gaga came.

Came back after 11 years, because the Wednesday.

But that doesn't mention the four songs. This year that we are actually jam back into the charts something that never charted and Sunday were off the charts for 40 years from Metallica, Kate Bush the crabs.

And that impact on culture Sofia Carson's music career took off because the purple hearts.

Jenny Jenny our tape picked up.

They get picked up 10 million social media followers in the first week Wednesday lunch that Netflix and all of these folks who build this gigantic careers that Netflix then go on to have to own their own companies sell their own makeup and in many cases.

Incredibly powerful.

Powerful influencers and all of that business is drawn because of the impact that this distribution platform and this incredible UI. They basically can take something like Wednesday, which was not a slam dunk for people to predict that people would love it as much as they do in the U I could pick up on that activity in the early going of the release and push it out to where it's going to be you know one of our most watched.

So that our history all over the world.

And we do use consumer products as a way to.

Intensify fandom.

And it could be anything from makeup from Wednesday's, you said or maybe even a hand on your shoulder Spence.

You never know, where Wednesday was gonna shove or at least thing.

I didn't get my chance to kind of talk and and at the risk of going back to the management changes and say you know I am thrilled with the changes.

I'm going to Miss maybe not seeing read as frequently as he supporting Greg and Ted So I just.

Brought in a little bit of reinforcement with thing, even though he's not going anywhere, but this way I've got a little daily reinforcement.

Sticking with constant for a few minutes at the local language, hence adulting fatality in the U S. That's how do you think about allocating your $17 billion on content budget between genres of languages like is there any way you can kind of parse it out yeah. It's a good it's it's a it's a big task and mountain watching where viewing is growing.

Where it's suffering and where we are under programming at Overbroad programming around the world is a big task of the of the job Spence and his team support Bella and her team and making those allocations figuring out between film and TV between local language and what is it what's really interesting is there isn't that many there aren't that many global hits meeting that everyone in the.

World watching the same thing squid game was very rare in that way and Wednesday. It looks like one of those two very rare in that way. There are a couple there are countries like Japan, and Ah, but as example, or even Mexico that have a real preference for local content and even when we have our big local hits and every once in a while something like square game is even a big hit in the U S.

We think about in Q4.

We launched a top 10 non English series nearly every week of the quarter from South Korea from Spain from Colombia from Japan from Poland.

And so the benefit of that kind of local language investment at the benefit of doing that early Ah.

It was that we'd become exceptional on the ground in those countries are those content teams generate not just cut that people want to see if a country that's leading the industry.

I have Netflix produced the Academy Award entry film for both Mexico, and Germany has never happened in the history of the Oscars, It's really phenomenon that I mentioned earlier, the all quiet on the western front and the success of Baxter.

And keep in mind that these investments are important because it actually increases the total addressable audience for Netflix around the world because if we were just doing English content for the world, we would be mostly attracting western centric viewers, but our addressable audience is anyone who's watching TV anywhere in the world.

Okay.

Jessica we have time for one or two last question to some extent you have a chance to I'm gonna margins or anything else you might want to ask.

Let's move away from content and so free cash flow first of all like.

What an inflection point $1.6 billion in 'twenty two.

Roughly $3 billion and 23 4 billion plus probably in 'twenty four and you know can you can you talk about historically you've been more adults.

And by is there any change in philosophy as cash starts accelerating can you talk about overall capital priorities.

And what's driving that operating margin increase.

Well Spencer why don't you go first with the capital allocation philosophy, if you like sure.

Thanks, Jessica so as we wrote in the letter no change at all to our capital.

Structure of policy or allocation.

<unk> guidance, which is to first and foremost reinvest in our core business and selective acquisitions after that but those are the main priorities.

Beyond that if we have cash in excess of our minimum cash levels, which we acquaint, which is nothing to quite say two months of revenue then we will return that to shareholders through our share buyback program.

Yeah.

Can pick up with margins I can start with its a bit of an explanation, but if you like in terms of just in the in the near ish term our outlook for 'twenty three and then just generally what's driving our our outlook, but what you saw in the letter.

<unk> back frankly, if we if we walk back to where we were in the beginning of 2022, when we saw a slowing revenue growth. We said, we're going to manage to a target operating margin of 19% to 20% FX neutral at those January 2022 rates.

And we ended the year of 20% so at the high end of that range and now as we kind of turn the page to 23.

You know first I should say with everything we talked about where we've got we're quite optimistic in terms of our path forward. I also just wanted to highlight there is also a.

Kind of a short term unusual amount of.

Less visibility than typical because when we do these things we're talking about in terms of our revenue initiatives, whether it's scaling our ads platform launching paid sharing which hasnt globally rolled out yet. These things are early days and then also all multinationals have a level of macro uncertainty so that that's a bit of a caveat in terms of the variability in the forecast, but but what we see.

Is we.

We see with the our path to accelerating revenue growth in our high confidence there that as we turn forward to 'twenty three we're guiding to now 21% to 22%.

<unk> neutral operating margins at those same January 2022 rates.

We're now in a new year. So we take it forward to January 23, the current rates and that's a range of our operating margin guidance of 18% to 20%. So now FX neutral for 'twenty, three we're going to manage within that band to deliver at least within the 18% to 20% operating margin guide so that is growing margin.

<unk> growing absolute profit and really what's reflected in there is that this we have high confidence in our ability to accelerate revenue throughout the course of the year as we scale ads and we launched paid sharing we've got high confidence in improving the service and the strength of our content slate are with everything that Ted discussed here on the call and we're also continuing to them.

Manage our cost structure with increasing discipline you saw that in the back half of 'twenty, two with our slowing expense growth and we'll carry that through similarly in 'twenty three so that all lends itself to our focus which is kind of healthy growing double digit revenue growth and accelerating that revenue growth throughout the year.

Our both our absolute profit and profit margin and then growing our positive free cash flow. So that's all reflected again with the big caveat that there is a bit less less visibility than typical in this near term.

It's something we'll continue to work through we'll obviously know a lot more over the next couple of quarters few quarters as we rollout paid sharing and we'll we'll update guidance as appropriate but that's that's what plays through and then also plays through to that cash flow generation that you see where we believe with all of those dynamics and managing at about the same level of cash content spend that we'll have more than $3 billion at least three.

Free cash flow in the year.

Thank you Spencer that answer and Jessica for that last question on all your questions and before I turn it over to Reid for closing remarks, I just want to say is a longtime Netflix employee.

Formerly brief prior to that as an analyst covering Netflix for many years read it has been a real privilege to.

To work alongside you and on behalf of all Netflix employees, we thank you.

For everything you've done for us in the company over the past 25 years and we're all Super excited for the next chapter with you as our executive Chairman and Ted and Greg is our co Ceos, so with that or do you really like yourself.

Spencer I, just add because I can't just deal with the thing I just want to thank Reid as well.

This is not a goodbye I know, but.

Fantastic you you know I couldn't have asked for a more incredible experience of the past four years with.

With you as our leader learned so much across everything from work to humanity and.

And so thrilled with the next chapter with Greg and Ted and you and so Super excited and and thanks Reed.

You might be muted.

Thanks, you guys are certainly not goodbye.

Heavily invested in Netflix success.

So it's.

It's been 83 earnings calls now and I honestly have loved them I love the interaction.

But it's time for Greg and Ted and the team to lead and I'll be in the prep sessions, but this will be my last earnings call.

On screen.

Overall, I would say our first 25 years were good and I'm Super excited about Netflix its next 25 years being great under our broadened leadership team.

You know pleasing our shareholders and members is so satisfying and I just wanted to thank all of you for your support and look forward to continued more progress. Thank you everyone.

Good afternoon, and welcome to the Netflix.

Q1, 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, and CFO Spence Neumann our year over year this quarter as Doug Anmuth from JP Morgan as a reminder, we will be making forward looking statements and actual results.

With that Doug I'm going to turn it over you put the first question.

Great. Thanks Spencer.

So your tone in the letter today around competition maturity and macro factors is very different than it was three months ago. I was hoping that you could start out by just walking us through how your views have changed over the past few months.

Yeah, Doug I mean, I think our views are little different because our numbers are a little different.

If we had made our $2 5 million guidance I think that was consistent with our thesis and the lower acquisition really forced us to kind of tease apart what's going on.

And as we put it in the latter COVID-19 created a lot of noise in how to read the situation boosted us a lot in 2020.

And then into 2021.

I think we thoughtfully said it was mostly pull forward, which was the logical conclusion, but now coming into 2022 that doesn't really hold so then pushing into it we realized.

With all of the account sharing which we've always had that's not a new thing but.

But when you add that up together, we're getting pretty high market penetration and that combined with the competition is really what we think is driving.

The lower acquisition and lower growth.

On the two parts were working on how to monetize sharing.

We've been thinking about that for a couple of years, but you know when we were growing fast it wasn't the high priority to work on and now we're working Super hard on it and you know remember these are over 100 million households that already are choosing to the units because they love. The service, we just got to get paid.

It's some degree for them. So that's part of it and then two its really you know we've got great competition, they've got some very good shows and films out and when we got to do is take it up a notch and I'll tell you that we're all pretty I know its disappointing for investors and it is for sure but internally, we're really geared up and this is like a moment to shine. This is.

When it all matters and we're super focused on achieving those objectives and getting back into our investors good graces.

The only thing I might add read assistant.

We've put a finer point on under on kind of elaborating on what we're seeing in terms of slowing growth and near term slowing growth, but the long term addressable market. We believe is unchanged in terms of all broadband household suggest that we have a better sense that COVID-19 clouded in terms of the near term limiters to penetrate that growth.

And capture that market. So that's one of the things that where we put a finer point on this matter, but I just want to reinforce that that the core addressable market is still there and that's what we're still growing into Doug.

Okay. Thanks.

So maybe just in terms of the recent trends if we could talk about <unk> a little bit more you lost 200000 subscribers or gained 500000 extra Russia removal.

Could you, perhaps parse out a little bit around some of those factors that you mentioned it sounds like acquisition.

At the top of the list and you've talked about that for a little while now, but hoping you could kind of isolate some of those factors and then talk.

Talk to us about how that informs your <unk> guide for a loss of 2 million subscribers.

Sure I'll take that and then others can fill in so so as you said, Doug we guided to two and a half million paid net adds we delivered 0.5 million. If you exclude Russia. So there's really a 2 million Miss in our Q1.

Actuals versus guidance and what's really reflected there is acquisition growth was consistent with what we expected we were seeing that slow down when we did the guide and it played out as expected the.

The difference is really some slight elevated churn.

Throughout Q1, and this is pretty small so retention was still very good but we're talking about like two to three tenths of a percentage point, but on our big member base that has a pretty big flow through it's a combination of factors. There are we talking about an interrelated factors and in the letter, but one very directly in Russia.

Invasion of Ukraine had some spillover effect in other parts of EMEA, we saw that in the central and eastern European countries, where there was some elevated churn. We also saw probably some little bit more macro strain in some countries. Some parts of the world like Latin America, We mentioned in our last call, but that was elevated and just a little bit more seasonality in the business week, we suspect some of that is.

Those macro factors, we mentioned in maybe a little bit of competition on the margin as well. So that's really what we saw in Q2 I'm sorry in Q1, and that's really what's reflected in Q2, which is sort of the continued trends we're seeing in acquisition and this.

That's slightly elevated churn to probably continue through the quarter. It's just a softer seasonal quarter for us typically and that's what's reflected in the guide is a little bit of softer seasonality and the same essentially the same on acquisition and retention trends.

And maybe I can pick it up and talk about the first two factors you wanted a little bit more detail on and we had this addressable market that's expanding over time in every country that we're operating in it's a bunch of enabling factors like broadband and smart Tvs and then in some countries that we're operating in we have been operating long, it's like the U S is a great.

For example, we have really significant a high penetration of viewers into that near term market potential and that was really boosted by sort of this grows at the beginning period of Covid and the Lockdown now that's viewer penetration is made up of two groups. One is a group that's paying us which is great and.

Then there is a group of viewers that are not paying us and they're sharing someone else's account credential and we really see that second group is a tremendous opportunity because there clearly well qualified.

They need to do to get to Netflix They know what the services. They found titles that they want to watch and so now our job is really to better translate that viewing and the value that those consumers are getting into revenue and the principal way. We've got of going after that is asking our members are to pay a bit more.

To share the service with folks outside their homes. So if you've got a sister, let's say that's living in a different city you want to share a netflix with her that's great. We're not trying to shut down that sharing but we're going to ask you to pay a bit more to be able to share with her.

And so that she gets the benefit and the value of the service, but we also get the revenue associated with that viewing.

So maybe let's let's follow up on that a little bit more Greg we'll come back to some of the more.

More recent trends in a moment, but I guess, when we think about account sharing.

Curious about the early testing that youre doing you'd think about Chile, and Costa Rica in Peru.

I guess now it's pretty clear to see why it's the right time to do this in a bigger way, but how do you think about rolling that out in in the U S and what would be implementation actually look like.

Yeah, I mean first it's important to note that we're trying to find a balanced approach here and we're trying to basically come up with a model that supports.

Our customer centric approach it still puts members and charger supports member choice that delivers great entertainment value at sort of all of the options that we've got but also very importantly allows us to bring in revenue for everyone who's viewing and who gets value from the entertainment that we're offering it and obviously, we're doing that so that we can invest.

First then and into more great content and a better service for everyone.

So there's a bunch of factors that we're working through that's why we deployed the tests that we have and you know frankly, we've been working on this for you now about almost two years of about a year a little over a year ago. We started doing some light test launches that we were informed our thinking and helped us build the mechanisms that we're deploying now we just did the first big country.

But it'll take a while to work this out and to get that balance right and so just to set your expectations. You know my belief is that you know we're going to go through a year or so of of Iterating and then deploying all of that so that we get that.

That solution globally launch, including markets like the United States.

Okay. That's that's helpful and maybe Spence just on that point.

Maybe if you could just walk through the accounting a little bit here and how do you think about the uplift whether more of it would come from arm or from subscribers.

Overtime.

Yeah, that's great Doug you kind of nailed it which is as you heard from Greg we're looking to monetize sharing and kind of meet our members where they are so you should expect that member numbers or subscriber numbers are sort of less relevant over time because of these.

Very likely show up in arms, so should think about it as engagement and <unk>.

Average revenue per member and probably increasingly important and then obviously revenue growth, which we've always said we're trying to optimize.

Near and long term revenue growth to drive that positive flywheel of reinvestment in the business. So it's not that there isn't going to be a P times Q theres still Q, but but increasingly important is probably arm in engagement and revenue overall.

So and just to clarify there are sub accounts will not count as subscribers. That's right. That's right. That's right. So it's less distinct and individual household account, okay and then in the process, though as some of those current shares outside of the households, do not become sub accounts, you'll pick up some of those subscribers.

Separately.

Right and as Greg said, we're still working through the ultimate solution here. So we don't exactly know how that's going to play out but you should assume that it's that there's less less importance on an individual household account number and therefore, what's more important is revenue viewing engagement.

Oh, so viewing engagement overall revenue growth in arm as it is.

As a key metric.

Okay.

Let's go back to acquisition for a minute.

So you you noted has not returned to pre COVID-19 levels.

What are the ways that.

You can influence acquisition beyond account sharing which we talked about and then beyond of course, just creating great content.

It shouldn't be.

It shouldn't be any more complicated than that Doug honestly, we've got to compete and we've got to make and to continue to improve on the core service, which right, which is making a TV series and films and now games that people really love.

That thing that that we're at that's what we're really focused on and I think that that's the thing that I think we can continue to grow the business and now we've talked about being highly penetrated in some of those core markets and with users, which means that it's harder to get them to do.

Joining afflicts, if they're already using Netflix so we've got to figure out. These different models that we're doing now to more effectively monetize that viewing as Ben said earlier. The engagement is really key as you see in the Nielsen data that we published in the letter our engagement has been super healthy even with this heightened levels of competition.

Our engagement are viewing as being very very steady holding on to our to our market share in that space, but on top of that in the quarter.

While we were not happy with the topline subscriber growth.

We definitely saw that the new season of Ozark did inventing Anna.

The atom project and certainly the biggest of them all of the new season of Bridgeton delivered exactly as expected actually quite actually a little bit bigger than expected with our fans now of course, we think we've got to do that and we have to have an atom project in our Richardson every month and to make sure that that's your expectation of the service constantly.

So we're definitely feeling the the the higher levels of penetration in those markets of users and.

And we're definitely feeling a heightened level of competition for sure.

And so we've just got to continue to do what we're doing and improve each of those things now how do you improve content. We've been doing this for a decade well first of all that's about 90 years less time than all of our competitors has been at it but.

But I look at things like things, we've been doing over the last few years now we've been improving so big movies.

Just a few years ago, we were struggling to monetize the market a little art films today, we're releasing some of the most popular and most watching movies in the world just over the last few months things like don't look up and read notice and Adam project as examples of that.

And that's just in a few years of improvement on one line of content.

Another is unscripted, we didn't we made zero unscripted about three years ago and today, creating these big unscripted brands in growing original unscripted universes like too hot to handle an ultimatum, that's really popular right now around the world.

Selling Sun said these are kind of a large growing original unscripted universes. So.

We've come a long way from ultimate These master My point is.

And I think about things like our content in Korea.

Again pretty new to the market everybody knows about squid game that was probably the biggest show in the history of television.

And just a few years ago, we were producing no original content in Korea, and while we all know about good game.

D P and all of US are dead and a slew of original contents are thrilling our members in South Korea and fans around the world. So we're continuing to improve constantly and getting those moments that can lead to something like a good game or Richardson constantly.

Got it okay.

I wanted to go to pricing just from them I mean, theres a lot of you kind of have this confluence of trends basically their take.

I'm pleased to hear but Greg I was just hoping you could talk a little bit more about the recent price increases primarily in the U S. I know it's still early.

In the U K, but I guess to what Oh.

You did mentioned slightly elevated churn and in one queue I guess, how much was that a factor how is this price increase being received currently.

Yeah. So top line is that the price changes as the last several price changes. We've done are generally performing as we've seen the price changes over the last several years. So it's been a sort of fundamental difference in performance.

First of all there. These price changes are significantly revenue accretive. So that's an important top level heuristic and we sometimes see a blip in churn.

And in some markets. We also see a marginal impact on acquisition often these effects are transitory. So it's sort of a change in fact, and we move through it and when those folks back.

But I would say that the big takeaway is the vast majority of our members recognize that we're investing you know what they pass on the incremental amount that we're asking them to pay us into more entertainment value back to them back to our members more great stories bigger films more variety of content and higher quality of programming. So we you know.

We generally plan to continue doing what we've been doing but I would also say it's you know we're also working hard to ensure that we have a range of price points across a set of plans with different features that deliver on.

Current consumer needs and consumer desires, while making sure and be very focused that we retain good accessibility to the service for a broad group of people in every country, we serve at sort of that entry level. So yeah, no major changes there and we're keeping sort of the plan that we've got in place.

And then related I guess.

Oh go ahead sorry.

Related to that.

Greg has done great work on the price spread.

And one way to increase the price spread is advertising on low end plans and to have lower prices with advertising and those who have followed Netflix know that ive been against the complexity of advertising and a big fan of the simplicity of subscription.

But as much of a fan of that I'm, a bigger fan of consumer choice and allowing consumers who would like to have a lower price and our advertising tolerant get what they want makes a lot of sense. So that's something we're looking at now we're trying to figure out over the next year or two but think of US is quite open to <unk>.

<unk>, even lower prices with advertising as a consumer choice.

Since you want to keep them in my opinion was.

Tactical I'm sure Doug you don't Wanna, perhaps on on your point, but I just want to be really clear on the point on Q1 performance and when I talked about slightly elevated churn relative to our expectations that was not due to our price increases. So the price increase that played out as as Greg said consistent with our expectations. We just saw some slight uptick in.

Seasonality for the other reasons I mentioned some of the the strain in central and Eastern Europe . Some of that macro trend we saw in maybe a little bit of competition on the margin.

Okay.

You pulled me forward advertising, so do you want to get there.

It was a little further down the list, but one last point just on pricing given all these factors that you've talked about and written about in the letter.

They're a change to your view on long term pricing power.

I would say you know our general view is unchanged and again, we don't have an a priori target you know in markets or whatever we've been sort of finding our way through adding more value you know keeping that virtuous cycle going that big spread that that Reed mentioned and again, where we're seeking ways to actually take.

That spread even wider and that's why I think adds is an exciting opportunity for us that we want to explore in more but no fundamental shift in our thinking about how that process works or the the potential that we have in that.

Okay. Thanks, Alright, so let's shift to and Doug I would just add that that's those directly related to you know, creating the content that people find to be incredibly valuable and our long term view of our ability to continue to do that is unchanged.

And there's a long history of that across entertainment for decades.

People Love film and television and games content and you know if we can continue to deliver that value deliver that engagement and then there's a long history of people being willing to pay for it and and as Reed said also advertisers trying to reach those audiences. So we believe we can kind of drive that value over time, and then monetize it so long as we deliver on that.

Entertainment value.

Okay. So on on advertising I think certainly read.

Serving the simplicity of the products has been very important but I think you've also kind of talked a little bit about at least in the past, perhaps not seeing the incremental profit potential.

As well in terms of a lower priced AD supported tier has has that view changed.

And I guess, if you were to.

Pursuing an AD based model on a lower tier how long would it take you to get there and kind of roll that out and what are the key things you need to do along the way.

Yes, it's not a short term fix because once you start offering a lower price plan with ads as an option.

Some consumers take it and we've got a big installed base that probably you know we're quite happy where they are so think of it as it would phase in over a couple of years in terms of being material volume and in terms of the profit potential.

Definitely the online AD market has advanced.

And now you don't have to incorporate all the information about people.

That you used to so we can be a great publisher.

And have other people do all of the P&C AD matching and integrate all the data.

About people. So we can stay out of that and really be focused on our members.

Creating that great experience and then again getting monetized.

A first class way by a range of different companies, who offer that service.

Got it and is it fair to think that.

It would be something you would test and a few small markets to start out and then and then kind of move along.

We're probably not that advanced but no I think it's pretty clear that.

It's working for Hulu Disney is doing at H B O did it I don't think we have a lot of doubt that it works.

All of those companies have figured it out I'm sure, we'll just get in and figure it out as opposed to test it and maybe do it or not do it. So I think we'll really get in but again it's a.

It would be a plan layer.

Like it is at Hulu. So if you still want the AD free option, you'll be able to have that as a consumer and if you would rather pay a lower price and your AD tolerance. That's also where can they cater to you also.

Okay.

Shifting gears to content.

Ted.

<unk>.

A bunch of returning hit series like elite.

Our exchanger things umbrella Academy.

How are you thinking about that slate in <unk> and maybe if you could also talk a little bit more about the back half as well.

Yeah. So those are the two.

Moving.

Brands for Us of course in going into the I'll start with stranger things because the new season of Stranger things is a supersized season, that's why we cut it in half each episode of the new season feels like a big feature film, it's really phenomenal we're super excited about how much land and creatively and.

How excited fans are for it.

That's going to be a you know obviously the big story coming up later in the quarter.

The news the finale of those arc, which is R. A T.

Emmy Award winning fan favorite the season, three was a killer and season solar it brings it home and it really incredible way. We're also wrapping up our longest running show Grace and Frankie with an incredible final set of set of episodes coming up later this month.

They were really excited about it and.

We've always said we ran through the Covid delays that had us back stack 2021.

'twenty two is not quite as back stacked, but it does build throughout the year.

And it builds up to some of our big event films in Q4 that were really excited about like knives out to <unk>.

<unk> coming up before that from the Russo brothers, who bet a lot of great success with a really fantastic action movie with Ryan Gosling sow the seeds.

The upcoming slate in 'twenty, two we're confident is better and more impactful than it was 10 21, and we think 'twenty three will be better and better and more impactful than 'twenty. Two so it really the content flow has been fantastic and we're really excited about it.

And just to follow up on your measured today, not obviously not to forget.

Our international content and Leap day season, five as you know continues a really great run for US there we have a Korean version of my eyes coming up called money I scrutiny has Korea.

It's really been entirely new movie from Omar side that takedown from France.

Great film from Germany, all quiet on the Western front on a great slate of new content from Japan.

It could be versus love that we're really excited about the output from all of our international territories as well.

Ted you mentioned.

Splitting stranger things into the into different parts and you have done that with a number of serious over the last few years.

I guess, it's streaming proliferates it feels like there is this increasing debate around the value and stickiness of providing a full season of content all at once.

So just curious about how your thinking has evolved here given that we are seeing more of these series kind of broken into two parts essentially yes.

Splitting the seasons actually I had a practical reason before which was the COVID-19 delays in all of those projects that kind of led us to splitting some of the seasons, but what we found is that fans kind of liked both so being able to split it gives them a really satisfying binge experience for those people, who want that really satisfying long binge experience and then being able.

To deliver a follow up season, and a few months versus you know in some cases.

The new season of Stranger things as coming nearly three years. After after the year after the last one or more than two anyway.

And so we're really being able to split the season. When you can deliver both halves of it and it really high quality way like in the case of Ozark had additional episodes.

So they'll both experiences where we're really satisfying for the avenger or the one at a time viewers as well.

Okay, and we've also had great success in these kind of many batches of our scripted shows.

Doing well.

Three episodes a week every week has also been great and still true to the avenger by giving them more than one episode to watch at a time.

You've talked about cash content spending of around $18 billion. This year.

Period of.

Slower sub growth.

Are you more likely to pull back to manage costs or to lean into further differentiate the offering.

Look I think we've got to continue to invest in the content both in the quality and the variety of the content and our.

We will continue to grow the content spend relative to prior years and I think in general we look at the <unk>.

What's most important though and there is the impact of the slate.

And we're very focused on making sure that the impact of the slate continues to grow we should be able to 10 years and now get more bang for the Buck.

Relative to what we've done ourselves and relative to the market.

Yeah, and Doug Doug to that point, obviously, the revenue growth has slowed we're gonna be responsible in terms of how we manage the business we talked about in the letter during this period of slower revenue growth, we're going to protect our operating margins are roughly in line with what we guided to.

For this year. So we are holding to our guidance for the full year 'twenty two but for the.

Presumably for the next 18 24 months called the next two years, we're kind of operating to roughly that operating margin, which does mean that we're pulling back on some of our spend growth across both content and non content spend but still growing our spend is still investing aggressively into that long term opportunity, but we're trying to be.

Smart about it and prudent in terms of pulling back on some of that spend growth to reflect the realities of the revenue growth of the business.

So just.

Just to clarify only because you've been saying it for many years now.

300 basis points per year over a multiyear period, obviously, we were not going to see that this year, but it sounds like over the next couple of years, you're thinking more flattish.

You know until you get subscribers really growing in a bigger way well get.

Revenue growth again chemicals revenue engagement are going to be primary will also get subscribers going so there will be subscriber growth, but primarily re accelerating that revenue growth. We believe we have multiple levers to do that we have high confidence in monetizing sharing as we talked about you know we talked about things like perhaps Andy can advertising layer.

And obviously continuing to improve the service grow engagement grow revenue. So we have high confidence that we will.

Accelerate revenue when we do we also have our commitment to continue to.

Gradually grow our operating margins, but let's let's first get our revenue growth re accelerated and then let's talk about the piece of that margin acceleration.

And what does all that mean for free cash flow kind of near term and then over the next couple of years.

<unk> 2022 is certainly looked at it as like the first year of kind of sizable and sustainable.

Free cash flow.

Yeah and that continues so where is it.

We're managing the business.

Currently.

For all of our stakeholders will be positive free cash flow this year consistent with our expectations going into the year and we will continue to build on that in years going forward. So thats, our expectation and that's what we're still planning towards.

And Spencer if you would you would add to that maybe.

No I think you hit it right on the headsets.

Okay.

I wanted to talk about India, a little bit are.

You cut prices significantly in December across across plans.

But you've certainly pointed out the cable and India is around $3 a month.

Just curious what the response has been like do you still view those changes is as revenue accretive and what are you seeing in terms of.

Maybe early behavior from some of those incremental subscribers.

Yeah, I would say to your last point the incremental subscribers are largely behaving similar to that subscribers. We've added over the last 12 months and not a fundamental difference and really this was a bad in terms of long term Max revenue maximization, which as you know sort of how do we think about the top level value Tory model, we have for these things.

And it was stimulated specifically by the fact that you know Ted's team is doing some incredible work on Indian content and we saw the slate there and we're really excited about a bunch of titles that were coming down and thought there was an opportunity to broaden the audience that got to see those titles and so we've seen that.

Definitely take a hold where we have a you know an additional bump in subscribers that will now get to see that content and the bad is that you know those folks will enjoy those titles and that they will talk I enthusiastically about those titles to their friends their family their co workers and that'll lead to.

You know another sort of positive momentum on the flywheel of sign ups.

And <unk> can you elaborate a little bit more just on the content in India and I guess, just how youre thinking about kind.

Kind of overall product fit at this point in the market the product fit.

Corporate's, a subscription prices as well and willingness and ability to pay so we have seen a nice uptick in engagement and it is India. So we've definitely taken in the right direction.

Okay.

I wanted to talk about gaming a little bit.

I think.

Reed you discussed it in the past as perhaps the next genre of content beyond television.

And beyond film I'm curious, how you'd characterize your your progress.

So far.

I'm really happy with what the team has built a big capacity.

The city to be able to provide our members with interactive and gaming experiences.

We've had some nice successes, which I'll have Greg talk about.

So I think we're building capacity frankly faster than we did when we entered film.

So that's very encouraging.

We are excited and you've seen we've been doing these small acquisitions.

To buildup, the knowhow and the creative tops.

Do you have to make some really great games.

Yeah, and just to pick it up alright.

Eric do you want to.

Sure, it's where you're going I was just going to ask what the kind of puts and takes are around owning versus licensing IP and what the appetite is for further M&A going forward.

Sure and you know we're open to both models, but I would say, we're very enthusiastic about building our internal capacity and we're doing this both from sort of assembling it organically as well as through acquisition, which is a key part of our strategy to be able to build the capacity to produce the games titles that we think are really going to.

Unlock value for our members and we're learning more and more everyday from our licensed titles that we've got which is helpful. But you can sort of early glimmer of where we're trying to head with this with the announced and we've just recently did with that our launch of both our game and an animated series around the exploding kittens.

I don't know if you're familiar with this card game, but it's a super fun physical card game that we're now going to bring to form and Bolton animated series and the game and we.

We will have some interplay between these two different modes for fans of that IP, but that sort of that you know an initial step on a long road map, we have around thinking about how do we make the film in series side and then the interactive games experience sort of the interplay between those.

Magnify the value that our members are getting from both so it's like a one plus one equals three and then hopefully four and then five situation. So that's sort of the multi year vision that we've got behind it and really to deliver on that we think the internal development capacity is going to be key because we can obviously have those folks be very specifically focused.

On the opportunities that we see there.

And what is the what are the benchmarks or milestones, perhaps that you need to see around gaming to lean in even more here in terms of content budget and are there any metrics or numbers that you can provide so far.

I can certainly provide the framework that we're thinking about it and that's it.

A top level priority for us and we're very focused on it and so the bottom line, we think about games and delivering value to members and reflecting that back into the business through both acquisition. So we're aiming to have titles that land that you know creates conversation and enthusiasm in bus.

Does that drive more people to sign up for the service and then obviously in retention as well and you know engagement is that primary leading indicators that we have for retention and sort of value delivered so we're looking at both of those very very carefully and similar to how we think about it on the film and serious side, obviously, we want to make sure that the.

Best meant that we're making in any given title is sort of calibrated to that business value that we're getting out of it. So we're building our understanding of how those metrics work together. So that we can have a good you know sort of fitness function around the work that we're doing and making sure that's delivering value and that's really the sort of the go signs for us that we've got it figured out and we.

Want to ramp and scale of the investment.

Okay.

Ted.

Netflix shares are back to of course back to pre COVID-19 levels, but there also around the same level. They were at nearly four years ago in 2018.

So if you could just talk about your ability.

Two to continue to hire great talent within the company.

Okay, I think that when.

People looked at they join Netflix they join Netflix because they believe in this long term vision of of the move into <unk>.

Way from linear TV and kind of transactional movie business into a business that can be much more satisfying for consumers and deliver on the culture in terms deliver big audiences and really moved the market one of the things I would say is by way of example is what we can do around the world.

Our teams on the ground are creative executives are business executives are on the ground all over the world.

<unk> much.

Much more empowered.

They're a much more collaborative and there are much more.

Risk tolerance than their counterparts are all over the world, which enables it created an ecosystem for something like square game over like Lupron or Cassidy propel to exist and that is our ability to do that and to bring kind of global notoriety to local content local content.

<unk> is unprecedented in its pretty unrivaled at this point. So I think people look at that as something to be very exciting to be close to and at the long long terms to the long term story is.

The broadband household penetration, we're going to get to those to those houses there is a long term.

Short term and the short term you've got high.

A highly penetrated users and we're working through that right now and in the long term you've got things like smart TV sales at a bunch of other macro factors that slowed that down that we'd know the way I'll see that as temporary including everybody worries that Netflix. So it wouldn't really does see the long play and I know I've been here for more than 20 years and have been through a couple of them.

He is an and.

And yes, they don't feel great in the moment, but man it feels great to come on the other side of it and I think everyone is.

Knowing that that's going to come up and we'll come out on the other side of it.

Doug we have time for two last questions. Please okay.

Okay.

I wanted to.

Just back to content for a minute you've driven a lot of attention to formula one with the drive to survive.

Given the success there.

Sports is obviously a frequent topic how are you thinking about sports.

There is certainly more rumbling around doing things related to NFL media and it fell films.

How are your.

How are your intention shifting perhaps you're at all so we.

We look we expand our content verticals constantly.

For us I look at the games is a great. Great example of adding something brand new to the to the service something new for our members to enjoy.

We're going down the game path, because I think it fits us really nicely our ability to tell stories and build worlds are very consistent with our with our existing skill set and culture and we think that we can build a big revenue and profit stream.

Adding games.

We're not quite so sure that you can add the big profit stream by adding sports other folks who are trying it and we're going to and we've gone down. This other path in the meantime, we're incredibly excited about as you mentioned the formula one drive to survive as an example of kind of sports adjacent programming.

That is that our members really value we've grown the sport tremendously, we're taking that bad in the wealth of tennis and golf and others coming up and we also have an incredible sports documentary business that keeps growing so I'm not saying, we'd never would do sports, but we'd have to see a path to growing a big revenue stream and a big profit stream with it.

Okay, and then just to close out a read.

You've created this very unique very successful culture within the company over the past 20, plus years has anything changed in your view just from a cultural perspective around either content acquisition or in some of the more operational functions.

Yeah, I mean, we've changed every year.

Hopefully for the better we don't look at culture has some fixed thing we look at it is what's going to drive excellence. The Northstar is getting the excellence and so we've made a bunch of adjustments as we expand it around the world. We've made adjustments as we've become more original content centric.

So we're always improving and again the goal is excellence and then our culture as a tactic in that journey.

Okay, great. Thank you Paul.

Did you want to close this out hey can I say one thing before they close the sandwiches to single thing one tactical thing that I Should've mentioned earlier, Doug I, just want to make sure there's not a read through when we guide to negative 2 million paid net adds in Q2, we didn't talk about full year and how what we expect and we're not providing full year guidance, Doug, but I just want to make sure.

Theres not a read through from negative 2 million paid net adds in Q2 that theres going to be a steady.