Netflix Q3 Earnings Live Blog

Eric Jhonsa

Netflix kicks off tech earnings season with its third quarter earnings reports on Tuesday after the close.

Analysts polled by FactSet are expecting the streaming giant to report third-quarter EPS of $2.13 on revenues of $6.39 billion, and to have added 3.7 million paid net adds in the quarter, for a total of 195.9 million subscribers worldwide. These additions are expected to represent a slowdown from the first half of the year, which saw record growth from stay-at-home orders amidst the coronavirus outbreak. 

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

Comments (54)
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Eric Jhonsa
Eric Jhonsa

Editor

That's a wrap for Netflix's earnings interview.

Shares are currently down 5.8% after-hours to $494.96 after Netflix reported 2.2M Q3 paid streaming net adds and guided for 6M Q4 adds, missing consensus estimates of 3.57M and 6.56M. Revenue topped estimates, while EPS missed due to a $249M non-cash forex loss.

With production halts lowering content spend, Netflix reported Q3 free cash flow of $1.15B and guided for full-year FCF of ~$2B, while forecasting 2021 FCF of negative $1B to breakeven. The company noted it has resumed production for new seasons of Stranger Things and The Witcher, and said it's optimistic it will complete shooting by year's end on 150+ productions currently in progress.

Thanks for joining us.

Eric Jhonsa
Eric Jhonsa

Editor

Question about Netflix's cost structure as it progresses towards generating sustained FCF.

Neumann: We're not sustainably FCF-positive yet, but we're getting close. With over $8B in cash, we might not need to raise more capital going forward. We're going to remain disciplined and take an approach that maximizes long-term shareholder value.

Eric Jhonsa
Eric Jhonsa

Editor

Sarandos: At some point, theaters will reopen and people will go back. People often crave the social interaction that a theater-viewing experience provides.

Eric Jhonsa
Eric Jhonsa

Editor

Question about how Netflix could have a bigger pipeline of film-licensing opportunities due to theater shutdowns.

Sarandos: It's a fairly short-term opportunity. We have opportunistically licensed some films such as Enola Holmes and The Trial of the Chicago 7. We'll pick up some of the films that become available, not all, but we'll be in the mix.

Eric Jhonsa
Eric Jhonsa

Editor

Question about how Netflix measures the success of originals.

Hastings: For at least the last 5 years, we've understood it's fundamentally about member satisfaction. You can juice viewing for a particular title, but it hurts in the long-term if it lowers customer satisfaction. We want our titles to be the most talked-about titles in a country.

Sarandos: It's now unusual for a Hollywood studio to spend 50-100% of its production budget for a film on marketing it. We spend a fraction of that to promote originals, but get a ton of viewing for them. A lot of the "heavy lifting" for driving viewing is done by recommendations.

Eric Jhonsa
Eric Jhonsa

Editor

Question about how much content consumption is driven by recommendations.

Peters: A large % of our viewing is driven by recommendations. Many people launch Netflix trying to figure out what to watch, and we do a good job of finding things they'll want to watch. And when we do, that improves our future recommendations.

Eric Jhonsa
Eric Jhonsa

Editor

Question about disputes over app and channel store payment terms, including about planned Google Play policy changes.

Peters: On iOS, we've still been signing up people via mobile browsers. We've seen "steady, solid growth" for that channel. We have a long history of working with device manufacturers, aggregators, etc., and don't see that model changing.

Eric Jhonsa
Eric Jhonsa

Editor

Question about maintaining quality as the number of Netflix-produced originals keeps growing.

Sarandos: Last year, we had 160 Emmy nominations. That kind of quality attracts more quality. We've also had award-winning animated features. We're deep into our 2021-2023 animation slate. We think there's a big appetite for film and animated features on Netflix.

Eric Jhonsa
Eric Jhonsa

Editor

Question about the number of shows on Netflix declining.

Sarandos: We don't focus much on title count. Before we were licensing content and bulk and trying to figure out what was popular. We're now more focused on popular content that customers want to see.

Eric Jhonsa
Eric Jhonsa

Editor

Question about how much single pieces of content still impact subscriber growth.

Hastings: I don't think it's particularly changed. We might be a little more sensitive to it due to subscriber growth being lower on a percentage basis. We've got a lot of major releases coming up, such as new seasons of The Crown and The Witcher.

Eric Jhonsa
Eric Jhonsa

Editor

Question about the hiring of Neumann (formerly Activision Blizzard's CFO), who replaced David Wells as CFO.

Hastings: David is a great human being and generalist/tech CFO. But we felt "super fortunate" to hire Spence, who has been a "dream CFO" for Netflix.

Neumann (laughing): I thought I was going to get a keeper test here.

Eric Jhonsa
Eric Jhonsa

Editor

Question about Netflix's restructuring efforts.

Sarandos: We always look for ways to run the company better. We recently restructured our content team to be more like our film team. When you have leadership changes, there'll be downstream effects.

Hastings: Many senior Netflix execs have taken on additional responsibilities over time. No one gets to keep their job for free. You've got to earn it every year.

Eric Jhonsa
Eric Jhonsa

Editor

Question about Netflix originals that have been licensed to cable networks. Could Netflix expand those efforts?

Sarandos: We're always looking for ways to let people sample our content. Putting a show on Netflix has often significantly boosted awareness of that show, but the opposite hasn't always been true.

Eric Jhonsa
Eric Jhonsa

Editor

Question about ending free trials in the U.S..

Peters: We engage in testing to see what the most effective ways are to introduce Netflix to new consumers, and change our tactics as necessary. One idea we're thinking about: Providing Netflix for free to an entire country for a weekend. We plan to test that in India.

Eric Jhonsa
Eric Jhonsa

Editor

Question about whether there's room for Netflix to raise prices in additional markets over the next few quarters.

Peters: I won't speculate on particular markets, but there's "ample opportunity" to add more value in different regions. And as we do that, we'll occasionally go to subscribers and ask them for a little more.

Eric Jhonsa
Eric Jhonsa

Editor

Question about Canadian/Australian price hikes and how Netflix is thinking about price hikes going forward.

Peters: There's no "magic algorithm" for price hikes. But our strategy of taking the extra money our subs give us and putting it into additional content investments remains in place. We assess things on a country-by-country basis, looking at how much content we've added in a country, what engagement is like, etc. We want to remain an "incredible entertainment value."

Eric Jhonsa
Eric Jhonsa

Editor

Question about production work.

Co-CEO Ted Sarandos: We've finished shooting 50+ productions since March, and expect to finish production on 150+ more by year's end. We've been amazed by the adaptivity of production teams to get work done safely. We'll still have some production shutdowns from time to time, but we're back to "near steady state" in terms of production.

Eric Jhonsa
Eric Jhonsa

Editor

Question about engagement rates, and the impact that reopenings have had on them. Has there been a structural boost to engagement?

Hastings: We try not to get overly focused on COVID's impact. Engagement is around what we would've expected a year ago. We compete for time against HBO, YouTube, TikTok, Fortnite, etc.

Eric Jhonsa
Eric Jhonsa

Editor

Question about Latin American growth, and one about how much Netflix expects pull-forward to impact 2021 growth.

COO Greg Peters: YTD Latin American growth is still good (5M over the last 9 months), the pull-forward effect was at play in Q3.

Reed Hastings: The pull-forward into next year is "relatively modest" compared with 2H20. There will probably be a bit of an effect in Q1, maybe a little less in Q2. Our content output, word of mouth, etc. keep growing at a steady rate, and subscriber growth follows.

Neumann: We added 26M subs during 1H20, more than twice the growth we saw in 1H19. One can't expect Netflix to add as many subs in 1H21.

Eric Jhonsa
Eric Jhonsa

Editor

First question is about subscriber growth and Q4 expectations.

CFO Spence Neumann: Q3 subscriber growth was close to what we expected. We expected to growth following first-half pull-forward due to COVID. Underlying metrics are still very healthy. Customer retention remains strong. We've added more than 28M subs over the first 3 quarters.

Eric Jhonsa
Eric Jhonsa

Editor

Barclays' Kannan Venkateshwar is the interviewer.

Eric Jhonsa
Eric Jhonsa

Editor

Shares haven't moved much over the last hour: They're currently down 5.9% after-hours to $494.50.

Eric Jhonsa
Eric Jhonsa

Editor

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

Eric Jhonsa
Eric Jhonsa

Editor

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

Shares are currently down 6% after-hours to $493.81, after Netflix reported 2.2M Q3 paid subscriber net adds (below guidance of 2.5M and a consensus of 3.57M) and guided for 6M Q4 paid net adds (below a consensus of 6.56M).

Eric Jhonsa
Eric Jhonsa

Editor

As of the end of Q3, Netflix's 2020 cash content spend totaled $8.7B, down from $10.1B during the first 9 months of 2019 due to COVID-related production halts.

Look for cash content spend to grow again in 2021, as more production work resumes, and potentially top full-year 2019 spend of $14.6B.

Eric Jhonsa
Eric Jhonsa

Editor

Regarding Asia-Pac, Netflix notes it now has a double-digit penetration rate within broadband homes in Japan and South Korea.

The company also highlights its efforts to grow in India, where it faces stiff competition from Prime Video and Disney's Star service, noting a recent partnership with top Indian mobile carrier Reliance Jio and efforts to team with financial institutions to make payment processing easier.

Eric Jhonsa
Eric Jhonsa

Editor

One notable takeaway from these stats: Netflix's most popular original films are increasingly eclipsing its most popular original shows in terms of household viewer counts.

This is logical in a sense, given that films require much less of a commitment in terms of viewing time than TV show seasons. But given how long Netflix's original content work was associated with TV shows, it does represent a change of pace.

Eric Jhonsa
Eric Jhonsa

Editor

Stats for the number of "member households" that watched recently-aired Netflix originals in their first 28 days.

The Umbrella Academy: 43M
Lucifer: 48M
Ratched: 48M
The Social Dilemma: 38M
Cobra Kai: 50M
The Old Guard: 78M
The Kissing Booth 2: 66M
Project Power: 75M

Eric Jhonsa
Eric Jhonsa

Editor

Netflix ended Q3 with $8.4B in cash and $16B in debt. The company reiterates that it doesn't plan to tap capital markets again this year, and (with FCF improving) says its "need of external financing is diminishing."

Eric Jhonsa
Eric Jhonsa

Editor

Netflix's marketing spend fell 5% Y/Y to $527.6M (lower ad prices were likely a factor). However, its tech and development (R&D) spend rose 19% Y/Y to $453.8M, and its G&A spend rose 16% to $271.6M.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix's Q3 performance by region. The U.S./Canada now only account for 37% of paid subs. But they still account for 46% of streaming revenue, thanks to a relatively high ARPU of $13.40 (Facebook can relate).

Eric Jhonsa
Eric Jhonsa

Editor

As usual, Netflix remains diplomatic in its commentary about rivals, and insists it's not just competing against other subscription streaming services.

"Linear television and other big categories of entertainment, like video games and user generated content from YouTube and TikTok are all vying for consumers’ attention and are strong drivers of screen time usage. We remain quite small relative to overall screen time....We’re thrilled to be competing with Disney and a growing number of other players to entertain people; both consumers and content creators will benefit from our mutual desire to bring the best stories to audiences all over the world."

Eric Jhonsa
Eric Jhonsa

Editor

Netflix on production work: "Since the almost-global shutdown of production back in mid-March, we have already completed principal photography on 50+ productions and, while the course and impact of C-19 remains unpredictable, we’re optimistic we will complete shooting on over 150 other productions by year-end.

For our 2021 slate, we continue to expect the number of Netflix originals launched on our service to be up year over year in each quarter of 2021 and we’re confident that we’ll have an exciting range of programming for our members, particularly relative to other entertainment service options. As discussed last quarter, some of our most popular returning titles are expected to launch in the second half of next year."

Eric Jhonsa
Eric Jhonsa

Editor

Netflix ended Q3 with 195.15M paid subs globally. If it hits its Q4 guidance, it'll end the year with 201.15M paid subs.

Eric Jhonsa
Eric Jhonsa

Editor

Forex remained a major headwind in Latin America, where ARPU fell 16% Y/Y in dollars but was up 5% in constant currency.

On the flip side, with the dollar weakening against the euro, forex was a tailwind in EMEA, where ARPU rose 5% in dollars and 3% in CC. ARPU was down 1% in both dollars and CC in Asia-Pac.

Eric Jhonsa
Eric Jhonsa

Editor

Streaming ARPU fell 1.6% Y/Y in dollars, and was up 1% excluding forex swings.

For comparison, Q2 ARPU was up 0.4% Y/Y in dollars and up 5% excluding forex.

Eric Jhonsa
Eric Jhonsa

Editor

Shares have pared their after-hours losses a bit: They're now down 4.7% to $500.67. YTD gains remain north of 50%.

Eric Jhonsa
Eric Jhonsa

Editor

The Asia-Pac region, where Netflix has been rolling out cheap mobile-only plans in some markets, accounted for 1.01M of the 2.2M paid net adds Netflix delivered in Q3.

180K net adds were obtained in the U.S. and Canada, 760K in EMEA and 260K in Latin America.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix's 2020 paid net adds by week. The company previously said it thought its giant first-half subscriber growth served to pull forward demand from 2H20. This chart seems to back up that view.

Eric Jhonsa
Eric Jhonsa

Editor

Regarding FCF, Netflix forecasts it will be "slightly negative" in Q4, as more production work restarts.

It expects full-year FCF to total ~$2B. For now, Netflix is guiding for 2021 FCF of negative $1B to breakeven.

Eric Jhonsa
Eric Jhonsa

Editor

Here's the shareholder letter, for those interested.

Eric Jhonsa
Eric Jhonsa

Editor

Netflix on its 2021 expectations: "The state of the pandemic and its impact continues to make projections very uncertain, but as the world hopefully recovers in 2021, we would expect that our growth will revert back to levels similar to pre-COVID. In turn, we expect paid net adds are likely to be down year over year in the first half of 2021 as compared to the big spike in paid net adds we experienced in the first half of 2020."

Eric Jhonsa
Eric Jhonsa

Editor

With production halts limiting near-term content spend, Netflix generated $1.15B in free cash flow. That compares with Q2 FCF of $899M and year-ago FCF of negative $551M.

Eric Jhonsa
Eric Jhonsa

Editor

Q3 revenue of $6.44B beats a $6.39B consensus. GAAP EPS of $1.74 (impacted by a $249M non-cash forex charge) misses a $2.13 consensus.

Eric Jhonsa
Eric Jhonsa

Editor

Shares are down 6.1% in after-hours trading.

Eric Jhonsa
Eric Jhonsa

Editor

For Q4, Netflix forecasts 6M paid net adds, a little below a consensus of 6.56M.

Eric Jhonsa
Eric Jhonsa

Editor

The report is out. Q3 paid streaming net adds of 2.2M are below a consensus of 3.56M and Netflix's guidance of 2.5M.

Eric Jhonsa
Eric Jhonsa

Editor

Shares are down 1% in Tuesday trading to $525.36 heading into the close. The Q3 shareholder letter typically arrives shortly after the bell.

Eric Jhonsa
Eric Jhonsa

Editor

Though Netflix's stock hasn't moved a ton since it posted its Q2 report in July, shares are still up 62% YTD. That leaves Netflix sporting a $231B market cap.


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