Q1 2024 Netflix Inc Earnings Call

Operator: Development. Joining me today are co-CEOs Ted Sarandos and Greg Peters and CFO Spence Neumann. As a reminder, we will be making forward-looking statements, and actual results may vary. With that, we will now take questions that have been submitted by the analyst community, and we'll begin first with some questions about paid membership reporting and our results. So for our first question, it comes from Justin Patterson of KeyBank, and I'll direct this at Greg initially.

Joining me today are close he owes Ted Saran dosing, Greg Peters and CFO Spence Neumann as a reminder, we will be making forward looking statements and actual results may vary.

With that we will now take questions that have been submitted by the analyst community and we will begin first with some questions about paid membership reporting in our results and forecast.

So if our first question it comes from Justin Patterson of Keybanc and I'll direct this Ah Greg initially Greg could you. Please talk about the decision to stop reporting quarterly membership and arm data in 2025, why eliminate this and since you said success stems starts with engagement how are you thinking of expanding these disclosure.

Operator: Greg, could you please talk about the decision to stop reporting quarterly membership and arm data in 2025? Why eliminate this? And since you said success stems from and starts with engagement, how are you thinking of expanding these disclosures?

<unk>.

Greg: Yeah as we noted in the letter we've evolved and we're going to continue to evolve developing our revenue model and adding things like advertising and our extra member feature things that arent directly connected to a number of members. We've also evolved our pricing and plans with multiple tiers different price points across different.

Gregory K. Peters: Yeah, as we noted in the letter, we've evolved, and we're going to continue to evolve, developing our revenue model and adding things like advertising and our extra member feature, things that aren't directly connected to a number of members. We've also evolved our pricing and plans with multiple tiers, different price points across different countries. I think those price points are going to become increasingly different. So, you know, each incremental member has a different business impact. And all of that means that the historical simple math that we all did, you know, number of members times the monthly price is increasingly less accurate in capturing the state of the business.

Countries I think those price points are going to become increasingly different so each incremental member has a different business impact and all of that means that that historical simple math that we all did in a number of members times. The monthly price is increasingly less accurate and capturing the state of the business. So this change is really motivated by.

Gregory K. Peters: So this change is really motivated by wanting to focus on what we see are the key metrics that we think matter most to the business. So we're going to report and guide on revenue, on OI, OI margin, net income, EPS, and free cash flow. We'll add new annual guidance on our revenue range to give you a little bit more of a long-term view. And we'll also, you know, we're not going to be silent on members as well. We'll periodically update you on progress; when we grow and we hit certain major milestones, we'll announce those; it's just not going to be part of our regular reporting.

Greg: By wanting to focus on what we see are the key metrics that we think matter most of the business. So we're going to report and guide on revenue on Oi Oi margin net income EPS free cash flow will add a new annual guidance on our revenue range to give you a little bit more of a long term view.

Greg: We will also you know we're not going to be silent on members as well, we will periodically update when we grow and we hit certain major milestones we will announce those it's just not going to be part of our regular reporting.

Gregory K. Peters: We want to do all of this thoughtfully and give everyone time to adjust to this transition. So we're going to continue to report subscribers until Q1 of next year, which links into our next annual revenue guidance for 2025. So we think that provides some long-term continuity and expect that it will provide an effective bridge and transition. But ultimately, we think this is a better approach that reflects the evolution of the business. And it more matches and is consistent with how we manage internally for engagement, revenue, and profit.

Greg: Wanted to do all of this thoughtfully and give everyone time to adjust this transition. So we're going to continue to report subscribers until Q1 of next year, which links into our next annual revenue guidance for 225. So we think that provides some long range continuity and we expect that will provide an effective bridge and transition, but ultimately we think this is a.

Greg: A better approach that reflects the evolution of the business.

Greg: And then more matches and is consistent with how we manage internally to engagement revenue and profit.

Theodore A. Sarandos: Yeah, and on engagement, Greg, just a reminder, you know, we currently report our engagement in our biannual engagement report, leading the industry in transparency and granularity. And we're going to look into building on that both in granularity, which will be kind of tough.

Speaker Change: Yeah and on engagement, Greg as a reminder, we currently report our engagement on our biannual engagement report are leading the industry in viewing transparency and granularity.

Speaker Change: We're going to look into building on that both in granularity, which would be kind of tough. We are current report covers about 99% of the viewing on Netflix, but we'll look at the regularity in different ways that we can make it even easier to track our progress on engagement and but importantly, why we focus on engagement. It's because we believe it's the single best indicator of member satisfaction.

Theodore A. Sarandos: Our current report covers about 99% of viewing on Netflix, but we'll look at the regularity in different ways so we can make it even easier to track our progress on engagement. But importantly, why we focus on engagement is because we believe it's the single best indicator of member satisfaction with our offering. And it is a leading indicator for retention and acquisition over time. So happy members watch more, they stick around longer, and they tell friends, which all grows engagement, revenue, and profit, our North Stars. And so, and we believe that those are the measurements of success in streaming.

With our offering.

Speaker Change: And it is a leading indicator for retention and acquisition overtime. So happy members watch more they stick around longer and they tell friends, which all grows engagement revenue and profit are north stars.

And so and we believe that those are the measurements of success in streaming.

Speaker Change: Great. Thank you Ted and Greg Omnibus along to the next question from Ben Swinburne of Morgan Stanley, who asked two years ago, Netflix stopped adding members what changes inside of Netflix and or the broader industry explain the significant improvement in member growth. We're seeing today, excluding the paid sharing initiatives in other words, what are you doing better today.

Gregory K. Peters: Great, thank you, Ted and Greg. I'll move us along to the next question from Ben Swinburne of Morgan Stanley, who asked, two years ago, Netflix stopped adding members. What changes inside Netflix and or the broader industry explain the significant improvement in member growth we're seeing today, excluding the paid sharing initiative? In other words, what are you doing better today as a company than in the first half of 2022?

Ben Swinburne: As a company than in the first half of 2022.

Gregory K. Peters: That's a great question. I would say the thing we're doing is thrilling our members. That's the thing we set out to do. That's why we all bounce out of bed in the morning. You know, look at this last quarter.

Ben Swinburne: That's a great question I would say that the thing we're doing is we're thrilled our members. That's the thing we set out there to talk about why we all bounce out of bed in the morning.

At the district at the.

Ben Swinburne: This last quarter eight of the first 11 weeks of the year. We've had the number one film on streaming nine to the first 11 weeks. We've had the number one original series and I'm talking about hits like Avatar. The last Airbender Griselda Damsel Love is blind three body problem all of that just in the last few months. So this okay.

Gregory K. Peters: Eight of the first 11 weeks of the year, we had the number one film on streaming. Nine of the first 11 weeks, we had the number one original series. And I'm talking about hits like Avatar, The Last Airbender, Griselda, Damsel, Love is Blind, Three-Body Problem, all of that just in the last few months, a consistent and dependable and expected drumbeat of hit shows, films, and games.

Ben Swinburne: Consistent and dependable and expected drumbeat of hit shows films and games. That's the business that we're in and that's what we have to do every day and we have to do it all over the world. So if you think about that and how we're doing about just kind of quality at scale in multiple cultures in multiple regions I look at this last quarter you see Fool me once.

Gregory K. Peters: That's the business that we're in, and that's what we have to do every day. And we have to do it all over the world. So if you think about that and how we're doing about quality at scale in multiple cultures and multiple regions, I look at this last quarter. You see Fool Me Once, One Day, Gentleman, Scoop, The Super Buzzy, Baby Reindeer, all from the UK, all in the last few months. Berlin, Society of the Snow, Alpha Males, all from Spain, and all just in the last few months.

Ben Swinburne: One day, gentlemen, scoop, the Super Buzzy Baby reindeer all of that from the U K all in the last few months, our Berlin Society of the snow Alpha males. All from Spain, and I'll just in the last few months.

Gregory K. Peters: So that's been one of those things that we just keep building and building and building on. And Local Unscripted, which is a fairly new initiative for us. And we're finding huge success with things like our second season of Physical 100 in Korea recently, and Love is Blind in Sweden. These are all kind of hard to replicate things that we keep getting better and better at every day, and we're really proud of the teams for doing that. And remember, engagement captures all of this, and none of that's possible without great tech and products. We need to do both.

Ben Swinburne: So that's been one of those things that we just keep building and building and building on and the local unscripted, which is a fairly new initiative for us and we're finding huge success with things like our second season of physical 100 in Korea recently and Love is blind, Sweden are these are all kind of hard to replicate things that we keep getting better and better at every day there.

Really proud of the team for doing that so and remember engagement captures all of this and none of that is possible without great Tech and product we need to do both.

Gregory K. Peters: Yeah, I think that's right. I mean, the fundamental is all those amazing series, films, games, and live events. But a key component of our success and something that we're seeking to get constantly better at is that ability to find audiences for all those great titles. Part of making that happen is just the number of people who look to us for entertainment. We mentioned over a half a billion people in this letter.

Speaker Change: Yeah, I think that's right I mean, the fundamental is all of those amazing series film games live events, but a key component of our success and something that we're seeking to get constantly better at it is that ability to find audiences for all those great titles.

Speaker Change: In making that happen is just the number of people who look to us for entertainment, we mentioned over a half a billion people in this letter, but part of that is that that product, we do to effectively connect those folks with titles that they will love, which then enables us to bind the largest audiences for those titles that we think that they could get anywhere and I think as you've mentioned.

Gregory K. Peters: But part of that is that product we do to effectively connect those folks with titles that they will love, which then enables us to find the largest audiences for those titles that we think that they could get anywhere. And I think, as you mentioned, Ted, this applies globally to titles from all over the world, which is super exciting. And then, of course, we seek to maximize fandom and the impact on the conversation and the cultural zeitgeist that all those titles have.

Speaker Change: <unk> dad to suppliers globally to titles from all over the World, which is super exciting. So and then of course, we seek to maximize the fandom and the impact on the conversation and the cultural zeitgeist that all of those titles have and when we do that well that just feeds positively into that cycle as we launch new titles. So you know in terms of.

Gregory K. Peters: And when we do that well, that just feeds positively into that cycle as we launch new titles. So, you know, in terms of what we are doing better, what can we do better? We seek to get better at all those things. And if we can make that whole flywheel spin a little bit faster, then that's great for our members. It's great for our titles, and it's great for our creators.

Speaker Change: What are we doing better what do we do better we seem to get better all of those things that if we can make that whole flywheel spin a little bit faster.

Speaker Change: Then that's great for our members is great for our titles and it's great for our graders.

Operator: Thank you, Ted and Greg. Moving us along, we have Barton Crockett from Rosenblatt.

Speaker Change: Thank you Ted and Greg.

Speaker Change: That's a long way of Barton Crockett from Rosenblatt.

Spencer Adam Neumann: There's a question about our revenue guidance. I will direct this question to Spence. Spence, can you please explain what drives the revenue deceleration for the full year, so 13 to 15 percent revenue growth for the full year compared with the 15 to 16 percent growth in the first and second quarters of this year? Secondly, he also has a question about second quarter subscriber growth. Will that be higher or lower than Q2 of 2020?

A question about our revenue guidance I will direct this question to Spence Spence can you. Please explain what drives the revenue deceleration for the full year, so 13% to 15% revenue growth for the full year compared with the 15% to 16% growth in the first and second quarters of this year. Secondly, he also has a question about.

Spence: Second quarter subscriber growth will that be higher or lower than Q2 of 2023.

Spence: Alright sure well thanks for the question. So so first regarding revenue growth overall full year outlook I feel really good about where we are and our growth outlook. So I just want to be clear about that we've done a lot of hard work over the past 18 months or so to reaccelerate, the business and really reaccelerate revenue through a combination of improving.

Spencer Adam Neumann: All right. Sure. Well, thanks for the question. So first, regarding revenue growth overall, and the full year outlook, I feel really good about where we are in our growth outlook. So I just want to be clear about that.

Spencer Adam Neumann: We've done a lot of hard work over the past 18 months or so to re-accelerate the business and re-accelerate revenue through a combination of improving our core service, which Greg and Ted just talked about, and rolling out paid sharing, and launching our ads business. And that re-acceleration really started in the back half of last year, and it built through the year. So our growth in the back half of 24 is really kind of coming off of those harder comps.

Spence: Core service, which which Greg and Ted just talked about and rolling out paid sharing launching our ads business and and that Reacceleration really started in the back half of 'twenty three and it built through the year. So our growth in the back half of 'twenty four is really kind of comping off of those harder comps.

Spencer Adam Neumann: And at the high end of our revenue forecast, our growth in the second half is consistent with our growth in the first half, even with those tougher comps. And it's still early in the year. We've still got a lot to execute against.

Spence: And at the high end of our revenue forecasts our growth in the second half is consistent with our growth in the first half even with those tougher comps and you know it's still early in the year, we still got a lot to execute against we also as you see in our in our letter there's been some FX that are with the strengthening dollar that's a bit of a headwind. So we'll see where that goes throughout the year, but we're guiding.

Spencer Adam Neumann: We also, as you see in our letter, there's been some FX that with the strengthening dollar, that's a bit of a headwind. So we'll see where that goes throughout the year. But we're guiding that healthy double-digit revenue growth for the full year, which is what we set out to deliver. And that's what's reflected in the range.

Spence: That healthy double digit revenue growth for the full year, which is what we set out to deliver and that's what's reflected in that range and.

Spencer Adam Neumann: And I guess maybe it's in the question, I guess, and this is a little bit of like, what's the really kind of outlook for our growth of the business, not just the back half of this year, but into 25. And it's too early to provide real specific guidance, but we're going to work hard to sustain healthy double-digit revenue growth for our business. And we really like the opportunity ahead of us. We're so small in every aspect.

Spence: I guess, maybe it's.

Spence: In the question I guess seen it and this is a little bit of like what's really kind of.

Spence: The outlook for our growth of the business not just the back half of this year, but into 'twenty, five and and you know it's too early to provide specific guidance, but we're going to work hard to sustain healthy double digit revenue growth for our business and we really like the kind of.

Spence: The opportunity ahead of US we're so small in every aspect we are only 6% roughly of our revenue opportunity where less than 10% of TV share in every country in which we operate there are still hundreds of millions of homes that are that are not Netflix members in and we're just getting started on advertising. So the key is to as you just heard from Greg and Ted continually improve.

Spencer Adam Neumann: We're only 6% of our revenue opportunity. We're less than 10% of TV share in every country in which we operate. There are still hundreds of millions of homes that are not Netflix members.

Spencer Adam Neumann: And we're just getting started on advertising. So the key is to, as you just heard from Greg and Ted, continually improve our service, drive more engagement, and increase member value. As we do that, we'll have more members.

Spence: Our service drive more engagement more member value as we do that we will have more members.

Spencer Adam Neumann: We'll be able to occasionally price in that value and also have a big, highly engaged audience for advertisers. So more to come on 25 guidance, but that's when we feel good about the outlook. And then, Spencer, the second part of the question I'm trying to remember. I'm sorry. I'll be the bad guy on this one.

Spence: Are you able to occasionally pricing that value in and and also have a big highly engaged audience for advertisers so more to come on 25 guidance, but that's what we feel good about the outlook and then I guess the second part of the question I'm trying to I'm not expensive.

Speaker Change: I'll be the bad Guy on this one spend so the second question was do you expect Q2 subscriber growth and higher or lower than Q2 of the prior year. So Barton.

Spencer Adam Neumann: The second question was, do you expect Q2 subscriber growth to be higher or lower than Q2 of the prior year? So Barton, as you know, we don't give formal subscriber guidance. We did give an indication in the letter for you that we expect fairly typical seasonality. So Peytonhead ads in Q2 of this year will be lower than Q1 of this year. And that's the limit of the color we'll provide. Thanks.

Speaker Change: You know, we don't give formal subscriber guidance, we did give an indication in the letter for you.

Speaker Change: We expect fairly typical seasonality. So paid net adds in Q2 of this year will be lower than Q1 of this year and that's the limit of the color will provide.

Speaker Change: Hello.

Speaker Change: No problem.

Spencer Adam Neumann: So to follow up on the revenue guidance question, we have Jason Helfstein from Oppenheimer, who's asking for some more color on the drivers of the full-year revenue guidance with respect to subscriber growth versus arm growth and how those two dynamics will play into the revenue flow. Yeah. Do you want me to take this one as well?

Speaker Change: So to follow up on the revenue guidance question, we have Jason Health scheme from Oppenheimer. He was asking for some more color on the drivers of the full year revenue guidance with respect to subscriber growth versus arm growth and how about those two dynamics will play into the revenue forecast events.

Speaker Change: Yeah.

Speaker Change: Well, yes, I'll jump in on the others.

Spencer Adam Neumann: Yeah. Okay. I'll jump in. Others can chime in as well. But when you think about the outlook for the year, in terms of the mix of revenue growth, it's kind of pretty similar to, we expect it'll be pretty similar to what you see in Q1, where, you know, it's primarily driven by member growth because of the kind of full year impact of paid sharing rolling through the year and continued strong acquisition and retention trends.

Speaker Change: Those can chime in as well, but when you think about the outlook for the year. It's in terms of the mix of revenue revenue growth, it's pretty similar to we expect it'll be pretty similar to what you see in Q1, where it's primarily driven by by member growth because of the kind of the full year impact of paid sharing wrote rolling through the year.

Speaker Change: And continued strong acquisition and retention trends, but you are seeing we are seeing some some arm growth as well we saw it in Q1 of about one.

Spencer Adam Neumann: But we are seeing some ARM growth as well. We saw it in Q1, about 1% on a reported basis, and 4% FX-neutral. And, you know, I just want to be clear, what's happening is that with ARM, price changes are going well. And that's why we're seeing those strong acquisition retention trends because it's testament to the strength of our slate and the overall improvement in the value of our service. But we've only really changed prices in a few big markets.

Speaker Change: Sent on a reported basis, 4% FX neutral and yeah, I just want to be clear what's happening is that.

Speaker Change: With arm as price changes are going well.

Speaker Change: And that's why we're seeing a strong acquisition retention trends because it's testament to the strength of our slate the overall improvement in the value of our service, but we've only really change prices and in a few big markets and that was a U S. U K, France late last year and only on some of the planned tiers.

Spencer Adam Neumann: And that was the US, the UK, and France late last year, and only on some of the plan tiers in those markets, not even all the plan tiers. And since then, it's mostly been pretty small countries other than Argentina.

Speaker Change: Market's not even all the plan tiers and since then it's been mostly pretty small countries other than Argentina in Argentina. As you can see we're sort of pricing into the local currency devaluation and you see that in the difference between FX neutral and reported growth in Q1, so mostly what you're seeing in our growth profile. This year is that.

Spencer Adam Neumann: And in Argentina, as you can see, we're sort of pricing in the local currency devaluation. And you see that in the difference between FX-neutral and reported growth in Q1. So mostly what you're seeing in our growth profile this year is the fact that we haven't taken pricing in most countries for the past two years, really. And we also have some ARM kind of headwinds in the near term that you see in Q1, you'll probably see throughout most of this year, which is that, you know, when we have some, this plan mix shift as we roll out paid sharing.

Speaker Change: That we haven't taken pricing in most countries for the past two years really and we also have some arm kind of headwinds in the near term that you see in Q1, you'll probably see throughout most of this year, which is that.

Speaker Change: One we have some set this planned mix shift as we rollout paid sharing so it's while it's highly revenue accretive as you can see in our numbers and our.

Spencer Adam Neumann: So it's while it's highly revenue accretive, as you can see in our numbers and our, you know, our reported growth, strong reported growth in Q1 and outlook for the year, that as we spin off into new paid memberships, they tend to spin off into a mix of plan tiers, and it's a little bit of a lower price skew than what we see in our tenured members. And we're also growing our ads tier at a nice clip, as you've seen. I'm sure we'll talk about that.

Speaker Change: Our reported growth strong reported growth in Q1 and outlook for the year that as we spin off into new paid memberships. They tend to spin off into a mix of plan tiers that are a little bit of a lower price SKU than what we see in our tenured members and we're also growing our adds tier at a nice clip as you've seen I'm sure, we'll talk about in <unk> and <unk>.

Spencer Adam Neumann: And monetization is lagging growth there. I'm sure we'll talk about that a bit as well. We also have some country mix shifts. So that whole combination of factors results in pretty modest ARM growth, still some ARM growth, but pretty modest in Q1 and probably throughout the year.

Speaker Change: <unk> is a lagging growth there I'm sure we'll talk about that as well. We also have some country mix shifts so that whole combination of factors results in pretty modest arm growth still some arm growth, but pretty modest in Q1 and probably throughout the year, but.

Spencer Adam Neumann: But again, the key there is that, you know, we're kind of managing this business transition in a way that's really healthy for overall revenue growth, as you see with 15% reported revenue growth in the quarter and a strong outlook for the year. And we're building a much more kind of durable and healthy foundation for revenue growth going forward across a larger base of paid members and a really kind of strong and scaled, highly engaged audience for it to build into our advertising over time. And, you know, a strong paid sharing solution also to kind of penetrate those households. So we'll increasingly kind of see that mix in our revenue growth, and we start to see some of

Speaker Change: Again, the key there is that.

Speaker Change: No. This is all we're managing this business transition in a way that's really healthy for overall revenue growth as you see with 15% reported revenue growth in the quarter strong outlook for the year and we're building into a.

Speaker Change: A much more kind of durable and healthy foundation for revenue growth going forward across a larger base of paid members.

Speaker Change: And it really kind of strong and scaled highly engaged audience for it to build into our advertising over time and you know a strong page page sharing solution and also to kind of penetrate into those households, So we'll increasingly kind of see that mix in our revenue growth and we start to see some of it this year.

Speaker Change: Great.

Spencer Adam Neumann: Spence, the next question comes from Kanan Venkateswar from Barclays, and it's for you, which is, do you expect the margin growth trajectory to continue on the present path for a few years? Can you attain margins that are comparable to legacy media margins?

Speaker Change: The next question comes from Kunal <unk> from Barclays and its for you, which is do you expect margin growth trajectory to continue being on the present all for a few years can you attain margins that are comparable to legacy media margins.

Spencer Adam Neumann: Well, thanks, Kenan. And, you know, our focus is on sustaining healthy revenue growth and growing margins each year. That's what we talk about a lot. We also talk about it in the letter.

Kunal: Well, thanks get on and you know our focus is on sustaining healthy revenue growth and growing margin each year. That's what we talk about a lot of we also talked about in the letter and we feel good about what we've been delivering.

Spencer Adam Neumann: And we feel good about what we've been delivering, you know, 21 percent margins last year. That's up from 18 percent in the year before. And now we're targeting 25 percent this year, which is up a tick from the start of the year when we were guiding to 24 percent. So I'd say, just like we have in the past, we'll take a disciplined approach to balancing margin improvement with investing in our

Kunal: 21% margins last year, that's up from 18% in the year before and now were targeting 25%. This year, which is up a tick from the start of year. When we were guiding to 24%. So I'd say just like we have in the past, we'll take a disciplined approach.

Kunal: Balancing margin improvement with investing into our growth that we manage that balance historically pretty well growing content investment profit gross profit margin and growing cash flow you should expect we'll continue to do that but the amount of annual margin expansion.

Spencer Adam Neumann: We've managed that balance historically pretty well, growing content investment, growing profit, growing profit margin, and growing cash flow. You should expect we'll continue to do that. But the amount of annual margin expansion in any given year could bounce around a bit with FX and other investment opportunities. But again, we're committed to growing margin each year, and we see a lot of runway to continue to grow profit and profit margin over the.

Kunal: Given year could bounce around a bit with FX and other investment opportunities, but again, we're committed to grow margin each year and we see a lot of runway to continue to grow profit and profit margin over the long term.

Gregory K. Peters: Thank you, Spence. Our next question comes from Alan Gould of Loop Capital. Which inning are we in with respect to enforcing paid sharing? Two years ago, you said 100 million subscribers were sharing passwords with 30 million in UCAN. How many do you estimate still borrow passwords? And I'll turn the floor over to Greg to answer that question.

Kunal: Thank you expense. Our next question comes from Alan Gould of loop capital.

Alan Gould: Inning are we in with respect to enforcing page sharing two years ago. You said 100 million subscribers were sharing passwords with $30 million in you can I mean, do you estimate still borrow passwords and I'll turn it.

Alan Gould: <unk> floor over to Greg to answer that question.

Gregory K. Peters: Yeah, as we mentioned last quarter, we're at the point where we've operationalized the page sharing work. So this is just now part of that standard mechanism that we've been building and iterating on over time to translate more entertainment value and, you know, great films, series, games, and live events into revenue. And like we do with all of the significant parts of our product experience, we're iterating on that, testing it, improving it

Greg: Yeah, as we mentioned last quarter, we're at the point, where we've operationalized. The page hearing works. So this is just now part of that standard mechanism that we've been building and iterating on overtime to translate more entertainment value and great films series games live events into revenue and like we do with.

Greg: All of this significant parts of our product experience, we're iterating on that testing at improving it continually so rather than thinking beyond sort of specific cohorts, where specific numbers. We really think about this more as developing more mechanisms more effective ways to convert folks who are interacting with us whether they be bar.

Gregory K. Peters: So, rather than thinking beyond, you know, sort of specific cohorts or specific numbers, we really think about this more as developing more mechanisms, more effective ways to convert folks who are interacting with us, whether they be borrowers or folks that were members before that are coming back. We call them rejoiners, or folks that have never been a Netflix member.

Greg: Hours or folks that were members before theyre coming back we call him rejoin nerves are folks that have never been in Netflix member. So we want to find the right call to action the right offer the right <unk> at the right time to get them to convert and just to be clear, we still see opportunities to improve this process. We've got line of sight on several improvements this value translation mechanism that we expect.

Greg: We will deliver and contribute to business grows for the next several quarters to come but I also very much believe that just like for the last 15 years.

Gregory K. Peters: So, we want to find the right call to action, the right offer, the right nudge at the right time to get them to convert. And just to be clear, we still see opportunities to improve this process. We've got a line of sight on several improvements to this value translation mechanism that we expect will deliver and contribute to business growth for the next several quarters to come. But I also very much believe that, just like for the last 15 years, you know, we've always found something to improve in this process.

Greg: We've always found something to improve in this process and even beyond those for years and decades to come will be working on this and making it better and better and better so all of those improvements.

Greg: Should allow us to effectively get more of that 500 million plus smart TV households to sign up and become members Spence mentioned hundreds of millions yet to come. This is a way to effectively get at more of those folks and make them part of our membership base.

Gregory K. Peters: And even beyond those, for years and decades to come, we'll be working on this and making it better and better and better. So, all of those improvements could allow us to effectively get more of that 500 million plus smart TV households to sign up and become members. You know, Spence mentioned the hundreds of millions yet to come. This is a way to effectively get at more of those folks and make them part of our membership base.

Greg: And as we mentioned earlier on the call too I think worth noting that while we're fully anticipating attuned to grow subs. The overall business growth now has extra lever is an extra drivers like plan optimization, including things like extra members ads revenue pricing into more value, which is important. So those levers are also an increasingly important part of our growth model as well.

Greg: Al.

al: Great I'll move on now to a series of questions around advertising the first of which comes from Doug Anmuth of Jpmorgan. What are the most important drivers of scaling your AD tier when you think about adjustments you can make the pricing and plans partner bundles and marketing how do you get people over the hump for.

Gregory K. Peters: And as we mentioned earlier on the call, too, I think it's worth noting that while we're fully anticipating continued to grow subs, the overall business growth now has extra levers and extra drivers like plan optimization, including things like extra members, ads, revenue, and pricing into more value, which is important. So those levers are also an increasingly important part of our growth model as well.

al: That a few minutes of ads in our can still be a very good experience at the right price Greg why don't you take that one.

al: All the things.

al: You mentioned in the question matter and I'd say, we're generally taking our entire playbook to everything that we've learned about how do you grow members and we're applying it to our ads tier now so clearly that means partner channels that means device integrations bundles integrated payments. Those are all important tools for growth just as they are and will continue to be in our non ads offering.

Gregory K. Peters: Great. I'll move us on now to a series of questions around advertising, the first of which comes from Doug Anmuth of JPMorgan. What are the most important drivers of scaling your ad tier when you think about adjustments you could make to pricing and plans, partner bundles, and marketing? How do you get people over the hump for that a few minutes of ads an hour can still be a very good experience at the right price? Greg, why don't you take that one?

al: Increasing awareness of the quality of our ads experience, especially relative to the linear TV ads experience, which in many countries is really quite poor that's an important tool and we talk about sort of marketing and awareness building.

Gregory K. Peters: All the things mentioned in the question matter, and I would say we're generally taking our entire playbook, everything that we've learned about how to grow members, and we're applying it to our ads tier now. So, clearly, that means partner channels, it means device integrations, bundles, integrated payments.

al: That's going to be part of our growth mechanism.

A low price.

al: It's important to consumers 699, as an example in the United States for multiple streams full HD downloads, we think that's a great entertainment value, especially at the industry, leading low AD load that we've got so that's critical as well. So I think you can see the results of leveraging all of these mechanisms and more an hour adds tier has.

Gregory K. Peters: Those are all important tools for growth, just as they are and will continue to be in our non-ad offering. Increasing awareness of the quality of our ads experience, especially relative to the linear TV ads experience, which in many countries is really quite poor. That's an important tool when we talk about marketing and awareness building. That's going to be part of our growth mechanism. Low price, that's important to consumers. $6.99 is an example in the United States for multiple streams and full HD downloads.

al: <unk> been scaling over the last couple of quarters over 65% up quarter to quarter. This last quarter. That's after two quarters of about 70% quarter over quarter growth for me, it's exciting to see that growth rates stay high even as.

al: We've grown the base so much because obviously the numbers indicate that that means that theres more absolute additions each quarter. So we're making good progress there, but look we've got much much more to do in terms of scaling we've got more to do in terms of effective go to market more technical features more ads products. There's plenty of work ahead for us on that.

Gregory K. Peters: We think that's great entertainment value, especially at the industry-leading low ad load that we've got. So that's critical as well. So I think you can see the results of leveraging all of these mechanisms and more and how our ads tier has been scaling over the last couple quarters. So we're 65% up quarter-to-quarter this last quarter. That's after two quarters of about 70% quarter-over-quarter growth. For me, it's exciting to see that growth rate stay high. We've grown the base so much because, obviously, the numbers indicate that that means that there are more absolute additions each quarter.

al: Great. Greg next question on the advertising comes from Rich Greenfield of light shed. He is a three part question part one can you update us on your thinking around the optimal spread between the adds here in the AD free tier.

al: Secondly.

John Christopher Hodulik: Is your advertising Arco, excluding the subscription fee up meaningfully versus your original comments that it was in the eight to $9 range last year and then lastly can you give us a sense of what <unk> would look like if supply was not outstripping demand.

Gregory K. Peters: So we're making good progress there. But look, you know, we've got much, much more to do in terms of scaling. We've got more to do in terms of an effective go to market, more technical features, more ad products. There's plenty of work ahead for us on ads.

Speaker Change: I'll take the first one and then maybe hand, the RPC charm points to expense.

Speaker Change: We don't have a fixed a preferred position on sort of the optimal pricing spec spread and much like we've done with price changes in general we really use signals from our customers things like plan take rate conversion rates churn to guide us along an iterative path to get to that rate pricing.

Gregory K. Peters: Great, Greg. Our next question on advertising comes from Rich Greenfield of LightShed. He has a three-part question.

Gregory K. Peters: Part one, can you update us on your thinking around the optimal spread between the ad tier and the ad free tier? Secondly, is your advertising ARPU, excluding the subscription fee, up meaningfully versus your original comments that it was in the $8 to $9 range last year? And, finally, can you give us a sense of what ARPU would look like if supply was not outstripping demand?

Speaker Change: And I think it's also probably worth noting that sort of rate pricing is not really a static position as we can do to evolve and improve our offering that's going to change as well, but I think a good general guideline for us in the long term is that it would be healthy for us to land overall monetization between our ads and non ads offerings in roughly.

An equivalent position so it really comes down to what works best for any given remember and it's really a member choice about which plan. They think serves them. The best and then I'll hand, it over to spend on arm questions.

Gregory K. Peters: I'll take the first one and then maybe hand the ARPU slash ARM points to Spence. We don't have a fixed a priori position on sort of the optimal pricing spread. And much like we've done with price changes in general, we really use signals from our customers, things like plan, take rate, conversion rates, and churn to guide us along an iterative path to get to that right price. And I think it's also probably worth noting that this sort of right price is not really a static position.

Spencer: Sure. Thanks, Greg So in terms of arm and your question rich in terms of how we're doing now relative to what we discussed when we first launched the business and you know as Greg said, we've been growing our inventory at quite a fast clip and so monetization hasn't fully kept up with that growth and scale and inventory is where we're still early in building.

Spencer: Our sales capabilities in our in our AD products.

Spencer: That is an opportunity for us because.

Gregory K. Peters: As we continue to evolve and improve our offering, that's going to change as well. But I think a good general guideline for us in the long term is that it would be healthy for us to land overall monetization between our ads and non-ads offerings in roughly an equivalent position. So that really comes down to, you know, what works best for any given member. And it's really a member choice about which plan they think serves them best. And then I'll hand it over to Spence for the ARM questions.

Spencer: We're still a very premium content environment.

Very highly engaged audience, that's at an increasing scale. So our CPM has remained strong and we're building out our capabilities as Greg talked about so the revenue is going to follow engagement over time, and it's already kind of growing nicely, which is great just off a small base. So then really as Greg said, what that means for arm and so right now it is.

Spencer: A bit of a drag on our arm because of because of we're kind of under monetizing relative to supply.

Spencer: But over time, we expect to be similar in revenue on our ads tier a combination of subscription as well as add revenue with those kind of non ads offerings. So that's that's how to think about it but we're building to it over time.

Spencer Adam Neumann: Sure, thanks, Greg. So, in terms of ARM and your question, Rich, in terms of how we're doing now relative to what we discussed when we first launched the business, you know, as Greg said, we've been growing our inventory at quite a fast clip. And so, monetization hasn't fully kept up with that growth in scale and inventory as we're still early in building out our sales capabilities and our ad products. But that is an opportunity for us because we're still a very premium content environment, a very highly engaged audience that's at an increasing scale.

Spencer: Great last question on advertising comes from John Hodulik of UBS. How are you approaching this year's Upfronts and do you believe the basic AD supported users as now of the scale that upfront commitments can drive a meaningful change in advertising revenue and be a contributor to our growth in 2025, so perhaps.

Spencer: Ted maybe you could start and then Greg I'll follow up with that yes of course, the first and foremost. This is our second upfronts were really excited to go and share with advertisers. This incredible slate that we're very very proud of.

Spencer Adam Neumann: So, our CPMs remain strong, and we're building out our capabilities, as Greg talked about. So, revenue is going to follow engagement over time, and it's already kind of growing nicely, which is great just off a small base. But then, really, as Greg said, what that means for ARM is that right now, it is a bit of a drag on our ARM because we're kind of under-monetizing relative to supply. But over time, we expect to be similar in revenue on our ads tier, a combination of subscription revenue as well as advertising revenue with those kind of non-ads offerings. So, that's how we think about it, but we're building to it over time.

Ted: So theyre going to get a look at some of the shows that are upcoming right away like brand new seasons of Richardson and Sweet tooth and the 90 show some of our big unscripted events upcoming like Tom Brady Roast by way of example.

Greg: And a brand new shows like Deadboy detectives and Sean chain gills is new show tires.

Greg: Eric a great New limited series out of the U K with veteran covered box that we're super excited about and then they'll even get a longer look at what's coming up in the second half of the year, which is again returning seasons of Cobra Kai Emily in Paris.

Theodore A. Sarandos: Great. The last question on advertising comes from John Hodulik at UBS. How are you approaching this year's upfronts? And do you believe the base of ad support users is now of the scale that upfront commitments can drive a meaningful change in advertising revenue and be a contributor to revenue growth in 2025? So perhaps, Ted, maybe you could start and then, Greg, I'll follow up with you. Yeah, of course.

Greg: Nine agent outer banks and square game or a big one.

Greg: And a brand new ship season of monsters from Ryan Murphy, which is the lie on Eric Menander story, this year, which is going to be really incredible thing to share with our advertisers.

Greg: A brand New original series and limited series like American Prime Evil from Pete Berg Heartburn, but then all star cast Nicole Kidman and Lyft driver.

Theodore A. Sarandos: Yeah, of course. Look, first and foremost, this is our second Upfronts. We're really excited to go and share with advertisers this incredible slate that we're very, very proud of. So they're going to get a look at some of the shows that are upcoming right away, like brand new seasons of Bridgerton and Sweet Tooth and The 90s Show, some of our big unscripted events upcoming, like our Tom Brady roast, by way of example, and brand new shows like Dead Boy Detectives and Shane Gillis's new show, Tires, Eric, a great new limited series out of the UK with Benedict Cumberbatch that we're super excited about.

Greg: Centre, which is this great limited series on the the great Brazilian Formula one driver.

Greg: We're really excited about and also I look at our early at our movies coming up that we'll end the year with with like.

Greg: Eddie Murphy and his most iconic roll Axel Foley in Beverly Hills Cop Axel Foley carry on a big new.

Greg: Animated feature spell bound so they've got a we've got a lot of entertainment in store for the audience at the at the Upfronts.

I think this is an opportunity to re engage with advertisers and look at the fundamentals of what our offering is I mean first and foremost.

Theodore A. Sarandos: And then they'll even get a longer look at what's coming up in the second half of the year, which is again returning seasons of Cobra Kai, Emily in Paris, The Night Agent, Outer Banks, and Squid Game, our big one, and a brand new season of Monsters from Ryan Murphy, which is the Lyle and Eric Menendez story this year, which is going to be a really incredible thing to share with our advertisers And brand new original series and limited series, like American Primeval from Pete Berg, Heartburn with an all-star cast, Nicole Kidman and Liam Shriver, and Senna, which is this great limited series on the great Brazilian Formula One driver that we're really excited about.

Greg: It's an incredible list of titles that brands want to be connected with its a super excited to hear that roster. We've got great engagement from our members on our ads here, we've got an opportunity to grow that even further and we think that's connected again to that to the power of those titles were rapidly growing scale. As we mentioned that's number one request we'd had from advertisers. So that's exciting.

Greg: We're making progress on technical features like measurement on ads products. So we're excited to get that out there and really this is an opportunity to bring all of that progress in a package to advertisers.

Greg: And then and of course to get input from them, because we know that theyre going to have comments and they're going to have things that theyre going to want us to continue to work on and then really then just to continue that journey, because we know theres plenty more to go do to realize the potential we have in this space and so I would say.

Theodore A. Sarandos: And also, I look at our early movies coming up that we'll end the year with, like Eddie Murphy in his most iconic role, Axel Foley in Beverly Hills Cop, Carry On, and a big new animated feature, Spellbound. So we've got a lot of entertainment in store for the audience at the upfront.

Greg: We're continuing to grow here, we're growing off of a relatively small base in terms of the impact against our already big and substantial business. So even though it's growing quite quickly and how it takes a while to grow that into the point, where it's material. So we look forward to it and that increasing in 'twenty five and then increasing further 26 and beyond.

Gregory K. Peters: Yeah, I think this is an opportunity to re-engage with advertisers and look at the fundamentals of what our offering is. I mean, first and foremost, it's an incredible list of titles that brands want to be connected to. It's just super exciting to hear that roster.

Speaker Change: Great I'll now transition us to several questions around content and this first one I'll direct to Ted is a rare question around why don't we spend more.

Gregory K. Peters: We've got great engagement from our members on our ads tier, and we have an opportunity to grow that even further. We think that's connected, again, to the power of those titles.

Ted: Given what seems like a very favorable current backdrop for Netflix to acquire in license content why not lean in even more aggressively could it make sense to spend more than $17 billion in cash content. This year.

Gregory K. Peters: We're rapidly growing scale, as we mentioned. That's the number one request we've had from advertisers, so that's exciting. We're making progress on technical features like measurement on ads products, so we're excited to get that out there. And really, this is just an opportunity to bring all of that progress in a package to advertisers. And then, of course, to get input from them because we know that they're going to have comments and they're going to have things that they want us to continue to work on.

Independent of the availability of license content you should look at it I think we are where we've always been very disciplined about the way we invest in the business and how we grow it and we can get a lot of bang for our Buck by spending our money well and producing our shows really well and also by acquiring the right content.

And now the floodgates have opened a little more on licensing for sure.

Gregory K. Peters: And then really just to continue that journey because we know there's plenty more to do to realize the potential we have in this space. And so I would say we're continuing to grow here. We're going off of a relatively small base in terms of the impact on already big and substantial businesses. So even though it's growing quite quickly, it takes a while to grow that impact to the point where it's material. So we look forward to that number increasing in 2025 and then increasing further in 2026 and beyond.

Ted: But again, we're very focused on the ones that we think will drive the business. So I think we're at our current level of spending.

Ted: At our current level.

Ted: The rate of growth and we're pretty comfortable spending just behind that.

Ted: <unk>.

Ted: Rate of growth.

Ted: And Ted Jason helps seems follow up is also about license content or a second run content and his question is how would a second more second run licensing impact your margins and free cash flow.

Ted: Well the budget is the budget. So that's all part of how we spend that we're spending against the content and the free cash flow economics, we've gotten pretty close in our cash flow against against P&L on our content spend generally so I don't think it would have much very much impact on that especially when you add some color to that.

Operator: Great. I'll now transition us to several questions around content, and this first one I'll direct to Ted. It's a rare question around why don't we spend more? Given what seems like a very favorable current backdrop for Netflix to acquire and license content, why not lean in even more aggressively? Would it make sense to spend more than 17 billion dollars in cash on content this year?

Ted: I just love you're talking about the discipline on our content budget.

Speaker Change: Be happy no I agree with all of it I mean, yeah, we we spent into the opportunity, but with I think prudent constraints and discipline.

Speaker Change: And to be clear like we were there as you say there has been more license content opportunity but.

Theodore A. Sarandos: Yeah, independent of the availability of the licensed content you should look at, I think we've always been very disciplined about the way we invest in the business and how we grow it. And we can get a lot of bang for our buck by spending our money well and producing our shows really well, and also by acquiring the right content. And the floodgates have opened a little more on licensing, for sure. But again, we're very focused on the ones that we think will drive the business. So I think we're at our current level of spending and our current rate of growth, and we're pretty comfortable spending just behind that anticipated rate of growth.

Speaker Change: The vast majority of our content spend is still into original programming and it is and is likely to continue to be so we will always complement it with great license content for that variety and quality for our members, but the original original content is still a feature to yeah.

Speaker Change: Great next question is from Michael Morris Guggenheim.

Speaker Change: Specific about the jackpot, Mike Tyson fight for Ted what are the characteristics of the upcoming jackpot, Mike Tyson fight that make this type of sports programming you're interested in investing in how does that content benefit your member base and advertising growth goals.

Theodore A. Sarandos: And Ted, Jason Helstine's follow-up is also about licensed content or second-run content, and his question is, how would more second-run licensing impact your margins for free cash flow?

So we're in the very early days of developing our lives are live programming.

Speaker Change: And it's I would look at this as an expansion of the types of content. We offer the way we expanded to film in unscripted and animation and most recently games on demand and streaming has been unbelievable for consumer choice and control and it's really really put the controls of TV back in the hands of consumers, which has been really phenomenal, but theres all.

Theodore A. Sarandos: Well, the budget is the budget, so that's it.

Theodore A. Sarandos: I just love you talking about the discipline in our content budget, Ted. It makes me happy.

Operator: Great. The next question is from Michael Morris of Guggenheim, specific about the Jake Paul vs. Mike Tyson fight. For Ted, what are the characteristics of the upcoming Jake Paul vs. Mike Tyson fight that make this the type of sports programming you're interested in investing in? How does that content benefit your member base and advertising growth?

Speaker Change: So something incredibly magic about post gathering around the JV together in the living room to watch something all at the same time we.

Speaker Change: We believe that these kind of event is cultural moments like the J, Paul and Mike Tyson fight.

Or just that kind of TV that we want to be part of winning over those moments with our members as well so that that for me is the excitement part of this.

Theodore A. Sarandos: So, we're in the very early days of developing our live programming, and I would look at this as an expansion of the types of content we offer, the way we expanded to film and unscripted and animation and, most recently, games. On-demand and streaming have been unbelievable for consumer choice and control, and it's really put the controls of television back in the hands of consumers, which has been really phenomenal. But there's also something incredibly magical about folks gathering around the TV together in the living room to watch something all at the same time.

Speaker Change: We have beyond the fight itself you know we have several nights of live comedy coming from the Netflix as a joke festival next month.

Speaker Change: And starting in January we've got 52 weeks of live sports with WWE Roar, that's going to be coming to our members every week on Netflix and we think it's got a real value add to watch those things in real time.

Speaker Change: And we're going to continue to try a lot of new things, but the core of it is as do our members love it and judging from the early excitement around J, Paul Matteis invite there's going to be a lot of people waking up in the middle of the night all over the world to watch this fight in real time.

Theodore A. Sarandos: We believe that these kinds of eventized cultural moments, like the Jake Paul and Mike Tyson fight, are just that kind of television that we want to be part of winning over those moments with our members as well. So, that, for me, is the excitement part of this. Beyond the fight itself, we have several nights of live comedy coming from the Netflix is a Joke Festival next month, and starting in January, we've got 52 weeks of live sports with WWE Raw that's going to be coming to our members every week on Netflix, and we think it's going to be a real value add to watch those things in real time.

Speaker Change: I think worth noting that you know just as what's relevant to members in terms of these large cultural events. The Ted talks about that's what has relevance to advertisers as well so it's an opportunity for us to expand our advertising offering and give those brands access to these kind of culture defining moments.

Speaker Change: Thanks, Ted and Greg Im personally looking forward to that event. There my money is on iron Mike Thompson, but as a follow up on the sport bald yes.

Speaker Change: He still got it I think that as a follow up to the sports question for Ted as you continue to scale, Netflix and become bigger and bigger and potentially gain more leverage how can your sports strategy change.

Theodore A. Sarandos: And we're going to continue to try a lot of new things, but the core of it is, do our members love them? And judging from the early excitement around the Jake Paul and Mike Tyson fight, there are going to be a lot of people waking up in the middle of the night all over the world to watch this fight in real time.

Speaker Change: And what Youre doing today around primarily sports entertainment.

Theodore A. Sarandos: We've said this many times, but not anti sports, but pro profitable growth and I think that's the core of everything we do in all kinds of programming, including sports. So you know our north star is to grow engagement revenue and profit in it.

Gregory K. Peters: It's worth noting that, you know, just as what's relevant to members in terms of these, you know, large cultural events that Ted talks about, that's what has relevance to advertisers as well. So it's an opportunity for us to expand our advertising offering and give those brands access to these kind of culture-defining moments.

Theodore A. Sarandos: We find opportunities that we can drive all three of those.

Theodore A. Sarandos:

Theodore A. Sarandos: We will do that across an increasingly wide variety of quality entertainment.

Theodore A. Sarandos: So when when and if those opportunities arrive that we can come in and do that which we feel like we did in our deal with WWE.

Theodore A. Sarandos: We can repeat those dynamics and other things, including sports we look at them for sure.

Theodore A. Sarandos: So I think it's we've had the benefit of building an enormous business without a loss leader and we continue to believe that we can grow on that path just as you've seen so I think the core of it is is that we're going to look at those opportunities with the same discipline that we do when we talked to movie producers in television networks about putting our content on the air.

Operator: Thanks, Ted and Greg, and I'm personally looking forward to that event, and my money is on Iron Mike Thompson, but as a follow-up on the sports... Bold. Bold. Yes, he's still got it, I think. But as a follow-up to the sports question for Ted, as you continue to scale Netflix and become bigger and bigger and potentially gain more leverage, how could your sports strategy change beyond what you're doing today around primarily sports entertainment?

Theodore A. Sarandos: Great.

Theodore A. Sarandos: She comes from rich Greenfield from light shed about our film strategy. So for Ted a recent New York Times article cited internal communications.

Theodore A. Sarandos: Yeah, we've said this many times, but not anti-sports, but pro-profitable growth. And I think that's the core of everything we do in all kinds of programming, including sports. So our North Star is to grow engagement, revenue, and profit. And if we find opportunities, we could drive all three of those.

Theodore A. Sarandos: New Netflix film Chief Dan Lean, stating quote.

John Christopher Hodulik: The aim is to make Netflix as movies better cheaper and less frequent Lynn wants his team to become more aggressive producers developing their own material rather than waiting for projects from producers and agents that come to them unquote, everyone wants to make better cheaper films, but we find it hard to believe we being rich find it hard to believe.

Theodore A. Sarandos: We will do that across an increasingly wide variety of quality entertainment. So when and if those opportunities arrive, we can come in and do that, which we feel like we did in our deal with WWE. If we can repeat those dynamics in other things, including sports, we'll look at them for sure. So I think we've had the benefit of building an enormous business without a lost leader. And we continue to believe that we can grow on that path, just as you've seen.

John Christopher Hodulik: There is a magic formula help us understand the strategy shift to under Dan <unk> versus <unk>.

Scott Schneeberger: Scott Schneeberger.

Well thanks for that question Rich I would send you back to that New York Times article because that was not a quote from Dan.

Scott Schneeberger: And I would say that and nor do we participate in that article I would say just to be clear, there's no appetite to make fewer films.

Scott Schneeberger: But there is an unlimited appetite to make better films always even though we have made and we are making great films, we want to make them better of course.

Theodore A. Sarandos: So I think the core of it is that we're going to look at those opportunities with the same discipline that we do when we talk to movie producers and television networks about putting our content on the air.

Scott Schneeberger: We're super excited to have Dan joined the company. He just joined a couple of weeks ago and he's joined the joined US running 100 miles an hour.

Scott Schneeberger: Bela has said this publicly that our strategy remains variety and quality and she is doing an amazing job of bringing new fresh thinking to our content and our content organization, bringing Dan on board as a great example of that.

Theodore A. Sarandos: Great. The next question comes from Rich Greenfield from Light Shed about our film strategy. So for Ted, a recent New York Times article cited internal communications from new Netflix film chief Dan Lin stating, quote, "The aim is to make Netflix's movies better, cheaper, and less frequent. Lin wants his team to become more aggressive producers, developing their own material, rather than waiting for projects from producers and agents to come to them." Everyone wants to make better, cheaper films, but we find it hard to believe, we being rich, find it hard to believe that there is a magic formula. Help us understand the strategy shift under Dan Lin versus Scott Stuber.

Scott Schneeberger: We want to have a lot of movies, we want them to thrill, our audiences and they all have different tastes than we want them all to be great.

So we take a very audience centric view of what quality is and Dan knows that from having produced for us as the CEO right back he produced.

Scott Schneeberger: Oscar nominated films to Pope's for US he did avatar the last airbender for Us recently.

Scott Schneeberger: So he understands Netflix and the audience really really well and his success in live action and animation is very hard to defined and this is in the business. So we're thrilled he's doing it here.

Theodore A. Sarandos: Thanks for that question, Rich. I would send you back to that New York Times article because that was not a quote from Dan, and neither did we participate in that article. I would say, just to be clear, there is no appetite to make fewer films, but there is an unlimited appetite to make better films always, even though we have made and are making great films. We want to make them better, of course. We are super excited to have Dan join the company. He just joined a couple of weeks ago, and he has joined us running 100 miles an hour.

Venkatesh War: Great. Thank you Ted the next question comes from <unk> Venkatesh War from Barclays could you. Please provide an update on the engagement trends now that paid sharing is mostly behind you. So I'll kick it over to Ted first and go.

Venkatesh War: You can feel free to add on.

Theodore A. Sarandos: Well, it's important to note that we compete for every hour of viewing all the time every day everywhere we operate.

Theodore A. Sarandos: And when you think of that engagement reported is very important and that metric is important because again, it's the best indicator of customer satisfaction I know I. Just said this 10 minutes ago, but I'm going to repeat it.

Eight of the <unk>.

Theodore A. Sarandos: First a 11 weeks of this year, we've had the number one movie in nine of the last 11 weeks of this year. We've had the number one series and that's according to the Nielsen streaming data and for US that is what we are singularly focused on and we've actually seen and that wasn't data our share tick up a little bit even in this incredibly competitive space, where you've got.

Theodore A. Sarandos: Bella has said this publicly, that our strategy remains variety and quality, and she is doing an amazing job of bringing new, fresh thinking to our content and our content organization. Bringing Dan on board is a great example of that. We want to have a lot of movies. We want them to thrill our audiences, and they all have different tastes, and we want them all to be great. We take a very audience-centric view of what quality is, and Dan knows that from having produced for us.

Theodore A. Sarandos: A lot of folks competing for attention for time and for money.

Speaker Change: Yeah, John I think you can repeat that eight of 11 nine although as many times as you want as far as I'm concerned I'm going to close.

Speaker Change: As we have said.

Speaker Change: Due to the work we've been doing on password sharing where essentially cutting off some viewers who are not payers and therefore, we're going to loosen viewing associated with that so when you see our next engaging report you are going to see some impact to our overall absolute view hours as a result of that but despite that impact and despite the general pressure from strong competition that Ted noted.

Theodore A. Sarandos: As the CEO of Rideback, he produced the Oscar-nominated film, The Two Popes, for us. He did Avatar: The Last Airbender for us recently. He understands Netflix and the audience really, really well. His success in live action and animation is very hard to find in the business, so we are thrilled he is doing it here.

We think our engagement remains health that you can see it in the <unk>.

Operator: Great. Thank you, Ted.

Theodore A. Sarandos: The next question comes from Kanan Venkateswar from Barclays. Could you please provide an update on the engagement trends now that page sharing is mostly behind you? So I'll kick it over to Ted first, and Greg, you can feel free to add on.

Speaker Change: Stat that Ted indicated in terms of the Nielsen ratings and our modest growth in TV time in the United States, but we also wanted to do an apples to apples view of engagement. So we looked at the population non impacted by paid sharing will be called owner households, and in Q1 of 'twenty for the hours viewed per account were steady.

Theodore A. Sarandos: Well, it's important to note that we compete for every hour of viewing, all the time, every day, everywhere we operate. And when you look at that engagement report...

Speaker Change: With the year ago quarter. So that's a pretty good sign that our engagements holding up and it sort of cut through the noise around paid sharing and again I just want to reiterate we think we've got plenty of room to grow engagement right, we're still less than 10% of TV hours, even in our most mature <unk> matrix a markets. So there's tons of room of growth ahead of us.

Gregory K. Peters: Yeah, Ted, I think you can repeat that 8, 11, 9, 11, as many times as you want, as far as I'm concerned.

Operator: Thank you, Ted and Greg. I'm going to move us along now to a series of questions around plans and pricing and pricing strategy. So from Steve Cahill from Wells Fargo, Greg, as you continue to expand, do you think there is a ceiling for pricing? If so, how close are we to that ceiling in mature markets? And do you imagine Netflix having content here so that you can continue to expand your content genres and further segment your customer base? Yeah, I...

Speaker Change: Thank you, Ted and Greg I'm going to move US along now to a series of questions around plans and pricing and pricing strategy. So from Steve Kate Hall from Wells Fargo. Greg as you continue to expand do you think there is a ceiling for pricing. If so how close are we to that ceiling and mature.

Speaker Change: Markets and do you envision Netflix having content tiers. So that you can continue to expand your content genres and further segment of your customer base.

Gregory K. Peters: Yeah, we don't have a set position on a ceiling. I mean, sure, you can look at pay TV as a potential marker for where people have spent before, but we really don't think of it so much as defined by that. We see it as an opportunity to continue the process that we've been working on, which is to, you know, continue to try and invest wisely, and add more entertainment value.

Greg: Yeah, we don't have a set position on a ceiling I mean sure you can look at pay TV as a potential markers for you know where people have spent before but we really actually don't think of it so much.

Greg: As defined by that we see it as an opportunity to continue the process that we've been working on which is lets you know continue to try and invest wisely add more entertainment value and as we add more entertainment value. Then of course, we can go back to our subscribers and asked them to pay a little bit more to keep that virtuous cycle, moving and really the markers.

Gregory K. Peters: And as we add more entertainment value, then, of course, we can go back to our subscribers and ask them to pay a little bit more to keep that virtuous cycle going. And really, the markers for us in terms of the upside potential are more around, you know, the hours on TV that we are winning, you know, how many moments of truth we call it that we are winning. Again, you know, less than 10% in our even most mature markets.

Greg: <unk> for us in terms of the upside potential more around you know the hours on T. V that we are winning you know how many moments of truth, we call. It that we are winning again less than 10% and are even most mature markets. There's tons of room. There you can use total consumer spend on entertainment in the markets and categories.

Gregory K. Peters: There's tons of room there. You can use total consumer spend on entertainment in the markets and categories that we compete in. That's, you know, between 5 and 6%. So, there's a lot of runway still ahead of us to do a good job of making that investment happen, deliver more value, and then, you know, ask folks to pay a little bit more.

Greg: Areas that we compete in that's you know between five and 6%. So there's just a lot of runway still ahead of us to go do a good job at making that investment happened deliver more value and then ask folks to pay a little bit more.

Gregory K. Peters: The next question on pricing comes from Marshmallick of Bernstein. Can you please share progress on how the retirement of the basic plan is going in the UK and Canada? And is there any color you can share on when we could expect a similar rollout in the US?

Greg: Great.

Greg: Next question on pricing comes from Mark Shmulik of Bernstein can you. Please share progress on how the retirements of our basic plan is going in the UK and Canada.

Mark Shmulik: And is there any color you can share on if when we could expect a similar rollout in the U S. Correct why don't you take that one yeah.

Gregory K. Peters: Greg, why don't you take that? Yes, I do.

Gregory K. Peters: Yep. As we shared in the Q423 letter, we were planning on retiring our basic plan in some of our advertiser countries. We've now started that process in Canada and the UK, and very similar to what you saw us do with paid sharing, we're going to work hard to make this a smooth transition. Part of that is listening to our members before we make any further moves. So we've got nothing more to announce, and we really want to see how this goes.

Correct: As we shared in the Q4 'twenty three letter we were planning on retiring our basic plan in some of our ads countries. We've now started that process in Canada, and the U K and very similar to what you see when you saw us do with paid sharing we're going to work hard to make this a smooth transition part of that is listening to our members before we make any further.

Correct: So I've got nothing more to announce and we really want to see how this goes yes. We know that this is a change for our basic members, but we think we've got a strong offering for them, they're going to get more for less two streams versus one we've got higher definition, we've got downloads all at a lower price and of course, it goes without saying hopefully that members.

Gregory K. Peters: We know that this is a change for our basic members, but we think we've got a strong offering for them. They're going to get more for less. Two streams versus one. We've got higher definition. We've got downloads, all at a lower price. And of course, it goes without saying, hopefully, that members can always choose our ads-free plans as well if they prefer.

Correct: Can always choose our ads free plants as well if they prefer.

Spencer Adam Neumann: Thank you, Greg. A couple questions on overall capital allocations. So these would be for Spence, primarily from John Blackledge of TD Cowen. Excuse me, you mentioned an evolving capital allocation strategy in your investor letter with your new investment grade status. Can you please talk about the changes and how investors will see that change?

Speaker Change: Great. Thank.

Speaker Change: Thank you Greg.

Speaker Change: Couple of questions on overall capital allocation. So these would be for expense primarily from John Blackledge of TD Cowen.

John Blackledge: Excuse me you mentioned evolving capital allocation strategy in your Investor letter with the with your new investment grade status can you. Please talk about changes in how we invest.

John Blackledge: Investors will we.

John Blackledge: We will see that change.

Spencer Adam Neumann: Yeah, sure. Thanks for the question. It's really good.

John Blackledge: Yeah sure. Thanks for the question, it's really a it's really quite a modest evolution of our capital allocation strategy to better reflect our investment grade status and that's really what it is it's.

Spencer Adam Neumann: It's really quite a modest evolution of our capital allocation strategy to better reflect our investment grade status. And that's really what it is. It's, you know, we're still going to have the same financial policies and principles in terms of prioritizing profitable growth by reinvesting in our core business, maintaining a healthy balance sheet with ample liquidity, and returning excess cash beyond several billion dollars on the balance sheet of minimum cash and, you know, anything that we use for selective M&A to return to shareholders through share repurchase.

John Blackledge: We're still going to have the same financial policies and principles in terms of prioritizing.

John Blackledge: Prioritizing profitable growth by reinvesting in our core business, maintaining a healthy balance sheet with ample liquidity and returning excess cash beyond several billion dollars on the balance sheet, a minimum cash than anything.

John Blackledge: Anything that we used for selective M&A and returned to shareholders through through share repurchase. So really the only change is that now they were solidly investment grade we're going to you. While we will hold still several billion dollars of cash on the balance sheet, we won't.

Spencer Adam Neumann: So really, the only change is that now that we're solidly investment grade, you know, we're going to, while we will still hold several billion dollars of cash on the balance sheet, we won't have the same marker of two months of revenue, the equivalent of two months of revenue on the balance sheet, so it allows us to be a bit more efficient there. We also upsized our revolver, which was announced today, up to three billion from one bill, which also gives us more access to capital and better cash efficiency.

John Blackledge: Have the same marker of two months of revenue in the equivalent of two months of revenue on the balance sheet allows us to be a bit more efficient. There. We also upsized, our revolver, which was announced today up to 3 billion from 1 billion, which also gives us more access to capital and that our cash efficiency and then again any cash beyond that.

Spencer Adam Neumann: And then again, any cash beyond that will return to shareholders. We've historically been mostly a build versus buy company with select strategic kind of acceleration through M&A, and there's nothing right now planned, but that still is kind of our philosophy to build predominantly. And, you know, we're also going to kind of refinance our existing debt as those maturities approach, but we don't plan to kind of lever up through stock buyback. We want it; we really do value that balance sheet flexibility.

John Blackledge: I will return to shareholders, where we've historically been mostly a build versus buy company with select strategic kind of acceleration through M&A and that theres.

John Blackledge: Theres nothing right now planned but that still is kind of our philosophy is to to build predominantly and you know what.

Also going to kind of refinance.

John Blackledge: Our existing kind of dead.

John Blackledge: As those maturities approach, but we don't plan to kind of lever up through stock buyback, we want it we really do value that balance sheet flexibility.

Spencer Adam Neumann: Great. Thank you, Spence. I have one last question on capital allocation for you. This comes from Bikram of Baird.

Speaker Change: Great. Thank you spent a last question on capital allocation for you. This comes from Vic.

Vic: Vik around the Baird what are your latest thoughts on the appropriate level of content spend for the business beyond 2024, specifically in the past you have referenced a $1 one cash content spend to amortization ratio is that still the case and what would you need to see.

Spencer Adam Neumann: What are your latest thoughts on the appropriate level of content spend for the business beyond 2024? Specifically, in the past, you have referenced a 1.1 cash content spend to amortization ratio. Is that still the case?

Spencer Adam Neumann: And what would you need to see in an opportunity to meaningfully exceed that framework?

Vic: And an opportunity to meaningfully exceed that framework.

Spencer Adam Neumann: You know, it still holds true. It still holds true.

Vik: Yeah. It's still holds it still holds so there's still basically the short it is we're really kind of managing to that so as we said we we've been like so we've been focused on driving that acceleration of our revenue growth continuing to grow our business grow our profitability as we do that we would expect to continue to grow our content investment is.

Spencer Adam Neumann: So we're still basically, the short of it is we're really kind of managing to that. So as we said, we've been focused on driving that acceleration of our revenue growth, continuing to grow our business, and growing our profitability. As we do that, we would expect to continue to grow our content investment as we have historically in the highest impact areas, but also be quite disciplined there. So we want to grow our free cash flow.

Vik: We have historically into the highest impact areas, but also be quite disciplined there. So we want to grow our free cash flow. So we believe we can manage to that roughly 1.1 acts of cash content spend relative to expense on the P&L and that leads to.

Spencer Adam Neumann: So we believe we can manage that roughly 1.1x of cash content spend relative to expense on the P&L. And that leads to overall revenue growth, increased profit, profit margins, and growing free cash flow. And that still gives us a lot of opportunity to spend on all those content and entertainment categories that Greg and Ted have been talking about.

Vik: Overall revenue growth increased profit profit margins growing free cash flow and that still gives us a lot of opportunity to spend into the you know all of those kind of content and entertainment categories that that Greg and Ted I've been talking about.

Spencer Adam Neumann: We have a few more minutes left, so we'll wrap up with a few higher-level questions. The next one comes from Eric Sheridan of Goldman Sachs, and I think both Ted and Greg can tackle this one. The question is, what are your thoughts on the competitive impact of short-form video consumption? Sure.

Speaker Change: Thanks, Spence, we've a few more minutes left so we'll wrap up with.

Speaker Change: Two higher level questions.

Speaker Change: The next one comes from Eric Sheridan of Goldman Sachs, and I think both Tom and Greg can tackle this one.

Eric J. Sheridan: The question was what are your thoughts on the impact from short short form video consumption.

Theodore A. Sarandos: So I look at how what people watch and when they watch it have a lot to do with one another. What are the choices, and how much time do they have?

Eric J. Sheridan: So I look at how what people watch and when they watch it they have a lot to do with one another or what are the choices in how much time do they have so our version of short form is.

Theodore A. Sarandos: So our version of short form is more like giving our members the ability to watch 10 minutes of an episode of a series that they're binging right now if they only have 10 minutes. But some, and also when I look at the short form viewing on YouTube and TikTok, some of it is adjacent and quite complementary to our viewing. So our trailers or creators expressing their fandom for our shows like posting a Wednesday dance or ugly crying while watching one day, all those kinds of things that become viral sensations and actually increase the fandom of our shows.

Eric J. Sheridan: More like given our members the ability to watch 10 minutes of an episode of a C or a series of <unk> right now if they only have 10 minutes.

Eric J. Sheridan: Some and that was held in the when I look at the short from viewing on Youtube and Tic Toc.

Some of it is adjacent then quite complementary to arguing so our trailers or creators expressing their fandom for our shows like doing posting a wednesday dancer ugly crying watching one day, all those kind of things that become viral sensations and actually increase the fandom of our shows.

Theodore A. Sarandos: Now that being said, some of that viewing is directly competitive with us, the same as it is with other media companies who provide content to YouTube, by way of example. The art of this has always been finding the right balance of both. And I would point out that these platforms have been a way to have new voices emerge, and we've got our eye on them as well to try to develop them into the next generation of great storytellers on Netflix.

Eric J. Sheridan: Now that being said some of that viewing is directly competitive with US are the same as it is with other media companies, who provide content to you do by way of example.

Eric J. Sheridan: The art of this has always been finding the right balance of both.

So and I also would point out that.

Eric J. Sheridan: These platforms have been a way to have new voices emerge and we've got our eye on them as well to try to develop them into the next generation of great storytellers on Netflix.

Eric J. Sheridan: Great.

Gregory K. Peters: And I think for our final question, we'll take that from Dan Salmon of Newstreet Research. What is the opportunity for Netflix to leverage generative AI technology in the near and long term? And what do you think great storytellers should be focused on as this technology continues to emerge quickly? I'll turn that over to Greg.

Eric J. Sheridan: And I think for our final question, we'll take that from Dan Salmon of New Street research.

Dan Salmon: What is the opportunity for Netflix to leverage the generative AI technology in the near and long term. What do you think great storytellers should be focused on as this technology continues to emerge quickly I'll turn that over to Greg. Please.

Gregory K. Peters: Yeah, worth noting that we've been leveraging advanced technologies like ML for almost two decades. These technologies are the foundation for our recommendation systems that help us find, you know, the largest audiences for our titles and deliver the most satisfaction for our members. So we're excited to continue to develop and improve those systems as new technologies emerge and are developed. And we also think we're well positioned to be in the vanguard of adoption and application of those new approaches from our, you know, our just general capabilities that we've developed and how we've already developed systems that do all these things. We also think that we have the opportunity to develop and deliver new tools to creators to allow them to tell their stories in even more compelling ways. That's great for them.

Dan Salmon: Yes.

Greg: Yeah worth, noting I think that we've been leveraging advanced technologies like ml for almost two decades. These technologies are the foundation for a recommendation systems.

Greg: Help us find these largest audiences for our titles and deliver the most satisfaction for our members. So we're excited to continue to evolve and improve those systems as new technologies emerge and are developed and we also think we are well positioned to be in the vanguard of adoption and application of those new approaches from our or just general capabilities that we've developed and how.

Greg: Now we've already developed systems that do all these things.

Greg: We also think that.

Greg: That we have the opportunity to develop and deliver new tools to creators to allow them to tell their stories and even more compelling ways. That's great for them and it's great for the stories and it's great for our members.

Gregory K. Peters: It's great for the stories, and it's great for our members. And what should storytellers be focused on? I think storytellers should be focused on great storytelling. It is incredibly hard and incredibly complex to deliver thrilling stories through film, through series, and through games. And storytellers have a unique and critical role in making that happen. And we don't see that changing.

Greg: And what should storytellers be focused on I think storytelling should be focused on great storytelling is incredibly hard and incredibly complex to deliver thrilling stories through film through series through games and storytellers have a unique and critical role in making that happen and we don't see that changing.

Operator: Great. Thank you very much, Greg, and we are now out of time, so I want to thank you all for taking the time to listen to our earnings call. We look forward to speaking with you all next quarter. Thank you.

Speaker Change: Great. Thank you very much Greg and we are now out of time, so I want to thank you all for taking the time to listen into our earnings call and we look forward to speaking with you all next quarter. Thank you.