Netflix, Inc. (NASDAQ:NFLX) Q1 2024 Earnings Call Transcript

Netflix, Inc. (NASDAQ:NFLX) Q1 2024 Earnings Call Transcript April 18, 2024

Spencer Wang: Good afternoon, and welcome to the Netflix Q1 2024 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. As a reminder, we will be making forward-looking statements and actual results may vary.

A – Spencer Wang: With that, we will now take questions that have been submitted by the analyst community. And we’ll begin first with some questions about paid membership reporting in our results and forecast. So for our first question, it comes from Justin Patterson of KeyBanc. And I’ll direct this at Greg initially. Greg, could you please talk about the decision to stop reporting quarterly membership and ARM data in 2025? Why eliminate this? And since you said success stems – starts with engagement, how are you thinking of expanding these disclosures?

Greg Peters: Yes. As we noted in the letter, we’ve evolved and we’re going to continue to evolve developing our revenue model and adding things like advertising and our extra member feature, things that aren’t directly connected to a number of members. We’ve also evolved our pricing and plans with multiple tiers, different price points across different countries. I think those price points are going to become increasingly different. So each incremental member has a different business impact. And all of that means that historical simple math that we all did, number of members times the monthly price is increasingly less accurate in capturing the state of the business. So this change is really motivated by wanting to focus on what we see are the key metrics that we think matter most to the business.

So we’re going to report and guide on revenue, on OI, OI margin, net income, EPS, free cash flow. We’ll add a new annual guidance on our revenue range to give you a little bit more of a long-term view. We’ll also – we’re not going to be silent on members as well. We’ll periodically update when we grow and we hit certain major milestones, we’ll announce those. It’s just not going to be part of our regular reporting. And we want to do all of this thoughtfully and give everyone time to adjust this transition. So we’re going to continue to report subscribers until Q1 of next year, which links into our next annual revenue guidance for 2025. So we think that provides some long-range continuity. And we expect that will provide an effective bridge and transition.

But ultimately, we think this is a better approach that reflects the evolution of the business and it more matches and is consistent with how we manage internally to engagement, revenue and profit.

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Q&A Session

Ted Sarandos: Yes. And on engagement, Greg, just a reminder, we currently report our engagement on our biannual engagement report, leading the industry in viewing transparency and granularity. And we’re going to look into building on that both in granularity, which will be kind of tough. Our current report covers about 99% of the viewing on Netflix, but we’ll look at the regularity in different ways that we can make it even easier to track our progress on engagement. And – but importantly, why we focus on engagement is because we believe it’s the single best indicator of member satisfaction with our offering, and it is a leading indicator for retention and acquisition over time. So happy members watch more, they stick around longer, they tell friends, which all grows engagement, revenue and profit, our North Stars. And so – and we believe that those are the measurements of success in streaming.

Spencer Wang: Great. Thank you, Ted and Greg. I’ll move us along to the next question from Ben Swinburne of Morgan Stanley who asked two years ago, Netflix stopped adding members. What changes inside Netflix and/or the broader industry explain the significant improvement in member growth we’re seeing today, excluding the paid-sharing initiative? In other words, what are you doing better today as a company than in the first half of 2022?

Ted Sarandos: That’s a great question. I would say, the thing we’re doing is we’re thrilling our members. That’s the thing we set out there to talk about why we all bounce out of bed in the morning. I look at this last quarter, eight of the first 11 weeks of the year, we’ve had the number one film on streaming. Nine of the first 11 weeks, we’ve had the number one original series. And I’m talking about hits like Avatar: The Last Airbender, Griselda, Damsel, Love Is Blind, 3 Body Problem, all of that just in the last few months. So this consistent and dependable and expected drumbeat of hit shows, films and games, that’s the business that we’re in. And that’s what we have to do every day and we have to do it all over the world.

So if you think about that and how we’re doing about kind of quality at scale in multiple cultures in multiple regions, I look at this last quarter, you see Fool Me Once, One Day, Gentleman, Scoop, The Super-Buzzy, Baby Reindeer, all that from the U.K., all in the last few months. Berlin, Society of the Snow, Alpha Males, all from Spain and all just in the last few months. So that’s been one of those things that we just keep building and building and building on. And local unscripted, which is a fairly new initiative for us, and we’re finding huge success with things like our second season of Physical 100 in Korea recently and Love is Blind, Sweden. These are all kind of hard to replicate things that we keep getting better and better at every day that we’re really proud of the teams for doing that.

So – and remember, engagement captures all of this and none of that’s possible without great tech and product. We need to do both.

Greg Peters: Yes, I think that’s right. The fundamental is all those amazing series, film, games, live events, but a key component of our success and something that we’re seeking to get constantly better at is that ability to find audiences for all those great titles. Part of making that happen is just the number of people who look to us for entertainment. We mentioned over 0.5 billion people in this letter, but part of that is that, that product we do to effectively connect those folks with titles that they will love, which then enables us to find the largest audiences for those titles that we think that they could get anywhere. And I think as you mentioned, Ted, this applies globally to titles from all over the world, which is super-exciting.

So – and then of course, we seek to maximize the fandom and the impact on the conversation and the cultural zeitgeist that all those titles have. And when we do that well, that just feeds positively into that cycle as we launch new titles. So in terms of what are we doing better, what do we do better, we seek to get better at all of those things. And if we can make that whole flywheel spin a little bit faster, then that’s great for our members, it’s great for our titles and it’s great for our creators.

Spencer Wang: Thank you, Ted and Greg. Moving us along, we have Barton Crockett from Rosenblatt. There’s a question about our revenue guidance. I will direct this question to Spence. Spence, can you please explain what drives the revenue deceleration for the full year, so 13% to 15% revenue growth for the full year compared with the 15% to 16% growth in the first and second quarters of this year? Secondly, he also has a question about second quarter subscriber growth. Will that be higher or lower than Q2 of 2023?

Spence Neumann: All right. Sure. Well, thanks for the question. So first, regarding revenue growth overall, full year outlook, I feel really good about where we are in our growth outlook. So I just want to be clear about that. We’ve done a lot of hard work over the past 18 months or so to reaccelerate the business and reaccelerate revenue through combination of improving our core service, which Greg and Ted just talked about and rolling out paid sharing, launching our ads business and that reacceleration really started in the back half of ’23 and it built through the year. So our growth in the back half of ’24 is really kind of comping off of those harder comps. And at the high end of our revenue forecast, our growth in the second half is consistent with our growth in the first half, even with those tougher comps.

And it’s still early in the year. We still got a lot to execute against. We also, as you see in our letter, there’s been some FX that with the strengthening dollar, that’s a bit of a headwind. So we’ll see where that goes throughout the year. But we’re guiding a healthy double-digit revenue growth for the full year, which is what we set out to deliver and that’s what’s reflected in the range. And I guess maybe it’s in the question, I guess, seeded and this is a little bit of like what’s really kind of the outlook for our growth of the business, not just the back half of this year, but into ’25. And it’s too early to provide real – specific guidance, but we’re going to work hard to sustain healthy double-digit revenue growth for our business.