Netflix Q4 2022 Earnings Call Transcript

Presentation

[Spencer Wang, Vice President, Investor Relations & Corporate Development at Netflix]

Good afternoon, and welcome to the Netflix Q4 2022 Earnings Interview. I'm Spencer Wang, VP of Finance, IR and Corporate Development. Joining me today are Executive Chairman, Reed Hastings; Co-CEOs, Ted Sarandos and Greg Peters; and CFO, Spence Neumann. Our interviewer this quarter is Jessica Reif Ehrlich from Bank of America.

As a reminder, we'll be making forward-looking statements and actual results may vary.

With that, Jessica, over to you for your first question.

Questions and Answers

[Jessica Reif Ehrlich, Analyst at BofA Securities]

Thank you, and thank you so much for having me today. So, Reed, the big announcement about the management changes. Can you give us some more color on the process and how you came to this decision?

[Reed Hastings, Founder and Executive Chairman at Netflix]

Jessica, it feels like yesterday was our IPO. We were covered in red envelopes. We IPOed at about a dollar. Hopefully, some of you have held the stock, the full 21 years. And when I think of the evolution, the three of us, and so many other incredible Netflix employees to go from DVD service to streaming leader in films and television, an emerging player in games and now to have over 230 million members, it's just, well, Jim Collins probably said it best, he calls it a good start. We've had a good start.

But honestly, we dream of a whole world finding their favorite entertainment on Netflix and we shorthand that as entertaining the world. And the three of us have been working together for 15 years now, trying to figure out how do we get through this issue, that issue, how do we grow, and I couldn't be happier to complete our succession process. It really started about 10 years ago with the Board, trying to think through how could this work. They both have such amazing talents and gifts and to find a platform where they've been able to contribute is fantastic.

About 2.5 years ago, we took a partial step, Ted as Co-CEO, Greg as COO. We continue to just make super progress and frankly more and more they've been leading the company and this is acknowledging really in foremost terms well how we've been operating for at least the last few quarters. You know, it's just a great feeling. And when I think about the stock appreciation over the last decade, I know that they want to beat that record and I'm all for that, I'll be Executive Chairman helping them everywhere I can, but it's really theirs to lead and to do that energy and hustle and intensity that we've been doing. They're very ready. That's what's driving the timing. And so I could not be happier.

So, back over to you.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

Thank you. Subjectively, I'll just add that this may be the smoothest transition we've seen in media for quite a while. Now for Ted and Greg, what does this mean for Netflix? Does this signal a change in strategy or approach?

[Ted Sarandos, Co-Chief Executive Officer at Netflix]

Just let me start with the first and foremost thank Reed personally and professionally. He has been and I trust will continue to be a role model, a mentor, a friend. In 22-plus years, Reed has positively changed my life in every way imaginable. And he leaves some big shoes for Greg and I to fill. Unfortunately, we have four feet to do it. So, that's a good thing. In so many ways the way that Reed has been able to see around corners, that's why he's been thinking about the succession for the last decade.

He generously opened up more of a co-leadership model over a decade ago for he and I. And like he said, 2.5 years ago, made it a little more formal. And in that time delegating a lot of the day-to-day-to Greg and I. And at that time 2.5 years we've been working out. We've been working together for 15 years. Greg and I, but in the last 2.5 years, particularly, we've been able to build a really trusting, respectful and complementary partnership, in many ways the same way I have with Reed over the years.

And I really do believe that this kind of shared leadership model is going to help us to move fast and to challenge each other, to challenge the company to raise to new heights. And I'm just incredible that we're able to do it. To your point, this is the leadership team, it's been pretty stable and that's why that this steady transition feels so steady. This ability of this team has helped us build a great foundation and a culture that can absorb complexity and change. And as you saw in this last quarter, can rise to any occasion, and Greg, I just want to say I'm thrilled to be in this with you and Reed, we can't thank you enough.

[Greg Peters, Co-Chief Executive Officer at Netflix]

Thanks, Ted. It's a real honor to be asked to take on this responsibility and join you as Co-CEO and frankly, a pleasure to be able to continue working with some of the most amazing leaders that I've ever had the pleasure of working with. And frankly, my opinion, the best leadership team that Netflix has ever had, so. I'll just echo Ted's comments, it's been a real fun and rewarding experience to work closely with him over the last couple of years, especially and I'm tremendously proud of the partnership that we've developed in the shorthand and really how we have been able to take what are sort of a complementary set of skills and perspectives and seeing different angles to different situations.

But basically, at the end of the day we are -- I've always found are ultimately motivated by the same things, which is that we want to serve our members and we want to grow our business and that is an incredible and powerful aligning process to those different perspective, so. I'm proud of the work that we've done over '22 in the latter half, especially to get some more momentum into the business, but I'm even more excited about continuing to push that into '23 and follow the model that Reed has always had of continually seeking excellence and always striving to be better. So, looking forward to that.

And then to your specific question, Jessica, there's no big strategy shift or big culture shifts. Ted, Reed and I've been working and sort of grinding through our individual perspectives on this for a long-time. And so really, we look forward to taking things forward as we have been for the last little bit and responding to a dynamic industry and doing the changes that we think are appropriate. But we're not -- we don't have a bank of changes that were -- that we've been holding for this moment. So mostly, it's continuity and move forward.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

Great. So, this was originally for Reed, but now given the change in leadership structure, maybe for all three of you for Reed, Ted and Greg. One of the best quotes recently was from John Malone, who said, shareholders should build monument for Reed Hastings. John and Rupert Murdoch ran the dominant global media companies in prior decades. And were one of the few media executives who have been able to see around corners. Ultimately, they both sold the bulk of their assets. Netflix is now one of the most dominant global media companies, if not the dominant. What is your view of the next five-plus years? Do you need to get bigger, stay the course?

[Reed Hastings, Founder and Executive Chairman at Netflix]

Well, the one thing I'd point out is that what's happening now and what's going to be happening over the next couple of years is that the consumer is moving to streaming. So, the way that they watch content at-home, delivered to them on Internet on-demand, free of the linear schedule, all those things, that is a change, a fundamental shift in the business and you've got to be where the consumer is. And that's what we've been focused on since we started streaming 10 -- doing original content 10 years ago, but being -- really realizing that we really have benefited from being a customer-first company and meeting the customers where they are. And we've also had this blessing of not having to unwind our traditional media business as we built into this one.

So, we've always been focused on the future and where the consumers are going. And I think our ability to continue to stay focused on that, because we're -- this is really, I know, we've been talking about it for a long-time, Jessica, but this is really in its infancy. I mean, you think about as big as we become and all these things that are happening and in the US we're about 8% of TV time still. So, it's an enormous amount of growth ahead even in markets where we are very well-established. So, that's the key for us and being able to focus on consumers first and really been our biggest benefit and I think it's what led us to those milestones that you just referred to. Greg?

[Greg Peters, Co-Chief Executive Officer at Netflix]

Yeah, and Jessica, I would say I think that, that translates into being bigger. And I think that means being bigger in terms of touching more members around the world, delivering them incredible entertainment. We'll see that in terms of being bigger, in terms of the amount of engagement that we can drive, the amount of hours that we're satisfying them, be bigger in terms of the cultural impact is to. I mean you've seen, I mean just incredible cultural impact in terms of Wednesday, Stranger Things, the ramifications that these shows have in terms of the popular culture are significant and that's going to get bigger too. It also means bigger in terms of revenue and profit streams. We're looking forward to those as well.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

Right. So, losing subs in 2022 and the market reaction or valuation reset is akin to August 2015 when Bob Iger called out the early decline of Pay TV subs and the impact for Disney's ESPN. It will take a while for Disney to build ESPN+ into sports streaming giant and actually, they may never replace the profitability of ESPN at that point in time. Your pivot seems more broad-based by extending genres and going to new areas, whether it's games, fitness, live, etc. Do you see any similarities or differences to that momentous inflection point, which has certainly shifted Wall Street's view from subs to profits?

[Greg Peters, Co-Chief Executive Officer at Netflix]

I'll take a shot at that and then Ted maybe weigh in, but I think it's a fundamentally different situation. And if you look at where we're at, a significant part of what we need to go do is essentially take the core model that we've been operating since we've been starting in streaming and just execute it better in all dimensions. And so whether it's an incredible content that Bella and Scott's teams are producing constantly, how we're talking about that content to the marketing and conversation that we do, the product experiences and business model innovations that we're doing. But a lot of it really fundamentally is about executing that core model better.

We're not -- there's not a lot of massive pivots away from our traditional legacy business model that we have to go figure out. We're planting some seeds in terms of games and things like that that, that if we execute well and we're excited about the progress we're seeing so far, will represent the future potential for us in terms of growth and more profit opportunities. So, that's exciting. But essentially, a lot of this is just continue to execute the play that we've got and do it better and better.

[Ted Sarandos, Co-Chief Executive Officer at Netflix]

I don't know about the the similarities, but I would say that this business is really completely about engagement, profit and revenue, so and we've got to grow all of those things. And all those things are really are tied to executing on the content. When the content is working, the business is working. We grow engagement, we grow revenue, we grow profit. There's interesting thing, starting in July and you think about from Stranger Things Season 4 from the phenomena that became and what we've been able to offer up to our members from that day forward.

So, they went from Stranger Things to Extraordinary Attorney Woo, which is -- was a phenomenal success throughout Asia and in South Korea, but also, it built a big cult fan base in the US, straight into Sea Beast, which is our biggest animated film ever, straight into Purple Hearts and Gray Man, two of our most-watched films ever on Netflix. And then to August, the Sandman and Never Have I Ever Season 3. September, Cobra Kai Season 5, Empress. Cyberpunk is this animated adaptation of a video game that's been hailed is one of the greatest of all-time. Narco-Saints, another monster hit from North Korea, the Jeffrey Dahmer Story, Monster, straight into Watcher, back-to-back hits from Ryan Murphy, All Quiet on the Western Front, which just today became the most nominated non-English film in the history of BAFTAs. Only Gandhi has gotten more nominations in the history of the BAFTAs and that's from Germany with the great Ed Burger and then straight out of there into Enola Holmes 2, a big monster success and sequel to with Millie Bobby Brown.

And you look at all these things that go back-and-forth and they go all the way into January now, we will end the month with You People, Eddie Murphy and Jonah Hill. Any outlet would kill to have any one of those months as their entire year and it's our ability to fire on those cylinders and create hits. But more than that create the expectation that as soon as you're done with this one, there's another one waiting for you.

[Reed Hastings, Founder and Executive Chairman at Netflix]

Jessica, may I just one thing to add and I know -- but I just think the analogy is kind of fundamentally different, so. With ESPN and the example you gave, that was a fundamental kind of shift in the industry from 100-plus million Pay TV connected homes to cord-cutting that's on a path down to mid-to-high-single digit reductions in that distribution platform each year and that's moving in that direction. So, it's kind of a shrinking core distribution platform where you've seen our earnings letter, the world is shifting from linear to streaming. Even in the largest, there is no country where streaming is more than 40% of share of TV time and in any big countries, as you saw, it's less than 5%, so, it's -- worked less than 5%, it's less than 10%, so.

There is an incredible runway still in the shift from linear to streaming. And so for us, it's about growing into that shift and also obviously competing well and continuously innovating and improving. And what you saw or what we saw and felt when we had that decline in subscribers was really near-term limiters in growing into that big market, but the big market is still growing as opposed to fundamentally long-term limiters in that ESPN shift that you described.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

Right. So, let's move on to some of the drivers of growth both near and medium-term and start with advertising. So, your advertising platform has been opened only two months and you've amazingly given some money back to advertisers, indicating in one way that demand is exceeding supply. The company, you guys have consistently said, you're going to crawl, walk and run. How is the progress going relative to your expectations?

[Greg Peters, Co-Chief Executive Officer at Netflix]

Yeah, like you say, it's two months and I think the hardest part is actually that first step when you're crawling because you don't really know what exactly to expect as you get it going. And now with two months, it's ridiculously early, but we've learned a bunch already I would say, so. Just ticking through this, I mean, I'd say, first and foremost is that we were able to launch this very, very quickly and the tech is all working, the product experience is good and that's really testament to lots of hard work from both Microsoft and Netflix teams who worked very hard to make that happen and it's really rewarding to that to see.

The other, I'd say, pretty significantly fundamental thing is around engagement and we see that engagement from ads plans users is comparable to sort of similar to users on our non-ads plan. So, that's really a promising indication, means we're delivering a solid experience and it's better than we modeled. And that's a great sort of fundamental starting point for us to work with. Furthermore, now we're seeing take rate and growth on that ads plan is solid, it's great because partly that take rate in that growth as due to incremental subscribers coming into the service, because we have a lower price point, that's $6.99 in the US, EUR4.99 in Germany. Just give you two examples.

And so that elasticity is a real not only a benefit to sort of growing our ad scale and sustainability, but also to the general business. I expect to see that continue to actually grow over the year. That take rate fits sort of within the middle of our other plans, which is another really healthy sign. It means that we've got a complementary set of offerings that are working to sort of satisfy different needs for different consumers at the right mix of features and price points, so that's quite good.

Another important one I think for the investor community because it came up a lot before we launched was plan switching. We aren't seeing as expected much switching from high arm subscription plans like premium into our ads plan. So, the unit economics remain very good as we modeled, so. So, these are all really good initial sort of progress points, but I think it's important to reiterate that as you mentioned, we're crawling and we'd like to get to sort of move to the walking phase. We've got a lot to do to get there.

So, there's a bunch of technical improvements in terms of ad delivery validation, measurement. We've got progress already on that more to do in the next quarter or two. Targeting improvement, which will be better for consumers, more relevant advertising, better for advertisers in terms of more value delivered a better set of offerings products for advertisers to buy. We have a long list of experience improvements that we know we can deliver a little more value to both subscribers and advertisers and there's just also some nuts and bolts stuff that we are learning and improving. Just things like how do we do a better job with Microsoft that the ad sales and operations processes. There's so much that we need to do. Both companies need to do to better serve advertisers sort of an increasing number of advertisers and meet that demand.

So, we're just getting started. We're constantly improving and we see that trajectory ahead of us and really our aspirations are ultimately, successively over a period of years to basically build just like we have essentially in terms of the streaming experience, the best most effective highest quality premium connected TV ads experience as a win for consumers and advertisers and for us, as a business.

[Reed Hastings, Founder and Executive Chairman at Netflix]

And Spence and Greg, sorry, Jessica, Spence, you maybe give a little context on Hulu, and kind of what we know about our Hulu's advertising. They've had a 10-year head-start and sort of how many years will it take us to sort of pass them in all of these key dynamics?

[Spencer Neumann, Chief Financial Officer at Netflix]

Greg, you want to go first or you want me?

[Greg Peters, Co-Chief Executive Officer at Netflix]

No, I'll hand it over to you.

[Spencer Neumann, Chief Financial Officer at Netflix]

All right. Let's see. I mean Hulu, yes, they've had a long head-start. They started in the ads business, they have we would estimate Reed, we obviously don't know exactly, but roughly half of their membership is on the ads tier. It's a multi-billion dollar business for them already and that's a domestic business, US-only, so lower reach, lower engagement than us. So I guess, the short story there is we have given what we've seen and what Greg has outlined in terms of the engagement on our ad plan, the strength of the performance in terms of the monetization, kind of the unit economics and our ability to kind of scale in a way that is even better than the kind of comparable ad-free plan plus providing clearly choice that our members or consumers are seeking out because of the sign-up flow that we would expect to be as large or larger over-time certainly in just our US market and more from there.

But it's a -- I just want to emphasize, it's a multi-year path. So, we're not going to be larger than Hulu in year one, but hopefully, over the next several years, we can be at least as large and we wouldn't be getting into this business obviously Reed, as you know, if it couldn't be a meaningful portion of our business. So, we're we're over $30 billion of revenue, almost $32 billion of revenue in 2022 and we wouldn't get into a business like this if we didn't believe it could be bigger than at least 10% of our revenue and hopefully, much more over-time in that mix as we grow. So, that's kind of how I see it without putting a specific guide on it.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

You're committed to an upfront market spot taking CBS's spot, now Paramount spot, which really indicates your long-term advertising goals of being a major advertising platform. Given this is a prime spot on a critical week for advertisers in premium video like it's just -- it is, it's amazing how quickly you just took that slot way. What's the run stage and just how would you -- and what's the timeframe to get there?

[Greg Peters, Co-Chief Executive Officer at Netflix]

Well I think as Spence talked about it, it will be an iterative process. To your point, it does signal we have big aspirations here and we think there is a big potential opportunity. And so we're committed to incrementally execute against that opportunity. But just back to Spencer's point, we are starting from a zero-base, essentially. And also, we're also starting from a history where as a non-ads platform, we had a lot of folks basically join Netflix fully as non-ads subscribers and so I think that we'll be working through that over a period of time. But again, our goal and aspiration is that this is a very meaningful and significant source of revenue and profit for us over many years to come.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

So, when you think about the pool of money that you're targeting, linear, let's call it, $50 billion, $60 billion business seems like the easy money. Yours -- you've mentioned already, yours are right shifting from streaming -- to streaming from linear. So, you've seen all of the kind of eye balls move. And so now you have like basically more scalable reach. But the digital pool is much larger. But in the past you've said, you've made comments, the company has made comments that you can compete with Google and Meta or it would be incredibly difficult to compete with them. Has this changed? Has your view changed?

[Greg Peters, Co-Chief Executive Officer at Netflix]

Not really. I would say that initially we are competing mostly with that sort of traditional TV advertising pool. Now I think we can layer into that over-time components of what has made digital advertising so effective. So, we speak about the targeting capability. The fact that we're 100% signed in, fully addressable. If you think about the growing relevance of first-party data and how we do that. Those are real big advantages that we can bring relative certainly to the traditional TV world. But again, the form that we have at least for the next couple of years will still be in that sort of lean back, primarily in that lean back experience and so that lends itself to certain kinds of advertising and certain kinds of advertising goal. And a lot of the demand collection component that a Google or a Facebook is really good at, we won't be well-suited to compete with that for at least some time to come.

[Reed Hastings, Founder and Executive Chairman at Netflix]

And Jessica, just to add to that. The good news, as you saw in the letter is that, that branded video ad market that Greg talked about us focusing on is about $180 billion globally, ex-China and Russia. So, we got plenty to deal and a lot of opportunity ahead just in that area alone.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

Yeah, no, it's an enormous opportunity. But there's also besides advertising there's an enormous opportunity in incremental subscribers as you have mentioned. You have the lowest price service at least now, you have the lowest price. Can you frame the opportunity in terms of sub growth? How you're thinking about it?

[Greg Peters, Co-Chief Executive Officer at Netflix]

Sure. And just to comment on lowest priced. I mean, again, we don't really think about the pricing question from a competitive perspective. Again, we're -- think of ourselves as a non-substitutable good when you think about Wednesday or you think Glass Onion. These are titles you can only see on Netflix, that's extremely powerful. Scott and Bell are delivering more incredible titles that are non-substitutable in that regard. So really, we think about the pricing question is how do we offer a wide range of options for a wide range of consumer needs. We want to make that spectrum even wider as we seek to serve more members around the world and trying to deliver appropriate value at those different price points and we're doing a good job explaining that range.

And so, then you think about, so there's two pools then of incremental subscribers. There's a bunch of people around the world in countries where we're not deeply penetrated and we have more opportunity to go attract them. A component of that is we've got folks that are watching Netflix who aren't paying us as part of basically borrowing somebody else's credentials and our goal is over this year to basically work through that situation and convert many of those folks to be paid accounts or to have the account owner pay for them to get the Netflix subscription, but either way we're seeking to sort of monetize that viewing value that we're delivering.

And then beyond that, it's back to Spencer's comment, even our most penetrated market we are 8% of total TV time, which is potentially a relatively narrow lens to think about the broad competitive entertainment offering. So, we have huge opportunity to grow the engagement component of that several x, we feel like we can get to if we do a great job of executing across all fronts. And that represents a tremendous opportunity for more entertainment value delivered and we believe that the revenue flows from that in time.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

Before we get to password sharing, just one last advertising question, you now have roughly a decade of producing your own IP. Any thoughts on offering a fast service over-time, free advertising supported television?

[Greg Peters, Co-Chief Executive Officer at Netflix]

Ted, you want to take this one?

[Ted Sarandos, Co-Chief Executive Officer at Netflix]

Yeah, look, we are open to all these different models that are out there right now, but we've got a lot on our plate this year, both with the paid sharing and with the launch of advertising and continuing to this slate of content that we're trying to drive to our members. So, we are keeping an eye on that segment for sure.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

So, on the password sharing, what will drive consumers to pay $3 or $4 for sharing vs becoming a sub with their own profile? Is it affordability? Is there something else? What do you expect?

[Greg Peters, Co-Chief Executive Officer at Netflix]

Yeah I think there is a range of motivations for different borrowers. So, some of it is economically driven and so part of what we're trying to do is make sure that we are being responsive to that in finding the right price points, whether in terms of a individual account or an extra member affordance and obviously, the ad-supported plans give us the opportunity to present a lower consumer-faced pricing in the countries where we have advertising. Part of it's just, what we call casual sharing which is people could pay but they don't need to and so they're borrowing somebody's account.

And so our job is to give them a little bit of a nudge and to create features that make transitioning to their own account easy and simple, as we have this basically profile export feature, which allows you to take your viewing history and all the great recommendations with you. So, to your point, there is a range of motivations and I think a range of solutions that we'll be able to offer to land people in different places.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

Can you provide any details including the timeframe for converting borrowers to paying accounts?

[Greg Peters, Co-Chief Executive Officer at Netflix]

Yeah, so we've been working hard at this and trying to do some sort of thoughtful experimentation, let our members really speak to us in terms of what set of solutions work for them, so that's the testing that you've seen us do over the last couple of quarters. We feel like we have gotten to a good set of features, the profile export that I mentioned. But there's also a bunch of account management features that we think are important to making this experience work for folks. And so, we're ready to roll those out later this quarter. We'll stagger that a bit as we sort of work through set of countries. But we'll really see that happen over the next couple of quarters.

And I think it's worth noting that this will not be a universally popular move, so there will be current members that are unhappy with this move. We'll see a bit of cancel relax reaction to that. We think of this as similar to what we see when we raise prices. So, we get some increased churn associated with that for a period of time, but then generally, what happens is, both from the the specific changes that we make we'll see folks come on as new subscribers, essentially borrowers creating their accounts or incremental monetization through the extra member that will happen shortly thereafter. And then clearly, our job is to continue to grow value, right, to have more amazing titles that people cannot wait to see. And so whether that's satisfying those members who make those transitions or winning back essentially folks who have turned-off the service and bringing them back on the service over the months and years to come.

[Spencer Neumann, Chief Financial Officer at Netflix]

And just, sorry, I just made, we may discuss but we've touched on a little bit in the letter, but just to kind of reinforce little bit of what that looks like in terms of timing and guidance. So, those dynamics that Greg just walked through because of that as we kind of start to roll this out later in Q1 based on the timing what we talked about is that we'll have modest growth we expect in paid net-adds in Q1, but kind of atypical seasonality where typically Q2 would be a softer paid net-ad quarter, it will probably be a larger paid net-ad quarter, and most importantly, what we're most focused on is obviously revenue that is our primary metric.

And what you see is in the guide these revenue initiatives between paid sharing rolling out and then scaling ads, you don't see much of that in Q1, which is why we're forecasting 8% growth FX-neutral in Q1 revenue, but throughout the course of the year, we would expect to see accelerating revenue growth as we rollout paid sharing broadly across our business and then obviously scale ads throughout the year, which is a more gradual build. So, I just want to kind of highlight that and that's kind of what you're seeing in the guidance.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

And given the revenue drivers of paid sharing and advertising, how you're thinking about price increases in the current year? Is it just too complicated? How are you thinking about it?

[Greg Peters, Co-Chief Executive Officer at Netflix]

Well, I would say the two initiatives that you described represent the bulk of our pricing strategy in '23. We anticipate that they'll both be revenue positive, revenue accretive significantly, so and according to the details that Spence just offered. Now having said that, our core sort of pricing approach and theory remains the same. And so we're going to look at the metrics that our members are giving us and telling us and look for opportunities where we've I think we've done a good job of creating more value for them and for certain customer segment in a certain tier and a certain country, we think we've done a good job at delivering more entertainment for them and then we'll go back and opportunistically ask for them to pay a little bit more, so that we can sort of keep this virtuous cycle going and really invest that back into incredible content and stories.

And maybe Ted, I don't know if you want to highlight anything you see coming on that side?

[Ted Sarandos, Co-Chief Executive Officer at Netflix]

No. I would just say that it's the must-seeness of the content that will make the paid sharing initiative work, that will make the advertising launch work, that will make continuing to grow revenue work. And so it's across film, across television, it's the content that people must-see and that it's on Netflix, which gives us the ability to do that. I'm super proud of the team and their ability to keep delivering on that month-in and month-out and quarter-in and quarter-out and continuing to grow in all these different market segments that our consumers really care about. So, that to me is core to all of these initiatives working and we've got wind at our back on that right now.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

You amazingly continue to expand the genres of content, which as you guys have mentioned clearly drives engagement. But the most recent new genre, which you introduced on your platform and at the end of last -- very end of last month is fitness.

[Ted Sarandos, Co-Chief Executive Officer at Netflix]

Just in time for your New Year's resolution, yeah.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

I mean one class online could be the price of a Netflix of subscription. So, while many of the work that's byte size and some are longer, they're simple but deceivingly effective. Can you talk about what your plans are in this area? And you know to the extent you develop more content, it really as I said drives value for anyone who would work out anywhere else. So, how do you define success and is there anything you can say about partner economics with Nike?

[Ted Sarandos, Co-Chief Executive Officer at Netflix]

Yeah, we can't comment to the partner economics, but I would tell you that we've historically stayed away from the fitness category because it's abundantly available online, in many cases for free as you know. But we thought if we could partner with a great brand and Nike is certainly leading brand in fitness with really well produced content, which this content is and then let's go out to our members and see if it's something that they value. And we'll see that in the engagement and see where we could take it from there. So, I think in that way, working with a great partner and the high-quality to your point of the content itself, we'll put it really good test. Do people want to use Netflix to get in shape or to get back in shape. And if they do, we'd like to keep serving that and if they don't, we'll keep poking around. So, it's the way we kind of were able to test the market at a very high end with a premium brand partner.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

This constant speculation, you will experiment with sports, which is an expensive rental business for many. Does having an advertising offering change your views on offering sports and any thoughts that on like WWE, which is for sale? That could be potentially -- I'm just saying that could be a point content like any views on sports.

[Ted Sarandos, Co-Chief Executive Officer at Netflix]

Yeah, look, I would say in sports, our position has been the same, which is we really we're not anti-sports, we're pro profit and we've not been able to figure out how to deliver profits in renting Big League Sports in our subscription model. Not to say that, that won't change, we would be open to it, but that's where it's at today. And WWE, we look at, we have a lot of M&A activity all the time. We look at all of them, but nothing we can comment on.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

Does churn play a role in your investments into live events? While Live Comedy Specials seem to have value outside of the live window, other events like you just announced that you're going to host the SAG Awards. Sports, obviously, these are fairly short useful lives. So, how do you balance the investment in live versus the potential to drive advertising dollars?

[Ted Sarandos, Co-Chief Executive Officer at Netflix]

I would look at this as part of just like other crawl, walk, run scenarios where we are really looking at our content that would benefit creatively from being live. So, the results show for one of our competition series that we have or a reunion show that drives news or like the SAG Awards that opportunity to engage audiences live. And because we've got the shelf-space, we can do hours of shoulder programing around the live event and all of those things that our members may enjoy. So, there's nothing particularly novel about live television as you know, but we are dabbling in it starting with our Chris Rock Live Concert to try to create the excitement around live for those things that are uniquely more exciting to be live.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

Right. The theatrical release of Glass Onion was incredibly successful in it's limited release. But for some it looks like you left a lot of money on the table by not continuing beyond the first that one week. Do you have any regrets or can you give us your thoughts on your evolving film strategy?

[Ted Sarandos, Co-Chief Executive Officer at Netflix]

Well, I'm thrilled with every aspect of the release of Glass Onion, starting with Rian Johnson and his great film and Scott Stuber and the film team for bringing it to the table and I think what you saw was a lot of excitement. We drove a ton of buzz with that theatrical release and we created a bunch of demand and that demand we fulfilled on our subscription service. Our core business is making movies for our members to watch on Netflix and that's what we're really focused and everything else is really a tactic to drive excitement around those films.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

So, you have like a massive global hit like a Wednesday. There seem to be so many ways you could drive monetization. I know like just staying with Wednesday with for a second like, like the Wednesday makeup was sold down in every MAX store in New York City. You could not buy it anywhere. Do you participate these type of consumer products or is it just a way to fuel fans, fuel engagement?

[Ted Sarandos, Co-Chief Executive Officer at Netflix]

It's a little bit, mostly to fuel engagement and fuel fandom. We actually we do participate in it. Our owned content we do drive a lot of revenue in our consumer products business, but mostly the motivation is that is to drive fandom. And Greg alluded to this earlier, this impact on the culture that this content can have on our platform. In our earnings letter we mentioned the Lady Gaga song that came back after 11 years because of Wednesday, but that doesn't mention the four songs this year that we actually jammed back into the charts, some that never chartered and some they were off the charts for 40 years from Metallica, Kate Bush, The Crabs.

And that impact on culture -- Sofia Carson's music career took off because of Purple Hearts. Jenna Ortega picked up 10 million social media followers in the first week, Wednesday launched on Netflix. And all of these folks who build this gigantic careers on Netflix then go on to have to own their own company, sell their own makeup in many cases and become incredibly powerful influencers and all of that business is drawn because of our -- the impact that this distribution platform and is incredible UI that basically take something like Wednesday, which was not a slam-dunk for people to predict that people would love it as much as they do and the UI can pickup on that activity in the early going of the release and push it out to where it's going to be one of our most-watched shows in our history all over the world. And we do use consumer products as a way to intensify fandom and it could be anything from makeup from Wednesday as you said or maybe even a hand on your shoulder, Spence.

[Spencer Neumann, Chief Financial Officer at Netflix]

You never know where Wednesday is going to show up or least thing. I didn't get my chance to kind of talk and at the risk of going back to the management changes and say, you know I am thrilled with the changes. I'm going to miss maybe not seeing Reed as frequently as he's supporting Greg and Ted. So, I'd just brought in a little bit of reinforcement with thing even though Reed is not going anywhere, but this way I've got a little daily reinforcement.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

Sticking with content for few minutes, the local language hits are building, but so are your US hits. How do you think about allocating your $17 billion or so content budget between genres or languages? Like is there any way like you can kind of parse it out?

[Ted Sarandos, Co-Chief Executive Officer at Netflix]

Yeah, it's a big task. Like -- watching where viewing is growing and we're it's suffering and where we are under programming and over programing around the world is a big task of the job. Spence and his team support Bella and her team in making those allocations, figuring out between film and television, between local language. And what's really interesting is, there isn't that many -- there aren't that many global hits. Meaning that everyone in the world watches the same thing. Squid Game was very rare in that way. And Wednesday, it looks like one of those too, very rare in that way.

There are countries like Japan as example, or even Mexico, that have a real preference for local content even when we have our big local hits. And every once in a while something like Squid Game is even a big hit in the US. So, think about in Q4, we launched a Top 10 non-English series nearly every week of the quarter from South Korea, from Spain, from Colombia, from Japan, from Poland. And so the benefit of that kind of local language investment, the benefit of doing that early was that we become exceptional on the ground in those countries. Those content teams generate not just content that people want to see but content that's leading the industry.

To have Netflix produce the Academy Award entry film for both Mexico and Germany has never happened in the history of the Oscars. It's really phenomenal. And I mentioned earlier, All Quiet on the Western Front and the success of BAFTA. And keep in mind that these investments are important, because it actually increases the total addressable audience for Netflix around the world, because if we were just doing English content for the world, we will be mostly attracting Western-centric viewers. But our addressable audience is anyone who is watching TV anywhere in the world.

[Spencer Wang, Vice President, Investor Relations & Corporate Development at Netflix]

And Jessica, we have time for one or two last question, just want to make sure you have a chance to ask about margins or anything else you might want to ask.

[Jessica Reif Ehrlich, Analyst at BofA Securities]

Let's move away from content then, so free cash flow, first of all, like and what an inflection point, $1.6 billion in '22, roughly $3 billion in '23, $4 billion-plus probably in '24. Can you talk about historically, you've been more build than buy. Is there any change in philosophy as cash starts accelerating? Can you talk about overall capital priorities? And what's driving that operating margin increase?

[Spencer Neumann, Chief Financial Officer at Netflix]

Spencer, why don't you go first with the capital allocation philosophy, if you like?

[Spencer Wang, Vice President, Investor Relations & Corporate Development at Netflix]

Sure. Thanks, Jessica. So, as we were in the letter, no change at all to our capital structure policy or allocation guidance, which is to first and foremost reinvest in the core business and selective acquisitions after that. Those are the main priorities. Beyond that if we have cash in excess of our minimum cash levels, which we equate -- which is roughly equates to two months of our revenue, then we'll return that to shareholders through our share buyback program.

[Spencer Neumann, Chief Financial Officer at Netflix]

Yeah, and I can pick up with margins. I can start with a bit of an explanation. But if you like, in terms of just in the near-ish term our outlook for '23 and then just generally what's driving our outlook. But what you saw in the letter, it kind of dates back frankly, if we, if we walk back to where we were in the beginning of 2022 when we saw slowing revenue growth, we said we're going to manage to a target operating margin of 19% to 20% FX-neutral at those January 2022 rates and we ended the year at 20%, so at the high-end of that range.

And now as we kind of turn the page to '23, first I should say, with everything we've talked about where we've got, we're quite optimistic in terms of our path forward. I also just want to highlight, there is also kind of short-term unusual amount of less visibility than typical because these things we're talking about in terms of our revenue initiatives, whether it's scaling our ads platform, launching paid sharing, which hasn't globally rolled out yet. These things are early days and then also all multinationals have a level of macro uncertainty. So, that's a bit of a caveat in terms of the variability in the forecast.

But what we see is we see with our path to accelerating revenue growth and our high confidence there, that is we turn forward to '23, we're guiding to now 21% to 22% FX-neutral operating margins at those same January 2022 rates. We're now in the New Year. So, we take it forward to January '23 to current rates and that's a range of our operating margin guidance of 18% to 20%. So, now FX-neutral for '23, we're going to manage within that band to deliver at least within 18% to 20% operating margin guide. So, that is growing margins, growing absolute profit and really what's reflected in there is that this -- we have high confidence in our ability to accelerate revenue throughout the course of the year as we scale ads and we launch paid sharing. We've got high confidence in improving the service and the strength of our content slate with everything that Ted discussed here on the call. And we're also continuing to manage our cost structure with increasing discipline. You saw that in the back-half of '22 with our slowing expense growth and we'll will carry that through similarly in '23.

So, that all lends itself to our focus, which is kind of healthy growing, double-digit revenue growth and accelerating that revenue growth throughout the year, expanding both our absolute profit and profit margin and then growing positive free cash flow. So, that's all reflected again with the big caveat that there is a bit less visibility than typical in this near-term, that's something we'll continue to work through. We'll obviously know a lot more over the next couple quarters, few quarters as we rollout paid sharing and we'll update guidance as appropriate. But that's what's plays through and then also plays through to that cash flow generation that you see where we believe with all those dynamics and managing it about the same level of cash content spend, that will have more than $3 billion, at least $3 billion of free cash flow in the year.

[Spencer Wang, Vice President, Investor Relations & Corporate Development at Netflix]

Thank you, Spencer for that answer and Jessica for the last question, all your questions. And before I turn it over to Reed for closing remarks, I just wanted to say, as a long-time Netflix employee, and as formerly prior to that, as an analyst covering Netflix for many years, Reed it has been a real privilege to work alongside you and on behalf of all Netflix employees, we thank you for everything you've done for us and the company over the past 25 years and we're all super excited for the next chapter with you as our Executive Chairman and Ted and Greg as our Co-CEO.

So with that, over to you, Reed to take us home.

[Spencer Neumann, Chief Financial Officer at Netflix]

Anyway, it's Spencer. I just -- because I can't just deal with the thing. I just want to thank Reed as well. This is not a goodbye I know but it's been fantastic. I couldn't have asked for a more incredible experience the past four years with you as our leader, learned so much across everything from work to humanity and I'm so thrilled with the next chapter with Greg and Ted and you and so super excited and thanks, Reed.

[Spencer Wang, Vice President, Investor Relations & Corporate Development at Netflix]

Reed, you might be muted.

[Greg Peters, Co-Chief Executive Officer at Netflix]

You're muted Reed.

[Reed Hastings, Founder and Executive Chairman at Netflix]

Thank you, guys. It's certainly not goodbye. I'm heavily invested in Netflix success. So, it's been 83 earnings calls now. And I honestly, have loved them. I love the interaction. But it's time for Greg and Ted and the team to lead and I will be in the prep sessions. But this will be my last earnings call on-screen. Overall, I would say our first 25 years were good and I'm super excited about Netflix's next 25 years being great under our broadened leadership team. Pleasing our shareholders and members is so satisfying and I just want to thank all of you for your support and look forward to continued more progress.

Thank you, everyone.

Participants

Corporate Executives

• Spencer Wang, Vice President, Investor Relations & Corporate Development
• Reed Hastings, Founder and Executive Chairman
• Ted Sarandos, Co-Chief Executive Officer
• Greg Peters, Co-Chief Executive Officer
• Spencer Neumann, Chief Financial Officer

Analysts

• Jessica Reif Ehrlich, BofA Securities