Apr 21, 2021

Netflix (NFLX) Q1 2021 Earnings Call Transcript

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RevBlogTranscriptsEarnings Call TranscriptsNetflix (NFLX) Q1 2021 Earnings Call Transcript

Netflix held its Q1 2021 earnings call on April 21, 2021. Read the full transcript here.

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Spencer Wong: (00:01)
Good afternoon, and welcome to the Netflix Q1 2021 earnings interview. I’m Spencer Wong, VP of IR and corporate development. Joining me today are co-CEO Reed Hastings, co-CEO and Chief Content Officer Ted Sarandos, COO and Chief Product Officer Greg Peters, and CFO Spence Neumann. Our interviewer this quarter is [Nittie Ghouta 00:00:20] from Fidelity.

Spencer Wong: (00:22)
As a reminder, we’ll be making forward looking statements and actual results may vary. With that, let me turn it over to nitty for her first question.

Nittie Ghouta: (00:30)
Thanks, Spencer. Thank you all for having me. Great to be with you. And thank you all for all the great work over the years. It’s been great for us to be on this journey with you as shareholders.

Nittie Ghouta: (00:40)
So with that, let’s just jump right in. Obviously, you were comping a really big Q1 last year with 16 million net adds. The net adds this quarter came in below your expectations and below the Street’s expectations. Any additional color you can provide on what caused this?

Spence Neumann: (01:00)
Hey, Nittie, it’s Spence. I guess I’ll take this one first. Hopefully, you can see us. It looks like it’s a little frozen. Maybe it’s just frozen on our end. But look, so in terms of Q1 performance, it really boils down to COVID, frankly. As you know, the extraordinary events of COVID have had a big impact on the world, continue to have a big impact on the world. And for us, it at a minimum creates just some short-term choppiness in some of the business trends that we see in our business. So, in particular, we had this huge pull forward in 2020, in terms of our subscriber additions, nearly 40 million paid net adds in 2020. And we also had a nearly global shutdown in production, which we’ve been ramping safely and at scale through much of last year and into this year, but it did push some key title launches into the back end of this year.

Spence Neumann: (01:54)
So, the combination of those two things does create some noise. It’s super hard to obviously forecast quarterly subscribers in a typical quarter for us, and particularly hard in this environment. In fact, on page two of our earnings letter, we show our actuals relative to forecast, which in our guide is our internal forecast for subscribers. And as you know, because it’s our forecast, that we’re going to miss every quarter. It’s just a matter of whether they’re bigger or smaller misses. And we can see, over the past five years, our biggest misses to forecast, either up or down, most of those big misses, the biggest are in the past five quarters relative to the past five years. And that was these five quarters of COVID.

Spence Neumann: (02:44)
So it’s just a difficult time to forecast the business, but the key is the business remains healthy. Our engagement, our viewing per household was up year over year in Q1. Our churn was down year over year, and the is still growing. So even at four million paid net adds, if you take COVID out and look over the past two years, we’ve grown from two years ago at about 150 million members to almost 210 million now. So that’s nearly 40% growth. And about just under 20% over an average over each of those two years, which is in line with the past couple of years.

Spence Neumann: (03:20)
So the business remains healthy, and that’s because the long-term driver’s this big transition from linear to streaming entertainment, and that remains as healthy as ever. But you do see a little noise in the near term, but a lot of longterm clarity.

Nittie Ghouta: (03:36)
Thank you, that’s helpful.

Ted Sarandos: (03:37)
Nittie, we had those 10 years where we’re growing smooth as silk, and then it’s just a little wobbly right now. And of course, we’re wondering, well, wait a sec, are we sure it’s not competition? Because obviously, there’s a lot of new competition. And we really looked through all the data, looking at different regions where new competitors are launched or are not launched, and we just can’t see any difference in a relative growth in those regions, which is what gives us confidence that it’s intensely competitive, but it always has been. We’ve been competing with Amazon Prime for 13 years, with Hulu for 14 years. It’s always been very competitive with linear TV too. So there’s no real change that we can detect in the competitive environment. It’s always been high and remains high.

Nittie Ghouta: (04:31)
Well, it’s encouraging to hear that your churn was actually down year over year, and you did announce some price increases in Q4 and Q1 in a few markets. So maybe just talk about how well this was [inaudible 00:04:44] to absorb these price increases in the current environment.

Ted Sarandos: (04:49)
Sure. Greg, do you want to go first?

Greg Peters: (04:51)
Yeah, I can take that one. So, we’re seeing results that are very similar to what we’ve seen over the last two years, which is that if we wisely invest in great stories, and we increase the variety and the diversity and the quality of our programming, which Ted’s team is assiduously trying to do in every country around the world, we also invest in a better product experiences that make it more delightful and easy to connect with those stories. We’re just delivering more value to our members. And if we do that well, then we can occasionally go back and ask them to pay a little bit more to keep that positive cycle going.

Greg Peters: (05:29)
And so having said that, I just want to reiterate, we think we’re still an amazing entertainment value. We want to remain an incredible value compared to our competitors and the competitive offerings that are out there broadly. So even as we continue to improve the service, we’ve got that in mind. And we want to make sure that we’re accessible to more and more people on the planet through that process.

Ted Sarandos: (05:50)
And Nittie, the only thing I’d just add to what Greg said, I agree with all that, it’s just very specifically in terms of what we see in the numbers on the churn side, our churn is actually below pre price change levels already in the US and in most of the markets where we have adjusted prices. And just some of the newer ones haven’t come all the way back down, but they’re rapidly getting there.

Nittie Ghouta: (06:12)
That’s great. Can you talk a little bit about what you’re expecting, in terms of subscriber growth, as the world reopens? I don’t know if there’s anything you’re seeing in your more open versus less open markets that would give you a window into this, but how are you thinking about that and what’s baked into your [inaudible 00:06:31]?

Reed Hastings: (06:33)
Well, tragically Nittie, many countries have opened and closed over the year. And we’ve got many countries right now that are in real crisis. Fortunately, the US not one of them right now. So we’ve got a lot of evidence on that point. And there was the initial surge of COVID, which was quite large in subscriber growth and viewing. But since then, every opening and closing, including the US over Christmas, really didn’t generate any noticeable material effect. So I don’t think there’s any material effect we’re going to notice about future openings and closings. Again, because we’ve been through in many countries’ pretty intense surges, unfortunately.

Ted Sarandos: (07:16)
And the only thing I’d add, I guess, to Reed’s point, specific to your question on the Q2 guide, Nittie, is related to that, it’s very similar to what we saw in Q1 is what’s reflected in Q2, in terms of still working through that pull forward, still working through some of the pushed slate of some of those big titles into the latter half of the year. And also, it’s a bit of a seasonally soft period for us. So those were all playing into it, but the good news, as he said, the core underlying metrics are very healthy, and there’s this clear catalyst to a re-acceleration of growth and towards that back end of the year, as those big titles start to launch and strength of slates, and we come out of that pull forward. So feeling good about the longterm trends.

Nittie Ghouta: (07:59)
Do you feel like Q1 and Q2 encapsulate the pull forward that you’re expecting? I know it’s really hard to forecast when you add 26 million subscribers over the course of two quarters last year, but just how are you thinking about how the second half might shape up with the additional content, as well as maybe some of the pull forward behind us?

Spence Neumann: (08:23)
You guys want me to take it [crosstalk 00:08:25].

Greg Peters: (08:26)
Go for it. Go for it [crosstalk 00:08:28]

Spence Neumann: (08:28)
One of the things to keep in mind is that we normally… what we have to do day in and day out, week in and week out, year in and year out, is deliver programming that our members love and value. And the shape of that gets determined sometimes two, three years in advance. So you go into these production cycles, you go into planning cycles, and you’ve got a pretty smooth release of high profile projects and smaller passion projects and all those things.

Spence Neumann: (08:55)
And what happened, I guess, in the first part of this year is a lot of the projects we’d hoped to come out earlier did get pushed because of the post production delays and the COVID delays in production. And we think we’ll get back to much steadier state in the back half of the year and certainly in Q4, where we’ve got the returning seasons of some of our most popular shows like The Witcher and You and Cobra Kai, as well as some big temple movies that came to market a little slower than we’d hoped, like Red Notice with the Rock and Ryan Reynolds and Gal Godat, and Escape from [inaudible 00:09:27] with Chris Hemsworth and big event content. Now, all that being said, in every quarter of the year, we released more content than we did in the previous years, quarter by quarter, in every region. It’s just, I think, that the shape of the mix of the content is become a little more uncertain. And then the long-term impacts of the COVID shutdown are also becoming a little more uncertain in that timeframe, in the first half of this year.

Nittie Ghouta: (09:54)
Great. Well, I’d like to shift to the big picture now that I’ve beaten you up about the quarter enough. So, you’re at over 200 million-

Nitty: (10:03)
You’re at over 200 million subscribers around the world. You’re five years into your original content strategy. You seem to be coexisting really well with possibly the largest direct competitor you might ever see, and you’re self-funding. Thank you for that. We did notice. Maybe just talk about, with that backdrop, key priorities for each of you in 2021, and really just the next two to three years as you see them. Maybe we can start with you, [inaudible 00:10:35].

Reed Hastings: (10:35)
Probably your reference was to Disney, but our largest competitor for TV viewing time is linear TV. Our second largest is YouTube, which is considerably larger than Netflix in viewing time. And Disney’s considerably smaller, but we’re in the middle of the pack. In terms of what we focus on is the same things that we’ve always focused on, which is our member satisfaction, drives retention and word of mouth and drives our growth. So it’s, where can we find the story that you talk about even more, that you connect with? Where can we improve our choosing, where the best things are recommended for you? And then ultimately the content of, can we have stories that are just incredibly compelling? And we’re just, quarter by quarter, learning more lessons on each one of those, which is what improves the member satisfaction, which is what really drives the growth.

Pat: (11:32)
And I’d say one of the things to keep in mind is over the years, media companies have been really great at exporting Hollywood content around the world. And I think I’m proud of how we’ve done that as well with shows like Bridgerton with over 100 million starters, and movies reaching these enormous audiences all over the world. But the one thing that we really have sharpened our skills on the last couple of years has been creating content from anywhere in the world and playing it all over the world. And the great thing about that is those stories that are coming from all over the world, like we saw with Lupin this year, this quarter was our biggest new series on Netflix in the world was Lupin from France. And the show was not a watered down French show. It was a very French show.

Pat: (12:17)
And what’s really been great about it is as you tell stories from around the world. The more authentically local they are, the more likely they are to play around the world because people recognize the authenticity of the storytelling. And that’s something that we’ve been really focused on as well as continuing to offer a very big variety of content from Hollywood to the world as well. But we’ve got new seasons of really popular shows from around the world like Elita in Spain, La Casa De Papel coming up, The Naked Director from Japan, which has been an enormous hit for us, The Gift from Turkey. So our ability to do this around the world at scale and be able to bring those stories to a big global audience is something that we’re really incredibly of, and we’ll keep working on over the next couple of years.

Greg: (13:02)
And I’ll pick it up from there. I’m also super excited about that aspect of our business to find stories from around the world and connect them with audiences around the world. And a companion piece of that is making sure that we increasingly are understanding what are our members needs and the members we haven’t signed up, consumers needs generally in more and more countries. And they all have unique constraints that they’re working through. They have unique expectations from the service.

Greg: (13:30)
And our job is to learn more and more and more about what those are and make sure that we are being able to offer the service in a way that feels natural, that feels delightful to them. And whether that’s having the right payment methods so that consumers don’t have to think about what hoops they have to jump through to actually sign up and pay for the service, to how we present the content to them, regardless of what country it comes from or what language it’s in, but presents it in a way that allows them just to get into the story of it and realize that the plenty and the amazing diversity of storytelling that exists across the planet.

Speaker 1: (14:10)
Yeah. I think everyone’s pretty much hit it, Nitty. I’ll try to add. I get super excited about just this giant transition to streaming entertainment. Streaming is… The entertainment, it’s the now and the future. And we talked a little bit in the letter about our business and how it’s transitioned over the last 10 plus years from DVD by mail to streaming, from US only to global, and from licensed content to original production. But what’s helped is just our velocity of decision-making and our focus has served us well. And there’s just… We’re sitting here we’re still less than 10% TV view share even in our biggest markets. So there’s just this big, long runway of growth if we stay focused and keep getting better. And so I love the opportunity to keep continually getting better, improving our creative excellence, our operational excellence, and just maintaining that speed and velocity even as we get larger as a company.

Speaker 2: (15:14)
[inaudible 00:15:14]. Oh, I’m sorry, Nitty. I’d say my main job is to continue to make sure you’re happy as well as our other shareholders. But I think what that means is just making sure that you all understand what we’re doing and why we’re doing it from a strategic standpoint. In my broader finance role, supporting spends on the finance side, just to make sure that we’re allocating capital as wisely as possible, and then continuing to support Ted and Greg and the other business units from a finance support standpoint.

Nitty: (15:42)
Great. So Pat, I’d love to dig a little bit deeper with you. Film has been a recent success for Netflix. 36 Oscar nominations. Congratulations, that’s incredible feat. So my question is, over the longterm, do you think Netflix can be the primary or dominant way that people consume films? And if so, what does it take to achieve [inaudible 00:16:11]?

Pat: (16:10)
I don’t know about dominant, but I would say it’s going to be a continually material way people view films. This is where the audience is kind of going. And what we find is that we’re not really changing the way we make films, for the way people watch films. So they’re watching the kind of films they would’ve gone out to the theater to see, but in many cases in the convenience of their timetable and in the comfort of their home, where they can really enjoy a great new film. And it could be a film of enormous scope, certainly competitive to the kind of things you see in the theater.

Pat: (16:40)
You mentioned the Oscar success, and that’s certainly one flavor of filmmaking that we’re super proud of. Mostly, we had 17 different films with an Oscar nomination this year, which is super, incredibly exciting. But also the fact that we can do these very large scale action movies that audiences love around the world at the same level that they’re being produced for the theater. So I do think that that’s going to continue to be more and more meaningful to viewers, as to what percentage of the films that they see in or out of the home.

Nitty: (17:09)
So over the years, you’ve been really successful getting a high share of most watched TV shows, whether I look at IMDB top shows, or most searched shows on Google. Do you have to do anything fundamentally different in film to achieve that same level of high share in films?

Pat: (17:31)
It’s not dissimilar, in that people just have very diverse tastes. So you really want to try to hone in on… We’ve always kind of set out to do the, your favorite film, your favorite show, whoever you are, wherever you are, and whatever mood you’re in. So that’s why we kind of go at it from so many different angles. And it’s a very unusual thing where you have Mank sitting next to the next to the Tiger King on the shelf for most media companies. But we have very specialized teams that focus on being best in class of each of those things that they do. And that’s, I think, why we’ve had those results you’re talking about.

Reed Hastings: (18:03)
And Nitty, I think we would say too, we would need to spend more. So we spend a lot more right now in series than film, but that will grow as the total budget grows. And then it’s also the experience curve. We’ve been doing series longer, and we’re more dialed in about what goes really big and what hits and we’re getting there on film, and also on animation, also on kids. Each of these have their own experience curve that we’re progressing down.

Nitty: (18:31)
Mm-hmm (affirmative). Can you share any more details about the Sony deal? I guess more specifically, what is the rationale for the deal? And what does it get you that your original [inaudible 00:18:46] doesn’t achieve for you?

Pat: (18:48)
Yeah. Well, what’s really exciting about that deal is that we’re going to be producing global original films from Sony’s IP library and their development slate for Netflix. That’s really an incredible opportunity, access to IP that we wouldn’t otherwise have. And it’s a big global programming strategy over the next five years. The domestic pay one deal that is also part of that, I think, compliments and adds to it, but only for our domestic subscribers, for five years. And we do think that that’s a great thing, and it complements our growing output of original film as well. And we’ve had their output prior and through other deals over the last several years. It’s been great. They’re great films and people have diverse tastes, like I said, and I think this adds to that. It doesn’t compete with it.

Nitty: (19:38)
Right. Greg, switching gears to pricing, your price range around the world has really widened over the years. But the reality is in terms of willingness to pay, there’s probably households in the US that are willing to pay you $50 a month, and then households in India that can’t pay you more than $5 a month. So assuming over the longterm-

Nitty: (20:03)
Be more than $5 a month. So assuming over the long-term that you can match everyone’s willingness to pay around the world, what do you think your revenue distribution will look like across these different price points?

Greg: (20:16)
Well, as you point out, our spread has been growing wider, and I think that that’s part of that story. We’re really trying to find a set of plan types with the right kind of features. And we know some folks have gigantic TVs at home and some folks are watching on their mobile phones. Some folks are approaching the service as an individual. Some folks are approaching it as a family. So there’s just so many different needs out there. And so we’re really going to try and match those feature sets at the right price points to that really wide group of folks. And we know that that inevitably means that we’re going to really see an expansion of that.

Greg: (20:59)
And an important part of that is making sure that we are continually looking at how do we broaden accessibility? So how do we bring in price points that are low enough for more and more of the world’s population to be able to access a service, to enjoy the kind of amazing stories that we are creating? You’ve seen us do that with rolling out the mobile plan, for example, in several countries in Asia, that we find a good balance of features and price points. We’re going to just do more and more of that. But I think the broad trajectory is the one that you’ve seen, which is a widening of the breadth of our offerings and price points associated with them.

Nitty: (21:39)
Related to that, your content investment in Asia has ramped up pretty significantly. I think you announced this quarter of $500 million in Korea, 40 new films, and [inaudible 00:21:55]. Obviously Japanese anime continues to ramp. I’m curious what’s giving you the confidence to invest this aggressively in Asia, particularly in a market like India, which is still a low share of global GDP, and willingness to pay for premium content seems pretty…

Pat: (22:12)
Well, remember, I think it’s the product market fit is what we’re always looking for. Are we programming the service in a way that consumers value it and love it? And it’s a bit of trial and error at the beginning of each of the territories as we’ve rolled out. We started launching in international territories with no original programming in local language with local producers, and now we’re producing in most corners of the world. And I do think our confidence and investment in Korea, in India, Japan has been the success of the investments to date, and that it gets us closer and closer to that product market fit that we have in our more mature markets. So I do think… And what we’ve seen in our Korean originals and our Japanese anime is that they play really well around the region as well as in country and occasionally can be very, very global in their interest and desire. And the fact that we can bring a global audience to those creators in each of the territories has been really attractive.

Reed: (23:08)
And Nitty, we’ve had enough success in Japan and South Korea for you guys to think about it like Germany or France, like it’s a big developed rich market. We’ve got that wired. India, we’re still figuring things out. And so that investment takes some guts and a belief forward-looking, but the other investments you should think of just like rich European countries, content exports really well. And we’re just getting a little better every month on it.

Speaker 3: (23:40)
Yeah. And I’d just add to that and you can kind of see that in the numbers too and even in what we release on the regional numbers. The APAC region was about a third of our member growth this quarter, and also still healthy revenue growth, including average revenue per member. And that’s in part because, as we improve the service has engagement is up and churn is down, we can occasionally take price increases, as Greg mentioned. And that happened recently in Australia and New Zealand and Japan. And I think our members are clearly appreciating the value of what we’re delivering them to the business. The business is scaling. It’s scaling well.

Nitty: (24:22)
Yeah, that’s helpful. So Reed, is that gut or belief when it comes to these lower ARPU or just the newer market, is it that eventually you’ll be able to play the low ARPU, high volume strategy? Or is it over the longterm, incomes will rise in these markets, ARPUs will rise, and the math will sort of work.

Reed: (24:44)
I think on that, we’re still learning. We’ve done some pricing experiments in India that Greg can talk about. And I would say we’re still mostly focused on getting a content fit and getting broader content. So that’s why I say that one is a more speculative investment than, say, Korea or Japan, which again, five years ago was very specular when we did those. But we’re over the hump on that. We’ve got a great match. And we’re still working on the India and it’s super exciting. Again, right now this month, things are terrible in, the COVID spike. But outside of that, we’ve been really producing a lot of great new content that’s currently shut down. Greg, do you want to talk about Geo or any of that?

Greg: (25:36)
Yeah. It may be a couple of things there. Nitty, we recognize that we don’t know a lot yet compared to how much we’re going to learn over the next many, many years. And so our job is to really try and be innovative and push and experiment. And so whether that is pushing on the actual model in terms of multi-month or sachet and explore the ranges of that kind of offering, but then also something that we’ve seen that is quite successful for us in pretty much all the markets we serve around the world is leveraging go-to-market partners who have existing relationships with consumers as a way to expose them to the Netflix service and then have them make it easy to pay.

Greg: (26:22)
And of course, the ultimate and easy to pay as it’s just included, the bundle offerings that we’ve been doing more and more of. And Geo is a great example of a partner we’ve been working with to really bring the service to a new demographic at a very, very low price associated with low cost mobile plans that they’re offering as well as home-based IPTV plans, and those have been successful for us as well. So it’s constantly just trying to come push on all those different engines and really figure out, what is that right price point, the right offering, and the right way that works for the local members and consumers?

Pat: (27:01)
I would just add that India is a tremendous opportunity, and I think Netflix offers a tremendous opportunity for the creative community to connect with enormous audiences. And it’s just like all great opportunities. It’s a long journey and it’s a challenge. We think it’s worth it, and that’s why we were investing early and trying to stay ahead of it. And I think we’ll be able to see those kinds of results that we’ve seen in other places in the world as we continue to learn more and more and more.

Nitty: (27:27)
Right. Well, I am a big consumer of your Indian content, so keep it coming. Greg, you’ve started to run some tests in certain markets, I think maybe just the US, limiting account sharing. Can you talk about the size of the opportunity here and why now is the right time to start tightening the screws on that?

Greg: (27:50)
Yeah. First of all, we recognize that our members are in different positions. Again, they have different needs from us as an entertainment service, and we’re really seeking that flexible approach to make sure that we are providing the plans with the right features and the right price points to meet those broad set of needs. So we’re going to keep doing that. We’re going to keep working on that, working on accessibility across all of the countries that we serve. But we also want to ensure that while we’re doing that, that we’re good at making sure that the people who are using a Netflix account, who are accessing it are the ones that are authorized to do so. And that’s what this line of testing is about.

Greg: (28:35)
It’s not necessarily new thing. We’ve been doing this for a while, so you may see it pop up here and there in different ways, but it’s the same framework that we use that I think you’re familiar with in so much of how we think about continuously improving the service, which is we iteratively work, we use the tests and the test results to inform and guide how we proceed and just continually try and make that better and better.

Reed: (29:01)
And Nitty, we will test many things, but we would never roll something out that feels like turning the screws, as you said. It’s got to feel like it makes sense to consumers, that they understand. And Greg’s been doing a lot of great research on how to try variants that harmonize with the way consumers think about it.

Nitty: (29:22)
Are there any particular markets where the subscriber, or the user to subscriber ratio is particularly high?

Greg: (29:31)
I think every market, every country is different, and so we see different ranges of behavior. And I think just how people orient themselves to the service is different, from country to country. So I want to… It’s more than just how they think about how they’re working the system or [inaudible 00:29:50], how did they think about sharing the service with extended family or people that they love is a natural part of how they connect with the stories that we’re telling. So it’s all different around the planet and it’s different within countries too, as you might well expect.

Greg: (30:02)
Around the planet, and it’s different within countries too, as you might well expect.

Nitty: (30:05)
If this were a gap that you could close over the very long-term, do you think that there’s a bigger revenue opportunity in getting some people to pay more through limiting account sharing or getting everyone to pay more of your kind of rate? Which is the bigger revenue opportunity over the next, I don’t know, 10 years or however long it takes to sort of start closing the gap?

Greg: (30:35)
What I would say is I think the optimal revenue opportunity, optimal business opportunity is trying to figure out a way to best serve our members and trying to figure out the models, the plan types, the right price points, the right features that really work for them in a natural way. And that really is what’s informing our investigation exploration. I would say we don’t really know, as often the case when we’re going down a path of innovation, what the right place to land is [inaudible 00:31:09]. That’s why we do this experiment and we do the iterative approach. So it’s mostly letting that process unfold and letting our members speak to us about what’s really the ideal model for them.

Nitty: (31:21)
Great. That makes sense. Spence, switching gears to you. Now that your balance sheet doesn’t keep me up at night anymore, I can ask a much more fun question, which is, what will you do with all the excess cash? You’ve been asked to [inaudible 00:31:37] buybacks, which is great to see. Maybe just talk about the numbers and this sort of cadence about this particular buy back and just how you think about buybacks philosophically over the next couple years.

Spence: (31:52)
Yeah, sure, Nitty. So as we’ve said in the letter, in the last couple of letters now, we think we’ve turned that corner. We know we turned the corner in that cashflow story. So we expect to be about cashflow breakeven this year, and then sustainably free cash flow positive and growing thereafter. And we don’t intend to build up a bunch of excess cash on the balance sheet. So we will maintain a debt level, a gross debt level in the 10 to 15 billion range. We paid down about 500 million in principle in Q1. So our gross debt did come down from the prior quarter. And we think that share buybacks are a way to return value to shareholders in a way that is a responsible steward of capital, but also maintains a level of balance sheet flexibility for us to continue to be strategic.

Spence: (32:44)
Because first and foremost, our number one priority is to invest strategically into the growth of the business, but then of course, return excess cash to our shareholders. So we’re still maintaining a goal of about two months of revenue as our cash on the balance sheet. And you’ll see us ease into that share buyback program. So it’ll start this quarter. I say, I think you’ll see as ease into it, and we’re authorized for up to 5 billion of share repurchase, and we’ll get the program going this year.

Nitty: (33:17)
Great. Reed, you’ve remained incredibly focused over the years. I remember you telling me recently just the importance of keeping the main thing, the main thing, which has obviously led to a lot of success for Netflix. But when I look forward to the next 10 years, which I realize is a very long time, but if you continue to be successful adding, call it, 30 million subscribers a year, you’ll be at well over 500 million subscribers in 10 years, which feels like a high level of penetration. So I guess with that backdrop, how important is it to have a second app versus continuing to let the business mature and focusing on capital return?

Reed: (34:05)
Well, YouTube and Facebook and those properties are a multi-billion and the internet is only growing. So were we so fortunate to get to those numbers that you referred to, we’re going to be super hungry to double from there going forward too. So outside of China, I think pay television peaked about 800 million households. So lots of room, and that was several years ago that it peaked, lots of room to grow. So thinking about it as we do want to expand. So we used to do that thing, shipping DVDs, and luckily we didn’t get stuck with that. We didn’t define that as the main thing, we defined entertainment as the main thing. And so then we expanded into… Well, actually, Ted expanded us into original content. And first, it was original series and then films and then animation and kids and unscripted.

Reed: (35:03)
And so bit by bit, we’re adding categories. So we got a lot of work to do in terms of different types of entertainment that we’ll continue to do that. A lot of work in terms of global production. So I don’t think there will be a second act in the sense that you mean like a AWS and Amazon shopping. I’ll bet that we end up with one hopefully gigantic, hopefully very defensible profit pool, and then continue to improve the service for our members by doing that by expanding in category. So I wouldn’t look for any big, large, secondary pool to profits. There’ll be a bunch of supporting pools, like a consumer products that can be both profitable and can support the title brands. So that’s an obvious one.

Spence: (36:00)
Hey Nitty, have time for two last questions.

Nitty: (36:01)
Great. So just to follow up on that, people often view gaming as the natural extension or adjacency for you that’s obviously still within the entertainment categories you mentioned. In what ways is that true or untrue? And is there a way to do gaming in a Netflix title? And Spence, [inaudible 00:36:20] way it came from that world?

Reed: (36:27)
Exactly. In ways, we’re kind of in gaming now, because we have Bandersnatch and we have some very basic interactive things. But Spence and then Greg, maybe talked a little there.

Spence: (36:38)
Well, I’ll probably let Greg mostly go. I always, I would just say it kind of ties to what Reed said. We’ve kind of dabbled in it already through some of our interactive programming, as well as on the licensing and merchandising side in consumer products. And we’re a business that continues to learn. And so far learning has been good learning. We’re happy with how it’s played out, and hopefully we continue to learn from here. But I don’t know, Greg, if you want to add to that.

Greg: (37:07)
I’ll just take one more point at it, which is that, Nitty, we’re in the business of creating these amazing, deep universes and compelling characters. And people come to love those universes and they want to immerse themselves more deeply and get to know the characters better and their backstories and all that stuff. And so we really, we’re trying to figure out what are all these different ways that we can increase those points of connection, we can deepen that fandom. And certainly, games is a really interesting component of that. So whether it’s gamifying some of the linear storytelling redoing like interactive Bandersnatch and the kids’ interactive programs, that’s been super interesting, and we’re going to continue working in that space for sure. We’ve actually launched games themselves as part of our licensing and merchandising effort, and we’re happy with what we’ve seen so far. And there’s no doubt that games are going to be an important form of entertainment and an important modality to deepen that fan experience. So we’re going to keep going and we’ll get you to learn and figure it out as we go.

Nitty: (38:10)
Great. Well, if we have time for one more, my last question is just over the last five earnings calls, how many times would you say Ted has used the word [inaudible 00:38:24]?

Ted: (38:23)
Do I use [inaudible 00:38:24] a lot?

Nitty: (38:26)
I only noticed it because I was listening to the previous earnings call.

Ted: (38:31)
It’s a good word. Nitty, you have to admit it’s a good word.

Nitty: (38:35)
I actually actually have a real last question, which is, of your Oscar nominated films this year, which did you most enjoy watching? And I can go first. Mine was White Tiger.

Ted: (38:48)
I am going to diplomatically pass the question to Reed.

Reed: (38:53)
Chicago 7 for me.

Greg: (38:57)
White Tiger for me.

Speaker 4: (39:00)
Chicago 7 for me.

Spence: (39:02)
White Tiger for me too.

Ted: (39:03)
And just so I don’t completely wimp out, you should take the time and watch a really beautiful animated short that’s Oscar nominated called, If Anything Happens I Love You, that is a really, I think, a remarkable bit of storytelling in a way that people can really expand the universe of what they think storytelling can be.

Reed: (39:23)
And Ted, maybe you could wrap us up.

Ted: (39:25)
Awesome. Well, thank you so much, Nitty, for joining us on for the call and walking us through this. I know that our… Well, we’re busy doing, and I know that some folks are on edge today watching the news and in certain pockets of the world, like our friends and colleagues in Brazil and India are having a particularly tough time. I know that our hearts and thoughts are with you as well, but thank you. We’ll see you next quarter.

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