Streaming Service

What are your margin targets?

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.

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Why not add additional tiers of content (i.e. premium content for more $ per month)?

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.

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International

What's your FX exposure for International?

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.

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How do you handle FX in your guidance?

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.

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Will you have to invest more in local content to be successful internationally?

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. 

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Revenue and pricing

Are you focused on membership or revenue maximization?

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. 

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What is your approach to pricing?

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.

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Content

Why are you moving towards more exclusive content arrangements which must cost more?

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.

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How do you evaluate new content deals or renewals?

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.

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Streaming Content Accounting

What is the accounting guidance you apply for streaming content?

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.

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How do you account for streaming content licensing?

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.

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How should investors think about your streaming obligations, which are significant?

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.

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Do you have any significant amounts that are not included in the Contractual Obligations table even though the contracts are signed?

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.

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Where is streaming content amortization recorded in the P&L?

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

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Do you have other content costs recorded in the P&L?

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.

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Originals

What new original series are coming to the service?

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

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How do you measure success of originals?

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.

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Why are you making non-English language originals?

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.

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What percent of your content spend and percent of viewing does originals make up?

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.

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Since you've been successful with originals and are increasing your investment in this area, will this increase your overall content spend or does it replace spend on other content deals?

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

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Free Cash Flow

Why is there a gap between net income and free cash flow?

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.

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How can I derive your cash payments for content?

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.

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How has Netflix historically been free cash flow negative?

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.

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Capital Structure

How do you plan on financing your content investments?

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.

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What is your capital structure policy?

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).

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Miscellaneous

What is your approach to guidance?

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.

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How do your business development partnerships work?

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.

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Who do you see as your main competitors?

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.

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In terms of competition, would people maintain multiple relationships with subscription video providers or just chose one provider?

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.

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Free Cash Flow

We define free cash flow as cash provided by (used in) operating and investing activities. We believe free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make investments in content and for certain other activities or the amount of cash used in operations, including investments in global streaming content. Free cash flow is considered a non-GAAP financial measure and should not be considered in isolation of, or as a substitute for, net income, operating income, cash flow (used in) provided by operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP.

In assessing liquidity in relation to our results of operations, we compare free cash flow to net income, noting that the three major recurring differences are excess content payments over expense, non-cash stock-based compensation expense and other working capital differences. The excess content payments over expense is variable based on the payment terms of our content agreements and is expected to increase as we enter into more agreements with upfront cash payments, such as licensing and production of original content.

Forward-Looking Statements

This communication contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited to statements regarding: membership penetration in the U.S.; revenue and operating margin; pricing tiers; pricing adjustments; foreign exchange exposure; net income and profitability; membership growth; content investment, including in local content and exclusive content; access to content; content offerings; and launches; relative cost of original content; free cash flow; debt; share repurchases; the evolution of our service offering; and competition. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those included in forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2021, each filed with the SEC.

We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this communication, unless required by law.