Netflix: 4Q19 earnings conference call transcript expects 7 million new paying subscribers in the first quarter

Netflix (NFLX.US) released its fourth-quarter financial report on Wednesday, ending December 31, 2019. The financial report showed that Netflix's total revenue in the fourth quarter was US$5.467 billion, a year-on-year increase of 30.6%; the net profit attributable to Netflix was US$587 million, a year-on-year increase of 338.1%.

After the financial report was released, Netflix CEO Reed Hastings, Spencer Neumann, Chief Content Officer Ted Sarandos, Chief Product Officer Greg Peters, and Vice President of Investor Relations and Corporate Development Spencer Wang attended the financial report video conference to interpret the key points of the financial report and answer questions from Guggenheim Securities analyst Michael Morris.

The following is the transcript of the earnings conference call:

Analyst: Before we delve into the specific content of your quarterly financial report, I would like to talk about your strategic ideas for the new year and the new decade. First of all, what do you think is the biggest achievement in your strategy in 2019? Then, what kind of results do you want to achieve in the future?

Reed Hastings: As you may know, for the past 20 years, we have been adhering to the same strategy, which is "delight our users and use the help of users to help us achieve growth." Of course, we have adopted various methods. At the beginning, it was in the form of mailing DVDs, and then it became a combination of various methods. If you have paid attention to our efforts in investing in movies to make it a very strong part of Netflix, we have made continuous progress. However, even with the same strategy, we are still learning how to please users, whether in terms of products, marketing or content. In the next ten years, we predict that everything will remain the same. We will use the powerful resources we have now and even do better than before.

Analyst: Now, let's talk about several key points of the financial report. The first one is of course about the outlook for the next quarter. In the past quarter, the performance was quite strong relative to the outlook at the time. The first quarter was slightly less strong than the same period last year. You mentioned that there were timing issues in the first and second quarters. However, the question that investors are most concerned about is actually what will the performance be like for the whole year ahead? Compared with 2018, 2019 is very similar, and the performance in the fourth quarter was very good. Can we also assume that the same situation will occur in 2020?

Spencer Neumann: Let me answer this question. I want to say that our long-term opportunities are still very large and have not changed. This must be made clear. We do not provide an outlook for the entire year ahead, but you can look at the outlook for the first quarter. As always, this will be the best first quarter ever, and we expect to achieve 7 million new paying customers. So, 7 million is still a very significant increase. From a historical perspective, the number of new paying customers in a quarter has only exceeded 7 million four times. The numbers still speak for themselves.

First of all, it reflects some of the situations we face in the United States. We mentioned it in the financial report, which is attributed to the loss of users caused by competition and price. In the fourth quarter of last year, this competition did not last for the entire quarter, but we expect to face competition in the first quarter throughout the quarter, and in the future, this competition will sweep the world throughout the year. Therefore, we want to carefully take into account the impact of these factors on the business. In addition, we also mentioned the seasonality of the first and second quarters. That is, in the first half of this year, we think it will be more balanced. Considering the price measures in the second quarter of 2019, we believe that the first half of this year will be similar to the situation in 2018 and 2019.

Analyst: Regarding competition, you mentioned customer churn and its possible impact. Can you talk about the impact of competition on user growth and user engagement? Especially in terms of user engagement, I know it's early to talk about this, but Disney's related products are obviously more focused on the children and family market. Have you found any changes in user engagement in such products?

Spencer Neumann: First of all, the good news is that we still grew in the fourth quarter, even in the US market, even though we were impacted by the release of new products by competitors. So, we took a different approach and focused our business development on improving user satisfaction and viewing volume. As you can see, in the fourth quarter, the viewing volume per user increased globally and even in the US market. As long as we can continue to make progress, it will get better and better.

Reed Hastings: Disney+ has many products, such as The Mandalorian. They will first take away the cable TV business. Of course, they will have some impact on us, but our future growth will still come from those viewers who have lost cable TV.

Analyst: Regarding this question, I would like to discuss the comparison between the market outside the United States and within the United States. Obviously, the US market is more mature, and this is also a market that Disney focused on when releasing new content in the fourth quarter. Of course, they also further released these contents around the world. For example, in the first quarter, they expanded the scope to the European market. Can you talk about your ideas, any ideas are fine?

Reed Hastings: Disney will be upgraded to a global service in a very short time. In addition, there are other global competitors. I don't know if you still remember that we competed with YouTube for a long time. We compete in many aspects, including the number of views. Spencer mentioned that our unit user views have increased, which is because our content is of higher quality and our service has become better.

Analyst: Regarding the pricing issue we discussed last quarter, you mentioned that the entry of these competitors will not have any impact on your pricing. So, my first question is, what are the latest progress and plans for this issue?

Greg Peters: If you noticed, our total revenue in the fourth quarter of the U.S. market increased by 23% year-on-year, so the growth is still very significant. We don't think there is anything that will fundamentally change our outlook for the future. Our model is that if we continue to invest money and do well, then our users will continue to pay us membership fees, which comes from great stories, comfortable product experience, and value created for users. Then, from time to time, we will charge users more money to keep this positive cycle running. So far, many aspects are proving that this model is feasible.

Analyst: Let's talk about this topic in more depth. From a historical perspective, you have had several quite significant price increases in percentage terms. Are you considering making annual price increases in some more mature markets? For example, some people are actually quite familiar with the cost of fixed cable TV.

Greg Peters: We don't have any fixed model at the moment, and there is no one right model. We mainly listen to our users, of course, and through their engagement. We actually use that as our guideline, and it also gives us a signal of when we can increase prices. We really don't have any fixed model.

Ted Sarandos: We can indeed see the right time to raise prices through the growth of viewing, engagement, and users. The more often we see these signals, the more frequently we can raise prices. The result of the model we have built is that we have to prove ourselves to users every month, which makes us very demanding of ourselves.

Analyst: The last question in this regard is the comparison between premium members and ordinary members. What is the trend of ordinary members migrating to premium members? Is there any way to further motivate them so that they can get better products even if the price is increased?

Greg Peters: We have been evaluating the relationship between price and functionality, but we have not seen a strong migration relationship between the two. The subscription rates of our various membership types are actually quite good, which is a very encouraging sign. We currently offer different products and different price levels, and users can choose the price and service package that suits them. We hope to be more innovative in this area and bring more value to all our users. However, at present, everything is progressing very orderly.

Spencer Wang: Let me add something. We found that a very small number of users migrated to higher-priced memberships, but the trend of change was very gradual. Therefore, there was no cliff-like change. This kind of gentle growth mainly depends on smart TVs and high-definition TVs. (Editor: Liu Rui)