Continuing to invest efficiently, Netflix's vision goes beyond streaming media (3Q24 earnings call minutes)

The following is the summary of Netflix's performance conference call for the third quarter of 2024. For financial report analysis, please refer to " Netflix's Soaring Performance: How High Can It Fly? 》

I. Review of Core Financial Information:

II. Detailed Content of Financial Report Conference Call

2.1. Q&A Analysts' Questions and Answers

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

A: First of all, we are very optimistic about 2025. We have set out plans to accelerate growth and have successfully achieved this goal, as reflected in our financial performance in 2024. In 2024, we expect to achieve a 15% revenue growth and a 6 percentage point increase in operating profit margin. Engagement, as the best indicator of user satisfaction, has been strong. The more time users spend watching, the higher their retention rate, and the more discussions about Netflix increase, thereby driving the acquisition of new users. Users who watch more content also tend to value their subscriptions more highly.

Q：This year, our users on average watch about 2 hours of content per day, and overall engagement has increased in the first three quarters of 2024.

A：We have released some hit shows in the third quarter, such as "Perfect Couple," "Monsters: The Lyle and Erik Menendez Story," "Nobody Wants This." Looking ahead to the fourth quarter, we also have exciting major releases planned, covering content from countries like the United States, Brazil, South Korea, the United Kingdom, Germany, and we also plan to launch some very exciting live events.

Looking ahead to 2025 and beyond, we plan to continue developing on the foundation of our existing successes. After over a decade of original content production, our core business is quite solid. We have a world-class creative team that can tell compelling stories in over 50 countries and attract over 600 million viewers globally. The 2025 lineup of shows will once again showcase our scale and ambition, reflecting our continued investment and pace in content production.

In 2025, viewers can look forward to new seasons of our most popular series, such as "Wednesday," "Squid Games," "Stranger Things," as well as new series from Shonda Rhimes and Ryan Murphy, a new installment in Rian Johnson's "Knives Out" series, Guillermo del Toro's "Frankenstein," and even the return of "Happy Gilmore." Therefore, we are very excited about the future direction.

Furthermore, we have always been committed to continuously improving our services, and this focus has helped us achieve success over the past decade. We also hope and believe that this strategy will continue to be effective in the coming decades. As for top priorities, our primary task is to enhance our core movie and series content, as Ted mentioned, we have made great progress in this area.

Secondly, we are also sowing seeds for future growth by investing in emerging forms of entertainment to expand and strengthen our entertainment products. These new initiatives include games developed based on Netflix intellectual property, such as "Squid Game" and "The Ultimatum," as well as new installments of classic game series like "Monument Valley 3."

Additionally, we have expanded into the live streaming field, planning to launch events such as the Tyson-Paul boxing match, NFL games, and WWE's 52 weekly matches starting in January 2025. These initiatives will help us further enhance user engagement and provide users with more choices.

While these new initiatives will take time to make a significant financial contribution to the company, we have already seen initial results in the advertising business. Despite the modest start of the advertising business, its revenue has nearly doubled annually, and it is expected to become an important revenue source in the coming years.

Overall, in the regions and countries where we operate, consumers' total spending in the entertainment sector exceeds $600 billion, and we currently only account for 6% to 7% of that. Therefore, if we continue to focus on improvement, we will have significant room for growth.

Q: Can you further explain the components of Netflix's future revenue growth, especially the roles and impacts of organic user growth, average revenue per user (ARM) growth, and advertising revenue?

A: When looking ahead to future growth, the investment focus is on driving core growth factors. Based on the guidance for 2025, we expect revenue next year to be between $43 billion and $44 billion, based on exchange rates at the end of the third quarter. This implies a base growth of about $4 billion to $5 billion compared to the expected 2024, with revenue growth of about 11% to 13%.

This growth mainly comes from membership growth and average revenue per user (ARM) growth. Most of the growth next year is expected to be driven by an increase in membership. This is mainly due to strong net additions of members this year and the expected healthy net growth next year. Additionally, we will continue to expand this market through outstanding content plans for 2025 and improvements in meeting consumer demands.

The growth in average revenue per user (ARM) comes from package optimizations, pricing adjustments, and advertising revenue growth. While advertising revenue is not yet a major driver of growth, we expect it to become a more significant revenue contributor in 2025. Overall, we expect revenue growth to remain in the double digits and achieve more balanced growth through various driving factors

Q: Given that the competitive environment is easing, how do you view the factors affecting the future operating profit margin?

A: We have sufficient room in the long term to increase the profit margin. We are very satisfied with the performance in 2024, expecting the profit margin to increase by 6 percentage points. We maintain our approach to profit management. In the process of growth, we set profit targets and achieve these goals by investing in improving service quality. We prioritize keeping the growth rate of costs lower than revenue and manage the company's operations like shareholders.

The annual growth rate of profits may vary due to strategic opportunities, exchange rate fluctuations, and other factors, but our goal is to increase the profit margin every year. The guidelines set for 2025 are consistent with this strategy. In 2024, our profit margin growth exceeded expectations, so we hope to continue providing more value to members, strengthening and developing the business while maintaining this positive trend. This includes continuing to invest in core film and television content, enhancing product discovery features, and expanding into new areas such as live streaming, advertising, and gaming. We believe that this approach lays a solid foundation for the 2025 plan and provides ample room for profit margin and absolute profit growth in the coming years.

Q: Please discuss the dynamic factors driving the net loss of members in the Latin American region in the third quarter and further explain the driving factors for the early growth in the Latin American region in the fourth quarter.

A: Overall, the business trends in the Latin American region remain healthy. Revenue in the third quarter increased by 9% year-on-year, which is a key indicator of our top-line growth. Revenue year-to-date has grown by 10% on a reported basis, consistent with the 9% growth in 2023. Compared to last year, the exchange rate pressure faced in 2024 is greater, so the actual growth calculated in local currency accelerated in 2024 compared to last year.

The slight decrease in the number of members in the third quarter was mainly due to price adjustments in some major markets in Latin America, which typically suppress member growth in the short term. However, early data for the fourth quarter shows a significant rebound in the number of members, with strong performance in member growth in the Latin American region. It is worth mentioning that if the third quarter were to continue for one more day, the net addition of members would no longer be a decrease but an increase. Overall, we remain optimistic about the outlook.

Furthermore, the Latin American region is about to see a series of very strong content lineups in the early fourth quarter. Brazil's "Senna" is expected to become a global hit, especially popular in Brazil. Colombia's "A Hundred Years of Solitude" and the film "Pedro Páramo" directed by Rodrigo Prieto in Mexico are highly anticipated works. Therefore, we are confident in the creative output and business environment in the Latin American region

Q: Will the advertising business become the main growth driver after 2025? How does the user engagement supported by advertising compare to non-advertising users? What is the current Cost Per Mille (CPM) in the US market? How should we view the improvement in the monetization capability of advertising inventory?

A: There are two primary priorities regarding the advertising business. Firstly, there is a need to expand the membership levels of advertising to achieve an attractive scale for advertisers in each market. Secondly, enhancing the capability and attractiveness of the advertising business to better monetize inventory.

Firstly, in terms of membership growth, over 50% of users in Q3's advertising plan are registered users of the advertising country (up from 45% in the previous quarter), indicating a steady growth in the membership base of advertising levels with a quarter-on-quarter growth rate of 35%. It is expected that by 2025, the company will reach a critical scale in all 12 advertising markets, with the viewing time of advertising level members similar to non-advertising level members, indicating a healthy level of engagement.

In terms of monetization, the company is enhancing its advertising services through various initiatives, including the upcoming launch of a one-side ad server in Canada, with plans to expand to other markets by 2025. Additionally, the company has established partnerships with Trade Desk and Google, and is introducing more advertising formats, features, and measurement tools. Despite work still in progress, the company remains confident in the growth prospects of the advertising business.

Our team has made significant progress in the advertising business, although there is still much work to be done. The advertising business relies on highly engaging content for users, which is equally important as our subscription business. Advertisers want to connect with stories that are discussed and debated by the audience, as well as events that people engage with. Therefore, when we launch popular works, the enthusiasm and discussion of this audience is exactly what advertisers want.

From a broader perspective, our goal for the next five to ten years is to combine the advantages of digital advertising, such as precision targeting, personalization, and relevance, with the best elements of TV advertising, including enhanced creative forms, deeply engaging audiences, and synchronized displays with series and films that define culture. Our current advertising revenue growth trajectory is good, and the CPM (Cost Per Mille) is at the high end level of the premium connected TV advertising market.

Although advertising will not be the main source of revenue in 2025, as our current user base and advertising inventory expansion speed are faster than the monetization capability, we have seen momentum in monetization and opportunities to narrow this gap. We expect advertising revenue to double in 2025 year-on-year, although the base is small, but this year's US advertising sales commitments have grown by over 150%, demonstrating the huge potential of the advertising model on premium videos.

Q: What are the initial experiences and gains from the cooperation with Trade Desk and DV 360? Netflix has decided to use Trade Desk to drive demand, but in the long run, will the company establish its own closed ecosystem (walled garden)?

A: First of all, Netflix has made positive progress in its cooperation with Trade Desk and DV 360 in UCAN (United States and Canada) and LATAM (Latin America) regions. Netflix has launched private marketplace advertising and gradually increased its programmatic advertising capabilities. While these partnerships have had a positive impact on advertising CPM (cost per thousand impressions), the growth in demand has also brought Netflix more ad inventory (available ad space), which means that although advertising revenue is steadily increasing, the pace of ad monetization has not fully caught up with the rapid expansion of ad inventory. Therefore, this growth potential will gradually come into play in the coming years, and advertising revenue is expected to steadily increase in the long term.

As for the issue of the "closed system," Netflix's strategy will not be overly rigid and will continue to adjust based on business progress and the evolution of the advertising ecosystem. This flexibility will help the company continue to enhance its ad monetization capabilities through partnerships with Trade Desk and other partners.

Q: How did last year's Hollywood strike affect the release schedule, user engagement, and retention rate for the 2024 programs? Was the impact significant in the UCAN region (United States and Canada)? If the impact has not subsided, when do you think the release schedule can return to normal?

A: This strike has had some significant impact on our program scheduling. Our goal has always been to ensure a steady output of excellent TV shows, movies, and gaming content throughout the year, so that members can look forward to the next program being just as exciting after finishing one. However, the content rhythm in the first half of this year was far from the smoothness we expected, mainly due to the strike-induced shutdowns, especially in the UCAN region (United States and Canada), but in reality, this impact has also affected productions globally.

Currently, we are gradually returning to a normal program output rhythm. Although the production progress of TV shows and movies has not fully recovered, the situation is gradually improving. For example, "Bridgerton" has smoothly entered the schedule for the first half of the year, but many highly anticipated returning series such as "Cobra Kai," "Emily in Paris," "Outer Banks," as well as new series "Perfect Couple," "Nobody Wants This," have been postponed to the end of the third quarter. These delays are indeed mainly due to the impact of the strike.

As for movies, although they have also been impacted to some extent, the current recovery process is satisfactory, especially with changes in the leadership team and adjustments to the release schedule. We are confident in the upcoming content for the fourth quarter, including works such as "Carry-On," "Piano Lesson," "Spellbound," "Six Triple Eight," "Emilia Perez," among others. By 2025, we can almost completely return to normal rhythm and will launch more blockbuster works, such as a new season of "Knives Out" and Guillermo del Toro's "Frankenstein." , such as the Russell Brothers' "Electric State".

Q: According to Nielsen's data, Netflix's user engagement in the United States has been stable recently. With the full implementation of the paid sharing plan, when do you think the user engagement in the United States will increase again? Do you think the exaggeration of live content will become a major driving force?

A: Compared to the same period last year, the overall viewing time in the first half of 2024 increased by about 1%. User engagement remains good, as we mentioned before, with each user watching for two hours a day. At the same time, there has been an improvement in engagement at the household level of account owners, which makes us very satisfied.

In terms of the contribution of live content, Netflix has about 200 billion hours of viewing time each year. Although only a small part of it is live content, the value of these contents is extremely high. Events like the Tyson vs. Paul boxing match and the Christmas NFL games will be the highlights, attracting a global audience to watch together, which is the appeal of live content.

Furthermore, the growth in user engagement will come from our scripted content, unscripted programs, documentaries, and various popular content, including the increased live content. We will also introduce more live content in WWE events and John Mulaney's new program. Although live content is challenging to surpass on-demand content, these activities will still contribute significantly to growth potential.

Q: Is it possible for a movie to trigger a cultural trend without being shown in theaters?

A: We are a subscription-based entertainment company, and this business model has proven to be very successful. From our data, it can be seen that Netflix has attracted a large consumer and fan base. Our top ten films have over 1 billion views globally and are among the most-watched films in the world. We hope to continuously add value for subscribers by allowing them to watch films that everyone is talking about without waiting for months, thus bringing more value to their subscription amount.

For filmmakers, we bring the largest global audience to their works. Whether it's the nine best picture nominees we released or any of the top ten films that are like box office hits, we believe we can help these works continue to make waves in cultural trends.

Q: Do you plan to adjust the talent compensation structure, reduce the upfront payment ratio, and pay more based on project success in the future?

A: Our compensation model is widely popular and has gained broad recognition from talents. For the company, rather than focusing on cost reduction, it is more important to improve the quality of film and television works. A few weeks ago, we also made it clear that we do not intend to adjust the existing compensation structure. In fact, Netflix is a pioneer in the prepayment compensation model, which is not only beneficial to creators but also very beneficial to the company. Through prepayment, Netflix takes on financial risks to ensure that creators can fully dedicate themselves to the creation of their works. For us, this model effectively helps us attract the world's top creative talents Despite this, we will continue to provide customized cooperation models for some talents based on specific circumstances. However, this situation is rare because most talents prefer the prepayment model. Therefore, we believe that the existing salary structure is very reasonable, and there are currently no plans to change it.

Q: What prevented Netflix from raising prices during one of its strongest content periods (from the end of the fourth quarter to 2025)?

A: We aim to provide more value to users each quarter and improve service quality through continuous efforts. We regularly evaluate key metrics such as user engagement, acquisition rate, and retention rate to assess whether we have achieved our expected goals. If the performance is satisfactory, we will choose the right time to raise prices, reinvest the funds obtained, and maintain this positive cycle.

In the past quarter, we have made price adjustments in multiple countries, including certain regions in Europe such as Scandinavia and Japan, and these adjustments have yielded the expected results. In our upcoming plans, we will also implement similar pricing strategies in Spain and Italy. Of course, we will continue to monitor market signals and choose the appropriate timing for adjustments in other regions.

Looking ahead, we believe there is still significant monetization potential in the market. As long as we continue to enhance the diversity and quality of film and television content, the outlook is very optimistic. We are excited about the upcoming exciting content, such as live events, the Tyson-Paul boxing match, and NFL games on Christmas. We believe these will be important drivers of future growth. If we can continue to succeed in these areas, we can further drive long-term revenue growth.

Q: The company has raised prices for non-advertising plans, but the price of the advertising-supported plan remains unchanged, while other streaming services have increased prices for both. How do you view the price difference between the advertising-supported plan and the non-advertising plan?

A: When pricing, we focus more on the value provided to users rather than direct comparisons with competitors. We aim to offer a healthy range of pricing to provide different features for different consumers while avoiding excessive complexity and decision fatigue.

Another key point to note is that our core metric of focus during pricing is optimizing long-term revenue, not just average revenue per user (ARPU). We evaluate our performance through various signals, with one important indicator being the proportion of registered users between different pricing options, indicating the health of our pricing strategy.

For the advertising-supported plan, we appreciate its low-price advantage and the broader user coverage it brings. Taking the U.S. market as an example, the $6.99 pricing offers great value, allowing users to access a wide range of TV shows, movies, and games, as well as support for two streams and HD downloads. This is a highlight of this plan.

Therefore, considering the above factors, we will continue to evaluate based on market feedback, strive to provide diverse pricing options for users, ensure appropriate feature combinations at reasonable price points, and continuously optimize and improve based on effectiveness

Q: Can you share the progress of gradually phasing out basic plans in the UK, Canada, the US, and France, and whether it is expected to gradually phase out basic plans in other advertising markets in the future?

A: The regions mentioned currently demonstrate how we continuously optimize our packages and pricing strategies, especially expanding within the low-price range of advertising plans while maintaining the simplicity of package choices. I believe each package must prove its value and provide enough value to consumers, otherwise it will only add complexity and the burden of a "choice tax."

The adjustments we have made in this regard are a good example of how we understand consumer reactions through exploratory adjustments and assess whether these changes are beneficial to the business. So far, this change is very much in line with our expectations. As mentioned, we will implement this strategy in another country, but apart from that, there is currently no more to add.

Q: The company expects to generate hundreds of billions of dollars in free cash flow in the coming years. How does the company plan to use these funds? Does the company plan to maintain a minimum net leverage level?

A: We are indeed looking forward to generating hundreds of billions of dollars in free cash flow in the coming years. This is a great challenge for us, but it will not change our capital allocation policy. Our primary task is to promote profitable growth through reinvestment while maintaining sufficient liquidity. Secondly, once we have enough cash on hand, the remaining funds will be returned to shareholders through stock buybacks. We will also engage in selective M&A activities, but the main focus is on increasing shareholder returns through buybacks.

Recently, we have taken some tactical actions, expanding our revolving credit facility to $3 billion to maintain additional liquidity when needed. In addition, we have issued $1.8 billion in investment-grade bonds to repay debt maturing in 2025. Nevertheless, we have no plans to repurchase shares or pay dividends by increasing leverage, as we highly value maintaining the flexibility of our balance sheet. Therefore, in short, we do not have a target for a minimum leverage ratio.

Q: Do you think YouTube's growth in market share in the TV consumption sector is an opportunity or a threat? Will user-generated content (especially content generated through AI) pose a threat to your company's business?

A: Regarding AI, although there is much discussion and hype about how AI will impact or change the entertainment industry, whether good or bad, history has shown that entertainment and technology have always closely collaborated. Therefore, creators need to maintain curiosity about these new tools and understand their potential. However, AI must pass a crucial test, which is whether it can truly help produce higher-quality film and television works. If AI can enhance the quality of works, rather than just reduce costs, it will greatly promote the development of the entire industry.

As for YouTube, Netflix is indeed competing with it for viewers' viewing time, especially on television screens. However, Netflix and YouTube have completely different advantages Netflix focuses on investing in ambitious high-quality content, which gives us an advantage in user engagement. Netflix is the best platform for telling high-quality stories because we provide creators with a broad audience base, take on the financial risks of content production, and offer higher returns to creators through a subscription model, which in turn drives their greater investment in new projects.

While Netflix and YouTube compete in some aspects, they also complement each other. For example, Netflix releases trailers on YouTube to drive traffic to the Netflix platform. Therefore, despite the competitive environment, we believe in Netflix's model of providing high-quality content for consumers and creators, which can sustain steady business growth. Furthermore, Netflix focuses on users not yet covered by YouTube or other platforms, indicating that we still have significant room for development.

Overall, by collaborating with top creators, Netflix continues to focus on high-quality, ambitious content creation, meeting consumer needs and creating significant value for creators and shareholders.

Q: Without the need to bundle with other streaming services at present, would Netflix consider partnering with smaller streaming platforms to offer complementary content (such as live sports events) for economic benefits through subscription revenue or ad revenue sharing?

A: We see many competitors seeking growth opportunities through bundled services, which is indeed a relatively safe business model for some traditional media companies. Given the relatively narrow content range and limited user engagement of these services, replicating some old media models like bundling content may be an appropriate strategy. But our focus is on continually adding more value to our packages - offering the best series, movies, and now games at a highly competitive price on one platform.

We have first-run movies, popular original series from around the world, and these series are the most-watched and most discussed content. And you no longer need to go elsewhere for unscripted shows, competition shows, top-notch animated series, animated movies, even the best stand-up comedy performances and increasingly popular live TV shows, such as the upcoming Brady Comedy Roast, Tyson-Paul boxing match, NFL games on Christmas, and even WWE next year. So we are focused on our ability to reach consumers and continue to enhance the overall value of this package.

It is also worth noting that even in our largest market, our share of TV viewing time is still less than 10%. This means we have significant growth opportunities. By continuing to invest in our content and improving the diversity and quality of content, we can continue to expand our user base. In addition, we are currently building many new capabilities such as advertising, gaming, live streaming, all of which can provide more value to our members. So before taking on any new projects, we must first do these things well Based on our experience, if we can focus on providing more entertainment value to users every day, we will have an extremely successful business.

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