Netflix Q2 Earnings Live Blog

Eric Jhonsa

Netflix NFLX kicked off tech earnings season after the close on Thursday with some disappointing numbers, falling short of earnings estimates and issuing weaker-than-expected guidance for Q3 subscriber additions. 

The streaming giant's Q2 revenue of $6.15 billion beat a $6.08 billion consensus, while GAAP EPS of $1.59 missed a $1.82 consensus. Quarterly paid streaming net adds of 10.09 million beat the company's guidance of 7.5 million and analyst consensus of 8.26 million adds. However, Netflix is only guiding for 2.5 million Q3 paid net adds versus an analyst consensus of more than double that figure at 5.27 million net adds.

The company attributed the low expected number of additions to the significant "pull forward" of subscriber additions to the first half of the year because of the coronavirus pandemic. 

Netflix also announced that  the company's long-time content chief, Ted Sarandos, had been named co-CEO along with current CEO Reed Hastings, and elected to the board of directors.

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.

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Eric Jhonsa
Eric Jhonsa

Editor

That's a wrap for Netflix's earnings interview. Shares are currently down 8.5% after-hours to $482.50.

After having reported a massive 15.77M Q1 paid streaming net adds in April, Netflix reported 10.09M for Q2, topping its guidance of 7.5M. But (with the caveat that Netflix often guides conservatively) the company guided for just 2.5M paid net adds for Q3, while stating that it thinks it saw "significant pull-forward" of demand in Q1 and Q2.

Netflix also reiterated that its 2020 content launch plans are largely intact, while adding that 2020 production halts will lead its 2021 slate to be more back-half loaded. And with cash content spend currently depressed due to production halts, Netflix says it now expects 2020 free cash flow to be "breakeven to positive," compared with prior guidance for FCF to be negative $1 billion or better.

Thanks for joining us.

Eric Jhonsa
Eric Jhonsa

Editor

Question about Netflix's views on video games and leveraging gaming IP.

Hastings: The big content franchises have generally come out of books and comic books, rather than video games. The video game space is rapidly evolving and remains very interesting. But Ted's got big plans to spend billions on movies and shows, so we still have a lot of places to invest our money.

Sarandos: Video games have a world-building aspect to them. But so do books, novels, original IP, etc. La Casa de Papel (original Netflix IP) was the most-watched show globally in Q2. We'll keep working to develop more IP.

Eric Jhonsa
Eric Jhonsa

Editor

Question about Netflix's strong Q2 free cash flow and op. margins in Q2, and how it sees things going from here.

Neumann: FCF is benefiting right now from low cash content spend due to production halts. We do expect to turn cash-flow negative again in 2021 as content spend rises again. But we're still aiming to keep improving FCF long-term and become FCF-positive on a sustainable basis.

Eric Jhonsa
Eric Jhonsa

Editor

Question about production shutdowns, and how Netflix is trying to partly offset this by acquiring third-party content that's available thanks to the current environment.

Sarandos: Even during shutdowns, we were often doing some production work. Some activity in North America and elsewhere is now resuming. Creators have often shown a knack for working remotely. There are some opportunities to pick up additional studio content, both for films and TV shows. For example, Cobra Kai.

Eric Jhonsa
Eric Jhonsa

Editor

Question about content mix, and whether Netflix feels it should take more risks.

Hastings: I feel excellent about the number of big bets we have coming up. Some of it will turn out great. We want to have so many hits that you never have to think about another service. We want to "be like your best friend, the one you turn to."

Eric Jhonsa
Eric Jhonsa

Editor

Question about how Netflix is thinking about improving the user experience going forward.

Peters: Our introduction of top-10 lists have caused a "a nice little positive lift" in engagement. It's indicative of what we're trying to do. We have the greatest collection of content ever available at the click of button. But it does create content-discovery challenges. We have teams that think about what content to recommend to a particular member, and how to present them. Comparing the Netflix experience from 5 years to today, there have been tremendous changes, and we're committed to making more.

Eric Jhonsa
Eric Jhonsa

Editor

Question about churn. Given how engagement has risen lately, is that resulting in lower churn for new-subscriber cohorts relative to past new-subscriber cohorts?

Neumann: Retention across every cohort is "as good or better" as it was pre-COVID. Subscribers have grown strongly across the globe.

Peters: In addition to churn, other metrics are very encouraging right now.

Hastings (waxing philosophically): I think of it as when someone churns, it's going to be temporary. They're going to eventually come back. We'll keep working hard to improve the service so that they do.

Eric Jhonsa
Eric Jhonsa

Editor

Question about ARPU growth. Excluding price hikes, it seems to be trending lower due to newer/low-cost plans. How does Netflix see it trending?

Peters: Every country has different characteristics. We look closely at a number of metrics (engagement, churn, etc.) to see how particular plans are working in a market. And when those metrics are encouraging, we're open to going back to customers and asking them for "a little more" so that we can invest more in content.

Eric Jhonsa
Eric Jhonsa

Editor

Question about Netflix's distribution deals with pay-TV providers and telcos.

Peters: The deals are important, but they remain a relatively small percentage of new sign-ups. We evaluate these partnerships along two lines: How much revenue they add, and what the customer experience is like. We're very positive about how things are going in both areas, and look forward to striking new deals.

Eric Jhonsa
Eric Jhonsa

Editor

Question about the arrival of streaming services from companies whose parent companies are pay-TV providers (i.e., HBO Max, Peacock), and how it affects partnerships.

Peters: It's unfortunate when negotiations between content providers and device makers prevent consumers from watching shows on the devices they want to watch. We work hard to collaborate with device makers, it's a win-win.

Eric Jhonsa
Eric Jhonsa

Editor

Question about investments in reality shows and whether low content costs influence Netflix's decision-making.

Sarandos: The reason to invest there isn't low content costs, but the fact that consumers love the content.

Eric Jhonsa
Eric Jhonsa

Editor

Sarandos: At a time when much of the world is at a standstill, we're still releasing a lot of new content.

To give an example, he highlights Netflix's expansion into reality shows, where it has had some recent hits (Love is Blind, Too Hot to Handle).

Eric Jhonsa
Eric Jhonsa

Editor

Question about Netflix's 2020 op. margin guidance, which remained at 16%.

Hastings (laughing): That's called tamping down the expectations. We tend to use any revenue upside to invest more in content.

Neumann: There could be some upside to our guidance. But our focus is on growing margins each year, we're currently managing towards a 300bps margin increase in 2021.

Eric Jhonsa
Eric Jhonsa

Editor

Question about low Q2 marketing spend, and whether spending will remain depressed in the near-term.

Sarandos: Our members spend a lot of time on Netflix every day. So the best place to talk to them about Netflix is Netflix, and we put a lot of effort into that. We're spending less, but doing more to create buzz and attention for our content.

Neumann: We previously expected marketing spend would be roughly flat in 2020. But it now looks like it'll be lower. Some of the spending declines are temporary in nature, but some of it is permanent due to what we've been learning.

Hastings: The service is getting better and better, and we're taking advantage of that.

Eric Jhonsa
Eric Jhonsa

Editor

Question about Netflix's Q3 guidance and near-term growth expectations.

Neumann: We have to look at Q3 guidance in the context of Q2's strong growth. If he hit Q3 paid net add guidance, we'll beat our record for combined Q2/Q3 net adds by 1M.

Eric Jhonsa
Eric Jhonsa

Editor

Question about to what extent recent plan changes could be permanent.

CFO Spence Neumann: In a lot of ways, things don't change much. We did see some pull-forward in member growth, and there are some changes around the margins, such as for real estate purchases. But a lot of things aren't changing.

Sarandos: Some things, such as new safety protocols, will become a permanent part of production. And some of our activities related to content production have gotten more efficient, and that will probably last a long time. We've also learned some new things about marketing.

Peters: In a lot of ways, we've been accelerating things we were already doing, such as letting certain content creators work remotely.

Eric Jhonsa
Eric Jhonsa

Editor

Hastings: The three of us have been working together for a long time. Ted might be able to put some bigger deals now, Greg will spend more time internationally. But a lot of things will be the same. We have a great model, we just have to keep working to make it better.

He also highlights how Netflix has expanded into movies, animation, unscripted content, etc., giving management more work to do.

Eric Jhonsa
Eric Jhonsa

Editor

Reed Hastings: The opportunity across the next decade is amazing for us. It's always great to have some help.

"I'm in for a decade," Hastings adds, looking to quash any speculation that he might be planning an exit.

Eric Jhonsa
Eric Jhonsa

Editor

First question is for new co-CEO Ted Sarandos and new COO Greg Peters about how they see the world evolving:

Sarandos: Reed Hastings and I have worked together for more than 20 years. Looking forward to working together for the next 200M subs around the world.

Peters: This is an opportunity to lean in a little more, become a little more proactive.

Eric Jhonsa
Eric Jhonsa

Editor

Eric Jhonsa
Eric Jhonsa

Editor

The interview is up. This quarter's interview is Barclays analyst Kannan Venkateshwar.

Eric Jhonsa
Eric Jhonsa

Editor

Heading into the interview, Netflix is down 9.6% after-hours to $476.90.

Eric Jhonsa
Eric Jhonsa

Editor

Having some issues sharing links today. But if you want to tune into the video interview, it'll be uploaded by the Netflix Investor Relations account on YouTube.

Eric Jhonsa
Eric Jhonsa

Editor

Hi. I'm back to cover Netflix's earnings interview, which should be up on YouTube 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 set to be published at 6PM ET.

Shares are currently down 10.2% after hours to $473.88 after Netflix posted Q2 paid subscriber net adds of 10.09M (above guidance of 7.5M), but also guided for Q3 paid net adds of 2.5M (below a consensus of 5.4M), while indicating that paid subs have been roughly flat for the last two months after soaring in March and April.

Eric Jhonsa
Eric Jhonsa

Editor

As usual, Netflix is offering a very diplomatic and sanguine take on the arrival of additional streaming competition -- competition it sees coming not just from the likes of HBO/WarnerMedia and Disney, but also from social media platforms such as TikTok.

"All of the major entertainment companies like WarnerMedia, Disney and NBCUniversal are pushing their own streaming services and two of the most valuable companies in the world, Apple and Amazon, are growing their investment in premium content. In addition, TikTok’s growth is astounding, showing the fluidity of internet entertainment. Instead of worrying about all these competitors, we continue to stick to our strategy of trying to improve our service and content every quarter faster than our peers. Our continued strong growth is a testament to this approach and the size of the entertainment market."

Eric Jhonsa
Eric Jhonsa

Editor

For context, Netflix's cash content spend totaled $14.6B over the whole of 2019, and the company was guiding for it to grow again in 2020 back in January.

Eric Jhonsa
Eric Jhonsa

Editor

With content spend temporarily depressed by production halts, Netflix's Q2 cash content spending came in at $2.6B. That compares with Q1 spend of $3B and year-ago spend of $3.3B.

Eric Jhonsa
Eric Jhonsa

Editor

On a big-picture level, Netflix's Q3 guidance might reignite some debates about how much recent consumer demand spikes seen by tech companies following lockdowns -- whether in streaming or in other fields such as gaming and e-commerce -- represent a pull-forward of demand that would've otherwise occurred in the following months and years as opposed to a structural, long-term change in the demand outlook for an industry.

In many cases, it's probably a little of both.

Eric Jhonsa
Eric Jhonsa

Editor

As usual, Netflix has shared some viewing stats for new originals.

"In Q2, we notched successes in many of our key content verticals. In English scripted TV, Never Have I Ever, a fun, young adult dramedy from Mindy Kaling, broke through with 40m households choosing to watch this show in its first four weeks, and 40m households for our new comedy Space Force (starring Steve Carell). On the heels of Love is Blind, Too Hot to Handle and Floor is Lava are the latest in our line of buzzy unscripted shows (51m and a projected 37m households, respectively, in the first four weeks).

In original films, 27 million households chose to watch Spike Lee’s Da 5 Bloods, which was celebrated as a “soul stirring film for the ages.” Extraction (starring Chris Hemsworth) and The Wrong Missy, a comedy starring David Spade and Lauren Lapkus, were also big hits with audiences (99m and 59m households, respectively, chose to watch in their first 28 days). In addition, The Willoughbys (38m households in the first four weeks) is an example of the level of animated feature film we are ramping towards to bolster our offering for kids and families."

Eric Jhonsa
Eric Jhonsa

Editor

Though its revenue was up 25% Y/Y, Netflix's marketing spend (impacted by lockdowns and lower ad prices) fell 28% Y/Y to $434.4M.

Tech/development (R&D) spend rose 14% to $435.1M. G&A spend rose 23% to $277.2M.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix is currently down 10.3% after hours to $473.06. Shares are still up 46% on the year, and 9% relative to where Netflix traded going into its Q1 report.

Eric Jhonsa
Eric Jhonsa

Editor

Forex had a major impact on Latin American ARPU growth, and also affected EMEA and Asia-Pac ARPUs. The adoption of cheap mobile-only plans is also an ARPU headwind for Asia-Pac.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix's Q2 performance by region. The company added a healthy number of paid subs in all four geographic segments. North American sub growth (2.94M vs. a consensus of 996K) was well above expectations.

Eric Jhonsa
Eric Jhonsa

Editor

Following a $1B April debt raise, Netflix ended Q2 with $7.2B in cash and $15.8B in debt. The company thinks it has enough cash to fund its operations for more than 12 months, and doesn't expect to tap debt markets again in 2020.

Eric Jhonsa
Eric Jhonsa

Editor

One interesting disclosure: Netflix says it has decided to stop billing subs who haven't watched anything for the last two years.

Netflix: "Like all of our former members, they can easily restart their membership in the future. While this change resulted in a slight hit to revenue, we believe that pro-consumer policies like this are the right thing to do and that the long term benefits will outweigh the short term costs. In a world where consumers have many subscriptions, auto-pause on billing after an extended period of non-use should be how leading services operate."

A noble sentiment, though somehow I don't think cable companies will be quick to join.

Eric Jhonsa
Eric Jhonsa

Editor

The company also notes that (with many movie theaters still closed) it has been able to acquire the rights to films such as The Trial of the Chicago 7 (an Aaron Sorkin movie) and The Spongebob Movie.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix reiterates that its 2020 launch schedules for originals remains "largely intact." However, it cautions that production halts will lead its 2021 schedule to be more second-half weighted for big titles, though the total number of launches will still be above 2020.

Eric Jhonsa
Eric Jhonsa

Editor

Tech stocks in general are seeing a bit of after-hours selling pressure following Netflix's report. QQQ is down 0.9% after hours.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix on restarting filming.

"Today, we’re slowly resuming productions in many parts of the world. We are furthest along in Asia Pacific (where we never fully shut down in Korea, for example) and are now shooting live action series like season 2 of our Japanese original The Naked Director. In EMEA, we are now back in production in many countries, including Germany, France, Spain, Poland, Italy, and the UK. While we recently resumed production on two films in California and two stop-motion animation projects in Oregon and expect some more of our US productions to get going this quarter, current infection trends create more uncertainty for our productions in the US. Parts of the world like India and some of Latin America are also more challenging and we are hoping to restart later in the year in these regions."

Eric Jhonsa
Eric Jhonsa

Editor

Roku is down 3.5% after hours following Netflix's report. Amazon is down 1.4%.

Eric Jhonsa
Eric Jhonsa

Editor

It looks as if the link for the Q2 report didn't appear the last time around, so I'll give it another shot.

Eric Jhonsa
Eric Jhonsa

Editor

One other executive change: Product chief Greg Peters will now also serve as Netflix's COO.

Eric Jhonsa
Eric Jhonsa

Editor

Streaming ARPU was up 5% Y/Y in constant currency, after growing 8% in Q1. With the dollar having strengthened this year, ARPU was only up 0.4% in dollars.

Eric Jhonsa
Eric Jhonsa

Editor

Q2 free cash flow, which benefited from content production halts, was $899M vs. negative $594M a year earlier.

With some content spend pushed out into 2021, Netflix says it now expects 2020 FCF to be "breakeven to positive." The company previously guided for FCF to be negative $1B or better.

Eric Jhonsa
Eric Jhonsa

Editor

A chart showing how Netflix's 2020 paid net adds have trended over the year. There was a massive spike in March and April, but the chart indicates paid subs have been roughly flat since early May.

Eric Jhonsa
Eric Jhonsa

Editor

I think it's surprising, though I wouldn't say shocking. Sarandos has arguably been the second-most important exec at Netflix for a while, given his role in shaping its content strategy.

Nelson Wang
Nelson Wang

Editor

That news about Ted Sarandos becoming co-CEO of Netflix is super interesting. I wonder if anyone saw that coming.

Eric Jhonsa
Eric Jhonsa

Editor

Shares are now down 12.8% after hours to $460.00.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix also announces that long-time content chief Ted Sarandos has been named co-CEO (joining Reed Hastings) and elected to the board.


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