Okay. Good afternoon, everybody. Quick disclosure: Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear as a handout available in the registration area and on the Morgan Stanley public website. Really excited to welcome back to the conference, Netflix, and specifically Spencer Neumann, CFO. Spence, good to see you. Thanks for coming.
Good to see you, Ben. Good to be here.
Thanks for coming.
Thanks for having me.
Absolutely.
So many cheers from the audience.
I heard a faint cheer, I think. So you guys just, you know, not too long ago, I guess, wrapped up 2023, with first year under the co-CEO structure of Ted and Greg. What's that transition been? What's that been like? What's changed at the company with the new leadership team?
Yeah, you know, it's, it's a kind of a boring answer because, not much has changed. It really was a continuation. You know, when Reed... part of Reed's amazing kind of strength and foresight is really kind of wanting to build a, a, a company that is last beyond any individual person or people or leader, including himself. So you know, we started working on the transition a few years ago, starting with, you know, when, when Ted went to co-CEO and Greg as COO, and so, really kind of building that kind of trust and kind of operating rhythm. And so he had been handing off more and more of the day-to-day operating activity to them for, for a couple of years, and then it just felt quite natural. So the biggest thing is probably just a new boss for me.
Got it. We don't see that structure a lot, especially in public, you know, large public companies.
Yeah.
Is there something unique about Netflix that's making it work for you guys?
Well, you know, I think it can work in a number of places. I mean, I think you can all think of your own examples, but for us, you know, it really boils down to having folks that are, you know, aligned in terms of our mission and objective of what we're trying to achieve. So that shared kind of responsibility and belief in what we're trying to build as a company, and we're trying to, you know, entertain the world as a company. It's that trust and respect that they have for each other. And, you know, when you have that strategic alignment, when you have that trust, it can work well.
You know, it doesn't mean they agree on every single thing in the beginning, but they have that ability as a relationship to kind of work through it and lead together, and then it gives them a whole bunch of capacity to be in two, literally two places at once and cover multiple things. So for us, it works. I'm sure it doesn't work for everybody, but it's working well for us.
Yes, you mentioned sort of the shared mission across-
Yeah
... the team, and Netflix has been coming to this conference for many years, and I was thinking back, 10 years ago, it was a $4 billion, 40 million subscriber or member company, and you're on your way to 300 million members and a $40 billion business, at least those are our estimates. So is it mission accomplished, or how do you guys think about what's ahead for Netflix from here? What's the opportunity as you think about it?
We are just getting started, Ben. We are just getting started.
Right.
Now, seriously, we're small on every measure. So every way we look at it, we're less than 10% of view share in every country in which we operate, and that's just a pretty small slice of the entertainment pie. We're, you know, a little over 5% of the revenue opportunity, which we see as a $600 billion+ revenue opportunity in the areas in which we play today. And, you know, in terms of just our kind of member growth, there's hundreds of millions of connected TV homes around the world that where we have not went out still at this point, kind of won our way into those homes and won them over. So we've got a bunch of paths to grow.
It's why, we're looking to, you know, expand in every part of our business in terms of getting better. So we stay very focused on getting better at film and TV every day. You know, more great both scripted and unscripted shows and films that people love, expanding our offering into more big games and live. And so we honestly, we're still kind of just getting started in terms of really bringing more joy and satisfaction to people's homes, being that first choice of entertainment, and if we think we do that well and keep getting better at improving our service faster than the competition, we've got a really long runway for growth, revenue, profit, and cash flow over time.
When I typically think about how that translates into financial growth, at least I think of you guys talking about, you know, double-digit revenue growth, margin expansion over time. Is that sort of how investors should frame the financial algorithm from success for you guys?
Yeah. I mean, we're very focused on healthy... We talked about it in our last earnings letter, and we've talked about it consistently. We wanna deliver healthy revenue growth. If we do that well, we believe we can continue to increase our margins every year. Some years will be a little bit more, a little bit less in terms of the pace of margin expansion, and then drive healthy free cash flow. But again, it all starts with delivering more entertainment value to our members. When we do that, then we have the ability to drive that growth across all those levers, and that's why we're so focused on continuing to improve that entertainment offering.
I think when you first joined Netflix, we had held a meeting back in New York, with you and a lot of analysts and investors, and I think the question then was: Where can long-term margins-
Yeah
... go for the business? You raised margins this year before you even reported a quarter for 2040-
Yeah
- estimates. What are the sort of short-term and long-term levers that we should all be thinking about as we think about the margin potential for Netflix?
Look, I think that the core business has the potential to be a really powerful business model if you kind of really step back. So, we're trying to deliver this, you know, amazing collection of entertainment around the world. We deal with a primarily subscription revenue business that's now being buttressed by what we believe will be a bigger and bigger advertising revenue and profit pool. But that subscription model is our primary revenue piece, and then with a content model that is so diversified to kind of satisfy such a broad range of tastes and moods and cultures around the world.
So we're telling stories in all these countries, you know, first for big local impact, but then all those stories have some level of ability to travel, either to multiple countries or across a region, or in the case of, like, Squid Game, around the world. So that creates also a content model that has kind of great leverage to that model as well. So the combination of those two things creates a pretty good level of visibility for a business. So you get to kind of the point about kind of increasing margin guidance before we started the year. If we're, you know, executing well, we have a look. You know, pretty good forward visibility.
It's not perfect, but pretty good given the nature of the business, and one that, because of that content model, we think we can drive operating leverage in basically every aspect of our business. So that's kind of how we think about it, and then we're always balancing. We're optimizing for the long term, so we're trying to manage to optimize long-term revenue growth and to build our business for kind of long-term durability because we want to be the most loved and most valued entertainment company in the world. That's what we're trying to do. We're a long way from where we are to where we want to be.
When I say we're just getting started, so we're trying to always kind of manage, you know, responsibly for the short term, while building for the long term, and we think we can do that through that combination of, you know, focusing on those things, delivering that healthy revenue growth, and steadily increasing margins.
Great. I want to get into some of the, the sort of drivers of the business in more detail, but before-
Sure
... I do that, I think about a year ago, you guys really sort of started implementing paid sharing.
Yeah.
And I know you're sort of saying it's in the business now, so maybe not a lot to look forward to in terms of new analysis or disclosure from you guys on that front. But how would you sort of assess how Netflix has done with paid sharing thus far? And are you still working to improve from here?
Yeah. You know, as you said, you know, we've been working on this for a while. Any kind of change like this that we bring to our members, we want to be very thoughtful, considered in how we roll it out. It's why we intentionally staged the rollout, it's why we tested a bunch along the way, and we tried to bring, in a thoughtful way, value to our members as we were doing this. So things like being able to transfer profile or the Extra Member opportunity, which is now enjoyed by, you know, millions and millions of folks who have Extra Members or managed devices. So there's a value proposition that comes with this, along with obviously delivering more entertainment value over the years.
So as we've done that, we've been, you know, as Greg's talked about it on recent earnings calls, we've been enforcing on more and more of these kind of member use cases, borrower use cases, borrower populations, and we're getting to the point where it really is just a part of the business, so it's tougher and tougher to tease out. Obviously, it was one of the drivers of our strong growth in Q4, but there was also very healthy, we call kind of organic growth in the business as well. And now, as we look forward, it's about. It's really just part of how we operate. It's, you know, we're very good at optimizing, as we go across all aspects of our business, and this is another one where we view it as, you know.
Again, it starts with delivering more and more value to our members, and then once we do that, we now have a better opportunity to monetize that value and get paid for all that viewing we're generating. It's, I think we talked about it as a better monetization engine going forward.
Got it. Okay, well, that makes sense. So in the shareholder letter, you highlighted, kind of four big areas of opportunity in 2024.
Yeah.
I wanted to sort of frame our conversation around that. Improve the core product, broaden into new verticals, scale advertising, and then deepen connection with fans. Why don't we start with the core? You guys spend ±$17 billion a year on content, and at least the way I think about your business, the return on that spend is probably the most important driver of value for the company over the long term. As you think about optimizing return on content spend, you know, how, how well do you think you guys do that today, and is there an opportunity for that to get better over the next several years?
Yeah. You know, we hope to always be getting better. So it's a bit of an art and a science, right? So it's a little tough in a subscription model with a, you know, a single entertainment bundle to have a precise kind of ROI on a specific genre or title of content spend. So we have a lot of ways to triangulate on it, but it starts with top-down. I mean, we're managing our business with that healthy revenue and margin growth. So we can kind of...
It's a bit of an output in terms of how much are we willing to spend on content, and then and where do we think we can allocate those dollars for highest impact, where we see opportunities for growth around the world, where we see content genres, where we may be underrepresented relative to the opportunity. And then there's the bottoms up, which is at kind of that title level or genre level, how is that content performing? And we're constantly iterating as we go. Every day, every month, every quarter, every year, we're learning in terms of where we're allocating that spend and where we're getting the best impact. Ultimately, we're trying to drive the business for kind of that steady improvement in acquisition and retention, and you know, member satisfaction and have more impact per dollar spent.
So yeah, we think we're getting better at it every year, but there's also still a lot to learn.
... Where is that incremental dollar going? Are there parts of your content portfolio that you're not at scale yet, whether you think about movies or TV shows, English language, foreign?
Yeah, so I mean, it gets back to kind of what we said before, where we're just getting started. So, it's hard to think of areas where we're truly, like, you know, you try to solve for what's steady state scale. I mean, we're not really... There's not much that's at steady state in our business.
Yeah.
I'd say the closest we are is like English language scripted television series, because we've been at it the longest. So we're probably closest from, like, say, a volume perspective, let's say, but it's not perfect there. We, again, we still learn every year. But then once you get past that, almost every area of content has opportunity to grow. So games is a simple example. I mean, we're literally just getting started in games, right?
Yeah.
But if you think about unscripted, five years ago, we weren't really in English language unscripted content, and now it's a pretty big part of our programming. It's much smaller in many parts of the world outside of the U.S., so that's growing. Non-English programming, generally, I mean, I think we just had our first Indonesia original a few months ago, Cigarette Girls. So there's whole countries where we're still building out our kind of branded programming presence in scripted series. Animation is still pretty early for us. We had a nice success with Leo last quarter, but then we've got, you know, a new partnership, as you know as well, with Skydance. So there's a lot that we—I think seven of the largest streaming titles ever since Nielsen's been measuring are animated films.
So it's obviously a big category. Those aren't ours, by the way. So we've still got a long ways to go to continue to build our performance in animated films. There's a lot we're excited about. Basically, every category has opportunity to grow and get better.
When I think about your long-term growth and also where you're so differentiated, Spence, I think about, you know, international growth driving the business and also international local originals. A lot of us look at the English language slate and look for that to be the driver of the business.
Yeah.
So you report these shows in your letter, and we're like: "I never heard of any of these shows," and you're delivering such strong results. Is there a way for you to give us a sense of scale and impact from foreign language or local originals from outside the US that are driving Netflix?
Well, for us, it's a big part of our business. I mean, it really comes back to our strategy. We wanna be that first choice in entertainment. We wanna be that first choice in entertainment around the world. So as of the last quarter, we were at 260 million plus paying members. We talked about the fact that if you assume, you know, at least two folks in every home, which is probably a conservative assumption, that means we're entertaining over half a billion folks around the world and growing. So to do that, we're satisfying a ton of tastes and cultures and mood states, and to deliver on that, part of that is local storytelling. There's it doesn't make sense that Hollywood content corners kind of the best stories around the world.
So we love Hollywood content, but we also love all that other content and all those other storytellers and creators around the world. So it's a big part of our proposition to kind of satisfy our members. And so it's... When we talk about non-English content or local content, it starts with having that big local impact. You know, we wanna tell authentic stories from every place around the world, and as I said, they occasionally travel, and then they have varying degrees to which they, they travel. So it's, it's a big part of the entertainment experience for us. If we're gonna be that big part of a, that much a part of people's lives and entertainment experience, it has to be both local and global.
You know, to kind of put a specific point on it, we have this Engagement report now that we release twice a year.
Mm-hmm.
We had our first one a few months ago, and you can see in that of our total view hours, about 30% of it is not English. So it's a big part of our viewing around the world.
Yeah. No, that's helpful context. Speaking of engagement, you know, Neil, you guys often include the Nielsen Gauge metrics in your letter.
Yeah.
Again, speaking to the opportunity you still have ahead of you, I do get the question a lot from investors, whether engagement is growing-
Yeah
... on Netflix. Can you talk at all about the trends in engagement around the business?
Yeah. Yeah, we've. So our engagement is growing. It, I mean, if you kind of look at the couple year arc, using that same Nielsen data, you know, we've gone from about, call it, roughly 6.5% of TV view share, up to the kind of 8%-9% share, depending on the month. So over the last couple of years, it's been growing. Most recently, it's been flatter, and when you kind of see the data, and we tried to signal that as we were rolling out paid sharing.
Yeah.
Because when we do that and when we're enforcing on borrowers, obviously there are folks that were viewing Netflix, and counting in that view share for Nielsen that are no longer able to access Netflix. So thankfully, we've converted a lot of those folks into paying members, but some folks can't enjoy Netflix right now, so that has an impact. But overall, the trends are, are healthy. If you kind of tease out our, what we call our owner population from the borrowers, that viewing is, is, is quite healthy. And so the goal is for us to kind of work through that kind of initial rounds of enforcement of paid sharing, which we've been doing the last few quarters.
Mm-hmm.
Now that we're operationalizing it, we would hope, again, I don't have the exact timing, but we would hope we get to the point where we then have established that new base and we grow off of that new base of viewing, so it should be more transparent in the external reporting.
I think it's easy and comforting for investors to think about price increases being supported by a growing engagement. Do you need engagement to grow, to implement price increases? How important is it to the pricing power of the business?
Well, you know, the engagement, it does all start with engagement. So I don't wanna... Now, I talked about what is a bit of a shorter term, medium-term dynamic for us because of paid sharing. But over long-term trends, we do want to deliver more and more engagement because... engagement is a sign of, it is a sign of. Now, it's not just quantity of engagement, but it's quality of engagement as well. But when you have more engagement and more high-quality engagement, people stay longer, which tends to be... I mean, there's two key metrics in our business: of acquisition and retention. When they stay longer, there's more retention.
Frankly, they're also, when they're enjoying more, they're talking about it more with their friends, with their family, and that's the conversation, and it's the fandom, and that drives acquisition. So those really feed on each other. So it not only drives the core acquisition, retention kind of metrics over time, it also, as you say, it's a sign of the value we're delivering, you know, both but it's quality and quantity of engagement. When we're doing that, that's value that we can occasionally increase prices, ask for a little bit more from our members.
And then obviously, with an advertising revenue stream, it's also engagement that we can provide that we can provide an advertising opportunity into for brands, because we tend, you know, as you also know, revenue tends to follow ad dollars tend to follow engagement over time. So almost every kind of value metric in terms of driving the business forward, it does start with engagement and driving higher quality and more engagement over time.
Got it. Okay. Maybe just last thing on the core. I want to ask about the film business and film strategy at Netflix.
Yeah.
It's, you know, it's evolved over time. You guys have ramped up your volumes quite a bit. Tell us how you're feeling about the return on investment in the film business and also the recent management changes with Scott leaving and Dan taking over, you know, what we might expect different, if anything, from the film business.
Yeah. Well, generally, I feel really good about the film business. I mean, it's, you know, in terms of returns, we talked about just before here, it's very difficult to ascribe a specific ROI on a specific genre of content or title of content in our subscription bundle. But film has been a great. It's come a long way for us, and give a lot of credit to Scott for what he built over the last years in terms of the quality and level of talent that we work with.
You know, we had big breakout hits across both live action film, you know, most recently, even like, you know, the film The Mother was a big one in my household, Leave the World Behind, and then animated film like Leo, last quarter, I mentioned. So, you know, we've come a long way. We just I think we have 19 Oscar-nominated films, you know, for next week, so we'll see how we do. But the film business has come a long way. It's been a nice success for us. It's a return, if you will, in terms of investment, is very similar to our other content categories. It's a very important element of the entertainment that we deliver to our members and the value we deliver to our members.
I think with Dan, you know, it's, it's all about kinda we're excited to take it to the next level. Just like everything we do, we're trying to continuously improve, so we're gonna build from there. Excited for, you know, what Dan's gonna bring. It's not a change in strategy per se. You know, we're, we're just continuing to kinda evolve and get better, and Dan brings this amazing experience from everything from, like, LEGO movies to Sherlock Holmes movies, to It horror films. Like, he's got production experience in big companies. He's been entrepreneurial in what he's done in the last, you know, couple handfuls of years.
So I think he's just gonna bring another perspective, and, you know, this business is so much about working with the best creatives, you know, the best people internally and externally, having great process, and we're really excited to have him be part of the team and take us to that next level.
Great. Okay, let's shift gears to some of these new verticals you guys are focused on. I want to start with games.
Yeah.
I think it's been maybe a little over two years.
Yeah
... since you guys got into that. How would you say the business is doing relative to what you hoped when you started putting capital work here two years ago?
So, you know, again, we're really pleased with where we are, but it's super early days. I think, you know, and I don't know why-
Being a theme here.
I don't know. Sometimes I feel guilty saying it, but we did say it right out of the gates. Like we said, "Hey, building the games business is gonna be for the next decade of growth.
Yeah.
We're two years in, so yeah, we're really pleased. In these first two years, I think we've put 90 games on service. We tripled our engagement, our members engaging with games. Last year, we had a really nice kinda exit to the year with GTA Trilogy. Those were our most kind of successful to date in terms of engagement and gameplay, and so we're learning a bunch as we go. It's just, it's still really small, right? So, our expectation and aspiration is to grow engagement multiples of the current size over the next few years, to bring bigger and bigger, more bigger, bigger games to our service, more compelling games to our service.
We're seeing that our members love to engage not just with Netflix intellectual property, but also with kind of big games IP like GTA. So I think you'll see more of both of those things. We've got a Squid Game game coming later this year, so we're fired up about that. You know, and we also see at this kind of small level, the ability for the business to get stronger because of the games on our service, in terms of like when folks are engaging with games, they retain better incrementally to if they're not engaging with games regularly on the service. So we have to figure out a way to continue to scale that. And if we do, that's adding more, obviously more and more value to the subscription bundle, which is then good for our business.
And what we saw with GTA also, which was nice, was not just incremental retention, but some incremental acquisition. So that it bodes well for what can be over time as we keep building the business. But it's a many-year build.
The GTA success was super interesting, I think, for a lot of reasons. How should we think about the benefits to the business from third-party games versus your own? And do you expect to sort of lean in more now to third party now that you've had this success?
... I you know I think the benefits are I think similar. It's not you know again what I mentioned is like we're seeing a small scale of the benefits to retention and over time that we can scale that retention benefit and hopefully even an acquisition benefit. And we see it with you know generally with IP that resonates both Netflix and third party. And I think the mix I don't know if it'll be exactly the same as film and TV. I'm sure it isn't but there are some analogs there. I mean as we built our film and television business it's always a combination of licensed content that was you know What we call unbranded or second run so with other people's originals.
Mm-hmm.
And then, over time, we built into a higher mix of licensed originals and then actually original development through our studio infrastructure around the world and system around the world. So, and I think games will be kind of similar. So we've just started to see some of our internal studios delivering games to the service, so I think licensed games is a big gonna be a big part of our games future for a long time, and probably forever. It's just the mix will change over time, and we'll see.
Okay. Also announced a pretty interesting deal with WWE-
Yeah
... to have Raw on the service and other WWE IP, and a deal that could be a 20-year deal if you guys decide if you want it to be a 20-year deal. Why did that make sense for Netflix?
I'm trying to see if there's wrestling fans in the audience. I can't tell.
There are.
Uh.
There definitely are.
Why did it make sense? You know, the deal, it looked a lot like the characteristics we look for in any kind of large licensed content relationship. So as you say, you know, one, it starts with programming, it's a programming lens, and we felt that this is a type of sports entertainment programming that's gonna work well for our members in many parts of the world. So one, it was, it filled a kind of programming desire-
Mm
... and opportunity for us. Two, just from a kind of economics, you know, is this, do we think that there's a reasonable, again, getting back to how do we think about impact of our dollars spent? And we felt like this had an attractive value opportunity for us in terms of member impact relative to our kind of cost of providing it. And we also had... And at the cost over time, so the fact that we had some level of predictability here, because this kind of we had a long-term security, if you will, up to 20 years, if this is working for us and for WWE, so we like that flexibility. And we did like the, you know, relatively global nature of it.
That's not like all content has to be that way, but for us, if you look at countries in every region, there are certain countries where there's a lot of wrestling fans. So, so we're super excited about it, and it, it also was, you know, as we talked about, one of our strategic areas that we're kind of flexing into as we expand our entertainment offering, it's live programming. And with WWE, there's hundreds of hours of, of live programming events that is kind of appointment viewing each week. So I think we're going to, you know, kind of build our capabilities along with, along with WWE. So we think this is an opportunity to kind of make us better and drive growth for, for, for the WWE.
And what do we take from this, all of us, in thinking about Netflix and other live sports? Is it that if you can check all the boxes you just laid out, other sports might make sense, or what else would you tell us to think through?
Well, right now, we love our position in sports, so I wouldn't look at WWE as any indication of a change in our sports strategy, because it's not. You know, we are—it's right in that sweet spot of sports entertainment for us and what we call our sports shoulder programming, which is around the drama of sports and telling the story behind the sport. And we've done that, you know, for everything from Formula One and then NASCAR to, you know, Full Swing, and we've had certain events. We, you know, we just had Netflix Slam, which was kind of a, we think, an ownable event for us this last weekend. We had Netflix Cup before that in golf. We've got a lot more coming. We've got Sprint, which is around the 100-meter dash around the Olympics.
I'm excited for that one this year. We've got LaLiga coming, which is our first, I think, of this kind of sports entertainment, sports storytelling coming out of Spain later this year. So there's a lot more to come. That works for us. It works for these leagues because it kind of grows the fandom for the leagues and the, and the reach and the audience, and it works for us because our members love the programming. So all that said, as, as you know, Ted said in the past, we're not anti-sports, we're just really pro profit. And so if, if there are elements that make sense for us, we'll always look at it, but for us, we're very comfortable where we are in, in sports today.
Okay, that makes sense. Let's talk advertising.
Yeah.
Another in the radical transparency theme of asking you how you think you've done so far in the advertising role?
You're asking me for grades, you know?
For grades.
How we've done. So in ads, it's, you know, we're again. I'd say we're pleased with the progress. We got a long way to go. So, you know, when we launched from a standing start, we said we were gonna be in this kind of crawl, walk, run evolution with ads. And, you know, we've come a long way in a short period of time, but still lots more to do. So our biggest priority is, one, we wanna scale the business. So, you've seen us doing that. I think, we announced shortly before the last earnings call that we're above 23 million monthly active users.
For our ads tier, we've been growing our ads tier membership from, you know, it's like 100% quarter-over-quarter, then 70%, 70%, so really nice sequential growth. The organic sign-up, which was kind of under 20% of kind of new sign-ups into the ads tier when we launched initially is now, in the last earnings call, we talked about it's a 40% organic sign-up rate. So we are scaling that business in we think a healthy, organic way, and we're gonna keep doing that. We've been doing it through a number of levers, including improving the feature set, working with our partners and distribution partners, and just making it more generally known that we even offer an ads tier, right?
So, and then the second piece is improving the monetization and the capabilities around advertising, so building out the ad sales force, building out some of our tech stack capabilities in parallel with Microsoft as a partner, and bringing kind of more value to our advertisers and brands. So those are really the two dimensions. We've got a lot more work to do, but it is nice and growing. We're gonna grow the business meaningfully this year, our ads business.
It's not, as we talked about in our last earnings call, we don't expect it to be a material driver of our revenue growth this year because there's some other bigger impacts, but we expect it to scale meaningfully and then be, hopefully, a much more meaningful and material driver of our revenue growth in 2025 and 2026 and beyond.
Is this a big area of investment for the company? I know you talked about Xandr and your partnership, but are you trying to bring more tech in-house, and is this a big part of where you're leaning into OpEx in 2024?
It's definitely an area of growth. So, you know, in totality, we manage our business, so, you know, hopefully, you see from our kind of revenue growth guidance and our margin guidance, that we're committed to grow expenses slower than revenue. But there's pockets of the business that are higher growth. Games is one of them, ads capability is another. It's mostly people, people in terms of those go-to-market capabilities. We're in 12 countries around the world where we're selling advertising, we have an ads presence. And also in terms of some of those areas of the tech stack, from the very beginning, we've been kind of working side by side with Xandr and Microsoft in areas where we think we can provide differential value. So it is mostly people, but it is also all in our, in our margin guidance.
It was pretty clear, I think, from the earnings video, that you guys are trying to grow your AVOD sub base quickly-
Yeah
... and probably faster than you can monetize it.
Yeah.
Which is not unusual in the business, but maybe just talk about... Is there, is there any way for us to think about what level of scale you need before the dollars start to catch up with the growth in engagement? Is there some level in, in the U.S. and MAUs or globally that we should be thinking about where it inflects?
Well, it's definitely a focus for us of increasing scale. I don't think there's any bright line.
Yeah.
I think we've talked about a little bit in the past, that there's kind of a range of scale. There's from like, you know, sort of sufficient scale to be kind of meaningful and relevant and where people care about you, and then there's scale where you're the biggest.
Right.
You know, we're trying to, you know, be, you know, in that zone in every market in which we operate, and some we're pretty far from that, and some we're actually kind of getting there. So, and you're gonna see us keep moving in that direction, and we've got a bunch of levers at our disposal. But we... You know, we wanna do it in a way that's healthy for our business. We obviously started ad-free, and we also have markets where we're- you know, the nice thing, the, you know, the positive and the negative is we're in a lot of markets, we've been in there for a long time, we're pretty well penetrated, and we have good retention.
So that creates our own dynamic of how do we, in a healthy way, kind of scale the business, but you see we're finding ways to do it. And we're highly confident that we're on a nice path to get to a meaningful scale in all the markets in which we operate around the world.
Great. Okay, and then lastly, one, you just talked about deepening fan connections, and actually, this is probably not an area that investors tend to ask a lot about-
Mm
... but it's interesting that you guys think it's an interesting opportunity. So you talked about marketing, consumer products, and innovative new live experiences. What does it all mean? And what- if you're successful, what's the impact on the business from these initiatives?
Well, the biggest thing it does, you know, in, for now, is it's driving more fandom. So when we talked about before, that, that kind of great virtuous cycle for our business is if we deliver more and more entertainment value, if we make it easier and easier for folks to discover what they want to watch next, and if we wrap that together with making it more and more relevant in people's lives through that kind of, things like consumer products, experience, et cetera, that, that's just kind of... It's all additive. You know, for, for a long time, film and TV has driven, aspects of culture across food and music and other things. And when the two come together, it's kind of that kind of special sauce.
And, yeah, you see it when you can see it in some of the songs that, you know, kind of rip to the top of the charts with Stranger Things.
Right.
I mean, I hadn't heard that Metallica song in a long time, and all of a sudden, it's top of the charts again. Like, these things happen or just the fact that, like, you know, if you're, you know, in between seasons of, you know, Bridgerton or Queen Charlotte, and all of a sudden you can go to a Bridgerton ball and kind of have that experience, or right now in L.A. to go to the Squid Game trials. You know, we've got the game coming, and then we've got the next season coming. So it's a way to kind of keep some of these titles and, you know, fan experiences kind of alive, kind of always on for, for our members. So right now, it's...
Over time, some of these will become bigger businesses as well, but right now it's part of driving that fandom and driving the core of the business.
Got it. Okay. Shifting to kind of your balance sheet and M&A capital allocation. You guys are, you know, pretty steady eddy, as it goes from free cash flow generation and use of capital, but arguably, you're potentially underlevered. At least some may argue that. I might argue that.
Yeah.
At one time, debt to EBITDA, and your free cash flow looks like it's gonna continue to grow nicely. So, what, how do you think about optimizing, you know, for cost of capital or using your balance sheet in a way that drives the most value over time?
I just like the steady eddy and free cash flow generation, 'cause when I came in in 2019, we were losing over $3 billion in free cash flow, so we were not, not discussing that way.
Right. Exactly.
So, no, it's a nice place to be. It gets back to kind of what we've talked about before, and that streaming is a tough business, but it can be a good business at scale. And I think we're trying to demonstrate that every quarter, every year. We've gotten to this place where we're at a nice scale in terms of revenue, profit, and free cash flow. So look, I view it as our financial policy and capital structure policy is really pretty unchanged in that, you know, the principles are unchanged, which is that we first and foremost invest in the business. And then, with respect to, you know, occasionally, we will do M&A. It's typically been kind of small, bolt-on, kind of strategic accelerators of the business.
And then we return excess cash to shareholders, and we define excess cash as right now we carry about two months of revenue on the balance sheet, so roughly $6 billion. We're a little high right now, which is why we had been stepping up our share repurchase. And that philosophy has served us well over the last handful of years, will continue to be kind of, we think, prudent stewards of capital. We'll probably also be under-levered intentionally, because we think the biggest opportunity we have to deliver increasing value to shareholders is through the growth of the business and growing profits, growing cash flow. The kind of...
You know, so don't expect, at least, you know, anytime in the foreseeable future, for us to do, like, a levered, a repurchase of the business. We don't think that kind of financial engineering is the optimal path for us. It's a highly competitive marketplace, right? Entertainment's very dynamic. We've got a whole range of competitors, from legacy entertainment, to Big Tech, to orthogonal competition from folks like TikTok and others, and we think that balance sheet strength and flexibility is a real asset for us.
Does your M&A screen and sort of what you guys look for and think about change as you get bigger and generate more free cash flow?
Well, we're always looking, but it doesn't really change in that the calculus is the same, which is, are we better off investing that capital into inorganic growth versus building on our own or returning to our shareholders? And in making one of those acquisitions, what is the kind of distraction tax-
Yeah
... of doing so relative to this long runway of growth and opportunity that we see ahead of us in terms of continuing to build into it and improving the service? And most of those transactions, I mean, you all know the history of entertainment, you know, media transactions at scale. I mean, there's a lot more failures than success-
Yeah
... and most of them come with a lot of other either businesses that we're not interested in being in. In the last earnings letter, we talked about the fact that we have no interest in being in kind of linear networks. And many of them come with more employees than we have in our company today, and we, we take that very seriously as well as can we integrate folks and have a kind of a healthy operating culture? So, so far, you know, we look at everything, but we're very choosy, and we think we have the opportunity to be choosy.
Okay. All right, well, the most important question, the last question: What should everybody in this room watch on the flight back east or wherever they're going after the conference is over?
Oh, man, I... It's hard for me to pick one. I'm super, I'm super excited for 3 Body Problem.
Mm.
I don't know if anybody's, you know, read that book and interested in it, but there's just so much. There's a show, The Gentlemen, coming out of the U.K., Guy Ritchie, that I'm super interested in it. For those who were Axel Foley fans. We've got a new Beverly Hills Cop coming later this year. I mentioned all the sports kind of drama behind the sports that are coming. I'm super excited for Sprint. I'm super excited for LaLiga, as we talked about. We've got our new, our first of the animated films coming from our new partnership, they're Spellbound. So we, we've got a lot. We've got some big international, kind of non-English content, like Senna, which is gonna come out of Brazil. Hundred Years of Solitude, also from Latin America.
So anyway, there's a lot to watch, but I'm biased. But, you know, go check it out.
When I think of breadth of content, 3 Body Problem and Beverly Hills Cop-
Yeah
... sums it up.
Love Is Blind: Sweden, come on! I mean, I'd talk about breadth. That's coming out, you know. That came out. Okay. All right, I think we're losing everybody.
Thanks. Thanks so much.
Good to see you, Ben.
Thanks, everybody.