Hello, and welcome to the Netflix Q4 2021 Earnings Interview. I'm Spencer Wang, 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 Neumann. Our interviewer this quarter is Nidhi Gupta from Fidelity. As a reminder, we'll be making forward-looking statements and actual results may vary. Nidhi, over to you now to kick off the Q&A.
Thank you, Spencer. Good to be with you all again. Great to see all the new content over the quarter. I've been a little less productive, so I think I can blame you all for that. As usual, I'd like to start with net adds during the quarter, which came in a little bit lighter than you expected. Just help us understand the underperformance there?
Nidhi, 8.3 million versus 8.5 million. I mean, you know, that's incredibly accurate.
On 222 million.
In fairness, Nidhi said it was a little shy, so I'll take it, Nidhi. As you said, we delivered. You know, first we're quite pleased with how the quarter played out. We delivered 8.3 million paid net adds, so it was just a bit shy, about 0.1% on that, on roughly 222 million paying members. You know, overall we're quite pleased with how our titles performed. We had big viewing. We started the quarter with Squid Game becoming a global phenomenon, and we ended the quarter in December with big TV series like the finale of La Casa de Papel, a big returning show in The Witcher, our two biggest movie releases of all time.
Overall, the business was healthy, retention was strong, churn was down, viewing was up. On the margin, we just, we didn't grow acquisition quite as fast as we would've liked to see. On our large subscriber base, a small change in acquisition can have a pretty big flow-through in paid net adds. Again, our acquisition was growing, just not growing quite as fast as we were perhaps hoping or forecasting.
Great. As we look ahead to Q1, you know, the guidance was a bit below kind of what was expected and what you've done in previous Q1s. Maybe just help us understand what some of the key considerations were that went into the guidance. You know, does it raise any concerns for you about anything structural, you know, whether it's competition or saturation or, you know, does it give you any pause in terms of sort of your return on content spend?
Sure. No, no structural change in the business that we see. What's reflected in the guidance, we guided to 2.5 million paid net adds in Q1, and what's reflected there is pretty much the same trends we saw in Q4. Healthy retention with churn down, healthy viewing and engagement with viewing up, and acquisition just, you know, growing but a bit slower than pre-COVID levels, just hasn't fully recovered. You know, we're trying to pinpoint what that is. It's tough to say exactly why our acquisition hasn't you know, kind of recovered to pre-COVID levels. It's probably a bit of just overall COVID overhang that's still happening after two years of a global pandemic that we're still, unfortunately, not fully out of.
Some macroeconomic strain in some parts of the world, like Latin America in particular. You know, while we can't pinpoint it or point a straight line when we look at the data on a competitive impact, there may be some kind of more on the marginal kinda side of our growth, some impact from competition, but which again, we just don't see it specifically. Overall that's what's reflected in the guide. I'd say our big titles are also landing, at least our known big titles, a little bit later in the quarter with season two of Bridgerton in March, The Adam Project also in March.
I should note we also, while we are taking, you know, changing prices in countries every quarter, in Q1 of this year, it happens to be our largest country as we announced last week, and actually our largest region with Canada as well. That's probably a little bit more impact than a typical quarter.
Nidhi, you're right to reflect on, you know, two years ago we were 10 million above plan, which was a shock. You know, last year we were 10 million below, you know, or 9 million. You know, the pull forward sort of, you know, makes it hard to read. You know, in the prior years we were very steady, so we could have confidence on incremental trends. As Spence said, you know, when we reflect of course, you know, "Hey, that's a low guide," you know, and we think it'll be accurate. It's not sandbagged at all on kind of what's going on. You know, there's a number of, you know, potential explanations in COVID, but then we worry about hanging too much on that.
You know, there's more competition than there's ever been, but, you know, we've had Hulu and Amazon for 14 years, so doesn't feel like any qualitative change there. Overall, confidence in streaming becomes all of entertainment. You know, linear dissipates over, you know, the next 10-20 years. Very high confidence in that thesis 'cause everyone's coming into streaming. Like market size, very large. Our execution, you know, is steady and getting better. For now we're just like, you know, staying calm and, you know, trying to figure out. Again, the COVID has introduced so much noise, it just wants us to give it some pause and as we work on everything we've always worked on.
Just to reiterate, I'd say, you know, we took a, you know, a big bet years ago that people would move onto Netflix and Netflix-type offerings to consume movies and film. That was a big, big bet that we've seen continue to go through. We have no change in our confidence in that. I think what's really been great about 2021, even through all those conditions, we were able to kind of prove out two other thesis that we've bet on starting years ago. One big one around our investment in international programming. You know, glad that we started that seven years ago with "Club de Cuervos." Now, you know, we were betting that you could take films and series from anywhere in the world and entertain the entire world. We were, you know, getting more, bigger and bigger milestones against that goal.
Now we have proven to have kind of global sensations from France with "Lupin," from Spain with "La Casa de Papel" and "Elite." Then in the biggest way possible in 2021 with "Squid Game," which has become our biggest series ever, and it is unapologetically and perfectly Korean. It's not built to be this kind of global thing. It's proving that great storytelling from anywhere in the world can entertain the world. Our other big bet was our investment in big budget feature films, and our bet that we could effectively release them and compete with big theatrical releases for audience and for attention. "Red Notice," this year of course, and "Don't Look Up" have become our number one and number two most watched movies ever on Netflix.
If you look at the hours put, you know, that we publish out, you could do the math and back into it, they may be the most watched movies anywhere in the world this year. I think those two bets coming true, it kinda strengthens our confidence in the overall bet, in the service and pleasing customers and leaning into consumer first business models, that we could succeed there.
Yeah, no, I think that's part of the question, right? I mean, this was probably the best content quarter you've had. Looking at sort of flattish subs versus previous Q4s, obviously a great number, but it's kind of in line with what you've done the last few Q4s. What do you read from that? Is the customers sort of hurdle just higher in terms of, you know, the amount and quality of content that you need to deliver to get the same number of net adds?
I think, you know, as Spence was saying, you know, we didn't see it get a hit to our engagement, we didn't see a hit to retention, all those things that would classically lead you to looking at competition, but it's a stew of all of those things. You know, not only are we in a pandemic, we've kind of come in and out of COVID at different levels in 2021, particularly the back half of 2021. So it's created a lot of bumpiness certainly, and not steady linear growth, which makes it a little tougher to predict. All the fundamentals of the business are pretty solid.
Got it. You know, you announced a U.S. price increase last week. Maybe just help us understand kind of over what timeframe you think this will flow through, what kind of churn you might expect?
Yeah. I'd say you can anticipate it flowing through over the next, you know, quarter, the quarter that we're in right now, Q1. You know, we largely are seeing in the price changes that we've done most recently and for the earliest indications that we have in the U.S. which we are, you know, still premature because we actually haven't, you know, actually rolled it out to any customers yet.
What we've seen over the last couple years, which, you know, is that sort of core theory that we have, that if we've, you know, done a good job investing, you know, the members' subscription fees that they paid us into, you know, better stories, more great storytelling, bigger movies, more variety, then, when we come back and ask them occasionally for a little bit more to keep that sort of cycle going, then they're generally willing to do that, and we don't see any significant disruption to the business otherwise in that regard.
I would say, you know, generally when we look at that sort of core theory and we look at also the competitors, you know, if you look at Disney+ as an example, but other streaming services out there as well, and their ability to grow, even as we've been growing as well, I think it's really strong endorsement for the core idea that consumers around the world are willing to pay for great entertainment, and it encourages us to continue that investment, and to try and deliver more entertainment value and earn, you know, more of that share.
Yeah, no, it's a good point about your streaming competitors and, you know, when I look at sort of your steady price increases in the U.S., it doesn't seem like you feel too constrained by where those competitors are priced. Is that a true statement? I guess as long as your viewing share is sort of, you know, multiples of any other streaming service in the U.S., should we think about your price relative to cable actually as we sort of think about your runway? Not that you'll get there overnight, but as we think about your runway, is that really sort of the comparison we should be thinking about as opposed to other streaming services?
Yeah. We don't have you know, an a priori sort of price target in any given country that we're tracking to. Mostly we're listening to our members and sort of iteratively doing this walk where the metrics that we see in terms of engagement and churn and acquisition, and those kind of things are really you know, our signal that we've done a good job at sort of creating this more value, and it's the right time to ask for a little bit more to keep that going. I you know, you know, to the previous comments around competition and things like that, we don't think that you know, it's immediately replaceable or substitutable good, let's say, right?
If we have incredible stories, you know, movies that you can only see on Netflix, great TV shows, unscripted, now games coming, then that really, you know, the value equation for a given member to be in a market is just, you know, are they getting good value for what they're paying? As long as we do a good job there, we feel like we're fulfilling that need.
Great. You also made a price change in India in the other direction. Maybe just help us understand what you're trying to achieve with that price change.
Yeah. I think it follows a whole set of activities that we've been doing in India over the years that we've been operating there and learning more about Indian consumers' tastes, et cetera. That's broadening the offering in the service across many different dimensions. It's obviously at the core is the content and the programming and seeking to expand that and provide a increased variety and range of programming that appeals and is attractive to more people in India. While we're thinking about go-to-market and the partnerships that we have, and making sure that we're available with those partners, you know, at that place where you know more people in India will find us. You know, it gets to payments and you know many things.
When we looked at it and we saw sort of the sum total of all those activities, we felt it was the right time to decrease our prices there, to increase accessibility to all of that sort of, you know, those incremental, you know, value or features that we've been trying to deliver to the market to more Indian consumers. We also wanted to do it, not just like we did with mobile, which is, you know, a good lower entry price point, but do it across the range of plans that we had under the theory that some of those features, like the ability to watch on TV, you know, with the basic plan, really unlocks more value in the service.
Therefore it would create, you know, more retention, more attractiveness to those plan types for those Indian consumers. Again, we're doing this through the lens of what's the long-term sort of revenue maximization, our best guess at that, you know, that exchange. In this case, we're, you know, basically anticipate that while we decrease, you know, ARM, average revenue per member as a result of the price decreases, we're going to make it up in more subscriber adds. I would say it's still very early in looking at India and some of these effects, like retention. It takes a couple months to get a very clean read on it. The early data that we are seeing very much supports a positive, you know, read on that lens of revenue maximization through these changes.
Nidhi, as you well know, but not all viewers might, what's unique about India is cable is about $3 per month per household. Radically different pricing than the rest of the world which does impact consumer expectations.
Right. If this approach doesn't give you the desired result, and it sounds like it is so far, but if, you know, fast-forward six months or 12 months from now, it isn't giving you the desired result, would you consider sort of right-sizing your content spend in India or, you know, maybe consider an ad-supported model? I guess, in other words, how hard do you wanna push for India? Are there examples of success you see either in the media industry or outside of it that, you know, give you the confidence that you can make money in this market long term?
You know, I think it would be a long time before we adjusted materially because in our experience in Brazil, you know, was brutal for the first couple of years. We thought we'd never break even. You know, we've got this great business and then, Greg , why don't you talk about the experience in Japan?
Yeah. It's when you used the word brutal and my mind went back to that, and obviously it's a different country, different characteristics in terms of affluence and things like that. It took us quite a while to, you know, unlock all of these components, product market fit, get the right content, all these different pieces. Then once you get that sort of flywheel spinning, you know, it's been an incredible market for us and a source of tremendous growth in membership and revenue in the region. I think we're quite bullish that India isn't fundamentally different in some, you know, way that we can't figure out how to tailor, you know, our service offering to be attractive to Indian consumers who love entertainment. We know that for sure.
That I think gives us a lot of optimism just to continue to work away at it.
You know, I would just add.
The great news is.
Oh, sorry, go ahead, Reed.
The great news is in every single other major market, we've got the flywheel spinning. The thing that frustrates us is you know, why haven't we been as successful in India? We're definitely leaning in there. Go ahead.
There wasn't an easy one in the bunch. Well, that's kinda what I was gonna say, like what Ted touched on. Like, for as much as we have what we believe is a terrific business and terrific business model that scales so well with content that can be created anywhere and travel everywhere, and you see that with our, you know, more than 222 million paying members around the world, it's also super hard. It's hard in every country, and every country's on a different adoption curve and we talk about product market fit, but it's, you know, even though everyone loves film and TV and even games, it is very specific, and entertainment is still fundamentally pretty local around the world. It's global and local, and we need to figure that out.
That is actually a good thing about our business is that it scales well, but it's also super difficult, otherwise, it'd be really easy for everybody to replicate it.
It seemed going into producing original content in India being pretty almost impossible when we first started looking at it. Then this quarter alone, we've got original content coming out from Turkey. We're in production in Russia, from Argentina, from Mexico, from Sweden, from Denmark. We've got original content coming from all corners of the world. We have 20 originals coming out of Korea this year. The idea that they invested in this early and have built up on it, and that it really is gonna be something that it's going to start to. We think it will start flowering in India for all the same reasons, a good product market fit, content people love, value that fits with their life, and product they can't live without.
I'll triple down on that point as well, Teddy, 'cause we're still learning even now as we have these incredible stories from all these different places around the world, how to bring them to that global audience in increasingly effective ways. You know, it's simple things, obviously, like subtitling and dubbing, and we've you know subtitled you know 7 billion runtime minutes in 2021 and dubbed 5 million runtime minutes. But at that scale, we're learning actually how to do that better and how to make that localization more compelling to our members. But it also gets to even like things that you wouldn't even anticipate, like just how you present these titles in an emotionally evocative way.
You know, we describe a story maybe as nostalgic or eerie, and that means something to us, but you can't just literally translate that. You have to find out in every culture and language around the world what is that similarly emotionally evocative descriptor that is gonna, you know, communicate really easily and quickly what a story means. There's just so much work and incredibly fascinating things that we're learning about how to do that every day.
In many of those places where we built that out, there was zero infrastructure for subtitling and dubbing.
Well, speaking of content that travels well, you know, South Korea, as you mentioned, Ted, has been a really bright spot for you.
Yeah.
As you said, you're launching over 20 new shows there this year. What are sort of the unique factors that drove your success in South Korea? More importantly, you know, what do you think the adoption curve can look like here relative to maybe what you've seen in other markets?
I'd say first and foremost, we've developed over the years an incredible team in South Korea that has worked with the talent community that recognized the storytelling that really works in Korea, that didn't try to make a difference so it would travel, but really tried to find all the things about Korean cinema and Korean drama and build them up in a way that people could see kinda new levels of production value. It's not like we had to go in and teach anyone in South Korea how to make great content. It's an incredible market for that. There's always been curiosity around the world. The K-drama market has always had little pockets of success all over the place.
I think the ease of delivery that we've offered has kind of pushed that into the mainstream. Yes, there was this kind of a turning point with Parasite and Bong Joon-h o's Oscar last year to kinda open up people's minds to it. We saw that even way before that with Okja, working with Director Bong, that there was this incredible storytelling culture that we could tap into, and that people would love K-dramas and watch them all over the world. It just wasn't that easy to find them. At Netflix, we've been able to kinda put together the great storytelling and great delivery and a great value proposition that has grown the watching of Korean content in the U.S. to numbers I would have never believed three years ago.
100% growth in 2021 over 2020.
Will we get a second season of Squid Game?
Absolutely. The Squid Game universe has just begun.
Great. Looking forward to that. Shifting gears to Latin America, you know, this region feels like it's maturing at a lower level of penetration than you've seen in the U.S. Is that due to competition, affordability, account sharing, or something else? Or maybe you disagree with the statement that it's actually maturing. Help us understand if there's anything you can do differently to sort of drive penetration levels there higher.
Well, first I just wouldn't necessarily read through that it's maturing faster, Nidhi. I mean, it. You know, again, I just don't wanna understate the impact of what we've been going through for the last two years, and then Latin America in particular has been more strained. It's had less, you know, kinda government funding and subsidization relative to many parts of the world to kinda fuel their economy. On top of that, you know, we also continued to increase prices in that market last year across some big countries for us, Mexico, Brazil, Argentina. Between macroeconomic factors and, you know, and general strain, you know, business is still growing there.
We grew by about 2.5 million members last year, so under the kind of pre-COVID growth rates, but still growing. It is a market where pay TV is healthy. Folks love film and TV. I think there's a long runway of growth there. It's also been a great market for us for Spanish language content that we're creating for the rest of the world. You know, we don't see a need to change strategy, and others can chime in. We continue, like we talked about with India, we're getting better everywhere every year. We're getting better with our local content in Brazil and Mexico and so forth. There's a lot more to come, but it's not a fundamental change in strategy.
Agreed.
That makes sense. Maybe just stepping back, you know, you've talked about 800 million-900 million homes globally outside of China. That's sort of your TAM. You know, your, call it, 25% penetrated into that. As you're seeing how various markets are playing out in terms of penetration levels, some higher, some lower, obviously they're all still growing, has your thought process changed at all on, you know, how many of these 800 million-900 million homes you can have ultimately or, you know, sort of the timeframe to get there, whether, you know, whether it's higher than you expected or lower than you expected? And how might you actually evolve your content strategy or your pricing strategy to get the next 200 million subscribers?
You know, I'd say, Nidhi, on that pay TV comparison, you know, we look at it, we're in the U.S., you know, at about 2/3 of the pay TV high water mark. You know, the back third is definitely gonna be harder than the first 2/3 In terms of appealing, you know, more unscripted, more superhero, and you know, we're working on all of that. Because we don't have sports and news, you know, you might say, "Well, you know, if we get to 80% or something of pay TV, that's a good accomplishment." Also, you know, streaming TV is such a better experience than the old linear TV.
We, you know, in some ways, we think to ourself we should be higher than pay TV, a combination of lower pricing and better experience. You know, it's definitely frustrating for us, the current slower growth. It's why, you know, it could well be kind of just COVID effects.
You know, it could be as you're, you know, pushing on smaller market than we thought, but I'm not sure why. You know, we try to be really rigorous of, you know, thinking about the long term. It's possible that we'll get there, but slower than we thought, you know, smart TV adoption, you know, complexity, those kinds of things. You know, we're still focused on the original thesis of, you know, if we become incredibly compelling, everyone's gonna wanna be, you know, so a Netflix member.
Mm-hmm.
I know it feels like we've been saying it for a long time, but it's early days.
Mm-hmm.
It really is. I think about the evolving value proposition and how it's still maturing. The idea that, you know, big-ticket movies that people really care about premiering and being part of your Netflix subscription, is actually taking the value proposition to a new level than it was just a couple of years ago. I do think, like I said, it's a dynamic market for sure. It may not be as, you know, as steady as people can think about it in terms of we're gonna add X number every month, every quarter, every week. There's no question that that's the direction the business is going in.
Yeah. Yeah. Ted, that's a good segue to where I wanted to go next. You had an incredible lineup of films in Q4 with a lot of viewing. I'm curious, what did having a strong film slate in the quarter do for you relative to periods where you didn't have that? You know, did you see more aggregate engagement, lower churn, more conversation? Just, you know.
What was sort of unique about delighting your customers with a film versus a show in terms of kinda the benefits that you see?
Yeah. There's a big theory which is that people differently value movies because they always have to pay for it. You know, you have to buy a movie ticket, you have to buy a pay-per-view transaction or a DVD. There's always a kind of transactional, and a pretty big one for some people to see a big movie premiere in your home. There was this kinda temporary effect that some other folks were doing. It's in our premium model to premiere our big movies on the service.
I think people, well, even if you really watch mostly television, you have a movie night, and we can service you on movie night, and I think that's a very big, important value proposition that we have that's different from everybody else. That these are the movies that people really love and care about. You start seeing them at the scale of Don't Look Up and Red Notice in Q4, and it gets you just super excited as to what could be next when, you know, what's coming next. For that, we have things like The Adam Project coming up with Ryan Reynolds and Shawn Levy directed, coming up in Q1.
It's a phenomenal movie for the whole family, with big action movie from the Russo brothers, like Gray Man with Ryan Gosling, Knives Out 2 and Enola Holmes 2. We have this movie lineup that any one studio would kill for, any one season. We've got new movies every week on Netflix, and they're big movies that people care about. We think once that expectation is set and we keep delivering on it, people will react to that too.
Great.
Nidhi, I just add that it's at the core what our members love and what they tell us they love is a great variety of high-quality content, and that means across TV, film, and hopefully games over time in a much broader way. Films, having a great film offering is for us a key part of that equation. I think we're just starting to fulfill more and more of that, you know, our member kinda needs and wants and satisfaction. That's what we're seeing. It's not like it's just so differential than something else. It's part of that overall quality and variety of entertainment offering.
I also think it differentially serves people watching together. It's much easier to watch a movie together than to make sure you're all tracking on the same episode every week if you travel or whatever you do. That kind of together experience, well, we can deliver on every weekend on Netflix. It's pretty great. I think about even just in the upcoming quarter alone, you know, Spence talked about variety. Everyone has very different taste, so any one movie is only gonna serve a segment of the audience. Now you get big, exciting thing like Don't Look Up and Red Notice, you can get to a big chunk of the base, but you're still only getting to about 60%.
To serve everyone, you have to have a big variety of output. It does seem like a lot of volume, but it's not all for you. In Q1 alone, we have The Adam Project I mentioned. We have Munich from Germany. Texas Chainsaw Massacre, which is kind of a reinvention of that franchise. Tall Girl 2, which is a sequel to one of our big YA rom-coms. Home Team with Kevin James. Judd Apatow's new movie, The Bubble. That's all in Q1. And plus, you know, original local language films from all over the world as well. To meet the kind of variety of taste, we're able to really step up and deliver no matter what that taste is.
Yeah. That makes sense. Reed, you talked on the Q3 call about sort of, you know, over time building out the whole experience of games, consumer products, live events, et cetera, around some of your IP. It obviously starts with great IP and great storytelling, but what else do you have to get right operationally and strategically to really build a franchise? Do you feel like you have the pieces in place now?
You know, we're building those muscles steadily with our consumer products, both like the "Squid Game" tracksuits, and then we're making a big push on experiences that are mobile and portable and we can set them up quickly and developing that muscle. Obviously, the gaming muscle we're very young on and building. If you think of a world in a few years where you know those are strong muscles, and then you think of the next "Bridgerton" or "Squid Game" coming through, that's when we hope to be able to really pull those pieces together. You know, the people talk about franchise like it's, you know, zero or one, but of course, there's a complete continuum that will add value in the short term, you know, to our various titles.
We're doing that already through the consumer products world and having people feel a bigger connection to those big franchises. It's already working, but it's probably, I don't know, 20% of what it will be in a couple years in terms of the auxiliary boost beyond just the title.
Yeah. I'd say on that continuum, Reed, you've got "Stranger Things," which I'd say is as valuable a franchise as exists today in entertainment around the world. We certainly have things that are in the early stages of becoming a franchise, like "Bridgerton," which we launch our second season of this, our second most popular show ever, in Q1. This year you'll see an origin story on Queen Charlotte and these incredible "Bridgerton" live experiences around the country and around the world that fans will flock to and flood their social media feeds with. There's consumer products that go along with that as well.
It's all those kind of makings of a franchise, instead of tapping into one that's been building for 50 years, can you build it from whole cloth? I think "Stranger Things" is a proof point that you can.
We touched on gaming a little bit. You know, it's very exciting to see some worldwide launches during the quarter. Greg, I know it's early days, but what has sort of the reception and engagement been from the subscriber base, and what have your learnings been as well?
Yeah, as you say, it's tremendously exciting to get to this point because we basically have been building the plumbing and all the technical infrastructure just to get to the point where we can do this, which is consistently launch games globally, you know, to all of our members. It's great to do that. Now, as you point out, we're now really getting to learn from all those games. You know, what are the discovery patterns? What are the engagement patterns? How are they performing? What do our members want from games on the service? It's still very early days, but generally what we're seeing is, you know, not surprisingly, we have a growing number of monthly active users, daily active users on these games. We're generally seeing good growth in that regard.
Really, you know, as we're doing this, we've been building in parallel what I'm super excited about it, which is this sort of internal development capacity, our own game studio. We've been hiring some incredible talent that brings a you know a set of experience to this process. We've done an acquisition in this space, and that now allows us to you know incrementally gradually over a period of time get to that sort of you know the value that you and Reed were talking about, where we get to deliver now interactive experiences that are tied to the IP that we're excited about, that are timed with it. That I think is really when you're gonna see a next level of unlock around the value we can deliver to members.
You know, given that gamers tend to sort of consolidate their time around a smaller number of titles compared to video, where, you know, we tend to consume a wider variety of content, would it be more efficient to sort of buy your way into some well-known titles to sort of anchor the product? You know, just the last couple of weeks, we've obviously seen a couple of major companies make big acquisitions or at least announce big acquisitions because this is obviously something that's difficult to build organically. I'm just curious what your reaction to that is and, you know, why isn't Netflix participating in big acquisitions given your aspirations in gaming?
Well, I mean, it was exciting to see the activity in the space, and I think to some degree it's an endorsement of, you know, the core thesis that we have around subscription being a great model to connect, you know, consumers around the world with games and game experiences. And we, you know, we're open to licensing, accessing large game IP that, you know, people will recognize. And I think you'll see some of that happen over, you know, the year to come. But we also see, back to Ted's like building out of whole cloth and the ability to sort of take the franchises or the big titles, let's call it, that we are excited about and actually develop interactive experiences that are connected to those. We see a huge, you know, long-term, multi-year opportunity in that too.
You know, we're very open. We're gonna be experimental and try a bunch of things. I would say the eyes that we have on the long-term prize really center more around our ability to create properties that are connected to the universes, the characters, the stories that we're building in other places and sort of magnify that value for the fans of those stories.
Hey, Nidhi, we have time for two more questions.
Okay. Maybe, Reed, just a bigger picture question for you, and Spencer, I might have more than a couple questions. You know, you have this global subscription product that's inside sort of, you know, hundreds of millions of households around the world, and you've, you know, really nailed 2D lean back content. There's this, you know, whole world of interactive or semi-interactive content, whether it's gaming or fitness or education, and at the more extreme end there's VR content, and now everyone's talking about the metaverse. You know, you've obviously already gotten going on gaming, but as you look at sort of this broad spectrum of content, you know, how much of it do you wanna sort of wrap your subscription around thinking about the long term?
You know, when you say how much do you want to, you know, that would be a high number. But you know, we have to be differentially great at it. You know, there's no point of just being in it. That's very dilutive of the whole proposition. It took us several years to get great at English original series, and you saw in the letter on the Google search trends how well we did there. You know, we built with a lot of effort, you know, a really strong film franchise, and that's, you know. Ted calls it just the third inning, you know. It's like we're really just getting going to what we think we're gonna be able to do there. Of course, we've got all the international content. We've got unscripted, documentaries.
You know, gaming, which, you know, initially we're focused on the mobile gaming's a big one. I would say, you know, when mobile gaming is world leading, and we're some of the best producers, and, you know, like where we are in film today, you know, two of the top 10 for our gaming, then you should ask, "Okay, what's next?" 'Cause we're definitely crawl, walk, run, and like let's nail the thing, and not just be in it for the sake of being in it or for a press release, but, you know, we gotta please our members by having the absolute best in the category. You know, and Ted and Greg have been doing a terrific job on that, and, you know, we'll just continue to work on that.
Queue it up for that, when we're winning in games, then we'll take the question.
Great. Spence, just turning over to you on margins. Does the guidance for a lower level of margin, and you know gave a lot of explanation around that in the letter, but outside of sort of the FX impact, does it have more to do with some of these incremental investments we're talking about, like games and perhaps consumer products, or does it have more to do with sort of the lower level of revenue growth that you're expecting?
No. It's really just FX, Nidhi. As we said in the letter, you know, we lost about $1 billion of expected revenue in 2022 through FX. That's about 2 points of margin. If you just kinda look at our guide and add that back on, we're right on our pace of adding about 3 points of margin per year. Can't forget we were over-delivering on margin the last couple of years. That's really all that's happening here. The FX move happened in really the last six months of last year. What we've always said is we don't wanna swing the business unnecessarily fast. We wanna be able to invest in a healthy way into our growth opportunities.
Over time, we will then rightsize our, appropriately, our investment levels, our cost structure, our pricing in order to rightsize for where, you know, the currencies are coming in, and so this gives us some time to do it. It gives us a little time. We will catch back up. We're still committed to roughly 3, you know, 3 points of margin increase over any few year period, but there's no change there, and we've been factoring in our content investment, our games investment all along. I just wanna say in our growth too, you know, we talk a lot about this deceleration. Obviously, we'd like to grow faster, but there's still very healthy growth in this business. You know, what you're seeing in
You know, we ended the year last year with 19% growth year over year. You see in the guide is 10% revenue growth for Q1, but that's a bit misleading again because of FX. You know, there's about 4 points of drag in our revenue in Q1. So what I would argue FX-adjusted constant currency for Q1 year over year is about 14% growth. It's also a tough comp year over year in Q1, 'cause you may remember we increased prices in the U.S. in Q4 of 2020, which flowed through to Q1 of 2021 is when it really materialized. So the year-over-year comp is tough. So the underlying organic revenue growth in the business is right now, at least in Q1, more like 15% +, 15%, 16%, 17%.
That's now at least just in the quarter, you know, that's still very healthy underlying growth in the business. I don't wanna dismiss that. We'd love to be growing faster. We'd love to not have the negative FX swings, but it's still very healthy growth in the business.
Great.
Nidhi, since it's your last earnings interview, I will grant you one extra question.
Thank you.
You get that.
I have one last question. This will be the last one, but it's also for Spence. You know, it's very exciting that you'll become sustainably free cash flow positive this year. Congratulations on reaching this milestone. I feel like I've been waiting 10 years to ask this question, but how will you balance M&A and buybacks with your free cash flow? Maybe sort of related to that, have we peaked in terms of that ratio of cash content spend to amortization, and how long will it take for earnings and free cash flow to kind of converge?
Can't believe you wanted to end with me, Nidhi. There's so many more exciting people to speak with on the call. We appreciate what you said there. It is a big milestone for us to be cash flow positive going forward. We're excited for that. The business model has been proving out, so that's great in terms of our increasing profits, profit margins over time, as well as cash. In terms of use of cash, and Spencer you can chime in too, but as we've talked about in prior calls, our top priority is to be, you know, responsible stewards of the business and our cash, but to invest in the healthy growth of our business and strategically invest in the business. First organically. If there's then opportunistically M&A, that.
M&A is not the strategy for us per se. M&A is a tactic to accelerate our strategy, whether it's to accelerate our content capabilities and capacity, or just acquisition of IP, like deals across film, TV, and games, as you've seen. You know, what's left over after that, we're not going to sit on excess cash, as we've said. Our capital allocation plan is as it's been, which is to have roughly two months of revenue in the form of cash on our balance sheet, and excess beyond that, we'll return to shareholders opportunistically as we have done. We did that to the tune of about $600 million last year in share repurchase, and we're authorized up to $5 billion share repurchase. That's still our plan.
In terms of when those ratios converge and earnings and cash flow look the same, I don't want to put a prediction out there. We're still very much in growth mode as a business, so it will continue to converge over time. I don't want to declare a specific peak. It's been going in the right direction over a multi-year period, and it'll continue to do so.
The only thing I would add to that, Nidhi, is just on the capital allocation part, just to remind you, our balance sheet target is for gross debt of about $10 billion-$15 billion. We ended the quarter slightly above the $15 billion mark. As we said in the letter, we will be paying down about $700 million in Q1. Obviously, delevering a bit is something you should anticipate in terms of use of cash. Then just lastly, on the EPS free cash flow question, I just want to remind you, there are some below the line items like the non-cash remeasurement of our euro bonds that, you know, can skew EPS in any sort of given quarter. Just a call out there. Thank you for your questions.
I'm going to turn it over to Ted now for his closing remarks and to take us home.
Nidhi, thank you so much for these, and thank you for today. The love of film and TV and games has built big businesses for people who can figure out what people love, build a creative environment that creators know how to feed it, and then deliver it to fans with a value proposition that they appreciate. I think those fans are positively moving from old linear models and transactional models to more fan friendly subscription services that are with high quality programming delivered well with great value. That's absolutely happening, and it's happening all over the world. The pace of the migration may be a little hard to call from time to time when there are kind of varied global events or even local conditions, but it's absolutely happening.
There's no question of that. Films that you love and series that you define yourself by and games that thrill you, that's a pretty great business. We're thrilled to be in it. We're also planning to continue to improve what we have, what we're doing, and to grow this by growing revenue, by growing profits, and by growing audience affinity around the world.
Once again, Nidhi, if I could see you in person, I'd give you this. I've got two of them. Where's the other one?
Ted, I found one for you.
Thank you, Nidhi.