Netflix (Minutes): Entertainment content demonstrates resilience during economic pressure periods

The following is $Netflix(NFLX.US) FY25 Q1 earnings call minutes. For the earnings report interpretation, please refer to《 Netflix: A "Golden Safe Haven" Amid Tariff Turmoil? 》

1. Core Information Review of the Earnings Report

1. Earnings Significantly Exceed Expectations

The main area of outperformance was in gross margin. In addition to the continued popularity of hit shows, Dolphin Research believes this is related to price increases in multiple regions and the advancement of high-margin advertising in Q1. Management has raised its profit margin guidance for Q2, with operating profit margin increasing to 33% (up 1.5 percentage points quarter-on-quarter), but has temporarily maintained its full-year operating profit margin guidance at 29%, likely due to cautious considerations regarding current environmental changes, especially as pressures gradually manifest in the second half of the year.

2. User Growth "Estimates" Are Fair

Although subscription numbers are no longer disclosed starting in Q1, Dolphin Research has roughly estimated the incremental subscription users in different regions based on actual revenue and price increases in various areas. Overall, the growth in subscription revenue in Q1 was still driven by user increases (Dolphin Research estimates a net increase of 4.5 million users, higher than the latest adjusted expectation range of 3-4 million from institutions).

The Eurasian region saw significant growth, mainly benefiting from the local content that was popular during the season (the residual heat of "Squid Games 2," "Ad Vitam," and European films like "Counterattack"). However, core regions have entered a new round of price increases, which has had some short-term impact on user scale, leading to a noticeable decline in revenue growth in regions like North America.

However, from a historical perspective, these are all short-term fluctuations. This year's content pipeline remains relatively rich, so it is expected to gradually attract user return, and under the effect of price increases, drive revenue back to double-digit growth.

3. Advertising Continues to Scale Up

As for the AVOD business, 2025 is the year for formal large-scale development. In Q1, Netflix launched its own 1P advertising system, Netflix Ads Suite, in the U.S., and will continue to roll out deployment in other regions for the remainder of the year.

The full-year revenue guidance of $43.5-45.5 billion remains unchanged, which includes expected doubling of advertising revenue, meaning this year's advertising revenue is expected to approach $1.5 billion, accounting for 3% of total revenue. The current turbulent environment may temporarily delay Netflix's advertising exceeding expectations, but the direction and trend remain unchanged

4. Slowing Growth in Content Investment

In the first quarter, free cash flow (Non-GAAP) was nearly $2.7 billion, a year-on-year increase of 25%. As monetization capabilities peak due to the content cycle, the year-on-year growth rate of content investment is slowing.

Generally, looking at the investment rhythm, the second half of the year tends to accelerate relative to the first half. However, considering the relatively turbulent macro environment this year, with a content investment budget of $18 billion, Dolphin Research believes it is possible that the budget may not be fully utilized due to cautious control. Competitors may also face this issue, but generally speaking, such times tend to be more favorable for the current leaders.

5. Increased Buybacks

With operational improvements, cash flow conditions have also improved significantly. Beyond basic operations, remaining cash is mainly used for debt repayment and buybacks.

In the first quarter, $800 million in notes were repaid, and $3.5 billion was spent to repurchase 3.7 million shares. The buyback amount exceeded the previous year's quarterly level of $1.5-2 billion, with a remaining buyback authorization of 13.6 billion yuan.

II. Detailed Content of the Earnings Call

2.1 Q&A

Q: How do you view Netflix's plan to increase content spending over the next five years, as well as the Wall Street Journal's report that Netflix aims to double its revenue and triple its operating profit by 2030?

A: The company generally discloses public information, but occasionally internal discussions may leak to the media. These long-term visions mentioned in the news are not our forecasts; the company does not have a five-year forecast or guidance. The company has long-term plans—namely, striving every day to build the most beloved and valuable entertainment company for all stakeholders.

Currently, the company's business is performing well, with annual revenue exceeding $40 billion, over 300 million paying households, and more than 700 million viewers, leading in streaming viewership share. However, from various indicators, the company's market share remains relatively small, accounting for about 6% of consumer spending and advertising revenue in the countries and regions it serves, indicating significant growth potential in user engagement, revenue, and profit.

Q: This is Netflix's first potential recession period with a low-cost ad tier; how do you view consumer behavior in switching plans during this recession compared to previous downturns?

A: The company closely monitors consumer sentiment and macroeconomic trends. From the current business operations, key indicators such as user retention rates are stable and strong, with no significant changes in plan combinations and acceptance rates. Recent price adjustments have met expectations, and user engagement remains good. The entertainment industry typically shows resilience during economic downturns, and Netflix is no exception.

The launch of a low-cost ad tier in the largest market has enhanced the company's risk resilience. This ad tier is priced at $7.99 in the U.S. and Canada, offering significant entertainment value, and strong entertainment demand is expected to persist. Additionally, the company focuses on enhancing Netflix's value by producing original content in 50 countries worldwide, including a $1 billion commitment to Mexico and a $2.5 billion commitment to Korean content, positively contributing to local economies and cultures while being relatively insulated from international risks.

Q: Will global economic uncertainty change Netflix's price increase pace, or will content advantages and increased user viewing time offset this impact?

A: The company's price adjustments are mainly based on member feedback. After sufficient investment to enhance service value, the decision to adjust prices for reinvestment will be made. The company will continue to adhere to this philosophy rather than following a preset plan. Historically, when facing economic challenges in different countries, the company has maintained a positive cycle, indicating a gap between product value and price, making it a cost-effective choice for many. The company is also expanding its price range, including launching low-cost advertising packages in the advertising market to meet more consumer needs, and will continue to strive to enhance value and accessibility as in the past.

Q: Given the strong growth in paid users in the fourth quarter, how is member retention, and has the company retained most of the new subscription users? What is the trend in user churn rate?

A: The user acquisition and retention trends of the company's business are strong and stable, achieving healthy member growth in the first quarter. Some large live events in the fourth quarter of last year (such as the Paul Tyson boxing match, NFL events during Christmas, and Squid Game-related content) contributed a small proportion of new users in that quarter, and the retention characteristics of members attracted by these events are similar to those who joined due to other popular content. Currently, there is no significant change in retention.

Q: Given the strong operating profit margin performance in the first half of the year, can you discuss the key incremental costs that led to a decline in profit margins in the second half? Are these costs expected to be more significant in the third or fourth quarter?

A: The company still forecasts an annual operating profit margin of 29%, primarily managing the annual profit margin. There will be fluctuations in profit margins between quarters, mainly influenced by content scheduling. Content costs are expected to increase year-on-year in the third and fourth quarters due to the return of major series in the second half, and the fourth quarter typically has more movie releases.

Sales and marketing expenses are expected to increase in the second half to support content scheduling and advertising sales. Besides the typically higher number of movie releases in the fourth quarter, there are no significant differences between the third and fourth quarters. The operating income in the first quarter exceeded expectations, mainly due to timing differences in revenue and expenses, with annual expenditures expected to remain unchanged.

Q: Will the current macro environment change the company's strategy for the television advertising pre-sale market? What is the overall view on the pre-sale market and the spot market strategies?

A: The company is closely monitoring the market, but direct interactions with buyers have not shown signs of market weakness, and some positive signals have been observed as pre-sale activities approach. The company's scale in the advertising business is relatively small, which allows it to withstand market changes to some extent. The company is launching its own advertising technology suite, which has been rolled out in Canada and the United States, with the remaining 10 markets to follow, providing advertisers with new features and opportunities. Based on the current situation, the company expects its advertising revenue to roughly double by 2025, achieved through a combination of pre-sales, programmatic advertising expansion, and spot market integration.

Q: Can you provide an update on the company's first-party advertising technology platform? How does the launch in Canada compare to expectations? What observations have been made in the United States?

A: Launching the proprietary advertising suite is an important milestone, and it is still progressing. The launch in Canada and the United States is in line with expectations. Based on actual operational feedback, the company is learning and improving rapidly, with plans to roll out in the remaining 10 markets in phases over the coming months The biggest benefit of using a proprietary ad server is that it provides advertisers with more flexibility, reduces activation barriers, and improves the overall purchasing experience, thereby driving sales growth. Over time, first-party advertising technology platforms will offer advertisers more key features, such as more programmatic advertising opportunities, enhanced targeting capabilities, the use of more data sources, and more robust measurement and reporting functionalities.

Additionally, using a proprietary advertising tech stack allows for better control in creating higher-quality ad experiences for members, such as improving ad relevance. The company has a clear roadmap to continuously iterate, improve, and innovate its advertising business.

Q: Netflix has made some progress in solving personalized content recommendations. What are the key steps to solving ad content recommendations or relevance, and what stage is it currently in?

A: Netflix aims to achieve the same level of maturity and capability in advertising as it has in personalized content recommendations, which is to match the right ads with the right audiences, viewers, and titles, creating a win-win situation for advertisers and members. This process has just begun, with the first step being the establishment of its own advertising platform, which has been launched in Canada and the United States, with plans to expand to other markets in the coming months.

During this period, targeting capabilities have been significantly expanded, including targeting features based on Netflix's unique data, such as life stages, interests, and viewing moods. In the United States, advertisers are also allowed to conduct more precise targeting on their imported audiences, Netflix model audiences, and audience segments provided by third-party vendors.

Looking ahead, more data targeting capabilities will be added globally by 2026, along with enhanced measurement capabilities across all markets; targeted investments in more advanced data capabilities, such as machine learning optimization and advanced targeting, will occur in 2027. Furthermore, having its own advertising platform allows for faster innovation and development of new ad formats. Netflix believes it can advance this process faster than other streaming services because it can leverage existing technology, data, data science expertise, and rapid product innovation experience.

Q: Currently, with resources from UFC, WWE pay-per-view events, F1, and Major League Baseball, how well does Netflix's strategy align with these resources?

A: Netflix's live broadcasts are not limited to sports events, and we currently do not comment on these specific opportunities. Our strategy for live events remains unchanged, focusing on major breakthrough events that must be economically viable.

Live broadcasts account for a relatively small proportion of content spending and are also less compared to viewing hours, approximately 200 billion hours, but live events have a huge positive impact on topic discussions, user acquisition, and help with user retention. For example, the Taylor Swift concert in July was the most-watched women's sports event in U.S. history; NFL games will be broadcast again all day on December 25, 2025. Currently, live events are mainly conducted in the United States, with plans to expand related capabilities globally in the coming years.

Q: Will video podcasts perform well as a category on Netflix?

A: Netflix has been paying attention to various types of content and content creators, with the lines between podcasts and talk shows becoming increasingly blurred, hoping to collaborate with media creators that consumers love. Nowadays, podcasts are increasingly focusing on video formats, and Netflix itself has produced many podcasts for promotion and marketing, targeting specific shows, specific genres, or specific stars. With the popularity of video podcasts, it is expected that some video podcasts will appear on Netflix.

Q: What is needed to create iconic animated series and build culturally relevant animated IPs? Is it about forming different teams, making acquisitions, or other methods?

A: Creating animated IPs is a brand new and completely creative process. Netflix has had both successes and failures, and there is still much work to be done. However, there have already been some good results, such as "Puss in Boots: The Last Wish," "The Sea Beast," and "Pinocchio" (LEO, Seabeast, Gamma DeToro Pinocchio), with "Pinocchio" even winning the Oscar for Best Animated Feature.

In 2024, 9 out of the top 10 most popular streaming movies are animated films, indicating a high demand for animated films. In terms of animation strategy, Netflix wants to both produce in-house and license content, currently gaining more licensing opportunities through output agreements with Universal, Illumination, and Sony.

The animation team, Hanna and Dan, is working hard to produce a series of promising exclusive original animations, planned for release in 2027, including "Inner Dreams," which will be launched in the fourth quarter.

Q: In the next five years, can investors expect Netflix to venture into the short video or creator-led content space and compete directly with YouTube?

A: From a macro perspective, Netflix has always faced strong competitors, including YouTube, all vying for users' entertainment time. Netflix believes the biggest opportunity right now is to capture about 80% of television viewing time that neither Netflix nor YouTube currently occupies. In direct competition with YouTube or similar platforms, Netflix believes it can provide more competitive services for specific types of creators and storytelling, and lead in the monetization of these contents, offering creators and stories better opportunities than YouTube.

At the same time, Netflix is looking for the next generation of outstanding creators, believing it has the best monetization model for high-quality storytelling globally, which can help creators reach audiences. Its model can also support creators in more ambitious creations while reducing risks. For example, Ms. Rachel consistently ranks in the top ten on Netflix every week, and "Kill Tony" is popular among talk show fans. Netflix has collaborated with Side man to launch "Pop the Balloon."

Q: How does Netflix leverage artificial intelligence technology for its creative partners? What significance can this have? Can you share some examples?

A: Currently, creators are very excited about the changes that artificial intelligence can bring to content creation. Netflix's creators are using AI tools for scene references, rehearsals, visual effects sequence preparation, and shooting plans, making the creative process better In the past, only large-budget projects could use advanced visual effects, such as de-aging effects (VFX). Now, with the help of artificial intelligence tools, small-budget projects can also present big-budget visual effects on screen. For example, five years ago, "The Irishman" used very cutting-edge and expensive de-aging technology, but it still had significant limitations and caused many on-set troubles for the actors. This year, Rodrigo Pieto, who served as the cinematographer for "The Irishman," directed Netflix's first narrative feature film "Pedro Paramor," using artificial intelligence tools to achieve de-aging visual effects at a cost that was only a small fraction of that of "The Irishman." The entire budget of the film is comparable to the visual effects cost of "The Irishman." Netflix's focus is on finding ways to improve the experience for members and creators through artificial intelligence.

Q: With a large amount of content, what measures can Netflix take to improve user engagement on the platform in terms of content discovery? Can the recommendation engine be further structurally improved, or are more marketing strategies needed?

A: Even the most popular and discussed content accounts for less than 1% of viewership, so content discovery and recommendation capabilities are crucial for unlocking the value of global content investment. Netflix believes there is still room to enhance content discovery and recommendation experiences, thereby providing more value to members and allowing content to reach a wider audience.

Last year, Netflix began testing a brand new, simpler, and more intuitive TV homepage, marking the first major structural adjustment in over a decade, which is expected to launch later this year. This will significantly improve the content discovery experience on Netflix and represents a major structural shift.

Additionally, Netflix is developing new features such as interactive search based on AI generative technology, which is also expected to enhance members' content discovery experience. There are many specific improvements planned in this area, with almost limitless potential for enhancement.

Q: What has been the adoption trend of the extra member accounts since their launch? What contribution has this service made to revenue growth so far? Do you think it will help future growth?

A: Extra member accounts are part of Netflix's subscription and pricing model, providing members with flexibility and choice, allowing them to share Netflix services with family or friends at a lower cost. The retention and engagement rates for this plan are good, making it a healthy component of the business. However, from a business perspective, extra member accounts are not the main driver of Netflix's business, and their scale is expected to remain relatively small in the foreseeable future, with moderate growth currently.

Q: What types of games are currently well-received on Netflix, and in what areas are there opportunities to improve user experience and increase game engagement?

A: The currently well-received types of games include the following categories.

First, immersive narrative games based on Netflix IP, such as "Squid Game: The Challenge," which will receive updates with the release of new seasons of "Squid Game"; there are also dark-themed electronic pet-style games based on "Black Mirror."

Second, mainstream mature games, such as "Grand Theft Auto," which has been very successful, and more such games will be launched in the future Third, children's games can provide a safe gaming experience for kids without ads or in-app purchases, such as the recently announced "Peppa Pig" game.

Fourth, social interactive party games, although currently there is not much data, are highly anticipated and can be seen as an interactive evolution of family board games or TV game shows. There are many aspects to improve user experience, focusing on user experience, game discovery, starting to play, and launching more attractive games.

In terms of investment and growth, Netflix will gradually increase its investment. Currently, the investment scale is relatively small compared to the overall content budget, and it will moderately increase investment when there is more incremental evidence. The global gaming market (excluding China and Russia, not including advertising revenue) has consumer spending of about $140 billion, presenting significant long-term opportunities.

Q: What are the key drivers for the expected revenue growth acceleration in North America in the second quarter? Is it mainly pricing factors, or are there other aspects such as growth in advertising or subscription users?

A: In the first quarter, North American revenue grew by 9% year-on-year, a slowdown from 15% in the fourth quarter, mainly due to the timing of price increases, and the fourth quarter benefited from the NFL games and the associated advertising revenue. The revenue growth in the second quarter accelerated mainly due to the full quarter revenue from annual pricing (price increase effect), while the advertising business, although still smaller than the subscription business, continues to grow throughout the year.

Q: Netflix expects to achieve $8 billion in free cash flow by 2025, and the goal is to achieve free cash flow growth. Historically, it has not spent much on acquisitions. Can it be assumed that most of the growing free cash flow will be used for stock buybacks?

A: Netflix's capital allocation policy has remained consistent over the years, prioritizing profit growth through reinvestment in the business and maintaining sufficient liquidity as the top two priorities, followed by returning excess cash to shareholders. Aside from retaining hundreds of millions in minimum cash and for selective acquisitions, if there are no significant acquisitions, the expected growing free cash flow will be used for stock buybacks.

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