Good afternoon, and welcome to the Netflix Q1 2020 Earnings Interview. I'm Spencer Wang, VP of IR and Corporate Development. Joining me today are CEO, Reed Hastings; CFO, Spence Neumann; Chief Content Officer, Ted Sarandos; and Chief Product Officer, Greg Peters. Our interviewer this quarter is Mike Morris from Guggenheim. As a reminder, we'll be making forward-looking statements, and actual results may vary. With that, let me turn it over to Mike for his first question.

Thank you, Spencer, and good afternoon. Glad to see you all safe and healthy and take this opportunity to extend my best wishes to our viewers. Your letter had a lot of detail about the impact of the environment, but I'd like to hear directly from you some key thoughts, and then we can dig in more deeply into a few topics. So if we'd just start with the impact of COVID, the changing consumer behavior. Reed, your thoughts on both the sustained, strategic impact of the change and change of behavior. And then maybe for each of you, if you could highlight the most significant thing that's changed for you, how you're thinking about permanence or how to work through that in the coming weeks and months.

Sure, Mike. I mean, it's an incredible tragedy for the world. Everyone is wrestling with the implications, both on health, on hunger, poverty. And we, too, are really unsure of what the future brings. It's super hard to say if there's strategic long-term implications because we've just been scrambling to keep our servers running well, keep the content, and get our postproduction done. Our small contribution in these difficult times is to make home confinement a little more bearable. And we take that seriously; we're working super hard on that. And in a couple of months, we'll all be able to grapple with the long-term implications. But right now, we're just focused on getting our content out, getting it dubbed, and I'll let the other team members talk.

Yes. It's been humbling to be a place that people around the world in a time like this turn to for some entertainment and escape. And I think just reiterating what Reed was saying, our real focus at this point in time has just been to keep our service operating at as high a quality as possible and available when our members need us and turn to us.

Yes. What has been truly amazing is the role that Netflix has played in keeping people connected, particularly for those who feel incredibly lonely. It's provided a distraction and a major source of entertainment during times of isolation. It's been challenging as many people have had to adapt to roles and locations they've never experienced before. Our productions, postproductions, and offices have been transformed into people's homes across the globe. This shift is a testament to the innovation we experienced; within hours, and certainly within days of the shutdowns, we got remote production, postproduction, animation, virtual pitch meetings, and online writers' rooms up and running. It's been remarkable to see the creative community unite to entertain the world through Netflix.

Yes, I would agree with what Reed, Greg, and Ted mentioned. Our main focus right now is on managing our operations effectively, ensuring everything runs smoothly, and taking care of our employees and production teams to keep them safe and healthy. This has been our top priority. While it's difficult to predict the long-term influence on our business, we believe the ongoing shift from linear to streaming on-demand entertainment that we've discussed over several quarters remains consistent. There may be some timing effects, but the overall long-term trend is unchanged. Therefore, our aim, as Ted and others have pointed out, is to make everything appear seamless and easy. However, the reality is that it requires significant effort from thousands of employees and entails numerous challenges. We are dedicated to doing this well for both our members and the community.

And for me, Mike, speaking specifically for the finance department, I'd say we're just trying to work hard to really support the other business units like Ted's organization, Greg's organization, the marketing team, to get through this process as easily as possible.

And understanding that it's very difficult to predict what's going to happen. I am curious, Reed, if you could share anything that you look at as sort of key indicators externally as you try to plan for the business going forward. And also, I'm curious if there are any internal data points given that you do have that relationship with your consumers that could help you with the planning process and how to progress from here.

I think to have a planning model, you have to have a model of COVID and when are certain treatments coming online, how broadly are they distributed, when are vaccines coming online, how quickly can they be manufactured. And we don't know any more than anybody else on those big elements, and that is the most significant aspect. So think about it as we're in the same uncertainty that everyone else is. The things we are certain of is the Internet is growing. It's a bigger part of people's lives, thankfully. And people want entertainment. They want to be able to escape and connect, whether times are difficult or joyous. That's pulling up. We've had an increase in subscriber growth in March. It's essentially a pull forward of the rest of the year. So our guess is that subs will be light in Q3 and Q4 relative to prior years because of that. But we don't use the words guess and guesswork lightly. We use them because it's a bunch of us feeling the wind, and it's hard to say. But again, will Internet entertainment be more and more important over the next 5 years? Nothing has changed in that.

Great. So we've had a number of questions about the member growth and the topic of pull forward that you just referenced, Reed. And I guess to the extent we could understand anything about the composition of that influx of subscribers that came, or we can see the geographic split, which is of course very helpful, and I think there's a pretty fair conclusion that I'd be interested and you're sort of addressing, which is that clearly the hardest hit markets by COVID were those that saw the greatest change in subscribers. Beyond that, I'm curious if you could talk at all about the sort of composition, even in the UCAN region, of whether it's a multiperson household or whether it's a different income strata or anything like that, that you feel could give some insight into who's part of that ramp in members.

Sure. It's really more of the same. There's nothing that separates the people just joining from anybody else. And then our job is to do the same things we've been doing to retain them, that is to have incredible shows, make it very easy to choose, help the recommendations, all the things we do that make the experience so wonderful. So again, in terms of usage, in terms of viewing patterns, it's all pretty consistent with the families that have been members for a long or a short time.

And there are some questions on the pricing side that sort of predate this, right? This is all intertwined at this point. But we have lapped or we're getting close to lapping some of the significant prices you did, especially in the U.S. market last year. We had subscriber impact. So I guess I'll put this question to Greg, but also more broadly, number one, how do you feel, in the absence of the COVID situation, with the way that process played out? I know we saw some elevated churn. How was that progressing? And if you look at the sort of end result, are there things that you would have tweaked about it? And then I think there's a follow-up question just about the economic sensitivity perhaps going forward, but let's just start with that pricing question.

Yes. I would say just one comment, which is in January and February, we were seeing in UCAN a return to pretty much normal pre-price change churn levels. But really, at this point, we're not even thinking about price increases. Obviously, what's going on around the world is dominating our thoughts and our considerations. And we just want to stay super focused at this point in time, making sure that we're continuing to be there, have a great service, and make sure that we're able to provide entertainment and escape for our members around the world. So we'll really just focus on that for this period.

This has the potential to be the first time we've seen a more significant global economic impact, similar to what we saw 12 years ago perhaps. I'm not an economist per se, but there is some sensitivity there. And I guess my question is, when you think about pricing and pricing levers and packages, how do you think about approaching perhaps a weaker global consumer spend environment? Where do you see your price point and your value proposition as very attractive in a potentially softer consumer environment?

Spencer, do you want to take that one?

It really builds on what Greg said. Right now, we're not focused on price changes. When considering the potential impact of a recession, it's challenging to predict what the future will look like. Historically, during recessions, people tend to stay home more and engage with home entertainment, which leads them to be cautious with their spending. Pay-TV has been resilient in past downturns, and even Netflix has shown resilience recently. However, this situation is unique; we haven't experienced anything like this before, making it difficult to provide clarity. The one aspect we can control is the quality of the service we offer our members. Our primary focus is on enhancing the product, improving content, and ensuring a consistent flow of titles. We don't take it for granted that people choose us for their home entertainment; we want to emphasize that value. Our price points begin at $9 in the U.S., and in other regions, they go as low as $3 for mobile. Our aim is to maintain accessibility while delivering real value.

That's a good transition to discuss what's happening with the pipeline. Ted, you provided some insight earlier, and you also addressed it in the letter. Could you elaborate on how the production stoppage will affect the release schedule? Let's start with that. Additionally, how much content is currently in the pipeline? This is a significant part of the question, and how do you plan to strategize the spacing of releases moving forward?

Yes. Well, the one thing that's maybe not widely understood is we work really far out relative to the industry because we launch our shows all episodes at once. And we're working far out all over the world. So our 2020 slate of series and films are largely shot and are in postproduction remotely in locations all over the world. So we're actually pretty deep into our 2021 slate. So we aren't anticipating moving things around. And to give you some examples, The Crown, in its fourth season; our big fourth quarter animated release, Over the Moon. These are shot productions in our finishing stages right now to release later this year as planned. So we don't anticipate moving the schedule around much and certainly not in 2020.

Okay. I think that answers this question, but we did have it come back up. I asked it a couple of quarters ago, whether this impacts your interest in revisiting perhaps a more spacing of releases versus a pretty consistent stacked-at-once strategy that you've employed so far here?

You mean the episode spacing?

Correct.

We've been experimenting with various release strategies and continue to do so. For example, our competition shows had significant success last quarter with Love is Blind, which used a staggered release. Recently, we released Too Hot to Handle all at once, and it's on track to be one of our biggest competition shows ever. We believe that consumers enjoy having the option to watch at their own pace with an all-at-once model. However, we continue to test and evaluate how different release methods affect viewing habits and overall satisfaction. Feedback from our customers indicates a strong preference for the all-at-once model, so I don't foresee us making any significant changes to that strategy.

Understanding your current production pipeline is essential as you work towards resuming production. What are some key milestones to consider in this process? Will the different genres or production intensities change as we move forward?

Yes, it will differ by region and production type. Our top priority is to ensure that we maintain an exceptionally safe working environment. We have always prioritized workplace safety on our sets and in our offices, and we are committed to continuing that focus. Several factors need to be in place before we can resume production, including the easing of shelter-at-home orders. Even in that scenario, we will ensure that testing is available. We must be able to assure our employees, cast, and crew that it is safe to work before proceeding. We will collaborate closely with our production partners and local governments to achieve this. Currently, we are in production in Iceland and Korea, and we are learning from those experiences to inform our plans for starting productions worldwide.

Any specific highlights of those two markets that you could share?

Not very much. It's very fluid. We're taking the learnings at face value now and observing how they scale out. However, it's important to note that those are two countries that were very aggressive about testing and tracking early. So this probably provides a good framework for future rollouts.

Okay. I definitely want to talk about unscripted, which is a big story in the quarter. But before we do, Spence, I want to ask you about the financial implications of what's going on with the production process right now, how to think about sort of the cash flow. You talked about it in the letter, but maybe if you could lay that out for us a bit. And then also, if the amortization schedule, does that change at all as a result of more viewing and more consumption? Or should we think of that as a pretty consistent process?

In terms of cash flow, we achieved positive free cash flow in the quarter, which was not influenced by COVID. To clarify, we would have generated positive free cash flow regardless of the recent COVID developments. While there was some reduction in spending during Q1, most of the impact from slower cash expenditures and postponed content spending is more reflective of the entire year rather than just Q1. Looking at the full year, due to paused productions, we anticipate some delays in spending. Previously, we expected to have around negative $2.5 billion in free cash flow for the year, but we have now revised that to less than $1 billion. On a total cash content spend of approximately $15 billion, this represents a small portion of our overall spending, and it also affects only a minor number of our titles. Despite the delays, we will actually release more branded Netflix Originals this year than last year. Therefore, our free cash flow profile is set to significantly improve this year. As production ramps up, cash expenditures will also rise. As mentioned in our letter, we are still on a multiyear journey towards sustained positive free cash flow, albeit with some fluctuations along the way, and 2019 will remain our worst year in terms of negative cash flow.

That's very helpful. So Ted, coming back to the topic of unscripted, we've talked about film a lot over the last several years actually, and that's been really the key incremental topic. But unscripted hit a huge stride here, I think, at least in the public view. So Tiger King, can I just first ask about that? I mean, were you surprised by the public reception of Tiger King? Like at what point did you know that, that was the hit that it ended up being?

We've had numerous engaging unscripted and nonfiction shows on Netflix, building on the buzz that began with the Fyre documentary, which gained massive attention similar to that of Tiger King. From the start, we sensed the excitement on social media. It ended up being a perfectly timed distraction from global events, providing people with topics to discuss that weren't part of the mainstream news, which was fantastic. The team has really excelled at capturing the cultural moment and creating shows like Tiger King.

And as you look at where you've kind of cut through the clutter, I think, really, really excel, we've had these competition shows, as you refer to them, and we've had some of these true crime shows. I think those are 2 of the areas that really kind of stand out in people's minds.

Underhand most recently and the true crime space was phenomenal as well, yes.

Exactly. Are there other areas you believe are important to explore as you consider the progress? When you think about unscripted content, there is a range of different genres and subgenres. Do you see opportunities in additional areas like lifestyle or travel? There's also sports, and I want to bring up The Last Dance shortly. How are you approaching the wider scope of expansion in this area?

Our aim is to create your favorite show, whether that’s a high-quality drama for some or home improvement shows for others. We strive to make the best version of those experiences. As we expand our offerings beyond true crime and competition, we’ve introduced cooking programs like Nailed It and Chef's Table, and we're now venturing more into the home improvement and real estate genres, which are quite popular among our members. You should consider the wide range of unscripted content as we continue to grow in this area. Similarly, we have expanded into film and previously into animated series and feature films, all in an effort to provide content that resonates with you. Each household has different preferences, which keeps us challenged and motivated to improve continuously in our new content areas. We are pleased with the progress we've made.

I want to ask you about The Last Dance, the Michael Jordan and Chicago Bulls documentary that premiered on ESPN over the weekend, starting with the first two episodes which received positive linear ratings. I know you have a partnership with them. Can you remind us of your relationship regarding ownership and rights? Additionally, it seems this partnership was established several years ago when your business models were more complementary than competitive. Could you also address that?

Yes. The creative team behind the film, including Michael Jordan, was very excited to have Netflix involved and encouraged ESPN to open discussions with us, which we were happy to do. ESPN has been a great partner on this project, and we’ve been working on it for years. In fact, two years ago at the All-Star Game, Jimmy and I introduced the first look at the documentary with Adam Silver. They premiered the film over the weekend on ESPN, and we also launched it on Netflix with the same two episodes. We saw significant global viewership for the first two episodes of The Last Dance. It has been beneficial for both us and ESPN, and a tremendous win for basketball fans eager for new content. The documentary itself is exceptional. Due to the unique relationship between the NBA and ESPN, along with the complexity of rights and footage, it would have been very challenging for either of us to manage this project alone.

Okay. I have a question for either Greg or Ted regarding the top 10 list that really gained traction this quarter. Considering the unusual circumstances, how significant do you believe this has been in retaining members and encouraging them to continue streaming? Could you elaborate on that?

Look, I feel like we're constantly trying to help people find things they're going to love. Greg and his team do an amazing job doing that on the site. One of the things that people use as a tool to pick what to watch is popularity. We don't think it's the only thing, and we give them lots of tools to choose with. But one of them is popularity. So it's very helpful for people to want to be part of the conversation or part of the zeitgeist, again, with what are the things that other people are watching and using that as a thing to help them make decisions. So we looked at the top 10 list as adding a new decision-making tool for people who are looking for something great to watch. And Greg, would you add anything?

I believe that summarizes it well. Some people are very interested in engaging with the social conversations surrounding these titles. This is a great way to assist them in selecting what to watch based on what's popular in those discussions.

Okay. A couple more on content, just it's such a huge focus, and I'll throw that to either Reed or Ted here, and that's really about how you're viewing third-party content, where clearly we had seen a shift, as you've been very clear about, in terms of your focus on your owned content versus licensing. But in the current environment, there are a number of factors that could perhaps play into that dynamic changing, right? One being the ability to acquire more content if production is shut down on a prolonged period. Also, some of the studio companies perhaps are struggling themselves under the same circumstances and would be more willing to be sellers of content. I'm curious if you could talk about what you're seeing in that environment and whether your view there has changed at all.

One of the things you mentioned in the top 10 highlights how prevalent our original-branded programming has become on Netflix. This trend is pushing us forward, especially as we believe that our core suppliers may start to see themselves as competitors and might not be as eager to sell us content in the long term. In the short term, there are some dynamics to consider. However, when we look at our 2020 and 2021 lineup, we're really pleased with it. We've also worked with some of our partners to enhance this lineup by licensing titles like Lovebirds, Enola Holmes, and a significant film from Korea called Time to Hunt, which is releasing this week. Our goal is to focus more on creating the programming that audiences love rather than just purchasing it. This effort is part of our ongoing shift towards owned original content. Nonetheless, we continue to engage in third-party licensing as well, which is evident in this week's U.S. top 10 list where titles like The Green Hornet and Despicable Me have appeared.

And my last question on this has to do with the feature film side, especially given the disruption in the theatrical part of the business. At the risk of something opportunistic on the situation, but still understanding that there has been a secular shift in terms of people's behavior, is this something you can lean into a bit more in terms of your own spending and investment in films, just given that this might accelerate that consumer behavior and just sort of capital flow?

Just to reiterate, Mike, we're really thrilled with our slate in this year. So what's the things that are coming up, we're looking at them, every one of them, but we're looking at it with the same discipline that we do all of our other licensing and original opportunities.

Okay. Great. I want to talk a bit about some of the product and distribution strategy. And Greg, a couple of changes, I believe, took place in the quarter having to do with both free trials in particular markets, how you're onboarding folks and maybe reducing the number of markets you have free trials available, and also your mobile plan, which I think expanded to a couple of new markets during the quarter as well. So can you talk about both of those decisions? And again, trying to isolate maybe the core trend versus the COVID-driven trend, if that's at all possible, to understand how that's impacting the business.

Sure. On your first point, we have a whole range of marketing promotions that we sort of use in different ways, in different countries, at different times. And like most things we do on the service, we're constantly trying to improve those and figure out new and better ways to introduce the service to new members, to give them an easy on-ramp. And we're just going to continue to seek to test and refine and improve that range of promotional strategies. And then on mobile, it's a plan that we've tested for a while. We've rolled it out now in a bunch of countries: India, Malaysia, Indonesia, Thailand, and the Philippines. And it's consistent with this broad theme and a broad goal that we have, which is we're seeking effective ways to make the Netflix service more accessible to more and more people around the world. And it certainly has been performing the way that we've sort of seen and expected, which is that it is a significant increase and acceleration in being able to add new members, which is great. But also that it's doing it in a way that's, from a revenue perspective, neutral to positive, which we think is a really great position to be in the long term for the business.

You referenced India. We talked about that a bit on every call because of the size of the market, of course. And I guess 2 questions there were just, one, can you speak at all about whether that market has behaved perhaps typically, if you will, with respect to the unique situation we're in right now? And then secondly, Disney+ did launch in the market, and their partnership with Hotstar clearly gave them a great advantage in ramping the business. Can you talk about the competition there with that service and their ability to partner with a service that's already established, has a live offering? How does that competitive dynamic play out for you?

Yes. I would say, first of all, I wouldn't draw any strong contrast between India and other countries around the world. So fairly similar in that regard. And we have been working really, really hard to do a lot to try and make our offering in India more competitive and more attractive to members and members-to-be, and there's a bunch of different product features we've been doing, partnerships, and payment integrations. And obviously, this mobile plan is a recent one. And I think, Ted, I'll throw to you too on a bunch of work we've been doing on the content side there as well.

Yes. We've experienced significant growth in viewership in India and have achieved notable success with our local originals, particularly with titles like She and Guilty, which have driven high engagement with local content on our India service. Additionally, Indian audiences are enthusiastic about our global original content, with La Casa de Papel being a major success, along with many other U.S. originals. We are expanding our business in terms of licensed, original, international, and domestic content across the board to cater to diverse content preferences.

Mike, we have time for 1 or 2 more questions, please.

Okay. Let's take two more questions. I want to revisit the topic of competition, which has not been at the forefront this quarter. However, I believe it is significant enough to discuss again. Reed, I have a broad question for you: the streaming wars are currently at an unprecedented level of intensity, especially in the U.S. What insights have you gained over the past three to six months? Perhaps things have gone as you anticipated, but what should investors and the public understand more clearly about the shift towards streaming consumption?

I've been very impressed with the execution of Disney+. In my 20 years of observing various businesses, including well-known companies like Blockbuster and Walmart, I have never witnessed such effective adaptation and mastery of new methods by an incumbent. Achieving over 50 million subscribers in just 6 months is remarkable. It's great to see the execution and the results align, and I commend them for that. We are certainly enhancing our offerings for kids, family content, and animation, and I believe we will excel in those areas too. The key takeaway from this is that strong execution, clear branding, and focused efforts really make a significant impact. There are many more services entering the market, which is beneficial for consumers as it gives them more options. We cannot control what others do, including competitors in video gaming or YouTube, so our approach is to concentrate on improving our service day by day. We aim for solid execution and to capture part of consumers' viewing time. No one will dominate the market entirely, but this strategy is proving to be very effective for us. Internally, we emphasize not focusing on competitors, but rather on continuously enhancing our service, which has served us well.

Great. So let's wrap it up, as I'd like to do, asking each of you a question. At this time, I really want to focus on the content coming out given that many of us are doing a lot more streaming, and we always love recommendations. So we're going to come to the fore, and so I'd like up to 2 recommendations, one would be something new coming out. I'd love to hear what you are most excited to seeing and having me and the rest of the world see that we haven't seen yet. And the second would be something already on the service that you've really enjoyed that maybe hasn't quite hit that popularity graphs that you think it deserves that we should be diving back into. So I'll start with Spencer, as I'd like to do, and then Spence, you've been grandfathered into going second.

Awesome. Well, I would say for me, I'll take 2 shots at this. Number one, I've had a chance to get an early preview of Extraction, which is our new action film coming out later this week with Chris Hemsworth, and I think it really delivers for people who love that genre, super exciting with great action sequences. Number two, I will say, I have really enjoyed the first 3 episodes of Too Hot to Handle. So that would be my second recommendation.

Oh, boy. Okay. Me next. Let's see. So I will say in terms of things that I've watched recently, I thought Unorthodox was a terrific story and one that I really enjoyed and just shed light on a whole kind of culture that I didn't really have a whole lot of visibility into. So I thought that was a real treat and special. And I'd say, in terms of things I'm looking forward to, there's a whole bunch. I just started watching #blackAF, which I just think is just brilliant and fresh and new. And then I'm really looking forward to the end of the year with things like Over the Moon and just the next big chapter in our kind of animation journey.

Well, this shows why Spence and I get along so well, is Unorthodox and #blackAF were also my picks. But an obscure little one is our Indian film Yeh Ballet, that's just a great little film with some street dancers at Mumbai trying to make it into the world of ballet.

I can't limit my response to just two. Choosing only two would have various relationship implications. Therefore, I will provide a longer list since people are interested in upcoming releases for this quarter. Spence mentioned Extraction, which is an incredible action film featuring Chris Hemsworth. The writer, director, producers, and stunt team from the Avengers movies and Deadpool 2 have come together for this movie, and it truly delivers. This week, we are releasing a major animated feature for the entire family called The Willoughbys. There is also a film from Adam Sandler's production company titled The Wrong Missy, featuring David Spade, which is a lot of fun. Additionally, there’s a significant Korean movie called Time to Hunt, and Greg Daniels' new show Space Force, starring Steve Carell. We have the second season of After Life, the second season of Dead to Me, a new season of 13 Reasons Why, a third season of Dark from Germany, the finale of Cable Girls from Spain, and a new anime series, Ghost in the Shell, debuting next week.

Greg, good luck having anything to talk about.

Yes, I mean you've taken everything. I'm really excited about Extraction. Ghost in the Shell is amazing; if you love anime, you have to check it out. Unorthodox blew me away with its incredible story. And another title that hasn't been mentioned, which is well-known but features really impressive storytelling, is Ozark. That last episode was just wow. I don't even know what to say.

And if you're thinking of one tonight, Outer Banks is really making an impact as it's climbing the top 10 list, showing strong performance this quarter.

Thanks, Mike, for doing this from your home and look forward to talking with all of you investors over the quarter. Thank you very much.