Netflix Inc (NFLX) — Q4 2024 Earnings Call Transcript

Good afternoon, and welcome to the Netflix Q4 2024 Earnings Interview. I'm Spencer Wang, Vice President of Finance, IR and Corporate Development. Joining me today are co-CEOs, Ted Sarandos and Greg Peters; and CFO, Spence Neumann. As a reminder, we will be making forward-looking statements and actual results may vary. We will now take questions submitted by the analyst community. And we will begin with our first question from Dan Salmon of New Street Research. Dan asks, "Given the need to ensure safety and well-being of cast and crews, has there been any disruption to your L.A-based productions owing to the wildfires? If so, can you please quantify the impact on this year's cash content spending?"

Thanks a lot, and thanks, Dan. Let me start by saying this is a really difficult time for a lot of people in Southern California. So many people in our industry, including our employees, were deeply impacted by these fires and the hardest hit areas of these fires, the areas around Pacific Palisades, Altadena, Malibu, are very heavily populated with the folks above and below-the-line who we work with every single day. So, we're doing everything we can to help with relief and we're getting those folks who can back to work. To your question directly, no meaningful delays in the delivery of the projects and no meaningful impact to the cash in '25, but very meaningful disruption in people's lives. So, our goal is to keep everything on schedule safely, be mindful of folks who need time to work through the challenges of the fires, including in some cases, loss of life and home. But this industry has been through a really tough couple of years, starting with COVID, going into the strikes and now this. So, it's really important that we try not to delay anything and try to make sure that these jobs stay safe. But I definitely want to add that we are extremely grateful to the firefighters and first responders who are still fighting flames right now. These are the real heroes here. But to answer your direct question, no impact in 2025 on cash or deliverable. Nothing meaningful.

Thanks, Ted. We'll take our next question from Jason Helfstein of Oppenheimer. "Is it fair to assume that most of the upside in the 19 million subscriber additions came from the Jake Paul and the Christmas Day football games? And how was the attrition or retention, I guess, post the Christmas Day games versus normal post-holiday levels?"

Yeah. Short answer to that question is no. At a high level, we've seen broad strength across content categories across all regions. We've seen it throughout the entire year. And as we've consistently seen across our history, no single title really drives the majority of our acquisition or engagement. So, even in an amazing quarter where we had three huge live events, we had an incredible fight, two NFL games, we had one of our biggest TV series ever in Squid Games Season 2, all very successful events and titles that we are thrilled about. Our estimates for subscriber adds driven by those titles combined represent a small minority of our total member acquisition in the quarter. So, it's really the whole service that's working that delivered the upside that we saw this quarter. The vast majority of our net adds were driven by our broad slate in our portfolio globally. And Ted, maybe you want to pick it up for the last half of that?

We have built our business on variety and quality across different countries, regions, and genres, and we maintain a strong programming slate for our members throughout the year. We're excited that some viewers joined us for the fight and others for the games, but they also stayed for shows like Squid Game, Carry-On, Black Doves, Six Triple Eight, Senna, and Nate Bargatze's new comedy special, all of which performed well this quarter and continue to do so. What's particularly encouraging is that the retention patterns of those who tuned in for these events resemble those of our audience for other major titles. While we are pleased that these big events performed successfully this quarter, it’s important to note that to translate this into significant revenue growth, everything needs to function well together—the product, pricing, marketing, and advertising. We witnessed strong execution in all these areas throughout the quarter and the year.

Thanks, Ted and Greg. Our next question is from Steven Cahall from Wells Fargo. And Spence, this is probably best handled by you. "The U.S. dollar has strengthened since your last results and you said that you'll tend to underperform your margin targets when the dollar is stronger. What FX volatility do you think you can successfully hedge out in 2025? And what are the best ways to estimate the impact of currency movements net of hedging?"

Sure, Spencer. I will take that one. So, roughly 60% of our revenue is in non-U.S. dollar currencies. And think of it as the way we look at it is of that amount, we try to hedge roughly 50% on a rolling forward 12-month basis. So, I want to stress that we view hedging as sort of a short- to medium-term solution at best. Our focus has always been to manage the underlying operating results of the company through natural hedges where we can plus pricing and cost structure over time. So, our hedge program is really just a price averaging program to smooth the impact of FX, reduce the volatility from big near-term FX moves, and avoid short-term swings to the business so that we can invest appropriately for both the short and the long term.

Thanks, Spence. The next question comes from Brian Pitz of BMO Capital. "The advertising user base is growing quickly and your ad tech has been ramping for almost a year. What are your biggest learnings and perhaps hurdles for advertising monetization in 2025?"

First and foremost, we love our ads plan because it allows us to offer a lower price point for consumers. That's more choice, good accessibility that is proving to be popular and it means that we obviously have more people that can sign up and enjoy the growing range of entertainment that we've got to offer. It's also the reason that we've been successful in driving that first ads priority we had in our ads goals, our most primary ads goals, which were to get to sufficient scale. So, Q4, ads plan represented over 55% of sign-ups across our ads countries. We've seen membership on those ads plan increase about 30% quarter-over-quarter. This last quarter that was on top of 35%, the quarter before, on top of significant growth the quarters before that. So, as you point out, we've seen significant growth since launch, which we're excited about. Maybe even more excited about the fact that the engagement of those ads members remains healthy. So, view hours per member on the ads plan is similar to engagement on our standard non-ads plan in our ads country, which is a really good marker that we're excited about. So, we've done the work, I would say, to meet our scale goals for advertisers in '25. And that means that increasingly, we've been able to shift more of our focus, more of our attention on making the offering better for advertisers to increase monetization of that growing inventory. This is going to remain a priority and part of our roadmap for at least the next several years, likely years to come after that, but we're making solid progress already. For example, we exceeded our ads revenue target in Q4, which was an exciting milestone to get. We doubled our ads revenue year-over-year last year. We expect to double it again this year. So that should give you a sense of the slope of monetization growth that we're on. And broadly, we think of this as we're making solid progress, there's considerable work ahead of us for sure, but we don't see specific hurdles that you mentioned in the question other than just doing the work. So, we think our path is relatively straightforward and we're confident we've got a significant runway to continue to grow that revenue.

Great. And we have a follow-up question on advertising from Jessica Reif Ehrlich of Bank of America. "On advertising, do you have all the tech and tools you need to significantly scale up and move from the crawl to walk phase?"

I believe that 2025 will be the year we move from a crawl to a walk. A significant aspect of this transition is establishing our own advertising infrastructure. We have successfully launched this in Canada, and through testing and learning, we are preparing to expand it in 2025 to the remaining 12 advertising countries, starting with the U.S. in April. One of the main advantages of utilizing our own ad server is that it provides us with greater flexibility, more purchasing options for advertisers, and fewer activation challenges, thereby enhancing the overall experience for buyers. This is intended to lead to increased sales and ease of transactions with Netflix, and we've already begun to see positive revenue growth from these benefits in Canada, which is encouraging and boosts our confidence. Over time, our first-party ad tech platform will enable us to offer essential capabilities that advertisers need, such as improved programmatic availability, enhanced targeting, and better data integration, measurement, reporting, and incrementality studies. Utilizing our own technology stack supports these advertising features and also improves the experience for our members, making it more relevant. This is beneficial for everyone involved in the ecosystem. To summarize, we have many years of building ahead of us, and our plan is clear. We are committed to continuously innovating in advertising, similar to what you have seen in other areas. Although we have a lot of work to do, we believe the path forward for the next several years is quite clear. We are confident in our ability to grow revenue at a strong pace and capture an increasing share of the over $25 billion in CTV ad spending.

Awesome. Thanks, Greg. I'll now shift to a couple of content-related questions from analysts. The first is from Ben Swinburne of Morgan Stanley. He asks, "Ted, do the strong viewing numbers for the NFL games leave you more interested in full season sports rights for Netflix, or do you still see full season sports rights as generally unattractive for Netflix?"

Let me begin by discussing the NFL game viewership, which includes two of the most streamed NFL games in history. The average audience for these games was impressive, with 30 million and 31 million viewers. We're really excited about these numbers and the entire experience, including Beyoncé raising the standards for future halftime shows, even at the Super Bowl. However, we are always looking to diversify our programming, and live events, including sports, play a crucial role in that strategy. While this is indeed a great achievement, it doesn't fundamentally alter the fact that securing full season rights for major league sports remains quite difficult economically. If there were a feasible way to make the economics advantageous for both Netflix and the leagues, we would certainly consider it. For now, we believe that focusing on live events, with sports as a significant component, is the right direction for us.

Thanks, Ted. And Rich Greenfield from LightShed has a similar follow-up question. "Has the fight and WWE Raw results influenced your decision process on additional rights like the UFC?"

I'm not going to comment specifically on the UFC, but WWE is off to a great start. In our first week, we attracted around 5 million views, which is about twice the audience that Monday Night Raw was getting on linear television. This aligns well with our projections for audience growth in the league. We also noticed that the views outside of the live event day increased by 25%, particularly strong in markets such as the UK, Canada, Mexico, Australia, and Brazil. We are excited about these results. In the U.S., our viewing numbers for Monday Night Raw matched its highest levels in five years, which we're very pleased with. While I don't want to repeat myself too much, we are committed to being mindful of our bottom line, as it is critical that the economics work out. The financial challenges of big-league sports are significant, and we aim to deliver value to the sport, just as we've successfully done with WWE and the NFL, where we've managed to attract a substantial and younger global audience beyond linear television, but this must also be reflected in our agreements.

Thanks, Ted. And that's a good segue to our last question on sports. To round it out from Vikram of Baird, "Could you elaborate on the decision to acquire rights to the FIFA Women's World Cup in 2027 and 2031? What were the features of the event that made it attractive? And how does this fit into your broader strategy for live sports?"

I believe this aligns perfectly with our strategy. The Women's World Cup is a significant television event that complements our objectives. The matches set numerous viewing records in 2023, and interest in women's sports has only grown since then. It's a month-long event filled with excitement, featuring some of the best athletes globally. We are excited to host these games starting in 2027 and look forward to sharing the stories of these teams and athletes, similar to what we have successfully done with other sports through our series and documentaries.

Great. Another question from Rich Greenfield of LightShed Partners. "Did Carry-On prove that movies can break through without a theatrical release? In less than two months Carry-On was well reviewed and has racked up 313 million view hours. And the film generated significant buzz across social media and is set to surpass Bird Box viewership. Was there an unusually high level of marketing spend for this film, or did the buzz build organically on Netflix?"

This was a great example of a movie created on Netflix that can attract a large audience and generate a lot of excitement. One of the producers called me during the break to share that this experience felt similar to having a major film in theaters, which was encouraging to hear. We even became part of the ongoing debate about whether Die Hard is a Christmas movie, and whether Carry-On is the new Die Hard, which shows we are very much present in the cultural conversation, drawing a substantial audience for a film that debuted on Netflix with a typical modest marketing budget. This highlights how effective our platform is in promoting to our members, reaching them directly on Netflix to inform them about a new movie they are likely to enjoy. Additionally, our social channels, which have over 1 billion subscribers, help sustain that discussion. Therefore, it’s a strong demonstration that a film originating on Netflix can indeed become a significant success and be central to the culture.

Thanks, Ted. And for the record, I do think both Die Hard and Carry-On are Christmas movies.

To be continued.

And I think that's a great segue to Doug Anmuth's question from JPMorgan. "Ted, does the agreement to debut Narnia in the theater in 2026 suggest any shift in your overall theatrical strategy?"

There is no change to our theatrical strategy. Our main approach is to provide our members with exclusive first-run movies on Netflix. The IMAX release of Narnia is a strategic move. We often release movies in theaters a couple of weeks ahead of time to qualify for awards, fulfill festival requirements, and generate publicity. For Narnia, it's a two-week special event. This release is quite distinct since it's unlikely anyone has an IMAX screen at home, creating a unique consumer experience. We have implemented various release strategies in the past, and using IMAX simplifies our release approach as well. Most importantly, I'm very excited to collaborate with Greta on this project. We are eager to begin production so we can discuss the film's greatness beyond just its release format. She is an outstanding director, and this project is incredibly exciting.

Great. Our next question comes from Vikram from Baird, and it's about plans and pricing. "How do you plan to approach the cadence and magnitude of price increases going forward, particularly in your largest markets? What are the signals that inform those decisions across the different regions and plans?"

I can take this one. Our pricing philosophy hasn't changed. It's pretty much the same as we've talked about for the last several years. Of course, we look to continually provide more value to our members seeking to wisely invest to increase the variety and quality of our entertainment offering. And then, we listen to those members. We listen for signals like engagement, retention, acquisition, there's more secondary signals as well, all to tell us when we've achieved that increase in value. And when we've done that then we ask them to pay a bit more to keep that virtuous cycle going. You've seen us take up price across a number of markets in EMEA and APAC and LatAm over the last couple of quarters across most plans and including ads too. And those changes have gone smoothly. You can see those in our results. We certainly expect the same for these latest changes. And I think it's worth noting and reiterating that we believe that our starting price $7.99 in the U.S. is an incredible entertainment value and it's a highly accessible entry point. So, ultimately, we feel really good about our long-term monetization opportunity. We earn right now only 6% of the revenue opportunity in the countries and segments that we currently serve. And as long as we continue to deliver on improving the variety, the quality of our TV and film slate, we gradually expand the offering with newer content types, we'll believe we'll be able to increase that share progressively every year.

If I could just chime in on you, Greg, I just, when you're going to ask for a price increase, you better make sure you have the goods and the engagement to back it up. And I feel like what we have going into 2025 is just that. We have the returning seasons of our biggest shows ever Wednesday, Stranger Things and Squid Game, Night Agent, Ryan Murphy's Monster, You, Alice in Borderland from Japan, Delhi Crime from India, a new season of Drive to Survive. And on the film side, we've got new movies from Oscar winners like Guillermo del Toro, Kathryn Bigelow, Noah Baumbach, the Russo Brothers' new film, Happy Gilmore 2, a new Knives Out film. And live, obviously, we've got the SAG Awards next month, Christmas Day Football, Monday Night Raw every Monday night. And a few surprises there, too. So, I definitely feel like the strength of slate has never been better.

Great. I'm going to now turn to a few questions on engagement. So, our first one comes from Peter Supino of Wolfe Research. Engagement is stable based on data from third-party panels. Is engagement growth a strategic priority for Netflix?

Absolutely. We aim to entertain the world by measuring how people engage with content and stay connected to what they love. Bela and her team are working hard to deliver a diverse range of programming that caters to everyone, regardless of mood, language, or location. It’s a challenging task, but they are committed to winning over viewers every night. Last year, viewers spent around 200 billion hours streaming, with our average member watching for about two hours a day. There is still significant room for growth, and that is the team’s primary focus.

Yeah, just...

Sorry, I'll do that. Not surprisingly, we consistently find that improvements in engagement are linked to other key business drivers we have. This clearly enhances retention, acquisition, and so on. We are excited to see ongoing growth in engagement and look forward to even more of it. Spence?

You mentioned an important point. Everything begins with engagement. It's the cycle of engagement, revenue, and profit that propels our success. The other figures discussed are key points, but as a reminder, we will now provide our engagement report twice a year on the same day as our earnings release, starting in July with our Q2 report. This will help reinforce our focus on earnings and overall performance.

And to get a little more granular even sooner, our next engagement report is going to publish in February, so it's next month.

Great. And then, our second question on engagement is a little bit broader. It's from Justin Patterson of KeyBanc. "What are the key steps to competing more with short-form video platforms for engagement?"

Our goal is to entertain all audiences, especially younger viewers who are increasingly drawn to short-form content. The great thing is that these audiences also appreciate films and TV shows. We consistently entertain them with projects that excite them, prompting them to engage, share on social media, and create tributes to the shows. When new seasons are released, social media becomes flooded with excitement for our content. While our focus is on professional long-form storytelling, which remains a significant and enduring business, we want to cater to shifting viewer preferences as well. Short-form services are also excellent platforms for emerging storytellers. We're thrilled to bring Ms. Rachel to Netflix, which parents are looking forward to. Additionally, we have a proven track record of discovering successful projects elsewhere and elevating them on our platform, such as Cobra Kai, CoComelon, and Somebody Feed Phil, now in its eighth season. Our task is to win over audiences with beloved programming. Whether it's Heartstopper, Stranger Things, Ginny & Georgia, Alita, or Outer Banks, we must strive to excel in providing moments of entertainment.

I think we see ourselves as playing a specific and differentiated role in the ecosystem. We aim to be a destination for great storytellers, allowing them to transition from platforms like YouTube or the theater. Consumers are looking for a place to enjoy high-quality movies and TV shows, supported by a user interface and experience tailored for that purpose. Our creative partners need us to share the risk involved in bringing their stories to life, and we are committed to bolstering that aspect of the ecosystem. We want to ensure that popular shows like Stranger Things, Wednesday, Heartstopper, and Outer Banks, which attract significant viewership and have strong fanbases, especially among younger audiences, continue to be accessible, appreciated, and enjoyed.

Great. Thank you. Our next question comes from Alan Gould of Loop Capital. "How do you assess your progress in the video game space? How have the engagement trends been? When do you anticipate video games will have an impact on subscriber growth or retention?"

Okay, so a lot there. I'd say, we've learned quite a bit and made some good early progress since we've launched games. We've, of course, launched a bunch of games, with some highlights amongst them, the critically acclaimed OXENFREE II stands out. Certainly Grand Theft Auto where we drove tens of millions of downloads. We've got fan favorites based on Netflix IP, things like Too Hot to Handle, Emily in Paris, Selling Sunset, and to our latest big release Squid Game: Unleashed, which we really think validates our Netflix game formula, which is enabling this virtuous cycle between linear content and simultaneous game offerings. And we are just scratching the surface today in terms of what we can ultimately do in that space. But we already see how this approach not only extends the audience's engagement with the universe and a story, but also creates a synergy that reinforces both mediums, the interactive and the non-interactive side. So, based on all of those learnings, and under the leadership of Alain Tascan, we continue to refine our strategy. And we're going to be focusing on more narrative games based on Netflix IP. These are consistent fan favorites, and we've got a lot in the library to work with there. We'll also be introducing party and couch co-op games on the TV delivered from the cloud. We think of this as a successor to family board game night or an evolution of what the game show on TV used to be. So, we're excited about delivering some cool experiences in that space. We'll deliver games for kids. This is no ads, no in-app payments. It's a safe space for kids, just included with your subscription. And of course, we want to do more recognizable mainstream titles, whether that is licensed titles like GTA, and we're going to have more of those big licensed business titles to come that we're looking forward to, as well as homegrown titles based on our IP like Squid Game: Unleashed, which I'll just reiterate, Squid Game: Unleashed reached #1 in action games in the app stores in 107 countries. It's on pace to become our most downloaded game. And so, to your question about impacts on the subscriber side, we already see positive impacts in acquisition and retention from our game-playing members. Now, those effects are relatively small currently, but frankly, so is our investment in games relative to our overall content budget. And we're going to stay disciplined about scaling that investment as we see continued scaling and member benefits. So, to try and summarize, there's plenty more to do in this space, but we're breaking into a whole new content category, which by the way, drives approximately 140 billion in consumer spend ex-China, ex-Russia, and not even including the ad revenue. So, we're iteratively showing our members that we are a place to discover and play games, and we look forward to continuing to launch bigger and bigger games every year.

Thanks, Greg. We have a couple late-breaking questions on the forecast that analysts have submitted, so I'll wrap up with two of those questions. This comes from Jason Helfstein of Oppenheimer. "You spent roughly $17 billion on cash content spending in 2024 and will spend about $18 billion in 2025. How should investors think about long-term spending levels? Is there a point where you reach an equilibrium where you don't need to increase spend beyond inflation?"

You want me to take that? Sure, I'll take that one. I think we're a long way from equilibrium, as you say. We're taking up our cash content spend this year estimated from $17 billion to $18 billion. That's in the context of we're small in terms of view share and penetration everywhere around the world. We're less than 50% penetrated into connected households. You heard from Greg that we're only capturing about 6% of our estimated revenue market. So, we have a long way to grow. It's really about where do we put the next billion dollars and then beyond that to work in the most impactful way over the next year or so. You'll see that in areas like continuing to build into big scripted TV series. As you heard from Ted, we're continuing to build out live, we're continuing to build out our original programming in each of our regions around the world, and also seeing more and more kind of impactful licensing opportunities. And I think we kind of grow from there. So, the opportunity there's a long runway to continue to grow. We do it in a disciplined way, right? So, we kind of set our growth based on our top-line growth and our margin targets and then we kind of allocate as we can across the business for highest impact. And I think you've seen us do that in a responsible way where our cash spend and our content cash amortization, it's sort of 1.1 ratio roughly, plus or minus between our content amort which runs through the P&L and the cash spend which runs through cash flow. And both are growing slower than our revenue growth. So, I think you should see us continuing to grow in that way for the foreseeable future as we continue to grow more and more engagement and please more and more hopefully growing audience around the world.

Thanks, Spence. And our last question comes from John Blackledge of TD Cowen. "Can you please talk about the drivers of raising your 2025 operating margin guidance? What are the biggest points of leverage driving higher margins this year?" Spence, you want to take that?

Yeah, sure. So, we're always kind of looking to balance our revenue growth with strategic investment into the business. And we think we've balanced that well this year. You see we guided to 12% to 14% top-line revenue growth. If you kind of do the read-through in terms of based on our margin guidance, what that we would expect in terms of our implied expense growth, you can see it's sort of high single-digit, 9% plus or minus expense growth expected for 2025. And if you break that down, we're expecting sort of high single-digit, roughly, content amortization growth. So, still below revenue growth. So, some margin there. And that's based on again that $18 billion of plus or minus expected content cash spend. And the amort moves around a bit based on the timing of titles and releases, but high single-digit is a pretty good estimate. And then, we're investing into our growth priorities. We're pretty heavily investing into our product and engineering teams to build out ads and live and games capabilities and also our new user interface to enhance our product discovery. We're also investing in the marketing and sales line, mostly on the sales side as we build out our ad sales organization and go-to-market capabilities. And beyond that, our support areas are kind of growing sort of mid low-single digits. So, across the board, for the most part, we're driving margin improvement in a way that we think is appropriate for the business while investing into our growth.

Great. Thank you, Spence. And thank you all for joining us for our Q4 earnings call. And we look forward to speaking with you all next quarter. Thanks very much.