Netflix earnings call: Seeking margin growth with pricing power -- and more scale
Mario Tama
Netflix (NASDAQ:NFLX) had risen 13% postmarket Wednesday by the time it released its quarterly executive interview, tied to third-quarter earnings where it popped eyes with its best subscriber growth in years.
That came despite the company joining production-company counterparts in facing off with actors in an ongoing strike that continued to threaten entertainment output. (Producers reached labor peace with the Writers Guild earlier.)
"We want nothing more than to resolve this and get everyone back to work," co-CEO Ted Sarandos said in the interview. He was optimistic that the two sides were making progress, but "the guild presented this new demand ... for a per-subscriber levy, unrelated to viewing or success and this really broke our momentum."
But while "we need to get a deal done that respects all sides," in terms of impact, "these are the times that I'm glad we have such a rich and deep and broad programming selection."
The stoppage still has a definite impact on Netflix's spending plans: After cutting back to $13B in annual content spending, it's aiming to get back toward a historically recent $17B in time, though "the biggest swing factor is gonna be when the SAG/AFTRA strike resolves," Chief Financial Officer Spence Neumann said.
Meanwhile, after the subscriber-growth disappointments of early 2022, the company pinned acceleration hopes on two new revenue streams: a crackdown on password sharing that looked to pave the way to make account free-riders into new subscribers (what the company calls Paid Sharing), and the introduction of an advertising-supported service tier.
Paid Sharing
"The cancel reaction continues to be low, exceeding our expectations, and borrower households converting into full paying memberships are demonstrating healthy retention. As a result, weâre revenue positive in every region when accounting for additional spin-off accounts and extra members, churn and changes to our plan mix," the company said.
"I think Paid Sharing represents the kind of difficult challenge where we need to balance both important relevant consumer considerations with the importance of ensuring that our business got reasonably paid," co-CEO Greg Peters said.
The rollout of Paid sharing is still going on around the world and the company expects incremental boosts to growth for several more quarters.
Ad-supported plan
Alongside Paid Sharing as a key initiative for Netflix (NFLX) is boosting its advertising-supported service tier.
"We grew our ad plan membership 70% sequentially ... that's on top of the last quarter, we grew at 100% quarter-over-quarter," Peters said. "You now have 30% of our new signups choosing our ads plan in our ads countries, and we've done it by making the ads offering more competitive."
Last week, the company moved to replace advertising chief Jeremi Gorman with company veteran Amy Reinhard, with its ad sales and ad-supported subscriber numbers running about half of its internal projections.
"On a per-country basis, think about this as essentially a percentage of market penetration that helps us focus and drive the rate of growth that we desire. And we've got more work to do to get that something ... we're not satisfied with the scale that we're at, in any country that we're in: We want to be bigger, we know we can be bigger," Peters said.
Live sports
The company also aims to dip its toe into live sports with plans to broadcast "The Netflix Cup" live on Nov. 14. The event is a celebrity match-play golf tournament pairing golf pros with stars of Netflix's (NFLX) Formula 1: Drive to Survive program.
But it doesn't necessarily mean that Netflix will jump in to bid against Apple and Amazon for live rights to top sports leagues.
"We are in the sports business, but we're in the part of the sports business that we bring the most value to, which is the drama of sport," Sarandos said, pointing to the success of its shows around the Tour de France and golf, and more recently with its documentary on soccer icon David Beckham.
"I think about it as a great way of extending those great drama sports brands that we've created, but no core change in our live-sports strategy, or licensing live sports," Sarandos said, while noting the company is investing in boosting its live-streaming capabilities "as the demand grows for that."
As for whether the company plans to take Q3's $2.5B share repurchase as a run rate for the future, "I wouldn't read through that," Neumann said. The pacing of buybacks will depend on building up excess balance-sheet cash, he said.
Netflix's positive subscriber surprise was lifting other boats postmarket: FuboTV (FUBO) had risen 2%, while Roku (ROKU) gained 2% as well.

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