Netflix (NFLX) Q2 2021 Earnings Call Transcript

Spencer Wang: (00:01) Good afternoon, and welcome to the Netflix Q2 2021 earnings interview. I'm Spencer Wang, VP of IRR 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 Nidhi Gupta from Fidelity. As a reminder, we'll be making forward-looking statements and actual results may vary. Let's turn it over to Nidhi now for her first question. Nidhi Gupta: (00:27) Thank you, Spencer. Great to be with you all again this quarter. Lots of exciting stuff to talk about, so let's dive in. Just starting with the quarter, nice to see net adds coming in a little bit better than your expectations. Help us understand what contributed to that. Spence Neumann: (00:44) Sure, Nidhi, I can take that and others can jump in. But as you saw, the quarter kind of played out pretty much as expected. So we delivered 1.5 million paid net adds relative to a guide of a million. And what we're seeing is what we've sort of been talking about for the last couple quarters, and that there's still a bit of choppiness to our growth. We had the kind of big pull forward in 2020 of subscriber adds. We also had the push in production of some of our kind of key returning titles and big tentpole new releases until the latter part of the year. Spence Neumann: (01:16) But overall, the business is performing well. Our churn is actually down relative to the more comparable two-year-ago period in 2019, Q2 of '19, before COVID. Our viewing, and we've talked about in the letter, our engagement is up nearly 20% over that period. But we still feel a little bit of that drag in terms of our acquisition growth, as we're kind of working through what we hope is, and we can't be sure, but what we hope is the tail end of this COVID choppiness, where we see, on the acquisition side as markets reopen, it does slow things down a little bit. Ted: (01:52) Yeah. And I would just say that's a nice, steady progression, in terms of getting our COVID-delayed slate back up to our former numbers, little by little. We're still very heavily back-weighted for this year, but there's a nice, steady progress in the quality of the content and the excitement around the programming that came out in this past quarter, which we saw across the board, in our films, with Army of the Dead, and Fatherhood, and our series, both local language and English language for the world, like Lupin, and Who Killed Sara? And even our animated projects, like Mitchells versus Machines, was a nice hit this quarter. So we think nice, steady progress, but reminder that we're still pretty back-weighted in that slate. Nidhi Gupta: (02:33) What are you seeing in the business over the last month or so, as some of your markets have really started to open up? What's kind of in your guidance for that, and also the Olympics, balanced with the fact that you have a lot more content coming in the second half? Spence Neumann: (02:48) Sure. Well, the Q3 guide actually kind of reflects a lot of what we've seen in Q2, frankly. So as I mentioned, the underlying business metrics are really healthy. The one thing we do see with COVID is we don't see the big spikes that we saw in terms of engagement, or acquisition, or churn that we saw in the very early days of the pandemic. But on the margin, acquisition is impacted. So for example, in Q2, when things tightened up a little bit, say, in Brazil or India, we did see some increase in acquisition. And similarly, as markets reopened, particularly in most of EMEA and the UCAN region, that did have a bit of a headwind on acquisition. And that's reflected, basically, in our Q3 guide, as well, so similar business fundamentals hopefully kind of starting to move a little bit further away from those market reopenings, which is why you do see some incremental growth, so a better seasonal period, as well as moving a bit away from those market reopenings, but not a big fundamental change. And then hopefully into even more reacceleration as we get to the end of the year, as we really get into the heart of our strong release schedule, as well as peak seasonality. Nidhi Gupta: (04:06) I think a big question on investors' minds is just, how do you feel about your ability to get back to pre-COVID levels of net adds as we get into 2022? Spence Neumann: (04:17) Yeah, well, and others should chime in, but I just want to kind of emphasize even with the Q3 guide and then into Q4, if we deliver on our Q3 guide, and we talk about it in the letter, that will be... The growth pattern in our business is, over the long trends, is remarkably consistent and steady. So if we deliver on our guide, it means we'll have added 54 million new members over that two-year period, or on average 27 million a year, which is right in line with our past few years of growth in 2018 and '19. Spence Neumann: (04:56) So we remain on that growth trajectory, and again, once we get into Q4, what we would expect is as we get through, hopefully, that tail end of the COVID choppiness, we get into that strong strength of slate. We get to kind of the high seasonal period for us. We'd expect to end the year on a much more kind of normalized growth trajectory, but we kind of have to get there. Reed Hastings: (05:21) And Nidhi, you can decompose the long term risk into two things. One is, does internet streaming slow down? And that seems pretty unlikely. Internet streaming has been amazingly consistent, prolific. As you get new competition in, you get validation of more reasons to get a smart TV or limited broadband. So I think for at least the next several years, the growth story of streaming as a whole is very intact. Reed Hastings: (05:50) And then you've got the secular competition story, does HBO, or Disney, or other entry have a differential impact compared to the past? And we're not seeing that in the detail that we have per country, because they're launched in some countries and not in others. That gives us comfort. We're not seeing that in the total viewing, like the Nielsen measures. And so we think mostly all of streaming is a growth story competing from linear TV. And that will be true till, say, streaming is 50, 60, 70% of viewing. And then there's going to be shake out, and we want to be prepared in leading that. But again, the next couple of years, streaming is still in the early stages. Nidhi Gupta: (06:37) Thank you. That's super helpful, Reed. That actually answered my next question. So maybe just shifting gears to your longer term outlook. There's been some focus in the market recently on additional sources of revenue that you might have in the future. But before we get to that, help us understand what makes Netflix's core business a great investment for shareholders over the next five-plus years. What's kind of the growth, free cash flow, capital return algorithm that gets you excited that you think we should be focused on? Spence Neumann: (07:13) Reed, I think- Reed Hastings: (07:13) Go ahead, Spence. Spence Neumann: (07:15) Well, I was going to throw it to one of you first, if you like, so that's okay. You want to go? Reed Hastings: (07:20) The big picture that all investors get is being a secular internet play. And as much as Amazon was strong in 2005 and 2008, all of us collectively underestimated the impact of what the Internet could do. And this is the Internet applied to entertainment. And consumer entertainment around the world is enormous market. It has great potential for us, and potentially our competitors. And so that big thesis is, again, what gets people excited. Reed Hastings: (07:55) And when we're growing revenue by 19%, it's not that hard to grow 300 basis points of margin. As the revenue growth slows, it'll get a little bit tougher, but we'll continue to lean into that. And so I would say, it's fundamentally a story of this big secular revenue growth, management team committed to growing profits and cash flows, and then returning those cash flows through buybacks, which Spence got a big start on this quarter. So, over to you, Spence. Spence Neumann: (08:27) Yeah, no, you hit on all the key points. I would just add that it's still early days in pretty much every market around the world. I mean, if you go overall, and Nidhi, as you know, we're roughly 20% penetrated in broadband homes. And we talked in the last call that there's 800 to 900 million either broadband or pay TV households around the world, outside of China. And as we continue to improve our service and the accessibility of our service, we don't see why we can't be in all or most of those homes over time, if we're doing our job. Spence Neumann: (08:57) And then if you look at the range from an APAC region, where we're only roughly 10% penetrated, so clearly early days, to our, arguably I guess, more tenured markets at least, like in UCAN, where even there, with some of the metrics we put in the earnings letter, streaming, and Reed alluded to this, is only about 26% according to Nielsen of viewing consumption. So the 60%-plus is still linear consumption. And then within streaming, we're only at 7% share of total TV. So we're only 7% of that 26%. So there's big tailwinds there, in terms of that overall trend from linear to streaming entertainment. Spence Neumann: (09:40) And then that plays out in the financials. So again, our profit margins over the last five years have grown 5X. Our absolute profit dollars have grown 20X, as the business has scaled from about $100 million to $2 billion of operating income per quarter over the past five years. And so that will continue to scale, we think, in a healthy way, because the nature of our business scales well. It's creating content from anywhere to everywhere in this very large, addressable market with these big profit pools. So we think we have a long runway of growth, profitability, and return value to shareholders. Ted: (10:18) And I think if you think about how slow the business fundamentally changes, and how quickly streaming has changed the entire marketplace in terms of the way consumers watch, I go back to about only eight to 10 years ago, and no one was looking to the Internet or to streaming for the highest quality content. And today, the most watched, the most talked about, the most award-winning television is all coming up on streaming services. Ted: (10:43) But to Spence's point, you've got this enormous addressable audience. We're only in a fraction of them, and we're only getting a small percentage of their total viewing. So it's still an enormous prize, and we're still in the best position to run after it, as we've kind of expanded what Netflix is to members, which is not just a show you might like, but it's the shows you like, it's the films you love. Ted: (11:02) ... like, but it's the shows you like. It's the films you love. Nidhi Gupta: (11:04) Yeah, no, it's [crosstalk 00:11:05]- Spence Neumann: (11:04) Thanks, Nidhi, for letting us pitch the stock. Nidhi Gupta: (11:08) Great to give you a platform. No, you make a good point. You've created a consumer product with global appeal, and, as you said, if you do your job, there's no reason you shouldn't be in every internet household over time. Nidhi Gupta: (11:21) At the same time, not all subs are created equal. I think there's a lot of debate in the market as to how long can you continue to grow revenue double digit without some of these lower ARPU markets really starting to kick in, in terms of meaningful revenue contribution. Even this quarter, two thirds of your net adds came from the Asia-Pac region. Can you shed a little bit of light on that debate? Spence Neumann: (11:49) Greg, do you want to take it a little bit, too, in terms of just some of the growth in those regions and our pricing? Greg: (11:54) Yeah. I would say we're working hard to think about, how do we find this wide range of price points that speaks to a feature set and consumer needs in more affluent markets? We're really trying to find ways to add more value there, while we are also thinking about the populations that you're talking about, and making sure that we're increasing the accessibility of the service, and, really, the ability to participate in and drive joy from the stories that we're telling to more and more parts of the world's population that don't have as much means to pay. Of course the trick there is to find the right feature set offerings that allow us to broaden that range without cannibalizing the other layers. Greg: (12:41) We really take this iterative approach where we try different solutions to that puzzle and then measure them based on this, "What's the net revenue that we're seeing?" Very much what we're trying to do is, as we bring in lower price plan offerings that decrease average revenue per member, we're also thinking about that from the calculus of expanding the funnel in a way that delivers total net positive revenue. We're definitely seeing that. The mobile plan launches that we did in 78 countries this quarter are an example of us trying to make incremental progress against that puzzle, and broaden that reach. Nidhi Gupta: (13:26) That's very helpful. How is competition, particularly as the competition consolidates, affecting, just, your thinking on longer-term pricing power around the world? Greg: (13:40) I think ultimately we are competing already with tons of forms of places that consumers can spend their hard-earned money on entertainment. Mostly what we're looking at is in this specific calculus of, how do we deliver more value? How do we provide a wider range of incredible stories at high quality and a diversity of content that appeals to those consumers, and appeals to more and more consumers around the world? If we do a good job there, then ultimately then we have the ability to go back and occasionally ask some of those members to pay a little bit more to keep that virtuous cycle going. Greg: (14:22) I would say, on the demand side ... Maybe I'll let Ted speak to the supply side, if you will, in a second. But, on the demand side, really it's just that very narrow focus on, are we doing a good job at adding value and continuing to deliver more to our members? Ted: (14:36) Yeah. I think, in general, the dynamics of consolidation is, you see it across ... All these companies basically had consolidated themselves into bundles on cable for years. I do think all the access to ... These are all the same players we've been competing with from the beginning, just through different channels. I think, in general, that doesn't change in terms of what the offering is. In terms of access to that offering, Netflix, because of the size of our distribution platform and our ability to connect creators with a big audience, it's always been a big help in terms of lowering content to our platform. Reed Hastings: (15:12) Nidhi, certainly Disney buying Fox helps Disney become more of a general entertainment service rather than just a kids and family. Time Warner-Discovery, if that goes through, that helps some, but it's not as significant, I would say, as Disney-Fox. Then, for the remaining three, how they combine, or don't combine, or cooperate, it's unclear. Reed Hastings: (15:40) Again, day to day, we just focus on that content choosing and conversation. How do we improve the service for our members? Like Greg said, there's so much competition from Instagram, and TikTok, and sports, and the Olympics, and everything else that, back to the Nielsen data for the US, there's plenty of room to grow without taking it away from the other streamers. Ted: (16:10) I haven't looked at all of these. Those consolidations, when are they one and one equals three or one and one equals four, versus which most of them tend to be, which is one and one equals two? Nidhi Gupta: (16:22) Yeah, no, that makes a lot of sense. Switching gears to you, Spence, the last couple of quarters have shown us just how much profit potential is in this business. Going back to traditional TV networks, the most profitable networks did 40% plus EBIT margins at peak, and they didn't have the scale and direct-to-consumer business model that you have. What are the puts and takes as you look at your long-term margin potential against that 40% plus history that we've seen? Spence Neumann: (16:58) Nidhi, I'm definitely not going to provide long-term guidance relative to the 40%. While I appreciate it, but it's nice to know that those comparables are out there or those benchmarks are out there to have that ambition. Spence Neumann: (17:13) But, as we talked about before, what we love is that our business has a very scalable model. What's most important for us is to grow healthy. By that, I mean being able to aggressively, strategically invest in the growth of our business while increasing our profit. That's what, talked about before, we have been doing pretty well so far, and we'll continue to feel our way along. To date, we have been growing at that three percentage points per year for over any few year period. As Reed said, that's something that's been reasonably, I wouldn't say easy, but accomplishable for sure when we're growing in that 20% or so revenue growth per year. Spence Neumann: (17:55) Obviously that can't last forever in terms of three percentage points a year, but we think we have a long runway of growth. We have some things that work to our advantage in terms of the global nature of our platform, the ability to create stories anywhere. They travel well, not just in their market, but across countries and markets around the world. That's a nice model for us. Spence Neumann: (18:17) We have a revenue model and subscription that also scales well in established, larger, and smaller, and emerging markets. That's great as well. Then it's going to depend a bit on, as the business evolves, competitive dynamics, relative cost of content, of course, those things on the margin, impact margin, but a lot of healthy growth ahead of us. Nidhi Gupta: (18:41) Reed, the 300 basis points of margin per year has instilled a good amount of discipline on the business, probably reigned in Ted's content budget a little bit on the margin. Why is that the right cadence, going forward? I know it's an average, but if we look back in five years and the average was lower than that, would it have been because of new businesses you found to invest in, or competitive forces, or something else? Reed Hastings: (19:14) I don't think there was a ton of magic in the 300 basis points. If we had decided on 200 or 400 we'd be marginally different today, but I think, in the long-term, we'd get to the same place. It's a guess that sets up a framework for how we think about the allocation into faster growth that Ted and Greg have been driving, and providing a profit stream for our investors. We're comfortable on that balance. Reed Hastings: (19:47) The big prize is keeping the revenue growth at 20%. Most of our time is like, "Okay. How do we get the revenue growth going? How do we have the content that you just can't ignore, everybody's talking about?" That's what fuels those big surges. The more we do, the more we're learning. We're making a ton of progress, show by show, film by film, of how to really push the consumer satisfaction. That's very promising. That's work that you'll see showing up next year and beyond. Nidhi Gupta: (20:24) Great. Reed, maybe just staying on you for a minute, on the last earnings call, you talked about video streaming being the main profit pool, and, over time, potentially smaller supporting profit pools. Over the last few months, you've made some key hires in gaming and podcasting. You've launched an online store. I believe you've expanded your deal with Shonda Rhimes to include live entertainment. Can you just talk us through which of these adjacent business areas actually has the potential to be a meaningful profit pool in the future? Reed Hastings: (21:05) I would say none of them. That is, that they're not designed to be, but I'll draw a distinction. There's things that our consumers love in our service. Shonda Rhimes' future work, we're very confident of. Video gaming, we're pushing on that, and that'll be part of our service. Unscripted, all those things. Think of that as making the core service better. Lots of investment, but not a separate profit pool. It's enhancing the big service that we have. Reed Hastings: (21:40) Then there's a number of supporting elements, consumer products, various shopping, where we're really trying to grow those to support the title brands, to get our conversations up around each of the titles so that the Netflix service becomes must have. They're not a profit pool of any material size on their own, but they are helping- Reed Hastings: (22:03) ... will have any material size on their own, but they are helping. The reason we're doing them is to help the subscription service grow and be more important in people's lives. So I would say really we're a one product company with a bunch of supporting elements that help that product be an incredible satisfaction for consumers and a monetizing engine for investors. Nidhi Gupta: (22:27) Great. That's helpful. Just to follow up on gaming, Greg, I'll take it to you, very exciting to see a key hire in gaming. Last week, there was some more detail in the shareholder letter as well, but just bigger picture, how will you achieve the goals that matter most to gamers, whether it's great content, ease of play, a network of gamers to play with, what are sort of the unique assets that Netflix brings to the table and why will people be excited to play games on Netflix? Greg: (23:01) Yeah, well, sort of picking it up where Reid left off, we really see this as an extension of the core entertainment offering that we've been focused on for the last 20 years, right? So just as we've continuously expanded the nature of our offering by adding new genres, unscripted film, local language programming, animation, and on and on, we think we have an opportunity to add games to that offering and deliver more entertainment value to our members through that. And similar to what you've seen in that trajectory when we've added a new genre, that's what we expect will happen with games. So this is going to be... It's a multi-year effort. We're going to start relatively small. We'll learn, we'll grow, we'll refocus our investment based on what we see is working, we'll just continuously improve based on what our members are telling us is working. Greg: (23:54) But I'm really excited about a bunch of different ways that I think that we can provide an offering here that is differentiated from what's out there already, and the first of those is really about the IP that we create. We are in the business of making these amazing worlds, and great storylines, and incredible characters, and we know the fans of those stories want to go deeper. They want to engage further. They actually want to direct a little bit where their energy goes. And what's great about interactive is, first of all, you can provide universes that just provide really significant amount of time that people can engage in and explore. They can also provide a little bit of intentionality, where do they want to explore? What characters? What parts of the world? What parts of the timeline? So there's just a lot of exciting things that I think we can do in that space. Greg: (24:47) And we also feel that our subscription model yields some opportunities to focus on a set of game experiences that are currently underserved by that sort of dominant monetization models in games. We don't have to think about ads. We don't have to think about in game purchases or other monetization. We don't have to think about per title purchases. Really we can do what we've been doing on the movie and series side, which is just hyper laser focused on delivering the most entertaining game experiences that we can. So we're finding that many game developers really like that concept, and that focus, and this idea of being able to put all of their creative energy into just great game play and not having to worry about those other considerations that they have typically had to trade off with just making compelling games. So those are some of the core things that we're excited about and think that can make this effort for us special even in the world of games. Nidhi Gupta: (25:50) Thank you. That's super helpful. I've always known this management team to take an incrementalist approach on these things while also having a well-informed thesis on the long-term and how things will play out. So if you can articulate it, what is sort of your long-term thesis on gaming and is starting with mobile and sort of a content vertical strategy, is that sort of a starting point or is that an ending point? I mean, do you see yourself as a platform over time? Do you see gamers coming to the TV to play? What is sort of the long-term thesis of what this could evolve into? Greg: (26:35) Yeah, and I'll take it from the platform angle first and sort of maybe widen that view. But we think mobile is a great platform for games, clearly it's very mature. It's got great enabling technology tools, a great developer community, and the vast majority of our members have phones that are capable of great gameplay experiences. So it sort of checks all of those boxes and so it'll be a primary focus for us to deliver those experiences, but ultimately we see all of the devices that we currently serve as candidates for some kind of game experience. We've actually been delivering lighter weight, interactive experiences on TVs and TV connected devices for some time. And you can call those games, you can call them interactive experiences, but obviously they all exist on a spectrum and we're going to keep innovating in that space. Greg: (27:26) And we feel like there's a rich opportunity to continue to deliver and advance the technical capability to improve the quality of game experiences we can deliver across the range of devices. And then we want to... We'll be very sort of experimental and try a lot of things in this phase. A lot of what we have to do right now is just focused on learning and you mentioned that sort of incrementalist approach, a lot of this is really trying to maximize learning philosophy is what we would say. So we're going to try a bunch of different games through a variety of different mechanisms to see what's really working for our members. Part of that will be games that extend our IP, we think that's a really rich, rich space, so that's very much part of our long-term thesis. But also we'll do things where we try standalone games, we feel ultimately the success of this initiative is about great games fundamentally, and those can come from a variety of different sources. Greg: (28:26) Maybe someday we'll see a game that spawns a film or series, that would be an amazing place to get to and really see the rich interplay between these sort of different forms of entertainment. We'll also do licensing, just as we've done in that sort of other genre expansion, it's a great way to increase the volume of the offering that we have at the start to learn more quickly. And then as our internal production sort of scales, we can focus the energy on what we're learning in that regard. So broadly, we think, as you said, there's a big, big prize here and our job is really to sort of be very focused and deliberate about what we're going after that maximizes the learning value, iterate that continuous improvement approach, and we feel that, that's yielded really big results for us as we followed that sort of technique and all the kinds of genre expansions we've done around the service. Nidhi Gupta: (29:23) And is the financial success of this over time? Should we think about that as higher ARPU for the Netflix service? Or is there a standalone sort of financial success here you think over a very long period of time, if you're successful? Greg: (29:41) I'm not going to guess it to very, very long-term, but we're really thinking about this as a core part of our subscription offering and so we'd measure it very much like we do around the success of adding incremental movies or adding incremental series, which is that ultimately those are about being compelling to members, having them engage and talk about it, having that be part of the social conversation that's out there. We see those benefits in retention and obviously if we're delivering more value there then members stay with us longer. We see those values in acquisition as well, because if there's a great game that lots of people are talking about to their friends, their colleagues, their family, then that's a source of acquisition for us as well. Nidhi Gupta: (30:25) Great, thank you. That's super helpful. Maybe switching gears to another content vertical, sports, which comes up a lot. Ted, you haven't historically been keen on buying sports rights and that may have been the right call given the cost escalation we've seen there, but you have had a lot of success with sports related programming, like the Michael Jordan documentary, the F1 series. Do you see Netflix becoming sort of a key destination for sports related content over time? And I'm even thinking news and analysis, or is there sort of a limit to what you can do without the underlying rights? Ted: (31:08) Look, I think we've... You've pointed it out, but our success with the sports adjacent properties like the F1 Drive to Survive, Deaf U, and certainly the Michael Jordan doc, those are all examples, I think, of the platform and what it can do to build enthusiasm on what is already viewed to be an enormous business. Drive to Survive expanded the audience for Formula One racing pretty dramatically both in live ticket sales and TV ratings, in merchandise sales, all of those things, and I think that that can be applied as long as the storytelling is great. Ted: (31:43) So what's good about this for us is that we can apply those same kind of creative excellence to the storytelling behind those sports, the personalities behind those sports, the drama that happens off camera, and fans, not only deep fans are compelled to see more, but also can bring new folks into the sport. So we think it's pretty exciting. We think it's... We'll continue to explore it. We have this incredible documentary on Naomi Osaka that just came out this week, that's another example of this that can really broaden the fandom for the tennis world, particularly going into this exciting period of the Olympics. Nidhi Gupta: (32:20) Outside of the big American sports, football and basketball, where we've seen a lot of the cost escalation, are there more niche sports or sports in international markets where you feel like there might actually be a good ROI on owning the live air rights? Ted: (32:35) Look, I don't know that those sports suffer from being under distributed, so I don't know that we would bring that much to them. And just to be clear, I've reiterated this a lot, but I'm not saying to never say never on sports, it's just what is the best use of about 10 billion dollars? And I think that's what it's going to cost to invest meaningfully in big league sports. And that pricing has only gone up since I started saying that, so I believe that, that's likely to hold, but again, I don't think it's because those other sports are niche because they're under distributed. And that... Ted: (33:03) And I don't think it's because those other sports are niche because they're under distributed and that we could bring a lot to them. Our fundamental product is on demand and on advertising free and sports tends to be live and packed with advertising. So there's not a lot of natural synergies in that way, except for it happens on television. So when it becomes the best use of that next tranche of investment, we definitely would be open to it. Nidhi Gupta: (33:26) Do you see any merit in what Amazon is doing in sports? Ted: (33:32) I don't know particularly what they're ... I mean, I know as a watcher I know what they're doing. But I'm not sure exactly if they're looking for the same thing from their content spend that we are. Nidhi Gupta: (33:42) Yeah. That's helpful. Reed, switching gears to you, you wrote in your book about farming for dissent inside the organization on strategic decisions, which I thought was a really interesting chapter of the book. What would you say are some of the biggest debates inside Netflix today as it relates to strategy? Reed Hastings: (34:07) I'm a little careful on that relative to competition, because most of them about how do we out fox Disney, so to speak and deliver amazing entertainment? So that would be ... But if we do it in hindsight, we talked about video games for several years, writing up the pros and cons of the timing of entry. That has properties, like film, that you can own the IP. You can have these long franchises and very positive for us, and industry structure wise, if we can master the skill set. And so really it came down to us thinking that the incremental money to fund games made sense relative to our other content investments. So that would be the process that we go through. Ted: (35:05) I think a healthy way to look at it, Reed, might be in hindsight, almost everything that we've done, which has turned out well, also came with a very hardy debate period with people with very good opposing positions on why we should or shouldn't do it. And I'd say that's been true of every expansion we've taken on. Speaker 1: (35:27) [Nitty 00:35:27], we have time for two last questions, please. Nidhi Gupta: (35:30) Great. Spence, I'll turn it to capital allocation. It's very exciting that we're on the cusp of achieving positive free cash flow. So a couple of questions on that. First, what's the rationale for keeping gross debt at a $10 to $15 billion range while free cashflow grows over the next few years? Spence Neumann: (35:53) Yeah. They're similar to, I guess, our profit margin growth. There's not a pure science it. But what we viewed it as is we want to maintain some level of leverage in the marketplace because we want that familiarity, excuse me, with the capital markets, should we need access to capital over time. So that's why we talk about that $10 to $15 billion of leverage. But again, there's not a perfect science to it. What's most important to us in terms of our capital allocation strategy again, is to invest strategically in the business. So that is our first priority. That's what hopefully you're hearing in terms of our investment into film, into television, extension into video games and hopefully other content categories over time in that mission or objective to entertain the world. Spence Neumann: (36:40) But as we have excess cash, we will return it to shareholders occasionally. That's why we started the share repurchase program. We repurchased to half a billion of shares in this last quarter, in Q2. It's not that there's a fixed amount that we're going to repurchase every quarter. That's really after we've satisfied all of those other strategic objectives. And then we'll take it from there. But we have a 5 billion share repurchase authorization. We will maintain some debt in the capital markets. But we've significantly delivered, I think. Our leverage is down to about a two and a half X debt to EBITDA, which was above five X not too long ago. And we think it's important to have the flexibility in our balance sheet to invest into growth while being prudent and responsible with our capital allocation. Spence Neumann: (37:32) I know, Spencer, maybe you would add to it. But we talk a lot about this topic. Spencer Wang: (37:37) No, I think you nailed it, Spence. Nidhi Gupta: (37:40) And just related to that, I mean your appetite for M&A has historically been pretty low. And I'm wondering if that changes at all as you explore gaming or perhaps other areas. In your core business, you haven't seemed as interested in some of the traditional assets that have been in the market like MGM, for example. What are the characteristics that make a good acquisition for you? Spence Neumann: (38:04) Well, Spencer runs that group for us. So I'll let Spencer answer, and I can chime in. Spencer Wang: (38:09) Thanks, Spence. And Nitty, it's a good question. So I guess a couple of things without speaking towards any specific opportunities. I would say as a company, we look at many different ways to help accelerate the growth in our business, including M&A. So you should assume we look at many, many different things. And we've said in the past that we're open to content assets that can help accelerate our growth, things like intellectual property that we can develop into original series and movies. In addition, film and TV libraries could be interesting as well. We'll see on the gaming side. Spencer Wang: (38:44) That being said, we are mindful of a couple of things. First of all, our encumbrances. For example, which we have some of these content assets are heavily encumbered and limit our ability to use them on Netflix then they're of limited value to us since our top priority is to grow the core Netflix business. Spencer Wang: (39:02) Secondly, our opportunity costs and trade offs. So as we evaluate M&A, we always think about if we bought company X or asset X for Y dollars, what's the alternative use of Y dollars and which is best for the company? So hopefully that gives you a little bit of a framework for how we think about M&A. Spence Neumann: (39:23) Yeah, the key is it has to accelerate our strategy with low distraction costs. And so we're pretty picky. Ted: (39:29) Yeah, it's got to be something that's in the smack, right in the middle of the strategic core of what we're doing. Nidhi Gupta: (39:35) I mean, I guess with that backdrop, I mean, is there any reason to think the majority of free cash flow wouldn't be used for buy backs in the future? Spence Neumann: (39:47) Well, we're getting ahead of ourselves a little bit, but it's certainly something we've contemplated as why we have the $5 billion authorization. I look at that as a high class problem. We've guided to cashflow roughly break even for this year. So let's get through this year and look at how we're tracking next year. I'm excited for getting hopefully past this nearly what will then be almost a two year global pandemic and really full content slate and hopefully a more normalized world and then we can worry about what to do with our excess cash. Nidhi Gupta: (40:20) That's a good problem to have. Ted: (40:22) There you go. Well, Nitty, thank you so much for doing this again with us. I just want to say we're really happy with the quarter. We're happy with the programming. We're happy in this very complicated time, both in the world and in the business to be growing subscribers and revenue. Ted: (40:39) This is a big story, mostly about how the world is in love with streaming. And when it comes to watching your favorite show or your favorite film, it's more likely to be happening on streaming than ever before. And it's still just scratching the surface as to the potential for the business. And while everybody else is trying to figure out how to unwind businesses and restructure businesses and put together enormous populations of employees, we're focused on three things. I know we're spending about a thousand plates, but we're really focused on our three things, which is our content, our choosing and driving conversation around the world. And with that, we're really confident in our team to continue to drive that and drive this to continue success. So thank you.