Jessica Reif Erlich: So, would you like a massive global hit like a Wednesday? There seems to be so many ways you could drive monetization. I know like just staying with margin for a second. Like the Wednesday makeup was sold down in every MAX store in New York City. You could not buy it anywhere. Do you participate in these types of consumer products, or is it just a way to fuel fans, fuel engagement?
Ted Sarandos: It’s a little €“ mostly the fuel engagement and fuel fandom. We actually €“ we do participate in it. Our owned content, we do drive a lot of revenue in our consumer products business. But mostly, the motivation is that is to drive fandom. And Greg alluded to this earlier, but this impact on the culture that this content can have on our platform. In our earnings letter, we mentioned the Lady Gaga song came back after 11 years because of Wednesday. But that doesn’t mention, the four songs this year that we actually jammed back into the charts, some that never charted and some that were off the charts for 40 years from Metallica, Kate Bush, The Cramps. And that impact on culture, Sofia Carson’s music career took off because of Purple Hearts.
Jenna Ortega picked up 10 million social media followers in the first week Wednesday launched on Netflix. And all of these folks who build these gigantic careers on Netflix then go on to have to own their own companies, sell their own makeup in many cases and become incredibly powerful influencers. And all of that business is drawn because of our €“ the impact that this distribution platform, and it’s incredible UI that basically can take something like Wednesday, which was not a slam dunk for people to predict that people would love it as much as they do. And the UI could pick up on that activity in the early going of the release and push it out to where it’s going to be one of our most watched shows in our history all over the world. And we do use consumer products as a way to intensify fandom.
And it could be anything from makeup, from Wednesdays, as you said, or maybe even a hand on your shoulder. Spence?
Spence Neumann: Yes. You never know where Wednesday is going to show up or at least thing. I did get my chance to kind of talk and at the risk of going back to the management changes and say, I am thrilled with the changes. I am going to miss maybe not seeing Reed as frequently as he is supporting Greg and Ted. So, I just brought in a little bit of reinforcement with thing even though Reed is not going anywhere. But this way, I have got a little daily reinforcement.
Jessica Reif Erlich: Sticking with content for a few minutes. The local language hits a building, but tell me on the U.S. hits. How do you think about allocating your $17 billion or so content budget between genres or languages? Like is there any way like you can kind of parse it out?
Ted Sarandos: Yes. It’s a big task. Watching where viewing is growing and where it’s suffering and where we are under-programming and over-programming around the world is a big task of the job. Spence and his team support Bella and her team in making those allocations, figuring out between film and television, between local language and what is €“ and what’s really interesting is there isn’t €“ there aren’t that many global hits, meaning that everyone in the world watches the same thing. Squid Game was very rare in that way. And Wednesday looks like one of those two, very rare in that way. There are countries like Japan, as an example, or even Mexico that have a real preference for local content, even when we have our big local hits.
And every once in a while, something like Squid Game is even a big hit in the U.S. So, think about in Q4, we launched a top 10 non-English series nearly every week of the quarter from South Korea, from Spain, from Colombia, from Japan, from Poland. And so the benefit of that kind of local language investment and the benefit of doing that early was that we become exceptional on the ground in those countries. Those content teams generate not just content people want to see, but content that’s leading the industry. To have Netflix produce the Academy Award entry film for both Mexico and Germany has never happened in the history of the Oscars. It’s really phenomenal. And I mentioned earlier the All Quiet on the Western Front and the success of BAFTA.
And keep in mind that these investments are important because it actually increases the total addressable audience for Netflix around the world. Because if we were just doing English content for the world, we would be mostly attracting Western-centric viewers, but our addressable audience is anyone who is watching TV anywhere in the world.
Spencer Wang: Jessica, we have time for one or two last questions. I just want to make sure you have a chance to ask about margins or anything else you might want to ask
Jessica Reif Erlich: So, let’s move away from content then. So, free cash flow. First of all, like, what an inflection point, $1.6 billion in €˜22, roughly $3 billion in €˜23, $4 billion plus probably in €˜24. Can you just talk about €“ historically, you have been more build than buy. Is there any change in philosophy as cash starts accelerating? Can you talk about overall capital priorities? And what’s driving that operating margin increase?
Spence Neumann: Spencer, why don’t you go first with the capital allocation philosophy, if you like?
Spencer Wang: Sure. Thanks Jessica. So, as we were in the letter, no change at all to our capital structure policy or allocation guidance, which is to, first and foremost, reinvest in the core business and selective acquisitions after that. Those are the main priorities. Beyond that, if we have cash in excess of our minimum cash levels, which we €“ which is roughly equates to two months of our revenue, then we will return that to shareholders or to our share buyback program.
Spence Neumann: Yes. And I can pick up with margins, I can start with. It’s a bit of an explanation. But if you like, in terms of just in the near-ish term, our outlook for €˜23 and then just generally, what’s driving our outlook. But what you saw in the letter, it kind of dates back, frankly. If we walk back to where we were in the beginning of 2022, when we saw a slowing revenue growth, we said, €œWe are going to manage to the target operating margin of 19% to 20%, FX neutral at those January 2022 rates.€ And we ended the year at 20%, so at the high end of that range. And now as we kind of turn the page to €˜23, first, I should say, with everything we talked about, we have got €“ we are quite optimistic in terms of our path forward.
I also just want to highlight there is also kind of short-term unusual amount of less visibility than typical because these things we are talking about in terms of our revenue initiatives, whether it’s scaling our ad platform, launching page sharing, which hasn’t globally rolled out yet, these things are early days. And then also all multinationals have a level of macro uncertainty. So, that’s a bit of a caveat in terms of the variability in the forecast. But what we see is we see with the €“ our path to accelerating revenue growth and our high confidence there that as we turn forward to €˜23, we are guiding to now 21% to 22% FX-neutral operating margins, those same January 2022 rates. We are now into New Year, so we take it forward to January €˜23 to current rates, and that’s a range of our operating margin guidance of 18% to 20%.
So, now FX neutral for €˜23, we are going to manage within that band to deliver at least within 18% to 20% operating margin guide. So, that is growing margins, growing absolute profit. And really what’s reflected in there is that this €“ we have high confidence in our ability to accelerate revenue throughout the course of the year as we scale ads and we launch paid sharing. We have got high confidence in improving the service and the strength of our content slate with everything that Ted discussed here on the call. And we are also continuing to manage our cost structure with increasing discipline. You saw that in the back half of €˜22 with our slowing expense growth and we will carry that through similarly in €˜23. So, that all lends itself to our focus, which is kind of healthy growing double-digit revenue growth and accelerating that revenue growth throughout the year, expanding our €“ both our absolute profit and profit margin and then growing positive free cash flow.
So, that’s all reflected again with the big caveat that there is a bit less visibility than typical in this near-term. That’s something we will continue to work through. We will obviously know a lot more over the next couple of quarters, a few quarters as we roll out paid sharing, and we will update guidance as appropriate. But that’s what plays through and then also plays through that cash flow generation that you see, where we believe with all those dynamics and managing at about the same level of cash content spend that we will have more than $3 billion, at least $3 billion of free cash flow in the year.
