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spk01: Good afternoon and welcome to the Netflix Q2 2022 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 Doug Ameth from JPMorgan. As a reminder, we'll be making forward-looking statements and actual results may vary. With that, I'll turn it over to Doug now for his first question.
spk05: Great. Thanks, Spencer. Great to see all of you and thanks for having me host again today. So there's clearly a lot to talk about on advertising and new initiatives, but let's start with talking about recent trends. So you expected to lose about 2 million subscribers in the quarter and you did a little bit better at a loss of 970,000. What drove the slightly better than expected results in the quarter?
spk00: You know, looking at the quarter, Doug, you know, we're executing really well on the content side, obviously. Ozark, Stranger Things, lots of titles, lots of viewing. We're improving everything we do around marketing, improving the service, the merchandising, and, you know, all of that slowly pays off. If there was a single thing, we might say Stranger Things. But again, we're talking about, you know, losing one million instead of losing two million. So, you know, our excitement is tempered by, you know, the less bad results. But, you know, looking forward, streaming is working everywhere. You know, everyone is pouring in. It's definitely the end of linear TV over the next five, 10 years. So very bullish on streaming. And then our core drivers are just continuing to improve. And then, of course, we'll talk later in the call about monetization and how that's improving. So, you know, tough in some ways losing a million and calling it success. But, you know, really we're set up very well for the next year.
spk02: And Doug, I just add to that, I mean, the business stays, remains really resilient. And basically what you see in the quarter is it played out generally as expected, as Reid said. So the minus a million versus minus two million, slightly better in terms of member growth. And then on revenue, operating income, cash flow, other than the strengthening U.S. dollar, which I'm sure we'll talk about, it affects multinationals around the world. Our revenue was in line with guidance. If you adjust for that in our restructuring costs, our operating income was above guidance. Our EPS was above guidance and our cash flow remains strong. So overall, generally delivering on as expected.
spk05: So almost all of the subscriber base has seen a pricing change over the past year. How do you think about that in terms of a factor just, you know, perhaps in 2Q and, you know, maybe even going forward just in terms of gross ads or churn? I think you still have perhaps some rollout in UK and Ireland and maybe the tail perhaps in 2Q in the US.
spk02: That's right. Oh, go ahead. Go ahead, Greg.
spk04: And then I'll kick it off and then you can you can take expense. But I would say most of what we've seen in the countries that you mentioned, the big ones that we've done so far this this year, U.S., U.K., Ireland, we've seen pretty much the standard response that we've seen historically over the last five years or so, which is. that we typically have this adjustment period where there's slightly higher churn post the price change and that's certainly what we've seen in those countries but then if we do a good job basically at taking those price changes which are significantly you know net revenue positive and you know investing those into more great content and you know the product experiences and marketing and magnifying the conversation around our titles, then, you know, we know that we'll deliver more entertainment value and we'll be able to return those metrics. And that's certainly what we are seeing, you know, in the United States, for example, where we're seeing those like the churn, for example, that you mentioned, return to pre-price change levels. So largely that performance is as we've seen historically and what we would expect.
spk02: Yeah, Greg, you hit on it in the end in terms of the, it's part of what you see in the Q2 performance and the Q3 guide is that we're getting further away from some of those price changes. We always expect to see some slight elevated churn after a price increase, as Greg said, highly kind of revenue positive. And so we had some elevated churn early in the quarter because we had some big price changes, big markets that had price increases like U.S., U.K., Ireland, some other parts of EMEA. early in, you know, both Q1 and rolling through Q2. But then as we get further past that, that's part of why you see, you know, positive paid net ads guidance in Q3.
spk05: Okay. So when you think about the back half, and Spence, you just mentioned some of them, but some of these factors seemingly improve just as you get perhaps greater distance from some of the pandemic pull forward. You mentioned greater distance from pricing, better seasonality. I think the content slate builds through the year. I guess the question is, why only 1 million net ads in 3Q? And how do you think about subscriber growth for the back half overall and for the entire year?
spk02: Well, you kind of hit on it. We talked about some of the things that were near-term kind of headwinds to at least the subscriber growth numbers as well as revenue growth in our business, whether it's you know, the combination of, you know, growth in connected TV homes around the world, it's that, it's a little bit of paid sharing, it's competition, and some of these macroeconomic factors like higher inflation, as well as the invasion of the Ukraine and the knock-on effects around EMEA and other parts of the world. So we're still kind of working through that. But exactly as you say, we get further away from price increases. We get to a stronger seasonal period. We get to strength of slate. And we're working to address all these things. Some of them take a little bit more time to address, like what we talked about with paid sharing, which we'll talk about in the letter. And I'm sure you'll get to that. But some of these, we actually have to take action to further address.
spk05: Okay. The business was very different, clearly, in 2008 and 2009. But in a recession and just tougher macro in general, how do you think Netflix and streaming more broadly would hold up?
spk03: You want me to take it or you want somebody else? I'll just say this real quick. I think it's really important that, particularly in tough economic times, that consumers see Netflix as a tremendous value. So adding great content that they love and they can't you know, that they can't wait for the new season to add tremendous value in the form of this Friday, what do you see this movie, Gray Man, that's going to be premiering on Netflix? This is an enormous, big budget action film that normally people would have to go out and spend an enormous amount of money to go see. And they're going to be premiering it on Netflix. And then we've got a steady drumbeat for movies like Me Time with Kevin Hart and Mark Wahlberg coming up and a new edition of 365, next 365 days, a big franchise, a new season of Cobra Kai. Obviously, we saw the impact from Stranger Things this quarter, but that's just like the tip of the iceberg for the value that we're bringing to the consumer. And I think the consumer will embrace that even more so in tougher economic times.
spk04: Okay, great. Extend that just a touch. I mean, we think Netflix is a great entertainment value. We want to make sure that it is a great entertainment value. We try to provide a range of price points to consumers around the world to make sure that that service is accessible even in the current environment. And I would say, I'm sure we'll get to this in a little bit, but I think that our ad-supported offering is an extension of that sort of pro-consumer wide range of prices that will increase the accessibility of the service, especially in the years to come.
spk02: And just to build on, lastly, just at the risk of beating, oh, Spencer, go ahead. You'll hit on it. Go for it.
spk01: sorry doug i was just going to add if you zoom out a bit and look at past economic economic cycles at least in the in the us most forms of entertainment have been fairly resilient uh to downturns there's a level of escapism i think that entertainment provides also if you look at the pay tv business over economic cycles it tends to be a bit more resilient as well just because the value of in-home entertainment uh increases as you know folks um perhaps you know don't go out as much And also as a subscription business, it tends to be a little bit stickier. I don't, you know, obviously every recession and cycle is different. So we don't want to take that for granted and we're monitoring pretty closely. But that's hopefully a little bit of helpful context for you.
spk05: That's helpful. Thank you. So let's shift gears, talk about advertising clearly on everybody's minds. Reid, you've talked about making the Netflix ad tier a better ad experience than what's available on TV today. Can you give us an update on what the products will look like, some early thoughts there, and then also about more around timing, which I think you said early 2023?
spk00: That's a great question for Greg here.
spk04: Yeah, I think we're looking at this as an extension of, you know, two things that we think that we've historically done, which is one, be very consumer centric and think about the customer experience. And then also just taking an innovation oriented view, whether it's, you know, sort of how we started in streaming to how we think about, you know, great quality of experience and, you know, the innovations we've led. And I think in the discovery and choosing side. So we think that we have a real opportunity here to, you know, you know through a period of years and iteratively so i'd you know i want to set expectations at the onset you know we're going to take an iterative approach this is what we call the crawl walk run model so at the beginning it'll look you know what you're familiar with but over time we think there's a tremendous opportunity to leverage that you know that innovation dna that we have as well as a bunch of just sort of enabling characteristics around addressability and measurability and things like that to one provide an incredible experience for consumers those who choose to take the ad supported offering but also provide an incredible experience for brands and advertisers who want to work with us to make sure that we're doing a good job of elevating what that looks like for them. So there's a bunch of lines of inquiry, lines of innovation that we're going after that sort of support all of that piece. And I think we'll get into that iteratively as we go. But I think when you look at the scale of our offering, the technical DNA, the partners that we've got lined up, I'm pretty optimistic that over a couple of years, we can deliver an experience which is fundamentally different from the ad experience on Linear in a way that supports all of the stakeholders.
spk05: And Greg, when you say the partners that you have lined up, I mean, Microsoft, obviously a key one, but are you referring to advertisers here as well? They're already taking a lot of interest. Maybe you could talk more about what that looks like at this early stage.
spk04: Yeah, we've seen a lot of excitement in our early discussions with brands holding companies in the agencies because I think for them, they've wanted to connect with the titles, the incredible content that Ted's team is putting out there. And I think we also share, you know, a perspective on what is a great experience for consumers and for advertisers. So when we think about, you know, the kind of advertising we see, frequency caps, what's a great ad experience, we're noticing a high degree of alignment there. So that enthusiasm, that alignment, you know, is increasing sort of my optimism and the excitement that I've got to basically get this out there because I think it's going to be a win-win-win for all parties involved.
spk05: So in terms of the Microsoft deal, will ads be sold early on exclusively by Microsoft? And how do you think about your desire to build out more of your own Salesforce over time?
spk04: Yeah, so all of the ads that are served on our ad-supported offering will come through Microsoft, so that's an exclusive arrangement with them. But one of the reasons that we're partnering with Microsoft, there's a bunch of fundamentals. They've got a technical capacity, which is complementary to ours, a go-to-market capacity, which we need to leverage, and it'll be very important for us. But a key component of what we liked about this partnership was that there was sort of a flexibility and that innovation orientation that I mentioned before. And so they very much, I think, are approaching this as an opportunity to work together, to collaborate and to sort of evolve both the technical capacity and also, you know, sort of what the experience is and what the go to market approach is. So we've got lots of flexibility to work together there and evolve that over time. Okay.
spk05: You already have tiers across a range of prices, but what do you anticipate will happen in terms of members switching plans and perhaps trading down to the ad-supported tier? And do you have a view kind of long-term what percentage of subscribers might be on the ad-supported tier?
spk04: Yeah, I would say in general, we know that there's price sensitivity around consumers, and some of those consumers are folks that have never actually ever signed up for Netflix. Some of them are folks that were members for us for a period of time, and they decided to cancel for a variety of reasons. Some of those are folks that are currently watching Netflix, but they're using another paying member's account credentials, right? So those all, I think, represent opportunities For us, because we're bringing a wider range of prices through the ad supported offering a lower consumer facing price. to be able to attract a broader set of members. So that's sort of very consistent with our wide range of pricing and our general goals there. We think that's great for consumers. It's good for us, obviously. And when we run the models and talking to brands, advertisers, to Microsoft, we look at the monetization that is the complement to that sort of subscription part of the ad supported offering. and we're you know quite um optimistic that the sort of unit economics work to make that monetization um sort of equal or maybe even better than what we would see on the comparable side for the for the you know non-ad subscription only kind of plans so we think that this is again you know expansive uh from a from a member reach perspective but also um you know neutral to positive on the unit economics and monetization so that's great for us for you know obviously from a business perspective
spk05: And should we be thinking about this as a single tier essentially below the basic plan?
spk04: I would say over a period of time, you know, we think that this is sort of one of the dimensions that will inform sort of our plan structure. And we, you know, and we've, I would say generally are thinking of, you know, going from our good, better, best model that has been sort of, you know, the core offering that we've had into making that, you know, slightly more complicated because we're going to have more Um, sort of discrimination features that, you know, that, that would inform, uh, what, you know, um, offering, uh, consumers ultimately choose to get to. So will it be a little bit more complexity there and ads? No ads will be one of those dimensions, but we want to work into that model. And obviously, you know, while we're. thinking about, you know, sort of the right pricing model there. We also want to keep it as simple as we can from a consumer facing perspective. So in terms of the on ramp, the plan selection, how upsells happen, we want to sort of, you know, work those flows iteratively over time. So we build into that complexity without making, you know, an overwhelming for consumers. Sure.
spk05: Okay. And you talked about advertising monetization essentially helping you know, close the gap perhaps with current arm or getting above that level? How long, how do you think about timing and perhaps how long it could take to get to kind of current arm levels on the add tier?
spk04: I think about the timing more as sort of how we roll this out and how we sort of build more subscribers on those ad-supported offerings. So a component of this is countries. So obviously, we're launching first in the countries that have sort of the more mature ad markets. And we feel more confident in the ad monetization. Then we'll sort of explore next tiers of countries over time. So that's a dimension of growth. But I would say the initial response that we're getting from a brand and advertiser perspective is quite strong. So we feel quite confident that as we sort of grow into this and we have more subscribers over time on these plans, that at least initially the unit economics are going to be quite good. So we don't sort of see this as sort of, you know, building, you know, in that call it CPM side so much more as that we're actually building the total amount of volume on those plans and then the total amount of revenue. And again, you know, this is going to start small relative to our total revenue mix, but we think we can grow it to be substantial over a period of time.
spk02: I think that's key, Doug, is that this is going to build over time. It's not like all of a sudden all folks on ad-free Netflix are going to join advertising Netflix. And so supply-demand I think probably works in our favor between both geography as well as opening up the aperture to our members.
spk05: Okay. You talked in the letter certainly about the ad product is having the potential and likelihood to drive overall member growth and then certainly overall profitability. But Spence, maybe you could talk a little bit about what it means for margins and some of the puts and takes there versus the current business.
spk02: I'd say overall, Doug, these are, you know, this is our focus is as we've talked about, you know, these initiatives across paid sharing as well as advertising as ways to better monetize our viewing and grow members. As Greg said, you know, advertising as an example, it can do both. And we believe we can do this both in a revenue accretive way as well as a profit accretive way. As we roll out a solution for paid sharing, that probably has a more near-term impact once we get to a solution that works and there's not a lot of incremental changes. expense to that and then on the advertising side you know we we have some obviously some incremental costs that go against that business but as greg said there's incremental revenue we believe at the unit economic level so we think we can manage that um pretty to a um you know an operating income neutral to positive pretty soon out of the gate so but it's a it's a slower build over multiple years to have a material impact on the business but our focus across 2023 and 2024 is to build up to kind of return to a more accelerated revenue trajectory for the business.
spk05: Okay. Along those lines, there's been a lot of discussion around that Netflix needs to renegotiate deals perhaps with content providers to monetize through advertising. But also a lot of your viewing clearly comes through original content. Maybe you can help us understand what needs to be done on the licensing side and how to think about some of those incremental costs.
spk03: So Doug, today- Yeah, today, the vast majority of what people watch on Netflix, we can include in the ad supported tier today. So there's some things that don't, that we're in conversation with the studios on. But if we launch the product today, the members in the ad tier would have a great experience. And we will clear some additional content, but certainly not all of it. So we're looking, but we don't think it's a material hold back to the business.
spk02: It's certainly a nice-to-have, Doug, but it's not a must-have. As Ted says, we can launch today without any additional content clearance rights. And, you know, hopefully we can supplement that, but we'll be disciplined in what we do. Yeah. Got it.
spk05: Okay. Why did you choose Microsoft over other potential ad partners?
spk04: You know, at some basic levels, they've got the technical components we need. They've got the go-to-market components we need. They met a bunch of sort of fundamental, what I characterize as table stakes pieces, which is a strong commitment to privacy, data protection, because there were things that we cared a lot about and were fundamental to us. But I would say, you know, beyond those things, it was really what I mentioned before, which is that we saw a high degree of strategic alignment in their interest in innovating in this space and really working with us over the next several years to basically try and create a new ads ecosystem around premium TV, connected TV ads. And so both from the consumer perspective, because that's really important. And I think we've seen this sort of long arc of advertising towards very pro consumer. Let's make advertising part of the quality of the experience. rather than detracting from it, as well as having a really, you know, strong brand and advertiser kind of focus on what do they need to support their goals from there. And so, you know, we saw that as being, you know, a lot of alignment out of that. And we're just excited to sort of work with them iteratively on making that happen.
spk05: And is it fair to think that there are some significant guaranteed revenue commitments here over the next few years?
spk04: I would say we're not going to go into the specifics of any of the terms of the deal.
spk05: Okay. I'll try one more. I'm not sure what I'll get, but Microsoft, look, is the deal, can this be broader and can it be a more strategic partnership beyond advertising? Can it involve elements of cloud, gaming, perhaps other things over time?
spk04: Yeah, so a couple things there. First of all, we picked Microsoft as our ads partner because we think they're going to be great as an ads partner. So that was really the criteria that was used to inform how we thought about the choice. You mentioned cloud. We're super excited about Amazon and our partnership with them, and we haven't changed that relationship. We haven't changed our focus on AWS as essentially our cloud infrastructure partner. there. So we also have, you know, we've done other stuff with Microsoft. We continue to do work with them, you know, on sort of go-to-market partnerships, things like that. We'll look for those opportunities as they exist with Microsoft and with other companies, you know, as well. So I would say, you know, this doesn't foreclose on anything like that, but you should think about this as this was about, you know, a great ads partnership deal at the end of the day.
spk05: Okay. Great. So let's shift gears, talk about account sharing a little bit. You put out a blog post yesterday kind of expanding your efforts to monetize account sharing in LATAM across five new markets, but a slightly different implementation than in the first three countries that you announced in March. Just curious what you've learned here early on over these last few months and just how you're thinking about these different implementations going forward.
spk04: Yeah, first of all, it's excited to I'm excited to get to the stage. You know, we've been sort of working behind the scenes, you know, for almost two years and building the technical capabilities to get this stuff rolled out. And now we actually get to put something in front of consumers and see how they react. And this is sort of where the rubber meets the road. So we've got the two models, as you expressed, you know, essentially both of them are similar in that they ask questions. consumers not to stop sharing so much, but just to pay a little bit more for different forms of sharing. And the first model that we deployed, it's pay a little bit more to add a member and share with those additional members. The second model we're trying is pay a little bit more to add an additional home and share the account with the additional homes. So, you know, really at this point, we'll sort of see, you know, what works for consumers. That's obviously the reason we're trying these different approaches is to learn more. We're learning a lot every day on a daily basis at this point in time based on what we've deployed. And I would say while it's early, you know, to call it, obviously we just, you know, are getting going on the second approach, so we'll learn more from that. I would say we're tracking quite well to, you know, sort of the plan that we had in place and, you know, I am increasingly confident, you know, that based on what we're seeing that we'll have something that we can deploy next year as we were planning.
spk05: Okay. And can you talk about some of the technology that you're using here just to ensure that you're not limiting access for, you know, legitimately paying members who are traveling or perhaps away from home, you know, whether that's IP addresses or device ID or other things?
spk04: Yeah, and one of the reasons, you know, we've been working on this quite some time is because we were building those capacities in the background. So, you know, and these are mostly technical implementations that understand through a variety of network signals and stuff, you know, what is happening. But then, you know, it's sort of putting it through the lens of the consumer-facing model. And so in each of these two approaches have, you know, slightly different characteristics, but generally we're trying to lean into, you know, a consumer-friendly model that supports, you know, legitimate use cases. Travel is a good example of that. Personal device use, using your mobile phone as you go around the world, your PC, things like that. So supporting those legitimate use cases, but also making sure that we're doing a good job at getting paid as a business when we're delivering entertainment to folks outside that household or that home in a way that is reasonable, where we're asking for a little bit of extra monetization to make that happen, make it a smooth transition as we can for users, and really trying to balance that sort of very consumer, pro-consumer, consumer choice model with what we think are practical considerations as a business. Those approaches are different, and that's obviously why we're trying these different things to figure out sort of which is going to work better in managing that balance point.
spk05: Okay. And timing here, I think you said, is also 2023. Do you need to have account sharing and kind of lining up with the advertising to your rollout? Are there some benefits in doing that, or is it not kind of strategically important to you?
spk04: You know, we're pursuing both independently because we think that there's value to the business and value to consumers, frankly, especially on the ads plan with a wide range of prices. So we're pursuing them independently now. There's a great, you know, synergy that happens when, you know, as we think about on sharing and page sharing, you know, part of this is being able to offer to a range of folks who may be borrowing Netflix because they didn't quite see as much value from the entertainment and the viewing to sort of motivate getting their own plan. That's part of that segment. Part of the segment, you know, we just have to encourage them and push them and nudge them to get to that point. But part of what's great about ads is that obviously we get to give folks that are seeing a little bit less value a lower price and be able to convince more of them to sign up through that ads plan.
spk05: Okay. Ted, we're going to talk about content. I promise. All right. So maybe you can talk a little bit about how content performed in 2Q and how you're thinking about it into the back half. Stranger Things, you know, obviously your best English series debut of all time, Stranger Things 4, but go ahead.
spk03: Yeah, look, I think these titles continue to hit new heights, which is really, you know, fascinating. fantastic that we can still be doing this back to back and delivering hits on top of hits. And I think that really belongs to the content teams that do such a phenomenal job around the world. Bella Bajaria, who heads that TV group, and they keep surpassing records like we have been able to do with Stranger Things and Bridgerton and Squid Game. And our biggest hits have all come out in the last 12 months, which is a really kind of a phenomenal sign of progress. Scott Stuber and his film team, really killing it again. I'm going to call back to the Friday release of gray man. Cause I think it's a unbelievable proof point of what kind of films that this, this team can put out. I think that this is, and again, this is kind of back to back to back where I think gray man will join red notice and Adam project to be, and don't look up as among the most popular movies of the year. Not just on Netflix, but period. And I think that really is a testimony to these teams and the teams around the world that, working great with creators to create a platform for them to do the best work of their lives. So we've been really pleased with the output. We've been pleased with the performance. 35 of our original shows are nominated for Emmys this year, which says a lot about the work that's coming out, including three best drama nominees, which happen to be among our most watched shows on Netflix ever. So the fact that they could be crowd pleasing and award winning is a pretty tough and pretty gratifying combination.
spk02: And to kind of toot Ted and the team's horn, driving engagement, which is really the North Star driving viewing, because then we can drive member growth and monetization around it. And as we referenced in the letter, using the U.S. market as an example, Nielsen is going to be reporting later this week 7.7% screen time share for Netflix, which is the highest we've ever been, which is, again, testament to the team and the quality and engagement of what they're delivering.
spk05: All right. Hopefully they won't mind that you gave that number a little early. Okay. Let's go back to Gray Man for a minute. Ted, how are you approaching the marketing differently, perhaps for this title versus some of the other big movies that you've had in the past?
spk03: Well, I think you've seen a lot of it out there. I think we've done, based on the marketability of the projects themselves, this is why our marketing spend is a bit lumpy, because really you're trying to focus on the titles that mean a lot to our members and that create a lot of excitement and conversation around the world. Gray Man is certainly one of those movies that's going to attract a very broad audience. So you'll see the marketing spend out there pretty aggressively. I would think I want to point out Marianne Lee, our new CMO, is doing a phenomenal job. She came from inside of Netflix. She was running the U.S. She hit the ground running with that remarkable Stranger Things campaign. I think our best campaign to date, one of the strongest marketing campaigns I've ever seen. uh and she's in there back to straight up with gray man so i think these campaigns are really doing a ton to bolster conversation around the world around these projects uh so it's not not enough just to watch but also to get your friends to watch with you too uh so it helps uh bring bring folks along in the conversation so with stranger things for um
spk05: You know, your best English series debut of all time, which we talked about. Are there ways that you can leverage that record breaking viewing to drive engagement with other shows and learnings that you can take to build out additional franchise content?
spk03: Yeah, look, I think that time spent is such an engagement is such an important metric because the time spent on Netflix means you come in and you're exposed to everything else we're doing as well. And Greg and the product team did such a phenomenal job of audience matching to put the most relevant thing in front of you when you come to Netflix that you're bound to be exposed to something you're going to love. You also see it in the kind of that targeted post-play mechanism. So once you get through that last episode and you're getting that one second of anxiety about what am I going to watch next, you've got a couple of great choices in front of you. And folks use that tool all the time to find the next great thing to watch on Netflix. So it's a pretty great audience where I think it's rewarded in that the more you watch, the more you'll find great things. So I think... We get a stranger things that really pays off. We get a gray man that really pays off. We just got to do that constantly, Doug. The idea is, is that not only can we deliver on that, but people should expect it back to back.
spk05: And Ted, how do you balance out driving both that high quality content and the significant scale? Because you're clearly releasing a lot of content on an annual basis. Does anything change in your process around content going forward?
spk03: Look, I think the focus on quality has always been there and it's intensified as competition's intensified. So I think we've got to really focus on working tightly with the great, I think the output of great content is generally the result of a thousand great decisions. And the most important one is the creator that you're working with. And picking people who really want to win for the audience and working with our teams to create great TV shows that can go on for multiple seasons or great movies that spawn sequels or just great content that comes in and lives through its life and its episodes and makes people feel great. So I do think that the focus on quality and the thing that I've always said from the beginning is scale. Scale is the thing that we're going to do that no one else has ever done yet. And the way that we're doing it today is that kind of distributed decision making among the teams, the decision making on the ground in country for our teams making original content is what enables this thing to scale. If it all bottlenecked behind one or two or three decision makers in California, we wouldn't be able to do what we're doing today for sure. Okay.
spk05: So to support that content, you know, you've talked in the past about kind of the $17 to $18 billion spending for this year. Spence, if you can update kind of how you're thinking about it for 22. And, you know, as we talk to investors, there's probably about half of them that actually want Content spending to come down some and to be kind of reined in a little bit and then the other half wants that to continue to grow and find more hits and go more globally.
spk03: Um, have one more and have one less. Have one more welcome to our life.
spk05: I hear you.
spk02: How do you think about that content spending going forward? Well, sure, I can take it. And maybe, Ted, you chime in. As you said, we're expecting to spend on cash content, spend about $17 billion this year, Doug. As we look forward, 2023, next couple few years, say we're probably in about the right zip code. So we've come through the a pretty big business transition for us and the most cash intensive um you know portion of that transition over the last five ten years where we moved to original um netflix originals predominantly in producing our own content largely so about You know, 60% of our content assets on the balance sheet are produced content. So that's been a pretty big transition. We've come through that. And then also, you know, cash content spends a little bit choppy. So we went through a bit of that COVID wave. We were coming out of COVID. We got into production when we could as quickly as we could on some things, including when talent was available. So that pulled forward some cash content spend in 21 and 22. So I'd say just generally when we look at the next couple few years, we'll be probably right around in that zip code, which puts us in a good place. It also, as we said, we were trying to work through moderating our growth in content expense or content expense will continue to grow, but it's more moderated as we adjusted for the growth in our revenue. And we think we've gotten a lot smarter over the last decade or so being in the originals business as to where we can direct our spend for most impact, highest impact, and highest satisfaction for our members. So that's about roughly how we're thinking about it. I don't know who that makes happy, by the way. I don't know if it makes either one of them happy. Just half of them.
spk03: I would say, look, we spent the way we spent to get to where we are today. And we think that we're about in the right zip code. And like Spence said, that COVID distortion in the last two years are going to make it a little murky. But in general, I think that we're kind of in the right zip code. I agree.
spk01: Doug, just to give you a sense, we have about time for two more questions. But Reid, I think you want to add something.
spk00: Ted, maybe just talk about Stranger Things 4 as an example. How much did COVID inflate the production costs in your view?
spk03: Well, that particular show was probably affected as much as any because of the young cast and the size and scope of the production and the multiple locations we shot in. So it was a very expensive burden on the show to make sure that we could deliver it. You know, one of the catalysts of splitting the season in half was how long it took to produce that show. And a lot of that was stalled because of early shutdown of the production and restarting production and being extremely careful with the cast of the show early on in COVID. So it was more financially impacted than a lot of our other projects were. But again, I think if you did it all again, it took that off the top, you might even get a couple of extra episodes out of it.
spk02: And more broadly, maybe, Reed, as a way to think about it, is throughout COVID, we were at various times 5% to 10% of our overall spend was kind of COVID-related costs. It started higher, worked down lower. So on these kind of numbers, that's significant. And it's obviously much smaller now. But that was a big kind of drag on our overall efficiency of spend.
spk03: Yeah, and that wasn't an overall 5% across all productions. Some of them impacted a lot more than others. Exactly.
spk05: Okay, I want to make sure we talk about operating margins and, of course, free cash flow. So operating margins, Spence, I think you're talking about 19 to 20% for this year, but X restructuring. And then also, I think the FX changes from January when those numbers were first provided. So maybe you can just provide a little more context there.
spk02: Yeah. So, so, uh, we, when we, um, we had our call, we basically are holding to our margin guidance. So at the beginning of the year on the Q4 21 call, so as we start launched and started this year, We said we already saw kind of slowing revenue growth, and we said given the slowing revenue growth, we're going to maintain or we're going to manage to a 19% to 20% operating margin before any impact of major swings in FX. And that's what we're still holding to. So this year we've got the FX moves, and we also mentioned the $150 million of restructuring. We're not expecting more restructuring costs throughout the year, so that's what's baked into it. And we're holding to our margin guide and similarly holding to it for 23. So basically, we're saying until we reignite revenue growth, we're holding flat to that margin guide. overall underlying very healthy operating metrics. And when you look at the revenue side, we're tracking it was 13% constant currency revenue growth this quarter. We're guiding at 12% next quarter. You can see the read-throughs in a similar range for the full year and to 19% to 20% operating margins for this year and next. But obviously, the strengthening of the US dollar is a is a major outlier. And we just need to kind of work through that and operate our, you know, as, you know, as best we can on what we can control in the meantime.
spk05: Okay. And on free cash flow. So 2022, really your first year of sustainable kind of strong free cash flow, you're talking about a billion dollars or so for the year. How are you thinking about some of the key puts and takes around that? And what does substantial growth mean in 2023?
spk02: Well, it'll be more than the roughly a billion. So again, the numbers we provided are, again, assuming no major additional kind of big swings in FX. So hopefully we've seen most of that given the extraordinary moves in the last three to six months, more than we've seen in the last 20 years. But as you say, we're guiding to a billion plus or minus a few hundred million of positive free cash flow in 22. We think that'll continue to grow substantially next year. It's a combination of what we said before. We're through that kind of cash-intensive transition of our business. We're also operating about kind of roughly similar levels of cash content spend next year as this year. In fact, as we said, we pulled forward a little bit of cash spend into 21-22. So those things are kind of working in our favor as we continue to scale the business. So I don't want to put a specific number out there, but assume it'll be kind of meaningfully more. And then obviously, as we kind of work through what we expect to do in terms of accelerating our revenue growth and then start ramping up operating margins again, and hopefully there's a little bit of reversion on these various global currencies, all those things accelerate cash flow generation down the road.
spk05: Okay. And then we just want to maybe close out with what content each of you are most excited about in the back half. And I don't know if it's Gray Man for everybody or not, but I'm sure there's a lot of other good things.
spk03: Well, Gray Man has a recency advantage for sure because it's coming on this Friday and it is mind-blowing.
spk01: I'll go with another recency. For me, Doug, I'm super excited for Knives Out 2. I've heard great things from our content executives on that one. So definitely anticipating that one for me.
spk04: Spencer, you beat me to the punch there. I'm going to go Knives Out 2, but I'll flip back to what I'm currently watching, which is Umbrella Academy, which is a great current season.
spk02: I'll jump in and let Reid close it out. I've been going through Stranger Things to catch up. I just finished that, and I am really looking forward to Extraordinary Attorney Wu. I'm hearing great things from everyone throughout the hallways, and I'm excited to watch it soon.
spk00: I'm going to be in trouble because we just watched Michael Pollan about hallucinogenics and a great documentary series.
spk03: Changing your mind. Thanks. Thanks a lot, Doug. Hey, billions of people around the world love streaming TV and film, and we only serve a few hundred million of them. So the opportunity for growth here is enormous. We have some headwinds right now and we are navigating through them. Remember, this company and this team has navigated through a lot of change in the last 20 plus years. We've seen entertainment formats come and go. We've seen entertainment business models come and go. And we have managed to grow through all of them, through all kinds of economic conditions and through all levels of competition. So we're super confident that as long as we make the films and the TV series and the games that people love, we're going to continue to lead this exciting and young industry. Thanks a lot, Doug.
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