No changes in top-level management affect content strategy, with advertising revenue targeting above 10% (Netflix 4Q22 conference call minutes).
Below is the summary of the Netflix 4Q22 earnings call. For the interpretation of the financial report, please refer to the article " Netflix Transcends Ads with Blockbuster Strategy Focusing on Content Quality."
I. Overview of Core Financial Metrics vs Market Expectations
1. Revenue: Quarterly revenue was ¥7.852 billion, YoY+1.85%, slightly lower than market expectations (-0.02% miss);
2. Gross Margin: Gross margin for the quarter was 31.18%, YoY-0.86%, higher than market expectations (0.48% beat);
3. Guidance: 1Q23 revenue growth of 4% (excluding exchange rate impact of 8%); operating profit margin of 21%-22% in 2023 (assuming stable exchange rate).
II. Q&A
Business
Q: Outlook for the Next 5 Years
A: Consumers are shifting from linear TV to streaming.
As early as ten years ago, when Netflix started producing original content, it became clear that putting the customer first was essential. The industry is still in its infancy. Even in mature markets, there is still significant growth potential, and we will continue to expand our cultural influence worldwide. For example, "Wednesday" and "Stranger Things" have had a significant impact on popular culture and have driven revenue and traffic growth.
Q: Disney still needs time to develop ESPN+ into a sports streaming giant, and the uncertainties regarding profitability inflection point are high. Compared to Disney, Netflix has a broader range of monetization options - expanding into new genres, entering gaming, live streaming, etc. What are the similarities and differences between the two companies in terms of the timing of monetizing subscriber traffic?
A: The key difference between the two companies lies in their core execution models. We are currently experimenting with gaming, and progress is going well. However, Netflix has always adhered to its core execution model and is doing better and better.
In essence, content is key. When content is popular, business will progress, and customer engagement, revenue, and profit will increase. In 2022, Netflix launched many successful TV shows, movies, and animations. For example, "Stranger Things S4" in July created a phenomenal response. Extraordinary Attorney Woo achieved amazing results in Korea and even Asia, and gained a massive following in the US. The Sea Beast became the largest animated film in Netflix history, followed by the highly anticipated "Purple Hearts" and "The Gray Man." In August, "The Sandman" and "Never Have I Ever S3" were released, and "Cobra Kai S5" followed in September. From the game-adapted animation Cyberpunk: Edgerunners, DAHMER-Monster: The Jeffrey Dahmer Story, Back 2 Back Hits, which have received wide praise, to All Quiet on the Western Front, which has set the highest nomination record for non-English language films, and to the upcoming Enola Holmes 2, which is expected to achieve huge success.
The world is shifting from linear television to streaming media, with many major countries' streaming shares still below 10%. Future growth is promising. There will inevitably be competition, as well as continuous innovation and improvement in this transition from linear to streaming.
Q: The advertising plan has only been launched for 2 months, and Netflix has already benefited from it. What are the management's expectations for the crawling (crawling - walking - running) stage of the advertising plan?
A: The hardest part is the first step, but we have accumulated a wealth of experience so far.
Firstly, the most important thing is to launch the advertising plan very quickly, and the product experience is excellent.
Secondly, the participation of advertising plan users is comparable to that of non-advertising plan users, which means that Netflix is providing a reliable experience, indicating a good start.
Thirdly, the monetization rate and growth of the advertising plan are quite stable, with different prices in different countries and an increase in the number of new subscribers. Netflix has a complementary set of products that are meeting the different needs of different consumers at appropriate prices.
Fourthly, for consumers, there is no conversion from premium subscription plans to this plan as market expectations, so the unit economics are still very good.
Currently, Netflix has made many technological improvements in advertising placement and verification, and will provide consumers and advertisers with better experiences in the next quarter.
Q: Hulu has launched advertising plans for 10 years. When can Netflix catch up with its volume?
A: About half of Hulu's members are subscription users of the advertising plan, contributing to its multi-billion-dollar domestic business.
The participation and monetization rates of Netflix's advertising plan are even better than those of non-advertising plan users, and its scale will gradually expand over time and extend to more markets.
However, this is a multi-year development path. Netflix will not surpass Hulu in the first year. It hopes to reach the scale of Hulu at least in the next few years. Netflix hopes that the advertising business can achieve a revenue share of at least 10% and gradually expand.
Q: In the past, you have stated that "Netflix cannot compete with Google and Meta." Has this changed?
A: Not yet.
Most of Netflix's competitors in the advertising arena are traditional television media. Google and Meta can meet the needs of certain specific industries' advertisers, which Netflix cannot do for the time being.
However, the good news is that the global brand video advertising market is approximately $180 billion (especially in China and Russia), and there are many opportunities in this field. Q: How many subscription users growth is expected to keep the advertising package at a low price?
A: First of all, due to the non-replaceability of Netflix's content, the company did not consider pricing issues from a competitive perspective (meaning that it did not deliberately set a low price after comparing prices with peers, and the advertising package prices of Disney+, Hulu, and HBO are all higher than those of Netflix).
Second, Netflix is dedicated to providing different consumers with what they want globally.
Third, shared accounts will be cracked down on in 2023.
Currently, in the market with the highest penetration rate, it only accounts for 8% of the total TV time, and there is huge room for future growth, which is expected to create huge revenue.
Q: What are the reasons for the existence of shared accounts?
A: There are many reasons. One of them is economic factors. Therefore, the company is determining the appropriate price point. Obviously, the advertising plan will help lower pricing. The second one is (called) arbitrary sharing, where viewers borrow someone else's account and do not need to pay. The company will launch appropriate features to simplify the process of transition from shared accounts to self-owned accounts, such as viewing history. The relevant products will be launched later this season.
It is worth noting that there will generally be user churn in the early stages. However, in the long term, it will bring incremental subscription users. Therefore, Q1 will present atypical seasonality, and Q2 will show moderate net additions based on this income guide. However, the company hopes to gradually achieve accelerated revenue growth through paid sharing and advertising scale expansion in 2023.
Q: Considering the revenue drive of paid sharing and advertising, will you consider raising prices this year?
A: Content is key.
Paid sharing and advertising define this year's pricing strategy, and revenue is expected to increase significantly in 2023. The core pricing method remains unchanged, maintaining a virtuous circle of "creating more value for customer groups - revenue growth - increased content investment".
Netflix continues to deliver content that meets the needs of different segmented market consumers every month and every quarter, which is the core.
**Q: What is your view and expectation of Netflix's cooperation with Nike to enter the fitness content scene with the Nike Training Club personal training program launched in conjunction with Nike at the end of last year? **
A: In the past, Netflix has not touched this field because it believed that a large amount of fitness content could be obtained online for free. However, it is worth trying to work with leading brands such as Nike to produce excellent content. Currently, Netflix is conducting tests with high-end market partners.
Q: How to balance investments in live streaming and advertising businesses?
A: What really matters is the creative benefits of live streaming content, such as The SAG Awards and comedian Chris Rock's performances (the first artist to perform live on a streaming platform). Q: Glass Onion was highly successful in its limited release, but only lasted for a week. Was there any regret, and what is the outlook for movie strategy?
A: The core is to produce a movie for Netflix members to watch. The movie's release caused a sensation, created strong viewing demand, and increased Netflix's user subscriptions.
There are many ways to monetize it. Taking "Wednesday" as an example, peripheral MAC cosmetics sold out in New York City, Lady Gaga's song returned to the charts, and it had a huge cultural impact.
Q: From the perspective of language genre, how to allocate the budget of about 17 billion US dollars for content?
A: Investing in local language (non-English) series and films benefits not only local users but also leads industry development. Netflix has never made Oscar and Academy Awards submissions for Mexico and Germany films before. Squid Game, Wednesday, All Quiet on the Western Front all extremely popular. These investments are important because if a series is produced in the local language, it will attract users worldwide.
(II) Finance
Q: Allocation of cash expenditures
A: Firstly, most importantly, investment in core business and certain acquisitions.
Then, if cash exceeds the minimum cash level (equivalent to 2 months' revenue), it will be returned to shareholders through a stock buyback program.
Q: Forecast of operating profit margin
A: Based on the exchange rate at the beginning of 2022, the operating profit margin for the fiscal year 2023 is set at 19%-20%. Now it is expected to achieve an operating profit margin of about 21%-22% (higher than the range of 19%-20%). If the exchange rate level on January 1, 2023, is used, it means that the operating profit margin target for the fiscal year 2023 is 18%-20%.
(III) Management Changes
Q: Founder Reed Hastings stepped down as co-CEO
A: The board of directors has been discussing succession plans for many years. As part of this process, Ted was promoted to co-CEO in July 2020 and Greg was promoted to COO. In the past two and a half years, Reed Hastings has increasingly delegated management of Netflix to them. Reed, Greg and Ted have been working closely together for 15 years, even though Reed has stepped back.
Q: Does the management change signify a strategic shift for Netflix?
A: No strategic change, still pushing forward on the current track.
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