2018 was a stellar year for streaming TV company Netflix (NASDAQ:NFLX). Revenue during the year soared 35%, driven by a 26% year-over-year increase in paying members and higher average subscription prices. With 2019 underway, it's a good time to check in on what management is saying about the company.
In Netflix's recent fourth-quarter earnings call, management shared plenty of insight about the company, including its thoughts on price increases, its plans for funding content, and how original productions are becoming more material to the customer experience.
Here are three key quotes from the earnings call.
How management thinks of price increases
Ahead of its fourth-quarter shareholder letter, Netflix surprised investors with an announcement of a major price increase in the U.S. that would affect every member tier. Representing the company's fourth-ever price increase, it's a good time to get an update on how management approaches price increases. According to Netflix chief product officer Greg Peters, the way Netflix goes about price increases is straightforward.
I think, the model we've got [for price increase] is a fairly simplistic one, where we think our job is to effectively invest the money that our subscribers give us every month so that we can give them incredible content and a better and better product experience. And if we do that well, we create more value for our subscribers and then occasionally, we'll come to them and we'll ask for a little bit more money, so that we can actually start that next cycle of investment. And so that's the overarching framework.
Peters also added that the company looks at engagement levels and other metrics to help inform exactly what prices should be.
Netflix wants to be self-funding... but not yet
Free cash flow for Netflix was about negative $3 billion in 2018. This was the result of the company transitioning more of its content to original programming, which requires more up-front investments that licensing from the second-run market.
For now, investors have been forgiving as Netflix regularly taps debt markets to fund its content expansion. As net member growth slows, however, investors may not be as forgiving. Fortunately, the company plans to generate enough excess cash in the future to no longer rely on debt markets. But don't expect this to be the case soon.
"[U]ltimately, our aspiration is to be self-funding," explained Netflix CFO Spencer Neumann, "and we believe we will do that over time with these content investments. In the interim, as we continue to access the markets, I don't foresee any change to our approach."
Netflix isn't as dependent on second-run content
Supporting the case for ongoing aggressive investments in original content, Netflix chief content officer Ted Sarandos said that today "the vast majority of the content that's watched on Netflix are our original content brands."
Indeed, if you were to list all of the company's content -- both original and second runs -- by viewing hours, originals would dominate both top 25 and top 50 lists, Sarandos said.