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Netflix (NASDAQ: NFLX)
Q3 2024 Earnings Call
Oct 17, 2024, 4:45 p.m. ET

Overview of Netflix’s Financial Outlook

• Initial Remarks
• Q&A Session
• Participating Team

Initial Remarks:

Spencer Wang — Vice President, Finance, Investor Relations, and Corporate Development

Good afternoon, and welcome to Netflix’s Q3 2024 Earnings Call. I’m Spencer Wang, VP of Finance, IR, and Corporate Development. Joining me are Co-CEOs Ted Sarandos and Greg Peters, and CFO Spence Neumann. Please keep in mind that we will share forward-looking statements, and actual results may differ.

Next, we’ll address questions from analysts, starting with Eric Sheridan from Goldman Sachs. Eric, what’s your view on our main investment strategies for 2025 and how have they changed in the last 12 to 18 months?

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Theodore A. Sarandos — Co-Chief Executive Officer

Thank you, Spencer. Let’s discuss our outlook for 2025. We’re optimistic about our growth strategies and, so far, we’ve been executing on our plan.

This year’s financial results reflect our goals: a projected 15% revenue growth and a 6 percentage point increase in operating margin. Engagement—a key measure of member satisfaction—remains robust, with members averaging about two hours of viewing daily. More viewing means more retention, which drives new memberships.

So far in 2024, we’ve delighted audiences with major hits like Perfect Couple and Monsters: The Lyle and Erik Menendez Story. Looking ahead to Q4, we have a lineup featuring productions from the U.S., Brazil, Korea, the U.K, and Germany, along with exciting live events. Our aim for 2025 is to build on our momentum by continuing to produce original content.

Having invested in original programming for over ten years, Netflix’s creative core is stronger than ever. Our talented global team allows us to create diverse stories catering to over 600 million viewers. The upcoming slate for 2025 promises exciting new seasons for shows like Wednesday and Squid Games, alongside new projects from renowned creators and adaptations like Guillermo del Toro’s Frankenstein.

Gregory K. Peters — Co-Chief Executive Officer

To add on, our long-term focus has always been enhancing our service. This mindset has proven successful for us over the past fifteen years, and we expect it will continue to do so. As Ted mentioned, our main priority is improving the core film and series offerings. We’re excited about the rise of hit titles from various countries, including Japan, Korea, Thailand, and India. This is a result of our extensive investment in local creative communities.

We’re also keen on enhancing the user experience. A new, more intuitive TV homepage is in testing, and we’re preparing to launch this improvement for our global subscribers.

Our secondary priorities involve launching new initiatives and investments to bolster our entertainment options for growth. Exciting projects include games based on Netflix properties, such as Squid Game and others. We’re expanding into live events too, with scheduled fights and comedy specials, aiming to provide more affordable entertainment options through advertising. While building these new initiatives takes time, we’ve seen promising gains, doubling ad revenue yearly from a smaller base. Over the next several years, we anticipate this becoming a significant revenue stream, especially with the immense consumer spending potential exceeding $600 billion in our operational markets.

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Disney’s Strategic Movements and Netflix’s Growth Outlook: Key Insights from Financial Leaders

Analyzing Netflix’s Revenue Growth: Key Factors at Play

Spencer Wang, Vice President of Finance, Investor Relations, and Corporate Development opened the discussion by highlighting the significant potential for Netflix’s growth. Currently, the company captures only about 6% to 7% of its target market, but there is tremendous upside if continuous improvement remains a priority.

Future Revenue Predictions and Membership Growth

Jessica Reif Ehrlich from Bank of America inquired about Netflix’s revenue growth strategy. CFO Spencer Adam Neumann responded, stating that investment priorities are essential for driving growth. Netflix projects revenue of approximately $43 billion to $44 billion for 2025, which translates to a revenue increase of $4 billion to $5 billion compared to 2024, reflecting an expected growth rate of 11% to 13%. This growth will likely be primarily driven by an increase in membership, supported by an expansion into the advertising sector.

Neumann emphasized that Netflix still has millions of potential subscribers. A strong lineup of content in 2025 and improved strategies to turn consumer interest into memberships will fuel growth. Although advertising revenue is not yet a primary contributor, the company anticipates it will play a more significant role moving forward.

Operating Margins: Future Direction

When asked about operating margins, Neumann explained that Netflix has room to increase margins over the long term. The company is targeting a 6 percentage point increase for 2024 and is focused on consistent margin growth by investing in service improvements while managing costs. The approach remains steadfast as they aim to grow profits year after year.

Neumann noted that recent strategies, including enhancing film and TV offerings and expanding into ads and games, align with their margin growth goals. As 2025 approaches, Netflix aims to maintain this trajectory while adding value for its members.

Latin America’s Performance and Future Prospects

John Blackledge of TD Cowen raised concerns about Netflix’s slight net loss in Latin American memberships during Q3. Neumann clarified that the overall business trends in Latin America remain strong, with revenues increasing 9% year over year. Although recent price adjustments impacted membership numbers, early Q4 data shows promising growth.

Theo Sarandos, Co-CEO, highlighted the exciting slate of upcoming productions in Latin America, including projects like “Senna” from Brazil and “A Hundred Years of Solitude” from Colombia. He expressed optimism about the region’s creative output and business climate.

Advertising Strategy: Future Growth Potential

Steve Cahall of Wells Fargo inquired about Netflix’s advertising strategy. Co-CEO Gregory K. Peters outlined the importance of expanding ad-tier memberships to achieve a significant scale for advertisers. As of Q3, Netflix’s ad tier accounted for over 50% of sign-ups in targeted markets, indicating positive momentum in their advertising efforts.

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Netflix’s Ad Membership Growth Soars as Company Eyes Enhanced Monetization Strategies

The company’s ads plan membership base grew 35% quarter over quarter.

This marks over a year of significant growth, reinforcing that we are on the right path. As we noted last quarter, our advertising partners expect us to reach critical scale in all 12 ad countries by 2025. Engagement levels remain robust as well.

Ad plan members are watching similar hours and titles compared to those without an ads plan, showcasing our progress in this area. I am incredibly proud of our team’s accomplishments, which enable us to focus more on our second priority: effectively monetizing our growing inventory.

It’s important to recognize that we have substantial work ahead to enhance our offerings for advertisers. This will be a focus for the coming years. Our first-party ad server, crucial for unlocking value in advertising, is on track to launch in Canada this quarter, followed by other markets in 2025. Partnerships with Trade Desk and Google Live are progressing well.

We have plans for new formats, features, and measurement tools that are on the horizon. While we have much to accomplish, we are confident in our ability to grow our ad business, much like we did with the paid sharing initiative.

Spencer Adam Neumann — Chief Financial Officer

Thank you.

Theodore A. Sarandos — Co-Chief Executive Officer

Could I follow up on Greg’s points? We’re making significant progress, yet we still have much to do. This new venture taps into our core skill sets, both technically and creatively. It hinges on engaging content, which is essential for our subscription and ad businesses alike.

Advertisers want to align with the stories that capture audience interest—popular shows and events that drive viewership. When we produce titles like Nobody Wants This or Perfect Couple, the resulting fan engagement is precisely what attracts advertisers. That’s why I feel optimistic about our direction.

Gregory K. Peters — Co-Chief Executive Officer

Absolutely. Looking at the bigger picture, our objective over the next five to ten years is to merge successful digital advertising elements, such as targeting and personalization, with the best of TV advertising’s creative format.

We boast highly engaged viewers watching culturally significant shows. Although ads won’t be a primary revenue driver by 2025, as we continue to scale our audience and inventory, we are seeing momentum in monetization. Our projections indicate that by 2025, ads revenue might roughly double year over year, albeit from a small starting point. Additionally, during this year’s U.S. upfront, we are witnessing a 150% increase in ad sales commitments.

Given the proven model of ads against premium video, our potential for growth excites us. We aim to position ourselves effectively within the expanding CTV ad market, which could enhance our overall revenue and profit growth in the future.

Spencer Wang — Vice President, Finance, Investor Relations, and Corporate Development

Thank you, Ted and Greg. We have received questions regarding ad tech, which I will break into two parts. First, from Justin Patterson at KeyBanc: What have been your early takeaways from partnerships with The Trade Desk and DV360? Secondly, from Rich Greenfield: As Netflix uses Trade Desk to build demand, how do you envision the role of such partnerships versus a self-sufficient approach in the long-term?

Gregory K. Peters — Co-Chief Executive Officer

These partnerships are performing well. We’re live with private marketplaces in UCAN and LatAm, along with ongoing deals in the U.S. and Australia. We plan to enhance our programmatic capabilities next month in UCAN and LatAm. Our major learning is straightforward: increased demand positively impacts CPMs.

Fostering more channels facilitates easier purchase channels for clients. We’re observing solid growth trajectories in ad revenue, which is crucial as we expand our inventory. It may take time to catch up to our inventory growth, but it represents significant potential for increased revenue.

Regarding Rich’s question about self-sufficiency, we have learned to remain flexible. We’ll continually assess and adapt as our business and the advertising ecosystem evolve. Currently, we believe these partnerships are highly beneficial for us.

Spencer Wang — Vice President, Finance, Investor Relations, and Corporate Development

Thank you, Greg. Let’s turn to content and engagement questions from Ben Swinburne of Morgan Stanley, specifically for Ted. How did last year’s Hollywood strikes influence your plans for 2024 and affect engagement and retention? Did UCAN feel the impact more than other markets due to production halts in the U.S.? When can we expect a return to a normalized slate devoid of lingering strike effects?

Theodore A. Sarandos — Co-Chief Executive Officer

Thank you, Ben. Our objective is always to maintain a steady stream of engaging TV shows, films, and games for our members throughout the year. Aiming for a consistent delivery is vital for keeping viewer expectations high. However, the early months of this year were not as steady as we would have preferred, largely due to the work stoppage. UCAN was significantly impacted, alongside production worldwide.

We’re now getting closer to a normalized output schedule. Series production is resuming more quickly than films, although neither has fully rebounded yet. Popular return shows like Bridgerton have successfully premiered, but many other anticipated series are still catching up.

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Netflix Updates on Content Strategy and Engagement Growth

Netflix’s late-year content rollout shows promising signs post-strike and strengthened financial expectations going into 2025.

The release schedule for some of Netflix’s most popular shows, such as Cobra Kai, Emily in Paris, and Outer Banks, experienced delays due to the recent strike, impacting the UCAN slate. However, as we entered Q4, the situation has stabilized with titles like Perfect Couple, Monsters, and Nobody Wants This starting to hit the platform consistently.

Similarly, the film slate faced disruptions but is bouncing back. Changes in leadership may have altered the flow of releases, but Netflix is set for a strong Q4 lineup, featuring upcoming films like Carry-On, Piano Lesson, Spellbound, Six Triple Eight, and Emilia Perez. Looking forward, 2025 appears to bring a return to normalcy within the lineup.

As mentioned previously, major upcoming films include the new Knives Out sequel, Guillermo del Toro’s Frankenstein, Happy Gilmore 2, and a project from the Russo brothers starring Millie Bobby Brown, Electric State, reinforcing the expectation of a robust content schedule starting in 2025.

Spencer Wang — Vice President, Finance, Investor Relations, and Corporate Development

Thank you, Ted. We have a question from John Hodulik of UBS. The Nielsen Gauge shows that Netflix’s engagement in the U.S. has remained stable, which may indicate a flat trend. With the rollout of paid sharing in full swing, when do you anticipate U.S. engagement to start increasing again? Do you view the expansion into live programming as a key factor in that growth?

Theodore A. Sarandos — Co-Chief Executive Officer

To clarify, total view hours increased by about 1% in the first half of the year compared to last year. Engagement is strong, with members averaging around two hours of viewing per day. The uptick in account sharing has also been positive. Live programming may not represent the bulk of what we offer—around 200 billion hours annually—but its potential lies in creating high-value viewing experiences. Notable live events like the Tyson-Paul fight and Christmas Day NFL games are designed to capture larger audiences.

This increasing focus on live content, in addition to our strong scripted and unscripted offerings, can boost overall engagement. Upcoming weekly live events, such as WWE programming and a new show from John Mulaney, will contribute to diversifying our content variety.

Spencer Wang — Vice President, Finance, Investor Relations, and Corporate Development

Thank you, Ted. We now have a question from Rich Greenfield. He asks about the possibility of films achieving cultural significance without a theatrical release. Ted, over to you.

Theodore A. Sarandos — Co-Chief Executive Officer

I appreciate the question, Rich. We prioritize subscription-based entertainment. Our data shows that our top 10 Netflix films alone garnered over 100 million views each, proving that we can resonate with a large audience. By releasing films directly to streaming, we add convenience for viewers who want immediate access, enhancing the value of their subscription. We provide filmmakers with a significant platform to reach a wide audience, further encouraging them to create top-tier content.

Spencer Wang — Vice President, Finance, Investor Relations, and Corporate Development

Thank you, Ted. Alan Gould from Loop Capital has a question regarding potential changes to talent compensation, suggesting a shift towards less upfront payment and more back-end pay based on performance. Ted, what are your thoughts?

Theodore A. Sarandos — Co-Chief Executive Officer

I appreciate the chance to clarify. Our current compensation model works well for both creators and Netflix. Paying upfront allows us to attract top talent while enabling creators to focus on producing quality work without financial concerns. Although we remain open to tailored deals, our model, which we pioneered, stays intact. Most talent prefers the upfront model, and we believe this structure supports our goal of making the best films and shows possible.

Spencer Wang — Vice President, Finance, Investor Relations, and Corporate Development

Thank you, Ted. The next topic revolves around pricing and plans. Rich Greenfield from LightShed asks about potential price increases during a strong content phase at the end of Q4 and into 2025. Greg, can you address this?

Gregory K. Peters — Co-Chief Executive Officer

Sure, we’d love to have Rich on our pricing committee. Our approach to pricing remains consistent. We focus on delivering greater value to our members each quarter. We then assess engagement and retention metrics to determine when it might be appropriate to raise prices to continue investing in valuable content. We’ve seen positive effects from recent price changes in select regions like Europe and Scandinavia, and we’re open to future increases based on member feedback and market signals.

Netflix’s Future Strategy: Expanding Content Variety and Leveraging Live Events

Executive Insights on Upcoming Offerings

As Netflix aims to enhance the variety and quality of its upcoming TV and film slate, exciting plans are in the pipeline for the next year. The company is also branching out into live events, including the Tyson-Paul match and the Christmas Day NFL games, which are set to add more excitement to its offerings. The introduction of games further signals Netflix’s intent to diversify its portfolio.

If these initiatives are executed effectively, Netflix anticipates maintaining a steady long-term monetization cycle.

Spencer Wang — Vice President, Finance, Investor Relations, and Corporate Development

Pricing Strategy Amid Streaming Competition

Turning to pricing, Robert Fishman from MoffettNathanson raised an important question regarding Netflix’s decision to increase prices for non-ad plans while keeping the ad-supported tier unchanged. How does this strategy affect the pricing spread?

Gregory K. Peters — Co-Chief Executive Officer

Our pricing strategy focuses on delivering value to our members rather than merely competing with others. We believe in providing an array of price points that cater to different consumer needs without overwhelming them with options. It’s essential that every plan justifies its existence by delivering sufficient value to consumers, rather than complicating their choices.

For example, our ad-supported plan at $6.99 in the U.S. offers significant value, providing access to a wide variety of TV shows, films, and games. It enhances accessibility while maintaining a low price point. We continuously evaluate our offerings based on this framework, refining our pricing and features to suit consumer preferences.

Transitioning Plans: Insights from Recent Changes

Spencer Wang redirected the discussion to Doug Anmuth from J.P. Morgan, who asked about the potential phase-out of the Basic plan in various markets.

Gregory K. Peters — Co-Chief Executive Officer

The phased removal of the Basic plan is an example of our commitment to evaluating and refining our offerings. Each plan must demonstrate its value to our customers, avoiding unnecessary complexity. Consumer feedback plays a crucial role in this process, guiding our decisions as we assess how the changes align with our business goals. So far, this transition has performed well, and we will continue adapting based on market response.

Future Capital Allocation Plans Amid Surging Free Cash Flow

Shifting focus to future growth, Spencer Wang addressed a question from Ben Swinburne at Morgan Stanley about Netflix’s capital allocation strategy as it anticipates generating substantial free cash flow in the coming years.

Spencer Adam Neumann — Chief Financial Officer

Indeed, projecting tens of billions in free cash flow is an encouraging outlook. Our capital allocation policy remains unchanged, prioritizing profitable growth through reinvestment. Liquidity is essential, and we aim to return excess cash to shareholders while maintaining a robust balance sheet. Recent actions include increasing our revolver to $3 billion for added liquidity and raising $1.8 billion in investment-grade debt for upcoming maturities.

We emphasize balance sheet flexibility; thus, no immediate plans to increase leverage through stock buybacks or dividend issuance exist.

The YouTube Dynamic: Navigating Competition and AI Impact

A question from John Hodulik of UBS centered on YouTube’s growing influence in TV consumption and the potential risk posed by user-generated content and AI.

Theodore A. Sarandos — Co-Chief Executive Officer

AI’s role in entertainment generates considerable discussion, with both potential benefits and risks. Historically, advancements in technology have complemented the entertainment industry. Our focus remains on whether AI can genuinely enhance the quality of our films and shows, which ultimately drives our success. Quality takes precedence over cost, and any tool that raises production values is beneficial.

While Netflix competes with YouTube for viewership, we recognize our different strengths. Our commitment to ambitious premium content positions Netflix as the leading platform for top-tier storytelling, attracting a vast audience of 600 million viewers. Our subscription model allows us to take financial risks in creating content, leading to higher financial returns for creators and enabling more ambitious projects. This complements the content seen on YouTube, such as our trailers, which help drive traffic back to Netflix.

In summary, we believe streaming is the future and prioritize giving consumers choice and control.

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Netflix’s Success: Insights from Leadership on Growth Strategies

In a recent earnings call, Netflix executives discussed their impressive industry engagement and continued dedication to providing value to consumers and shareholders alike.

Creators are achieving substantial audiences across platforms. Netflix’s leadership believes they are well-positioned to deliver strong returns, evidenced by substantial revenue and profit generation. Greg, do you want to elaborate on these points?

Gregory K. Peters — Co-Chief Executive Officer

Absolutely. I want to emphasize that Netflix plays a unique role for both viewers seeking top-notch movies and shows, and creators looking for partnerships that share the risks of storytelling. This quarter, we have several major releases, including Squid Game, Outer Banks, and A Hundred Years of Solitude. These titles, particularly those from Latin America, represent ambitious projects that would be challenging to support through other streaming models.

Although competition is fierce, we believe that our focus on premium storytelling aligns well with consumer preferences and creator partnerships, while also ensuring robust operating margins.

Theodore A. Sarandos — Co-Chief Executive Officer

Right. As discussed in the last quarter, we are concentrating on the 80% of viewership that remains untapped beyond YouTube and Netflix. There’s a significant opportunity ahead of us.

Spencer Wang — Vice President, Finance, Investor Relations, and Corporate Development

Thank you, Ted and Greg. We have one final question from Michael Morris of Guggenheim. He asks whether Netflix might consider bundling with other streaming services, especially given your leading global member base, perhaps pairing with niche platforms that feature live sports or complementary content.

Theodore A. Sarandos — Co-Chief Executive Officer

Many competitors are indeed using bundles to stimulate growth, which fits well with traditional media companies. However, our approach is different. We aim to enhance our service by providing a wide range of outstanding series and films, all at an attractive price. Our offerings include first-run films, original series from around the globe, and a variety of unscripted shows, competition series, comedy specials, and high-profile live events such as the NFL games.

Our strategy focuses on delivering unparalleled value directly to consumers without needing to partner with others.

Gregory K. Peters — Co-Chief Executive Officer

That’s correct. It’s important to mention that our share of total viewership remains below 10% in our largest markets. This limited share presents a tremendous opportunity for growth. We plan to increase that share by continuing to invest in diverse and high-quality content offerings.

We face considerable tasks ahead, such as developing advertising capabilities, expanding our gaming options, and introducing live features—all designed to elevate the member experience. Our primary focus will remain on perfecting these capabilities to enhance the value we provide.

Spencer Wang — Vice President, Finance, Investor Relations, and Corporate Development

Thank you, Ted, Greg, and Spencer. We appreciate your insights. Thanks to the analysts for their questions, and gratitude to all listeners for joining our quarterly earnings call today. We look forward to our next conversation.

Thanks again.

Duration: 0 minutes

Call participants:

Spencer Wang — Vice President, Finance, Investor Relations, and Corporate Development

Theodore A. Sarandos — Co-Chief Executive Officer

Gregory K. Peters — Co-Chief Executive Officer

Spencer Adam Neumann — Chief Financial Officer

Spence Neumann — Chief Financial Officer

Ted Sarandos — Co-Chief Executive Officer

Greg Peters — Co-Chief Executive Officer

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