Netflix, Inc. (NASDAQ:NFLX) Q4 2022 Earnings Call Transcript

Netflix, Inc. (NASDAQ:NFLX) Q4 2022 Earnings Call Transcript January 19, 2023

Spencer Wang: Good afternoon and welcome to the Netflix Q4 2022 Earnings Interview. I am Spencer Wang, VP of Finance, IR and Corporate Development. Joining me today are Executive Chairman, Reed Hastings; Co-CEOs, Ted Sarandos and Greg Peters; and CFO, Spence Neumann. Our interviewer this quarter is Jessica Reif Erlich from Bank of America. As a reminder, we’ll be making forward-looking statements and actual results may vary. With that, Jessica, over to you for your first question.

Q – Jessica Reif Ehrlich: Thank you and thank you so much for having me today. So Reed, the big announcement about the management changes, could you give us some more color on the process and how you came to this decision?

Reed Hastings: Jessica, it feels like yesterday was our IPO. We were covered in red envelopes, we IPO-ed at about $1. Hopefully, some of you have held the stock, the full 21 years. And when I think of the evolution, the three of us and so many other incredible Netflix employees to go from DVD service to streaming leader in films and television and emerging player in games and now to have over 230 million members, it’s just €“ well, Jim Collins probably said it best. He calls it a good start. We’ve had a good start. But honestly, we dream of the whole world finding their favorite entertainment on Netflix and we shorthand that as entertaining the world. And the three of us have been working together for 15 years now trying to figure out how do we get through this issue, that issue, how do we grow.

And I couldn’t be happier to complete our succession process. It really started about 10 years ago with the Board trying to think through how could this work. They both have such amazing talents and gifts and to find a platform where they have been able to contribute is fantastic. About 2.5 years ago, we took a partial step. Ted as Co-CEO, Greg as COO. We continue to just make a super progress. And frankly, more and more, they have been leading the company and this is acknowledging really in formal terms how we have been operating for at least the last few quarters. It’s just a great feeling. And when I think about the stock appreciation over the last decade, I know that they want to beat that record and I am all for that. I will be Executive Chairman, helping them everywhere I can, but it’s really theirs to lead and to do that energy and hustle and intensity that we have been doing.

They are very ready. That’s what’s driving the timing and so I could not be happier. So back over to you.

Photo by Thibault Penin on Unsplash

Jessica Reif Ehrlich: Thank you. Subjectively, I will just add that this maybe the smoothest transition we have seen in media for quite a while. Now for Ted and Greg, what does this mean for Netflix? Does this signal a change in strategy or approach?

Ted Sarandos: Jessica, let me start with, first and foremost, to thank Reed personally and professionally. He has been, and I trust will continue to be a role model, a mentor, friend. And 22 plus years, Reed has positively changed my life in every way imaginable and he leaves some big shoes for Greg and I to fill. Unfortunately, we have four feet to do it with. So that’s a good thing. In so many ways, the way that Reed has been able to see around corners. That’s why he has been thinking about the succession for the last decade. He generously opened up more of a co-leadership model over a decade ago for he and I, and like he said, 2.5 years ago made it a little more formal. And in that time, delegating a lot of the day-to-day to Greg and I.

And in that time, in the 2.5 years we’ve been working at it. We’ve been working together for 15 years, Greg and I. But in the last 2.5 years, particularly, we have been able to build a really trusting, respectful and complementary partnership. In many ways, the same way I have with Reed over the years. And I really do believe that this kind of shared leadership model is going to help us to move fast and to challenge each other, to challenge the company to raise to new heights. And I am just incredible what we are able to do. And to your point, this is the leadership team. It’s been pretty stable and that’s why that this steady transition feels so steady. This ability of this team has helped us build a great foundation and a culture that can absorb complexity and change.

And as you saw in this last quarter, it can rise to any occasion. And Greg, I just want to say I am thrilled to be in this with you. And Reed, we can’t thank you enough.

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Q&A Session

Greg Peters: Thanks Ted. It’s a real honor to be asked to take on this responsibility and join you as Co-CEO and frankly a pleasure to be able to continue to working with some of the most amazing leaders that I have ever had the pleasure of working with and frankly, in my opinion, the best leadership team that Netflix has ever had. So I’ll just echo Ted’s comments. It’s been a real fun and rewarding experience to work closely with him over the last couple of years especially and I’m tremendously proud of the partnership that we’ve developed in the shorthand and really how we have been able to take what are sort of a complementary set of skills and perspectives and seeing different angles to different situations. But basically, at the end of the day, we are €“ I have always found are ultimately motivated by the same things, which is that we want to serve our members and we want to grow our business and that is an incredible and powerful lining process to those different perspectives.

So I am proud of the work that we have done over €˜22 in the latter half, especially to get some more momentum into the business, but I am even more excited about continuing to push that into €˜23 and follow the model that Reed has always had of continually seeking excellence and always driving to be better. So, looking forward to that. And then to your specific question, Jessica, we €“ there is no big strategy shift or big culture shifts. Ted, Reed and I have been working and sort of grinding through our individual perspectives on this for a long time. And so really, we look forward to taking things forward as we have been for the last little bit in responding to a dynamic industry and doing the changes that we think are appropriate.

But we are not €“ we don’t have a bank of changes that were €“ that we have been holding for this moment. So mostly, it’s continuity and move forward.

Jessica Reif Ehrlich: Great. So this was originally for Reed, but now given the change in leadership structure, maybe for all three of you, for Reed, Ted and Greg. One of the best quotes recently was from John Malone, who said shareholders should build a monument for Reed Hastings? John and Rupert Murdoch ran the dominant global media companies in prior decades and we are one of the few media executives who have been able to see around corners. Ultimately, they both sold the bulk of their assets. Netflix is now one of the most dominant global media companies, if not the dominant. What is your view of the next 5 plus years? Do you need to get bigger, stay the course?

Ted Sarandos: Well, the one thing I would point out is that what’s happening now and what’s going to be happening over the next couple of years is that the consumer is moving to streaming. So the way that they watch content at home delivered to them on Internet on demand, free of the linear schedule and all those things, that is a change, a fundamental shift in the business and you have got to be where the consumer is. And that’s what we have been focused on since we started streaming, doing original content 10 years ago, but being really realizing that we really have benefited from being a customer-first company and meeting the customers where they are. And we have also had this blessing of not having to unwind our traditional media business as we built into this one.

So we have always been focused on the future and where the consumers are going. And I think our ability to continue to stay focused on that, because we are €“ this is really €“ I know as we’ve been talking about it for a long time, Jessica, but this is really in its infancy. I mean you think about as big as we’ve become and all these things that are happening. And in the U.S., we are about 8% of TV time still. So, it’s an enormous amount of growth ahead, even in markets where we are very well established. So, that’s the key for us and I think being able to focus on consumers first and has really been our biggest benefit. And I think it’s what led us to those milestones that you just referred to. Greg?

Greg Peters: Yes. And Jessica, I would say I think that, that translates into being bigger. And I think that means being bigger in terms of touching more members around the world, delivering them incredible entertainment. We will see that in terms of being bigger, in terms of the amount of engagement that we can drive the amount of hours that we are satisfying them, be bigger in terms of the culture impact is too. I mean you have seen €“ I mean just incredible cultural impact in terms of Wednesday, Stranger Things, the ramifications that these shows have in terms of the popular culture are significant and that’s going to get bigger, too. Also it means bigger in terms of revenue and profit stream. So we are looking forward to those as well.

Jessica Reif Ehrlich: Right. So losing subs in 2022 and the market reaction or valuation reset is akin to August 2015 when Bob Iger called out the early decline of pay-TV subs and the impact for Disney’s ESPN. It will take a while for Disney to build ESPN Plus into a sports streaming giant. And actually, they may never replace the profitability of ESPN at that point in time. Your pivot seems more broad-based by extending genres and going into new areas whether it’s games, fitness, live, etcetera. Do you see any similarities or differences to that momentous inflection point, which has certainly shifted Wall Street’s view from subs to profits?

Greg Peters: I will take a shot at that and then Ted, maybe weigh in. But I think it’s a fundamentally different situation. And if you look at where we are at a significant part of what we need to go do is essentially take the core model that we have been operating since we have been starting in streaming and just execute it better in all dimensions. And so whether it’s the incredible content that Bella and Scott’s team are producing constantly, how we are talking about that content to the marketing and conversation that we do, the product experiences and business model innovations that we are doing, but a lot of it really fundamentally is about executing that core model better. We are not €“ there is not a lot of massive pivots away from a traditional legacy business model that we have to go figure out.

We are planting some seeds in terms of games and things like that, that if we execute well and we are excited about the progress we are seeing so far, will represent the future potential for us in terms of growth and more profit opportunities. So that’s exciting. But essentially, a lot of this is just continue to execute the play that we have got and do it better and better.

Ted Sarandos: And then I don’t know about what the similarities, but I would say that this business is really completely about engagement, profit and revenue. So €“ and we have got to grow all of those things and all those things are really are tied to executing on that €“ on the content. When the content is working, the business is working. We grow engagement, we grow revenue, we grow profit. There is an interesting thing starting in July and you think about from Stranger Things Season 4 from the phenomena that became and what we have been able to offer up to our members from that day forward. So they went from Stranger Things to Extraordinary Attorney Woo, which was a phenomenal success throughout Asia and in South Korea, but also built a big cult fan base in the U.S., straight into Sea Beast, which is our biggest animated film ever; straight into Purple Hearts and Gray Man, two of our most watched films ever on Netflix.

And then to August, the Sandman and Never Have I Ever Season 3, September, Copra Kai Season 5, Empress, Cyberpunk is this animated adaptation of a videogame that’s been hailed as one of the greatest of all time, Narco-Saints, another monster hit from North Korea, the Jeffrey Dahmer Story, Monster, straight into Watcher, back-to-back hits from Ryan Murphy, All Quiet on the Western Front, which just today became the most nominated non-English film in the history of BAFTAs. Only Gandhi has got more nominations in the history of BAFTAs and that’s from Germany with the great Ed Burger. And then straight out of there into Enola Holmes 2, a big monster success, sequel to €“ with Millie Bobby Brown. And you look at all of these things that go back and forth and they go all the way into January now, we will end the month with You People, Eddie Murphy and Jonah Hill.

Any outlet would kill to have any one of those months as their entire year. And it’s our ability to fire on those cylinders and create hits, but more than that create the expectation that as soon as you are done with this one, there is another one waiting for you.