Welcome to the Q1 2015 Netflix earnings call. I'm David Wells, CFO. Today, I'll be joined on the company side by Reed Hastings, our CEO and Ted Sarandos, our Chief Content Officer. Interviewing us will be Mark Mahaney from RBC and Michael Nathanson from MoffettNathanson. I think Mark has the first question.
So over to you, Mark.
Okay. Thanks, David. First question is for Fareed. This was a maybe an inflection point quarter in terms of the domestic streaming sub ads. They came in materially ahead of your guidance.
They were actually up a little bit year over year, which is a bit of a surprise. In the press release, you talked about both getting more subs in and retaining them better maybe than you had expected. Could you provide a little bit more color? And is this something that you think is happening across the industry, the greater focus on streaming offerings is just helping the leader in the market? Or is there something specific that you're doing on both of those ends, the gross sub ads and the churn?
We've continued to focus on the same things over the last couple of years, improving the content, improving the streaming, improving the user interface. And we've seen the rewards of that in continued growth. I think this quarter in particular, we had some amazing original content with Unbreakable Kimmy Schmidt, with House of Cards, with Bloodline. And so all of that compounded to really push us forward. And certainly what you're seeing is all of Internet TV growing.
The attention of the new launches of the competitors is only creating a bigger ecosystem, drawing more and more people into thinking, hey, I got to check that out and try this Internet TV thing.
And Reed, for some time, you've talked about a long term goal of 60,000,000 to 90,000,000 subs. At this pace, sooner or later, the financial markets might actually agree with you. Any updated thinking on where we could fall in that range and when we could get to that?
Well, I'd say they agree with us already. I mean, at a $25,000,000,000 to $30,000,000,000 market cap, there's a lot of growth priced into it, I think you'd agree. And so yes, dollars 60,000,000 to $90,000,000 feels great for us. We're continuing to grow. That's $60,000,000 to $90,000,000 in the U.
S. Market. Of course, the really big upside beyond that is in international. For most global Internet firms, the U. S.
Is 20% to 35% of usage revenue. We're not anywhere close to that yet, but we're continuing to invest in international.
Reed, in the past quarter, we've seen new entrants like HBO NOW and Sony View come out with pricing. That looks pretty expensive relative to Netflix. I wonder, do you think you have a pricing umbrella given where they've launched their products relative to where you guys have priced today?
No, I think HBO at $15 is a great value. I mean, I've traditionally paid more than $15 for my cable company for it. So I think they're doing great work with their premium content. It does create an obvious underlying of just how great the value is of Netflix, with prices ranging from $7.99 to $11.99 But we're really comfortable with that strategy. We're continuing to grow with this strategy And it is an incredible value.
But I think you should really think about it as all the Internet services, HBO NOW and Netflix and Hulu are great values in comparison to the big bundle.
Okay. And David, for the current quarter, can you talk about the trend on churn? I know you guys don't give out churn numbers. But what was the impact of original content on churn this year versus a year ago?
Well, as Reade said, just picking up on those comments, you really do see the improvements in the service, both on the content, the interface, the payments across the globe really moved together. So you see that with acquisition and churn improving, but we did see improving churn. So we are saying that we saw improving retention through the quarter and that contributed to that net add performance and growth that we saw in Q1.
Great. And David, if I can stick on the U. S. Business, last quarter you talked about 30 ish percent margins. 90 days later, we're already materially above that and you're telling people to expect this to be your business to be above that.
So just I know there's some stuff in the press release on it, but any more color on why there's such a pretty material shift in the margins? And to what extent should we just be concerned that you're just pushing content costs in the international markets, so really there's not an improvement in the leverage here in the U. S. Business?
Well, it's both, Mark. So there's absolutely an improvement driven by the growth. We're growing revenue faster than we're growing our expenses. But in terms of the outperformance relative to our target of where we would want to be in terms of U. S.
Margin growth, it's a couple of things that we talked about in the letter. One of them is we're shifting marketing from the U. S. To international. We think it's we can grow a little bit faster on international.
It's more efficient to do that. And the second thing is a little bit of just the mechanics of how we allocate content cost by geography. So by going faster internationally and putting that allocation more towards international, it's going to provide some relief to those global originals and the global projects that we do have that are allocated to the U. S. And we intend to continue to invest in that.
That's also why we put in the letter that our target remains the same, 40% in 2020. So we want to continue to balance the growth of profit with the growth and the competitiveness of our service. We want to reinvest in the service prudently along the way.
So let me ask a 2 part follow on question of that one for David and one for Ted. David, cutting back marketing spend in the U. S. In an increasingly competitive market, some level that feels a little extra risky than it you should be doing. So can you just talk through why you're so confident you don't need to you can cut back on those content spend being more efficient with the content spend being more efficient with original content than with license content.
Do you feel like you've really reached the point that that's what we're seeing in the business model today that you're continuing to see more leverage just that original content purchase?
Yes. I'll take the last question first there. What we're seeing is the dollars invested in our original programming are more efficient in that for every dollar spent, we get more bang for the buck in terms of hours viewed. And hours viewed leads to higher retention, more word-of-mouth and more brand halo. That's why we say that it's turned out to be not just an important strategic investment, but also an efficient
one. And Mark, on your first question about our relative comfort with moving dollars out of the U. S. And into international with just 1 quarter. I would say we've had multiple quarters of strong growth.
Marketing dollars have been up. They've been down. I don't think there's a direct connection within a 1 quarter in terms of the level of marketing spend and the level of growth that we see. We have migrated over the last 2 to 3 years to be more content forward in our marketing, more digital in our marketing. We're getting smarter and more efficient about how we put those dollars to use.
And so, right now, we think there's a greater opportunity with international, and that's what we're doing. We're moving to international spending. Ted, in
the past 6 months, we've seen Viacom and Turner write down the value of acquired syndicated content. Clearly, the value of the content wasn't worth what they're paying. Can you talk a bit about your own usage trends on acquired content? Whether or not you think the long term trend for what you're acquiring will be declining on a per hour basis?
Look, as we continue to grow, the thing that's most encouraging is the content we're licensing around the world has got equal and sometimes even disproportionate value to us outside of the U. S. So what we're seeing real global value from licensing shows in multiple territories. And as we're continuing to grow domestically, we're seeing those viewing hours on license content, even older license content that we saw with Friends last quarter, where the viewing continues to grow. So we're still seeing a lot of value from that programming, both our original and our license programming from all those sources.
And you would expect the price pay going forward will be trending up or down for the acquired?
It's tough to say. Mostly it's a reflection of how many buyers are in the market. So you got a few other people into the market. There's some value in having a larger footprint and being able to bring more value to the franchise for being on Netflix that we get to realize in our negotiations. But I think most of those prices up and down is driven by the number of competitive buyers in the marketplace.
Okay. And then let me ask one for David. You mentioned before on the content spend shift between U. S. And international.
Can you remind us again how you amortize content between domestic and international markets? How do you decide what the allocation rates are between the two geographies?
Sure, Michael. In terms of how we amortize is straight line for originals there's accelerated, how we allocate across countries or territories between the operating segment of domestic and international is based on the relative value of that content. So we use the PwC Media survey to help validate what that content would be worth in that market. And there's pluses and minuses to various types of allocation. We've looked at many types and we think that's the most accurate in terms of ascribing the relative value of content within each market.
And David, Wells, if we have global content, where does the allocation for Poland show up today?
Today, the allocation for Poland is going to be spread across because we haven't yet launched that market. So what's a little bit new for us is we now have clear line of sight that we are launching the rest of the world, which is new relative to the last 6 to 9 months. So we've shifted a bit and you're seeing part of that Poland, if we sign a global right for Poland, distributed across our current territories. A year ago, you would have seen us, if it was going to be launched in the next year, park that on the balance sheet and then start amortizing it once we launched Poland. And if we prospectively signed up for a Poland right and we just didn't have line of sight to the next year whether we were going to launch the territory, that would be spread across the existing territories that we were in, which is what we would do today.
And if you back it up a few years, we would have sold off Poland not knowing what to do with it and look for it later.
That's right. Okay. If I could get back to Reed on a question that came up earlier about pricing and maybe tiering power. So Reed, your latest thinking given the momentum in the business and the ability to raise fees or raise ARPU over time and particularly via tiering, either via service and number of lines or content, your latest thoughts on your pricing and tiering power today?
Well, Mark, we're super happy right where we are. We've got a great mix of pricing plans and options. And for those who get a new 4 ks television and are excited about 4 ks content, we're the leading service in the world for 4 ks and that plan is a little more expensive at $11.99 So as more 4 ks TV sold, we'll get people to upgrade to the $11.99 plan. In terms of the total pricing structure, we couldn't be happier with the way it creates an incredible value for the consumers feels fair to them and it's propelling our growth.
Okay. Now let me pivot over to the international market. So we also had subs upside in the U. S, we had subs upside internationally. Could you talk about where that came from?
What wasn't mentioned in the letter was Germany and France. Those are obviously major markets. Maybe they're growing in line or a little less than you thought. What was mentioned is Australia, New Zealand. So any particular color there on which countries are performing in line better and worse than expectations?
Sure. That's somewhat of a recency bias. We launched France and Germany 6 or 8 months ago and we talked about it in the immediate aftermath also that they were successful launches. Now we've added Australia, New Zealand. In all of these markets, the Internet and Internet television is catching on and we're leading relative to competitors.
And we've got competitors all around the world. In each market, there's a series of competitors. So, we're feeling very bullish on the long term in all of these markets. We've seen when we entered in Latin America 3 or 4 years ago that it takes us a year or 2 to build the brand and get awareness. But think of it as every country in the world or in consumers in every country in the world want the benefits of Internet television choice and selection in price.
So, absent severe piracy that might be in some of the newer countries,
I
think we're going to see large commercial
success. And Mark, this is David. There was no one particular market that drove that. So there were multiple markets that drove that outperformance relative to what we thought to our forecast.
And in Reed's tweet a couple of days ago, you mentioned 10,000,000,000 hours consumed in the quarter. Can you give us a sense of consumption rates domestically, internationally? Are there any international markets that jump out to be above normal consumers?
There's variation between countries and some countries are amazing and U. S. Is one of them and there is but it's not the biggest. So for competitive reasons, I'm not going to give you a precise color, but there's variations. And what's great about the viewing is, if you look 2 years ago in this call, we said it was 4,000,000,000 hours in the Q1.
And over those 2 years, we've gone from 4,000,000,000 to 10,000,000,000 hours of viewing. And so you can see along with our membership growth, we're also having engagement growth, which given all the new competitors, improving television, is really impressive that Netflix is growing not only the subs, but engagement also.
Okay. And then, Ted, you recently mentioned that in China, it sounds like you have a go alone strategy. So what is your timing on Chinese launch? And how does that strategy impact your actual launch in China?
Well, Michael, a bit of that press was lost in translation a bit. I was explaining to the questioner why we have not taken on partners in the past, But it's not a reflection of what we want to or what we're willing to do in China. We're anxious and open to all forms of doing business in China. So that was the press was a little bit out of context there.
Okay. David, last quarter in that your script press release, you bolded one of those things was the expansion to all global markets by the end of 2016. Is there an update on that given what's happened in
the first half of the year? Are you accelerating that timeline? There's no update other than that. The expectation for us to launch 2016 was an acceleration of our earlier stated objectives. So no further update.
And then for the June quarter, you talk about an increase in the operating loss to $101,000,000 You've gotten bigger launches in the back half of the year. Help us think about what the when the peak operating loss quarter is in international and what the size of that be? Could that be if it's $100,000,000 in the June quarter, what's the worst case scenario? Are you willing to
run it at $200,000,000 in any one quarter? Well, I don't provide specific guidance 4 or 5 quarters out for operating loss, but we've said that we're committed to running the business at global breakeven and we have ambitious plans to launch international. So this quarter, you see what you have. You see our guide with the full sort of Australia, New Zealand. You see our guide with additional investments in marketing and some content.
We'll have some bigger launches and we've described those as meaningful and significant in the back half of this year. So you should expect those losses to trend upward and into 'sixteen and then to improve from there.
Recently, Reid, you changed your terms and conditions to alert people who use VPNs that they can be shut down from usage. We've heard a lot from our clients who are outside the U. S. That they do use VPNs to watch U. S.
Content. Why did you change the terms and conditions? And for Ted, are studios asking you about VPN usage? Is that part of the reason?
So with VPN usage, that's where someone to bring up Poland again where we're not yet operating has the money to pay for content. They want to access content. They want to pay for that content. Netflix is not yet in Poland. And so they'll use a VPN to come to the U.
S. Virtually over the Internet, pay for content. So it's certainly less bad than piracy. It's not something we encourage. It's actually very hard to detect because VPN gets very good at covering their tracks for all the obvious reasons.
And because we're focused on getting global very quickly, I think we'll see this issue disappear and it will disappear because we'll be able to meet the demand directly in all the countries. Ted, anything on the studios as our partners?
Yes. I mean, it's one of the many things that we have discussions with studios about on an ongoing basis and we do continue to work with them and work with these VPNs. But to be honest with you, it's kind of a whack a mole to get ahead of the different usage of VPNs. It's become kind of a lifestyle thing for a very small segment of the population. The real great news is, in the piracy capitals of the world, Netflix is winning.
We're pushing down piracy in those markets by getting access. So the best way to really make the VPN issue a completely non issue is through global licensing that we're continuing to pursue with our partners.
And Mark, to add to annotate to Ted, the only comments that I would add to Reed's earlier pricing comments were piracy is a governor in terms of our price in high piracy markets outside the U. S. So we wouldn't want to come out with a high price because there's a lot of piracy, so we have to compete with that. So there is a little bit of a governor on our price outside the U. S.
Okay.
And David, one question we had a lot is about your content obligations. They grew in this quarter. Can you talk a bit about your comfort of MIMO's obligations? And when do you think you see a peak of your obligations on the balance sheet?
Well, so I am comfortable with the level of contact amendments we have and there's a couple of reasons that I am comfortable with that. One is that the content is working. So we see engagement. We see value for the content. So it makes me more comfortable and confident that we're investing in something that has lasting value.
2 is that we really are scaling along with the business. So we have grown from $9,500,000,000 in streaming content commitments in the table to $9,800,000,000 That's about a 31% year over year growth rate and our streaming revenue has grown at 31% year over year as well. So that makes me a little bit more comfortable. Now that includes what we know in terms of licensing commitments. It doesn't include things like Disney output.
So let's take that as an example. That is for future film output at a future box office. So it's we're unable to know the licensing amount on those films, but we do have to factor that into our forecast as we have from the very beginning. So if we look ahead and we factor that in, we think it's an additional $3,000,000,000 to $5,000,000,000 of content commitments over the next 3 years, and that's already baked into our forecast. And we've been doing this from the very beginning.
So we've gotten a little bit better at sort of making sure that we waterfall deals, we have the flexibility we need to balance those commitments and that expense level over time.
Michael, if I can interrupt for a second, I'd also add that you should look at that as a signal of future access to content. As we identify the high value content, we seek to lock them up in long term deals. So that does increase our long term obligation, but for things that we want and attract revenue and viewing.
Ted, could you stick on that topic on the content and especially the Disney output that's coming on board next year. Just remind us of some of the details on that. And when you think about the white spaces of Netflix, the content areas that you really like the most fill out, how important is Disney as part of that of those white spaces?
Our Disney partnership is phenomenal. I mean, we have the output deal coming up, but you just last week, we launched our Defender series for Marvel with our first series, Daredevil. It's been a huge success. Disney is a licensing partner with us around the planet and we're really excited about the output deal coming on. It's probably one of the few output deals that I'm enthusiastic about, because the Disney content is global, it's tentpole, it's family, it's a lot of co viewing among families for the content that gets watched.
And it's a great brand to bring comfort to families who subscribe to Netflix. So it's a bit of a play between movies and kids programming that I think is successful for us. The white space you referred to is, with all the excitement about the golden age of television and all the excitement about our own series, about a third of the viewing hours on Netflix today are still movies. So when we see something like we did early in the year with the interview, we were able to close that window to 30 days. We had a phenomenal reaction in the U.
S. And Canada to that movie. And I want to keep pushing on behalf of the consumers to get those windows narrower and narrower, including premiering original movies on Netflix. So which is why we're doing that to fill some of that white space.
A 2 part follow on on that. Were there direct outputs from that interview deal whereby you think you can actually do this much more often in the future? And then, Reed, can I swing it back to you afterwards and ask you about the products and major product pipeline for the next 24 months? I know you mentioned in the letter the enhancement of bringing video playback forward into the browse experience. I'm not sure I actually understand what that means.
Could you explain it? And then help us think about how material that could be to the user experience?
I would say you should look at the interview as a beautiful one off. I say beautiful because bypassing the theaters and premiering on demand, Sony managed to raise about $45,000,000 in revenue from between a modest theatrical and primarily from digital on demand and then a very strong fee from Netflix for our license 30 days following that, which took what could have been a financial disaster and turned it into a financial win for the studio. So if anything, you want to look at that and say, wow, it's a beautiful possibility for a future disruption and release patterns.
And as Ted said, Mark, we're really sorry on the circumstances for Disney sorry for Sony in that case of the interview. And we certainly would want to see more of that. But we are focused with our original new movies trying to push those windows up so early. Then you asked about the product enhancements. We're doing so much.
We try to sample a little bit in the earnings letter. The particular improvement that we're talking about there, Britain today, when you browse for movies, it's a bunch of stills. And then you say play, you wait a couple of seconds and then it plays the content. And what we're learning is how to use real time video as you browse, so that things are auto starting, making that easier on the display pages, on the detail pages. So I think you'll be really impressed.
But think of it as symbolic of a whole long series of 100 improvements per quarter that we're always working on that in accumulation continue to make our experience better, which pushes up the satisfaction, which helps retention and growth.
Ted and Reed, when you first started building a streaming product, Ted would be in Beverly Hills giving people checks for content and all my content companies would say, this is incremental to the pie, we're happy that Netflix is a buyer. In the past 9 months, we've seen ratings for cable and broadcast tumble to levels that I never thought was possible. So I wonder, do you worry that as our industry, traditional media worries about ratings trends, they become less likely to sell you content and therefore becomes harder to source really good second or original content. So I wonder how you feel about that.
I'm not seeing any actual evidence at the table in terms of that there's any reluctance to continue to sell. They definitely are trying to juggle the terms of their core business versus their license business. But that's true not just of us, but they're also seeding these opportunities for themselves where you see the networks launching their own on demand services. So I think they really are trying to find the right balance. And then generally, I think we are still very healthy for the business in terms of both in terms of our licensing dollars and in terms of the audience generation that we're able to build for the shows on broadcast.
And it's very encouraging that even with all of the disarray that you spoke about, that Fox can have a phenomenal cultural hit like Empire in that in the middle of all that. So I do think that there is obviously plenty of concern about the old way of doing business, but there's lots of action going into how do we do it going forward as well.
And Michael, it's pretty natural. You've got linear TV has been an amazing 50 year run. Internet TV is starting to grow. Clearly, over the next 20 years, Internet TV is going to replace linear TV. And so I think everyone is scrambling to figure out how do they do great apps, how do they things like Noggin are fantastic and that will just keep getting built up.
And so it's a transition into figuring out the Internet. And the way people do that is to get involved with us, with our competitors, to try to start to learn what are the new patterns and modalities, because Internet TV is the way that people will consume video in the future.
Okay. And David, can you just talk a bit about your cash spend versus your P and L spend? I think this quarter is about 30% higher cash spend than P and L. Is that the right way to think about this year and even next year as well? Yes.
We've been Michael, we've been pretty consistently telling people that prior to the build out of originals, it was 20%, 20% over the expense. Now it's drifting up to 30%. It could drift up to 40% and peak around there in certain quarters, especially if we take delivery of a lot of original product. But in general, we're building out our content investment, our original content investment. And that is cash intensive, as we put in the letter.
And we've been pretty consistent about this. I think what you're going to see now is several persistent quarters and going forward of negative free cash flow while we build this out.
On that, David, you did that $1,500,000,000 debt offering in the March quarter. Is the should the expectation on our part be the market's part be that you won't need to come back to the markets for the next year and a half? Or do you want to have the flexibility to if international launches really do even better than you think to come back for even more?
Well, if we're successful in building out the content and if we want to get to ever increasing mix of original content, meaning that up to 50% of our business is really our own owned content, then we're going to continue to invest in that content and that will require more and more cash. So I don't think we're saying no that we're good now for the future. I don't think we're saying we're definite. But likely, we will need, if we're successful, to go back to the market at some point to continue to build that investment.
And then I want to ask a net neutrality regulatory question to Reid. This actually came from Rich Greenfield. With the FCC laying out this clear oversight of interconnection in that newly filed net neutrality order, do you think if that had been around before that Netflix would have had to pay for the interconnections, if those rules have been in place, would they have had to pay for interconnections that they have been for whatever the last year or so?
It's awfully hard to tell. Going forward, as we think about interconnection, it's a new climate with the FCC Title II in place, and we'll try to figure that out. We have a number of contracts that are in place already. So there's no immediate actions, But we're very encouraged by the general consumer perspective and political perspective that broadband access is so important that it is a utility. It is like power distribution, where it's a natural monopoly in the last mile.
There should be 1 fiber or 1 cable going to a home with super high speed and that's the architecture of the future. So everything around it being a utility is great for Internet companies like ourselves and it's great for consumers.
Reed and Ted, in the past couple of weeks, we've seen the NFL of all people explore Internet TV when they've announced they're going to stream a game over the Internet. We've asked you in the past, but given the changes in the model, do you think you can add sports as a category to Netflix at this point?
Michael, I think the part of our core consumer proposition is on demand. We make viewing certain kinds of content better because they're on demand. And I don't know that on demand sports is markedly better than live sports. So that's why we haven't been that excited about why we haven't chased it. There's economic reasons as well.
But I think in general that sports is great for live television.
And the great thing, Michael, about the emergence of sports online is it frees people up to be more a la carte, which gives them more money to be able spend on Netflix. So if we can anchor the entertainment side for movies and TV shows, for every consumer and somebody else or other set of leagues anchor the sports part, which is still over the Internet, then the Internet TV proposition is even more powerful for consumers.
Okay. Over the past year, Reed, I've asked you about the Comcast Time Warner Cable merger. You've said we'd love to see deal conditions put on that in order to protect the Internet. You've gone above and beyond with the FCC Title II support. But one of the questions we have at our firm is price regulation Title II.
So where do you come down on EFCC's ability to regulate pricing? Is that a good or a bad thing for the development of Internet TV?
I have to say, it's very clear that broadband is a necessary utility across the land. I don't think anyone is a fan of price controls. So our main goal at this point is to get the government to block the Comcast Time Warner merger. We think we're that merger to come together and as DSL fades, that company combined would have over 50% of U. S.
Residential Internet homes. And frankly, that's just too much in one company.
I wanted to ask a question on marketing to either David or Reed. You talked about maybe shifting more of your marketing budget online. Any more color beyond that? There's a lot of different places, ways to spend money online, including via Facebook, etcetera. So any more color on that?
And then why the switch to online? Is there something that's made the offline marketing channels less efficient for you?
Well, it depends on the market, Mark. So in places where our brand is really well known, we've noted that we're much more efficient being very targeted with that and being very specific around content marketing. In outside the U. S. In markets where we're building a brand, you should see a mixture of that.
So you should see some offline and some online in terms of our spend. But every year we get more efficient and more sort of knowledgeable about where that money is best spent. So we're an experimental company. You know that. You followed us.
So you should see us continue to sort of test around the edges of where things are better spent.
Okay. And then a question on the actual end usage of Netflix. So maybe a broad question for Fareed. When you think about the different use cases in the living room TV, on the go with mobile devices, etcetera, have you seen over the last 2 or 3 years a dramatic shift in how people are consuming Netflix content? And particularly as you go into international markets, which may be more mobile oriented, particularly in Asia, Do you think that you've got the are you set up the way that you want to be set up on devices and the formats to kind of work that trend, that mobile trend?
We're feeling really good about our preparation for continuing to expand around the world over the next 2 years in terms of devices, in terms of networks, in terms of content. So yes, we've thought through a lot and studied the patterns of consumption. And we're ready to at least begin that journey by launching around the world. And then what we'll be able to do is learn from there, frankly, as we did in Latin America 3 or 4 years ago.
Reed, following on that question, has there been a handoff on tablets versus smart TVs? A couple of years ago, we kept thinking, okay, smart TVs will be the device that drives Internet TV. But have you seen a difference on consumption by tablets versus smart TVs in the past couple of
years? Now we've seen smart TVs just continuing to grow and grow in usage and sales. I mean, virtually every new TV sold now a smart TV, at least at the middle and high end, and it's natural for people to use. Now, do they also watch on tablets? Yes.
And on phones? So, really all those categories are experiencing absolute hours growth. But on a percentage basis, smart TV is one of our fastest growing categories.
Okay. And David, you called out the impact of foreign exchange in the Q1. Can give us a sense of what the year is going to be on foreign exchange? And then when do you expect to break out revenues by region, so we can get more details on the regional international exposure?
Well, if I knew what was going to happen with foreign exchange, I'd probably quit and then run a hedge fund.
You're going
to come up for today's market
as of today, okay? I would say in Q1 most of that below the operating income foreign translation loss was unrealized, right? So we did have a change in our functional currency for our European entity. So when we first launched into Europe, we were very U. K.
Centric. So most of our operating cash flows were in British pounds, which leads you to an accounting decision to a functional currency of pounds. Since we've expanded in Europe particularly into mainland Europe with more and more, our operating cash flow switched to the euro, so we switched it over. So there's some impact of that in that translation adjustment. Going forward, it really does depend on what happens in terms of the dollar strengthening further into the euro.
We're about 25% in terms of revenues exposed to foreign currency, and that's growing. If we're successful, that will grow to 50%. But we also are pretty transparent that we don't hedge. And so we're not really concerned with those accounting translation adjustments. We're pretty transparent to you as an investor that we don't hedge.
You have the option to go out and hedge if you feel like you're exposed with your Netflix investment. And we're watching in terms of our opportunities for natural hedging. But with the move to a global license, we may see more and more of those be dollar denominated. So I'll have to update you along the way in terms of our foreign currency exposure.
And why don't we hit it with one more question each guys and then we'll wrap up?
Okay. Let me, David, just check off real quickly ARPU in both international and in the U. S. Market. In international markets, assuming currencies kind of stay where they are, does ARPU kind of stabilize where you've guided to implicitly in Q2 and where it came out in Q1 and then start moving back up as price increases go into effect?
Or should we just kind of straight line it? And then in the U. S, ARPU has been rising. Is any of that caused by tearing of services? Are you getting a lot more people signing up for the $11.99 plans?
Or is that just the impact of the price increases?
It's both, Mark. So just to answer your question on both domestic and international, we are seeing ARPU progression because of people taking the higher tier and higher value plans. And we're also seeing the expiration of people sort of coming off grandfather rejoining or joining the service new at a higher price point. And obviously, we have a lot more subscribers in the U. S.
So you're seeing that ARPU increase disproportionately rise internationally versus the U. S. Just because we're building from a base of much fewer grandfathered subscribers outside the U. S. So you see both.
But your very first question was, should we see that progress? Yes, but we have a large body of U. S. Subscribers that come off grandfathering next year. So you can waterfall your churn models and you would expect that the U.
S. Has a much larger base of folks at the older price point.
Reid, over the past 10 years, you guys have pivoted perfectly from selling DVDs to streaming, to making your old content, to going overseas. So I wonder when you look at your business plan, what gives you worry? When you look at the challenges ahead, what's the thing that worries you?
Well, you're nice to say we pivoted perfectly, but I think you're forgetting about certain incidents 4 years ago. But we have succeeded in getting through them. And the key thing is that the company is very agile. We're just a learning machine. When you think about how TED has grown our original content muscle, it's just so impressive.
How we're continuing to expand international, it's just like we're learning country by country. We don't get fundamental is we're just open minded, curious, we're learning. And then frankly, it's that Internet TV is growing around the world at incredible rates. And so we're really propelled by that big macro trend. And to wrap up here, Ted is producing so much content.
I thought Ted maybe you could share a little bit of this quarter's highlights like Chef's Table and Sense8 and Orange is the New Black and just the amazing things that Netflix is debuting.
Well, you definitely get a sense of the diversity of the programming that we're going to be offering up just if you look at just what's coming up next quarter with our first original documentary series called Chef's Table from the director of Jiro Dreams of Sushi. We've got our 3rd season of Orange is the New Black, which is a global sensation that will break in June. We have a comedy with Lily Tomlin and Jane Fonda called Grace and Frankie that we're really excited to share with the world. Sense8, I think, will show everybody what global TV series can really be like, filmed on location in 9 cities around the world, spectacular scale and scope of a theatrical film directed and created by the Wachowski siblings, and even original series for kids with How to Train Your Dragons 2. So we're super excited about both the volume and the quality and the diversity of everything we're doing in the original programming next quarter.
And Ted, all those series globally available on Netflix?
Globally available on Netflix. I love that.
Thank you so much everyone and in 4 ks. Thank you so much everyone for your support and I look forward to talking to you over the next quarter.