Netflix Inc (NFLX) — Q4 2019 Earnings Call Transcript

Good afternoon and welcome to the Netflix Q4, 2019 Earnings interview. I'm Spencer Wang, VP of IR and Corporate Development. Joining me today, our CEO, Reed Hastings; CFO, Spence Neumann; Chief Content Officer, Ted Sarandos; and Chief Product Officer, Greg Peters. Our interviewer this quarter is Mike Morris, Guggenheim. As a reminder, we'll be making forward-looking statements and actual results may vary. With that, let me turn it over to Mike now for his first question.

Great. Thank you, Spencer and good afternoon. Before we dive into some of the details we provided in this quarter's letter, I'd love to have Reed provide some strategic thoughts as we head into the New Year, the new decade. Perhaps we can start with just what were the most important strategic accomplishments in your mind of 2019? And as you look forward what do you hope to accomplish this year?

We've had the same strategy basically for 20 years which has pleased our members and they helped us grow. And we've done that in a variety of ways. Of course, initially just with DVD-by-mail then the combination. And if you look at what we've done in expanding film and making that a really strong aspect of Netflix. We've had a lot of continuous progress. But the same strategy we've always done is how do we learn? How to please our members? Whether that's on the product side, marketing side or content side. And for the next decade, we anticipate the same. How do we use the great resources that we have to do even better?

Now let's talk a little bit about some of the key specifics from the letter today. The first, of course, is the guidance on your member growth for the coming quarter. You have a very strong fourth quarter compared to your guide. The first quarter is lighter than it was in the prior year. You talked about some of the potential for timing between the first and second quarter. I think the key question on investors' minds is how to think about the full year. 2019 looked very similar to 2018 with the strong fourth quarter. How should we think about the coming year in that regard?

You want me to take this one? I'll take this one, Mike. So first, I just say, Mike, our opportunity, we view our long-term opportunity, is big and unchanged. So we should be clear about that. We're not providing full-year guidance but when you think about Q1, again it's comping off of the all-time biggest quarter we've ever had in Q1 of last year. We guided to 7 million paid net adds in 2020. So when you look at that Q1, 2020 number of 7 million that's still big growth. We've only had four quarters in our history where we've grown more than 7 million in paid net adds. And specifically it reflects, first, there's primarily a US story there and that we've seen some elevated churn in the US from a combination of pricing and competition. We can roll that through into Q1 including a full quarter of competition in Q1 versus a partial quarter in Q4. We also anticipate that competition rolling out globally throughout the year. So we're trying to be prudent of thinking about that impact throughout the business. And then when we think about the seasonality, the arc between Q1 and Q2, the first half of the year, we think it's likely to be more balanced because of the timing of the price changes. We took that through Q2 of 2019, so we think that our seasonality is going to look more like 2018 and 2019 when you think about the first half of the year.

Okay. When we talk about competition, you've mentioned churn a couple of times with respect to the potential impact. Can you talk about competition on both gross adds and engagement as well? Especially on engagement. I know it's early but clearly the Disney Plus product has a heavy kids and family focus to it. Have you seen any specific engagement change on your content in that genre?

Sure. Well, I'll jump and others can as well. We actually alluded to this in the letter, Mike. The great thing is, first off, we're growing in Q4 including in the US even with some of those challenges from competitive launches. Ultimately, what drives our business is increasing member satisfaction and viewing. What you also see in the US is that our per membership viewing grew not just globally but in the US through Q4 and continues. So that bodes well for our long-term opportunity as long as we keep getting better.

And Mike, thinking with the Disney product, Disney Plus has a lot of great catalog product and one big new show, 'The Mandalorian.' It primarily is going to take away from linear TV and takes away a little bit from us. But again, most of the future growth is coming out of linear TV.

It draws down by a variety of people because they were so broadly distributed prior to the launch.

Okay. And I guess the last thing on this particular topic is the behavior outside the US as compared to the inside. Clearly within the US, it's a more mature market and that's where the products were primarily focused in the fourth quarter, their launches. We do have some more expanded international rollout, particularly Disney talked about or announced a broader European rollout at the end of the first quarter. Any thoughts specific to that? Is that factored in? Is that one of many things? What's your thought there?

It's one of many. I mean, Disney is going to be a global service quite quickly. And there are many other global services. Remember that we compete a lot for time with YouTube. It's not dollars because that's ad-supported. But we compete very broadly for viewing and as Spence mentioned our per member viewing is up. That's because our content is getting better. Our service is getting better. And that's all coming out of linear TV.

And I would say that their brands are definitely global brands. But they're not, with the exception of China, they're not more popular than they are in the US anywhere else in the world.

Okay. And so, Greg, a question on pricing. When we spoke last quarter, you felt that these competitive launches would not have an impact on your prices. So I guess the first question is now that you have this quarter under your belt. Any update on that point in particular?

Yes. I think it's useful to start with just noticing that our revenue in the United States is up 23% year-over-year in Q4. So we're still seeing pretty significant growth there. We're not seeing anything that fundamentally contradicts our core model or suggests that it's changed in a material way. And that model is if we do a good job of judiciously investing the money that our members give us every month in great stories and better product experiences creating more value for them then we occasionally earn the ability to come back to them and ask for a little bit more money to keep that virtuous cycle of improvements going. Everything we're seeing continues to support that core model.

Okay, great. And you go down that path a little bit further historically you have done some sizable price increases at least on a percentage basis on a somewhat spread out timeframe. How do you think about possibly doing perhaps a single annual price increase in a more mature market at a more modest rate? I hate to say this but maybe somewhat more similar to what people have experienced with their cable bill or something to that effect.

We don't have a fixed model that we're coming in and saying this is the right approach. Our job is to actually listen to our members. If the signals that they're giving us in terms of the engagement that we're seeing that we gain from growth. We'll really use that as a mechanism to guide us towards when if we've earned that opportunity to come back and ask for more. So we're not really coming in with just a fixed model that we're going to shift to or anything like that.

And if we're putting hits on the board. And we can see that in the terms of watching engagement and subscriber growth then the more you can do that the more frequently you can go back. So we're in this great model of where we have to prove ourselves to our members literally every month. It holds us to a very high bar and keeps us coming back and doing more and topping ourselves if we need to.

One last question on this is around premium plan subscribers versus your standard plan subscribers, which is the largest. You've mentioned in the past clearly the largest group. What has been the trend with respect to your subscribers moving to the premium plan? And is there a way to further incentivize them to almost have a self opted price increase but also clearly getting an improved product as well?

I think we're constantly evaluating the right balance of what's features, what prices at those various different tiers. We haven't seen a significant shift in that. We see a healthy take rate across all of our plan options which is a really good sign. We're providing a range of options at various price points that allow consumers in the markets that we serve to select into the right model. Again, we want to be innovative about that. We'll look for ways to create more value across all of our tiers. But right now that blend is pretty healthy, we think.

And Mike, I would just add that in terms of plan mix, you have over the years seen a slight migration towards the higher price point plans. That is something that we have seen but it's quite gradual. There's no sort of big jump in any sort of given quarter, but quite a gradual increase in that which I think maps to the growth in smart TVs and high-definition TVs.

Okay. I'd like to switch to a few questions on content and content strategy. So, Ted, the ramp in feature-film product in particular both development and release are a big step forward for you in 2019. As you look into 2020, what are you most excited about either from a content perspective or an overall thematic perspective? There's a healthy amount of information on some key titles, but would appreciate you highlighting the things that are most important to you.

Well, looking forward to next year, we get the opportunity to do some things that we know have worked and come back with some sequels. And they are super popular. In genres like YA, we've got these rom-coms; 'To All the Boys I've Loved Before' and 'Kissing Booth' coming back with sequels in Q1 and Q2. We have big ticket action films with Mark Wahlberg, Charlize Theron and Chris Hemsworth, similar to the things you've seen in Q4. We're trying to program our movies like we do our series for every taste, every mood, every region of the world. So it's not trying to make one-size-fits-all programs. That's what we have so much of it, just what we all want to hold to a very high entertainment bar. So you're going to see us working across all genres like we did in Q4 and continuing to press up the production quality and production investment in these films.

And those are all coming out in Q1 and Q2 of this year and some in Q3, Q4. Just got a tremendous slate this year.

Yes. And I think the one thing we have been putting out in the letter, it's exciting that we end up being the most nominated studio at the Oscars this year with our films. But the most exciting thing is those films are all incredibly popular with our members as well.

So that leads into another question which is as you have sort of shifted and increased this focus on film, Ted, and particularly you've highlighted a couple of reasons for that and benefits to the members. Those have included some comparison with respect to the value proposition, right, and compared to a film.

You know what a movie ticket costs, so sure.

Exactly. I think we've also talked about the ability for film content to travel. There's perhaps a broader global base of interest. Anything else that you would highlight or remind us of for why this shift in investment, or maybe not shift but expansion is important? Now we have another year under our belt with a pretty robust slate, so have things been progressing as you would have expected given those objectives?

Yes. I would say, look, when I look back at Q4, I look back and say, I'm glad we decided to do this about a year and a half ago. That's about the time it takes to secure the deals, obviously do the production and get everything delivered at the level of quality that we were able to. We have ramped up our feature innovation for almost three years. It hit the ground with our first project, 'Klaus', in Q4. It was a complete audience pleaser and an Oscar nominee for Best Animated Feature. In Q2, we have an animated feature called 'The Willoughbys' and in Q4 we have 'Over The Moon', which is from Glen Keane, who did 'Little Mermaid' and 'Beauty and the Beast'. These are big theatrical scale animated features that would be competitive with anything you would see in the box office. I think people really do value them. They do travel much more predictably than TV series do.

One of the things you just mentioned and clearly has been very widely reported and seen is the critical acclaim that you've achieved and you've had growth in Golden Globes, now at this point, Oscar nominations. My question is around the business benefit of that and the cost of achieving it as well. Maybe it's a somewhat open-ended question, but how much is it costing you at this point to have those films in a place that they can be considered for that? And what does the timeframe for the benefit to the business look like for that?

What you've seen is the expansion this last year within our existing content budget. We're growing, and we're choosing to allocate additional spending to enhance the breadth and scale of our films without detracting from our growth in series, which is also expanding. In particular, our local language series are growing by around 130 seasons globally. To me, the key takeaway is that the benefit to the business stems from the growth you're witnessing.

And I would just add to that. Sorry. You’ll see that if we further our reputation for doing well for talent by being one of the best in the world at winning awards for our talent then the business benefit is that we will win deals that we wouldn't have otherwise won for incredibly entertaining content. So think of all of our awards work as a really smart way to make us the best home for talent in the world.

I think it's also worth noting that there's a consumer component to this too. Some of our members around the world use the awards piece as a sign of what they want to watch. So when we present that information to them, we actually see them respond to that. There is an immediate benefit there as well.

And just one point, one more time, there seems to be a big gap between critical acclaim and award-winning and popular. We are really trying to do both, and we have in the past quarter achieved both. We're bringing popular film to the market at such a quality that's also being recognized by the critics and by the awards groups.

Sorry, Mike. I just want to chime in just to that point, it is working already, and the model is working in terms of seeing the return to our business. That programming, that level of diversity and quality across such a broad member base ultimately is driving member satisfaction. It's growing our member base, it's growing our revenues; you've seen roughly 30% growth this year. We're growing our profits, both our profit margin and up to $2.6 billion of operating profit this year. We're delivering on our cash flow objectives including on a path to improve our cash flow profile next year as you saw in the letter, material improvement from negative $3.3 billion this year to roughly negative $2.5 billion next year on that path to cash flow positive over the coming years. You are seeing it play out in the business model already.

To that point, Spencer, my next question for you is really around your cash investment. On content in a coming year, can you share a specific in terms of the growth that you are anticipating there? Can you just help us with the modeling side which is the amortization of that content relationship between that amortization and the cash investment?

Yes, sure. We'll continue to increase our content investment across the board next year. Because as I just said, we are seeing a great return on that in terms of our business model. Our content amortization is just under $10 billion this past year in 2019. I think you should expect to see with our specific guidance, a similar level of growth and that kind of grew in a roughly 20% range this past year. You should assume we will continue to invest at those types of levels this year. The conversion or the relationship between our cash spent and our amortization that ratio was about 1.6 meaning 1.6x the cash investment relative to our amortization of about $15 billion of cash investment this past year in 2019. You should see that ratio continue to come down a little bit. Again, without a specific number but we are scaling into the business. We’ve moved a long way from what was an all-licensed content business to now the well over 50% of our cash spent being on originals, the future of our business is mostly originals.

And Mike, I am sure you realize it but it is a huge milestone in our growth last year being peak negative free cash flow. We’re on the glide path slowly towards positive free cash flow. We're excited about that, but that's not coming from shrinking back our content spending. That's coming from the increase in revenue and operating income.

Alright, great. So let's pull it back a little bit and talk about a couple of additional content issues or topics. 'Friends,' a significant title and one of your more popular shows, was removed from the service at the end of 2019. I realize we’re only three weeks into the new year, but given that you have access to real-time data, has the removal of this content affected your consumer and member engagement in any way?

Nothing that we've seen or can measure.

Okay. So let's also talk about viewership then. A couple of things. I had a question here and then you gave us an entire page of viewership metrics. Mime that is why I should probably put a little more color on that simple answer. Just to say, we've had over the years incredible popular product come on and off the service and expires. Typically what happens is our members through our incredible personalization, deep library and broad library are able to find their next favorite show. And that will happen with 'Friends.' Fans of 'Friends' will find it somewhere else and some of them will find their next favorite show.

Like, Mike, it was about years 10 ago we dropped, we had to drop all the Disney content, not phased out like we are but all the ones, we added to the Starz deal. We were all worried about the big impact and instead people came back to the magic of the personalized service and they were able to find other things to watch and viewing growth just kept rising.

Yes. And we've seen that phenomenon over and over again even in, when one that may have been even more dramatic than that was all the Nickelodeon content when they came up and was completely displaced by other kids watching overnight. I should say equally good content just people had the ability to find something new.

Sure, understood. And so within that, what I was getting to is the viewership metrics that you provided in the letter for a number of your programs. I'd be curious if you wanted to highlight something that stood out to you? But I'll tell you something that stood out to me is the information you provided about 'The Crown.' Okay, so in particular season 3 saw growth in early season viewing and yet it's still I think by the metric 21 million households through the first four weeks of season 3 compared to 73 million households worldwide for the series overall. What strikes me is that your members have enough content that even though that was important to 73 million and 21 million was a big step up, there're still 52 million yet to watch it.

Correct. But I have mentioned with that first 28 days doesn't capture things like brand-new viewers to season 1 that just started in the ramp up to season 3. The show has been incredibly popular in the UK, in the US and around the world.

How does that compare to other key shows, right? I understand that every show doesn't behave like 'The Crown,' but is that viewership pattern somewhat similar for a show like, let's say, 'Stranger Things' that has three seasons?

It's so unique. Sometimes the show can enter the zeitgeist in such a loud way like 'Stranger Things' season 3 around the 4th of July phenomenon. Everything that happened had a lot of that viewing pop like that. Something similar we saw with a huge launch for 'Witcher.' 'Witcher' was kind of pent-up demand for known IP, but people loved it right out of the gate and it delivered viewing hours for us. Other shows come out and they pop and they're dependable and people are going to watch it as soon as they finish what they're watching right now. It's very different from show to show. You can see that in that list of how those shows will perform. Sometimes it's a really great indicator of its full-year performance, and sometimes its new shows will continue to build on their positive word-of-mouth and become even bigger over time.

I'd like to ask a couple of questions about product and distribution. So, Greg, I'd like to come back to the topic of pricing. We spoke a little bit about the US, but you have expanded your mobile-only plans I believe during the quarter. Can you talk about where that is now? I think it's India, Indonesia, I believe Malaysia but maybe the balance between what has become a more permanent part of your offering? What's still being tested and how we should think about that mix going forward?

Yes, and you've got the three countries correct. And we've seen in the performance across those three countries is that because we've added this price at a lower price point, this year at a lower price point. We've been able to add incremental subscribers which are great. We've seen an increase in retention not only in that mobile plan but in other plans as well. In net, that’s a revenue positive action for us and so we’re super excited about that. It’s a good indicator that there might be other countries around the world where that kind of offering will work as well. We're going to continue to test both that in different countries and see how that goes. We’ve also got a bunch of different other approaches that we're going to try out and will really try and be active and innovative in that area to try and improve the accessibility of the service for more and more people around the world, but in a way which we think is long-term revenue optimizing as well.

Can you expand on that as well in terms of expanding that availability?

I'd anticipate that we'll do more testing of the mobile plan in more territories. That's probably the one to talk about at this point then we'll sort of see what else works through our testing as we go.

Okay, great. Over the weekend, it was announced that you strengthened your partnership with Sky. How did that partnership become stronger?

Yes. I think what we're seeing is there's more opportunity through whether it's mobile operators, pay TV operators, ISPs to reach out to a customer segment. While we're probably growing with them in general, we can actually accelerate that growth. It starts by just being available on set-top boxes or the device that they're using to watch TV, and we can put Netflix there and make it easy to see the service and potentially sign up there. But increasingly now with bundles we've removed yet another point of friction, so that's just a part of their offering and they can just, we can do a call to action right in front of them like a standard thing, that's launching right now, watch and that’s a very effective way to introduce people to the service. We’re finding that with co-marketing programs and other things that we're getting more sophisticated to do a more effective job of reaching out to more of those members around the world.

You brought up the topic of bundling. Two kinds of questions with respect to bundling or different pricing packages. The first is a question of the need for consumers for this re-aggregation of these multiple services. If that is the case perhaps a third party would like to or should be taking some portion of the payment for adding value. I guess my question is your position on the need for some sort of aggregation of these multiple services? The second question is around annual pricing versus monthly pricing and perhaps a discount for consumers who choose to take an annual plan. How do either of those factor into your thoughts here?

I think we’ll see the right solution for consumers as we shift to this online streaming world. I anticipate that there are models that make sense where they’ll bundle multiple content services together and make it easier for consumers to access that. That might be the effect we’re seeing, but most of the bundles that we have are either connecting to an existing pay TV or legacy pay TV service or they're connecting to things like your mobile plan or your internet plan. There are multiple opportunities to find the right mix where we're able to introduce Netflix as part of a set of offerings that just make it simple for people to sign up and it's logical and intuitive for them to do so.

And the likelihood that we have your favorite show or favorite movie raises the chances that you're going to figure out how to get to us as well.

That's right and then you also mentioned I think an annual, a question on annual.

That's right.

I think it's an interesting model, and certainly we see some. There are certain countries around the world where that's a more common standard. So we want to experiment with that and test that out and understand if that's a more effective way for our members to access us. We'll go do that and we’ll hear from them if that's something that's more effective or not. We don't know yet.

Okay. I'd like to revisit the topic of advertising as a source of revenue or a means for your members to pay you for access to the service. Remind us we talk about a lot every quarter; the topic comes up again. So remind us why advertising is not a right option given that you do have a focus on providing your members with them. Some optionality in terms of their way to enjoy the service.

Yes. Mike, I think we addressed this last quarter in the letter. But I'll go over it again, which is Google and Facebook and Amazon are incredibly powerful at online advertising because they're integrating so much data from many sources. There's a business cost to that but it makes the advertising more targeted and effective. I think those three will get most of the online advertising business. To grow $5 billion or $10 billion advertising business you have to rip that away from other advertisers. This is quite challenging. Don't think of that as easy money. Instead, we think if we don’t have exposure to that, the positive side is we're a much simpler place. We're not integrating everybody’s data. We’re not controversial that way. We’ve got a much simpler business model, which is just focused on streaming and customer pleasure. We think with our model that we'll actually get to larger revenue, larger profits; larger market cap because we don't have the exposure to something that we're strategically disadvantaged at.

I do think that last point is something we do hear people lose sight of sometimes which is you are not aggregating an immense amount of data about your viewers. You have viewership habits but beyond that I think correct me if I'm wrong, you don't collect a significant amount of personal data that would be used to target advertising. Is that accurate?

We don't collect anything. We're really focused on just making our members happy. We're not tied up with all that controversy around advertising. If you wanted to succeed in online advertising, you can't just have a little data. To keep up with those giants, you've got to spend very heavily on that and track locations and various things that we're not interested in doing. We want to be the safe respite where you can explore, get stimulated, have fun, enjoy, relax, and have none of the controversy around exploiting users with advertising.

Now one of the biggest changes that you guys have made in a while with respect to what you share with us is the geographic breakdown that you're providing now with respect to your actuals. Can you remind us the reason that you made this change? We have had some questions whether it was somewhat suggested or required of you. So why did you make the change? I do have a couple of specific questions about the markets, if I could.

Spencer, you want to handle that?

Sure. To answer your question, like, no, this was not a required change. This was a change that we made and as we talked about it to evolve our view of our business as our business changes. With our launch of 'rest of the world' in 2019 we are basically a fully global company ex China. We've increasingly been looking at the business internally along these four regions. We want to map our external reporting and align it with how we look at it internally. It was not a requirement but our choice.

We work hard internally to not be US and international. There's no such thing as international. There's a bunch of nuances in every market around the world. Part of our development from an originally domestic company is to lose those kinds of distinctions. We think of it as four equal regions and we’re growing all of them. We’re sophisticated about all of them, which is why we look at it in that four-region way internally, which drives the external reporting.

It's been a great internal discipline for everybody to think about the business more in that way for sure.

Well that's a great segue into some questions specifically about the nuances in these regions. Perhaps we can start with Latin America, which was your first broad international launch in 2011. We noticed then and of course this quarter, you had record member growth in each of the regions, but it does look like Latin America is perhaps closer to being mature with respect to its growth trajectory. At the same time, if we look at the data, the penetration level of broadband households is still very low in that region. Can you characterize where you think we are in the lifecycle of member growth in that region?

Spence, you want to take that?

Yes, sure. Across the board, we're still in the early days right. Even with the roughly 167 million members across the globe and significant membership in Latin America, it's roughly kind of in that 30% penetration. We've seen around the world whether it's pay TV or broadband households, we don't see why we can't get into all of those households over time. So yes, we're a bit more mature in Latin America than perhaps we are in APAC and some specific countries. But we're continuing to grow. It happens to be a region where, similar to the US, our price increases were a bit more significant than in other parts of the world. Foreign exchange is working against us more meaningfully in Latin America. But I'd say in general, there's a very long runway. We continue to see both global content and local content working really well in that region. I think you'll see continued healthy growth on the horizon.

And you just, Spence, you mentioned APAC. Working with a couple of questions here. One is because this region has both Australia, New Zealand, so larger English-speaking markets and a large emerging market population. The first question is can you share the balance of subscriptions in that market between those two? I would think there’s still a relatively high ASP there, which would imply some mix of higher-price markets. But first the mix there and then should we expect that ASP to come down based on what you're seeing now with respect to adoption of the lower price mobile plans?

In terms of the mix others can jump in as well, but we don't break it down specifically by country. The takeaway should be though that we're seeing healthy growth in all of these markets across Japan, Korea, and India. We're increasing that content market fit. We’re getting much smarter about the markets in both the content we offer as well as the pricing, packaging, bundling, and distribution to our members and payment methods. We're getting better literally every quarter and every year and that's playing out in terms of very healthy growth across those markets. With respect to pricing, it varies in every country around the world. We’re not managing to ARPU, we’re managing to revenue maximization. We're not providing a long-term focus. Obviously, as we have lower-priced mobile offers that are going to bring down a blended ARPU in a country or in a market, but if we're doing that in a revenue accretive way, we think that's great for a long-term business. We're growing subscribers and we're growing revenue.

Again, our local content and our regional content in Japan and Korea, by way of example are becoming much more sophisticated about what's impactful in those countries. Plays pan regionally and occasionally plays globally. These investments are paying off in the form of things like 'Naked Director,' which was a big hit for us in Japan, and 'Kingdom,' which is the second season coming up from Korea that's been a big global hit. Exciting things are happening in the content space. A movie like 'Parasite' coming out of Korea has done $140 million globally; $100 million in Korea and $40 million outside. The expansion of people finding stories from around the world is only going to make the opportunity bigger and bigger.

Might be a time for one or two more questions. Let me hit on EMEA and then I'll get a wrap-up question. I think in the European, Middle East and Africa market, it's somewhat similar in terms of some mature markets and some emerging market opportunities. As you think about that market, growth opportunity is the answer similar to the same as the question on Asia? The question is a little bit rooted in, we do have some specific mobile-only lower-priced plans in Asia that we've been focused on. Should we think about that EMEA market as perhaps following a similar pattern?

Greg, do you want to take that pricing? I’d say in terms of the opportunity we see a huge opportunity in EMEA. It's a multiple of the number of addressable pay TV or broadband households compared to the UK or US and Canada region. We're less than 20% penetrated in the market. It's driving more than 50% of our paid member additions in recent quarters or roughly 50%. So we're low penetrated and growing in a very healthy clip in that market. I'll turn to Greg, in terms of pricing strategy.

The pricing and plans approach, again that region, much like APAC, is both affluent and mature markets as well as less affluent markets. I anticipate that we will have a mix of plans and approaches that will spread across that region that will be different price points, but it will be looking to optimize revenue through that mix across the entire region.

Great. So I'd like to conclude again as we did last time with a little bit of a 5 for 1 question. Last quarter, we talked about each of your something each of you was excited about in the coming quarter. This time, I'd like to ask you to press analyst reports, etc. about your company. I'd love to hear your take on what you think is most misunderstood about the company or at least less appreciated about the company. Last, as with last quarter I'll start with Spencer and go from there.

I honestly don't think that there's that much that's misunderstood. We're a single product company. I think pretty straightforward for most investors to understand. I think I'd like to think about one thing that I personally think there's probably a bit of an overfocus on the streaming wars sort of notion. I know it's exciting for folks to talk about the clash of the titans and all that kind of stuff. The big thing that's going on is the transition from linear entertainment to streaming on-demand entertainment, which is really, really big. It's similar to the transition the industry went through from broadcast to cable. A lot of those new cable networks didn't take much share from each other, but really grew together as broadcasting became smaller over time. I think that's what's the really big thing happening that might be less well understood.

Thanks, Spencer. What about you, Spence?

I think what is most misunderstood is the business model and what you see in our cash flow generally. Folks thinking that we are losing money, if you will, when we've shown is that we are increasing our profitability both growing and growing our profit margins. Over the last few years is forward investment as we've been going through a pretty significant transition of our business model from licensed content where you pay basically ratably for content you receive over time. It's on the network to original content not just licensed originals, but self-produced originals where oftentimes we're investing many years before that content is on the service. We've moved a long way in this business model transition from what was once an all-licensed content business to now where well over 50% of our cash spent is on originals, and we're becoming a very profitable business that will ultimately over the years become meaningfully self-funding.

Thanks, Spencer. Greg? How about you?

Spence actually took mine. It's my favorite sort of gap between external and internal worldviews. I’m very excited to be turning the corner on the free cash flow issue so that we can put that behind us and really focus on growing the business ahead.

Great and Ted?

In terms of misunderstanding, I think you do hear every once in a while that there is so much stuff on Netflix that everything gets lost. I think the opposite is true, which you'll see in those numbers that we release in the letter. Our ability to launch new brands, to sustain brands over multiple seasons or multiple sequels at a very high volume from all over the world has been unparalleled. The idea that we can create brands out of thin air over and over again sometimes multiple times in a week like this past week is something that I'm super proud of. It gets lost on people because they think all this content is for them. It isn't. It's just meant to be your favorite show and your favorite movie. That's going to be something for everybody.

I am really pleased with our impressive results. Achieving 88 in Q4 is truly remarkable. I’m excited about that and the success of 'Witcher,' which concludes the year on a strong note with a promising new franchise that will continue to evolve in the coming seasons. Looking ahead to the next few years, the significant focus should be on our rate of improvement. We are learning a great deal as we produce numerous shows, and our level of understanding is increasing. We're also conducting many product tests, which enhances our learning, and the quality of our service will be significantly better two or three years from now than it is today. This aspect is often overlooked, as people tend to focus on the current service rather than the improvements we will achieve in the future.

Thank you, Mike. Great job and I look forward to talking with all of our investors and everyone over the quarter.