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Date

Tuesday, Jan. 20, 2026 at 4:45 p.m. ET

Call participants

  • Co-Chief Executive Officer — Gregory Peters
  • Co-Chief Executive Officer — Theodore Sarandos
  • Chief Financial Officer — Spencer Neumann
  • Vice President, Finance, IR, and Corporate Development — Spencer Wong

Takeaways

  • Revenue Growth -- 16% annual growth was directly stated for 2025, driven by stronger acquisition, retention, and ads business expansion.
  • Operating Profit Growth -- Operating profit grew by approximately 30% for 2025, supported by expanding margins.
  • Operating Margin -- Management is guiding to a 31.5% operating margin for 2026, up two points, incorporating a 0.5 point headwind from expected M&A expenses.
  • 2026 Revenue Outlook -- Forecasted to reach $51 billion, an increase of 14%, fueled by membership, pricing, and an approximate doubling of ad revenue to $3 billion.
  • Free Cash Flow -- Guidance for approximately $6 billion in free cash flow for the year, with no additional drivers cited beyond timing effects.
  • Advertising Revenue -- Ad sales were 2.5 times higher in 2025 and are expected to double again to $3 billion in 2026.
  • Content Amortization -- Content amortization is estimated to grow roughly 10% year over year for 2026.
  • Content Spend Discipline -- Content spend is planned to grow slower than revenue, aiding continued margin expansion.
  • Total View Hours -- Global total view hours increased 2% in 2025, representing an acceleration from 1% in the prior year.
  • Branded Originals Engagement -- Viewing of branded originals rose 9% year over year in the second half of 2025, up from 7% growth in the first half.
  • Retention -- Management said churn improved year over year and retention remains "among the best in the industry."
  • Operating Leverage -- Five-percentage-point margin expansion in the second quarter was noted, with full-year margin target raised from 25% to 26%.
  • Scale of Service -- Netflix remains under 10% of TV time in all major markets and at approximately 7% of the addressable market for consumer and ad spend.
  • Live Events -- The service has executed over 200 live events, and is expanding internationally, including World Baseball Classic in Japan.
  • Podcast and Games Initiatives -- Video podcasts have launched, and the cloud-first gaming strategy is expanding, with TV-based games seeing post-launch engagement uplifts.
  • Warner Bros. Studios and HBO Acquisition -- The pending acquisition is described by management as a "strategic accelerant," with 85% of combined revenue expected from current core businesses.
  • Ad Technology -- The proprietary ad tech stack is now in place, enabling new ad formats, interactive ad capabilities, and improved monetization focus for the next several years.
  • Global Content Licensing -- New global pay-one deal with Sony, expanded Universal licensing for live action, and newly announced Paramount slate noted.
  • Quality Metric Achievement -- Management reported achieving an all-time high in its primary quality metric for value delivered to members in 2025.
  • Geographic Growth -- India was cited as number two and number three in paid net adds and revenue growth in the most recent quarter.
  • Basic Tier Phase-Out -- Basic tier phase-out is ongoing, with members migrated to higher-value plans and rollouts moving forward in the U.S. and France.
  • Content Spend -- $17 billion in content cash spend budgeted, to grow slower than revenue, including both sports and entertainment programming.

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Risks

  • Spencer Neumann noted a "half a percentage point drag from the expected M&A expenses" in 2026 margin guidance, indicating deal-related costs impacting profit expansion.
  • Theodore Sarandos described live events as "a relatively small portion of total view hours" and content spend, stating, "But, again, small in total view hours," highlighting scale challenges for this segment.

Summary

Netflix (NFLX 0.48%) reported meeting or exceeding all stated 2025 financial objectives, with 16% revenue growth and 30% growth in operating profit. Management guided to 2026 revenue of $51 billion and a 31.5% operating margin, with the pending Warner Bros. Studios and HBO acquisition positioned as an accelerant but representing only a modest shift in overall revenue mix. Advertising is becoming a more significant growth driver, targeted to double to $3 billion in 2026, while investment in global content, new initiatives like podcasts and games, and continued operating leverage remain core to the company’s strategic approach.

  • Management stated their primary quality metric reached an all-time high in 2025, which they assert correlates with improvements in retention and member satisfaction.
  • Netflix reported a global increase in total view hours for 2025 and noted disproportionate engagement and retention lifts from branded originals and select live events.
  • India remains a top contributor to paid net additions and revenue growth, emphasizing expanded content-market fit.
  • Ad-supported plan ARM remains below ad-free but the company is focused on closing this monetization gap through ongoing tech and inventory improvements.
  • The annual $17 billion content budget will expand more slowly than revenue, reflecting margin discipline amid the addition of new multi-format properties and live events.

Industry glossary

  • Pay One Window: The first period after theatrical release when a studio licenses its films to a streaming or TV service, typically before pay-TV or broadcast windows.
  • Ad Tech Stack: The set of software, platforms, and tools enabling end-to-end programmatic advertising operations, including targeting, delivery, and measurement.
  • ARM (Average Revenue per Membership): A company-specific metric referring to the average monthly revenue generated per paid member, segmented by plan type.
  • Content Amortization: The expensing of content investment over the period it is expected to generate value or viewership; critical for margin and cash flow analysis in streaming.
  • Live Operation Center: Dedicated facilities supporting the production and global delivery of live streaming events.

Full Conference Call Transcript

Gregory Peters: Sure. We find it useful to talk internally about our long-term aspirations. Which, as we said at the time that this was reported last year, aren't the same as a forecast, but having said that, those goals were based on organic progress. They did not contemplate or assume any M&A because we didn't have any M&A on sort of our horizon at the time. And over the last nine months, we've seen continued growth. We are now forecasting more healthy growth for the year to come, organic growth. Of course, there's a lot of hard work ahead to fully realize those opportunities both short term and long term.

But based on the progress that we've made so far and expect to make, and our continuing assessment of the opportunity, we still feel good about those targets. Putting maybe a little bit more meat on that bone, in 2025, we met or exceeded all of our financial objectives. We made solid progress on our key priorities. We delivered 16% revenue growth, roughly 30% operating profit growth, expanding margins, growing key free cash flow, Ad sales, two and a half times in 2025. We expect that business to roughly double again in 2026 to about $3 billion. So we're making good progress, and the opportunity ahead of us is massive.

We are still under 10% of TV time in all major markets in which we compete, with hundreds of millions of households around the world still to sign up. We're just about 7% of the addressable market in terms of consumer and ad spend. So tons of room ahead of us. Anything you wanna add there?

Theodore Sarandos: I would just say, you know, looking ahead to 2026, we're focused on improving the core business. You know? And we do that by increasing the variety and quality of our series and films, enhancing the product experience, and by growing and strengthening our ad business. We're also building out some newer initiatives, like our live outside of The US, things like the World Baseball Classic in Japan, that's launching in March. We're expanding into more content categories like video podcasts, which just kicked off this week. And we're continuing to scale our cloud-first game strategy. We're working really hard to close the acquisition of Warner Brothers Studios and HBO, which we see as a strategic accelerant.

And we're doing all this while we're driving and sustaining healthy growth. We forecast 2026 revenue at $51 billion, which is up 14% year on year. It's an exciting time. You know? This is an exciting time in the business. Lots of innovation, lots of competition. But that's also been true of us for twenty-five years. Netflix, Inc., we kind of embrace change and thrive on competition because it pushes us to keep improving the service even faster and faster for our members. You know, years ago, when we moved from DVD by mail into streaming, we were in a heated battle with Walmart for that DVD business. So we're no strangers to competition, and we're no strangers to change.

Through that change in competition, we've grown into an entertainment company that is thrilling an audience that is now approaching nearly 1 billion people. And producing series and films around the world with hits that resonate with audiences locally and globally.

Spencer Wong: Thank you, Ted. So and just to circle back to Greg's point real quick, you know, we're very excited about the business. We're very excited about the organic opportunity ahead. See that in our performance, and we're as energized as ever to achieve our mission to entertain the world.

Spencer Wong: Thanks, Ted. Our next question is about our outlook. It comes from Steve Cahall of Wells Fargo. The content amortization growth forecast of 10% in your earnings letter implies a bit of an acceleration from 2025. Can you provide some context as to where you're pushing for the most incremental investment, e.g., events, reality series, films, licensed content, etcetera?

Theodore Sarandos: Yeah. Look. I think the cadence of our releasing is really strong. We have a really strong push out in the first half of this year already. With some great hits right out of the gate. So you wanna talk to that, Spence?

Spencer Neumann: Yeah. I mean, I would say just generally, we've got a strong lineup throughout the year. But, yeah, Steve, as you noted, in 2025, our slate was heavily back half weighted, and we expect more typical seasonality this year. So still a bit heavier in the back half of '26 than the front half of '26. In particular, Q4, the fourth quarter is always generally the most packed for us in any given year, but overall, a smoother slate and smoother slate timing this year relative to '25. So as a result, you should see higher year-over-year content expense growth in '26 growing off of that smaller base that we had in the first half of last year.

But for the full year, we're estimating, as you I think you see in our letter, content amortization to increase roughly 10% year over year. Our content cash to expense ratio should hold pretty steady at about the 1.1x ratio that we've been managing to the last few years. So it's no change in our approach. We aim to grow content spend slower than revenue so that it can contribute to our margin expansion while strengthening and expanding that entertainment offering as you heard from Greg and Ted across not just our core film and series, but expanding into more content formats.

Theodore Sarandos: Yeah. Let me tell you what that waiting looks like to the members too, what you just talked about, Spence. But, you know, in the first half of this year, we said we'd come out of the gate with some great hits. People we meet on vacation, the rip, his and hers, A New Year's Eve release of Stranger Things finale is still crushing. We've got Bridgerton season four that's coming up later this month and next month. So you see that we're really excited about the 2026 slate. Both H1 and H2.

We've already mentioned the Bridgerton return, but we also have a return of One Piece season two, third season of The Night Agent, second season of Beef, A Hundred Years of Solitude from Columbia back for a second season, got Avatar: Last Airbender. We've got Emmy, Golden Globe, and SAG actor nomination for Diplomat season four back again for a new season. Tires season three. And the series finale of Outer Banks. That's, like, the returning stuff. For new things, we're really excited about something very bad in the boroughs. Both new series from the Duffer Brothers Following Up Stranger Things.

Pride And Prejudice From The UK, Man on Fire, Can This Love Be Translated just launched from Korea, looks like it's gonna be another really nice hit for k-drama lovers. I mentioned some of our early films. We've got people we meet on vacation in the rip. We've got Affleck and Matt Damon that's already off to a great start. Still looking forward to Peaky Blinders, Immortal Man, from Killian Murphy. We've got Greta Gerwig's Narnia. We've got Apex with Charlize Theron. We've got Denzel Washington and Robert Pattinson in a great heist caper. Here comes the flood. And we've got a bunch of surprises upcoming too for '26.

Spencer Wong: Thanks, Ted. Thanks, Spence. That's a good segue into our next question on the outlook from John Blackledge of TD Cowen. For your 2026 guidance, can you walk through the key drivers of the top line revenue range, which was above consensus at the midpoint? And for the operating margin guidance of 31.5%, can you talk about the puts and takes to that guidance, and any other color would be great.

Spencer Neumann: Yeah. Sure, John. I'll take this one. We've got a strong growth outlook. As you heard from Greg and Ted, we feel great about the organic growth outlook. I hope you see that on our top and bottom line guide. On the revenue side, for 2026, key drivers are similar to '25. So it's membership growth, it's pricing, and it's a rough doubling of our ad revenue in 2026 to about $3 billion. So a bit more relative contribution from ads as we're scaling that business. So we feel great about that, and we feel great about our operating profit growth and margin growth too. We're targeting 31.5% operating margins for 2026. That's up two points.

So no change to our approach there. We set margin targets. So you think about the puts and takes. We're always balancing the investment into our core business to drive sustained revenue growth with spend discipline. And we aim to grow our margins each year. That rate of that year-over-year growth bounces around a bit based on investment opportunities and other considerations in a given year. If you look back over the last handful of years, we've expanded our operating margins about two percentage points annually on average. This guide at two percentage points, that actually includes about a half a percentage point drag from the expected M&A expenses that we referenced in the letter.

So if you exclude that, we're guiding to about two and a half points of margin expansion. So very much in line with what we've been delivering. This year in particular, again, getting back to the puts and takes, we're seeing a number of attractive investment opportunities to strengthen and expand our entertainment offering and our product and commerce capabilities.

Theodore Sarandos: So we are increasing our expense growth a bit this year. A bit higher pace of growth relative to last year to invest into those opportunities. All while continuing to expand our margins and deliver strong dollar profit growth. And don't know. Maybe, Greg, Ted, don't if you wanna talk a little bit more about our focus areas of investing in the content.

Gregory Peters: I'll tell you a couple of things that we're excited about in this, you know, we're investing into them because our members are showing a lot of excitement for them. So we've got some new license deals in place with Sony. That includes the first of its kind global pay one movie deal. We've expanded our universal licensing deal for the kind of that already included some very successful animation films. To include live-action films. We have a new slate of licensed titles from Paramount which is gonna bring a lot of new series and television shows that Netflix, Inc. has never had around the world. Very exciting. In the live area, we've now executed more than 200 live events.

And we're expanding to do more now outside of The US. Including, World Baseball Classic in Japan, I mentioned that in March. And this Friday, have Skyscraper Live which is gonna be an edge of your seat TV experience for sure. So more to come there. And we just kicked off podcast this quarter, which has been exciting. We've launched new ones from Spotify and the Ringer. IHeartMedia, Barstool. We have a lot more to come, and some new originals. So these are all areas that have shown great promise. Members love them. We're excited to broaden the investment to include them. Greg, you wanna jump in there too?

Gregory Peters: Yeah. I'd say on top of content, we got a number of other areas that we expect will drive meaningful growth and returns on the tech and dev side. We're continuing to build out that ad tech stack. We're evolving our mobile UI. We're adding two more live operation centers in '26. One is gonna be in UK and one in Asia to support the growth of our live efforts outside The US. In ads, beyond the tech side, we continue to invest in more sales, more go-to-market capabilities. That's a direct driver of advertising growth. On games, we are going to continue to invest in the cloud-first gaming strategy that we've added.

This makes TV games more accessible by rolling out cloud games to more customers in more countries. If you take all of that sort of stepping back within the margin expansion model that Spence described, which keeps us disciplined on returning to shareholders as we invest in new growth, We also think about investing across our portfolio based on capability to translate those investments into value for members and returns for the business. We've got a solid track record of doing that, and our core content categories, so we're gonna continue to grow there.

We're also increasingly about our ability to do that in ads and live where the 200 live events that Ted mentioned indicates that we should ramp and grow in those areas. And then for our other initiatives, those represent a small fraction of our overall investment, and we always remain very disciplined and measured in increasing those investments based on demonstrating that we can deliver member value, we can translate that investment into member value, and move the business forward.

Spencer Wong: Thanks, Greg. Thanks, Ted. Thanks, Spence, for that Folsom I'll move this along now to a few questions around engagement. The first comes from Rich Greenfield of Light Shed Partners. At this stage of Netflix, Inc.'s maturity, how directly tied is engagement to churn and pricing power as you started talking more openly about how all hours of engagement are not the same?

Gregory Peters: So viewing hours, that's a really important in assessing the value that we deliver to customers. And value delivered is what drives the outcomes that you mentioned, Rich, and really, it drives most outcomes that we care about. But it's just one of many metrics that we look at. And we continue to develop an increasing understanding of how to measure that value delivered. So maybe start by just noting that total view hours in the '25 grew 2% year on year. That's billion and a half additional hours. Slight acceleration from the 1% growth we saw in the '25. But even with that number, there's some nuance underneath that.

Viewing of our branded originals was actually up 9% year over year in the second half. Versus 7% in the first half. That represents roughly half of our overall viewing. But viewing on the second run titles was lower year over year because the volume of licensed titles that we're carrying came down across most regions. And that's due largely to the fact that we stepped up our licensing in '23 and '24, during the strikes, which had shut down new productions, So that's balancing out that volume right now. But beyond view hours then, as you stated, all hours of engagement are not the same. And we really care about the quality of that engagement.

For example, we said in the letter, live programming is an example where any given hour of entertainment has the potential to deliver outsized value. That's certainly also the case when you have a huge fan of a particular series or a movie. We, as viewers, we feel this intuitively. Right? We feel that excitement, that difference, that value when we watch something that we've been anticipating and we just can't wait to watch. And as a business, you know, we've become increasingly sophisticated, evolving our measures of that quality of engagement that we are delivering. It's very hard to do this, but we're getting better and better at it.

And our primary quality metric we achieved in '25 an all-time high for the service. We set a high goal for that metric and Bella and our content team stepped up and achieved that goal. That means that we deliver more entertainment value for our members and that shows up in core metrics like acquisition, like retention, You know, and retention's among the best in the industry, and we just completed a quarter where churn improved year on year. Customer satisfaction is at an all-time high. We also saw strong member growth.

We really managed more and more towards that complete understanding of value delivered because it's really what translates best and directly to revenue growth, and it better captures the overall health of our business.

Theodore Sarandos: Yeah. I would just add, Greg, if you don't mind, you know, do of course, we look at the view hours, Rich, but we also look at a myriad of other signals to assess how our members are engaging and how important are do they value that engagement. So, you know, members have different value for different types of programming. In the letter, we talked about the fandom for k-pop and for Stranger Things season five. How fandom is such a powerful engine for our business because it creates advocates for Netflix, Inc. Valuable even beyond the ten hours spent watching Stranger Things, or the hour thirty-nine spent watching k-pop demon hunters.

You know, so we're really super confident we're gonna continue to grow engagement, but more importantly, the value of that engagement as well. Because that's what allows us to sustain healthy revenue growth in the long term.

Spencer Wong: Thanks, Ted. Our next question on engagement comes from Ben Swinburne of Morgan Stanley. The engagement report gives us a sense of aggregate engagement across all titles and all members. Arguably, it's an overly simplified lens with which to view the health of the business. But one that suggests to some that the WB acquisition reflects a need for Warner and HBO's IP to address stagnant engagement levels on Netflix, Inc. today. Why is that the wrong conclusion, and how do you see the underlying engagement trends, in the business? Very succinct bear case from Ben Swinburne. Over to, you know, Ted or Greg.

Gregory Peters: Yeah. So I'll take this one. So, yeah, you're right, Ben, and as we sort of got to a little bit in the previous answer, total view hours by itself, it's an overly simplified view into engagement and engagement trends. Why is that? Because view hours is basically a very broad metric. It's influenced by a lot of things. It's You've got plan mix, tenure mix, geography, culture differences are a big factor. Just as one example, take consumers in Japan. They watch roughly half to two-thirds the amount of TV as American consumers.

So as you have more member growth in places like Japan, and there are a lot of places like that and frankly where we have more upside and more potential growth over the years to come. That skews the view hours per member. So we look at engagement at a portfolio level. View hours is one element of that, but we also look to those quality metrics that we were talking about. And as we said, you know, we see improving quality translates into core metrics like better retention and, you know, just to reiterate, our retention is among the best in the industry. Customer satisfaction is at an all-time high.

Those are more complete or maybe better said, those are outcome measures that we really, really focus on. So we have multiple tools. To keep improving those measures. And the value that we deliver. More and better production, back to pushing on the quality scores and how do we improve that. More licensing, more partnerships with local creative communities, with local broadcasters around the world. That improves local content market fit. We're very optimistic about organic growth prospects. As you see from our forecast, as well as maybe the aspirational goals that were referenced before, which don't include any M&A, we see huge opportunity to keep improving things there. But we also see Warner Bros.

With one hundred years of IP, an incredible library, great new shows and films. That's an accelerant to our strategy, and it's another mechanism to improve our offering for our members. So our job is to identify the best opportunities to improve that offering, both organic and through selected M&A, and always remain flexible and disciplined in pursuing those opportunities.

Spencer Wong: Thank you, Greg. Since Ben brought up Warner Brothers, I'll shift us to a few questions on the Warner Brothers acquisition. First from Mike Morris of Guggenheim. Does your planned acquisition of WB impact your approach to pricing the near to intermediate term? Would you consider raising the price of the service during the regulatory review process?

Gregory Peters: There is no impact or change to our approach in how we're running the business in that regard.

Spencer Wong: Right. Next one comes from Rich Greenfield of LightShed Partners. What surprised you most from the Warner Brothers due diligence, Greg? You in particular sounded less enthusiastic about major M&A back at the Bloomberg Screen Time Conference in October. As you went through the due diligence process, what got you more excited about the acquisition?

Theodore Sarandos: Greg, can I interrupt you for one second here? Please go ahead. I just wanna make it clear. That it was our default position going in that we were not buyers. We went into this with our eyes open and our minds open. And when we got into it, we both got very excited about this amazing opportunity. So Greg, you could share with what was exciting for us there.

Gregory Peters: That's right. And thanks, Rich, for bringing this up again. Yeah. One more time. But to Ted's point, when we got into the hood, there were several things we saw that were just really exciting, and we saw were exciting additions to our current business. Take first the film studio. We already know that, you know, existing from existing film output deals that the theatrical model is a complement to the streaming model. So we've seen that before. And to be super clear on this point, we have often, in our history, debated building that theatrical business. But we were busy investing in other areas, and it never made our priority cut.

But now with Warner Bros, they bring a mature well-run theatrical business with amazing films and we're super excited about that addition. Then you've got the television studio. Also a healthy business. It also complements our own, expands our production capability, You got great producers, great developers, and we intend to continue to produce shows for third parties and being a leading supplier to the industry. And then you get to the streaming side of things, You've got HBO. It is an amazing brand. It says prestige TV better than almost anything. Customers know it. They love it. They know what it means. You know, when you have programming from HBO, you know what an HBO show means.

It's also very complementary to our existing service and business. So owning HBO will allow us to further evolve our plan structure, allows us to deliver more series, more film, more value to consumers, and we'll leverage our global footprint in our streaming expertise to make that an even better service for consumers. So big picture, we just saw tremendous opportunity very achievable opportunity as well in bringing these two businesses together.

Spencer Neumann: You know, if it's okay to pile on a little bit, I'll just pile on to the trivia. So you know, I just maybe I'm the numbers guy. So to put some numbers against it, Rich, also, I just key from our perspective is that when you when you look at this combined company or when we look at the combined company on a pro forma basis, so pro forma post close, We estimate that roughly 85% of the revenues in that pro forma post close business that roughly 85% is from the core business we're in today. That's why we view this deal as primarily an accelerator to our core strategy. Strategy.

With this added benefit, a big added benefit of a complementary scaled world-class TV and film studio that we're excited to run and continue to build.

Spencer Wong: Thanks, Spence. Rich Greenfield also has a follow-up question on the transaction. What gives you the confidence the deal will get approved during the regulatory process? Ted, do you wanna take that one?

Theodore Sarandos: Yeah. Thanks, Rich. We've already made progress towards securing the necessary regulatory approvals. We submitted our HSR filing. We're working closely with WBD and the regulatory authorities, including the US Department of Justice and the European Commission. We're confident we're gonna be able to secure all the approvals. Because this deal is pro-consumer, It is pro-innovation. It's pro-worker. It is pro-creator, and it is pro-growth. You know, Warner Brothers, we just said earlier, it's got three core businesses that we don't currently have. So we're gonna need those teams. These folks have extensive experience and expertise. We want them to stay on and run those businesses. So we're expanding content creation, not collapsing it.

In this transaction, this is gonna allow us to significantly expand our production capacity. In The US and to keep investing in original content over the long term. Which means more opportunities for creative talent and more jobs. This is really a vertical deal for us. It allows us to gain access to a hundred years of Warner Brothers deep content and IP for development. And distribution in more effective ways that will benefit consumers and the industry as a whole. HBO, as Greg just mentioned, is a very complimentary service to ours. And the TV market is extremely dynamic and very competitive. So the TV landscape, in fact, has never been more competitive than it is today.

There's never been more competition for creators. For consumer attention, for advertising and subscription dollars. The competitive lines around TV consumption are already blurring, you know, as a number of services put their content on both the linear channels and the streaming services at the same time. And the more platforms are making their way into the TV, in your living room. So TV is not what we grew up on. TV is now just about everything. Oscars and the NFL are on YouTube. Networks are simulcasting the Super Bowl. On linear TV and streaming. Amazon owns MGM. Apple's competing for Emmys and Oscars. And Instagram is coming next.

So, you know, YouTube is just surpassed BBC and monthly average audience according to Barb that publishes these figures in The UK. So YouTube is not just UGC and cat videos anymore. YouTube has full name films. New episodes of scripted and unscripted TV shows. They have NFL football games. They have the Oscars. The BBC is gonna be producing original content for YouTube soon. They are TV. So we all compete with them in every dimension. For talent, for ad dollars, for subscription dollars, for all forms of content.

So more broadly, you know, we compete for people's attention across an even wider set of options that include streaming, broadcast, cable, gaming, social media, big tech video platforms, Our deal strengthens the marketplace. And it ensures healthy competition that will benefit consumers and protect and create jobs. That's why we're confident in the approval, Rich.

Spencer Wong: Thank you, Ted. We'll now go to a series of questions on the topic of content and content strategy. The next question comes from Ben Swinburne and Morgan Stanley. In light of the global Sony pay one agreement and the pending WB transaction, can you talk about your film strategy looking ahead? Are you leaning away from that original films and increasingly to licensing films after an exclusive theater run?

Theodore Sarandos: Thanks, Ben. No. There's no change to that approach. Dan Lynn and his team are gonna continue to produce a slate of Netflix, Inc. original films, and we'll also continue to license films in every available window as well. You know, our members love movies. And taste and diverse are very broad. Appetites are huge. So we wanna have a broadest offering as possible.

Spencer Wong: Great. Next question is from Vikram Kisabhavola of Baird. What were your observations from recent live events such as Jake Paul versus Anthony Joshua, and the NFL on Christmas Day? How should we expect your investment in live events to evolve from here?

Theodore Sarandos: Well, Vikram, remember, this is still a relatively small portion of total view hours. So the big live events like the amazing fight you're just talking about and that six-round knockout, and our NFL Christmas Day games and this new halftime show. Really important and differentiated parts of the service. But, again, small in total view hours. These events typically have outsized positive impacts on the business, around conversation and acquisition, and we're also starting to see some benefits to retention as well. But I said, it's a small portion of the content spend. With two hundred billion hours of very small portion of the total view hours too.

We remain really excited about it, and that's why we're building out and strengthening that offer. With things like Star Search premiering globally tonight with live voting. And we're beginning to invest in more events outside of The US like I mentioned, the World Baseball Classic in Japan, for local markets.

Spencer Wong: Thanks, Ted. Another question from Vikram Kasavabola. What types of podcasts do you think will be most effective on the platform? What are your initial observations from the launches, this past month?

Theodore Sarandos: Well, it's still very, very early, but we're super pleased by the early results that we're seeing. You know, we think about video podcasts like a modern talk show. But instead of having a single brand defined show, you have hundreds of them. So it's a broad offering versus a single broad show or format. But it does generate a lot of very passionate engagement, lots of variety. Are looking forward, you know, to the types of things we're gonna add here. The things that our members already love. So sports, you've seen it. We can build on the success of our sports adjacent strategy. Comedy and entertainment, and, of course, true crime.

You may have heard we've got some true crime stuff on Netflix, Inc.

Spencer Wong: Great. Last question on content strategy comes from Rich Greenfield of LightShed. This is our quarterly theatrical question. Why has your, why has your view on theatrical windowing changed?

Theodore Sarandos: Well, Rich, I will point out here, I have in the past made observations about the theatrical business. We were not in the theatrical business when I made those observations. This deal closes, we will be in the theatrical business. And remember this, I've said it many times, this is a business and not a religion. So conditions change and insights change, and we have a culture that we reevaluate things when they do. So, you know, short list of examples there. The pivots we've made around advertising, around live, around sports, In theatrical, we debated many times over the years whether we should build a theatrical distribution engine or not.

And in a world of priority setting and constrained resources, it just didn't make the priority cut. So now when this deal closes, we will have the benefit of having a scaled world-class theatrical distribution business with more than $4 billion of global box office. And we're excited to maintain it and further strengthen that business. Warner Bros. Films are gonna be released in theaters with a forty-five-day window. Just like they are today. This is a new business for us and one that we're really excited about. I'm actually quite proud of our long track record of evolving the business, and I believe our results speak to that as well.

Spencer Wong: Thanks, Ted. We'll now move on to a few questions we have from analysts about advertising. Steve Cahall from Wells Fargo asks, as you look at the ads potential in 2026, do you think you could reach parity on ARM, average revenue per membership, or ad-supported for ad-supported versus your ad-free plans?

Gregory Peters: Yeah. So there is still a gap between the ad tier ARM for standard without ads, but that gap is narrowing. And while because there's a gap, it means we're under realizing revenue growth in the near time. It also, therefore, represents an opportunity for us. So as we improve our ad capabilities, we can close that gap over time. We can drive more revenue. We've seen exactly that ability to do that over the last year. We've expanded demand sources. We continue to prove our speed of execution on our own ad tech stack. That's more ad features, ads products, more measurement, etcetera. That means increased fill rates and that's driven ads ARM higher.

Now that we've grown to relevant scale, meaning consumer reach and all our ads countries, our main focus is on increasing the monetization of that growing and in inventory. It's likely to remain our focus for, you know, at least the next several years. So we believe we can close that gap and that means upside in terms of revenue growth.

Spencer Wong: Thanks, Greg. As a follow-up from Ben Swinburne, as you head into your second year with your own ad tech, build out across the 12 ad markets. What's the opportunity to drive revenues? Can you maintain your premium CPE and so meaningfully increase bill rate in the year ahead to deliver another rough doubling of advertising revenue?

Gregory Peters: Yeah. So as we mentioned a couple of times before, really the most immediate benefit we've seen from our rollout of our own stack has just been making it easier for advertisers to buy in our service, more places to buy. We hear that directly in terms of feedback from advertisers. We see it in the sales performance, of course. In 2026, we are making more Netflix, Inc. first-party data accessible, of course, in a privacy-safe, data-secure way. For assessing media investments. That ability to tap into this deep library of insights that we have ultimately enhances the performance of media buys.

We're also offering advertisers a wider array of ads formats so more ads products, enhanced interactivity, which should improve outcomes, At the end of last year, we started testing modular capabilities with interactive video ads. These ads cater to members' viewing behaviors and allows advertisers to benefit from essentially a dynamic template that uses mix and match creative elements to drive better business outcomes. We've seen good early results in the testing, and we'll roll those out globally by 2026. Additionally, now that we've been on our own ad stack for over six months, we've got a better set of data, historical campaign data, We can use that to enhance our RFP process.

Drive better media planning, better outcomes for our advertisers. So get to the point of question, we see all of that adding up to the same kind of performance we saw over the last year, which means we can grow revenue targeting doubling that revenue growth by improving fill rate and growing inventory with similar CPMs.

Spencer Wong: Thanks, Greg. We also have a question on gaming, which I'm excited for since I'm a big player of our new party game, Boggle. If my family's watching, I'm still the number one winner. But this question comes from Vikram, Kesap Abhotla Baird. Netflix, Inc. had some key developments in its video game offering throughout 2025. How would you characterize your success and progress at this stage? What are your key priorities for this business in 2026?

Gregory Peters: We've seen some really positive results with games like Red Dead Redemption, same kind of performance that we saw in GTA for folks that are familiar with that. We're also excited about more kids, more narrative feature releases in 2026. So those are good areas of growth for us. But a big advancement, as you sort of alluded Spencer, a big priority for us is our cloud-based TV games. It's an exciting launch for us. We're still in the early stages of this rollout of roughly a third of our members have access to TV-based games. This is sort of a process of upgrading the TV technology, the TV clients to be able to handle that.

And recently, with our party games on TV boggle, as you mentioned, Pictionary, LEGO party games like that, we've seen, you know, really strong uptake. So it's off a small base because about think about 10% reach into those eligible members. But our TV-based games have enjoyed quite a significant engagement uptick, after that party pack launch. And then in 2026, this year, we're gonna be expanding that cloud-first strategy. We've got a growing set of cloud games to the TV like our recently announced newly reimagined, more accessible FIFA football simulation game. We're super excited to be able to launch that. And stepping back for a second, if you look at that in totality, why is this important?

You know, as we said in the past, it's a big market, roughly $140 billion worth of consumer spend China. We are just scratching the surface today in terms of what we can do in this space. But we already are seeing multiple instances of how this approach not only extends the audience's engagement, with the service and with the story, but it also creates synergy that reinforces both mediums. So the interactive and the noninteractive side, that drives more engagement, more retention. So, you know, bottom line, we're very bullish on the opportunity side. We're seeing progress. Still got a lot of work to go do.

And I should say, like, all of our developing initiatives we're gonna ramp our investment based on demonstrated value to members and returns to the business.

Theodore Sarandos: We will have Spencer give us a Boggle demo next quarter. I watched the video of Greg playing with Elizabeth, and there's no way I'm gonna challenge Greg because I think he'd take me down in two seconds. But with that, we'll take our last question from Rich Greenfield of Light Shed, on innovation. His question is, why isn't vertical video a higher priority for Netflix, Inc.?

Gregory Peters: Rich, we've actually been testing vertical video features for some time, about six months or so. We've had a vertical video feed in the mobile experience that's been available for several months. So, that feed is filled with clips of Netflix, Inc. shows and movies. You can imagine us bringing more clips based on new content types like video podcasts, which Ted mentioned that we're adding to the general service. We'll bring the, you know, sort of appropriate components of that into that vertical video feed. And really, this is part of a broader upgrade of our mobile experience.

Just as you've seen us do with the new TV UI, we're working on a new mobile UI that will better serve the expansion of our business over the decade to come. We're gonna roll this out later in 2026. And just like our TV UI, it then becomes a starting point. It becomes a platform for us to continue to iterate, test, evolve, and improve our offerings. So don't worry, Rich. We got more vertical video coming for you.

Spencer Wong: Thank you, Greg, Ted, and Spence. That is all the time we have now for our call. We thank all the listeners for tuning in to our earnings call. We look forward to speaking with you all next quarter. Thank you. Welcome to the Netflix, Inc. Q2 2024 earnings interview. I'm Spencer Wong. VP of finance, IR, and corporate development. Joining me today are co-CEOs, Theodore Sarandos and Gregory Peters and CFO, Spencer Neumann. As a reminder, we'll be making forward-looking statements, and actual results may vary. We'll now take questions from the sell-side community that have been submitted, and we'll begin with a series of questions on our Q2 results and our forecast.

So the first question on our results comes from Doug Anmuth of JP Morgan. So, Spence, Doug asks, how can you provide some color on how churn is trending and perhaps share some color on what drove revenue growth in the quarter?

Spencer Neumann: Yeah. Sure. Thanks, Doug, and thanks, Spencer. We were pleased with our performance in Q2. There were strong performances across the board, good momentum across the business. Strong revenue growth, member growth, and profit growth. In terms of that member growth in churn, I'd say that the kind of outside paid net outsized paid net adds in the quarter was primarily driven by stronger acquisition, a little stronger than we expected, but also very healthy continued healthy retention in the quarter, and that's across all regions. In terms of growth generally, there's probably a kind of three key factors that drove member growth.

First, strong performance of our content slate, a wide variety of titles that delivered across genres and regions, and I'm sure we'll talk more about that. There was some positive impact from page sharing that continues. As we've said on recent calls, it's tougher and tougher to tease that out. We're clearly seeing healthy organic growth in the business, but we're also continuing to get better and better at it. Translating improvements in our service into business value. Including getting better and better at converting unpaid accounts, And on at least on the paid member front, we're also probably benefiting from that attractive entry point in terms of price point and feature set for our ads plan.

So you put all that together, and it was a nice quarter for subscriber growth, but even more importantly, a nice quarter in terms of driving healthy revenue growth and healthy profit growth. So 17% reported revenue growth, and margins that were up five percentage points year over year.

Spencer Wong: Thanks, Spence. Doug also has a follow-up question on the results. We noted or Netflix, Inc. noted that India was our number two and number three country in terms of paid net ads and percent revenue growth in the second quarter. Do you feel like you're hitting more of an inflection point in that market? Or is that more about a very specific successful content slate in Q2? Ted, do you wanna take it?

Theodore Sarandos: Yeah. Well, look. I think India's growth is a story that we see around the world. Playing out very similarly. So you look at the content, the product market fit, is what drives our ability to attract members and retain members. And monetize with them as well. So I feel like what's going on in the quarter has been this ongoing build. We had this great show here on Monday. Sanjay Leela Bansali, SLB is one of the most celebrated filmmakers in India, and he took on this incredibly ambitious series and brought it to screen on Netflix, Inc., directed every episode, and it's our biggest drama series to date in India.

So on top of that, our original films and our licensed films as films in the pay TV window immediately following theatrical have continued to thrill our members. So we pick them well. We program well. We improve the product market fit. We improve engagement. We grow members. We grow revenue. It's the same formula I think everywhere else everywhere we go. And there's certainly plenty of room to grow in India long as we keep thrilling our audiences there.

Spencer Wong: Thank you, Ted. Our next question on the results relates to operating margin, and the question comes from Jessica Reif Ehrlich of Bank of America. For Spence, how should we think about the pace of margin expansion going forward? And the drivers of the margin outperformance this year?

Spencer Neumann: Well, thanks, Jessica. Well, you know, when we think about margin expansion, we're obviously pleased with how it's trending so far. You know, our focus kind of stepping back. Our focus is to sustain healthy revenue growth and grow margins each year. You know? So we feel good about what we've been delivering, As you see in the letter, we're now targeting 26% full-year operating income margin, and that's up from our prior guide of 25%, and it's up five percentage points year over year, assuming we kind of land there. But the amount of annual margin expansion as we look forward it could bounce around each year. We've talked about this in recent quarters.

Could bounce around because of foreign exchange in a year where that moves or other business considerations. But we're committed to grow margins each year and we see a lot of room to continue to grow profit margin, absolute profit dollars, and do that over an extended period of time for years to come.

Spencer Wong: Thank you, Spence. Our next question comes from Steven Cahall from Wells Fargo, and it's regarding free cash flow. So the question is Netflix, Inc. has raised their full-year and margin outlook, but did not change their free cash flow forecast of approximately $6 billion. Is this just a pull forward in cash content spend, or is there anything else that is impacting your free cash flow guidance?

Spencer Neumann: I'll tell you, though. Not nothing else impacting it. We you know, as we've noted as you noted, we continue to expect approximately $6 billion of free cash flow for the year. There's always some uncertainty in terms of timing of things like content spend, sometimes timing of taxes. So that kind of keeps us right now holding at approximately $6 billion, but no other read-through beyond that.

Spencer Wong: Thank you, Spence. We have our quarterly question on page sharing next from John Hoodlik of UBS, which I'll direct to Greg. The question is, do you still have upside from the page sharing initiative, and have you moved forward on mobile page sharing? And if so, how big of an opportunity is this?

Gregory Peters: Yeah. Spence already gave some commentary on this quarter's performance. I'll talk about it sort more from a long-term perspective. And as we said, a couple quarters now, we're at the point where we really operationalize page sharing. So it's just a standard part of our product experience. We think about the improvements there. To be clear, we do see still some significant areas for improvement there. But we see those as part of all the opportunities, essentially, we have to improve the product experience. So we're constantly prioritizing all those opportunities based on what we think is the expected value.

And just to give you a sense of, you know, how wide that is, even things that we've been working on for over a decade, like our sign-up flows or the user experience that a consumer has when they wanna sign up for Netflix, Inc. We have found multiple improvements just over the last couple of quarters in those flows which have delivered material incremental revenue wins. We're gonna continue to look at all these opportunities. We're gonna improve things for members and for the business. We'll iterate. We'll improve them. And we think of this as a just a constantly improving value translation. So we wanna take all the value that's created by Bella's teams in film and series.

We got more live events, games, and we want to translate that more effectively into revenue so we can continue to invest and keep that flywheel spinning. If we can keep improving that value translation mechanism each quarter, and keep improving the entertainment offering that it operates on top of those two things compound and drive the business. It'll drive the business through the rest of year. It'll drive through '25 and beyond, and that really allows us to more effectively get more of those 500 million plus and growing smart TV households around the world that aren't currently members, to sign up.

And it also drives our other levers of growth, like plan optimization, extra member, ads revenues, and pricing into more value. So I just I think about this as more of the, you know, constant work we are doing to improve for decades to come.

Spencer Wong: Thank you, Greg. I'll now move us along to a series of questions about advertising, and we'll start first with Barton Crockett of Rosenblatt, and I'll point this question to Spence. You say that advertising is not a, quote, primary, unquote, driver revenue growth yet. Can you provide a little more clarity on what that means for both '24 and '25?

Spencer Neumann: Yeah, sure. Thanks. So stepping back, I'd say we're very pleased with how we're scaling our ads business. We talk about that in our letter. We've been primarily focused on scaling reach. But if you think about even just the revenue portion of ads, it is growing nicely. The rate of growth, it just happens to be growing off of a relatively small base because we're starting from only eighteen months into ads, so to have the kind of primary revenue impact across a business that has been primarily for a long time, that just takes some time.

So we're scaling well through reach, through engagement, through growing inventory, and that represents opportunity for us over a multiyear trajectory to have a big and increasing revenue and profit impact on the business. So again, stepping back, we feel really good about our position, our ability to sustain healthy revenue and profit growth. Ads is kind of one more tool in our tool chest there. We're doing the hard work now to improve our service across the board. So we the year strong in '24 and drive growth into '25 and beyond. We're small in every measure. We talk about it a lot. We're smallest share of TV time. We're small in terms of penetration of connected TV homes.

We're small in revenue market share. And we're gonna grow in those areas across the board. And ad's gonna be a bigger piece of that puzzle. Just if we won't have it be primary in 2425, but it contributes. It's a meaningful contributor. That's what we've said, and that's what it is doing. And then when you get into '26 and beyond, it can be even more meaningful, and, hopefully, it becomes to the point where it is a primary contributor. Given all of that engagement and reach that we're building.

Spencer Wong: Thank you, Spence. A follow-up question on advertising from Ben Swinburne of Morgan Stanley, and I will direct this to Greg. Looking into your advertising revenue ramp into 2025, what are the key areas that need to improve to bring in significantly more revenue? Can you talk about the opportunities and challenges scaling up your direct sales efforts and leveraging third-party sources of demand? Primarily programmatically.

Gregory Peters: Yeah. We've said many times our priority, number one priority, first priority is scale. So we've been heavily focused on that. And the great news is we've seen great progress in regard. We've been scaling our ads member base very quickly from zero years ago to where we are today. And we're excited to say that we're on track to achieve our critical scale goals for all of our ads countries in 2025. Clearly, we expect further growth beyond that, but that represents a great threshold to get to and then to build more scale and more attractiveness from there. That allows us to shift more of our energy now on more effectively monetizing that rapidly growing inventory.

And there's sort of two main fronts here. One is our go-to-market capability. So we're adding more sales folks. We're adding more ads operation folks. Building our capabilities to meet advertisers, A big component of that is giving advertisers more effective ways to buy Netflix, Inc. It's a big point of feedback that we heard from advertisers. So by adding demand sources that are already integrated into their processes and their systems, that just makes it easy for them to buy. And in some cases, that was a threshold item for them to buy in us we're gonna expand the number of buyers as a result of that.

And then the other big area of growth for us is the sort of product and technology stack. We mentioned we're building our own ad server now. We're excited to launch that in Canada this year and then the rest of our ads markets in '25. That unlocks a whole set of innovations that we expect that are focused on a better user experience for our members on those ad tiers and better advertiser features. So think a lot about this as targeting relevance, more capabilities in that space, as well as thinking about, you know, do we do ROI, ROAS, incrementality measurements, all the things that we want.

And ultimately, really, this is about bringing what has been amazing about digital advertising in terms of targeting relevance measurement, etcetera, and what we think is amazing about TV advertising, which is an incredible creative format, better creative format in many cases than digital, as well as the ability to put those advertisements next to content, to titles, stories that are you know, the social conversation which is important for advertisers. So lots of work ahead. We've got years of work to do but that's the line that we're moving forward with.

Spencer Wong: Thank you, Greg. From Steven Cahall, his question is, given what we think are pressures on AVOD CPMs, and the ten hours per account per month of viewing time you disclosed at the upfront for ad-supported members what's the likelihood that ad-supported ARM drops below ad-free member ARM the second half, would you consider raising the price of ad-supported tiers as an offset?

Gregory Peters: Okay. So perhaps starting by just providing some clarification here. Our engagement on our ads plans is very similar to what we see on our non-ads plans. That's close to the approximate approximately two hours of viewing per member per day across all the plans that you can calculate globally from our engagement reports. You should think of that as roughly, you know, how our ad plan members are engaging as well.

And then on terms of ads ARM, so ads ARM, which is, of course, a combination of the subscription amount plus the ads revenue, Currently, because we've been scaling so rapidly, we are not we're racing behind essentially to fulfill all of that increasing inventory, and we're lagging in that regard. So currently, our ads ARM is lower than our non-ads ARM, and that's obviously we look at that both you know, it's a go-do, but it's a revenue growth opportunity for us as we scale into that represents an opportunity to accelerate our revenue growth. As well. So you mentioned price.

We think about pricing for ads tier very similar to how we would think about pricing for our non-ads First of all, I just think it's, you know, worth noting that we love having an entry price that's lower. That means we are more accessible for more people in our ads markets. That's a great thing because get to all the amazing storytelling that we are doing there. But in terms of, you know, raising that price, we think about similar to how we think about pricing in general, which is, you know, it's our job to increase the value that we are delivering all of our members. We've got more amazing film, more series.

The live events that are coming, more games. And when we have signals from our members, this is, you know, the amount of acquisition that we've got going on, engagement, what our retention and churn looks like, then we find the right moment to ask our members to pay a bit more to keep that fly while spinning. We'll think about that in the ads context just like we would in the non-ads context.

Spencer Wong: Thank you, Greg. John Huluk from UBS. Asks, can you provide an update on the CTV ad environment? And update us on initial feedback from advertisers on your ad tech What features do you expect to add with the ad tech build, and anything you can tell us about the cost associated with it?

Gregory Peters: Sure. Well, there's a lot of excitement amongst advertisers. To you know, about the work that we're doing. I'd say the primary one and, again, one that we're responding to, which is sort of very tactical and immediate, is being able to provide advertisers more ways to buy on Netflix, Inc. So those demand sources are something we heard very clearly from advertisers that it was either a real improvement for them or it was a necessary point for them to be able to buy on Netflix, Inc.

So then beyond that, we hear lots of enthusiasm for the things I mentioned before, increased ads relevancy, targeting personalization, better measurement, incrementality, all these, you know, things that we'll be building over the next several years. Lots of excitement about that. The biggest negative feedback we get is that we aren't there right now. So advertisers want us to have all those features in place today. We would love to have all of those features in place today for sure. So we're, you know, got the hard work ahead of us of, you know, building those as quickly as we can and closing that gap as soon as we can.

But this is you know, it's years ahead of us to go ahead and keep building these things and quite frankly as we build those features I am quite certain that there'll be more that will come onto the roster that advertisers will be for us and more that we'll go be excited about doing.

Spencer Wong: Thank you, Greg. And our next question is for Ted coming from Rich Greenfield of LightShed Partners. Hey, Spencer.

Spencer Neumann: Spencer, sorry to interrupt you. We didn't really ask the answer to the kind cost thing unless I missed it. I miss it in terms Sure. I can I can chime in if you like? You know, all of what Greg talked about in terms of investing in the business, suffice to say that is all embedded in our margin guidance. So we're we make trade-offs all the time with the business where, you know, we're expenses are up 7% year to date, where if you kind of step back, we're on track to be. You can do the math.

It's probably north of $28 billion in total expenses across our business for the year, and we're still expecting to deliver five percentage points of margin improvement. So we try to run the business like owners, make smart trade-offs, and invest into growth. Like live, like ads, like games, like product innovation, and ads is part of that both for this year as well as into next year where, again, we expect to drive revenue growth and increase our margins while investing into ads.

Gregory Peters: Thanks for catching that, Spence. Yeah. Yes. Thanks for keeping us on this, Spence.

Spencer Wong: So next question is for Ted coming from Rich Greenfield of LightShed Partners. Is your recent agreement to stream two NFL games on Christmas day signaling that you need live sports to build a robust advertising business, or are you trying to create a regular cadence of high-profile live events to bring onto Netflix, Inc. platform who will then spend across your broad array of entertainment content?

Theodore Sarandos: Thank you, Rich. That's a great question. Let me back up a minute. We're in live because our members love it. And it drives a ton of engagement, it drives a ton of excitement. And those two things are very valuable. So the good thing is that advertisers like that too, and they like it for the exact same reason. The excitement and the engagement. So everyone's interests here are perfectly aligned in that way. What we signaled to the world when we went live with the Chris Rock selective outrage special last year ago.

Is that this company, Netflix, Inc., who you love for on-demand viewing of your favorite TV shows and movies, is also I say also gonna surprise you with amazing exclusive buzzy live entertainment. And since then, we've launched a golf tournament with the biggest stars in PGA golf and Formula One drivers, a tennis match with two, like, generational titans of professional tennis, Nadal and Alcaraz. A live comedy with Kat Williams, an entire week of groundbreaking live talk show episodes from John Mulaney, that epic roast of Tom Brady, our biggest livestream yet. And still to come, we've got a live show with Joe Rogan.

Have this hot dog eating grudge match between Chestnut and Kobayachi that people are remarkably excited about. We have this long-awaited boxing match between Mike Tyson and Jake Paul in November. On Christmas Day, not just one, but two great NFL football games. So I would call that a really fast ramp, and it leads right into a weekly live coverage of WWE. So it's that thrilling excitement engaged watching that people are really thrilled about and we're thrilled about that we're thrilled that our advertisers are excited about it too.

Spencer Wong: Thank you, Ted. Rich has a part two to this question, not surprisingly. How do you thread the needle licensing sports to drive advertising spend without becoming beholden to leagues at renewal?

Theodore Sarandos: Well, hopefully exactly the way we're doing it, by making these Netflix, Inc. events, not necessarily taking on a lot of tonnage from any one league, but actually making these games events, like having two NFL football games on Christmas Day, and two great games, the Chiefs and the Steelers and the Ravens and the Texans. They're both gonna be great games, and it really creates a lot of real excitement within the service, and it's one day of football.

So when I look at that and I think along those lines, you'd see how we solved for that in our WWE deal, which was economics that we like and live with and can grow into and contemplate what the expansion of cost and viewing would be over the over in that case, as long as twenty years if we want it to be. So I think it's really not a matter of there's an automatic disconnect between you can't do sports and have profit. It's very difficult to have big league sports and profit. So, you know, in when you offer them entire seasons.

But when you offer them in this event model that we're building on, really excited about our opportunity to do that without the risk that you're talking about right now. So and then beyond that, we were in love with the kind of very profitable storytelling version of sports. So if you can't wait for those football games on Christmas day, you can watch receiver right now. It just started on July 10. On Netflix, Inc., is part of that storytelling version of sports.

Spencer Wong: Thank you. Thank you, Ted. Our next question comes from of Barclays. It's a question regarding our engagement. So, Ted, could you speak to the underlying engagement health, at now and what are you seeing there?

Theodore Sarandos: Yeah. Look. I think I've talked about this a bit on the last calls well. But, you know, competition for entertainment is super intense, and we compete for every second of view time we get. So beyond that, you know, kind of the competitive intensity that's always been out there, we also anticipated some headwinds in our engagement because of paid sharing. Remember, we were taking folks who were watching Netflix, Inc. and not paying off the service. So we thought that our engagement would go down. We took a deep dive into how that was impacting and how we could isolate the impact. And look at it as owner households.

So those folks who are not impacted by paid sharing at all. And what we saw was in last quarter, is that engagement was holding steady. So that much of the engagement headwind was coming from that. And I looked then but now we look forward accordingly. Now I'm not gonna get in the habit of releasing this as a new metric every quarter, but looking at that same segment again, that segment's engagement is actually not just steady, but up year on year. So we're very excited about that. I think it's a very healthy sign of engagement growth.

And even with all of that, so beating down the headwinds of that and beating down competition, we're still about 10% of TV time in every country we operate in. So still lots of room to grow, but very pleased, with our engagement, but not fully satisfied.

Spencer Wong: Thank you, Ted. Our next question comes from Ben Swinburne of Morgan Stanley. Your primary competitor for more passive home entertainment engagement increasingly looks to be YouTube. What are you doing in terms of programming and product to try and take share from YouTube in the future? Or is this not a focus? Are there key verticals like kids programming where you see YouTube as particularly advantaged? Perhaps Ted you and Greg can tag team on this one.

Theodore Sarandos: Yeah. Sure. Looking at the Nielsen data that just released for June, what you see there is Netflix, Inc. and YouTube are the clear leaders in direct-to-consumer entertainment. So our two services and YouTube represent about 50% of all streaming to the TV in The US. And we use The US only because we that's we have the data. So really what we're focused on here is focusing ourselves on that other 80% of total TV time that isn't going to either us or YouTube. So that's a ton you know, that's both streaming continuing to expand, which it did in June, so that share of TV time grew against linear.

And as linear continues to give, I think there's a lot of opportunity for us to grow long as we keep executing well. Now we clearly do compete with YouTube in certain segments of their business, and we certainly compete with them for time and attention. But our services also feed each other really well. So remember, our shows are the most watched and, talked about and award nominated. We just came out of a 107 Emmy nominations for our slate this year. Yesterday. And so our teasers and trailers and behind-the-scenes clips and all those kind of things are incredibly popular on YouTube. So in that way, we kind of feed each other pretty nicely.

Greg, I know you wanna add anything.

Gregory Peters: Sure. I think it's also important to note that Netflix, Inc. fulfills an important and differentiated need for both consumers who really want you know, they want amazing spectacle movies and TV shows well as an important need for creators who want partners that can share in the risk that's inherent in bringing those stories to life. So you think about, you know, shows like Stranger Things or Wednesday, Heartstopper, Outer Banks. These shows create amazing viewing fandom and especially with younger audience. So it's not, you know, just one generation. And it's really hard to imagine how that kind of big creative bet would happen and be possible within YouTube's model.

So you know, to Ted's point, it is very competitive out there. And we also feel confident that our model works. It works well for our consumers. It works well for creators, and it works well for our business and helps us generate significant operating margins.

Spencer Wong: Thank you, Ted and Greg. Our next question comes from Maria Ripps of Canaccord. Netflix, Inc.'s CTO, Elizabeth Stone, recently appeared on a podcast where she said that Netflix, Inc. is exploring how to integrate generative AI into the platform to improve the member experience. Do you think the technology could have more of a potential impact on the content creation or discovery side? How do you think about the relative on engagement from improving discovery versus content? Greg, over to you for this one.

Gregory Peters: Yeah. We've been using similar technologies, AI and ML, for many years to improve the discovery experience and drive more engagement through those improvements. We think that generative AI has tremendous potential to improve our recommendations and discovery systems even further. We wanna make it even easier for people to find an amazing story that's just perfect for them in that moment. But I think it's also worth noting that the QR success stacks. Right? It's quality at all levels. So it's great movies. It's great TV shows. It's great games. It's great live events. And a great and constantly improving recommendation system that helps unlock all of that value for all of those stories.

Theodore Sarandos: Yeah. It begs the question about, you know, the impact on creative with AI coming going forward, which is hard to predict, obviously. But I would say this. I think that AI is a great gonna generate a great set of creator tools. Great way for creators to tell better stories. And one thing that's sure if you look back over a hundred years of entertainment, you can see how great technology and great entertainment work hand in hand to make to build great big businesses. You could look no further than 10% better than it is making it 50% cheaper. So remember, I think that shows and movies they win with the audience when they connect. You know?

And it's when the it's in the beauty of the writing. It's in the chemistry of the actors. It's in the plot, the surprise and the plot twist. All those things And I'm not saying that, audiences don't notice all these other things, but I think they largely care mostly about connecting with the storytelling. I'd say they probably don't care much about budgets and are arguably, maybe not even about the technology to deliver it. So my point is they're looking to connect. So we have to focus on how to tell on the quality of the storytelling. There's a lot of filmmakers and a lot of producers experimenting with AI today.

They're super excited about how useful a tool it can be, and we got to see how that develops before we can make any meaningful predictions what it means for anybody. But our goal remains unchanged, which is telling great stories.

Spencer Wong: Thank you, Ted and Greg. We now have a question from Ben Swinburne, regarding product. And the question for Greg is can you dimensionalize the opportunity from a new home page you said that this is the biggest update in a decade, which sounds meaningful. What are the primary areas of improvement you are targeting with this?

Gregory Peters: Yeah. It's hard to know exactly at this moment how much benefit that new homepage will, you know, derive I think it's worth noting that it's less about the improvements we're going to deliver initially, but it's more about creating a structure that allows us to evolve and advance more freely than the current structure does. In terms of what are the pain points, what are we trying to solve, a lot of this is getting to the increase in diversity of entertainment that we are now offering. We've been amazing at film and series for a long period of time, but now increasingly we're adding events into it.

So live events like, you know, the Brady Rose which was incredible, but it's a user of one-off event that we have to create demand for. It's live events like WWE, which are consistent and repeating that we wanna make sure that fans of that experience have an easy way to access those things. We're increasingly promoting games as well into our service. What we found is we need to create structures that allow us to flexibly go from one type of content and entertainment to another in terms of how we're promoting and those. So there's things like that.

There's also things like we wanna increasingly recognize that we're doing even in the same content type, we're doing different jobs for our users in different moments. And that could be, you know, Sunday afternoon family movie time. That'd be a great experience if we wanna provide exactly the right discovery and choosing experience for versus maybe late on Thursday night when you're coming home and you just wanna get into the episode of the series that you're currently cruising through. So it's that kind of flexibility we wanna provide.

This is our expectation is that this new structure will allow us to deliver as the old structure did for, you know, a decade, multiple repetitive material benefits to users in terms of engagement, which lead into retention and then revenue. But again, that'll be a long iterative journey, and we're trying to take that first step and set us up for that.

Theodore Sarandos: And less technical too, Greg. It's the UI is beautiful.

Gregory Peters: There we go. We like beauty as well. Beauty is It is. It really is.

Spencer Wong: Thank you. Next question is from Jason Helfstein of Oppenheimer. What have been the early results from phasing out the basic tier in a handful of your markets, and how does that tie back to success in selling ads? Greg, would you wanna take that one?

Gregory Peters: Sure. As you've seen us do, you know, multiple times before, we spend a lot of energy on the right product experience. For doing this migration. And then what we do is we, you know, we roll it out and we test it. And we see how that goes and I let our members tell us if we did a good job there or not. Make whatever changes and iterations before we then scale it out and roll it even further. And I think it's, you know, worth noting here that we feel like in this migration we've got a very strong offering for our members. Essentially, we're providing them a better experience, two streams versus one.

We've got higher definition. We got downloads. And, of course, all at a lower price, $6.99 in The United States. We think that represents a tremendous entertainment value, and it includes ads. And for members who don't, you know, want that ads experience, they, of course, can choose our ads-free standard or premium plans as well. And then in terms of performance, I'll just let our actions speak for ourselves. When those things go well, we typically roll it out and that's you know, we've had the confidence to move forward with that change in The US and France. That's an indicator of how it's going.

Spencer Wong: Thank you, Greg. Next question comes from Eric Sheridan from Goldman Sachs. The question is regarding gaming. Can you provide any update on your gaming initiative and user engagement and your ability to scale your gaming efforts?

Gregory Peters: Sure. Games is a big market, so it's almost $150 billion China and Russia, not including ad revenue, which we aren't part participating in our current model. And we're getting close to three years into our gaming initiative, and we're happy with the progress that we've seen. We've had set ourselves pretty aggressive engagement growth targets, and we've met those, exceeded those in many cases. In 2023, we tripled that engagement. We're looking good in our engagement growth in '24, and we've set even more aggressive growth goals for '25 and '26. But worth noting that engagement and that impact on our overall business at the current scale, it's still quite small.

And it's also probably worth noting that the investment level in games relative to our overall content spend is also quite small. And we've calibrated the growth and investment with the growth and in business impact, so we're being disciplined about how we scale that. So now, obviously, the job is to continue to grow that engagement. To the place where it has a material impact on the business. I think you can you've seen this trajectory with us before, whether it's been a new content genre like unscripted or film or maybe getting the content mix right for a particular country.

You can think about Japan or India, which, you know, we're now an amazing place through the hard work of our teams there. We continually iterate. We refine our programming based on the signals we get from our members. If you look over several years with that model, can make a huge amount of progress. We've launched over 100 games so far. We've seen what works. What doesn't work. We're refining our program to do more of what is working with the 80 plus games that we currently have in development. And one of those things that really is working is connecting our members with games based on specific Netflix, Inc. IP that they love.

And this is an area that we've been able to move in quickly in a particular space, which is interactive narrative games. These are easier to build and we place those in a narrative hub that we call Netflix Stories. Q2, launched Virgin River and Perfect Match. Starting this month in July, we're gonna launch about one new title per month into Netflix Stories. This is, you know, amazing IP like Emily in Paris and Selling Sunset. And we have lots more, including very different types of games yet to come in the quarters and years ahead.

Theodore Sarandos: Yeah. I just wanna chime in for a second, Greg, if you don't mind. This is why I'm really excited about the opportunity in games, which is the way that it's pretty rare for the content new content vertical like this to actually complement or draft off of one of the of each other. Every once in a while we get something like Squid Game the challenge following the Squid Game the squid the scripted series. But I think our opportunity here to serve super fandom with games is really fun and remarkable.

I think the idea of being able to take a show and give the super fan a place to be in between seasons and even beyond that to be able to use the game platform to introduce new characters, the new storylines, or new plot twists, Event now you could do those kind of things, and then they could then materialize in the next season or in the sequel to the film. It's a really great opportunity and a rare one where one and one equals three here. And to kind of replicate some of the success we've seen building fandom in with live events and consumer products, this actually fits really nicely into that.

So really excited to see where this goes.

Spencer Wong: Thank you, Ted. Thank you, Greg. Our last question comes from Jessica Reif Ehrlich of Bank of America. The question is regarding content, spend. Ted, you have targeted $17 billion in cash content spend. This year. You're increasing your sports spending within that. How should we think about your spending on entertainment or non-sports entertainment, and what's the overall content spending growth going forward?

Theodore Sarandos: Well, thanks for the question. I would like to have back up a little bit and say that, you know, creating TV and films for a big global audience, is a creative process. So remember, we're programming for more than 600 million people around the world. Who are watching us for a couple of hours a day every day. So we've got our work cut out for us. And that $17 billion, all those exciting things we talked about earlier are all tucked into that $17 billion, and that $17 billion will grow as our revenue grows. It won't grow as fast as our revenue grows, but it will grow to accommodate that.

And I think what's really important and where I think we have a real interesting advantage here is that we have these distributed creative teams all over the world. So what's great about that is they are very tightly wound into the creative ecosystem in all these different countries, the star systems, the producer systems, and more importantly, the culture. What fans in those countries really love. So what we've got all these folks working at the same time, so that in this creative process, which does have you know, hot streaks and cold streaks, they can be operating pretty simultaneously to create a very steady cadence of big exciting hits.

We certainly compete with Hollywood to make the best and most popular programming in the world. But we're also doing that in India, in Spain, in France, in Italy, in Germany, in Korea, in Japan, all over Southeast Asia, in Mexico, in Colombia, Spain, Argentina, and The UK. The program that's create the programming that we create in those countries all, again, all part of that $17 billion. Are all designed to thrill the local audience. And when they really, really thrill the local audience, there's a possibility and sometimes a probability that they could find a gigantic audience all over the world, in North America.

So the team in EMEA, particularly in The UK, is doingTheodore Sarandos: a remarkable job of this right now. So, they have been able to deliver big global hits but they've been sensational in-country. So Baby Reindeer and The Gentleman both landed with Emmy nominations yesterday and have been sensations in The US. But they are a phenomenon in The UK. So more than 50% of all of our members in The UK have watched or are watching Baby Reindeer and The Gentleman. Similar with, One Day, our original film Scoop. So those things that are thrilling the world are super serving the British audience.

The same thing just came out of Paris or out of France with Under Paris, which was 90 million views, 157 million view hours around the world. More than half of every French member loves this movie. Same thing with The Osunte Case in Spain. More than 50% watching in Spain and big watching all over the world. Queen of Tears in Korea is another example that's happening in APAC right now. So this kind of like super serving local audiences, creating global content around the world, gives us an efficiency that I think is getting better and better and a muscle that's getting stronger and stronger, I'm really excited about. And how does that play out?

You know, our slate coming up is unbelievable. So as we've concurrently forecast, we're gonna deliver for the rest of this year and what we're gonna deliver into the next into through '25 just for just before the end of this year. We've got Squid Game, returned. We've got Emily in Paris returned. You've got a new season of Selling Sunset, Lincoln Lawyer, The Diplomat, Virgin River, Love is Blind. Ryan Murphy has an incredible new season of Monsters that tells the Eric and Lyle Menendez story. That's all just coming up before the end of the year.

And then looking forward, you know, over the next you know, through '25, you've got new seasons of Wednesday and Stranger Things and Night Agent. In production on One Piece, so there's a ton of excitement there just in our series. This week, we kicked off the finale of Cobra Kai, which is gonna blow your mind. August 8, we've got the finale of Umbrella Academy kicking off. And a brand new series that we're also thrilled about. Susan Beer's Perfect Couple, with this has got Nicole Kidman and just a really fun, fun thriller. Nobody Wants This from Kristen Bell and Adam Brody. Black Doves is a beautiful show out of The UK. Beauty in Black from Tyler Perry.

No Good Deed, which is bringing Ray Romano and Lisa Kudrow back to TV, Classic Spy with Ted Danson from Brazil. We have Cena from Colombia. We've got A Hundred Years of Solitude. And then, of course, all those live events I talked to you about. And our movie slate is fantastic. With Rebel Ridge, Will and Harper, The Six Triple Eight, The Piano Lesson, Carry On. We have got a lot packed into that. Our goal and our mission here is we have to spend the next billion dollars of programming better than anyone else in the world. And there's no one better at doing it than Netflix, Inc. So we're excited.

Spencer Neumann: Spencer, how do you not get excited about that and then also get excited about that we're gonna do all that while, you know, growing content spend slower than revenue. That's a lot of stuff going on. Thanks, Ted. It's all in there. It's all in there. And the hot dog contest too, Spence. Don't forget that.

Spencer Wong: Alright. Well, I'm gonna leave it at that since it sounds like we're gonna have a lot to watch, so, we all need a little bit more time. So we'll end the Q2 call here. So thank you, Ted, Greg, and Spence, for joining us today. Thank you, investors and analysts, for dialing into our call, and we look forward to chatting with you next quarter. Thank you very much.