Netflix (NFLX) Q3 2024 Earnings Call Transcript

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Netflix (NFLX -2.04%)
Q3 2024 Earnings Call
Oct 17, 2024, 4:45 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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

Good afternoon, and welcome to the Netflix Q3 2024 Earnings Interview. I’m Spencer Wang, VP 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’ll begin with questions about our Q4 results and our outlook. The first question comes from Eric Sheridan of Goldman Sachs. Can you please frame your key investment priorities for 2025 and beyond? And how have they evolved in the past 12 to 18 months?

Theodore A. Sarandos — Co-Chief Executive Officer

Thanks a lot, Spencer. Let’s start with looking into 2025. We’re feeling really good about the business. We had a plan to reaccelerate growth, and we delivered on that plan.

You can see that in our 2024 financials. We expect to deliver 15% revenue growth and 6 percentage points of operating margin improvement and engagement, which we view as our best proxy for member happiness because when people watch more, they stick around longer. So, that’s retention. They talk more about Netflix, which drives acquisition.

And they place a higher value on their Netflix subscription. This year, we’ve maintained very healthy engagement, about two hours of viewing per member per day, and engagement on a per-owner household is up through the first three quarters of 2024. So, if you look at where we’re sitting now, we finished Q3 with some big hits: Perfect Couple, Monsters: The Lyle and Erik Menendez Story, Nobody Wants This. And we’re really excited about our Q4 slate because it’s filled with great big titles from the U.S., from Brazil, from Korea, from the U.K., from Germany.

And we also have got some really amazing live events coming up. So, when we look forward into 2025 and beyond, we want to build on that success. We plan to build on that success. And we’ve been making original programming now for more than a decade.

And the core has become very strong. We have a team of people who are the best creative talent around the world. We have a culture and an operating model that allows us to create stories in more than 50 countries and thrill audiences of more than 600 million people all over the world. So, our 2025 slate, I look at that as another ambitious step toward this push to make us even greater for our members.

So, it really showcases the scale and the ambition and reflects the investment that we’ve made and the steady cadence of programming. So, looking into 2025, you’ve got new seasons of our biggest shows: Wednesday, Squid Games, Stranger Things, on top of new shows from Shonda Rhimes and Ryan Murphy, a new Knives Out film from Ryan Johnson, Guillermo del Toro’s Frankenstein, even the return of Happy Gilmore. So, we could not be more excited about where we sit right now and where we’re heading.

Gregory K. Peters — Co-Chief Executive Officer

Just jumping on that, we’ve always been focused on trying to constantly improve every aspect of our service. It served us quite well for the last decade and a half. We hope and expect that it will serve us well for decades to come. And then the question — I mean you mentioned priorities, too.

And our top priority is really bringing that mindset to improving our core film and series offering. I think just to double down on what Ted was saying, we’ve seen really good progress on that front and on our plan. One of the things that I like the most is increasingly seeing a steady drumbeat of hit titles from countries around the world. Ted mentioned a bunch, but you’ve got Japan.

You’ve got Korea. You’ve got Thailand. You’ve got India. This represents, again, that decade-plus investment in those creative communities, working with local storytellers there and making sure that they have the capability to tell their stories in a compelling way.

So, that’s super exciting and we expect to see more of that. Also improving the product experience. We tested a new more intuitive version of our TV homepage. We’re excited about the progress that we’ve seen there, so we’re polishing it up, and we’re excited to bring that to our subscribers around the world.

Our second set of priorities are about planting seeds, these investments, and new initiatives that help us expand and strengthen our entertainment offering and that we believe will be incremental levers for growth in the coming years. We’ve got initiatives like games. We’re excited about games based on Netflix IPs. We got a Squid Game coming.

We’ve got a Virgin River Christmas. We’ve got The Ultimatum. We’ve got games based on storied game classics like Monument Valley 3 that’s coming out. We’re also expanding into live.

We’ve got the Tyson-Paul fight, NFL in December. We got 52 weeks of WWE coming in January, John Mulaney, and more and more. And then we’re also growing advertising as the principal goal here is the more effective way to give members and members-to-be a lower-priced plan to access all of that great entertainment. I think it’s worth noting, it takes time to build these new initiatives to the point where they’re significant given that we already have a fairly large core business.

And ads is a great example of how we approach growing these seeds. It takes a lot of work, but we know the path, and we’re hustling to move down that path as quickly as possible. And you can sort of see some of the benefits that we’re getting. We’re roughly doubling revenue each year, but it’s off a small base.

So, it starts to become a material contributor of revenue over the next several years. But if you step back and you think about this opportunity ahead of us, over $600 billion in consumer spend in the areas and countries that we operate, we’re only capturing roughly 6% to 7% of that today. That’s tremendous upside if we can just stay focused on that continuous improvement and drive to that future.

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

Thank you, Ted and Greg. Our next question on our outlook comes from Jessica Reif Ehrlich of Bank of America. At a high level, when we think about the Netflix revenue growth algorithm, can you please provide some color on the pieces moving forward between organic membership growth, ARM increases, and advertising? Spence, maybe you can take that one.

Spencer Adam Neumann — Chief Financial Officer

Sure. I’ll try that one, Jessica. So, really, those investment priorities and that focus that Greg and Ted just talked about really are the engine that kind of drives that growth equation. But if you look at our 2025 guide as a proxy for that evolving mix or components of our growth over time, I’ll walk through that a bit as an indicator.

So, we expect to deliver roughly $43 billion to $44 billion of revenue next year based on FX rates at the end of Q3. That represents about $4 billion to $5 billion of incremental revenue over our kind of 2024 expected landing where — think of it as about 11% to 13% growth. And that’s from a combination of membership and ARM growth. The majority of growth next year, we expect to be membership-driven growth.

It’s from the full year impact of this year’s strong net adds plus solid paid net adds expected next year. We still have hundreds of millions of households that aren’t members, and we’ll grow into that opportunity, thanks to a great ’25 slate and our improvements in converting consumer demand, and we will have ARM growth. ARM’s a combination of continued plan evolution and pricing, building off the actions we’ve been taking this year, and growing our ads revenue, as Greg just talked about, not yet a primary growth driver but to be a more meaningful contributor in ’25. So, overall, healthy double-digit revenue growth, more balanced across multiple drivers, and strong outlook.

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

Thank you, Spence. Building on that question from Justin Patterson at KeyBanc, given what appears to be a moderating competitive environment, how are you thinking about the puts and takes around operating margins going forward?