Finance and Economics APP has learned that recently, Netflix (NFLX.US) released the 3Q24 earnings conference. The company's management Spencer Adam Neumann stated that looking ahead, the company has great potential for future profit margin growth, expecting a 6% increase in profit margin, and the company's profit policy will not change. The company has set a profit margin target, which will vary based on strategic opportunities in specific years, forex trends, and other factors, but the overall goal is to grow annually, prioritizing an operational approach where cost growth is slower than revenue growth. After experiencing a significant growth in profit margin in 2024 (exceeding expectations), the company will actively invest to provide more value to its memberships, consolidate and expand its business, such as core film and television products, as well as explore new areas like live streaming, advertising, and gaming.

Netflix stated that the basic business trends in the Americas are healthy, with revenue in the third quarter being the main driver of its performance growth, up 9% year-on-year. Year-to-date, the growth is at 10%, aligning with the company's 9% growth target for 2023, even though compared to 2023, the currency headwinds for 2024 are more apparent, hence the actual growth in 2024 will be faster. Specifically, the slight decrease in membership numbers is mainly due to price changes in some larger markets in the Americas, restraining membership growth. However, there has been a rebound, with a positive momentum in membership numbers in the Americas at the beginning of the fourth quarter.

Compared to 2023, the total viewing hours in 1H24 increased by 1%, with a much larger increase in viewing hours for paid users compared to the same period last year. Netflix has approximately 200 billion hours of viewing per year. Only a very small percentage is actual live content, but they all have high value. Scripted programs, non-scripted programs, or documentary programs are the main drivers of engagement, with on-demand viewing hours surpassing 200 billion hours.

Gregory K. Peter stated that there are two key priorities for the advertising business at present: 1) developing the advertising layer membership, achieving sufficient scale, and connecting with advertising clients in each market. The company has made solid progress, with the ad plan accounting for over 50% of registered known advertising countries, and the company's ad plan membership base has grown by 35% compared to the previous quarter. The company's advertising partners are requesting the company to reach a certain scale in 12 advertising countries by 2025. 2) Enhancing the company's capabilities and attractiveness to advertisers, improving the monetization of inventory. The company's proprietary ad server is a key component in unlocking value in this area, which will be launched in Canada this quarter and in other advertising markets by 2025. The company has established partnerships with Trade Desk and Google Live, making good progress. The company's aim for the next 5-10 years is to combine the best digital advertising. The company's advertising revenue growth is strong, with a healthy CPM in the high-end CTV advertising market, expanding audience and inventory faster than its monetization capabilities, already seeing growth in monetization and opportunities to narrow this gap; in 2025, the company expects its advertising revenue to double year-on-year.

2) Enhance the company's capabilities and attractiveness to advertisers, improving inventory monetization. The company's own advertising server is a key component in unlocking value in this area, launching in Canada this quarter and expanding to other advertising markets by 2025. The company has established partnerships with The Trade Desk and Google Live, making smooth progress. The company's 5-10 year goal is to combine the best digital ads. The company's advertising revenue is growing well, with a healthy CPM in high-end CTV advertising markets, expanding audience and inventory at a faster rate than the monetization capability, seeing opportunities to grow monetization and narrow this gap. The company expects advertising revenue to grow by about double year-on-year in 2025.

Q&A

Q: What are the company's investment priorities for 2025 and beyond?

Theodore A. Sarandos

A: The company has developed a plan to re-accelerate growth and has already achieved it. The company expects revenue to grow by 15% in 2024, operating margin to increase by 6%, user engagement to increase by 6%. Engagement is the best indicator the company uses to measure member satisfaction. On average, each member watches about 2 hours per day, with engagement per household continuing into the first three quarters of 2024. From 2025 onwards, the company plans to drive members to create even more value by launching a new season of large-scale programs, including exciting program returns.

Q: How have the company's investment priorities evolved in the past 12-18 months?

Gregory K. Peters

A: Over the past 15 years, the company has continuously improved its services, with two main priorities: 1) More and more popular movies from around the world are being released on the platform. The company's investments in creative community and collaborations with local storytellers have yielded many captivating works. At the same time, the company is enhancing the product experience and has been testing a new, more intuitive television homepage. 2) Investments and new initiatives will help the company expand and strengthen the entertainment industry, becoming an incremental lever for growth in the coming years. The company is interested in Netflix IP-based games and will launch Squid games and classic adaptation games. Additionally, the company is expanding its live broadcast business and increasing its advertising business. In countries and regions where advertising is underway, consumer spending exceeds $600 billion, with the company currently holding only 6%-7%, providing huge room for future improvement.

Q: How should the company's organic membership growth, ARM growth, and revenue growth in advertising be understood?

Spencer Adam Neumann

A: Indeed, the focus of investment and attention is truly the engine driving the growth equation. Viewing the 2025 guidance as a constantly evolving combination over time, based on the fixed forex at the end of the third quarter, the company expects to achieve approximately $43 billion-44 billion in revenue next year, representing an increase of about $4-5 billion compared to the expected target for 2024, an increase of about 11-13%, which is the combined result of membership and ARM growth. Next year is expected to be driven by membership growth, with a strong net increase this year plus an expected steady net increase in paid subscriptions next year.

To improve the conversion of consumer demand and promote an increase in household members, the company will build on this year's initiatives to increase ad revenue (currently not a major growth driver but will make a significant contribution in 2025). Overall, the company has achieved double-digit healthy revenue growth, with a more balanced mix of driving factors, and a strong outlook.

Q: How does the company view the future fluctuations of operating profit margins in a relaxing competitive environment?

Spencer Adam Neumann

A: In the long term, the company sees significant room for the future profit margin to rise, with an expected 6% increase in the profit margin, and the company's profit policy will not change. The company has set profit margin targets, and although they may vary based on specific year's strategic opportunities, forex trends and other factors, the overall goal is growth every year, balancing the pros and cons while focusing on an operational model where cost growth is slower than revenue growth. After experiencing a significant (beyond expectations) increase in profit margin in 2024, the company will actively invest to provide more value to members and strengthen and expand the company's business, such as core film and television products, as well as expanding into new areas like live streaming, advertisements, and gaming.

Q: What are the main sources of the increasing pressure on net losses of Latin American region memberships in the third quarter, and what are the driving factors for the performance recovery in the Latin American region at the beginning of the fourth quarter?

Spencer Adam Neumann

A: Overall, the basic business trend in the Latin American region is healthy. Revenue in the third quarter is the main driver of its performance growth, up 9% year-on-year, and year-to-date, the report calculates 10% growth, in line with the company's 9% growth target for 2023. Compared to 2023, the headwinds in 2024 are more apparent, so the actual growth in 2024 will be faster. Specifically, the slight decrease in membership numbers in the Latin America is mainly due to price changes in some larger markets, restraining membership growth. However, we have seen a rebound, and membership in the Latin American region is showing good momentum at the beginning of the fourth quarter.

Theodore A. Sarandos

A: The Americas will launch films popular in Brazil.

Q: How is the company's participation in the advertising business after 2025? How is the CPM in the USA market? How are improvements in the advertising inventory monetization capability being considered?

Gregory K. Peter

A: Advertising business has two priorities: 1) Develop the advertising layer of memberships, achieve sufficient scale, and connect with advertising clients in each market. The company has made solid progress, with advertising plans covering over 50% of registered advertising countries, and the company's advertising plan membership base has grown by more than 35% compared to the previous quarter. Company's advertising partners require the company to reach a certain scale in 12 advertising countries by 2025.

2) Enhance the company's capabilities and attractiveness to advertisers, improving inventory monetization. The company's own advertising server is a key component in unlocking value in this area, launching in Canada this quarter and expanding to other advertising markets by 2025. The company has established partnerships with The Trade Desk and Google Live, making smooth progress. The company's 5-10 year goal is to combine the best digital ads. The company's advertising revenue is growing well, with a healthy CPM in high-end CTV advertising markets, expanding audience and inventory at a faster rate than the monetization capability, seeing opportunities to grow monetization and narrow this gap. The company expects advertising revenue to grow by about double year-on-year in 2025.

Q: What has the company gained from its collaboration with The Trade Desk and DV360? Netflix uses Trade Desk to build demand. In the long run, what is the importance of this partnership compared to a self-built advertising platform?

Gregory K. Peters

The company has one-on-one private markets in UCAN and Latin America, and next month the company will add more programmatic features in UCAN and Latin America. Through cooperation, more demand will have a positive impact on CPM, more channels mean more customers are more likely to purchase, making advertising more valuable. Regarding whether to build an advertising platform, the company will continuously evaluate business development, as the importance of collaboration is to understand how the ecosystem evolves.

Q: How will the 2023 Hollywood strike affect the company's 2024 film plans, final engagement and retention rates? Is the impact on UCAN too significant? When will the company return to normal status before the strike impact?

Theodore A. Sarandos

The company's goal is to provide stable new TV shows, but the program lineup was significantly affected in the first half of the year, mainly due to the strike. The strike hit UCAN the hardest. The company is approaching a normal production schedule, series and movie progress has fully recovered, popular returning series were completed in the first half of the year, but some returning series were not completed. The company's film plans are also returning to normal after being affected. Changes in the company's leadership have caused changes in distribution rhythm, making the fourth quarter more stable.

Q: When will the company's engagement in the USA achieve growth again after the gradual digestion of the dividend from paid sharing? Can the expansion of live programs be seen as the main driving force?

Theodore A. Sarandos

Compared to 2023, the total engagement time in 1H24 increased by 1% year-on-year, and the engagement time of paid users increased much compared to the same period last year. Netflix's annual viewing time is about 200 billion hours. Only a very small number are truly live, but they all have extremely high value. Scripted programs, non-scripted programs, or documentary programs are the main drivers of engagement, and the on-demand time of these programs has exceeded 200 billion hours.

Q: Does the company believe that movies can become a cultural trend without being released in theaters?

Theodore A. Sarandos

A: The company is engaged in subscription and entertainment business, attracting a large number of consumers and fans. The first 10 movies premiered on Netflix have all been viewed over 0.1 billion times, making it one of the most-watched movies globally. The company aims to continuously add value to consumers' subscriptions. Therefore, the company brings the largest audience in the world to filmmakers on Netflix, helping them create the best movies. The company believes Netflix can continue to break through the trends of the times and create these moments in culture.

Q: Does the company plan to change the compensation structure for talents by reducing upfront payments and increasing success-based backend compensation?

Theodore A. Sarandos

A: The company will not change our compensation structure; upfront payment is a pioneering practice for Netflix, benefiting both creators and Netflix. Therefore, for creators, Netflix takes on all financial risks so creators can focus on producing the best works. For Netflix, this model attracts top talent. In conclusion, the company has been and will continue to engage in more customized deals. Therefore, the company does not wish to change the compensation model.

Q: What are the factors hindering the company from raising prices during the most content-rich period in 4Q24-2025?

Gregory K. Peters

A: The company's pricing strategy remains unchanged. The core belief of the company is: first, the company works very hard to ensure we provide more value to members every quarter. Then, it evaluates engagement, retention rates, and other indicators based on progress. If the company meets its goals, raising prices will help the company better monetize its offerings. Last quarter, the company implemented this approach in several countries, with progress proceeding smoothly and results meeting expectations. The company will announce the adoption of this method in Spain and Italy in the future. The company focuses on long-term monetization opportunities, and as long as it continues to enhance the variety and quality of its film and television programs, the company can expand its products into new areas.

Q: The company has raised the price of non-advertising plans, while the advertising plan prices remain unchanged, and other streaming services have raised the prices of both plans simultaneously. How does the company view the reasonable price difference between advertising and non-advertising?

Gregory K. Peters

A: When pricing, the company primarily considers the value it can provide to its memberships, rather than the relationship with competitors. Therefore, the company offers different price points to be able to provide different features to different consumers, ensuring not to add too much complexity or choice tax. The company's primary goal is to optimize long-term revenue rather than ARPU, focusing on the relative balance of their registered compositions. At the same time, the company emphasizes the low price and increased accessibility brought by advertising plans. The company will continue to strive to provide consumers with a variety of plan options at appropriate prices with appropriate functionalities and evaluate and develop based on feasible approaches.

Q: The company has gradually discontinued basic plans in the United Kingdom, Canada, the United States, and France. Does the company have any experience to share? Does the company expect to gradually discontinue basic plans in other advertising markets?

Gregory K. Peters

A: When considering the further development of plans and pricing, the company looks to expand the range, especially for low-end services in advertising plans, while also maintaining a manageable number of options. The company typically attempts changes and evaluates whether they make sense for the enterprise based on consumer reactions. Therefore, the company hopes to demonstrate actions, and if the transformation progresses smoothly and meets expectations, the company will announce the plans in this country.

Q: The company is expected to generate billions of dollars in free cash flow in the coming years. What are the potential uses of this capital? Will the company maintain the net leverage ratio at the lowest level?

Theodore A. Sarandos

A：1)公司的资本分配政策不会改变。公司优先考虑通过对业务的再投资实现盈利性增长，其次是保持充足的流动性。然后公司会将超出资产负债表最低限额的几十亿美元现金，以及用于选择性并购的现金，返还给股东。除此之外，公司通过股票回购来回报股东。根据公司的政策，公司采取了新的战术性举措，将循环贷款规模扩大到3 billion美元，以备不时之需。本季度早些时候，公司筹集了1.8 billion美元的投资级债务，为即将到来的25年到期债务再融资。2)公司没有计划增加杠杆来回购股票或派发股息。公司非常重视资产负债表的灵活性，即公司没有最低杠杆率目标。

Q：请问公司认为YouTube在电视消费中份额的不断增长是敌是友?请问通过人工智能生成的用户内容对公司的业务是否构成威胁?

Theodore A. Sarandos

A：人工智能方面：历史上看，娱乐和技术一直都是携手并进的。对于创作者，对新工具以及它们的功能充满好奇是非常重要的，但人工智能需要通过一个非常重要的测试——它能否帮助制作出更好的节目和电影?公司从提高电影和节目的质量中获益匪浅，比公司从降低成本中获益更多。因此，任何能够提高质量的工具，都会利于行业发展。

具体到 YouTube：公司与YouTube直接竞争的是人们的时间，是人们花费在电视屏幕上的时间。公司将继续产出优质内容，提高公司的参与份额。当用户制作内容时，公司会承担财务风险，公司的订阅模式为创作者带来了更高的回报，这些更高回报鼓励创作者对下一个项目进行更具信心的投资。

Netflix和YouTube虽然在时间上存在竞争，但二者也具有互补关系。Netflix在YouTube上发布的预告片获得了大量浏览，这有利于Netflix观看效果的提高和用户数的增加;同时这项投资可以为消费者带来利益，带来巨大的性价比，创作者可以在两个平台上获得大量观众;进一步，这项投资能够为股东带来巨大价值，获得更高的收入和利润。

Gregory K. Peters

A：Netflix对消费者和创作者扮演着重要而不同的角色。Netflix作为创作者的合作伙伴，为创作者分担将故事变为现实的固有风险，这是在YouTube的模式下，难以实现的创意赌注。因此，虽然处于竞争激烈的环境，但是公司的重点和模式，对消费者和创作者都有益处，同时也为企业带来了可观的营业利润。

Q: Netflix does not need to bundle with other streaming services, but is there an opportunity for the company to leverage its industry-leading global membership base and bundle with smaller streaming service providers to offer one or more services with complementary content, such as sports live streaming, in exchange for subscription market share or advertising inventory share?

Theodore A. Sarandos

A: The company focuses on adding more and more value to its package. The company has a series of films and movies, games, first-run movies, original series from around the world, most-watched programs, unscripted programs and competition programs, animated series and animated movies, talk show comedies, and popular live events on television. Therefore, the company focuses on the ability to reach consumers and the ability to continue to increase the value of this package.

Gregory K. Peters

A: In the USA, the company's viewership share is less than 10% of TV time. The company can increase its viewership share through the above-mentioned methods, i.e., by increasing investment and continuing to enhance the diversity and quality of its products. The company is working to expand its advertising, gaming, and live services offerings, which will bring more value to members. Therefore, the company will focus on increasing value and providing more entertainment value to members.