EDITED TRANSCRIPT NFLX - Q1 2019 Netflix Inc Earnings Call EVENT DATE/TIME: APRIL 16, 2019 / 10:00PM GMT

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EDITED TRANSCRIPT

NFLX - Q1 2019 Netflix Inc Earnings Call

EVENT DATE/TIME: APRIL 16, 2019 / 10:00PM GMT

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Client Id: 77

APRIL 16, 2019 / 10:00PM, NFLX - Q1 2019 Netflix Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Gregory K. PetersNetflix, Inc. - Chief Product Officer

Spencer WangNetflix, Inc. - VP of Finance & IR

Spencer Adam Neumann Netflix, Inc. - CFO

Theodore A. SarandosNetflix, Inc. - Chief Content Officer

Wilmot Reed HastingsNetflix, Inc. - Co-Founder, Chairman, President & CEO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Eric James SheridanUBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

P R E S E N T A T I O N

Spencer Wang- Netflix, Inc. - VP of Finance & IR

Good afternoon, and welcome to Netflix Q1 2019 earnings interview. I'm Spencer Wang, VP of IR and Corporate Development. Joining me today are CEO, Reed Hastings; CFO, Spence Neumann; Chief Content Officer, Ted Sarandos; and Chief Product Officer, Greg Peters. Our interviewer this quarter is Eric Sheridan from UBS.

As a reminder, we will be making forward-looking statements, and actual results may vary. With that, let me turn it over to Eric for the first question.

Q U E S T I O N S A N D A N S W E R S

Eric James Sheridan- UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

Thank you, Spencer. Reed, I'd love to start with you. Now that we're 3 months into 2019, against your broader goals for what you're expecting for the business in 2019, what are the key messages you want to share with investors on how the first 3 months of the year went?

Wilmot Reed Hastings- Netflix, Inc. - Co-Founder, Chairman, President & CEO

Well, we put in the earnings letter our weekly net adds, and it's just phenomenal, how steady and smooth and up and to the right that is, to start off the year with over 9.5 million net additions. It's a phenomenal start. So steady progress, basically the same as many prior quarters, cranking away on amazing content, amazing service and steady growth around the world.

Eric James Sheridan- UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

Maybe sticking with that theme on the subscriber front, we'd love to understand some of what you saw internationally in subscriber strength. There were some particular pieces of content that seem to resonate globally on an individual and on a worldwide basis. So would love to ask both from a content perspective and a subscriber growth perspective, maybe to Ted and Greg, how you're thinking about the subscriber performance, especially internationally in Q1.

Theodore A. Sarandos- Netflix, Inc. - Chief Content Officer

Well, the one thing that was good about in terms of the content connection is the things that worked best that we called out in the letter are things that worked around the world, which is really fantastic. And then we had some great international breakouts where they really help drive excitement.

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APRIL 16, 2019 / 10:00PM, NFLX - Q1 2019 Netflix Inc Earnings Call

And by way of an example, Kingdom in Korea, that did phenomenal and get watched and is getting watched all over the world and throughout the region. So yes, we've been able to work on a very local basis and a very global basis with the content this year -- this quarter.

Gregory K. Peters- Netflix, Inc. - Chief Product Officer

And then from a product perspective, yes, the basic model that we've seen, and consistently across pretty much all the markets that we operate in is, as we launch our service, we get a chance to learn from our members. They tell us what content we incrementally need to provide to them. We do a better and better job at that, how we modify the product experience, what we need to add from a payments perspective, from a partner's perspective. And we're seeing that basically in all the markets that we operate in the world. And so the longer we've been in that territory, like Europe is a great example, we've got a lot of stuff dialed in. And consumers are really loving us, and that's leading to great, accelerating growth.

Eric James Sheridan- UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

Ted, maybe following up with you. On local content that goes global, you've got a number of hits now that started as local language and went global. Are you getting better at identifying what those pieces of content might be? What are your learnings as you're getting more of those types of successes in the model?

Theodore A. Sarandos- Netflix, Inc. - Chief Content Officer

Well, we've kept one strict principle around it, which was that these shows had to be very locally relevant. And to do that, you have to be pretty authentically local. So what we're trying not to do is try to inauthentically make a global show because basically that doesn't work for anybody. So the more authentically local the show is, the better it travels, which we've seen with Kingdom. So fans of K drama around the world loved that show, and it resonated incredibly well for us in Korea. Similarly, coming up, we have a new season of Rain coming out this quarter that is perfectly Swedish. We don't try to make it -- water it down or make it travel any better inorganically and have found that the best way to make global stories is to make them incredibly, authentically local.

Eric James Sheridan- UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

So Greg, maybe coming back to you on the subscriber front. You had some information in the letter about the amount of traffic globally that you get from mobile. We're continuing to see performance above what we thought in terms of download of Netflix app on phones globally. Can you talk a little bit about mobile as a stimulant for both traffic subscriber growth and how you might go after that on the product side over the medium and long term?

Gregory K. Peters- Netflix, Inc. - Chief Product Officer

Sure. I think the most important -- the headline message there is actually frankly how much time we don't win on the mobile experience, right? So over 97.5% around the world, people are using other different entertainment services, other ways to enjoy their time on their mobile phone. But certainly, what we are seeing is that mobile is an increasing way for us to attract new subscribers. It's a great place for folks to find out about Netflix, to sign up to the service even if they're signing up to the service on mobile and then they're watching on other devices like the TV, which we see as the common paradigm. And it works really well with our partners because whether it's handset partners, which we can work to sort of preload our application on; or actually the mobile operators, which we can work on increasingly, doing things like bundling the Netflix as part of their standard offering, which you see us doing more and more around the world, it's a great way for us to make it super simple for our members to sign up for Netflix and enjoy that experience.

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APRIL 16, 2019 / 10:00PM, NFLX - Q1 2019 Netflix Inc Earnings Call

Eric James Sheridan- UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

Maybe I'll start with Spence but would love a couple of different perspectives on this. There was a solid outperformance on margin in the quarter, and the company talked about shifting some expenses into the later part of the year than maybe what you'd envisioned when you guided Q1. Can you talk a little bit about how the cost structure evolved in the business in Q1, how that margin outperformance came about? And maybe give a little bit more granularity on those shifting costs as you look through the better part of 2019.

Spencer Adam Neumann - Netflix, Inc. - CFO

Yes. Sure, Eric. I mean I think the takeaway is we're overall very pleased with our continued margin progression. We guided at the beginning of the year to increasing our margins by 300 basis points for the full year to 13%. We came in this quarter slightly ahead. Part of that is we're continuing to scale our business in terms of some combination of content and marketing spend, in particular growing at a slower rate than revenue. In this quarter in particular, I think you saw that on the marketing line where we had a lot of both growth and experimentation in marketing last year, which we talked about. We talked about the fact that we would level off that growth this year, and you saw that come to play in Q1, which was a meaningful driver of that margin expansion. The timing in the quarter was not all that significant. There were some spend in -- particularly on timing of some creative spend and creative development spend on the marketing side, and particularly that shifted to later in the year as well as some content spend but nothing material, and we're well on track to that 13% full year margin.

Eric James Sheridan- UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

And just to follow up there, Spence, just to make sure we understand the message from the letter. Still, second half versus first half should be the way investors think about the margin profile of the business this year against that broader 13% goal.

Spencer Adam Neumann - Netflix, Inc. - CFO

Yes. Generally, I mean you'll see some margin expansion as you can see in the guide for Q2 as well, and then it will continue to expand in the back half of the year. As you know, there have been some price adjustments in the first half of the year that will be flowing through that also. Between that and just on member growth, we'll see the benefit of that margin expansion in the back half.

Eric James Sheridan- UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

Maybe one more on the quarter and the letter itself, back to you, Ted. For the second quarter in a row, you gave a lot of information about consumption of the product in the quarter and some of the watch statistics. So I'd love both Ted and Reed maybe to weigh in on how you think about the type of watch and engagement statistics the company is getting when measured against the broader media landscape, what that means for the company longer term and whether we can expect to continue to hear that from the company going forward.

Theodore A. Sarandos- Netflix, Inc. - Chief Content Officer

Yes, definitely. We're trying to get to a place where we could be a lot more transparent, both with our producers and with our customers who are incredibly interested in helping them make better choices by -- based on -- and so a lot of times, that's influenced heavily by what's the world watching. So being able to share some of those numbers gives people a better sense of what things that they might be interested in as well. And just real quickly, I'll correct myself, Eric, I said Sweden for Rain, but obviously the show's from Denmark. But -- and -- what I wanted to do is point out that over the next several months, we're going to be rolling out more specific, granular reporting, first to our producers and then to our members and, of course, to the press over time and be more fully transparent about what people are watching on Netflix around the world.

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APRIL 16, 2019 / 10:00PM, NFLX - Q1 2019 Netflix Inc Earnings Call

Eric James Sheridan- UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

And Reed, how do you think about the broader media landscape, what Netflix is trying to solve for and go after as a big opportunity over time when measured against the type of watch or engagement statistics the company's putting up against their original content?

Wilmot Reed Hastings- Netflix, Inc. - Co-Founder, Chairman, President & CEO

I think we're just beginning to start to share that data, as Ted mentioned, and we'll be leaning into that more quarter by quarter. But the big picture for our members is they watch all kinds of things. I mean our members are watching pay-per-view and DVDs. Our members are watching linear. Our members are watching -- or playing Fortnite. It's all of these things. So think of it as -- the real metric is can we keep our members happy and grow that subscriber base as we did so strongly in Q1.

Eric James Sheridan- UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

So maybe sticking with you, Reed, you had a section of the letter about Disney, some of the competition that's coming to the broader landscape. Maybe just help people frame how you see the competitive landscape, how you see those types of products existing alongside or in competition to Netflix and what your sort of view is of the landscape going forward.

Wilmot Reed Hastings- Netflix, Inc. - Co-Founder, Chairman, President & CEO

Sure. Well, one part is great competition makes you better, and so we're thrilled to have Apple and Disney in. They're awesome companies. Just to be in the same league as them is very exciting for us. And then on a practical basis, there's already so much competition. I mean we mentioned we only win 2% of downloading on mobile. Like 98% of the time people are not doing Netflix on U.S. television, that 90% are not watching Netflix. So there's a ton of competition out there. And Disney and Apple add a little bit more. But frankly, I doubt it will be material because again there's already so many competitors for entertainment time, which is great for consumers, and it's exciting for us.

Eric James Sheridan- UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

Greg, I'd love to take that answer and maybe go to you next of how you think about the product itself when you see potential new competitors come into the field, what you think some of the big differentiators you have on the product side, how you think about pricing as a company longer term and maybe where you want to take the product medium, long term.

Gregory K. Peters- Netflix, Inc. - Chief Product Officer

Sure. I mean again back to Reed's model, we sort of see this broad landscape of competition, and our job is to think about every touch point that we have with the service and how can we make it incrementally more compelling, how do we connect our members with the amazing content that we're making in a way which is new and differentiating. You talked about international. That's a great opportunity where we think about localizing this content well, whether it's in subtitles or dubbing and then actually explaining to our members, connecting our members with those stories in a meaningful way, which then opens up them to watch TV shows or movies from around the world from countries that they never would have conceived of doing before. And I think that's a huge example of the opportunity we have to bring this global platform to bear in the right kind of product experience to create differentiation. And then with regard to pricing, I would say again back to this sort of framework of broad, broad competition where a bunch of different entertainment options are being provided, all sorts of different models, some in ad-based subscription at different pricing points. We don't really think there's sort of an immediate equivalency or substitution. And so mostly, it's about how do we create more value, how do we create the right content and present it at the right way that's compelling and differentiating for our members. And we think we do a great job at that. We'll just win more of those viewing hours, we'll deliver more value to our members and we'll be able to grow from a subscriber perspective like we did this quarter.

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