Netflix Logs Big Subscriber Gains-Q1 Earnings Live Blog

Eric Jhonsa

Netflix NFLX kicked off tech earnings season after the close on Tuesday in a big way, reporting Q1 net subscriber adds of 15.77 million versus expectations of just 8.2 million as stay-at-home directives significantly boosted results. After initially gaining as much as 10% after-hours, gains moderated to flat to slightly down at last check, reflecting high expectations that have driven the stock to record highs lately.   

For Q2, Netflix forecast 7.5 million paid streaming adds, well above a consensus of 4.14 million. Q1 revenue of $5.77 billion came in slightly above a $5.75 billion consensus, while EPS of $1.57 was below a $1.64 consensus. Notably with a lot of content production on hold, Netflix also said it now expects 2020 free cash flow of negative $1 billion or better, compared with prior guidance of negative $2.5 billion.

TheStreet's tech columnist, Eric Jhonsa, is analyzing the company's earnings report, as well as the "video interview" with Netflix executives that's scheduled to begin streaming at 6 p.m. ET.

Comments (63)
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Eric Jhonsa
Eric Jhonsa

Editor

Netflix's call has ended.

Shares are up 0.7% after hours to $437.00 after the company reported 15.77M paid streaming subscriber adds (far above an 8.22M consensus) and guided for 7.5M Q2 adds (above a 4.14M consensus), but also cautioned that it thinks subscriber growth is likely to cool in the second half of the year. With the stock up 34% on the year going into earnings, expectations were high.

Thanks for joining us.

Eric Jhonsa
Eric Jhonsa

Editor

Morris asks Netflix execs for some content recommendations (both existing and upcoming titles).

Some of the recommendations: Extraction, Too Hot to Handle, Unorthodox, BlackAF, Ghost in the Shell, Ozark.

Eric Jhonsa
Eric Jhonsa

Editor

Question about competition.

Hastings: I've been so impressed by Disney+'s execution. Have never seen an incumbent execute so well with a new streaming service. We're both gonna do great work.

Reiterates it's great for consumers to have many streaming options, and that Netflix remains focused on improving on its own service rather than how it compares with rivals.

Eric Jhonsa
Eric Jhonsa

Editor

Question about Netflix's performance in India, where Disney+ recently launched in partnership with Hotstar.

Peters: I wouldn't draw any strong contrast between India and other countries. Have been trying to make our service more attractive there.

Sarandos: We've seen big viewing growth in India. Local originals have been well-received, and so have some international originals.

Eric Jhonsa
Eric Jhonsa

Editor

Question about reducing free trials in some markets, and one about Netflix's mobile-only plans.

Peters: We have a range of marketing promotions that we use, and are constantly trying to improve those. Mobile-only plans now available in several countries, part of our efforts to make Netflix more accessible. They've been performing the way we expected, and are neutral-to-positive for revenue.

Eric Jhonsa
Eric Jhonsa

Editor

Question about Netflix having access to more licensed content in the current environment.

Sarandos: We're still quite committed to our long-term strategy of investing a lot in originals. But there are some opportunities to license additional material in the short-term.

Eric Jhonsa
Eric Jhonsa

Editor

Question about Netflix's top-10 lists.

Sarandos: One of the things that people pay attention to when deciding what to watch is popularity. Some people want to watch things that they can know others are talking about.

Eric Jhonsa
Eric Jhonsa

Editor

Question about whether there are other unscripted genres Netflix wants to expand into.

Sarandos: Our goal is that we want to make your favorite show. We've been expanding into a variety of genres, and will continue to.

Eric Jhonsa
Eric Jhonsa

Editor

Sarandos on Tiger King: It turned out to be such an unbelievably well-timed distraction for people around the world. Gave people something to talk about during lockdowns.

Eric Jhonsa
Eric Jhonsa

Editor

Neumann: Netflix would've been cash-flow positive in Q1 even without COVID-19's impact on subscriber growth. For the rest of 2020, the push-out of some content spend will boost FCF. But only "a small minority" of content spend is being pushed out.

Reiterates that 2019 will still be Netflix's "maximum negative year" for FCF, while adding that the path to positive sustained FCF could now be a little choppier.

Eric Jhonsa
Eric Jhonsa

Editor

Sarandos on resuming production: A lot of work needs to be done to guarantee safety. Testing and tracking is important. Will work with governments on this.

Eric Jhonsa
Eric Jhonsa

Editor

Sarandos: We're experimenting with our release schedule. Love is Blind saw a staggered release. But while we experiment, we think consumers like getting everything at once, and don't see us changing that meaningfully.

Eric Jhonsa
Eric Jhonsa

Editor

Question about the impact of production shutdowns on Netflix's release schedule.

Sarandos: We work really far out relative to the industry. Our 2020 slate of originals is largely shot and are in post-production remotely. We're also deep into our 2021 slate. We don't anticipate moving the schedule around much, certainly not in 2020.

Eric Jhonsa
Eric Jhonsa

Editor

Neumann reiterates that forecasting how subscribers will grow in the near-term amounts to guesswork, and that his company is dealing with an unprecedented situation.

Eric Jhonsa
Eric Jhonsa

Editor

Peters: In early 2020, Netflix was already returning to the U.S./Canada churn levels it saw before last year's price hikes.

Adds (not surprisingly) that Netflix isn't thinking about new price hikes at this time.

Eric Jhonsa
Eric Jhonsa

Editor

Hastings: Our mindset when it comes to pleasing new subscribers is the same as that for existing subs. Viewing patterns and activity for new subs is similar to that for existing ones.

Eric Jhonsa
Eric Jhonsa

Editor

Hastings: When creating a planning model, one has to model for COVID's impact, the development of vaccines, etc. And Netflix doesn't know any more about that than others. But consumption of Internet entertainment keeps growing.

Hastings adds that Netflix doesn't use words such as "guess" and "guesswork" lightly when talking about guidance.

Eric Jhonsa
Eric Jhonsa

Editor

CFO Spence Neumann: The long-term impact of COVID-19 is impossible to predict. But the long-term trend towards streaming adoption remains in place.

Eric Jhonsa
Eric Jhonsa

Editor

Product chief Greg Peters and content chief Ted Sarandos join Hastings in saying that their main focus has in near-term has been on keeping Netflix running. Sarandos adds that Netflix had things like post-production, animation, pitch meetings, etc. happening remotely shortly after lockdowns happened.

Eric Jhonsa
Eric Jhonsa

Editor

First question is about COVID-19's impact on consumer behavior, and its long-term effects.

Reed Hastings: It's a incredible tragedy for the world. We too are unsure of what the future brings. Hard to say whether there'll be long-term implications. Have been scrambling to keep our service running well. In a couple months, we'll be able to grapple with long-term implications.

Eric Jhonsa
Eric Jhonsa

Editor

This quarter's interviewer is Guggenheim Securities' Mike Morris.

Eric Jhonsa
Eric Jhonsa

Editor

And it's up. Here's the link, for those wanting to watch.

Eric Jhonsa
Eric Jhonsa

Editor

The interview should be up any minute.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix is now up just 0.3% in after-hours trading, as investors balance blowout Q1 subscriber adds and strong Q2 guidance with high expectations and cautious second-half commentary.

One thing worth keeping in mind here is that Netflix has shown a knack for guiding conservatively in recent quarters. As a result, the company might be trying to keep expectations in check at a time when (as it admits) its visibility about future subscriber growth is limited.

Eric Jhonsa
Eric Jhonsa

Editor

Hi. I'm back to cover Netflix's earnings interview, which should be made available in a few minutes.

Eric Jhonsa
Eric Jhonsa

Editor

I'm taking a short break, but will be back to cover Netflix's earnings interview, which is due to become available at 6PM ET.

Shares are currently up 1.1% after hours to $438.74 after Netflix blew away Q1 paid subscriber add forecasts and guided its Q2 paid adds above consensus, while also cautioning that growth is likely to slow during the second half of the year.

Eric Jhonsa
Eric Jhonsa

Editor

Interestingly, in spite of its massive Q1 subscriber adds, Netflix's marketing spend fell 18% Y/Y to $503.8M. With companies in many industries drastically cutting ad spend in right now, Netflix might be benefiting from lower ad prices.

Technology and development (R&D) spend rose 22% to $453.8M, and G&A spend rose 25% to $252.1M.

Eric Jhonsa
Eric Jhonsa

Editor

As usual, Netflix is sharing a few stats about how new originals have performed.

The company says 64M member households watched Tiger King during its first 4 weeks, 85M watched Spenser Confidential and 30M people watched Love is Blind.

Season 3 of Ozark is expected to be watched by 29M households during its first 4 weeks, and Season 4 of La Casa de Papel/Money Heist is expected to be watched by 65M.

Eric Jhonsa
Eric Jhonsa

Editor

Streaming content obligations stood at $19.2B at the end of Q1, down $300M Q/Q and up $300M Y/Y.

Eric Jhonsa
Eric Jhonsa

Editor

On a cash basis, Netflix's content spend, which can fluctuate a lot from quarter to quarter, was slightly over $3B in Q1. That was down from $4.5B in Q4 and roughly flat Y/Y.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix says it has added 2,000 customer service agents (all working remotely) to help deal with a spike in customer support requests amid COVID-19 lockdowns.

Eric Jhonsa
Eric Jhonsa

Editor

Altogether, Netflix had 182.9M global paid streaming subs at the end of Q1, of which just 70M were in the U.S. and Canada.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix's Q1 performance by region. ARPU grew strongly in the U.S./Canada with the help of year-ago price hikes, but fell a bit in Asia-Pac, where Netflix has been rolling out cheap mobile-only plans in some markets. Latin American ARPU rose, but saw a 9-percentage-point forex hit.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix is now up just 0.9% after hours to $447.50. Aside from high expectations, the company's comments about Q3/Q4 paid net adds potentially being below year-ago levels could be weighing.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix also notes that if the dollar remains at elevated levels, it could impact the company's 2021 operating margin guidance. But for now, it's maintaining its 2020 op. margin guidance of 16%.

Eric Jhonsa
Eric Jhonsa

Editor

The dollar's recent gains have been a bit of a headwind for Netflix: Forex had a $115M revenue impact in Q1, and the company observes that its Brazilian ARPU has dropped about 25% in dollar terms thanks to forex swings.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix also notes it's making moves to strengthen its content library, such as acquiring streaming rights for films that were previously due to see box office releases.

This fits with a recent report from The Information about how Netflix and other streaming services are receiving dozens of pitches to gain streaming rights for films whose box office debuts have been put on hold.

Eric Jhonsa
Eric Jhonsa

Editor

Regarding its content schedule, Netflix says its planned Q2 content launches should be unaffected outside of an impact on language dubbing options for a few titles. There will be more of an impact in Q3.

Eric Jhonsa
Eric Jhonsa

Editor

Though guiding for negative full-year free cash flow, FCF, which can be lumpy from quarter to quarter, was positive by $162M in Q1.

Netflix ended Q1 with $5.2B in cash, $14.7B in debt and $750M in undrawn credit facility funds. The company asserts it has "more than 12 months of liquidity and substantial financial flexibility."

Eric Jhonsa
Eric Jhonsa

Editor

The company also thinks that its Q3 and Q4 paid net adds might be below year-ago levels of 6.77M and 8.76M, given that some sign-ups are likely being pulled forward right now.

"Intuitively, the person who didn’t join Netflix during the entire confinement is not likely to join soon after the confinement," management says.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix admits that its Q2 paid net add guidance (7.5M) is "mostly guesswork," given variables such as when COVID-19 lockdowns end and what consumers do with their free time afterwards.

Eric Jhonsa
Eric Jhonsa

Editor

ARPU rose 8% Y/Y in constant currency, which compares with 12% constant currency growth in Q4. Netflix notes that Q1 ARPU was hurt by the fact that a large portion of its paid net adds were obtained late in the quarter.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix has pared its gains: Shares are now up 3.2% after hours. As noted previously, expectations were pretty high going into the report.

Eric Jhonsa
Eric Jhonsa

Editor

Here's the Q1 letter, for those interested.

Eric Jhonsa
Eric Jhonsa

Editor

Latin America and Asia-Pac paid net adds more than doubled Y/Y. U.S./Canada net adds rose 22% and EMEA rose 47%.

Eric Jhonsa
Eric Jhonsa

Editor

Paid net adds by region:

2.31M in U.S./Canada
6.96M in EMEA
2.9M in Latin America
3.6M in Asia-Pac

Eric Jhonsa
Eric Jhonsa

Editor

With a lot of content production work on hold, Netflix now expects 2020 free cash flow of negative $1B or better, compared with prior guidance of negative $2.5B.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix: "Like other home entertainment services, we’re seeing temporarily higher viewing and increased membership growth. In our case, this is offset by a sharply stronger US dollar, depressing our international revenue, resulting in revenue-as-forecast. We expect viewing to decline and membership growth to decelerate as home confinement ends, which we hope is soon."

Eric Jhonsa
Eric Jhonsa

Editor

For Q2, Netflix is guiding for revenue of $6.05B (+23% Y/Y) and GAAP EPS of $1.81, above a consensus of $5.98B and $1.55.

Eric Jhonsa
Eric Jhonsa

Editor

Q1 revenue of $5.77B is slightly above a $5.75B consensus. EPS of $1.57 is below a $1.64 consensus.


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