🍿 Netflix: Engagement Machine

🌈 Abstract

The article discusses Netflix's strong performance in Q1 FY24, highlighting its continued growth in paid memberships, revenue, and operating margins. It covers recent business initiatives, such as the expansion into live sports and games, the launch of the ad-supported tier, and the crackdown on password sharing. The article also analyzes Netflix's engagement metrics, content strategy, and competitive positioning in the streaming market.

🙋 Q&A

[01] Netflix Q1 FY24 Overview

1. What were the key metrics and financial results for Netflix in Q1 FY24?

• Netflix added 9 million paid memberships in Q1 FY24, beating expectations by around 5 million.
• Revenue grew 15% year-over-year to $9.4 billion, beating guidance.
• Operating margin was 28%, up 7 percentage points year-over-year and 2 percentage points above guidance.
• Earnings per share (EPS) was $5.28, beating expectations by $0.76.
• Operating cash flow was $2.2 billion (24% margin) and free cash flow was $2.1 billion (23% margin).

2. How is Netflix shifting its key performance metrics?

• Starting in 2025, Netflix will stop reporting membership and average revenue per membership (ARM) data, and instead focus on revenue and operating margin as its primary success metrics.
• This is due to new initiatives like tiered pricing, the password-sharing crackdown, and advertising, which make subscriber numbers less indicative of the company's performance.

3. What were the regional trends in Netflix's membership growth?

• North America now accounts for 31% of Netflix's memberships, down from 45% five years ago, demonstrating the success of their international expansion.
• Q1 growth was strongest in APAC (+20% year-over-year) and EMEA (+19% year-over-year).

[02] Recent Business Highlights

1. What are some of Netflix's new initiatives in live content and sports?

• Netflix has launched or announced several live events, including the Netflix Cup (a cross-over golf competition), the Netflix Slam (a tennis exhibition), and a deal to take over WWE's Monday Night Raw show starting in 2025.
• This shift towards live content is an attempt to drive engagement and create cultural moments.

2. How is Netflix's gaming initiative progressing?

• Netflix's mobile game offerings, led by the launch of GTA The Trilogy, have seen significant downloads, with GTA San Andreas reaching an estimated 12 million downloads so far.
• Excluding the GTA title, Netflix's gaming downloads are up nearly 80% year-over-year as the catalog expands.
• Netflix is exploring game monetization through in-app purchases or ads, and has reportedly spent an estimated $1 billion on acquiring gaming studios and investing in its gaming business.

3. What is the impact of Netflix's crackdown on password sharing?

• Netflix began limiting accounts to a single household in the US in Q2 2023, aiming to convert those using shared passwords into paying subscribers.
• Management estimates that over 100 million households used shared passwords, and JPMorgan believes 62% of password borrowers could convert into paying members, potentially adding 36 million subscribers in 2024.

[03] Engagement and Content Strategy

1. How does Netflix's content strategy and promotion drive engagement?

• Netflix had the number one original series in nine of the first 11 weeks of the year, with high-performing titles like Griselda, The Gentlemen, and 3 Body Problem.
• Netflix's trailers generate over 6 billion impressions every month on its platform, more than 40 times what they get on YouTube.
• Netflix also acquires popular shows like Suits to drive engagement, even for content late in its lifecycle.

2. How does Netflix's engagement compare to other streaming platforms?

• According to Nielsen data, Netflix represented 8.1% of US TV time in March 2024, up from 7.3% a year ago, and more than Hulu, Prime Video, and Disney+ combined.
• While YouTube holds the overall streaming crown in the US, Netflix maintains a significant lead over direct streaming competitors as the streaming market continues to grow rapidly.

3. What are the key drivers of Netflix's engagement and monetization going forward?

• Netflix's foray into live content, expanding game offerings, and continued investment in diverse global content provide avenues to boost engagement and deepen monetization.
• The ad-supported tier and crackdown on password sharing are also expected to be key growth levers in the coming years.