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The following is the 4q20 financial report teleconference record will surpass Disney one day From Netflix recommended by recordtrend.com. And this article belongs to the classification: Enterprise financial report, Network entertainment, Network video.
On January 20, 2021, Netflix (NASDAQ: NFlx) released its fourth quarter financial statements as of December 31, 2020 on Wednesday. Netflix’s fourth quarter results exceeded expectations, and its share price soared nearly 11% after hours. According to the financial report, the total revenue of Netflix in the fourth quarter was US $6.644 billion, up 21.5% year on year; the net profit attributable to Netflix was US $542 million, down 31.4% year on year.
After the results were released, Netflix co CEO reed Hastings, CO CEO and chief content officer Ted sarandos, chief financial officer Spencer Neumann and chief operating officer and chief product officer Greg Peters Peters and Spencer Wang, vice president of investor relations and corporate development, attended the earnings video conference to interpret the key points of the earnings report and answer questions from analysts.
The following is the original text of the financial report conference call:
Analyst: as far as the forecast is concerned, the net growth of users in the first quarter of 2021 will be even higher than that in the fourth quarter of 2020. Although you forecast that the first quarter will be much higher than the fourth quarter, your forecast is relatively conservative. It seems that this pulling effect will stay for a while. Can you explain the problems you considered when making the relevant forecast?
Spencer Neumann: as far as the forecast is concerned, we predict that the number of net growth users in the first quarter will reach 6 million, which is actually quite a big number. Especially in the context of 2020, we will still reach a record high of 34 million net growth users. You have mentioned the problem of pulling effect. I don’t think we have come out of this stage. I think a very important factor in our forecast is how we can continue to grow on the basis of 2020. In the first half of 2021, the pulling effect will continue to exist. In a broader sense, it’s really difficult. This period is very challenging. Not only for everyone’s life, this period of time is also the most difficult to accurately predict a business, there are too many uncertainties. At the same time, the new crown has also brought some positive effects, that is, it has promoted the transformation process of cable TV to streaming media player. At least in the long run, the trend will be extremely gratifying. Just in the short term, there will be some turbulence.
Analyst: as far as the forecast is concerned, some figures in 2021 are bound to be affected by the pulling effect in 2020, which is about four or five million. We are also discussing what these four or five million mean. Can we talk more about the whole year’s trend of 2021 based on the forecast of the first quarter? You generally add 28 to 30 million new paying users every year. Are there 40 to 5 million of them included in the pull effect in 2020?
Spencer Neumann: we’re not going to provide a full year forecast. There’s too much uncertainty. We can give a number, but it doesn’t make sense. It’s hard for us to predict the next 90 days. In the long run, we are very optimistic. You also mentioned the growth in our history. I hope we can reach this level. The reality is that the amount of film viewing has increased. Although it has dropped from the peak level of the new crown, it has increased year on year, which is the case all over the world. Compared with last year, the retention rate has also increased, and so has the purchase rate. The indicators are very encouraging, but I’m not going to provide a full year forecast.
Analyst: as for regions, it is noteworthy that in some regions, even though everyone thinks that the market is saturated, you are still accelerating the pace of growth with the increase of prices, which is very surprising. In other regions, despite the dividend from the new crown, the growth in the third quarter was slower than that in 2019, and it was in those regions where the market was not saturated. Can you talk about the trends in these areas and the factors behind them?
Spencer Neumann: the situation is similar all over the world, and there are subtle differences between countries. The viewing trend and content types of users around the world are similar before and after the outbreak. Of course, we are also providing more and more kinds of quality content and excellent viewing experience. In some of these countries, we are still looking for the best content matching and further market penetration, but we have been growing. Take Latin America as an example. This is a relatively mature market. In the past few years, we have five or six million new users every year. As you mentioned, the US market penetration rate has reached 60%, and we are still growing. Our market share is still very small, even in pay TV, our viewing volume is still quite low, and we still have a lot of room for growth. Our goal is just to be better around the world.
Reed Hastings: the United States is the market with the highest penetration rate at present. Even in the United States, Netflix’s viewing volume only accounts for less than 10% of TV viewing volume. We have a lot of subscribers in the United States, but we still want to have more growth in viewing time.
Analyst: one of the new financial reports is the forecast of free cash flow and repurchase. Your free cash flow is higher than predicted. Can you talk about how you allocate capital? And why do you buy back shares in cash without considering other options? Why not choose leverage bonds, but choose the absolute amount of debt?
Spencer Neumann: we are very proud of free cash flow. We also held a meeting a while before the financial report. We mentioned that it is a milestone achievement for us to reach 200 million users and have enough cash to promote the growth of users. In terms of capital deployment, the basic policy remains unchanged. We will continue to be vigilant and only invest in areas that can maximize the value of our shareholders. Recently, the situation is improving. We have $1 billion in cash on our balance sheet. We predict that our cash flow will turn positive in 2021. We want to give back to our shareholders in cash. Therefore, we will not leave too much cash. We will leave $1 billion to $1.5 billion on our balance sheet, but this is purely to ensure that if we want to invest in bonds, we have enough cash on hand. There is no complicated reason behind it. In addition, we hope that our capital operation will be more flexible. We will still invest heavily, which is our top priority given the huge opportunities.
Analyst: in terms of competition, this may sound unfair, because you provide an industry template for streaming media. However, considering Disney’s recent success, it seems that Netflix has not fully tapped its full potential and has to redouble its efforts to reach the same scale. Is there any reason why Disney is not so comparable, and how are you going to reach that level?
Reed Hastings: Disney has achieved amazing results. There are signs that users are willing to pay more for more content, because everyone is hungry for good stories, and Disney happens to have a lot of such quality content. This gives us great interest in further investing in user growth and producing more content. The competition between Netflix and Disney is a good thing for the whole world. It’s a series to series, film to film competition. We’re trying to catch up with Disney in cartoons for family audiences. Maybe one day we can surpass them. Who knows? At the same time, we will maintain our leading position in mass entertainment. I don’t think Disney will launch this content in the near future.
Ted sarandos: in terms of competition, you have to watch Christmas 2020. There are a lot of long-awaited content online, such as “Wonder Woman 1984” and “strange journey to the soul”. These two films are released on the same day, and they are both the largest release in history. This tells us that people have a huge appetite for great entertainment content, they also love different kinds of content, and they are willing to pay more for it, which is very exciting. We’ve always told everyone that our goal is to make your favorite shows and movies. At the same time, other companies are also making efforts, and they will supplement the content that Netflix lacks. This kind of competition pattern is very healthy.
Greg Peters: not only from the perspective of user volume, but also from the perspective of revenue. More revenue also means that we can use it to create more popular content.
Spencer Wang: of Disney’s 87 million paid users, 30% are from hot star. As you can see, it’s still different. And our revenue per user is almost twice that of Disney. We got nearly 40 million new paying users last year. If these aspects are taken into account, and our global penetration rate is higher, we are quite satisfied.
Analyst: Disney is now joining in, even the discovery channel, and all these new content releases. If you think about it carefully, it will actually increase the scale of the whole streaming media market. These companies will try other and more delivery modes, and telecom companies will also start to make this a new daily mode. I guess that will bring about some changes in the future. In 2020, with the emergence of various streaming media services, will it bring you new opportunities to try new delivery channels or speed up growth?
Greg Peters: Yes. We have seen this massive transformation. Of course, this global epidemic has accelerated this process, and this huge impetus is good for us. More and more users all over the world know our excellent service. We are becoming more and more purposeful and more active. We strive to be more creative and constantly bring forth new ideas, aiming at accelerating growth, optimizing delivery mode and reaching more users. The key driving force is how we can satisfy those users who have already paid, which is the ultimate driving factor. As long as they get excellent experience and share with friends, family and colleagues how good our service is and how interesting our content is, they will naturally attract a new group of users.
Analyst: let’s talk about it again. You did a series of interesting experiments in this quarter. You tried the concept of “free weekend” in India, and you did cable TV broadcasting in France. Can you talk about what you have learned? Are these experiments successful enough to extend to other regions?
Greg Peters: as far as streamfest in India is concerned, what we have learned is that people in India are obviously interested in trying Nafi. In those 48 hours, millions of users logged into the service. Now, we are working on the more difficult part, which is how to turn this heat into sustainable growth. We are still adjusting the details according to what we have observed, and we will let you know later.
In addition, there are other aspects that we can use. Netflix users come here to have fun in a variety of ways. Sometimes it’s a movie, sometimes it’s a TV show or animation, it can be a drama, it can be a reality show. Sometimes they don’t know what they want to see. So we have the opportunity to be creative and try new models to help our users, especially those in this state. So we have the first mock exam mode. We’re not sure how to make it more effective, we’re still waiting.
Similar to this, there is another mode, which is a new function. It is still being tested. We will open this function all over the world. This function is quite effective. If users don’t want to browse the show window at all, they just need to tell us by pressing a button, and we will help them select a content and play it automatically. For some users, the effect is quite good.
Analyst: let’s talk about the Asian market. As you mentioned, in the past few years, Netflix’s revenue has increased by $400 million to $5 billion. As Europe, the Middle East and Africa become more and more important, your growth depends more and more on the performance of the region. Is that the case? Of course, the unit user revenue in this area is significantly lower. Based on this, what will be the future revenue growth trend?
Greg Peters: on this point, we think we need to find ways to make Netflix services more accessible to the public. Often, that means we have to trade off between users and growth. In the final analysis, we have only one basic policy in evaluating the effectiveness of various attempts and making decisions to further expand good attempts to more regions, that is, to maximize revenue. We will also carry out this policy in the gas trial, and try our best to increase the revenue to the highest point within our ability.
Spencer Neumann: I’d like to add another point. In the past quarter, Asia was the second largest contributor to growth. Two years ago, the annual growth was $4 billion. Last year, the annual growth was $5 billion. We forecast a year-on-year growth of 24% in the first quarter.
Analyst: let’s talk about your extraordinary performance. There are 70 movies a year, and you are now the “industry” in many ways. The top five studios probably make 90 movies a year, and you make 70 movies a year. To what extent do you think it’s OK, too much? How do you balance that? How do you evaluate the return on investment?
Ted sarandos: maybe more than 70. We had a chance to talk about this last time we released the new content, which is the exciting pilot film. We have to consider that the audience’s tastes are very diverse. They have a big appetite. Do they want to watch one movie a week? I think there is a lot of room for improvement.
Today, the scale of our film production is quite large. The film stars we work with include Gail gadot, Leonardo DiCaprio, Meryl Streep, etc., as well as film producers such as JAANE Campion, Adam McKay and Zack Snyder, Antoine Fuqua, etc. Antoine Fuqua has worked with us to make a lot of movies!
When people want to see a movie, they can watch it at home, at the cinema, on their mobile phones. The trend will continue to change, and people’s demand for movies will not stop at one movie a week. We have to meet the needs of global attention. Their viewing preferences are very different. A lot of times we need to release two or three movies a week. Some films specially made for certain regions are popular in these regions and have strong repercussions. Then they have influence all over the world, just like the movie “alive” that we saw last year and launched in the Korean market.
Analyst: when you are making these contents, you have made innovations in the financial model, which is different from the traditional and defective model. However, as the scale of content gradually expands, will there be greater risks or lower returns? For these studios, for example, there’s always no harm in leaning towards big production. Is that different from when you were a start-up making original dramas? Is this a better way for you to create a lot of content?
Ted sarandos: Yes, we have found that the scale is getting bigger, more than doubling every year, and we are constantly expanding the scale of the project in terms of its size, objectives and implementation. In terms of financial returns, even if only a few of the hundreds of content bring us huge returns, while others only recover the cost. This is a very good model for the studio. And when we reach a certain level, we can always support projects that are difficult for us to support in small-scale production. Therefore, the first mock exam love this pattern.
Covid-19: turn the world upside down in the movie release mode, considering the scale of your film production and the new crown epidemic. Not just Netflix, but the industry as a whole. Does this bring you new ways and channels? If the shorter release period is more widely accepted by the public, are you likely to get a share of the box office? Or to deliver a large amount of content in a short period of time to achieve a new way of revenue?
Ted sarandos: maybe. We studied this. We don’t have any problem with the movie entering the cinema. The main problem is that you have to make sure that these movies are exclusive for a long time, and other cinemas can’t show them. Once the exclusive period is over, if we have an easier way to show these movies in the cinema, we would be happy to let the audience choose between going out to the cinema and going to the cinema at home. Watching movies at home has obviously become a new routine during the epidemic period. We need to observe whether this trend will last. However, we all know that consumers’ habits will change over time. Going out to the movies with strangers is very different from going to the movies at home. It’s very good, but it’s not our main business.
Reed Hastings: through the measures taken by Warner Bros. in response to the epidemic situation, we can see that in the post epidemic stage, that is, in the second half of last year, when a large number of audiences went to the cinema to watch movies, HBO Max also released the same movie, which is very helpful for movies, showing both online and offline. But we have to wait until the epidemic is over before we can see it more clearly.
Ted sarandos: that’s what we’ve been trying to do with movies all these years.
Analyst: on the other hand, given your huge distribution scale, if a studio wants to release their films on Netflix platform, it will be the most efficient channel. Isn’t it good to make Netflix a VOD channel or other distribution channel?
Ted sarandos: not bad. It’s just that our existing model is the most suitable for our users and our business.
Greg Peters: you’re talking about another model. It’s a transaction oriented model. The first mock exam is from the user’s point of view. Our platform is pure, no advertising, no extra cost. Single subscription mode is very powerful. This can make our users very satisfied all over the world. We also want to focus on this mode.
Ted sarandos: it’s interesting that when you join in and think about what subscription model is the best. In fact, the audience are quite happy to explore. We usually think about which models work and which ones don’t according to the existing trends. But these are based on industry trends, not consumer trends.
What will happen? For example, an audience may say that he doesn’t watch foreign language movies, but he has heard of lupin and wants to have a try. It happens that members can watch the play for free, so after watching it for 10 minutes, he completely falls in love with it, and suddenly he begins to love watching foreign language movies. So the change is amazing.
Feng Junhao mentioned at the Oscars that the audience has to cross that inch of wall to enter a completely different world. He said it very well. We have seen a lot of examples of this phenomenon. Netflix’s content comes from all over the world. The audience can watch it on this inch wall, that is, subtitles. They can watch the dubbing version or the original version.
Analyst: when the content reaches this level and the film reaches this lineup, your bargaining power will be greatly improved. Because it’s no longer $10 for a person or $30 for a family to watch a movie, just pay a certain membership fee to Netflix. As a result, Netflix will have more bargaining power.
Ted sarandos: we’re promoting value for users. For every 10 minutes users watch movies on Netflix, the greater the value generated by membership fees. Therefore, the more choices we offer, the more likely users will be to click the play button. Once users start playing our platform, they will love them immediately.
Reed Hastings: in fact, users just think that going out to enjoy entertainment is a different experience. It’s like you can cook at home, and it’s cheaper. But people still go out to eat. So people still go out to watch movies, which is not the same. So don’t think of it as a direct competitive relationship. What people really love is that they can watch huge amounts of content at a very low price, and they can try all kinds of new content, such as Alice in the dying land and Jason Robin. These contents are directly connected with each other, which will create a unique viewing experience.
Analyst: I guess in this particular context, in terms of pricing, there are two decisive factors, one is the relatively fierce competition, the other is that consumers’ money has to be spent on more platforms. In this context, pricing power is relatively limited. But, on the other hand, if your market share continues to rise and the size of the entire market continues to grow, you will launch more products, so consumers will consider moving the costs of other platforms to Netflix. Is that so? In other words, will your bargaining power accelerate? In the western market, will your unit user revenue increase faster in the next few years?
Greg Peters: our competition is extremely extensive, whether it’s taking a share of users’ wallets, grabbing users’ time and attention, or how much entertainment and pleasure we bring to users, and I think we still have a lot of room for progress.
We are happy to see new dimensions that can create value for users, such as the launch of foreign language programs. The house of banknotes and Jason Robin have become popular programs all over the world. Moreover, the language in these plays is something we didn’t have before. We are very excited about this kind of value creation. This is an area where we are extremely focused. We are not trying to predict the future in this way, but we are very careful to consider what we should do next, so as to create more value for our members, attract their participation, make them happy, and produce more wonderful content and better product experience. If we do well, then our business will grow.
Spencer Wang: as for price, it went up from $9.9 a month to more than $11 a month in the last quarter. In addition, it is worth noting that during the same period of time, we also encountered the adverse wind of foreign currency exchange rate.
Reed Hastings: so it’s been 10% for the last three years. We are quite cautious, which helps us create great value.
Ted sarandos: a few days before Christmas last year, we released midnight sky. A few days later, we released Cobra. A few days later, we released Jason Robin, and then fragments of women. The response was very good. You see the relevant data, and you see how users like these works, which is unprecedented. The following new works continue to come out, which is our definition of bringing value to consumers.
Analyst: I guess you do some academic research on pricing. But fundamentally speaking, elasticity is related to the price itself. As prices continue to rise, it is possible that the elasticity of demand will change. Have you ever seen anything like this? Or far from such a situation? In addition, can you talk about what you have observed after price increases around the world?
Greg Peters: we don’t look at it from an academic point of view. We tend to look at it from a practical and operational point of view. In fact, on the other hand, we wait for users to give me a signal of price increase, which means that we have more value to bring to them. We will look at the participation rate, retention rate, wastage rate, purchase rate and so on. These are our criteria.
Analyst: in the rest of the world, there are a lot of small deals. There are several streaming media services in Southeast Asia, which are actually acquired by some Chinese Internet companies. Sony acquired crunchyroll. If you have some good assets that can help you scale up faster, but obviously you don’t show any interest in them. Can you explain what kind of assets are you interested in? A global service platform? Or, why aren’t these assets so interesting to you?
Spencer Wang: about other streaming services, one person can subscribe to multiple services. We want to harvest these subscribers naturally, not through mergers and acquisitions. Another point about our interest is that we are interested in the assets that can enhance our core business, especially the entertainment content. For example, we can make it into the IP of high-quality TV programs and movies.
Ted sarandos: Historically, we’ve all been builders, not buyers. Many years ago, in order to let the team understand the potential scale of our business, I mentioned that one day we will have a vice president of animation department, and “one day” means today. We are the largest animation studio today. If you take a closer look at these assets, they are all channel assets, not IP assets. Our policy has always been to build our own assets through our reality shows, animations, animated films, large-scale production of original films, etc.
Analyst: do you have any regrets about what you could have done but didn’t? One example I think of is roku, if it’s still part of the company, rather than being spun off? In terms of competition pattern, what do you think is real competition? Is it a streaming service or an external competition like fortnite?
Reed Hastings: of course, it’s good to keep roku. Of course, they won’t be as successful as they are now. It is not easy for us to achieve streaming media, original drama production and global expansion, and we need to do a lot of work. We are happy for roku’s success, but there is nothing to regret. Let’s have a little regret. We regret that we didn’t have the global license to buy house of cards in the first year, because we had to go back and share the super high cost.
Netflix: 4q20 Revenue $6.644 billion, up 21.5% year on year; Netflix: 3q20 Revenue $6.44 billion, up 22.7% year on year; Netflix: 1q20 net profit $709 million, more than doubled year on year Netflix: 3q20 earnings teleconference record user growth may slow down, retention rate is better than a year ago Net increase of 15.77 million paid members Netflix: the increase of paid members in the first half of 2020 is comparable to that in the whole year of 2019 Nearly 60% of Americans subscribe to streaming media services in the U.S
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