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

Netflix, Inc. (NASDAQ:NFLX) Q4 2023 Earnings Call Transcript January 23, 2024

Netflix, Inc. misses on earnings expectations. Reported EPS is $2.11 EPS, expectations were $2.22.

Spencer Wang: Hello, and welcome to the Netflix Q4 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. We do have a few changes to our interview format this quarter. First, we are live streaming this over YouTube. So hopefully it’s working. I guess we’ll find out shortly enough. Second, we’ve collected questions from the analyst community, and I’ll be reading those questions and moderating the interview. As a reminder, we’ll be making forward-looking statements, and actual results may vary.

A – Spencer Wang: With that, let’s dive first into the first set of questions, which is about our new partnership with WWE that we announced this morning. For Ted, the first question comes from Dan Salmon. Can you please expand on the decision to acquire WWE Raw rights? Is the WWE audience, one that is underpenetrated for Netflix today? And can you expand on the economics or the cost of the deal, please?

Ted Sarandos: Thanks, Dan. If I could raise a single eyebrow one at a time, I would lean into the camera with the single eyebrow and do my best wink. But I’m going to say instead that we are thrilled to bring this WWE Live programming to our members around the world. WWE Raw is sports entertainment, which is right in the sweet spot of our sports business, which is the drama of sport. Think of this as 52 weeks of live programming every week, every year. It feeds our desire to expand our live event programming. But most importantly, fans love it. For decades, the WWE has grown this multigenerational fan base that we believe we could serve and we can grow. We believe that WWE has been historically under distributed outside of North America.

And this is a global deal. So we can help them and they can help us build that fandom around the world. And not to – I should add that this should also add some fuel to our new and growing ad business. We’re very excited about this deal.

Spencer Wang: And Ted, did you want to comment on the economics or the cost of the deal?

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Q&A Session

Ted Sarandos: No, we don’t comment on the economics of any of our deals. I would just say this is a long-term deal that we’re really happy to be in with the WWE.

Spencer Wang: Right. Our next question comes from Rich Greenfield of LightShed. Rich, first wants me to say great quarter to you all and his question is, should we think about the WWE deal as fitting into your existing plans to spend roughly $17 billion a year in programming? Or is this expansion into live going to drive overall spending higher? And lastly, could you talk about the opportunities to create shoulder programming around WWE similar to Drive to Survive?

Ted Sarandos: Well, expanding into live event programming is something we’ve talked about for quite a while, and this has been in the works, so we used to look at this as fits inside of our $17 billion programming spend now. So – and in terms of building on it, you should think about Formula One as – like this is almost the inverse of Formula One, which is a very big and passionate U.S. fan base and a lot of room to grow outside of the U.S. And we could build that as we have with Formula One, and other sports like through our shoulder programming, like Drive to Survive, like Full Swing, like Breakpoint, like Quarterbacks, like Tour de France. And now with this great storytelling the events itself are the storytelling of the WWE. So this is a proven formula for us that we’re excited to jump into. This is sports entertainment, very close to our core. The deal is long term. We’re super excited about it.

Spencer Wang: Great. And the WWE partnership has spurred a lot of questions around our broader approach to sports, including a question from Ben Swinburne, but I’ll read Michael Nathanson’s question since he got it in first. So Ted, given the news today, is it safe to presume that you will now be interested in similar types of global sports rights like the NBA or UFC, why is the WWE more attractive than those rights?

Ted Sarandos: So unique to those other opportunities, WWE is sports entertainment. So it’s really as close to our core as you can get of that sports storytelling. So – and in terms of the deal itself, it has options and the protections that we seek in our general licensing deals and with economics that we’re super happy with globally. So I would not look at this as a signal of any other change or any change to our sports strategy.

Spencer Wang: Great. Thank you, Ted. I’ll move this along now to a series of questions regarding our results and the forecast. First, coming from Mark Mahaney of Evercore and this is for Spence. How should we think about ARM growth going forward? Is mid-single-digit percentage increase a reasonable benchmark? And what are the factors that could create either upside or downside to that growth outlook?

Spencer Neumann: Sure, sure. Thanks, Mark. So well, first, stepping back, 2023, as a reminder, was a pretty unusual year for us. It was essentially all member-driven growth because our pricing and plans focus in ’23 was on rolling out paid sharing. We had almost no price increases until late in the year in ’23. And even then, it was just a partial quarter impact. As we look to ’24, as we noted in the letter for 2024, we expect healthy double-digit FX-neutral revenue growth, including growth in FX-neutral ARM. So we expect continued member growth powered by a grade slate, including the full year impact of our 2023 net adds carrying into 24 and no change to our pricing philosophy. You saw some of that pricing action already in the past quarter.

And we should get some help from extra members and starting to scale our ads business. But as we said, ads won’t be a primary driver in ’24. So when you look beyond in general, over kind of multiple years, ’24 and beyond, we’re focused on continually improving our service. If we do that well, we’ll have more members or more value that we can occasionally price into and lots of engagement to build a big and profitable ads business. So healthy revenue growth with a mixture of volume and ARM, that’s really the output. And I’ll probably disappoint because I’m not going to provide a specific guide on ARM because we managed overall revenue growth, but we want ARM to be a component of that growth. Just that it could move up or down based on things in any given year like FX, like the place at which we’re scaling our ads reach and some lag that could happen in terms of monetizing that reach and just generally, our pricing and planned strategy more broadly in a given year.

Spencer Wang: Thanks, Spence. Our next question is from Steve Cahall from Wells Fargo for Greg. The question is once a subscriber and ARM benefits from paid sharing begin to diminish in 2024 what do you think are the biggest incremental opportunities to continue to drive subscriber and revenue growth, what types of additional content or additional member benefits provide the best ROI to help sustain healthy revenue growth?

Greg Peters: Well, we’re excited to be at the point where we’ve operationalized that paid sharing product work. So it’s integrated in everything we do. And we’re iterating and improving on it just like we would any other significant part of our product experience. So we think of this essentially as having built a more effective engine for translating the entertainment value that we’re creating for our members into revenue. But I think it’s critical to understand that, that engine works on top of, and we see it working on top of, very healthy organic growth. You can see it in things like better than forecasted churn, we see better-than-expected impact from the recent price changes we did. And that’s the model, essentially, right?