Netflix: Prudent investment, the entertainment outlook is still very broad

The following is a summary of Netflix's Q4 2024 earnings call. For an interpretation of the earnings report, please refer to The Dream That iQIYI Can't Chase? Netflix is "Flying High" .

1. Core Information Review of the Earnings Report:

2. Detailed Content of the Earnings Call

2.1. Key Information from Executives:

(1) Business Progress

1) Content Creation and Copyright:

• Content performance is strong, with various types of content driving growth, such as the popular series "Squid Game 2" and sports events.
• Cautious attitude towards sports event copyrights; although some events have good viewership, the economic costs of major league sports event copyrights are high.
• Secured the copyrights for the FIFA Women's World Cup in 2027 and 2031, optimistic about its development potential.
• Film distribution strategy remains stable, primarily focusing on Netflix premieres, with some films choosing theatrical releases to meet specific demands.

2) Advertising Business:

• Rapid growth in advertising users, with over 55% of advertising package registrations in Q4 2024, a quarter-on-quarter increase of about 30%.
• Continuous upgrades in advertising technology, with the self-service advertising stack successfully launched in Canada, planning to promote it in the U.S. and other countries by 2025, aimed at improving the quality and revenue of the advertising business.

3) Gaming Business:

• Initial progress in the gaming business, launching multiple games, with some achieving notable success, such as "OXENFREE II" and "Grand Theft Auto."
• Future focus will be on narrative games based on Netflix IP, cloud gaming, etc., with positive impacts on user acquisition and retention already observed.

3. Financial Performance

3.1. Financial Metrics:

Both Q4 and full-year performance for 2024 exceeded expectations, with Q4 2024 earnings per share (EPS) at $4.27 and revenue reaching $10.2 billion;

Full-year EPS was $19.83, with revenue of $39 billion. Full-year revenue guidance is $39 billion.

Q1 2025 EPS guidance is $5.58, with revenue guidance of $10.416 billion;

3.2. Costs and Profits:

Content cash expenditures are increasing for 2024-2025, estimated at about $17 billion in 2024 and approximately $18 billion in 2025, still not reaching a balanced expenditure stateBy reasonably controlling costs and making precise investments, the operating profit margin is expected to improve in 2025, with revenue growth projected at 12% - 14%, and expenses showing high single-digit growth.

3.3, Foreign Exchange Hedging: Approximately 60% of revenue comes from non-US dollar currencies, with about 50% hedged on a 12-month rolling basis. The hedging aims to smooth out foreign exchange impacts and reduce volatility, with the company placing more emphasis on managing operational results through natural hedging, pricing, and cost structure.

2.2, Q&A Analyst Questions

Q: Considering the safety of actors and crew, has production in Los Angeles been affected by wildfires? If so, can you quantify its impact on cash content spending this year?

A: The wildfires have been a difficult time for many in Southern California, with company employees and many in the industry being significantly affected. However, there have been no noticeable delays in project delivery, and there is no significant impact on cash for 2025. The company's goal is to proceed as planned while ensuring safety and taking care of those affected by the fires.

Q: Of the 19 million new subscribers, did most come from the Jake Paul event and Christmas football matches? How does user churn or retention after the Christmas matches compare to normal post-holiday levels?

A: Not necessarily; content categories and regions have performed strongly, and individual programs or events are not the main drivers of new subscriptions and user engagement. Most of the net new users for the quarter came from a rich global content mix. The company focuses on content diversity and quality, and the retention performance of users who joined due to specific events or programs is similar to those who joined due to other popular content, with strong execution across the board for the quarter.

Q: Since the last earnings report, the US dollar has strengthened, and the company has indicated that profit margins may not meet expectations during a strong dollar period. How much foreign exchange volatility can the company successfully hedge in 2025? After hedging, how can the impact of currency fluctuations be best estimated?

A: About 60% of the company's revenue comes from non-US dollar currencies, with approximately 50% hedged on a 12-month rolling basis. Hedging is only a short- to medium-term solution, and the company places more emphasis on managing operational results through natural hedging, pricing, and cost structure. The hedging plan aims to smooth out foreign exchange impacts, reduce volatility, and avoid short-term business fluctuations to facilitate long-term investments.

Q: The advertising user base is growing rapidly, and advertising technology has been advancing for nearly a year. What are the biggest gains and obstacles for advertising monetization in 2025?

A: The advertising program attracts more users due to low prices, is highly popular, and has good user engagement. The advertising scale target for 2025 has been achieved, with the focus now on optimizing advertising services to improve monetization levels. The company is making good progress in advertising revenue growth, and while there is a lot of work to be done, no significant obstacles have been identified, and there is confidence in the continued growth of advertising revenue.

Q: Does the company have the technology and tools needed to significantly expand its advertising business scale, and can it move from the startup phase to the development phase?

A: In 2025, the company will transition from the startup phase to the development phase, with the self-service advertising stack performing well after its launch in Canada, and plans to promote it in the United States and 12 other advertising business countries starting in April 2025Using a self-owned advertising server can provide more flexibility, lower the threshold for ad placement, improve the buyer experience, and offer advertisers more key features, enhancing user experience and ad relevance. The company is confident in the development of its advertising business.

Q: Does the high viewership of NFL games make Netflix more interested in purchasing the rights to broadcast an entire season of sports events? Or does it still consider that purchasing the rights to an entire season of sports events lacks appeal?

A: The viewership of NFL games is impressive, but the economic cost of purchasing the rights to major league sports events for an entire season remains high. If there is a proposal that reasonably aligns the economic interests of both parties, the company would consider exploring it, but currently, the company is more focused on live event broadcasting, with sports being just one part of it.

Q: Do the results of boxing matches and WWE Raw affect the company's decision to purchase rights for events like UFC?

A: WWE had a good start, attracting about 5 million viewers in the first week, with increased viewership during non-live periods. The company will consider the economic benefits and hopes to bring value to sports events, attracting a younger and more global audience, which needs to be reflected in the rights transactions.

Q: Can you elaborate on the decision to purchase the rights for the 2027 and 2031 FIFA Women's World Cup? What features of this event are attractive? How does this fit into the company's live sports strategy?

A: The Women's World Cup aligns with the company's strategy, as the 2023 event set multiple viewership records, and women's sports are becoming increasingly popular. The event lasts for a month and is full of drama. The company is pleased to be the broadcasting platform for the event and has the opportunity to tell related stories.

Q: Does "Carry - On" prove that movies can succeed without theatrical releases? Was the marketing investment for this film unusually high, or did it gain traction naturally through the Netflix platform?

A: "Carry - On" is an example of a successful Netflix original film, with moderate marketing investment, and the platform's own promotional capabilities and social channels played a significant role in its success, proving that the Netflix platform can attract a large audience and become a cultural hotspot.

Q: Does the agreement for "The Chronicles of Narnia" to be released in theaters in 2026 indicate a shift in the company's overall theatrical distribution strategy?

A: The company's core strategy is to provide Netflix exclusive premiere films for its members. The IMAX theatrical release of "The Chronicles of Narnia" is just one strategy to meet award selection, film festival requirements, and promotional needs. This is a two-week special event, different from other distribution methods, and collaborating with IMAX simplifies the distribution process.

Q: How does the company plan the rhythm and extent of future price increases, especially in the largest markets? What are the decision-making criteria for price increases in different regions and packages?

A: The company's pricing philosophy remains unchanged. After providing more value to members and improving the diversity and quality of entertainment content, price increases are determined based on signals such as member engagement, retention rates, and acquisition rates. The price increase progress in multiple regions over the past few quarters has been smooth, and the company believes that the entry price is attractive and is confident in long-term monetization opportunitiesPrice increases need to be supported by high-quality content and high user engagement. By 2025, the company will have rich content with numerous popular series and movies.

Q: According to third-party data, user engagement is stable. Is the growth of user engagement a strategic focus for Netflix?

A: The company aims to entertain global audiences and measures this through user playback and retention. The team is committed to providing diverse high-quality content, with current annual streaming hours for users at approximately 200 billion hours, averaging about 2 hours of viewing per person per day, indicating room for growth.

The increase in engagement is related to other key business metrics. Starting from the second quarter of 2025, the company will release user engagement reports twice a year alongside its financial reports, with the next report scheduled for February.

Q: What are the key steps to compete for user engagement with short video platforms?

A: The company's goal is to attract all audiences, including younger viewers. The core of the company is professional long-form video content, but it also pays attention to new creators in the short video space. By launching popular projects, the company aims to attract viewers and enhance user engagement. The company plays a unique role in the ecosystem, providing development space for creators, meeting consumer viewing needs, and supporting high-quality content creation.

Q: How do you assess the company's progress in the video game sector? What are the trends in user engagement? When do you expect video games to impact subscriber growth or retention?

A: The company has made early progress in gaming, launching several games, some of which have performed well. The company will focus on narrative games based on Netflix IP, cloud gaming, and children's games. It has already seen a positive impact of games on user acquisition and retention, although the current impact is small, it is expected to expand as investments increase. The company will steadily expand its gaming business.

Q: The company's cash content spending is about $17 billion in 2024 and about $18 billion in 2025. How should investors view the long-term spending levels? Will it reach a balance without needing to increase spending beyond inflation?

A: The company is still a long way from spending balance. The company has a low global market share and penetration rate of only about 6%, indicating significant growth potential. Future investments will continue in areas such as large scripted series, live broadcasts, and original programs, with reasonable spending planning to achieve business growth, and spending is expected to increase with business development.

Q：What are the drivers for raising the expected operating profit margin for 2025? What is the biggest leverage point for improving margins this year?

A: The company focuses on balancing revenue growth and strategic investments. Revenue is expected to grow by 12% - 14% in 2025, with expenses growing by about 9%. Content amortization growth is slightly lower than revenue growth, and some expenses will be allocated to product and engineering teams, marketing, and sales, with reasonable spending across all areas helping to improve margins while increasing investments.

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