Netflix's (NFLX) Management at Goldman Sachs 25th Annual Communacopia Brokers Conference Transcript

| About: Netflix, Inc. (NFLX)

Netflix, Inc. (NASDAQ:NFLX)

Goldman Sachs 25th Annual Communacopia Conference Call

September 20, 2016, 03:45 PM ET

Executives

David Wells - CFO

Analysts

Heath Terry - Goldman Sachs

Heath Terry

We're really happy to have with us today David Wells, Chief Financial Officer of Netflix. Obviously, this is an incredibly exciting time in Netflix's history as you launch the service globally. So David, really appreciate the fact that you could take the time to be here with us.

David Wells

Thanks for having us.

Heath Terry

So, David, obviously, there is no one in the room that's not familiar with Netflix, the very least as a customer. But how do you have -- how you would have investors think about what Netflix is as a company and what you're trying to build?

David Wells

Well, I think we're the world's first leading global internet entertainment company; television company. And so, we've got 83 million subscribers and growing across the globe. We're now in every country, ex-China, Syria, couple of places we're not allowed to be, but our intent is to connect the world's stories with consumption of those stories in television.

Heath Terry

Yes. So how are you thinking about the competitive landscape? There are obviously a lot of companies here and some that aren't that are looking to try and recreate in some form or another the success that Netflex has had? How does that competitive landscape stand now and how do you see it evolving?

David Wells

Well, we generally think of competition sort of more broadly for your entertainment time. So when you sit down at the end of the evening after working and you've got some time to yourself, there is a lot of things that you could do. You could read a book. You could play a video game. You could read a newspaper or magazine. You could watch any number of things on TV and choose any number of services to do that.

So we think very broadly across that spectrum and we know that if you flip on the Netflix app that we've got just a few seconds to engage you, try to grab your attention, try to get you to watch something because the predominant experience when someone sits down is a browse experience, meaning you're sitting down not because you have a certain title in mind because you have some free time.

You want to use and spend that free time and you may want a lean-back experience, so you flip on the Netflix and we try to get you something that you are going to watch. You may have a couple of signals in your mind of something that you’ve heard of whether it's Stranger Things, Narcos, and that you may have given that -- gotten out from a friend, you may have gotten out from social media, from some other form of media, but generally you're still browsing. So for us, it's really trying to win that moment of truth when you sit down and you choose Netflix over everything else you could do.

Heath Terry

And when you look at that competitive landscape and you ask which is probably what we are all most intermittently familiar with versus what you are seeing as you go into these newer international markets, how is it different?

David Wells

Yes, so I think in the U.S. nearly there is more development of entertainment options for folks. So we have -- you've got Hulu, Amazon Prime, Netflix, Les was just talking about Showtime. You've got emerging things like Disney. You have lots of options that are starting to come out.

So folks are having more and more choice in terms of what they are able to do. Outside the U.S., you have various stages of that development. So you may have very dominant incumbent linear players. You may have very low PayTV penetration. So you have some countries that are staring from very low PayTV.

They may have internet, and the internet is what's pushing that adoption and exposure and access across that country, and so you really apply and can bring again the enjoyment of the content titles that we’ve built and that we see that they travel pretty well across the world.

But we still have to build the trust with the consumer and the awareness of that. In some markets, it maybe low awareness of how OTT works or how this internet entertainment product works. In others, it may be okay, I have heard of Netflix, I know that's a product available in the U.S. and people enjoy, but I am not quite sure what's available. I am not sure how it works, what device I could use it on in my country. So there is more of the basic building blocks that we have to start with and build from there.

Heath Terry

And so when you look at the competitive advantage that Netflix is building, what are the key tenants, the key pillars of that advantage that allows Netflix to win in these markets?

David Wells

I think we've grown over the last five to six year internationally. We launched our first international market back in 2007 with Canada, so about nine years ago. In Canada, very culturally similar, so it may not be as challenging. But with Latin America, we've been there more than five years. We've been in the Nordics and territories in Europe that are very non-English speaking, and what we find is people really enjoy high production quality, good content.

So these titles are traveling, and so about -- we generally simplify it as 80-20, about 80% Western content, 20% local content, so we have a mix. We're not trying to replicate or compete at the local level with local television that's not what we're trying to offer.

We're trying to offer that consumer sort of a much more of a global choice and there is tons of demand for Western content. This country benefits tremendously from having been in the television – inventing the television industry.

And the quality of the content production is generally very high here and that's recognized outside the U.S. by others that want to demand that, and they're willing to consume that in sub titles or dubbing or in straight English.

So that's the first fundamental tenet is that we can apply global scale to if we have a product we license it. Our product generally works the same way it does in the U.S. outside the U.S. And then we add some icing on to that cake with local content with other licensed content and we like to find those hidden gems across the various parts of the world and bring that to the consumer.

And that's the technical aspect. So I would say we bring a lot of technical knowhow in terms of making sure that the product doesn’t buffer on someone, making sure that it's delivered over sometimes challenging network environments, and our team has gotten pretty good at that in terms of delivering the streaming at a high quality of service.

Heath Terry

With the success that you've had in original content, what's your current thinking on the right mix of original license and the impact that has on your economics?

David Wells

We've been on a multi-year transition and evolution towards more of our own content and that's both a response to differentiating in markets that are more highly penetrated and face other alternatives, OTT players, where we have to differentiate our content offering.

It's also somewhat in response to making sure that we have access to content in a world where some integrated producers are trying to figure out what their evolution looks like in terms of their relationship with the consumer over time.

But generally, we find a mixture across that. So I think you should expect us to continue to push towards more 50-50 in terms of original exclusive content and licensed content, but I fully expect us even with the environments that we're in today and the questions that folks are trying to manage their own transition with the consumer that we'll have both, and we'll be producing in a mixture of production models both pure Netflix owned original co-productions, licensed content, we'll all of that. But we will be pushing more and more towards a 50% of original exclusive content.

Heath Terry

I think by almost any standard, whether it's ratings, repeatability, Netflix's original model has pretty enviable hit rate. What would you say has been the driver behind that? How important is the data that Netflix gets from your existing user base and being able to continue that hit rate?

David Wells

The important of the data isn’t necessarily in the production of the content. It's in matching you to content that you might enjoy watching. So it's annoying based on your prior viewing what you're more inclined to enjoy and having the opportunity cost of putting those 10 shows that we can put in your visual range in front of you and having higher confidence that one of them or multiple of them are going to be something that you actually enjoy, not just click into sample, but finish and enjoy it.

So we'd say the data is important in terms of merchandising and making sure that we match content to its audience, and we benefit tremendously from our business model that we don’t have. We don’t have to aggregate a bunch of people around a certain night and then make a call on that night whether we're successful or not.

We can build audience over time and grow that to a point where we don’t necessarily have to have home runs. We've described it in the past as singles and doubles are fine. We love home runs, but we can also live with singles, doubles, and triples definitely commensurate to their cost.

So we'd say the data is important in there. The data is helpful in terms of sizing audience and therefore sort of backing into a production budget. But there is no excuse and there is no substitute for great creative content execution. We are not at a point yet where a machine can make content for a human being and have it be great. Maybe in our life time we get there, but we are not there yet.

Heath Terry

You've referenced the 80:20 rule of western and local content that you've been using in many of these markets. As you learn more about the less English speaking, less Western markets that you're starting to serve, how well does that ratio hold up do you think?

David Wells

It's held up pretty well so far. So there’s many markets in Latin America, Brazil, very non-English, very Brazilian culturally oriented. So not just a language, but also culture orientation and we see that holding up pretty well.

Finland, another very non-English market again holding up. Japan is our one example in an Asian market where we say, it's tilted more toward 50-50 in terms of local content, very famously oriented around Japanese content, and the language itself, and so in that particular market, we are off to 80-20.

Heath Terry

Yes. So this year where you really started to see more of the locally native shows that you launched, you launched Marseille and France, Savannah, and Japan…

David Wells

Gomorrah.

Heath Terry

Narcos, yes, Gomorrah, It sits in a Narcos which we saw last year and has become more of a kind of global success. What are you learning about that local native development and the impact that you think it can have on the business globally?

David Wells

Well, again I think what we are learning primarily is that people really will go out of their way to consume great stories. It doesn’t really matter what native language they are originated in. And so for us, we want to find content that has a large audience, and if the large audience doesn’t necessarily mean English speaking, it could mean Spanish speaking, it could mean French speaking. Narcos is a show produced by a French company, staring a Brazilian, playing a Colombian, shot in Colombia, 75% in Spanish, 25% in English.

So we are not the first ones to come along and try to create more global appeal to a show. But I think the consumer, if it's done very bluntly resents it, if it's done elegantly it really enhances the show. It enhances the more cultural appeal to it, I’m learning something, I’m being exposed to something new, different, and novel in a way that really just works and I think Narcos is one of those. And unfortunately, Narco trafficking is a global phenomenon. So it's a concept that everyone understands.

Heath Terry

And we're in this incredibly interesting time from a content perspective where on one side it certainly seems like there is a lot more demand for original content. There are more bidders for that content out there than we've ever seen before. But also in this peak television environment that we are in, there is also more content being created at the same time. How are those two things affecting the ROI that Netflix sees on the content that you are acquiring?

David Wells

Well, in a vacuum, we'll be paying less, but there is no such thing as a vacuum. So I would say we are equally -- we are competitive in the hunt. There were, according to FX's own research, I think there was New York Times article 409 scripted series last year. They haven’t yet updated that number this year. It was up from 380, I'll get the number wrong, but it's around that range the year before.

So the consumer is benefiting tremendously from this amount of choice. You have a plethora of choice. I'd say it's raising the game across the system in terms of the quality. For those who chose to rise to the top of that, you really are being more competitive in that sense.

For us, the technological barriers to content production have come down over the years, right, in terms of if you think about 10 years ago, 15 years ago, the ability to spend on special effects and how that level of $50 million or $100 million investment or more in sort of fixed aspects of content production, that has all really come down over time with technology.

So the barriers to entry in terms of content production have come down. The interest in that content has gone up. So you have more bidders. So I think you've got a supply and demand settling out. And for now, we love it because we are participating in a great age of television for the consumer, and we would love to provide as many stories as possible to consumer.

Heath Terry

Yes. So, I'm curious how your thinking has evoked on pricing? You've been through a couple of different pricing efforts over the last five years or so, and I think probably have learned a lot about elasticity and consumer reaction during that, where do you currently sit in terms of the way that you think about the right price for Netflix and your ability to raise potentially over time?

David Wells

I think most of the learning for us have been at the execution the micro level. At the macro level I would say our thesis is intact that we think as we add more value and add more content to the service, we can raise ASP slowly over time and we do that through two primary mechanisms.

One is through differentiation of the price tiers. So people can choose the service that's right for them and driving more value into the higher tier, middle tier and letting people choose the higher price plan and we do that through infrequent price raises.

We famously then -- 2011 was the biggest example and then the last one negatively surprised that the churn that we faced, but I'll orient people that our expectation is our revenue is increasing year on year. So the reasons that we did the price changer are very much still intact and we'll continue to do that. So at the macro level, steady ASP growth over time driving more and more value to make consumers feel good about that.

And I think the Netflix pricing relative to its alternative is where we face pressure from investors that we are underpriced. I'd say it's balanced to some degree in terms of the price that consumers have been anchored on Netflix. In the past there is an anchoring concept the price of available alternative in terms of competitive offerings. So it's balanced between the two I think.

Heath Terry

Yes. And so you referenced the uptick in churn that you saw at the second quarter related to the un-grandfathering. You also said at the same time that the gross ads had remained strong and hit where you were looking at.

What percentage of those people who churn off ultimately come back? How much of your -- how much of your -- when you see that kind of churn increase how much are you immediately certain that a percentage of those people are coming back in 6, 12, 18 months?

David Wells

The percentage of rejoins or the folks that come back are fairly high and we said in the past it's been anywhere from a third up to 50% and when we've had events like people churning off because of a price increase, it tends to float off it in the immediate after months of that.

So we get a fair number of these folks back. We don’t necessarily know after 12, 18 months exactly if they've been a member or not because of data retention constrains on that, but we have a pretty good indicator that some folks have been a member in the past.

Heath Terry

Yes.

David Wells

So we get a fair number back is the headline on that.

Heath Terry

On the international side from a pricing perspective, you've taken this very direct, you made this right direct decision to maintain a premium price point even in markets where you have earlier stage content library or maybe you don’t have the same per capita income that you do in some of your Western market, what's behind that?

David Wells

Well, I'd say initially for our first phase of growth and development in those markets we think that there is plenty of folks that can pay at a skim level the price in Netflix. So it's not to preclude any actions down the road, but in our first phase, I think we're pretty happy with where we are. And it's about making sure that we've got the right content set more than it's the right pricing.

It could be that down the road when we penetrate deeper in the market where we are talking about multiple levels of household income that ability to pay becomes an issue and then we would be looking at tearing or other ways to address that I think.

Heath Terry

One of the areas that you've have been investing in a little bit more over the last year or so has been in feature films, you did a video with Adam Sandler, Crouching Tiger. What have you learned in that that has made feature films it's pretty good given your success in serial television, feature films is something that you actually wanted to do.

David Wells

Well, I'll just remind folks that it's a relatively small portion of our overall content portfolio, it's about 5%. So I would describe it as Netflix is an innovative company. We like to try things. So I think it fits in that mould still as an experiment in terms of the ability to provide films that are very fresh and exclusive to Netflix to the service.

We've got Christopher Guest's Mascots coming up. There is different pockets of that. I don’t think that we are -- we've never produced something like a 10 fold equivalent or over $100 million. We've got Bright, which is the closest thing, we will come to that in terms of size and production budget, but again it's I'd describe it as we are testing.

And for us it's about seeing if there is a middle ground in that production level that we can provide nice fresh movies to the consumer that helps round out the content offering today. We are super happy. We're pleased with the Adam Sandler movies. We're pleased with -- we've got War Machine coming up, we have The Siege of Jadotville, which is a smaller title; First They Killed My Father.

So there is a wide swap of what you might describe as smaller, more artistic, more heavier films like Beasts of No Nation, that are more towards critical acclaim, little bit heavier and then Adam Sandler might be on the other end of that in terms of lighter and not aiming for critical acclaimed. Before I get a message from Adam, it'd great if you got critical acclaim, but I think he is more concerned about audience acclaim.

Heath Terry

Yes.

David Wells

It's hard to get both.

Heath Terry

Or something. So I guess one of the things that you've talked about as far as your goal around the original content, I was getting to the point where you are releasing a title every couple of weeks to keep customers satisfied, keep them on, reduce churn. Where are you in the process of getting to that and as you added more content what impact are you seeing it have on churn?

David Wells

Well, given that House of Cards launched, House of Cards being our first high profile title that was associated as an original with Netflix in February of 2013. We are about 3, 3.5 years into that. It will take us another couple of years to meaningfully progress more towards the 50% number that I said. So I'd say we are third to half way through of getting to where we like to be.

It may feel like the cadence of new content is really high, but you have to think about a world where we're releasing something every month that appeals to you individually and not everybody watches the same thing.

So we may have to release three things in there if on average a third of our subscribers watch this one particular title. So we've got our ways to go and that's across different genre, it's across different formats. The nice thing about the service is it really -- it allows a lot of creative freedom in terms of the story telling format, in terms of links of title you can have varied links of episodes depending on the story arc of that particular episode.

It doesn’t need to be a set 13 episodes, 50 minutes fit into a certain format. You can have -- the latest thing that I've really enjoyed are doc series, document series like Last Chance You, it's six episodes, the first episode is somewhat longer, but then the next episode is like 45 minutes. So you really can consume that your own pace and it's really fits I think with the storytelling arc.

Heath Terry

So you are starting to play with the format a lot more as you've increased the number of titles you mentioned Last Chance U, Stranger Things which obviously has gotten a lot of attention normally 10 episodes. You're also starting to do with Chelsea Handler in more frequent turn on kind of the talk show type thing.

Is there a point that we get to where Netflix just has it all in terms similar to a broadcast station in terms of having something to fit in every bucket, does that include sports at some point, how do you think this ends up?

David Wells

It's just like we include sports. I don’t -- given the plethora of content out there, we are not going to have -- we'd love to have something for everyone, but you're more than likely than not to subscribe to multiple services. You're not going to -- you just have Netflix.

We would love for us to be on first on your list, but you are more likely than not to have multiple services and that's what we see today. I think we're really early on just completing that last question in experimentation with the storytelling format. For those of you who caught Les's presentation right before mine, I happen to come in at the end and he is like yes, we're still somewhat constrained in the broadcast model to the 13 episode.

There is still the format that fits the advertising industry, that fits the broadcast syndication and the same is true for us. We're producing in multiple production models. So only the ones where we are pure and we purely own it, where we are not looking -- the producer is not looking for a secondary monetization or a tertiary, can we really experiment outside of today and that's the reason that you see a lot of our series are still in that 13 episode season format because they are co-produced with a broadcaster or they are in a model where you're seeing them in other places as well.

Heath Terry

Particularly from some other companies that are here today, there has been a lot of attention paid to alternative distribution channels set-top boxes being the obvious one that I think it's probably worth talking about. What's the right way to think about how those relationships work for Netflix? What you're able to get through those that you couldn’t get without them and how you expect that will impact subscribers?

David Wells

One thing for us it's about the convenience to the consumers. So Brian demonstrated the Comcast integration with Netflix this morning. You heard a liberty global deal announce. So I think for those cable providers especially the large ones, they come to the conclusion that, it’s better to have the Netflix app on their box and on their device and keep that subscriber in their technical echo system that it is to use them to an alternative technical echo system.

For us, we are somewhat agnostic between how you get your Netflix as long as you're getting it conveniently and it’s not a negative on your experience. And so we are just about making it easier for you.

Brian demonstrated some of the aspects of multi-search integration and for us again we’ve learned through our experiences with Virgin and other NYPD integrations that we don’t face Nexus potential threat today on that search as long as we're treated equally. You can’t burry us in the content, but if we are treated equally, then we are going to compete on the merits of the quality of our service, both on merchandising, our recommendations engine, how the streaming works and our content offering.

Heath Terry

Yeah, and so the FCC Chairman has a proposal out there in terms of next generation of how set-top boxes could evolve, is there an outcome that is -- that’s more favorable for Netflix that you're looking for?

David Wells

We’ve generally seen that the evolution in -- and not just on the set-top box as you've been on net neutrality, on data caps, has been evolving with and towards the consumer. The consumer I think is pushing a lot of it and so for Netflix we are super happy to see Comcast adopt one terabyte data caps, because that’s really following the consumer.

We think data caps are not a great consumer way to manage it and you are much better off selling higher speed broadband and having servicers use the service. So we were super happy to see that. We think that will continue.

In terms of the set-top box world, the FCCs pronounced that it was really about MVPD and so we are somewhat agnostic, we're interested by standards in terms of watching that. But today, they're still talking about a world where you have an app available on their set-top box and that’s how it works today.

Heath Terry

So with the investments that you have planning in content, how should investors think about your capital needs, your balance sheet, you stated that you plan to raise more money in the debt markets, what does that app look like?

David Wells

Yeah, there really isn’t a change there. We've been consistently telling our investors and the investment community that we're building content while we were building up that content and we're raising and moving more towards original. So that pressures our cash and that will continue. So as we move up the content, the ratio of cash to content is held about one three to one four.

It can peak in any one giving quarter based on deliveries. But that ratio I think is going to continue to hold, but it means that as we move the content expense budget from $5 billion we said last year to $6 billion this year and then above, that that cash need is growing.

We're organically growing two and able to fund some of it. But we are essentially running in play. So we are burning or needing in terms of free cash flow about a $1 billion to $1.2 billion a year and I don’t see that changing.

It could -- that one two could become one four, that can become one. And so it's hard to know exactly what will happen. But I do foresee for the next 12 to 18 months being a consumer of cash, 24 months really depends on the scale of the businesses as it grows. It could take longer in terms of building out that content library for the foreseeable future, especially if we were able to grow and grow globally.

Heath Terry

Yeah. Is there a target level of debt or target leverage level that you feel is right for the company from a capital structure standpoint or is this just a question of we're going to need that for a little while until we get this launch and then eventually we're going to go back to the being one of these Internet companies that just has much cash on the balance sheet.

Well if you go back to your finance, 201 days M&M I and II, I would say we are under leveraged from an optimal capital -- cost to capital structure. You make an argument that we should be somewhere around 20% to 25% levered.

And now Neil Begley, I think is speaking who is at Moody's in another room, I think he would rise at that, because that’s based on a market cap, debt to market cap. But most of our media peers, if you peer us to media companies, are much more levered.

To the extent that we have a subscription service and a reliable -- fairly reliable revenue stream, I think there is capacity there. So I would say we are measuring that and we're being fairly disciplined as we grow out and we have investments internationally and we're monitoring those and as we grow that organic operating profit and ability to pay, we’re going to get more comfortable I think with the leverage. So I would expect us to optimize over time to be more levered.

Heath Terry

Okay. So we do have mics around the room. If anyone has a question just raise your hand we’ll get one over to you. I am sure, I am not the only one with questions. We got one up here.

Question-and-Answer Session

A - David Wells

Just talk and I’ll repeat your question.

Heath Terry

Well yes, here you go Valarie.

Unidentified Analyst

One, would you ever consider an ad supported option for Netflix either to penetrate more deeply, the more mature markets like the U.S. or to perhaps have a greater market share in emerging market? That’s one, and then two, how do you think about YouTube given their rapid growth in online video and their investments in original content as a competitor?

David Wells

Yes so there is no immediate plans for an advertising supporting product. Netflix as a brand narrowly within the Netflix name stands for no advertising. I think people like that. So there is no immediate plans and then for YouTube, look they have a ton of eyeballs, they're globally their view that they're number one service basically that’s online video.

They certainly have launching YouTube Red and other things and looking at echo system that includes music. They have the ability to compete with -- there is nothing we would differently. We are just going to continue to focus on making our service great, adding a lot of content and building that out.

Q –UnidentifiedAnalyst

So I think you are making it great. I think it's pretty clear to anyone who has used Netflix both in the U.S. and abroad and that the quality of your portfolio in foreign countries is considerably inferior?

David Wells

You're talking about that from a service broadly, how -- re-buffering or you are talking about the content…..

Q – Unidentified Analyst

Films and series available. How do you think about investing contents in the U.S. that's invest in Broad?

David Wells

Well I think it’s a very popular mean that we get the non-U.S. consumer, get screwed. I think it's actually inaccurate. If you look at the film offering in Canada, you actually have more feature film covers than you do in the U.S. If you look at the film covering right now, in the Netherlands a lot or headquarters in the Amsterdam.

The film covering is far superior to the U.S. in terms of the content library. So I think its popular but inaccurate for that perception to persist and it's based on decades of having to wait for the latest shows to come outside the U.S. it actually precedes Netflix.

I think there is a general mean that the non-- whether it’s a European consumer, an Australian consumer, an Asian consumer, get screwed relative to the U.S. population. I would say that our service, the U.S. is not the highest country in terms of media and hours viewed. There is other countries that are higher than the U.S. and that’s a very strong indicator for folks who are finding lots to watch outside the U.S.

And then your last question was how do we think about investing in the U.S? We want to continue growing the content library both in the U.S. and outside the U.S. And as long as we are able to grow, our global subscriber population, we have virtue with cycle there in terms of being able to find and monetize that content across a larger and larger base, which then propels our ability to find more and more content and to produce more content.

Heath Terry

Yeah over there, yeah, there is mic behind you.

Unidentified Analyst

Could you comment on authentication and your tolerance of password sharing and where do you see that going?

David Wells

We have terms of use of the service. We are happy people use it within that in their household. If they don’t use it within the terms of use, we’re unhappy about, there is not a whole lot we can do. We could crack down on it, but you wouldn’t suddenly turn all the folks to paid users. So our attempt is to use as great merchandising and personalization to incent that person to use to want have a Netflix account and that’s what we are focused on.

Heath Terry

To go down and tap a little bit -- we got mic over here and I’ll just follow-up on that, but to go down that path a little bit more, there is some of the great personalization that you’ve done including adding individual profiles within a single accounts almost seems to encourage the other side of it.

There used to be a point of frustration of if I have to share my account with my wife, my kids we get this terrible personalization method or jumbled content of recommendations versus what you’ve done now instead of a really great experience that you can kind of just keep adding people, people on, do you start tightening the news in terms of things like simultaneous streams and news, news being may be a little too dramatic of what I’m on episode seven of Narcos, so I am in kind of a dark place.

David Wells

I would say, look there is a hard constraint today in the number of concurrent streams. Some of you may have hit it, some of you may have not, but if so many folks are sharing the account that they’re actually. There is too many people streaming one time, you’ll hit a limit, hard limit and then there is a prompt, to upgrade, either to upgrade your service or to say hey, you've hit a limit, you need to open it under account if you want to have more people streaming. So there is a hard limit today, but I think predominately we just focus on making it, the services doesn’t cost that much so, why don't you get your own.

Heath Terry

Yeah, I agree.

Unidentified Analyst

[Indiscernible]

David Wells

So the question was I spoke about tiers, different levels of ties internationally, would we offer different tiers in the U.S, we already do. So there is three tiers in the U.S. toady, there is a one stream and two stream and four stream plan with high def and so that is offered today in the U.S. So there is a lower price point. So there is folks that might be more income sensitive at $8 a month.

Heath Terry

Back to the discussion on that, how do you think about where Netflix sits currently in the high yield market, is there is there a path to investment grade the interests you at all.

David Wells

Yeah, I mean if you look at where our bonds trade today, they’re actually trading one to two grades better than our rating. So, I think that’s the market acknowledging that Netflix is a strategic asset. If there is any most of that debt is especially in a high yield situation is priced off of what if distress situation so, if you look at our interest coverage, if you look at the back that would be in any distress situation, a desired asset.

I think there is a lot of coverage there and that’s reflected in the way that that's trading today. For us, we would love to pay lower on the debt but in general I think the agencies are backward booking when they look at the financial metrics and as our operating profit improves and our EBITDA improves then that will improve but I would love to have them look ahead on some of that stuff. I think we have the confidence that those metrics are going to improve but probably so does every CFO that comes in front of them.

Heath Terry

Sure. So on the -- to follow up on the question on international content, you guys have talked about the incremental $1 billion you expect to spend over that the next year on content, how is the waiting of domestic versus international content I realize there is some grey area in there starting to shift as the business becomes more global?

David Wells

Yeah, I’m as a company, a lot of the question are U.S. Centric and we’re in New York, so that makes sense, but as a company we’re on the way to, on the way to 50% revenue outside the U.S.

I would say we’re becoming much more global and if our markets are growing faster than the U.S. market they’re not actually will tip the other way. We'll be 60-40 outside the U.S. I think as a consumer I love it because our team is just getting more and more ingrained and deeper in the world’s great content production outside of the U.S.

So I benefit because I love seeing new stuff come on to the site that may be uncovered in Korea, it may be uncovered in the Netherlands, it may be uncovered in South Africa wherever it ends up being Brazil, Columbia and so I think the consumer becoming more and more having greater access to the world’s great stories as part of our development and our value proposition that we bring.

For the content side that’s going to -- you’ll see that in the content. That said the U.S. has had 100 years of great content production. So, there is – it’s still a very much of a leading market and a influencer market in the world's consumption of media and content and you see that in all the companies that are having come to your conference.

So when we produce a great show, it maybe U.S. led, it has a great audience outside the U.S. I think you'll see both. It will be a great day when you start seeing shows as big as the ones you do in the U.S. start originating not just in the usual suspects of where they do today but in new places.

Heath Terry

Yes we've got question here if we can just get the mic up.

Unidentified Analyst

[Indiscernible] how is the mix changing in terms of size of production budgets? So are you -- is this enabling you to do more big budgets and/or is your data and scale around the globe allowing you to aggregate audience for pinpoint productions that have more critical acclaim?

David Wells

So I think most people heard your question. I would say the tendencies to have projects that are viewed in large numbers across the world. That doesn’t necessarily mean the production budget, it can be, it's not a one-to-one causal relationship.

You can even something that has a global phenomenon that has a modest production budget. So I would say for us it's more about making sure that we've right sized the opportunity and making sure that we're not thinking of it way bigger than it is and we will get some wrong than we have but on the average, it's helpful to think about just a range in terms of that.

But I would say, you've seen in the 600 hours of original programming that Ted, our Chief Content Officer has talked about and I talked about before that's a range of content. You have headline production like Narcos Season Two, you've got The Crown which is the story of Queen Elizabeth coming out in November 4, you've got Luke Cage coming out on September 30 but then you also have content like Christopher Guest Mascots, you've got content that I would describe as middle level production budget, you have standup comedian there.

You have some doc series, some new doc series coming out Chef's Table, the Parisian series that's in French. So there is a wide variety of content in there and I wouldn't equate it to the data. One doesn’t go with the other. I would say in general, we're looking for content that delights large audiences and that could be middle, low and high production budget.

Heath Terry

So maybe just to wrap on one last question, I thought it was really interesting that when the question was asked about international content, you immediately went to the technical side of things and we've seen from -- we saw when you launched in Latin America there were a lot of issues in growing the subscriber that had nothing to do with content payments, language localization, you localized in Turkey and Poland, you're starting to see some of that effort being made in other markets, what's the roadmap look like to get the truly native experience that you want in these markets, how long does that take, what happens in the near term?

David Wells

I naturally went to technical because I know that people feel like the content in less but that's not actually true from a factual base of either number of titles or quality or box office or whatever metric you want compare it to.

In the rest of world countries that maybe true in the sense that we launched a content library that was a subset of our tailored markets, so we're in the middle of building that out now and over the last seven months that has gotten bigger and better and better. We will go market by market in terms of the opportunity for more localization.

So for Poland and Turkey which we've said we'll come later, those were large markets. We thought there was an opportunity to better the subscriber experience. We thought that the content was already there and we can add sites, local sites language.

For other markets it really depends, it maybe the payments of the things that we need to tweak. So you will see us add more local payment options. It maybe that the content, the content mix is something that we need to tweak. I think I did get the question earlier today, there doesn’t seem to be a sense of urgency on attacking these markets.

I can assure you there is and it's more of a matter of focus and being disciplined about not trying to do everything all at once but sort of going after the best opportunities at the beginning and then going down there.

So I would say the rest of world markets that we launched in January will be multiyear in developing and some of those maybe gated by just the general pace and cadence of the Internet, the general pace and cadence of the content in general in terms of that system and us faring out with the right content mixes.

Heath Terry

Okay. David, thanks so much for joining us. We really appreciate it.

David Wells

Thank you.

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