US video streaming service provider Netflix released the company's third quarter financial report for fiscal year 2024 today: revenue was 9.825 billion US dollars, a year-on-year growth of 15.0%; net income was 2.364 billion US dollars, a year-on-year growth of 41%; earnings per share were 5.40 US dollars, an increase compared to 3.73 US dollars in the same period last year.
Netflix's third-quarter revenue and earnings per share exceeded Wall Street analysts' expectations, with total global streaming service paid users and global new paid subscriber numbers also surpassing expectations; the outlook for fourth-quarter revenue and earnings per share for fiscal year 2024 exceeded analyst expectations, as did the outlook for fiscal year 2025 revenue.
After the financial report was released, Netflix's Co-CEOs Ted Sarandos and Greg Peters, CFO Spencer Neumann, and Vice President of Investor Relations Spencer Wang and other company executives attended the subsequent earnings conference call, interpreting key points of the financial report and answering questions.
The following is the main content of the Q&A session:
Goldman Sachs analyst Eric Sheridan: Can the management introduce the investment focus for improving 2025 and beyond? How has the company's progress been over the last year to a year and a half?
Ted Sarandos: Looking ahead to 2025, we are confident in the company's business development. Netflix has developed a plan to accelerate growth and has accordingly achieved it, as can be seen from our financial performance data in 2024; we expect revenue growth to exceed 15%, operating margin to increase by six percentage points. Engagement is the best indicator we use to measure member satisfaction; when people watch more content on the Netflix platform, they stay longer, which is what we call retention; they talk more about Netflix, thereby driving the platform's user acquisition ability, and they also value Netflix's paid content subscriptions more.
This year, we have maintained very healthy user engagement, with each member spending about two hours a day watching content on the platform, and in the first three quarters of 2024, engagement in each household has increased. We provide members with high-quality content, in the third quarter we concluded some popular works for everyone, such as 'A Perfect Couple,' 'Monster,' and 'Nobody Wants This,' and we are also very excited about the fourth-quarter lineup, which includes exciting blockbusters from the USA, Brazil, South Korea, the UK, and Germany, as well as some very exciting live events coming up. In 2025 and beyond, we hope to continue expanding our business on these successful foundations, moving forward.
We have accumulated over ten years of experience in the field of original content production, our core capabilities have become very strong, we have a team composed of the world's most talented creative talents, coupled with Netflix's unique culture and operational model, allowing us to create story content in more than 50 countries and regions, touching over 0.6 billion viewers worldwide. Netflix's 2025 lineup will create greater value for our members, or take an important step towards creating greater value for our members, truly demonstrating the scale of our content and service ambitions, and reflecting the investments Netflix has made to achieve a stable program production pace.
Looking ahead to 2025, everyone will see new seasons of our most popular shows, such as 'Wednesday,' 'Squid Games,' 'Stranger Things,' and more. In addition, there are new programs from Shonda Rhimes, Ryan Murphy, and a new film 'Knives Out' directed by Rian Johnson, along with returning favorites like 'Game of Thrones,' 'The Frankenstein Chronicles,' and even 'Happy Gilmore.' Overall, we are incredibly excited about our current content reserves and the direction of our business development.
Greg Peters: Over the past fifteen years, we have been focused on continuously improving and optimizing every aspect of our service, and we believe we have been doing quite well in terms of service. We hope and look forward to providing even better service to members in the coming decades. In terms of prioritized business and work considerations, in my view, our primary task is to integrate this mindset of providing better service into our work, continuously enhancing our core movie and series products.
As Ted mentioned, we have seen very good progress in this regard, with our plans continuously advancing. What makes me most happy is that users are increasingly seeing a continuous stream of popular works from around the world. Ted mentioned many countries, including Japan, South Korea, Thailand, and India, which once again demonstrates the return on investment we have made in creative communities worldwide over the past decade, collaborating with local storytellers, empowering them, and helping them tell their stories in engaging ways. We look forward to seeing more works like this. In addition, in improving product experience, we have tested a new, more intuitive version of the TV homepage, progress that is very satisfying, and we are ready to bring it to our global subscriber base.
The second item that requires prioritized attention is sowing the seeds, investing in new businesses, which helps us expand and strengthen our entertainment products. We have taken some initiatives, such as developing games based on Netflix intellectual property, like the upcoming 'Squid Games' game, as well as games based on 'A Virgin River Christmas' and 'The Ultimatum', and classic games like 'Monument Valley 3' set to be released. We are also expanding our live event business, including the boxing match between Mike Tyson and Jake Paul in December, a 52-week consecutive series of WWE matches starting in January, and John Mulaney's live stand-up show. Additionally, we are driving growth in our advertising business, with our main goal being to provide existing and future members with lower-priced packages in a more efficient manner to enjoy all this wonderful entertainment content.
It is worth noting that expanding into new business takes time, but considering we already have a significant scale in our core business, we are confident about nurturing these new seeds and gradually growing in the future. Of course, this requires a lot of work, and we are making huge efforts to progress along this path as quickly as possible. People can already see some results, such as our revenue doubling approximately every year, although from a small base. We believe new businesses will be a significant contributor to revenue in the coming years. Stepping back, among all the regions and countries where we are already operating, consumer spending exceeds six hundred billion dollars, and we currently only have about 6%-7% market share. If we focus on continuous improvement and move towards a better future, what lies ahead is a huge growth potential.
Bank of America analyst Jessica Reif Ehrlich: Can the management provide insights on the future development of Netflix's revenue growth algorithm in terms of organic member growth, growth in Average Revenue per Member (ARM), and the advertising business?
Spencer Neumann: Greg and Ted just talked about the investment focus and areas of attention that indeed drive the company's business growth. I mainly discuss the business growth prospects for 2025, based on exchange rates at the end of the third quarter, we expect to achieve revenues of approximately 43 billion to 44 billion US dollars next year. This means compared to the expected revenues in 2024, there will be about 4 billion to 5 billion US dollars in incremental revenue, roughly an 11% to 13% growth. This growth comes from a combination of member growth and ARM growth, and we expect most of the growth next year to be driven by expanding member counts, thanks to strong net additions this year and their impact throughout the year, as well as the expected steady paid net additions next year.
Currently, there are still hundreds of millions of households that are non-paying members. Considering the exciting content lineup in 2025, as well as the improvements in converting consumer demand into revenue, this market opportunity will also be explored. Growth in ARM is also anticipated, which reflects adjustments to paid packages and pricing combinations. Building on this year's actions, as Greg mentioned, our advertising revenue will gradually increase, although not yet the primary growth driver, but there will be an opportunity next year to achieve a larger share. So overall, we predict a positive double-digit revenue growth where the company is expected to achieve a better balance between multiple driving factors, and the outlook remains very strong.
KeyBanc analyst Justin Patterson: Given the current competitive environment seems to have eased, how does the management view the future trend of operating margin?
Spencer Newman: As we discussed in our investor letter, in the long term, we see a lot of room to improve profit margin levels. The company is very pleased with the profitability achieved this year. As Ted mentioned, we expect the profit margin to increase by six percentage points. We will gradually increase the profit margin while growing the business to create a stronger and more sustainable business model. We have set profit margin targets, continuously improving our services through investments, as well as balancing and highlighting priority work, such as promoting cost growth slower than revenue growth, encouraging every employee to think about operations from the perspective of a company owner.
The growth rate of profit margin each year may fluctuate due to strategic opportunities in specific years, exchange rate changes, and other factors, but our goal is to increase it every year, including the outlook for next year. After experiencing a significant growth in profit margin this year, which exceeded the plan, we hope to ensure active investments in the company, provide more value to our members, and continuously strengthen and develop our business by further investing in our core film and television products, improving product discovery capabilities, expanding live broadcasts, advertising, games, and other new areas. All of these will lead us to find the right balance for our planning next year, with significant potential in the coming years to increase profit margin and profit amount.
TD Cowen analyst John Blackledge: A specific question about the company's performance in the fourth quarter. Could the management discuss the factors leading to a slight net loss of Latin American members in the third quarter and the factors driving the early recovery of Latin America in the fourth quarter?
Spencer Newman: Overall, the fundamental business trend in Latin America is healthy. The revenue in the third quarter is a key indicator of our business growth, showing a 9% year-on-year increase. Year-to-date, it has increased by 10% according to reported data. This is consistent with our 9% growth in 2023 but compared to last year, we are facing more significant unfavorable factors in exchange rates this year. So, actually, the growth of local business this year has accelerated significantly compared to a year ago.
Regarding the specific membership numbers in the third quarter, the slight decrease you observed is mainly due to price adjustments we made in some larger Latin American markets, which are factors restraining short-term membership growth. The good news is that we have seen a good rebound in the early fourth quarter, with growth in good shape. Interestingly, if there had been one more day in the third quarter, the net addition would have been an increase instead of a decrease, so overall, the overall business growth in that region is good.
Ted Sarandos: Of course, we will not adjust quarter-end timing to achieve growth. In the fourth quarter, what is truly exciting about the business in Latin America is the incredible high-quality content and programming we are about to launch. This includes "Senna" from Brazil, a series we believe will be highly popular worldwide but most importantly, loved by members in Brazil. There is also "One Hundred Years of Solitude" from Colombia. Renowned photographer Rodrigo Prieto brings us his directorial debut "Pedro Páramo" in Mexico, based on a Mexican epic masterpiece. We are incredibly excited about the creative output in Latin America and as Spencer mentioned, we are also very excited about the business environment in Latin America.
Wells Fargo analyst Steve Cahall: Could the management discuss the factors that will drive advertising to be the main growth contributor after next year? How does the performance of ad-based packages compare to non-ad-based packages? In the US market, how much is the cost per thousand ad impressions (CPM) charged by the company? How do you view Netflix's improvement in monetizing its ad inventory?
Greg Peters: Answering these questions requires looking at them from several dimensions, and I will try to interpret them one by one. First, when considering the advertising business, there are two most important tasks. One is to increase the number of members with advertising payment levels. Only when we reach a sufficient scale, our products will have promotability to advertisers in various markets. The second is to enhance our attractiveness and service capabilities to advertisers, in order to achieve commercial realization of all advertising inventory.
Regarding the first task, we have made solid progress. As mentioned in our investor letter, in the third quarter, the advertising package accounted for over 50% of new sign-ups in markets where we offer the service, and our advertising package membership base also increased by 35% quarter-over-quarter, achieving very significant growth after about the last four quarters, so the growth trend is very positive. As mentioned in the previous quarter, we expect next year to reach the scale expected by advertising partners in 12 markets where we offer the advertising package. Engagement remains healthy, as the viewing time and program viewing of our advertising package members are similar to non-advertising package members, which may be noteworthy. I am immensely proud of the significant progress the team has made in this regard.
It is also because they have done well in completing the first task that we are able to shift more attention to the second priority, which is effectively monetizing the continuously growing inventory. It is worth noting that to achieve this goal, we still have a lot of work to do to drive greater appeal to advertisers with our products, which will be a key focus for us in the coming years. Netflix's in-house advertising server is a key component in unlocking value in this area. We expect to launch this product in Canada this quarter, and then introduce it to other advertising markets next year, where our partnerships with Trade Desk and Google Live (providing a real-time bidding platform for advertisers or agencies) are progressing well. We have our own roadmap for offering more ad formats, more promotional functions, and more effect evaluations, all of which will be rolled out. While we have a lot of work to do, we are very confident in our ability to execute and develop our advertising business, and the successful launch of the ad-shared plan is one of the sources of our confidence.
Ted Sarandos: Just to add, our team is making great progress, and there is still a lot of work to be done. For our business, these seem to be new areas, but what is truly remarkable is that the expansion of the advertising business has sparked all our deepest skills, including technological and creative abilities, which are largely dependent on user engagement, both for subscription and advertising businesses. Advertisers want to be close to Netflix members' program viewing, the topics they discuss, and various events that people gather to participate in together; this is the basic principle of expanding the advertising business. Works like "Us Right Now" or "Perfect Couple" can inspire fans' enthusiasm and engagement, which are the content that advertisers want to be close to, and we are also very excited about this.
Greg Peters: Taking a broader industry perspective, our goal for the next five to ten years is to leverage all the advantages of digital advertising, including everything we have learned from targeted advertising, personalized recommendations, and enhancing marketing relevance, as well as the best advantages of television advertising. Therefore, our advertising business is a high-end creative model. We have a highly engaged audience, matched with those culturally significant programs and films Ted mentioned, which are the guiding indicators we follow. We see Netflix's advertising revenue growth on a good growth trajectory, with a higher cost per mille in the high-quality connected TV advertising market, which is the market we have always wanted to access. Next year, the company's advertising business will still not be the main driver of revenue growth. Compared to enhancing commercial realization capabilities, we are expanding the service audience and advertising inventory at a faster pace, but we have indeed seen strong growth momentum in commercial realization and the opportunity to narrow the gap between the two.
For next year, we expect advertising revenue to roughly double year-on-year, despite the smaller base. As a confidence booster for performance growth, we can say that in this year's U.S. market pre-sales, we have seen advertising commitments increase by over 150%. I think it is worth noting that, like premium video advertising, the advertising business we are expanding aggressively is a proven business model. Considering the potential growth scale of this opportunity and the growth trajectory we are seeing, we are confident that the advertising business can support Netflix's continuous healthy revenue and profit growth over the next few years.
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