NETFLIX INC Q1 FY2025 earnings call

• Ted and Greg clarify that internal long-term aspirations are not the same as forecasts; operating plans align with external guidance. - Greg highlights current business metrics: over $40B revenue, over 300M paid households, leading streaming view share but still a minority of addressable market. - Ted and Greg comment on economic environment, noting stable retention, no significant changes in planned mix/take rate, and low-cost ad plan provides resilience. - Spence Neumann discusses margin trends, with content and sales/marketing expenses expected to ramp in Q3/Q4. - Greg Peters talks about ad-tech platform rollout, benefits of own ad suite for targeting, ad relevance, and member experience. - Ted Sarandos talks about live event strategy, content creation including animation, AI use in content creation, and creator-led content. - Greg Peters talks about Netflix Games, types of games that resonated, and iterative approach to gaming.

No specific detailed financial performance for product segments in terms of absolute numbers and revenue contribution percentages provided in the transcript.

• Forecasts 29% full-year operating margin. - Content and sales/marketing expenses expected to ramp in Q3/Q4 due to slate timing. - Expect to roughly double advertising revenue in 2025 through upfronts, programmatic expansion, and scatter. - Targets $8B in free cash flow in 2025 and prioritizes share repurchase via capital allocation.

• International risks related to taxes, levies, and local regulations. - Macro economic uncertainty impacting consumer spending.

Q: The Wall Street Journal report discussed Netflix's internal goal of doubling revenue and tripling operating income by 2030. How should investors think about Netflix leaning into more content spending over the next five years?

A: Ted and Greg state that internal long-term aspirations are not forecasts; operating plans align with external guidance, and they are long-range thinking but don't have a five-year forecast.

Q: This is the first time you are potentially entering a recession with a low-cost ad plan. How do you think about consumers downgrading plans relative to the behavior you've seen in prior recessions?

A: Greg says retention is stable and strong, no significant changes in planned mix/take rate; entertainment historically resilient, low-cost ads plan provides resilience.

Q: Does your price increase cadence change due to the global economic uncertainty, or is that outweighed by the strength of your slate and increased time spent watching Netflix?

A: Greg says they rely on members indicating when value is enough to adjust pricing, proceeding as before while improving value and accessibility.

Q: How has member retention been trending, given the Q4 strong paid net additions? Have you retained the bulk of these subscribers? And can you give us a sense of how churn has been trending?

A: Spence Neumann says retention characteristics for members from big events are similar to others, no meaningful changes to retention story.

Q: Given the strength in operating margins in the first half of the year, can you discuss the key incremental costs that will drive lower margins in the second half? Do you expect these costs to be more heavily weighted to the third quarter or the fourth quarter?

A: Spence Neumann says content and sales/marketing expenses will ramp in Q3/Q4 due to slate timing; Ted adds most Q1 operating income beat was timing of spend.

Q: Does the current macro environment change your approach to the television upfronts? Any broad thoughts on how you're approaching upfront versus the scatter market would be great.

A: Greg says no signs of softness from buyers, small ads revenue provides insulation, rolling out ad tech suite, expects to double ad revenue in 2025.

Q: Could you provide an update on your first-party ad-tech platform? How has the rollout in Canada performed relative to your expectations? And do you have any observations so far in the U.S.?

A: Greg says Canada and U.S. launches went well, ad suite enables flexibility, better buyer experience, more control for member ad experience.

Q: Netflix has solved personalized content recommendations. What are the key steps to solving ad content recommendations or relevance, and which inning do you believe you're in?

A: Greg says just beginning, launched ad platform in Canada and U.S., expanding targeting capabilities, expect more in 2026 and 2027.

Q: There are four major sports properties available right now. How should we think about the strategic fit for Netflix in terms of number one, the UFC, number two, WWE premium live events, number three, F1, and number four, Major League Baseball?

A: Ted says won't comment on specific opportunities but live strategy is unchanged, focused on big breakthrough events.

Q: Do you think video podcasts could perform well as a category on Netflix?

A: Ted says constantly looking at content creators, video podcasts are video forward, some already produced by Netflix.

Q: How do you create iconic animated franchises? What does it really take to build out culturally relevant animated IP? Is the answer a different team, acquisitions, or something else entirely?

A: Ted says had hits like Leo, Sea Beast, etc., work in progress, animation team working on new originals.

Q: As you think about the competitive landscape over the next five years, should investors expect Netflix to move into short-form or creator-led content to compete head-to-head with YouTube?

A: Greg says focus on 80% TV time not captured by Netflix/YouTube, better monetization for creators, Ted talks about creator expansion.

Q: We are starting to see some of the fear around AI and content creation subside and major directors like the Russos, Jim Cameron, et cetera, begin embracing the technology. What is Netflix doing to leverage AI for its creative partners? How meaningful can this be? And are there any examples that you can share?

A: Ted says AI used by talent for set references, VFX prep, example of Rodrigo Prieto using AI for de-aging in Pedro Paramo.

Q: With so much content in your library, what can you do for discovery to help drive further engagement with the platform? Is there anything further structural you can do with the recommendation engine, or is it going to require more marketing?

A: Greg says discovery/recommendations critical, testing new TV homepage, building interactive search with generative tech, many improvements in works.

Q: How is adoption of extra member accounts trended since launch? Can you share how this offer has contributed to revenue growth to date and whether you see it as additive to future growth?

A: Greg says extra member is part of plans, provides flexibility, but not a major driver of business, expected to remain small.

Q: Alain, who leads our Netflix Games business, spoke recently at the Games Developer Conference about making gaming more accessible and achieving mass market appeal. What types of games have resonated on Netflix so far, and where do you see opportunities to improve the user experience and drive even more engagement for games?

A: Greg says immersive narrative games, mainstream established titles, games for kids, socially engaging party games; lots of areas to improve user experience and discovery.

Q: Can you unpack the key drivers of the expected UCAN revenue growth reacceleration in Q2? Is it mainly pricing or are there other aspects like advertising or subscriber growth?

A: Spence Neumann says deceleration in Q1 UCAN revenue was due to pricing timing, expect reacceleration in Q2 from full quarter pricing benefit and ads growth.

Q: You've been guiding to $8 billion of free cash flow in 2025. And one of your goals is to deliver growing free cash flow. You have historically not spent a lot on acquisitions. Should we assume most of the growing free cash flow is redeployed into share buybacks?

A: Spence Neumann says capital allocation prioritizes profitable growth, then returns excess cash to shareholders via share repurchase.