Top Investor Questions

Our goal is to continue to grow our total GAAP operating margin. We were at a 7% annual GAAP operating margin in 2017, which has grown to 18% in 2022. We are targeting 18-20% operating margin in 2023 based on F/X at the beginning of 2023.

We have tiers based on picture quality and in some markets, a mobile only plan, but we don't think tiers of content would be wise at this time.

Our FX exposure is growing as we expand internationally. We do not use hedging derivatives. Rather, when favorable, we engage in natural hedging, in which our spending for international markets are paid in local currency to match the revenue collected from our members. We also adjust prices from time to time to mitigate the negative effects of FX. However, our FX exposure, which is disclosed in our 10-Q and 10-K filings, will rise as we move increasingly towards global licensing, where content costs are more likely to be dollar denominated.

In setting financial guidance, we use the prevailing FX rates at that time. For example, in April, when we provide guidance for Q2, we use the FX rates at that time in April. We also slowly adjust pricing over time to mitigate forex moves over the longer term. However, when currency movements are rapid, they may affect our near term operating margin, as we saw in 2022 where FX moves reduced our margin by over 2 percentage points. We’ll tend to outperform our near term operating margin targets on dollar weakness and underperform on dollar strength.

We already invest significantly in local content around the world because we believe great stories can come from anywhere and can be enjoyed everywhere. That said, Hollywood content travels very well abroad with local content representing a minority of viewing in most of our markets. 

We care about membership growth, but primarily focus on revenue maximization. As we work to monetize sharing, growth in average revenue per membership, revenue and viewing will become more important indicators of our success than membership growth. We seek to grow revenue because it allows us to invest in more and better content and to improve our service and deliver profits for our shareholders. 

We offer several different price points so that consumers can select a plan that best fits their circumstances and needs. Additionally, we periodically adjust pricing as this allows us to invest in the service to better serve our members. We also test different approaches to pricing (including different tiers and price points) to better understand consumer demand.

We want to offer a differentiated service. We are focused on becoming an expert programmer that provides a high-quality, curated offering and therefore our content library has become increasingly exclusive.

We utilize detailed statistical models to determine expected hours of viewing for each piece of content over its license period. We compare cost per hour viewed against other "like" content deals (i.e. exclusive versus non-exclusive, TV versus movies, etc.) We look for high engagement and cost efficiency. For renewals, we look to renew content that performs well (based on hours generated relative to the cost) and do not renew content where the price doesn't make sense relative to the value generated. We feel we have good breadth of content so that no specific title or set of titles is must-renew.

We follow the guidance of ASC 920, Entertainment - Broadcasters, which provides the accounting framework for licensees of films and TV shows as applicable to our business. We follow the guidance in ASC 926, Entertainment - Films for the costs associated with the production of original content.

We generally license content for a fixed fee and a defined time period with payment terms varying by agreement. The signing of a license agreement to obtain future titles creates a streaming content obligation which we include in our Contractual Obligations footnote disclosure in our 10Q's and 10K's. If the minimum obligations are quantifiable, the amounts are included in the tabular disclosure. For deals with unknown future output, the obligation is added in the table when the title and its cost become known. Once a title is made available for us to use on our service, a Content Liability (current for the portion due within one year and non-current for the portion beyond one year) and a Content Library asset are recorded (current for the portion to be amortized within one year and non-current for the portion beyond one year) on the Balance Sheet. We also produce some content. For productions, we capitalize the costs, including development cost and direct costs. These amounts are included in "Non-current content library, net" in our balance sheet. For certain content where we expect more upfront viewing, due to the additional merchandising and marketing efforts, the amortization is on an accelerated basis. For more details on our content accounting, please refer to this overview.

Our streaming contractual obligations represent content that we have committed to licensing in the future that will eventually be recognized in our income statement as content costs. This provides us with access to an ample amount of content over the next several years. Other TV networks that enter into multi-year programming commitments (such as for sports rights) have similar obligations.

Yes. We have entered into certain license agreements that include an unspecified or a maximum number of titles that we may or may not receive in the future and/or that include pricing contingent upon certain variables, such as theatrical box office performance. As of each reporting date, it may be unknown whether we will receive access to these titles or what the ultimate price per title will be. Accordingly such amounts are not reflected in the Contractual Obligations table but they are expected to be significant and the expected timing of payments could range from less than one year to more than five years. Traditional film output deals are an example of this type of license agreement. Once we know the title that we will receive and the license fees, we include the amount in the Contractual Obligations table.

Streaming content amortization is included in and comprises the vast majority of our Cost of Revenues.

Yes, other content costs outside of content amortization include expenses related to content personnel, physical production, post production, music rights, and overall deals. These are included in cost of revenues.

For an overall view of our original content slate and upcoming premiere dates, please click Read more herehere.

We evaluate the performance of our originals several ways. We measure the impact of our originals on our ability to acquire new members and engagement, which is correlated with retention of existing members. We also seek reasonable economics relative to other exclusive content on a cost per hour viewed. We also take into account critical acclaim and awards for our originals and the impact original series may have on enhancing our brand and attractiveness of our service which helps with member growth.

We believe great stories transcend borders. There are amazing creators of content from all parts of the world and our global footprint allows us to showcase these storytellers to members across the globe.

Given the success we've had with our original series, we are increasing our investment in this area and we expect the % of our content spend on original series to increase over time. This increased investment generally replaces spend on other content deals, although our overall content spend is expected to increase in absolute dollar terms.

Replaces other content spend. However since we are growing content spend, there is room to grow both prior-season and original content.

Cash payments for licensed originals are weighted more upfront (relative to P&L). In the case of content that we produce, we fund the production cost during the content creation process prior to the completion and release of the title and when amortization begins. These timing differences result in content cash payments being higher than content amortization on our P&L currently. Over the long run, we believe self-producing is less expensive (including cost of capital) than licensing a series or film, as we work directly with the creative community and eliminate additional overhead and fees. In addition, we own the underlying intellectual property, providing us with global rights and more business and creative control.

Our cash payments for content can be derived from our cash flow statement. The sum of Additions to Streaming Content Assets and the Change in Streaming Content Liabilities equates to our cash spending on streaming content.

With the continued success of our originals, we've been investing more in original content, which weighs on FCF, as cash payments are more front end loaded than 2nd run content licenses. However, as we digest our big move into originals and as we grow our operating profit and margins, we no longer have a need to raise external financing to fund our day-to-day operations.

We fund our investments through operating profits and, historically, by raising debt. Given that we are sustainably free cash flow positive, we believe that we no longer have a need to raise external financing to fund our day-to-day operations.

We intend to maintain roughly $10 to $15 billion of gross debt. We maintain approximately two months of revenue in minimum cash. As we generate excess cash, we will return capital to shareholders through a share repurchase program under our $5 billion share buyback authorization (which has no fixed expiration date).

The quarterly guidance we provide is our actual internal forecast at the time we report and we strive for accuracy, not conservatism, in our forecast as under-estimating revenue growth would result in under-investing in content, marketing and other aspects of our business. This means in some quarters we will be high, and other quarters low, relative to our guidance.

Since the early days of streaming, we have partnered with a wide array of companies to make it easier for consumers to discover, sign up, use and pay for the Netflix service. Our partners include consumer electronics device companies, game console manufacturers, pay TV and mobile operators, Internet service providers, mobile device and set top box manufacturers, and brick and mortar retailers (gift cards). Some partnerships include marketing arrangements to increase the general awareness of Netflix and to attract new members. In turn, our partners benefit through customer acquisition, the opportunity to upsell higher value packages of speed/data/content, lower churn and increases in brand affinity. For the majority of these partnerships, we recognize revenue from new members acquired via partners on a gross basis and payments made to the partner as marketing expenses. If a partner bills on our behalf, the associated payment processing fee is recorded in cost of revenue alongside our other payment processing costs. In cases where the price that the member pays for the service is established by the partners and there is no standalone price for the Netflix service (for instance, in a bundle), these payments are recognized as a reduction of revenues.

As discussed in our Long-Term View, we compete with all the activities that consumers have at their disposal in their leisure time. This includes watching content on other streaming services, linear TV, DVD or TVOD but also reading a book, surfing YouTube, playing video games, socializing on Facebook, going out to dinner with friends or enjoying a glass of wine with their partner, just to name a few. We earn a tiny fraction of consumers’ time and money, and have lots of opportunity to win more share of leisure time, if we can keep improving.

Given our increased focus on exclusive content, our service will continue to become even more differentiated. With different content libraries, SVOD services are not perfect substitutes for each other. As a result, many people will subscribe to multiple networks, such as HBO and Netflix.