Industry Insider: A Look into Netflix 2023 Q1 Earnings Call

On April 18th, 2023, Jessica Reif Ehrlich, senior media and entertainment analyst at Bank of America Securities, interviewed Netflix’s co-CEOs Ted Sarandos and Greg Peters and CFO Spence Neumann for Netflix’s Q1 Earnings Call. Overall, the company’s prospects are strong, with a solid business plan that shows great promise in terms of exploiting both the new ad subscriptions and password-sharing control protocols to increase revenues and subscriber acquisition.

At the end of March 2023, Moody's upgraded Netflix's senior unsecured notes from Ba1 to Baa3, thus granting them “investment grade” status (before, they were still ranked as “junk bonds”). This rating is an extremely positive signal of expectations of future performance and speaks of the yet-to-beat Netflix primacy in the streaming industry. In fact, according to the Nielsen 2022 Streaming Unwrapped report, Netflix stands as the most-watched streaming service, with twelve out of fifteen most-watched titles being Netflix original productions. Neil Begley, Senior VP of Corporate Finance at Moody’s, stated that:

"We believe Netflix will continue to be a leader in streaming despite the increasing competition, and we forecast the subscriber base to grow to around 250 million globally and revenues to reach at least $38 billion by the end of 2025."

Right now, Netflix has 230 million subscribers and is planning to expand its customer base by turning the 100 million “borrowers” (those who share the password of a single account, thus counting as only one subscriber) into individual subscribers: these are all prospects, as they already proved to have the minimum physical requirements to access Netflix (a smart TV, broadband access, and so on) as well as a wish to watch its content. The combination of the launch of the ad-supported plans and the simultaneous efforts to eliminate the password-sharing phenomenon will ensure that those who find themselves deprived of the financial benefit of a shared account can nonetheless access a cheaper solution. In fact, one of the main goals of Netflix going forward is to expand its offer of subscription plans so as to meet demand in the best way possible and penetrate the markets in which it operates more effectively. The company has already put in action price decreases in 116 countries, varying from 13% to even 60% from the original price depending on the country. This choice followed the success of a similar strategy that was implemented in India in December 2021, thanks to which engagement rose 30% and revenue growth accelerated from 19% to 24%.

When asked about the strategy of their new subscription tiers, Gregory Peters says:

“We want to give a wide range of consumers, and ideally, increasingly, a wide range of consumers, access to our great stories at a range of prices with appropriate corresponding features. The second goal is to think about optimizing long-term revenue.”

Netflix has already implemented password-sharing controls in many countries, but they have announced that in Q2 these controls will extend to the bulk of their served countries - including the United States. The co-CEOs have described the expected to unroll of events: first, there is an initial negative reaction of cancellations, followed by a slow build of new subscribers (the ex-password-sharers). Overall, the number of subscribers that cancel due to the price is lower than the acquisition of new, individual ones. The solution’s goal is ultimately to keep track of all the people that are using the streaming service, so that there can be more reliable data on user preferences, hours of content watched, and thus better audience targeting.

Another important point that was addressed is the employment of capital. Netflix executives aim at maintaining a minimum cash equivalent to roughly 2 months of revenue - about $5.4 billion of minimum cash, based on revenues of Q1 2023. Following their capital structure policy, they plan on reinvesting the extra cash in Netflix’s core activities, strategic acquisitions, and content development - as well as share repurchases. When asked about their film strategy, the co-CEOs expressed no intention in revisiting it: with a customer base of 230 million people that have access to their titles, especially when put on the front page, there is no need to go to theaters.

Co-CEO Ted Sarandos also emphasized on the importance of content as the main driver of engagement. Ultimately, aiming at higher revenues serves the audience the most.

“The way that we win over those sharers and the way that we grow the ad plan is to have the content that people cannot live without. [...] So this past quarter, we were super thrilled with the results of the content. And we have to keep that up in order to win over those sharing accounts and also to grow that ad-supported tier.”