Netflix: Expanding content investment, leveraging content to drive price increases (Netflix 4Q23 conference call minutes)

Below is the summary of the Q4 2023 earnings conference call for Netflix.US. For the interpretation of the financial report, please refer to " Netflix: Content Dominator with Strong Fundamentals "

Q&A

WWE Rights:

Q1: Can you provide more details on the decision to acquire the WWE Raw rights? Is the current penetration rate of WWE audience on Netflix not enough? Can you provide more information on the financials or costs of this deal?

A1: This deal will bring WWE's RAW live shows to the company, which is a core content in sports entertainment and highly popular among fans. WWE has a huge fan base globally, which provides an opportunity for the company to expand its global influence. This collaboration also helps the company develop new advertising business. We won't comment on the financial benefits of any deal, but I can say that this is a long-term agreement and we are excited to partner with WWE.

Q2: Does the WWE deal align with the company's existing plan of spending around $17 billion annually on content production? Will this lead to an overall increase in expenses? Is there a possibility of creating supplementary programs similar to "drive to survive" around WWE?

A2: The company has been considering expanding into live event production for a long time, and this deal with WWE will be included in the company's annual $17 billion budget for content production. Unlike Formula One, WWE has a massive fan base in the United States and significant growth potential outside the US.

By partnering with WWE and creating supplementary content around other sports programs like Drive to Survive, Full Swing, the company can build its brand. The company has proven the success of this model, and we are very excited about working with WWE. WWE's content production aligns closely with the company's core business, and this collaboration is long-term.

Q3: Can we speculate that the company is now interested in global sports broadcasting rights such as NBA or UFC? Why are WWE's broadcasting rights more appealing to the company than these rights?

A3: WWE is different from other sports broadcasting rights as it is sports entertainment. It aligns closely with the company's core business and is a perfect choice for storytelling in sports. In terms of the deal itself, it has the options and protections that the company seeks in general licensing deals, and the global economic conditions are also very satisfactory to us. Therefore, do not consider this as any other signal of changes or shifts in our sports strategy.ARM and Paid Sharing:

Q4: How should we view ARM's future growth? Can median growth be considered a reasonable benchmark? What factors may bring upside or downside risks to this growth outlook?

A4: 2023 is an unusual year, primarily driven by membership growth as pricing and plans for that year are focused on launching paid sharing. For 2024, we expect healthy double-digit, currency-neutral revenue growth, including currency-neutral ARM growth. We anticipate continuing to increase membership through tiering plans, including the net additions in 2023 that will impact the full year, and our pricing philosophy remains unchanged.

As we have said, advertising will not be the primary driver of revenue growth in 2024. Our focus is on continuously improving our service. If we do well, we will have more members or more value, and we can occasionally monetize and build a large and profitable advertising business. Healthy revenue growth comes from the combination of quantity and ARM, that's the real output.

I won't provide specific ARM guidance as we manage overall revenue growth, but we expect ARM to be a part of that growth. ARM may fluctuate based on factors in any given year, such as exchange rates, the scale of our advertising coverage, and potential lag in monetization coverage, as well as our broader pricing and planning strategies for that year.

Q5: Once the benefits for subscribers and ARM start to decline in 2024 due to paid sharing, what are the biggest incremental opportunities to continue driving subscriber and revenue growth? What additional content or extra member benefits can provide the best return on investment to help sustain healthy revenue growth?

A5: The company is excited about the work it has done with the paid sharing product, which has been integrated into all aspects of the company's business, and the company is iterating and improving it as it would with any other important product experience. The company believes that this essentially builds a more efficient engine to convert the entertainment value created for members into revenue.

However, it is crucial to understand how this engine operates on the basis of healthy organic growth. The engine performs well in areas such as lower-than-expected customer churn and the unexpected impact of recent price changes.

If the company continues to improve its core product, this means that from the perspective of members, the diversity and quality of movies and shows will be enhanced, live event programming has been added to increase more value, and gaming will continue to grow. Through these offerings of entertainment value, the paid sharing and advertising work will create a more efficient engine to convert all value into revenue growth and support the conversion rate of potential markets in the years to come.

Q6: Overall and in all regions, the strong net addition of over 13 million users in the fourth quarter, but EMEA seems to have the highest increase. Are there any specific reasons, such as ad tiers, specific content, or localized pricing?A6: EMEA is a great example.

Firstly, excellent film performance and outstanding content performance are the foundation of EMEA's strong performance. Films such as "The Crown" from the UK, "Seaspiracy" and "City of Wolves" from France have all performed well in the EMEA region.

Secondly, better value conversion has been achieved through paid sharing solutions (cracking down on account sharing), which has also driven growth in the EMEA region. It's not just about net additions, the company's primary focus is on revenue growth. Due to the aforementioned factors, the EMEA region achieved a 13% currency-neutral growth in the previous quarter.

Q7: Regarding the benefits of paid sharing, how far has the company progressed? Does the company still believe that paid sharing will increase subscribers in the coming quarters? Is there a way to quantify the percentage of people out of 100 million households who have become additional members or paid subscribers?

A7: The company has already implemented pricing for paid sharing products, but like many other businesses, the company also sees a real opportunity to continue substantially improving the value conversion engine.

In the previous quarter, the company did indeed push forward interventions in new user regions and plans to continue implementing interventions in new markets in 2024. When considering conversions for certain specific groups, the company is increasingly inclined to find the most effective ways to convert, which may involve historical borrowers or new users of the service. The company will continue to improve this engine, which will continue to drive growth for the company in the coming years, not just in 2024.

Advertising Business:

Q8: What is the most important milestone for the advertising business in 2024? Does the company have target levels for MAUs or advertising member households? What improvements does the company hope to achieve in advertising technology and measurement? Does the company plan to launch advertising campaigns in new countries?

A8: The primary goal for the company's advertising business is user scale. It achieved a 70% QoQ growth in the previous quarter, and 70% and 100% YoY growth in the two quarters before that.

Currently, there are 23 million MAUs, and growth is expected to continue in the coming quarters. The target number of MAUs varies for each market, and there is no fixed number, but there is still significant room for growth in all markets where the company operates.

Additional work is being done to make advertising campaigns more appealing, such as adding streaming, high-resolution, and download capabilities, as well as collaborating with partner channels. The company knows that there is a lot that can be done in the advertising field and will continue to strive in the coming quarters.

The second priority is to enhance the company's advertising capabilities and improve the effectiveness of advertising. These capabilities include targeting and improving ad relevance. The company hopes to launch more advertising products, such as the recently launched series sponsorship ads. The company is working hard to enhance its ability to collaborate with advertisers and meet their needs.

The company is focused on the long-term revenue potential and is very optimistic about this field. It is a huge opportunity, as there is $180 billion in global advertising spending (excluding China and Russia), with $25 billion spent solely on streaming.The company is aware that advertising expenses will increase with the increase in user engagement, as the company has the most active user base.

In the existing operating countries, the company still has a lot of work to do to bring the advertising business to a mature level and have an impact on the business. The currently operating countries account for about 80% of global advertising spending. The company has already entered most of the opportunity-concentrated areas. However, there is still a lot of work to be done for the advertising business to have a substantial impact on the overall business.

Q9: How does the company view the effectiveness of continuing to use third-party relationships for advertising sales and investing in its own advertising technology and sales infrastructure? How much investment is required for the company to engage in more direct transactions with advertisers?

A9: The company has established a partnership with Microsoft in terms of advertising technology and has a small but growing team developing differentiated technology. In terms of advertising sales and marketing, the company is building its own team responsible for some sales and operational activities. The company plans to continue expanding these teams and has already formulated investment plans based on demand. Even at this level of investment and expected growth, the company expects the profitability of the advertising business to remain very high.

Q10: Later this week, T-Mobile's user benefit "Netflix On Us" will transition to a tier of Netflix with ads, unless users upgrade to an ad-free tier. Can it be reasonably assumed that the advertising-supported subscriber base in the United States will roughly double as a result? If so, how long will it take for the company to fill this ad inventory? Will this have an impact on the company's advertising business?

A10: The company has long used partner channels to increase subscription users, and this method is equally effective in increasing advertising members. The partnership with T-Mobile this time has brought new opportunities for the company to bundle advertising plans with low-cost partner products, which was previously unlikely to be achieved.

This bundled sales approach is a win-win situation for new advertising members, as they can get better packages than the base plan, with more streaming services and higher resolution downloads. Although rapid growth presents challenges in filling inventory, the company is more willing to face this challenge because it means the company is growing and then working hard to meet this growth and improve profitability.

Original Film and Licensed Content:

Q11: Is the company shifting the proportion of content spending towards more external licensed content? If so, how does this affect Netflix's operating profit margin?

A11: The company has always been open to obtaining content from other sources to provide to its members. The current profit margin expectations have already taken into account a healthy mix of original and licensed content. While some external licensed content may help the company save some expenses in program production, the company believes that original series can bring tremendous value, exciting content, and differentiation. The company has no plans to reduce investment in original content.A15: 全球和国内范围内的参与度趋势是稳定增长的。随着公司不断推出新的原创内容和独家授权内容，观众对 Netflix 的兴趣和参与度也在不断增加。付费共享对每位会员的参与度有积极影响，因为它提供了更多的观看选择和灵活性。会员可以根据自己的喜好和时间安排来选择观看内容，这增加了他们的参与度和忠诚度。公司将继续努力提供高质量的内容，以吸引更多的观众参与和享受 Netflix 的服务。A15: Netflix is very satisfied with the global and domestic engagement trends. This is a story about the shift from linear TV to streaming, and this trend has been ongoing. Netflix leads the way in movies, TV shows, and games. Engagement is affected by the impact of paid sharing, as the number of households sharing accounts decreases. As these households become independent and get their own accounts, and are attracted by Netflix's programs, engagement will normalize and continue to grow.

Netflix's engagement report shows the engagement of each program, with an average usage time of about 2 hours per day, which is a good performance. Some popular shows even attract a large number of viewers, approaching the level of hit shows. Netflix needs to continue to please its audience and do so in multiple languages, multiple countries, and worldwide. This is reflected in the engagement.

Games:

Q16: How is the investment scale of the gaming business considered? How has the engagement of the gaming business changed in the past year? What signals will be observed when it is time to monetize?

A16: The company is very satisfied with the performance of "Grand Theft Auto" (GTA), the engagement exceeds expectations, and it is currently the game with the highest download volume and user activity. The engagement of the gaming business has tripled in the past year.

Gaming is a huge opportunity, with consumers spending over $140 billion in the entire market, and the company believes it can build strong gaming and other content categories to provide entertainment value to subscribers.

In terms of investment scale, the company believes that sufficient resources need to be allocated to this project to ensure victory, while also recognizing that there is still much to learn and develop. The company wants to ensure that the investment scale will not increase significantly until it is proven that the investment can be effectively converted into member value.

Currently, the company's gaming business is still in its early stages, and the company's gaming investment currently only accounts for a small portion of the overall content budget.

Q17: Considering the excellent performance of "Grand Theft Auto" on the Netflix platform, will you reconsider focusing on exclusive game releases on Netflix? Will you try to offer games like "Candy Crush" or "Fortnite" on Netflix, following the success of "Grand Theft Auto"?

A17: The company has clearly recognized that popular game works or game series, as well as games based on well-known IPs (in many cases, these IPs come from the company's own movies and TV shows), are currently the most successful types of games. Therefore, the company will continue to look for suitable opportunities to bring these types of games to its members.

The company will also seek more excellent licensing and exclusive licensing, in order to be able to collaborate more, like the collaboration with "Grand Theft Auto" last quarter, and also including other successful games such as "Football Manager 2024," "Money Heist," and the upcoming "Viking River." The company will continue to execute this strategy and plans to do more of this in the future.Q18: Now that most of the password sharing issues have been resolved and recent price increases in the US, UK, and France have been completed, how do you view pricing changes in other regions around the world?

A18: During the launch of the paid sharing service, the company paused pricing adjustments and treated it as an alternative to price increases. Now, with the introduction of the paid sharing service, the company can resume its standard pricing strategy. Currently, the company has made pricing adjustments in the US, UK, and France, and the results have been better than expected.

The company will continue to monitor and evaluate when it can provide enough additional entertainment value to charge members more, thereby continuing to drive positive flywheel effects. The company can continue to invest in excellent film series and games to attract members and increase their stickiness to the platform.

Competition:

Q19: With Prime Video set to introduce ads at the end of this month and Amazon making it the default option for its Prime members, how will Netflix position itself with advertisers? Has Netflix considered making ads a default option, similar to Amazon's approach? What are the pros and cons of this decision?

A19: The company has considered making ads a default option but believes it is better for members, given the company's long-standing history without ads, to not force them to accept ads. The ad plan is beneficial for members who want more streaming, higher resolution downloads, and lower prices.

This strategy has been effective for members and has not faced significant opposition. In terms of competitive positioning, the company believes the market is large enough to accommodate multiple players. When competing for ad revenue, the company will leverage its own strengths, such as high viewer engagement and attention to culturally defining film and TV content, which will be an important area for brands to reach and differentiate themselves from competitors.

Q20: Is it possible for the company to expand its competitive advantage in the same or lower absolute content spending after 2024?

A20: The company believes that for top-tier shows, competition has always been fierce and will continue to be so. When top-tier works enter the market, everyone competes for them, which will maintain a considerable level of competitiveness.

The company is reinvesting at a very healthy rate, reflected in the growth of viewer engagement, retention rates, and subscriptions. Therefore, the company does not see now as the time to try to reduce content spending. The company emphasizes the importance of continuous improvement, excellent execution, and attention, as well as the gradual building of the business.

With the end of the strike, the company plans to restore content spending to the level of $17 billion in 2024. With accelerated business growth, the company aims to maintain healthy revenue growth and increase profits and profit margins over time, then reinvest a significant portion of the profits back into the business, namely increasing content spending. The company plans to increase content spending in a wise, prudent, and responsible manner while maintaining strict control over overall business performance.Business Expansion:

Q21: Considering the audience scale that Netflix has already established, how does the company plan to explore new areas to expand its exposure in vertical fields or media consumption formats?

A21: In the core business areas of movies, TV shows, and games, the company still has tremendous growth potential. In mature markets, the company occupies about 10% of TV time. Therefore, the company believes that there is no need to seek more ineffective growth opportunities in non-core areas, but rather focus on continuously improving and enhancing professional content to better meet the needs of its members.

The company also sees complementarity with some adjacent businesses, such as user-generated content platforms, which can serve as excellent marketing tools for professional content. Therefore, the company is focused on its core business of storytelling.

Asset Allocation:

Q22: What is Netflix's view on mergers and acquisitions (M&A) in the next 12 months? Is it possible for the company to engage in activities such as mobile gaming, acquisitions, or other types of M&A?

A22: The company's capital allocation strategy is "build rather than buy," and it will allocate capital responsibly. Currently, the company's total debt is between $10 billion and $15 billion, and it will provide sufficient funding for its business and new initiatives.

The company is considering selectively accelerating organic growth, such as investments in areas like advertising, live streaming, and gaming. The company is not interested in large linear assets that may or may not be acquired.

Q23: Netflix's capital allocation strategy is to maintain two months of revenue cash flow. Considering the current stock price, share repurchase activities, and upcoming debt maturities in the next few years, what is the optimal leverage ratio for the company to maximize shareholder value?

A23: The company's capital allocation strategy is to hold approximately two months of revenue in cash and return any excess cash to shareholders over time. Currently, the company has over $7 billion in cash and expects to generate approximately $6 billion in free cash flow by 2024, at current exchange rates. The company will continue to return excess cash to shareholders through share repurchases rather than attempting to predict stock prices.

Regarding the optimal leverage ratio, the company intends to maintain a low leverage ratio. This strategy has performed well in recent years, and the flexible balance sheet helps adapt to the ever-changing industry.

Outlook:

Q24: What are the key priorities for Netflix in 2024?

A24: The company plans to unlock greater potential and seize more opportunities in its core business. There are still hundreds of millions of households that have not subscribed to Netflix, so winning their support is crucial.

Additionally, the company aims to increase its share of TV time and improve entertainment content to attract more users. At the same time, the company will focus on enhancing its advertising business, optimizing standard pricing, to increase revenue and improve operating profit margins.

The company will continue to deliver content that people love, including movies, TV shows, games, and more, to drive conversations and entertainment. The company plans to launch a series of new programs, including Greiselda, a Narco spin-off starring Sofia Vergara, a new Avatar series, and more.Based on the best-selling science fiction novel "3 Body Problem" and the interesting new British series "The Gentleman".

In addition, the company will also bring back popular series such as "Bridgerton", "Emily in Paris", and "Squid Game", and release more exciting movies such as "Danville", Jennifer Lopez's new film "Atlas", and "Hitman", etc. The company would like to thank all the teams for their efforts to make all of this possible and is looking forward to the future.

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