Netflix : Third Quarter 2023 Transcript

Netflix, Inc. NasdaqGS:NFLX

FQ3 2023 Earnings Call Transcripts

Wednesday, October 18, 2023 10:00 PM GMT

S&P Global Market Intelligence Estimates

		-FQ3 2023-		-FQ4 2023-	-FY 2023-	-FY 2024-
	CONSENSUS	ACTUAL	SURPRISE	CONSENSUS	GUIDANCE	CONSENSUS	CONSENSUS
EPS	3.49	3.73	6.88	2.20	2.15	11.92	15.07
Normalized
Revenue (mm)	8540.28	8541.67	0.02	8766.43	8692.00	33719.02	38129.24
Currency: USD
Consensus as of	Oct-18-2023 1:56 PM GMT

		- EPS NORMALIZED -
	CONSENSUS	ACTUAL	SURPRISE
FQ4 2022	0.51	0.12	(76.47 %)
FQ1 2023	2.86	2.88	0.70 %
FQ2 2023	2.86	3.29	15.04 %
FQ3 2023	3.49	3.73	6.88 %

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Contents

Table of Contents

Call Participants	3
Presentation	4
Question and Answer	5

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NETFLIX, INC. FQ3 2023 EARNINGS CALL | OCT 18, 2023

Call Participants

EXECUTIVES

Gregory K. Peters

Co-CEO, President & Director

Spencer Wang

Vice President of Finance,

Corporate Development & Investor

Relations

Spencer Adam Neumann

Chief Financial Officer

Theodore A. Sarandos

Co-CEO, President & Director

ANALYSTS

Jessica Jean Reif Ehrlich Cohen

BofA Securities, Research Division

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NETFLIX, INC. FQ3 2023 EARNINGS CALL | OCT 18, 2023

Presentation

Spencer Wang

Vice President of Finance, Corporate Development & Investor Relations

Good afternoon, and welcome to Netflix Q3 2023 Earnings Interview. I'm Spencer Wang, VP of Finance, IR and Corporate Development. Joining me today are Co-CEOs, Ted Sarandos; and Greg Peters; and CFO, Spence Neumann. Our interviewer this quarter is Jessica Reif Ehrlich from Bank of America. As a reminder, we will be making forward-looking statements, and actual results may vary. Jessica, let me turn it over to you now for your first question.

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NETFLIX, INC. FQ3 2023 EARNINGS CALL | OCT 18, 2023

Question and Answer

Jessica Jean Reif Ehrlich Cohen

BofA Securities, Research Division

Thank you. So let's start with the you, Ted. Now that 1 strike is over, the writers guild, what are the implications for your business?

Theodore A. Sarandos

Co-CEO, President & Director

Thanks, Jessica. Let me first say, we want nothing more than to resolve this and get everyone back to work. That's true for Netflix. That's true for every member of the AMPTP. It's why our member CEOs have prioritized these negotiations above everything else we're doing. We spent hours and hours with SAG- AFTRA over the last few weeks, and we were actually very optimistic that we are making progress.

But at the very end of our last session together, the guild presented this new demand that, kind of on top of everything, for a per subscriber levy unrelated to viewing or success, and this really broke our momentum, unfortunately. But you should know, we are incredibly and totally committed to ending this strike. The industry, our communities and the economy are all hurting. So we need to get a deal done that respects all sides as soon as we possibly can.

In terms of the impact, these are the times that I'm glad we have such a rich and deep and broad programming selection. We -- programming costs themselves rise nearly every year, primarily driven by competition. Competition for talent, competition for shows and films. And you can see we've managed successfully through that year on year on year. And the same is true for -- during COVID when we were able to manage the slate through a prolonged and pretty unpredictable production interruptions. So -- but I really think we're not really that focused right there on how this impacts much, except for our biggest opportunity, which is to continue improving the quality of the slate.

We're focused on that day in, day out, year in, year out. And I'm incredibly pleased with Bela and the team and the progress that they're making. So if you'll indulge me for just a second, I just would draw your attention to the Q4 slate as an example of that, headlined by the return of The Crown for its final season. This is one of the most ambitious television shows in the history of television.

We have a new season of Big Mouth, a history -- a new season of Elite, the launch of Berlin, which is a spin-off from our La Casa de Papel, our Money Heist franchise, a new limited series like All the Light We Cannot See from Shawn Levy. That's incredible. And Bodies from the U.K. And that's just on the TV side.

And on the film side, one of our strongest quarters ever. We have this enormous sci-fi spectacular from Zack Snyder, Rebel Moon; a new film from David Fincher, The Killer. And these films that just lit up the fall film festivals recently, like May December from Todd Haynes; and Bradley Cooper's Maestro; the doc feature, American Symphony. That's all coming in Q4.

And for family too, we've got a new animated feature from Adam Sandler, we've Leo, that's hysterical; Chicken Run 2, which is a sequel to the most successful stop-motion animation film ever; and a new series from the CoComelon world called CoComelon Lane; Family Switch from Director McG, which stars Jennifer Garner and Ed Helm. So it's an incredible slate, something new and exciting for all taste all moods, all ages, and we're just super proud of the team that they've been able to manage through this and still deliver so much to it for our members.

Jessica Jean Reif Ehrlich Cohen

BofA Securities, Research Division

One more on strike-related-- like, just the aftermath, you discussed at a recent conference, giving talent more transparency. Could you talk about what that looks like? What are the new metrics talent will be paid on? And is it even standardized across the industry?

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NETFLIX, INC. FQ3 2023 EARNINGS CALL | OCT 18, 2023

Theodore A. Sarandos

Co-CEO, President & Director

Yes. Look, what I talked about there was heading towards a world where -- that -- where streaming data will be much more readily available. Remember, data -- streaming itself is not that exotic anymore. We've been doing it for 15 years. So we -- in the beginning, we thought there was a hard kind of apples and oranges comparison to ratings and streaming.

And I think we've gotten to a place where it's mostly about engagement and that does capture the value of watching and that things will become much more transparent the way TV has always had ratings and music has always had billboard and the theatrical has always had box office. So it'll be much more common for the data to be fully transparent.

What I didn't mention though is that part of that -- of our reason for not publishing early was part of our promise with creators. At the time we started creating original program, our creators felt like they were pretty trapped in this kind of overnight ratings world and weekend box office world defining their success and failures.

And as we all know, a show might have enormous success down the road and it wasn't captured in that opening box office. So part of this was the relationship with talent, not just the business aspects of it. And I do think that over time, people are much more interested in this. We're on the continuum today of how much data do we publish. I think we've been leading the charge, starting everyone down the path of a top 10, publishing our top 10 list and our annual wrap-up list and everything that give a lot of transparency to the viewing. And I just expect it'll be more and more transparent.

Jessica Jean Reif Ehrlich Cohen

BofA Securities, Research Division

Great. Let's move on to paid sharing. Have you identified most of the borrowers? And can you provide any help in how much more is left to go and the challenge in completing the crackdown?

Gregory K. Peters

Co-CEO, President & Director

Sure. I'll take that one. And I'll start by saying we're just incredibly pleased with how it's been going. And you can see the progress from our membership growth in Q2. Now in Q3, you can see it embedded in the revenue outlook for Q4. I think paid sharing represents the kind of difficult challenge where we needed to balance both important relevant consumer considerations with the importance of ensuring that our business got reasonably paid when we deliver entertainment.

And it's an example where we leveraged core execution capabilities that we've been building for over a decade, sort of how you develop good product experiences, how do you solve hard problems through them, how do you have an iterative model where you listen to consumers to tell us what's working and what's not, so we've been excited about that.

But because it's such a challenging problem, such -- we're shifting essentially consumers' expectations and what they expect from us, we've always thought that making this change should be done in a steady, considered way. And so our plan has been to stage out this rollout. We've been delivering our product experience to different borrower cohorts according to that plan. And as a result, I think as you're alluding to, there are a number of borrower cohorts, which has, as of today, have not received part of that experience.

And just to explain that a bit. I mean, part of the motivation to stage it out is based on technical considerations. So this is our ability to build features and improve model accuracy over time in a way that allows us to ensure that we're accurately developing and applying our interventions in as effective and as positive a way for consumers as possible.

Part of that has been just to stage things out based on borrower behavior. So we want to show up with the right product experience at the right moment that's more likely to convert a borrower over rather than have them spin off. So we want to think about that from maximizing long-term revenue.

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NETFLIX, INC. FQ3 2023 EARNINGS CALL | OCT 18, 2023

So we're going to continue the rollout for the next couple of quarters, and I think folks are trying to figure out how much how much juice is left there. And I would say we anticipate that we will have incremental acquisition, incremental adds for the next several quarters. We've seen that in the last couple of quarters. I think also worth noting that, that was on top of also very healthy organic, meaning not driven by paid sharing growth.

So we anticipate seeing that for the next several quarters to come. And then just stepping back, there's a set of borrowers that we're not going to convert. We haven't converted yet. We're not going to convert over the next couple of quarters. But that really represents how we think about paid sharing going forward, which is it's now become part of just our standard way of operating. And we have many hundreds of millions of qualified households out there. They're smart TV households that we want to win over, over the next several years.

And those borrowers we're not going to convert in the next couple of quarters represent that same group. So we got to go after them the same way we're going after people who have never signed up for Netflix, which is having an incredible content offering, an incredible value and get them so excited that they just have to sign up.

Jessica Jean Reif Ehrlich Cohen

BofA Securities, Research Division

Right. Moving on to the recent advertising restructuring. Can you talk about why you made the management change and what you would like to accomplish?

Gregory K. Peters

Co-CEO, President & Director

Yes. First, I'd say Jeremi has done a great job getting us essentially from 0 to where we are today. She'd laid the foundation for the ads business. She's hired and built a burgeoning team of leaders who, in turn, now are hiring the teams and people who are going to take the business forward.

But it's an important time and I think a great time for Amy to come in and extend that great work, to build on that foundation and drive our ads business to the next level. And why am I so specifically excited about Amy in the role. First of all, she's a high Netflix tenure employee. She's been with the company for over 7 years.

She's demonstrated really positive impact and great results in several different roles, but most recently as part of the studio and leading a big global team that is scaling very, very, very quickly, which sounds familiar when you think about what -- where we want to take our ads business. Second, she's got broad entertainment experience, ranging from content licensing, distribution. She's got business development, finance strategy at Netflix and in prior roles.

So I think when you think about that assemblage of skills, and you think about the existing ads leadership team that we have that has got a rich, rich history in ads in general and connected TV, especially if you think about somebody like Peter Naylor, who started selling connected TV at Hulu. That's a strong team to take our ads business to the next level.

And if -- and maybe I'll just -- if you -- I want to maybe just restate what we think the promise and the opportunity and sort of where we're at on ads business is. And so first of all, just starting off with, this is a $180 billion opportunity when you think about linear TV, you think about connected TV, not including YouTube, not including China and Russia. And we think we're in a great position to win some of those dollars.

We've got great content. The brands want to be next to. We're a safe place for brands to exist. We got great engagement from our members. That's a really strong foundation to work with. But we got a lot of work, and we know we have a lot of work to fulfill that potential.

Among that work, we've said it many times, I'll say it probably many times going forward. But scale is the #1 priority. We're making good progress there. This quarter, we grew our ad plan membership 70%

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NETFLIX, INC. FQ3 2023 EARNINGS CALL | OCT 18, 2023

sequentially quarter-to-quarter. That's on top of the last quarter where we grew at 100% quarter-to- quarter. We now have 30% of our new sign-ups choosing our ads plan in our ads countries.

And we've done it by making the ads offering more competitive. We've gotten to over 95% content period with our non-ads plans. We've improved features like a number of streams, the video resolution. We're going to keep doing that. We're adding downloads now. So we'll keep that good trajectory going and keep focusing on it.

Second big priority for us is delivering features and products that advertisers want. We've heard again and again, I've heard it this week, ad week from advertisers, top of that list is measurement. We've launched our measurement partnership with Nielsen in the United States this month in October. So we're excited about that. We've got a long list of other partners across other countries that we've got to deliver that same capability in, so we're excited about getting that out.

We're also excited about new products. So we've rolled out our top 10 media buy. We're going to roll out our binge ad product later this year. We're launching more ways to buy programmatically through Microsoft that gives more buyers more ways to access our inventory. So we've got a lot of work to do here on all of those fronts, but we've always said this is a multiyear build, a multiyear progress. We got a lot that we've got going on, and we're excited about the future to come.

Jessica Jean Reif Ehrlich Cohen

BofA Securities, Research Division

So now that you've phased out basic for new subs and you're getting extra members or paid more per sub from password sharing crackdown you've introduced advertising in 12 countries, could you talk about the outlook for ARM in '24 and beyond?

Spencer Adam Neumann

Chief Financial Officer

You want -- you guys want me to take that one?

Gregory K. Peters

Co-CEO, President & Director

Go ahead, Spence.

Spencer Adam Neumann

Chief Financial Officer

All right, you winded up for me. Thanks, Jessica. So I would say just generally, when we think about '24 and beyond, think about it as our revenue growth profile in general. And we talked about this recently. We expect a more balanced mix of membership and ARM growth in '24 and beyond '24.

So just looking at '24 specifically, as Ted talked about, we expect to have a great slate to drive the business forward. And we expect to continue to do things like add extra members, grow our advertising revenue, as Greg discussed. And in addition, have some pricing adjustments. You saw that in our letter. All those things will drive ARM.

So '23 was a pretty unusual year where essentially all of our growth came from member growth. And going forward, more broadly, not just '24 and beyond, we'll grow our business by continuing to kind of improve our service, increasing engagement, increasingly satisfying current and future members. And now that, as Greg discussed, we've got and account sharing solution, we have a more clear path to more deeply penetrate that big addressable market of 0.5 billion connected TV households and growing.

And with our continued plan evolution, pricing sophistication and all that hard work growing our ads business, we'll keep getting better at monetizing that big and growing reach and engagement. So we believe we've got a long runway for growth in both kind of more membership and higher ARM over time in a more balanced way than what you saw this year, which was, again, a pretty early year.

Jessica Jean Reif Ehrlich Cohen

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NETFLIX, INC. FQ3 2023 EARNINGS CALL | OCT 18, 2023

BofA Securities, Research Division

And then you touched on -- Greg touched on scale and advertising. How do you get to scale? Is it all through pricing, like, pricing changes? And what would you consider scale?

Gregory K. Peters

Co-CEO, President & Director

Yes. I think it's important to note that scale isn't -- it's not a binary condition, right? So it's not like you suddenly add 1 more member and you become a must-buy situation. So we become increasingly competitive with increasing reach. It's also, I think, worth noting that it's different in different countries. And it's largely based on what's the competitive channels and what's that competitive dynamic.

So having said that, though, we carry several relevancy targets on a per country basis, think about this as essentially percentage of market penetration that helps us focus and drive the rate of growth that we desire. And we've got more work to do to get those. So, I mean, like, we're not satisfied with the scale that we're at in any country that we're in. We want to be bigger, and we know we can be bigger.

I think there's a variety of techniques that we can employ to do that pricing and thinking about how do we factor in what's optimal pricing for ads, no ads. That's part of what we're doing and thinking about plan evolution. Part of it is what I mentioned before, which is feature set, right? These are the things that consumers want to sign up for. Part of it, too, is actually just educating consumers.

I think what we are seeing is, in some of our countries, consumers think about an ads experience mostly anchored and linear in what their expectation around ad load, frequency rates are. And to some degree, actually, some of our streaming competitors haven't done maybe as great a job in building an ads experience, which informs that expectation as well.

The part of it is just educating consumers about what the actual Netflix ads experience is so that they can think about what's the right choice for them. Do they want a lower price with ads and what we think is

a great ads experience for consumers really, or do they want to pay more and skip ads. So it's all those things coming together that ultimately drive us to the several multiples of scale that we're at today that we'll be satisfied with.

Jessica Jean Reif Ehrlich Cohen

BofA Securities, Research Division

One last one maybe on advertising before we move on to margins. But you mentioned a lot of the innovative offerings that you plan on and some of it's sponsored. Just -- it's very unique. It's different. When do we get to a point or when will you have a point where it's targeted, addressable, so it's really relevant for consumers and so they would want to see the ads?

Gregory K. Peters

Co-CEO, President & Director

Yes. So we're working with Microsoft right now on targeting, so you'll see that roll out in the near future. And that, I think, is the first step of how we think about increasing targeting relevance through both

a combination of product sets. So what are the types of ad products that brands can buy that yield increasing relevance as well as improving our sort of sophistication on what we might call targeting from a digital perspective, which is basically matching consumers who are most interested in that particular brand's message.

Jessica Jean Reif Ehrlich Cohen

BofA Securities, Research Division

Right. So Spence, I guess this one's for you on margins. But could you elaborate on areas like ad tech, content spend? Well, you did talk about content spend in your letter, but any other meaningful investment areas, something that maybe we're not thinking about?

Spencer Adam Neumann

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NETFLIX, INC. FQ3 2023 EARNINGS CALL | OCT 18, 2023

Chief Financial Officer

Sure. So let me step back a bit with some quick context. So first, Jessica, we set margin targets. They're our best judgment of how kind of best to grow the long-term value of Netflix, and we're trying to balance investment for future growth with near-term profits.

So for instance, after investing heavily to launch Global in 2016, Global Netflix, we wanted to take a disciplined approach to building profitability as we grew revenue because we felt, one, it was a good way to build that profit muscle across the company; and two, we understood that investors were -- they've been pretty patient with us, so we wanted to demonstrate the scalability and the health of the business model. And so that took us from -- it was, like, 4% OI margin, our operating income margin business in 2016 to our current roughly 20% margin. So we think a pretty good indicator that ad scale streaming can be a quite good business.

Now stepping back, there's no change in our financial objectives and also no change in our long-term margin expectations, including the fact that we see a -- and we don't think we're anywhere near a margin ceiling. We've got a long runway of margin growth. So again, no change in our objectives, no change in our long-term margin expectations.

But our current profitability and scale, we think it's prudent to balance that historical pace of margin improvement with growth investments. So you asked about growth investments. We think we've got a lot of places where we can continue to invest, plenty of room to invest further in our existing content categories. We're a small share of viewing in every country in which we operate.

Plus building out those ads capabilities that Greg talked about, our live offering and new content categories like games, so there's plenty to do. But all that said, we'll continue to drive healthy margin expansion. We expect roughly 22% to 23% operating margin in '24, assuming no material swings in FX. So that's up from our current expectation of 20% this year, which is at the high end of the range that we targeted in the beginning of the year.

So again, Jessica, just like we did in the past, going forward, we'll take a disciplined approach to balancing margin improvement with investing into our growth. We actually put a chart at the end of the letter that shows how we managed that balance historically, growing content investment, profit margins and cash flow. And you should expect that we'll carry that same discipline going forward as we invest and grow into that big opportunity we have.

Jessica Jean Reif Ehrlich Cohen

BofA Securities, Research Division

How does licensing content from third parties play into your overall content strategy? It seems like you've had incredible success with third-party content and -- I mean you always have, but in the last year, things like Suits or Band of Brothers, and you mentioned it in the letter, but if you could just talk about the third- party licensing.

Theodore A. Sarandos

Co-CEO, President & Director

Yes. Yes. Licensing third-party content has always been part of our strategy, and we've -- something we've been really great at being able to do is match that audience. I think Suits is a great example of the impact of the Netflix effect that we can have because of our distribution footprint and our recommendation system, we were able to take suits, which had played on cable and had played on other streaming services and pop it right into the center of the culture in a huge way, not just in the U.S. but all over the world.

According to the Nielsen charts, Suits was the #1 watched streaming series for 13 straight weeks. That's like -- that is a record for Nielsen. So this continues to be important for us to add a lot of breadth of storytelling to our consumers of a wide range of taste. And we can't make everything, but we can help you find just about anything. That's really the strength.

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