Netflix Q3: We are making a lot of money, we are very satisfied with ourselves

On October 17th, North American time, after the release of Netflix's third-quarter financial report, the stock price rose by 4.8% in after-hours trading.

The continuous rise in stock price is driven by several factors. Firstly, Netflix added 5.1 million streaming subscribers in the third quarter, exceeding Wall Street's expectations by over 1 million. Secondly, the return of the Korean drama "Squid Game" in December is a positive factor, as user numbers are expected to increase during the holiday season.

Most importantly, the financial data looks very impressive:

• Revenue of $9.825 billion, a year-on-year increase of 15%;
• Operating profit of $2.909 billion, a year-on-year increase of 52%;
• Operating profit margin of 29.6%, compared to 22.4% in the same period last year;
• Net profit of $2.364 billion, compared to $938 million in the same period last year.

The net cash generated from operating activities in the third quarter was $2.3 billion, compared to $2.0 billion in the same period last year. The total free cash flow amounted to $2.2 billion, higher than $1.9 billion in the third quarter of the previous year. For the full year, the estimated free cash flow for 2024 is $6.0 billion to $6.5 billion, higher than the previous estimate of $6.0 billion.

Since the beginning of 2024, Netflix's stock price has risen by approximately 47%, showing strong performance. It seems to have overcome the impact of the Hollywood strike and the global pandemic, achieving a reacceleration of growth and once again controlling the pace.

As usual, we will follow up on Netflix's quarterly earnings conference calls. After watching for a while, we have become very familiar with Netflix's conference call style. When it's not going well, there is basically not much useful information, just repetitive talk. When it's good, they will heap praise on many shows, mentioning a bunch of show names.

Of course, starting from the second half of last year, there have been many new expressions, such as games and live streaming, but the expressions are mostly routine.

However, this time the financial report is different. How should I put it? Netflix seems a bit strong? And the use of positive and optimistic vocabulary, such as "very satisfied," "correct," and "exciting," is significantly more frequent, to the point of being a bit boring - "Yes, I know you guys are really amazing."

Therefore, when summarizing the conference call, we only retained some core information, deleted some lengthy content, and added a bit of implied understanding to the title.

Overall, this is a financial report that clearly shows a very positive momentum within Netflix. It's straightforward - we're strong, OK?

Below is the transcript of the Q3 conference call, with the following participants:

• Ted Sarandos, Co-CEO
• Greg Peters, Co-CEO
• Spencer Neumann, CFO

Implied meaning: People are attracted by low prices, and the ad package will remain at a low price, $6.99, which is a great value Q: Netflix has raised the price of its ad-free plan, while keeping the price of the ad-supported plan unchanged. Meanwhile, other streaming services have raised the prices of both plans?

Greg Peters: We hope to have a range of price points that can offer different features to different consumers, which is healthy.

Our core goal is to optimize long-term revenue, not ARM.

Another important point is the affordability and accessibility brought by ad-supported plans. For example, in the United States, for $6.99, you can get amazing TV shows, movies, and games.

Implicit meaning: Don't stick to the idea that movies have no cultural value if they don't go to theaters and go straight to Netflix.

Q: There is an eternal question about cinemas, that is, if movies are not shown in theaters, can they still lead the cultural trend?

Ted Sarandos: Netflix is engaged in subscription business, and from the performance, it can be seen that this is a pretty good business, attracting a large number of consumers and fans. The number of views of 10 popular movies premiered on Netflix has exceeded 1 billion, making them among the most viewed movies globally.

We hope to continuously add value for consumers, allowing them to pay for subscriptions and see movies that everyone is talking about without having to wait for months, which adds value.

What Netflix does for filmmakers is to bring the largest audience in the world to their movies and help them make the best movies of their lives. This could be any of the nine best picture nominees we have released so far, or any of the top 10 movies with box office revenues of up to $1 billion.

Netflix can make these Netflix-originated films part of culture.

Implicit meaning: Cheap goods are not good, Netflix's collaboration with creators will not change the prepayment model, and will not adopt a post-payment model.

Are there plans to reduce upfront payments and increase success-based post-payments?

Ted Sarandos: We like our model, and so do the creators. This allows our movies and shows to get a little better, have a greater impact on the business, rather than making them a little cheaper.

A few weeks ago, Netflix made it clear to all creators' agencies: We will not change the payment method.

Netflix was the first to adopt the prepayment model, which benefits creators and Netflix.

For creators, Netflix takes on all the financial risks, so they can focus on making the best version of the work they are creating. For Netflix, this model also allows us to attract the best creative talent in the world.

We have the right model, and we don't want to change it Implication: Be serious, artificial intelligence is not yet capable, whether it can produce good content still needs testing.

Q: Does the content generated by AI pose a threat to Netflix's business?

Ted Sarandos: There is a lot of hype about how artificial intelligence will impact or change the entertainment industry, both positive and negative.

I believe that entertainment and technology have always advanced hand in hand throughout history. For creators, it is crucial to be curious about what these new tools are and what they can do.

However, artificial intelligence needs to undergo a very important test. That is, in reality, can it help in producing better shows and better movies?

I have said it before, and I will say it again now, improving the quality of movies and shows will bring us great benefits, far more than the benefits of cost reduction.

So any tool that can enhance quality and make them better will actually be of great help to this industry.

Implication: I broadcast long dramas, it's good to have trailers, Netflix competes with YouTube, but it's okay.

Q: Do you consider YouTube a friend or an enemy?

Ted Sarandos: We directly compete with YouTube, vying for the time people spend on the TV screen, but the advantages are completely different.

Netflix is the best place for high-quality stories, the headquarters of the best storytellers. We will continue to invest heavily in quality content to increase engagement.

Netflix has a very wide coverage, with 600 million viewers. It also takes financial risks in content production, but our subscription model brings higher returns for creators. These higher returns allow them to make bolder investments in the next project.

However, interestingly, Netflix and YouTube are also complementary.

We put trailers on YouTube, which gets a lot of views, this is great because it also directly drives a lot of views on Netflix and allows creators to have a large audience on both platforms.

One of Netflix's strengths is that streaming is the future, giving consumers choice and control, which also gives Netflix significant influence and extremely rich viewing experiences in terms of viewers and creators, accumulating a huge fan base.

Netflix will continue to lead the industry in engagement.

Implication: We are satisfied with ourselves, IP games, advertising, live streaming, investment focus clear by 2025.

Q: What are the main investment focuses for 2025 and beyond? How have these focuses evolved in the past 12 to 18 months?

Ted Sarandos: We are very satisfied with our business, have formulated a plan to accelerate growth, and have achieved this plan, which can be seen in the 2024 financial report, with revenue expected to grow by 15% Operating profit margin will increase by 6 percentage points, and engagement will also increase, which is the best indicator of measuring member satisfaction. When people watch more content, they will stay longer, which is retention rate.

This year, Netflix maintained a very healthy interaction rate, with each member watching for about two hours per day.

At the end of the third quarter, Netflix released some hot works: "Perfect Couple," "Monster: The Story of Lyle and Erik Menendez," "Nobody Wants This."

We are very excited about the plans for the fourth quarter because it includes excellent works from the United States, Brazil, South Korea, the United Kingdom, and Germany, as well as some very exciting live events.

Looking ahead to 2025, Netflix will usher in the hottest new seasons of TV series: "Wednesday," "Squid Game," "Stranger Things," in addition to new series from Shonda Rhimes and Ryan Murphy, Rian Johnson's new movie "Knives Out," Guillermo del Toro's "The Shape of Water," and even the return of "Happy Gilmore." Therefore, we are extremely excited about the current situation and future development direction, hoping to build on this momentum.

Netflix has been producing original programs, and the core team is already very strong. Netflix has a team of the world's best creative talents, and its culture and operating model enable Netflix to create stories in more than 50 countries and make over 600 million viewers worldwide.

The 2025 plan will truly showcase the scale and ambition of Netflix, reflecting the investments made and the stable pace of planning.

Greg Peters: Netflix has made good progress. Firstly, popular works from around the world continue to emerge. Secondly, the product experience has been improved. Testing a more intuitive new version of the TV homepage has been effective. Thirdly, some new investments and initiatives will help expand and strengthen entertainment products, which will be incremental levers for growth in the coming years.

This includes games, such as Netflix IP-based games. For example, a Squid Game game is about to be released. Netflix is also expanding into the live streaming field, including NFL, WWE, John Mulaney, etc. In addition, it is increasing advertisements, mainly aiming to allow members to access platform content in a more cost-effective way with lower-priced plans.

Of course, considering that Netflix already has a considerable core business, it will take time to develop these new plans into significant positions, such as advertising. Our estimate is that advertising will start to become a significant contributor to revenue in 2026.

Spencer Neumann: Based on the exchange rates at the end of the third quarter, next year's revenue is expected to be around USD 43 billion to USD 44 billion. This means that compared to the expected target in 2024, the incremental revenue is about $4 billion to $5 billion, with a growth rate of about 11% to 13%. This is a combination of membership and ARM growth. We expect that most of next year's growth will be driven by membership growth, which is the strong net addition this year combined with the stable expected net addition for next year for the full year impact.

There are still hundreds of millions of households globally that have not become Netflix members, and Netflix will seize this opportunity.

Revenue is expected to maintain healthy double-digit growth, and the outlook is strong due to a more balanced mix of various driving factors