Netflix, Inc.

Good afternoon and welcome to the Netflix Q2 2021 earnings interview. I'm Spencer Wong, VP of IR and Corporate Development. Joining me today are co-CEO Reed Hastings, co-CEO and Chief Content Officer Ted Sarandos, COO and Chief Product Officer Greg Peters, and CFO Spence Newman. Our interviewer this quarter is Nidhi Gupta from Fidelity. As a reminder, we'll be making forward-looking statements and actual results may vary. Let's turn it over to Nidhi now for her first question.

Thank you, Spencer. Great to be with you all again this quarter. Lots of exciting stuff to talk about, so let's dive in. Just starting with the quarter, nice to see net ads coming in a little bit better than your expectations. Help us understand what contributed to that.

Sure, Nidhi. I can take that and others can jump in. But as you saw, the quarter kind of played out pretty much as expected. So we delivered 1.5 million paid net ads relative to a guide of a million. And what we're seeing is what we've sort of been talking about for the last couple quarters and that there's still a bit of choppiness to our growth. We had the kind of big pull forward in 2020 of subscriber ads. We also had the push in production of some of our kind of key returning titles and big tentpole new releases until the latter part of the year. But overall, the business is performing well. Our churn is actually down relative to the more comparable two year ago period in 2019, Q2 of 19 before COVID. Our viewing, and we've talked about in the letter, our engagement is up. nearly 20% over that period. But we still feel a little bit of that drag in terms of our acquisition growth as we're kind of working through. What we hope is, and we can't be sure, but what we hope is the tail end of this COVID choppiness where we see on the acquisition side as markets reopen, it does slow things down a little bit.

Yeah, and I'd just say that's a nice, steady progression in terms of getting our COVID-delayed slate back up for our members. Little by little, we're still very heavily back-weighted for this year, but there's a nice, steady progress in the quality of the content and the excitement around the programming that came out in this past quarter, which we saw across the board in our films with Army of the Dead and Fatherhood and our series. both local language and English language for the world, like Lupin and Who Killed Sarah? And even our animated projects like Mitchells vs. the Machine was a nice hit this quarter. So we've seen nice, steady progress, but a reminder that we're still pretty back-weighted in that slate.

What are you seeing in the business over the last month or so as some of your markets have really started to open up? What's kind of in your guidance for that? And also the Olympics, you know, balanced with the fact that you have a lot more content coming in the second half?

Sure. Well, the Q3 guide is actually kind of reflects a lot of what we've seen in Q2, frankly. So as I mentioned, the underlying business metrics are really healthy. The one thing we do see with COVID is we don't see the big spikes that we saw in terms of engagement or acquisition or return. or churn that we saw in the very early days of the pandemic. But on the margin, acquisition is impacted. So, for example, in Q2, when things tightened up a little bit, say in Brazil or India, we did see some increase in acquisition. And similarly, as markets reopened, particularly in most of EMEA and the UCAN region, that did have a bit of a headwind on acquisition. And that's reflected basically in our Q3 guide as well. So similar business fundamentals, you know, hopefully kind of starting to move a little bit further away from those market reopenings, which is why you do see some incremental growth. So a better seasonal period as well as moving a bit away from those those market reopenings, but not a big fundamental change. And then hopefully into even more reacceleration as we get to the end of the year, as we really get into the kind of heart of our, of our kind of, you know, kind of strong release schedule as well as, you know, peak seasonality.

I think a big question on investors' minds is just how do you feel about your ability to get back to pre-COVID levels of net ads as we get into 2022?

Yeah. Well, you know, and others should chime in, but I just want to kind of emphasize, even with the Q3 guide and then into Q4, if we deliver on our Q3 guide, and we talk about it in the letter, that will be the growth pattern in our business over the long term is remarkably consistent and steady. So, you know, if we deliver on our guide, it means we'll have added 54 million new members over that two-year period. or on average, 27 million a year, which is right in line with our past few years of growth in 2018 and 19. So we remain on that growth trajectory. And again, once we get into Q4, what we would expect is as we get through, hopefully, that tail end of the COVID choppiness, we get into that strong strength of slate, we get to a kind of a high seasonal period for us, we'd expect to end the year on a much more kind of normalized growth trajectory, but we kind of have to get there.

And Nidhi, you can decompose the long-term risk into two things. One is, does internet streaming slow down? And that seems pretty unlikely. Internet streaming has been amazingly consistent, prolific. As you get new competition in, you get validation, more reasons to get a smart TV or limited broadband. So I think for at least the next several years, the growth story of streaming as a whole is very intact. And then you've got the secular competition story. Does HBO or Disney or other entry have a differential impact compared to the past? And we're not seeing that in the detail that we have per country, you know, because they're launched in some countries and not in others. That gives us comfort. We're not seeing that in the total viewing like the Nielsen measures. And so we think mostly all of streaming is a growth story competing from linear TV and that that will be true till say streaming is 50, 60, 70% of viewing, you know, and then there's going to be shakeout and we want to be prepared and leaving that. But again, the next couple of years streaming is still in the early stages.

Thank you. That's super helpful. That actually answered my next question. So maybe just shifting gears to, your longer term outlook. You know, there's been some focus in the market recently on additional sources of revenue that you might have in the future. But before we get to that, help us understand what makes Netflix's core business a great investment for shareholders over the next, you know, five plus years. What's kind of the growth, the free cash flow, capital return algorithm that gets you excited that you think we should be focused on?

Well, I was going to throw it to one of you first, if you like. So that's OK.

The big picture that all investors get is being a secular Internet play. And as much as Amazon was strong in 2005 and 2008, all of us collectively underestimated the impact of what the Internet could do. And this is the Internet applied to entertainment. And consumer entertainment around the world is an enormous market. It has great potential for us and potentially our competitors. And so that big thesis is, again, what gets people excited. And when we're growing revenue by 19%, it's not that hard to grow 300 basis points of margin. You know, as the revenue growth slows, it'll get a little bit tougher, but we'll continue to lean into that. And so I would say, you know, it's fundamentally a story of this big secular revenue growth management team committed to growing profits and cash flows and then returning those cash flows through buybacks, which Spence got a big start on this quarter. So over to you, Spence.

Yeah, no, you hit on all the key points. I would just add that it's still early days in pretty much every market around the world. I mean, if you go overall, and as you know, we're roughly 20% penetrated in broadband homes, and we talked in the last call about there's 800 to 900 million either broadband or pay TV households around the world outside of China. And as we continue to improve our service and the accessibility of our service, we don't see why we can't be in all or most of those homes over time if we're doing our job. And then if you look at the range from an APAC region where we're only roughly 10% penetrated so clearly early days to our arguably, I guess, more tenured markets, at least like in UCAN, where even there with some of the metrics we put in the earnings letter, streaming and and read alluded to this is is only about 26 according to nielsen of of viewing consumption so the 60 plus is still linear consumption and then within streaming we're only seven you know we're only at seven percent share of of of total tv so we're only seven percent of that 26 so there's there's big tailwinds there in terms of that overall trend from linear to streaming entertainment. And then that plays out in the financials. So again, our profit margins over the last five years have grown 5x. Our absolute profit dollars have grown 20x as the business has scaled from about $100 million to $2 billion of operating income per quarter over the past five years. And so that will continue to scale, we think, in a healthy way because the nature of our business scales well. It's creating content from anywhere to everywhere in this very large addressable market with these big profit pools. So we think we have a long runway of growth, profitability, and return of value to shareholders.

And I think if you think about how slow the business fundamentally changes and how quickly streaming has changed the entire marketplace in terms of the way consumers watch. You go back to about only 8 to 10 years ago, and no one was looking to the Internet or to streaming for the highest quality content. And today, the most watched, the most talked about, the most award-winning... television is all coming out on streaming services. And to Spencer's point, you've got this enormous addressable audience. We're only in a fraction of them and we're only getting a small percentage of their total viewing. So it's still an enormous prize and we're still in the best position to run after it as we've kind of expanded what Netflix is to members, which is not just a show you might like, but it's the shows you like. It's the films you love.

Thank you for letting us pitch out this talk.

Great to give you a platform. I mean, you make a good point. You know, you've created a consumer product with global appeal. And as you said, if you do your job, there's no reason you shouldn't be in every internet household over time. At the same time, you know, not all subs are created equal. And I think there's a lot of debate in the market as to how long can you continue to grow revenue double digit without some of these lower ARPU markets, you know, really starting to kick in in terms of kind of meaningful revenue contribution. And even this quarter, two-thirds of your net ads came from the Asia-Pac region. So can you shed a little bit of light on that debate?

Greg, do you want to take it a little bit too in terms of just some of the growth in those regions and our pricing?

Yeah, and I would say we're working hard to think about how do we find this wide range of price points that speaks to a feature set and consumer needs in more affluent markets. And we're really trying to find ways to add more value there while we are also thinking about the sort of populations that you're talking about and making sure that we're increasing the accessibility of the service and really, you know, the ability to participate in and drive joy from the stories that we're telling to, you know, more and more parts of the world's population that don't have as much means to pay. And of course, you know, the trick there is to find, you know, the right feature set offerings that allow us to sort of broaden that range without cannibalizing, you know, the other layers. And we're really take this, you you know, sort of iterative approach where we try different, you know, solutions to that sort of puzzle and then measure them based on this, what's the net revenue that we're seeing. And so, you know, very much what we're trying to do is, you know, as we bring in lower price plan offerings that sort of, you know, decrease average revenue per member, we're also think about that from the calculus of, in a way that delivers total net positive revenue. And we're definitely seeing that in the mobile plan launches that we did in 78 countries this quarter are an example of us trying to make incremental progress against that puzzle and broaden that reach.

That's very helpful. How is competition, particularly as the competition consolidates, affecting just your thinking on longer term pricing power around the world?

I think, you know, ultimately we are competing already with, you know, tons of forums of places that consumers can spend their hard earned money on entertainment. And mostly what we're looking at is, you know, in the specific calculus of entertainment. How do we deliver more value? How do we provide a wider range of incredible stories at high quality and diversity of content that appeals to those consumers and appeals to more and more consumers around the world? And if we do a good job there, then ultimately, then we have the ability to go back and occasionally ask some of those members to pay a little bit more to keep that virtuous cycle going. And so I would say on the demand side, maybe I'll let Ted speak to the supply side, if you will, in a second. But on the demand side, really, it's just that sort of very narrow focus on are we doing a good job at adding value and continuing to deliver more to our members?

Yeah, and I think in general, the dynamics of consolidation is, you know, you see it across all these companies basically had consolidated themselves into bundles on cable for years. And I do think all the access to those, these are all the same players we've been competing with from the beginning, just through different channels. So I think in general, that doesn't change in terms of what the offering is. And in terms of access to that offering, you know, Netflix, because of the size of our distribution platform and our ability to connect creators with a big audience, it's always been a a big help in terms of lowering content to, to our platform.

And maybe certainly, uh, Disney buying Fox helps Disney become more of a general entertainment service rather than just a kids and family. Um, you know, time Warner discovery, if that goes through, that helps some, but it's not as significant, I would say as, um, Disney, Fox, and then for the remaining three, how they combine or don't combine or cooperate, it's unclear. But again, day to day, we just focus on that content choosing and conversation. How do we improve the service for our members? And like Greg said, there's so much competition from, you know, Instagram and TikTok and sports and the Olympics and everything else that back to the Nielsen data for the U.S., there's plenty of room to grow, you know, without taking it away from the other streamers.

And I would look at all of these. When do those consolidations, when are they one and one equals three or one and one equals four versus what most of them tend to be, which is one and one equals two?

Yeah, I know that that makes a lot of sense. Switching gears to you, Spence, the last couple of quarters have shown us just how much profit potential is in this business. Going back to traditional TV networks, the most profitable networks did 40% plus EBIT margins at peak and they didn't have the you know, scale and direct to consumer business model that you have. So what are kind of the puts and takes as you look at your long-term margin potential against that 40% plus history that we've seen?

Well, I'm definitely not going to provide long term guidance relative to the 40 percent. So I appreciate it. But it's it's nice to know that those those comparables are out there. Those benchmarks are out there to have that ambition. But as we talked about before, what's what we love is that our business has a very scalable model. And so what's most important for us is to grow healthy businesses. And by that, I mean being able to aggressively, strategically invest in the growth of our business while increasing our profit. And that's what I talked about before. We have been doing pretty well so far and we'll continue to feel our way along. So to date, we have been growing at that three percentage points level. per year for over any few year period. And as Reid said, that's something that's been reasonably, I wouldn't say easy, but accomplishable for sure when we're growing in that 20% or so revenue growth per year. Now, obviously, that can't last forever in terms of three percentage points a year, but we think we have a long runway of growth. We have some things that work to our advantage in terms of the global nature of our platform, the ability to create stories anywhere. And so that they travel well, not just in their market, but across countries and markets around the world. So that's a nice model for us. We have a revenue model and subscription that also scales well in kind of established larger and smaller and emerging markets. And that's great as well. And then it's going to depend a bit on as the business evolves, competitive dynamics, relative cost of content. Of course, those things on the margin impact margin, but a lot of healthy growth ahead of us.

And Reed, the 300 basis points of margin per year has instilled a good amount of discipline on the business, probably reined in Ted's content budget a little bit on the margin. But why is that sort of the... the right cadence going forward? And I know it's an average, but if we look back in five years and, you know, the average was lower than that, would it have been because of new businesses you found to invest in or competitive forces or something else?

I don't think there was a ton of magic in the 300 basis points. If we had decided on 200 or 400, you know, we'd be marginally different today. But I think in the long term, we'd get to the same place. So, you know, it's a guess that sets up a framework for how we think about the allocation into faster growth that Ted and Greg have been driving, you know, and providing, you know, a profit stream for our investors. So we're comfortable on that balance. And the big prize is keeping the revenue growth at 20%. So, you know, most of our time is like, okay, how do we get the revenue growth going? How do we, you know, have the content that you just can't ignore, everybody's talking about, you know, and that's what fuels those big surges. And, you know, the more we do, the more we're learning. So we're making a ton of progress, you know, show by show, film by film of how to really push the consumer satisfactions. So that's very promising. That's work that you'll see showing up next year and beyond.

Great. Reid, maybe just staying on you for a minute. On the last earnings call, you talked about video streaming being sort of the main profit pool and over time, potentially smaller supporting profit pools. Over the last few months, you've made some key hires in gaming and podcasting. You've launched an online store. I believe you've expanded your deal with Shonda Rhimes to include live entertainment. Can you just talk us through which of these sort of adjacent business areas actually has the potential to be a meaningful profit pool in the future?

Well, I would say none of them. That is that they're not designed to be because But I'll draw to a distinction. There's things that our consumers love in our service. So Shonda Rhimes future work. We're very confident of video gaming. You know, we're pushing on that and that'll be part of our service. So unscripted, all those things. So think of that as making the core service better. So lots of investment, but not a separate profit pool. It's enhancing, you know, the big service that we have. And then there's a number of supporting elements, consumer products, various shopping, where we're really trying to grow those to support the title brands, to get our conversations up around each of the titles so that the Netflix service becomes must have. So they're not a profit pool of any material size on their own, but they are helping. The reason we're doing them is to help the subscription service grow. um and be more important in people's lives so i would say really we're a one product company with a bunch of supporting elements that help that product be an incredible satisfaction for consumers um and a monetizing engine for investors great that's helpful just to follow up on gaming greg i'll take it to you you know very exciting

to see a key hire in gaming last week. There was some more detail in the shareholder letter as well, but just, you know, bigger picture, how will you achieve the things that matter most to gamers? You know, whether it's great content, ease of play, a network of gamers to play with, what are sort of the unique assets that Netflix brings to the table and why will people be excited to play games on Netflix?

Yeah, well, sort of picking it up where Reid left off, we really see this as an extension of the core entertainment offering that we've been focused on for the last 20 years, right? So just as we've continuously expanded the nature of our offering by adding new genres, unscripted film, local language programming, animation, on and on, we think we have an opportunity to add games to that offering and deliver more entertainment value to our members through that. And similar to what you've seen in that trajectory when we've added a new genre, that's what we expect will happen with games. So this is going to be, you know, it's a multi-year effort. We're going to start relatively small. We'll learn. We'll grow. We'll refocus our investment based on what we see is working. We'll just continuously improve based on what our members are telling us is working. But I'm really excited about a bunch of different ways that I think that we can provide an offering here that is differentiated from what's out there already. And the first of those is really about the IP that we create. You know, we are in the business of making these. amazing worlds and great storylines and incredible characters. And we know the fans of those stories want to go deeper. They want to engage further. They actually want to direct a little bit where their energy goes. And what's great about interactive is, you know, first of all, you can provide, you know, universes that just provide really, you know, significant amount of time that people can engage in and explore. They can also provide a little bit of intentionality. Where do they want to explore? What characters? What parts of the world? What parts of the timeline? So there's just a lot of exciting things that I think we can do in that space. We also feel that our subscription model yields some opportunities to focus on a set of game experiences that are currently underserved by that sort of dominant monetization models in games. We don't have to think about ads. We don't have to think about in-game purchases or other monetization. We don't have to think about per title purchases. Really, we can do what we've been doing on the movie and series side, which is just hyper laser focused on delivering the most entertaining game experiences that we can. So we're finding that many game developers really like that concept and that focus and this idea of being able to put all of their creative energy into just great gameplay and not having to worry about, you know, those other considerations that they have typically had to trade off with just making compelling games. So those are some of the core things that we're, we're excited about and think, you know, that, can make this effort for us special even in the world of games.

Thank you. That's super helpful. I've always known this management team to take an incrementalist approach on these things while also having a well-informed thesis on the long-term and how things will play out. If you can articulate it, what is your long-term thesis on gaming and is you know, starting with mobile and sort of a content vertical strategy. Is that sort of a starting point or is that an ending point? I mean, do you see yourself as a platform over time? Do you see gamers, you know, coming to the TV to play? What is sort of the long-term thesis of what this could evolve into?

yeah and i'll just i'll take it from the platform angle first and sort of make maybe widen that view but you know we think mobile is a great platform for games clearly it's very mature it's got you know great enabling technology tools a great developer community um and the vast majority of our members have uh phones that are capable of great um gameplay experiences so it sort of checks all of those boxes and so It'll be a primary focus for us to deliver those experiences. But ultimately, we see all of the devices that we currently serve as candidates for some kind of game experience. We've actually been delivering lighter weight interactive experiences on TVs and TV connected devices for some time. And you can call those games, you can call them interactive experiences, but obviously they all exist on a spectrum. And we're going to keep innovating in that space. And we feel like there's a rich opportunity to continue to deliver and advance the technical capability to improve the quality of game experiences we can deliver across the range of devices. And then, you know, we want to be very sort of experimental and try a lot of things in this phase. A lot of what we have to do right now is just focus on learning. And you mentioned that sort of incrementalist approach. A lot of this is really trying to maximize learning velocity is what we would say. So we're going to try a bunch of different games through a variety of different mechanisms to see, you know, what's really working for our members. Part of that will be games that extend our IP. We think that's a really rich, rich space. So that's very much part of our long-term thesis. But also, we'll do things where we try standalone games. Ultimately, the success of this initiative is about great games, fundamentally. And those can come from a variety of different sources. Maybe someday we'll see a game that spawns a film or series. That would be an amazing place to get to and really see the rich interplay between these sort of different forms of entertainment. We'll also do licensing because just as we've done in that sort of other genre expansion, it's a great way to increase the volume of the offering that we have at the start to learn more quickly. And then as our internal production sort of scales, we can focus the energy on what we're learning in that regard. broadly, we think, as you said, you know, there's a big, big prize here. And our job is really to sort of be very focused and deliberate about what we're going after that maximizes the learning value, iterate that continuous improvement approach. And, you know, we feel that that's yielded really big results for us as we followed that sort of technique and all the kind of genre expansions we've done around the service.

And is it is a financial success of this over time? Should we think about that as higher ARPU for the Netflix service or? Is there a standalone sort of financial success here, you think, over a very long period of time if you're successful?

You know, I'm not going to guess it to a very, very long term, but we're really thinking about this as a core part of our subscription offering. And so we'd measure it very much like we do around the success of adding incremental movies or adding incremental series, which is that. Ultimately, you know, those are about like being compelling to members, having them engage and talk about it, having that be part of the social conversation that's out there. We see those benefits in retention, obviously, for delivering more value there than members stay with us longer. We see those values in acquisition as well, because when there's a you know, if there's a great game that lots of people are talking about to their friends, their colleagues, their family, then that's a source of acquisition for us as well.

Great. Thank you. That's super helpful. Maybe switching gears to another content vertical, sports, which comes up a lot. Ted, you haven't historically been keen on buying sports rights and that may have been the right call given the cost escalation we've seen there. But you have had a lot of success with sports-related like the Michael Jordan documentary, the F1 series, you know, do you see Netflix becoming sort of a key destination for sports related content over time? And are you even thinking, you know, news and analysis or is there sort of a limit to what you can do without the underlying rights?

Look, I think you pointed it out, but our success with the sports-adjacent properties like TF1 Drive to Survive, DefU, and certainly the Michael Jordan doc, those are all examples, I think, of the platform and what it can do to build enthusiasm on what is already viewed to be an enormous business. Drive to Survive expanded the audience for Formula One racing pretty dramatically, both in live ticket sales and TV ratings and merchandise sales, all those things. And I think that that can be applied as long as the storytelling is great. So what's good about this for us is that we can apply those same kind of creative excellence to the storytelling behind those sports, the personalities behind those sports, the drama that happens behind off camera and fans not only deep fans are compelled to see more but also can bring new folks into the sport so we think it's pretty exciting we think it's a we'll continue to explore it now we have this incredible documentary on Naomi Osaka that's just came out this week that's another example of this that can really broaden the fandom for the tennis world particularly going into this exciting period of the olympics

Outside of the big American sports, football and basketball, we've seen a lot of the cost escalation. Are there more niche sports or sports in international markets where you feel like there might actually be a good ROI on owning the lie there, right?

I don't know that those sports suffer from being under-distributed. So I don't know that we would bring that much to them. And just to be clear, I've reiterated this a lot, but I'm not saying to never say never on sports. It's just what is the best use of about $10 billion? And I think that's what it's going to cost to invest meaningfully in big league sports. And that pricing has only gone up since I started saying that. So I believe that that's likely to hold. But again, I don't think it's because those other sports are niche because they're under distributed and that we could bring a lot to them. Our fundamental product is on demand and advertising free and sports tends to be live and packed with advertising. So there's not a lot of natural synergies in that way, except for it happens on television. So when it becomes the best use of that next tranche of investment, we definitely would be open to it.

Do you see any merit in what Amazon is doing in sports?

I don't know particularly what they're doing. I mean, as a watcher, I know what they're doing, but I'm not sure exactly if they're looking for the same thing from their content spend that we are.

Yeah, that's helpful. Reid, switching gears to you, you wrote in your book about farming for dissent inside the organization on strategic decisions, which I thought was a really interesting chapter of the book. What would you say are some of the biggest debates inside Netflix today as it relates to strategy?

You know, I'm a little careful on that relative to competition because most of them about you know, how do we out Fox Disney, so to speak, and, you know, deliver amazing entertainment. So that would be the, but if we do it in hindsight, we talked about video games for several years, writing up the pros and cons of the timing of entry, you know, that has properties like film that you can own the IP. You can have these long franchises. And, you know, very positive for us and, you know, kind of industry structure wise, if we can master the skill set. And so really it came down to us thinking that the incremental money to fund games made sense relative to our other content investments. So that would be the kind of process that we go through.

I think a healthy way to look at it, Reid, might be, in hindsight, almost everything that we've done, which has turned out well, also came with a very hearty debate period with people with very good opposing positions on why we should or shouldn't do it. And I'd say that's been true of every expansion we've taken on.

Nidhi, we have time for two last questions, please.

Great. Spence, I'll turn it to capital allocation. You know, it's very exciting that we're on the cusp of achieving positive free cash flow. So a couple of questions on that. First, what's the rationale for keeping debt, gross debt at sort of a 10 to 15 billion dollar range while free cash flow grows over the next few years?

Yeah, they're similar to our, I guess, our profit margin growth. There's not like a pure science to it. But, you know, what we viewed it as is we want to maintain some level of leverage in the marketplace because we want that familiarity, excuse me, with the capital markets should we need access to capital over time. So that's why we talk about that $10 to $15 billion gap. of leverage. But, you know, again, there's not a perfect science. So what's most important to us in terms of our capital allocation strategy, again, is to invest strategically in the business. So that is our first priority. That's what hopefully you're hearing in terms of our investment into film, into television, extension into into video games and hopefully other content categories over time in that kind of mission or objective to entertain the world. But as we have excess cash, we will return it to shareholders occasionally. That's why we started the share repurchase program. We repurchased a half a billion of shares in this last quarter in Q2. It's not that there's a fixed amount that we're going to repurchase every quarter. That's really after we've satisfied all of those other strategic objectives. And then we'll kind of take it from there. But we have a $5 billion share of purchase authorization. We will maintain some debt in the capital markets, but we've significantly delevered. I think our leverage is down to about a 2.5x debt to EBITDA, which was significant. you know, up above 5X not too long ago. And we think it's important to have the flexibility in our balance sheet to invest into growth while being kind of prudent and responsible with our capital allocation. I don't know, Spencer, maybe you would add to it, but we talk a lot about this topic.

No, I think you nailed it, Spence.

And just related to that, I mean, your appetite for M&A has historically been pretty low I'm wondering if that changes at all as you explore gaming or, you know, perhaps other areas. You know, in your core business, you haven't seemed as interested in some of the traditional assets that have been in the market, like MGM, for example. What are the characteristics that make a good acquisition for you?

Well, Spencer runs that group for us. I'll let Spencer answer and I can chime in.

Thanks, Spence. And Nidhi, it's a good question. So I guess a couple of things without speaking towards any specific opportunities. I would say, as a company, we look at many different ways to help accelerate the growth in our business, including M&A. So you should assume we look at many, many different things. And we've said in the past that we're open to content assets that can help accelerate growth. Our growth, things like intellectual property that we can develop into original series and movies. In addition, film and TV libraries could be, you know, interesting as well. We'll see on the gaming side. That being said, we are mindful of a couple of things. First of all, our encumbrances, for example, which, you know, if some of these content assets are heavily encumbered and limit our ability to use them on Netflix, then they're of limited value to us since our top priority is to grow the core Netflix business. Secondly, our opportunity costs and tradeoffs. So as we evaluate M&A, we always think about if we bought company X or asset X for, you know, Y dollars, what's the alternative use of Y dollars and which is best for the company. So hopefully that gives you a little bit of a framework for how we think about M&A.

The key is it has to accelerate our strategy with low distraction cost.

And so we're pretty picky. It's got to be something that's right in the middle of the strategic core of what we're doing.

I mean, I guess with that backdrop, I mean, is there any reason to think the majority of free cash flow wouldn't be used for buybacks in the future?

Well, we're getting ahead of ourselves a little bit, but it's certainly something we've contemplated as why we have the $5 billion authorization, but... I kind of look at that as a high class problem where we've guided to cash flow roughly break even for this year. So let's get through this year and kind of look at how we're tracking next year. I'm excited for getting hopefully past this nearly what will then be almost a two year global pandemic and a really kind of full content slate and hopefully a more normalized world. And then we can worry about what to do with our excess cash.

It's a good problem to have.

There you go. Well, Nidhi, thank you so much for doing this again with us. I just want to say we're really happy with the quarter. We're happy with the programming. We're happy in this very complicated time, both in the world and in the business, to be growing subscribers and revenue. This is a big story mostly about how the world is in love with streaming. And when it comes to watching your favorite show, your favorite film, It's more likely to be happening on streaming than ever before, and it's still just scratching the surface as to the potential for the business. And while everybody else is trying to figure out how to unwind businesses and restructure businesses and put together enormous populations of employees, we're focused on three things. I know we're spinning about a thousand plates, but we're really focused on our three things, which is our content, our choosing, and driving conversation around the world. And with that, we're really confident in our team to continue to drive that and drive us to continued success. So thank you.