Categories Earnings Call Transcripts

Netflix Inc. (NFLX) Q1 2022 Earnings Call Transcript

NFLX Earnings Call - Final Transcript

Netflix Inc. (NASDAQ: NFLX) Q1 2022 earnings call dated Apr. 19, 2022

Corporate Participants:

Spencer Wang — Vice President of Investor Relations and Corporate Development

Reed Hastings — Founder and Co-Chief Executive Officer

Spencer Neumann — Chief Financial Officer

Greg Peters — Chief Operating Officer and Chief Product Officer

Ted Sarandos — Co-Chief Executive Officer and Chief Content Officer

Analysts:

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Presentation:

Spencer Wang — Vice President of Investor Relations and Corporate Development

Good afternoon, and welcome to Netflix Q1 2022 Earnings Interview. I’m Spencer Wang, VP of IR and Corporate Development. Joining me today are Co-CEO, Reed Hastings; Co-CEO and Chief Content Officer, Ted Sarandos; COO and Chief Product Officer, Greg Peters; and CFO, Spence Neumann. Our interviewer this quarter is Doug Anmuth from J.P. Morgan.

As a reminder, we’ll be making forward-looking statements and actual results may vary. With that, Doug, I’m going to turn it over to you for the first question.

Questions and Answers:

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Great. Thanks, Spencer. So your tone in the letter today around competition, maturity, and macro factors is very different than it was three months ago. I was hoping that you could start out by just walking us through how your views have changed over the past few months.

Reed Hastings — Founder and Co-Chief Executive Officer

Yeah, Doug. I think our views are a little different because our numbers are a little different. If we had made our $2.5 million guidance, I think that was consistent with our thesis. And the lower acquisition really forced us to kind of tease apart what’s going on. And as we put in the letter, COVID created a lot of noise and how to read the situation, boosted us a lot in 2020 and then into 2021 I think we thoughtfully said it was mostly pull forward, which was the logical conclusion. But now coming into 2022 that doesn’t really hold. So then pushing into it, we realized with all of the account sharing, which we’ve always had. That’s not a new thing, but when you add that up together, we’re getting pretty high market penetration. And that combined with the competition is really what we think is driving the lower acquisition, a lower growth. So on the two parts, we’re working on how to monetize sharing. We’ve been thinking about that for a couple years, but when we were growing fast, it wasn’t the high priority to work on. And now we’re working super-hard on it.

And remember, these are over 100 million households that already are choosing to view Netflix. They love the service. We just got to get paid at some degree for them, so that’s part of it. And then two, it’s really — we got great competition. They’ve got some very good shows and films out. And what we got to do is take it up a notch, and I’ll tell you that we’re all pretty — I know it’s disappointing for investors, and it is for sure, but internally, we’re really geared up, and this is like our moment to shine. This is when it all matters, and we’re super focused on achieving those objectives and getting back into our investors’ good graces.

Spencer Neumann — Chief Financial Officer

The only thing I might add, Reed, is just that we’ve put a finer point on kind of elaborating on what we’re seeing in terms of slowing growth — near-term slowing growth, but the long-term addressable market we believe is unchanged in terms of all broadband households. It’s just that we have a better sense that COVID clouded in terms of this near-term limiters to penetrate that growth and capture that market. So that’s one of the things that we’ve put a finer point on this letter, but I just want to reinforce that the core addressable market is still there and that’s what we’re still growing into, Doug.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay, thanks. So maybe just in terms of the recent trends, if we could talk about 1Q a little bit more. You lost 200,000 subscribers or gained 500,000 ex the Russia removal. Hoping you could perhaps parse out a little bit around some of those factors that you mentioned. It sounds like acquisition might be at the top of the list and you’ve talked about that for a little while now, but hoping you could isolate some of those factors and then talk to us about how that informs your 2Q guide for a loss of 2 million subscribers.

Spencer Neumann — Chief Financial Officer

Sure. I’ll take that, and then others can fill in. So, as you said, Doug, we’ve guided to 2.5 million paid net adds. We delivered 0.5 million if you exclude Russia. So there’s really a 2 million miss in our Q1 actuals versus guidance. And what’s really reflected there is acquisition growth was consistent with what we expected. We were seeing that slowdown when we did the guide and it played out as expected. The difference is really some slight elevated churn throughout Q1. And this is pretty small, so retention was still very good. But we’re talking about it like two 0.2 to 0.3 percentage point, but on our big member base that has a pretty big flow through. It’s a combination of factors there. We talk about interrelated factors in the letter, but one very directly, the Russia’s invasion of Ukraine had some spillover effect in other parts of EMEA. We saw that in the Central and Eastern European countries there with some elevated churn.

We also saw probably some — a little bit more macro strain in some countries, some parts of the world like Latin America we mentioned that on the last call, but that was elevated, and just a little bit more seasonality in the business. We suspect some of that is those macro factors we mentioned and maybe a little bit of competition on the margin as well. So that’s really what we saw in Q2 — sorry in Q1 and that’s really what’s reflected in Q2, which is the continued trends we’re seeing in acquisition and that slightly elevated churn to probably continue through the quarter. It’s just a softer seasonal quarter for us typically, and that’s what’s reflected in the guide is little bit of softer seasonality and the same — essentially the same acquisition and retention trends.

Greg Peters — Chief Operating Officer and Chief Product Officer

And maybe I could pick it up and talk about the first two factors you want a little bit more detail on. And we have this addressable market that’s expanding over time in every country that we’re operating in. It’s a bunch of enabling factors like broadband and smart TVs. And then in some countries that we’re operating in and we’ve been operating the longest, like the U.S. is a great example, we have really significant high penetration of viewers into that near-term market potential. And that was really boosted by this growth at the beginning period of COVID and the lockdown.

Now that viewer penetration is made up of two groups: one is a group that’s paying us, which is great; and then there is a group of viewers that are not paying us, and they’re sharing someone else’s account credential. And we really see that second group is a tremendous opportunity because they’re clearly well qualified. They have everything they need to do to get to Netflix. They know what the service is. They found titles that they want to watch. And so now our job is really to better translate that viewing and the value that those consumers are getting into revenue. And the principal way we’ve got of going after that is asking our members to pay a bit more to share the service with folks outside their home. So if you’ve got a sister, let’s say, that’s living in a different city, you want to share Netflix with her. That’s great. We’re not trying to shut down that sharing, but we’re going to ask you to pay a bit more to be able to share with her so that she gets the benefit and the value of the service, but we also get the revenue associated with that viewing.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

So maybe let’s follow up on that a little bit more, Greg. We’ll come back to some of the more recent trends in a moment, but I guess when we think about account sharing and just curious about the early testing that you’re doing when you think about Chile and Costa Rica and Peru, I guess, now it’s pretty clear to see why it’s the right time to do this in a bigger way. But how do you think about rolling that out in the U.S.? And what will the implementation actually look like?

Greg Peters — Chief Operating Officer and Chief Product Officer

Yeah, first, it’s important to note that we’re trying to find a balanced approach here, and we’re trying to basically come up with a model that supports a customer-centric approach, it still puts members in charge, it supports member choice that delivers great entertainment value in all the options we’ve got, but also very importantly, allows us to bring in revenue for everyone who’s viewing and who gets value from the entertainment that we’re offering in. And obviously, we’re doing that so that we can invest then into more great content and a better service for everyone.

So there’s a bunch of factors that we’re working through. That’s why we’ve deployed the tests that we have. And, frankly, we’ve been working on this for about almost two years. About a year — a little bit over a year ago, we started doing some light test launches that we — informed our thinking and helped us build the mechanisms that we’re deploying now. We just did the first big country tests, but it’ll take a while to work this out and to get that balance right. And so just to set your expectations, my belief is that we’re going to go through a year or so of iterating and then deploying all of that so that we get that solution globally launched, including markets like the United States.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay. That’s helpful. And maybe, Spence, just on that point, maybe if you could just walk through the accounting a little bit here and how do you think about the uplift, whether more of it would come from ARM or from subscribers over time?

Spencer Neumann — Chief Financial Officer

Yes, that’s great, Doug, you kind of nailed it, which is, as you heard from Greg, we’re looking to monetize sharing and meet our members where they are. So you should expect that member numbers or subscriber numbers are less relevant over time, because these may very likely show up in ARMs. So you should think about it as engagement and average revenue per member probably increasingly important and then obviously revenue growth, which we’ve always said we’re trying to optimize both near- and long-term revenue growth to drive that positive flywheel of reinvestment in the business. So it’s not that there isn’t going to be a P times Q. There’s still Q, but increasingly important is probably ARM and engagement and revenue overall.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

And just to clarify there. Subaccounts will not count as subscribers. They’ll just…

Spencer Neumann — Chief Financial Officer

That’s right. That’s right. That’s right. So it’s less distinctive of an individual household account.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay. And then in the process though, as some of those current shares outside the household do not become subaccounts, you’ll pick up some of those subscribers separately in a…

Spencer Neumann — Chief Financial Officer

That’s right. And as Greg said, we’re still working through the ultimate solution here, so we don’t exactly know how that’s going to play out, but you should assume that it’s — that there’s going to be less importance on an individual household account number, and therefore what’s more important is revenue, viewing, engagement — so viewing engagement, overall revenue growth, and ARM as a key metric.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay. Let’s go back to acquisition for a minute. So you noted it’s not returned to pre-COVID levels. What are the ways that you can influence acquisition beyond account sharing, which we talked about, and then beyond, of course, just creating great content?

Ted Sarandos — Co-Chief Executive Officer and Chief Content Officer

It shouldn’t be any more complicated than that, Doug. Honestly, we’ve got to compete, and we’ve got to continue to improve on the core service, which is making TV series and films and now games that people really love. That’s what we’re really focused on. And I think that that’s a thing that I think we can continue to grow the business in. And now we talked about being highly penetrated in some of those core markets with users, which means that it’s harder to get them to join Netflix if they’re already using Netflix. So we got to figure out these different models that we’re doing now to more effectively monetize that viewing.

As Spence said earlier, the engagement is really key. As you see in the Nielsen data that we published in the letter, our engagement has been super healthy — even with this heightened levels of competition, our engagement — our viewing has been very, very steady, holding on to our market share in the space. But on top of that, in the quarter, while we were not happy with the top line subscriber growth, we definitely saw that the new season of Ozark, the Inventing Anna, The Adam Project, and certainly the biggest of them all the new season of Bridgerton delivered exactly as expected, actually quite — actually a little bit bigger than expected with fans. Now, of course, we think we’ve got to do that and we have to have an Adam Project and a Bridgeton every month, and to make sure that that’s the expectation of the service constantly. So we’re definitely feeling the higher levels of penetration in those markets of users, and we’re definitely feeling a heightened level of competition for sure. And so we’ve just got to continue to do what we’re doing and improve each of those things.

Now, how do you improve content? We’ve been doing this for a decade. Well, first of all, that’s about 90 [Phonetic] years less time than all of our competitors have been at it. But I look at things like things we’ve been doing over the last few years that we’ve been improving in. So big movies, just a few years ago, we were struggling to out-monetize the market on little art films. And today we’re releasing some of the most popular and most watched movies in the world. Just over the last few months things like Don’t Look Up and Red Notice and Adam Project is examples of that. And that’s just in the few years of improvement on one line of content. Another is unscripted. We didn’t — we made zero unscripted about three years ago, and today creating these big, unscripted brands and growing original, unscripted universes like Too Hot to Handle and Ultimatum that’s really popular right now around the world, Selling Sunset, these are large, growing, original unscripted universes.

So we’ve come a long way from Ultimate Beastmaster my point is. And I think about things like our content in Korea. Again, pretty new to the market. Everybody knows about Squid Game, it was probably the biggest show in the history of television, and just a few years ago we were producing no original content in Korea. And while we all know about Squid Game, there’s D.P. and All of Us Are Dead, and a slew of original contents that are thrilling our members in South Korea and fans around the world. So we’re continuing to improve constantly in getting those moments that can lead to something like a Squid Game or Bridgerton constantly.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Got it, okay. I wanted to go to pricing just for a moment. There’s a lot of — you have this confluence of trends basically that are taking place here. But, Greg, I was just hoping you could talk a little bit more about the recent price increases primarily in the U.S. I know it’s still early in the U.K., but I guess to what effect — you did mention slightly elevated churn in 1Q. How much was that a factor? How is this price increase being received currently?

Greg Peters — Chief Operating Officer and Chief Product Officer

Yeah. So top line is that the price changes, the last several price changes we’ve done are generally performing as we’ve seen the price changes over the last several years. So there’s no fundamental difference in performance. First of all, these price changes are significantly revenue accretive, so that’s an important top level heuristic. And we sometimes see a blip in churn and in some markets we also see a marginal impact on acquisition. Often these effects are transitory, so it’s a change effect, and we move through it and win those folks back. But I would say the big takeaway is the vast majority of our members recognize that we’re investing what they pay us and the incremental amount that we’re asking them to pay us into more entertainment value back to them, back to our members, more great stories, bigger films, more variety of content, and higher quality of programming.

So we generally plan to continue doing what we’ve been doing. But I would also say we’re also working hard to ensure that we have a range of price points across a set of plans with different features that deliver on different consumer needs and consumer desires, while making sure and being very focused that we retain good accessibility to the service for a broad group of people in every country we serve that entry level. So no major changes there, and we’re keeping the plan that we’ve got in place.

Spencer Neumann — Chief Financial Officer

And one thing just…

Reed Hastings — Founder and Co-Chief Executive Officer

And related…

Spencer Neumann — Chief Financial Officer

Go ahead, Reed. Sorry.

Reed Hastings — Founder and Co-Chief Executive Officer

Related to that, Greg’s done great work on the price spread and one way to increase the price spread is advertising on low-end plans and to have lower prices with advertising. And those who have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription. But as much I’m a fan of that, I’m a bigger fan of consumer choice and allowing consumers who would like to have a lower price and are advertising tolerant, get what they want makes a lot of sense. So that’s something we’re looking at now. We’re trying to figure out over the next year or two. But think of us as quite open to offering even lower prices with advertising as a consumer choice. Spence, you want to keep going?

Spencer Neumann — Chief Financial Officer

My point was quite tactical. I’m sure Doug is going to want to follow up perhaps on your point, but I just want to be really clear on the point on Q1 performance and when I talked about slightly elevated churn relative to our expectations. That was not due to our price increases. So the price increase played out, as Greg said, consistent with our expectations. We just saw some slight uptick in seasonality for the other reasons I mentioned, some of the strain in Central and Eastern Europe some of that macro strain we saw and maybe a little bit of competition on the margin.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay. Reed, you pulled me forward to advertising, so I do want to get there, but it was a little further down the list. But one last point just on pricing. Given all these factors that you’ve talked about and written about in the letter, is there a change to your view on long-term pricing power?

Greg Peters — Chief Operating Officer and Chief Product Officer

I would say our general view is unchanged. And again, we don’t have [Indecipherable] target and markets or whatever. We’ve been finding our way through adding more value, keeping that virtuous cycle going, that big spread that Reed mentioned, and again, we’re seeking ways to actually take that spread even wider and that’s why I think ads is an exciting opportunity for us that we want to explore more. But no fundamental shift in our thinking about how that process works or the potential that we have in that.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay, thanks. All right, so let’s shift to ads…

Ted Sarandos — Co-Chief Executive Officer and Chief Content Officer

And Doug, I would just add that that’s those directly related to creating the content that people find to be incredibly valuable. And our long-term view of our ability to continue to do that is unchanged.

Spencer Neumann — Chief Financial Officer

And there’s a long history of that across entertainment for decades, right. People love film and TV and games content, and if we can continue to deliver that value, deliver that engagement, there’s a long history of people being willing to pay for it, and as Reed said, also advertisers trying to reach those audiences. So we believe we can drive that value over time and then monetize it so long as we deliver on that entertainment value.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay. So on advertising, I think certainly, Reed, preserving the simplicity of the product has been very important, but I think you’ve also talked a little bit about, at least in the past, perhaps not seeing the incremental profit potential as well in terms of a lower-price, ad-supported tier. Has that view changed? And I guess if you were to pursue an ad-based model on a lower tier, how long would it take you to get there and roll that out? And what are the key things you need to do along the way?

Reed Hastings — Founder and Co-Chief Executive Officer

Yeah. It’s not a short-term fix because once you start offering a lower-price plan with ads as an option, some consumers take it, and we’ve got a big installed base that probably are quite happy where they are. So think of it as it would phase in over a couple years in terms of being material volume. And in terms of the profit potential, definitely the online ad market has advanced and now you don’t have to incorporate all the information about people that you used to. So we can be a straight publisher and have other people do all of the fancy ad matching and integrate all the data about people. So we can stay out of that and really be focused on our members creating that great experience, and then getting monetized in a first-class way by a range of different companies who offer that service.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Got it. And is it fair to think that it would be something you would test in a few small markets to start out and then kind of move along?

Reed Hastings — Founder and Co-Chief Executive Officer

We’re probably not that advanced, but no, I think it’s pretty clear that it’s working for Hulu, Disney is doing it, HBO did it. I don’t think we have a lot of doubt that it works. All those companies have figured it out. I’m sure we’ll just get in and figure it out as opposed to test it and maybe do it or not do it. So I think we’ll really get in. But again, it a would be a plan layer like it is at Hulu. So if you still want the ad-free option, you’ll be able to have that as a consumer. And if you’d rather pay a lower price and you’re ad-tolerant, that’s also we’re going to cater to you also.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay. Let’s shift gears to content. Ted, the 2Q slate includes a bunch of returning hit series like Elite, Ozark, Stranger Things, Umbrella Academy. How are you thinking about that slate in 2Q and maybe if you could also talk a little bit more about the back half as well?

Ted Sarandos — Co-Chief Executive Officer and Chief Content Officer

Yeah. So those — they’re proven brands for us, of course, and going into, I’ll start with Stranger Things because the new season of Stranger Things is a super-sized season. That’s why we’ve cut it in half. Each episode of the new season feels like a big feature film. It’s really phenomenal. We’re super-excited about how it’s landing creatively and with how excited fans are for it. And I think that’s going to be, obviously, the big story coming up later in the quarter. The finale of Ozark, which is our Emmy Award-winning fan favorite. The season three was a killer and season four brings it home in a really incredible way. We’re also wrapping up our longest running show, Grace and Frankie with an incredible final set of episodes coming up later this month that we’re really excited about. And we’ve always said we ran through the COVID delays that had us back-stack 2021. 2022 is not quite as back-stacked, but it does build throughout the year, and it builds up to some of our big event films in Q4 that we’re really excited about, like Knives Out 2, Gray Man coming up before that from the Russo brothers who’ve had a lot of great success with, a really fantastic action movie with Ryan Gosling. So the upcoming slate in ’22 we’re confident is better and more impactful than it was — than ’21 and we think ’23 will be better and more impactful than ’22. So we’re really — the content flow has been fantastic and we’re really excited about it.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

And just to follow up on, you mentioned…

Ted Sarandos — Co-Chief Executive Officer and Chief Content Officer

I should say not — obviously not to forget our international content, Elite season five, as you know, continues a really great run for us there. We have a Korean version of Money Heist coming up called Money Heist Korea. That’s really fantastic. New movie from Omar Sy, The Takedown from France, a great film from Germany, All Quiet on the Western Front, and a great slate of new content from Japan, Akubi [Phonetic], The First Love. We’re really excited about the output from all of our international territories as well.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Ted, you mentioned splitting Stranger Things into different parts, and you’ve done that with a number of series over the last few years. As streaming proliferates, it feels like there’s this increasing debate around the value and stickiness of providing a full season of content all at once. So just curious about how your thinking has evolved here, given that we are seeing more of these series broken into two parts, essentially.

Ted Sarandos — Co-Chief Executive Officer and Chief Content Officer

Yeah, splitting the seasons actually had a practical reason before, which was the COVID delays and all those projects that kind of led us to splitting some of the seasons. But what we found is that fans kind of liked both. So being able to split it gives them a really satisfying binge experience for those people who want that really satisfying long binge experience, and then being able to deliver a follow-up season in a few months versus in some cases — the new season of Stranger Things is coming nearly three years after the last one, or more than two anyway. And so we’re really — being able to split the season when you can deliver both halves of it in a really high-quality way, like in the case of Ozark, had additional episodes, so both experiences were really satisfying for the binger or the one-at-a-time viewer as well. We’ve also had great success in these mini batches of our unscripted shows. So doing one to three episodes a week every week has also been great and still true to the binger by giving them more than one episode to watch at a time.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

You’ve talked about cash content spending of around $18 billion this year in a period of slower sub growth. Are you more likely to pull back to manage costs or to lean in to further differentiate the offering?

Ted Sarandos — Co-Chief Executive Officer and Chief Content Officer

LookI, I think we’ve got to continue to invest in the content, both in the quality and the variety of the content. And our — we will continue to grow the content spend relative to prior years, and I think in general we look at the — what’s most important though there is the impact of the slate, and we’re very focused on making sure that that impact of the slate continues to grow. We should be able to, 10 years in now, get more bang for our buck relative to what we’ve done ourselves and relative to the market.

Spencer Neumann — Chief Financial Officer

Yeah. And Doug, to that point, obviously, the revenue growth has slowed. We’re going to be responsible in terms of how we manage the business. We talked about in the letter, during this period of slower revenue growth, we’re going to protect our operating margins roughly in line with what we guided to for this year. So we’re holding to our guidance for the full year ’22. But presumably for the next 18, 24 months, call it the next two years, we’re operating to roughly that operating margin, which does mean that we’re pulling back on some of our spend growth across both content and non-content spend, but still growing our spend and still investing aggressively into that long-term opportunity, but we’re trying to be smart about it and prudent in terms of pulling back on some of that spend growth to reflect the realities of the revenue growth in the business.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

So just to clarify, only because you’ve been saying it for many years now, the 300 basis points per year over a multiyear period. Obviously, we were not going to see that this year, but it sounds like over the next couple years you’re thinking more flattish until you get subscribers really growing in a bigger way.

Spencer Neumann — Chief Financial Officer

We’ll get revenue growth, again, revenue and engagement are going to be primary, we’ll also get subscribers going, so there will be subscriber growth, but primarily reaccelerating that revenue growth. We believe we have multiple levers to do that. We have high confidence in monetizing sharing as we talked about. Reed talked about things like perhaps adding an advertising layer and obviously continuing to improve the service, grow engagement, grow revenue. So we have high confidence that we will accelerate revenue. When we do, we also have our commitment to continue to gradually grow our operating margins. But let’s first get our revenue growth reaccelerated and then let’s [Phonetic] talk about the pace of that margin acceleration.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

And Spence, what does all of that mean for free cash flow near term and then over the next couple years? 2022 is certainly looked at as like the first year of sizable and sustainable free cash flow.

Spencer Neumann — Chief Financial Officer

Yeah. And that continues. So we’re, as I said, managing the business prudently for all of our stakeholders. We’ll be positive free cash flow this year, consistent with our expectations going into the year, and we’ll continue to build on that in years going forward. So that’s our expectation. That’s what we’re still planning towards. I don’t know Spencer if you would add to that maybe.

Spencer Wang — Vice President of Investor Relations and Corporate Development

No. I think you hit it right on the head, Spence.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay. I wanted to talk about India a little bit. You cut prices significantly in December across plans, but you’ve certainly pointed out the cable in India is around $3 a month. Just curious what the response has been like. Do you still view those changes as revenue accretive? And what are you seeing in terms of maybe early behavior from some of those incremental subscribers?

Greg Peters — Chief Operating Officer and Chief Product Officer

Yeah, I would say to your last point the incremental subscribers are largely behaving similar to the subscribers we’ve added over the last 12 months, and not a fundamental difference. And really this was a bet in terms of long-term revenue maximization, which is how we think about the top level valuatory model we have for these things. And it was stimulated specifically by the fact that Ted’s team is doing some incredible work on Indian content, and we saw the slate there, and we’re really excited about a bunch of titles that were coming down and thought there was an opportunity to broaden the audience that got to see those titles. And so we’ve seen that effect definitely take hold where we have an additional bump in subscribers that will now get to see that content. And the bet is that those folks will enjoy those titles and that they will talk enthusiastically about those titles to their friends, their family, their coworkers, and that will lead to another positive momentum on the flywheel of sign-ups.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

And Ted, can you elaborate a little bit more just on the content in India and I guess just how you’re thinking about overall product fit at this point in the market?

Ted Sarandos — Co-Chief Executive Officer and Chief Content Officer

Yeah. The product fit incorporates subscription prices as well and willingness and ability to pay. So we have seen a nice uptick in engagement in India. So we’re definitely taking it in the right direction.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay. I want to talk about gaming a little bit. I think, Reed, you’ve discussed it in the past as perhaps the next genre of content beyond TV and beyond film. I’m curious how you would characterize your progress so far.

Reed Hastings — Founder and Co-Chief Executive Officer

I’m really happy with what the team has built, a big capacity to be able to provide our members with interactive and gaming experiences. We’ve had some nice successes, which I’ll have Greg talk about. So I think we’re building capacity, frankly, faster than we did when we entered film. So that’s very encouraging. So excited, and you’ve seen we’ve been doing these small acquisitions to build up the know-how and the creative chops to be able to make some really great games.

Greg Peters — Chief Operating Officer and Chief Product Officer

Yeah. And just to pick it up — sorry, Doug, do you want to…

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

I was sure it’s where you’re going. I was just going to ask what the puts and takes are around owning versus licensing IP and what the appetite is for further M&A going forward.

Greg Peters — Chief Operating Officer and Chief Product Officer

Sure. We’re open to both models. But I would say, we’re very enthusiastic about building internal capacity. And we’re doing this both from assembling it organically as well as through acquisition, which is a key part of our strategy to be able to build the capacity to produce the games titles that we think are really going to unlock value for our members. And we’re learning more and more every day from the licensed titles that we’ve got, which is helpful. But you could — there’s an early glimmer of where we’re trying to head with this with the announcement we just recently did with a launch of both a game and an animated series around the Exploding Kittens IP.

I don’t know if you’re familiar with this card game, but it’s a super fun physical card game that we’re now going to bring to form in both an animated series and a game. And we’ll have some interplay between these two different modes for fans of that IP. But that’s an initial step on a long roadmap we have around thinking about how do we make the film and series side and then the interactive games experience, the interplay between those, magnify the value that our members are getting from both. So it’s like a one plus one equals three and then hopefully four and then five situation. So that’s the multiyear vision that we’ve got behind it. And really to deliver on that, we think the internal development capacity is going to be key because we can obviously have those folks be very specifically focused on the opportunities that we see there.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

And what are the benchmarks or milestones perhaps that you need to see around gaming to lean in even more here in terms of content budget? And are there any metrics or numbers that you can provide so far?

Greg Peters — Chief Operating Officer and Chief Product Officer

I can certainly provide the framework that we’re thinking about it. And it’s a top-level priority for us, and we’re very focused on it. And so bottom line, we think about games and delivering value to members and reflecting that back into the business through both acquisitions. So we’re aiming to have titles that land that create conversation and enthusiasm and buzz, that drive more people to sign up for the service and then obviously in retention as well. Engagement is that primary leading indicator that we have for retention and value delivered, so we’re looking at both of those very, very carefully.

And similar to how we think about it on the film and series side, obviously, we want to make sure that the investment that we’re making in any given title is calibrated to that business value that we’re getting out of it. So we’re building our understanding of how those metrics work together so that we can have a good fitness function around the work that we’re doing and making sure that it’s delivering value. And that’s really the go signs for us that we’ve got it figured out, and we want to ramp and scale the investment.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay. Ted, Netflix shares are back to — of course, back to pre-COVID levels, but they’re also around the same level they were at nearly 4 years ago in 2018. So maybe you could just talk about your ability to continue to hire great talent within the company.

Ted Sarandos — Co-Chief Executive Officer and Chief Content Officer

Look, I think that when people look to join Netflix, they join Netflix because they believe in this long-term vision of the move into away from linear television and transactional movie business into a business that could be much more satisfying for consumers and deliver on the culture and deliver big audiences and really move the market.

One of the things I would say is, by way of example, is what we can do around the world. Our teams are on the ground, our creative executives, our business executives, are on the ground all over the world, are much more empowered, they are much more collaborative, and they’re much more risk-tolerant than their counterparts all over the world, which enables — it creates an ecosystem for something like Squid Game or for like a Lupin or La Casa de Papel to exist. And that is — our ability to do that and to bring global notoriety to local content players is unprecedented, and it’s pretty unrivaled at this point.

So I think people look at that as something very exciting to be close to. And at the long, long-term — the long-term story is the broadband household penetration, we’re going to get to those houses. There’s a long term and a short term. In the short term, you’ve got highly-penetrated users, and we’re working through that right now. And in the long term, you’ve got things like smart TV sales and a bunch of macro factors that slow that down that we all see that as temporary, including everyone who works at Netflix. So everyone really does see the long play. And I know I’ve been here for more than 20 years and have been through a couple of these. And yes, they don’t feel great in the moment. But man, it feels great to come out on the other side of it. And I think everyone is knowing that that’s going to come up, and we’ll come out on the other side of it.

Spencer Wang — Vice President of Investor Relations and Corporate Development

Doug, we have time for two last questions, please.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay. I wanted to — just back to content for a minute. You’ve driven a lot of attention to Formula 1 with Drive to Survive. Given the success there, sports is obviously a frequent topic, how are you thinking about sports? There’s certainly more rumblings around doing things related to NFL media and NFL films. How are your intentions shifting perhaps here at all?

Ted Sarandos — Co-Chief Executive Officer and Chief Content Officer

So look, we expand our content verticals constantly. For us, I look at games as a great example of adding something brand-new to the service, something new for our members to enjoy. We’re going down the game path because I think it fits us really nicely. Our ability to tell stories and build worlds are very consistent with our existing skillset and culture, and we think that we can build a big revenue and profit stream by adding games. We’re not quite so sure that you can add the big profit stream by adding sports. Other folks are trying it, and we’re going to — and we’ve gone down this other path. In the meantime, we’re incredibly excited about, as you mentioned, the Formula 1: Drive to Survive as an example of sports-adjacent programming that our members really value. We’ve grown the sport tremendously. We’re taking that bet in the world of tennis and golf and others coming up. And we also have an incredible sports documentary business that keeps growing. So I’m not saying we never would do sports, but we would have to see a path to growing a big revenue stream and a big profit stream with it.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay. And then just to close out. Reed, you’ve created this very unique, very successful culture within the company over the past 20-plus years. Has anything changed, in your view, just from a cultural perspective around either content acquisition or in some of the more operational functions?

Reed Hastings — Founder and Co-Chief Executive Officer

Yeah. We’ve changed every year, hopefully, for the better. We don’t look at culture as some fixed thing. We look at it as what’s going to drive excellence. The North Star is getting excellence, and so we’ve made a bunch of adjustments as we expanded around the world. We’ve made adjustments as we’ve become more original-content-centric. So we’re always improving. And again, the goal is excellence and then a culture is a tactic in that journey.

Douglas Anmuth — J.P. Morgan Securities, Inc. — Analyst

Okay, great. Thank you, all.

Spencer Wang — Vice President of Investor Relations and Corporate Development

Reed, Ted, do you want to close this out?

Spencer Neumann — Chief Financial Officer

Hey, can I say one thing before they close this out, just as a tactical thing — one tactical thing that I should have mentioned earlier, Doug? I just want to make sure there’s not a read-through when we guide to negative 2 million paid net adds in Q2. We didn’t talk about full year and what we expect. And we’re not providing full-year guidance, Doug, but I just want to make sure there’s not a read-through from negative 2 million paid net adds in Q2 that there’s going to be a steady strip down of negative adds. We’re not expecting our growth to reaccelerate — our revenue growth to reaccelerate before the end of the year, but we will grow revenue, and there will be paid net add growth. As we get to the back half of the year, Ted talked about the stronger slate, we get further away from some of the big price increases, we get into a stronger seasonal period. So I just want to make sure that that’s understood as you think about the full year, even though we’re not providing full-year guidance. Sorry, just we didn’t get to it.

Reed Hastings — Founder and Co-Chief Executive Officer

Always good to provide that non-guidance guidance.

Spencer Neumann — Chief Financial Officer

Thank you.

Reed Hastings — Founder and Co-Chief Executive Officer

When we look at the last 20 years, like Ted mentioned, we’ve gone through a lot of changes, and we’ve always figured them out one by one. It’s super-exciting. We’re going to figure this one out. We got a great team. We lead by a significant margin in streaming, and streaming is continuing to grow around the world. So we have a bunch of opportunity to improve. But coming out the other side, I’m pretty sure we’ll look at this as really foundational in our continued journey. Over to you, Ted.

Ted Sarandos — Co-Chief Executive Officer and Chief Content Officer

Yeah. That’s well said, Reed. I would only add that a reminder to folks is that as we keep talking about competition, remind you that we’ve always had really tough competition. And all of the players who compete with us today have been competing with us since our first day of streaming, some head-to-head and some through their legacy business models, and they’re now migrating to be more head-to-head players while they’re struggling to manage their legacy businesses.

So I really like the competitive position that we’re in. I love the competitive position that we are moving from relative to just a couple of years ago. But in every metric that we measure success, engagement, revenue, subscribers, profit, all those ways that we’re measuring, I like the competitive position that we’re coming at it from. And I want to just assure everybody that everyone at Netflix shares that excitement to come out the other side of this part of the business.

So with that, I’d just encourage you to enjoy the final episodes of our incredible show Ozark and our longest-running comedy show, Grace and Frankie, coming up at the end of the month and an incredible slate of films and series coming up in ’22. Thanks.

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

Canopy Growth Corporation (CGC) Earnings: 4Q22 Key Numbers

Canopy Growth Corporation (NASDAQ: CGC) reported fourth quarter 2022 earnings results today. Net revenue declined 25% year-over-year to CAD111.8 million. Net loss attributable to Canopy Growth Corporation was CAD574.6 million,

Infographic: A snapshot of Costco’s (COST) Q3 2022 earnings

Warehouse behemoth Costco Wholesale Corporation (NASDAQ: COST) has reported a double-digit increase in third-quarter earnings and revenues. Revenues increased 16% year-over-year to $52.60 billion. Total comparable store sales grew 14.9%, while

Infographic: All you need to know about Autodesk (ADSK) Q1 results

Design software company Autodesk, Inc. (NASDAQ: ADSK) on Thursday reported strong revenue growth for the first quarter of 2023. The San Rafael, California-based tech firm posted total revenue of $1.17

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top