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Netflix Trounces Subscriber Forecasts and Tempers Second-Half Expectations: 7 Key Takeaways

With sign-ups surging in March, the streaming giant added an eye-popping 15.77 million paid streaming subscribers in Q1.
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Netflix  (NFLX) - Get Netflix, Inc. Report made good on investor hopes that COVID-19 lockdowns would lead it to report stellar subscriber growth. But it also cautioned that growth could cool during the second half of the year.

On Tuesday afternoon, Netflix reported that its paid streaming subscribers grew by 15.77 million in Q1 to 182.9 million, easily beating a consensus for 8.22 million paid net adds. The company, which has shown a knack for issuing conservative outlooks, also guided for 7.5 million Q2 paid net adds, above a consensus of 4.14 million.

Q1 revenue of $5.77 billion (up 28% annually) slightly beat a $5.75 billion consensus, and EPS of $1.57 missed a $1.64 consensus. However, as usual, investor attention has been focused squarely on Netflix’s subscriber numbers and commentary.

Netflix finished after-hours trading up fractionally, after having surged to new highs in recent weeks. With the streaming giant having gone into earnings up 34% in 2020 and sporting a near-$200 billion enterprise value, expectations were high.

Here are some notable takeaways from Netflix’s Q1 report and earnings interview.

1. Subscriber Growth Was Strong Worldwide

After two quarters of adding less than 700,000 paid subs in the U.S. and Canada, Netflix’s paid subs within the countries surged by 2.31 million in Q1 to 70 million.

The EMEA region saw paid subs grow by 6.96 million to 58.73 million. Asia-Pacific, which is getting a boost from the launch of cheap mobile-only plans in several countries, grew by 3.6 million to 19.84 million, and Latin America grew by 2.9 million 34.32 million.

2. Netflix Considers its Q2 Guidance to be ‘Guesswork’

With the current environment featuring tremendous uncertainty -- both in terms of when and how COVID-19 lockdowns will end, and how consumers will act afterwards -- Netflix admitted in its Q1 shareholder letter that its Q2 subscriber add guidance is “mostly guesswork,” and that its actual Q2 paid net adds could be well above or below its guidance.

“[We] don't use the words ‘guess’ and ‘guesswork’ lightly,” added CEO Reed Hastings during the earnings interview. “We use them because it's a bunch of us feeling the wind.”

3. Subscriber Growth Is Expected to Slow in the Second Half of 2020

Netflix thinks that some of the subscriber growth that it's currently seeing will ultimately serve to pull forward sign-ups that would have otherwise happened later, and that those unwilling to sign up during the current lockdown period are unlikely to do so soon after lockdowns end. The company also notes that unlike last year, new seasons of Money Heist and Stranger Things won’t be launching in Q3.

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“Therefore, we currently guess that Q3’20 and Q4’20 will have lower net additions than last year due to these effects,” Netflix says. For reference, Netflix had 6.77 million paid net adds in Q3 2019 and 8.76 million in Q4.

4. Netflix Doesn’t Expect Lockdowns to Impact its 2020 Release Schedule a Lot

“[Our] 2020 slate of series and films are largely shot and are in post-production remotely in locations all over the world,” said content chief Ted Sarandos during the earnings interview when asked about the impact of content production halts on Netflix’s release schedule. “And we're actually pretty deep into our 2021 slate...So we don't anticipate moving the schedule around much, and certainly not in 2020.”

In its shareholder letter, Netflix said that it expects to release in Q2 all of the shows and films that it originally planned for the quarter, with lockdowns only impacting dubbing options for certain titles.

5. ARPU Continues Growing, But Forex and Mobile-Only Plans Are Headwinds

On a constant currency (CC) basis, Netflix’s average revenue per user (ARPU) rose 8% annually in Q1, following 12% growth in Q4. Dollar-based ARPU growth was lower, thanks to a $115 million revenue hit from currency swings.

In dollars, ARPU rose 14% in the U.S. and Canada with the help of 2019’s price hikes. It grew 2% in EMEA and (in spite of a 9-percentage-point forex hit) 3% in Latin America. In Asia-Pac, where mobile-only plans are weighing on ARPUs, it fell 5%.

6. Netflix Now Expects Less Cash Burn This Year

With some of its planned 2020 content spend getting pushed out due to production shutdowns, Netflix now forecasts 2020 free cash flow (FCF) of negative $1 billion “or better.” That compares with prior guidance of negative $2.5 billion and 2019 FCF of negative $3.3 billion.

At the same time, Netflix admits that spending push-outs could upend a prior forecast for FCF to improve each year starting in 2020. But the company reiterates that it aims to eventually be cash-flow positive, and that 2019 will be its peak year for cash burn.

7. Fresh Stats Were Shared About Originals

Sixty-four million “member households” watched true crime documentary Tiger King during its first four weeks of availability. Thirty million watched dating show Love is Blind during its first four weeks, and 85 million watched action comedy film Spenser Confidential.

Netflix also estimates that 65 million households will have watched Season 4 of Money Heist by the time that its first four weeks are up, and that 29 million will have watched Season 3 of Ozark.

TheStreet’s Eric Jhonsa previously covered Netflix’s earnings report and interview through a live blog.