Netflix added 10 million net new global subscribers last quarter, beating expectations as viewers hunkered down amid a pandemic. The company’s current third-quarter forecast disappointed however, knocking the stock down more than 11% in after hours trading.
In major news, chief content officer Ted Sarandos was named co-CEO alongside founder and chairman Reed Hastings.
Netflix net subscriber adds were above expectations of 8.26 million for the second quarter where it ended at 192.95 total subs. But the company said it only expects to add 2.5 million net new subscribers in the third quarter, a significant slowdown compared with previous periods — and even compared with last year when it brought in 6.8 milllion new subscribers in the same period. It’s half of what Wall Street expected.
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In his letter to shareholders that accompanies each earnings report, Hastings called huge growth in the first half of the year, when it added a total of 26 million net news subscribers, as “a pull-foward of our underlying adoption” and indicated that’s not realistically sustainable moving into the second half.
The 26 million paid memberships added in the first haflf of 2020 were nearly on par with the 28 million for all of 2019. “However, as we expected growth is slowing as consumers get through the initial shock of Covid and social restrictions,” Hastings said.
“As we navigate these turbulent circumstances, we’re focused on our members by continuing to improve the quality of our service and bringing new films and shows to people’s screens.”
The company’s stock has been among the best performers in the entertainment and media space as the first, biggest, best stocked and most international of streamers despite a raft of new competitors. Its shares slipped this week however on jitters that the stock may have gotten too high and Wall Street punished it today on the numbers. The company has a history of volatile market moves when it reports its hotly anticipated numbers.
Netflix reported earnings per share of $1.59, below Wall Street analyst consensus of $1.81 but way up from $0.60 the year before. Net profit jumped to $720 million from $271 million.
Revenue of $6.15 billion beat expectations of $6.08 billion and was up 25% from the year earlier quarter. Operating income nearly doubled to $1.34 billion.
A key metric, free cash flow, was nearly $900 million compared with a negative $594 million the year before. Improving FCF is being driven in part as the company digests its big move into original programming that requires more cash upfront versus licensed content. It also said the COVID-19 related pause in production has pushed cash spending on content into the second half of the year.
Netflix said it ended the second quarter with more than $7 billion of cash and equivalents on its balance sheet. Combined with a $750 million credit facility, which remains undrawn, and improving FCF profile, it has sufficient liquidity to fund its operations for over 12 months, it said. As a result, the company doesn’t expect to tap the debt markets for the remainder of 2020.
It has about $16 billion in debt.
Netflix noted a “slight hit to revenue” as it stopped billing people who haven’t used the service for the last two years. “A very small percentage of our members have not watched anything for the last two years and although we make it easy for people to cancel their subscriptions with just a few clicks, they have not taken advantage of that ability. So we decided to stop billing them and will do so for members meeting the same criteria going forward. Like all of our former members, they can easily restart their membership in the future,” Hastings said.
“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.”
In April, Netflix reported adding nearly 16 million new subscribers, smashing all estimates as COVID-19 spurred a surge in streaming. At that time, the company warned its outlook for the second quarter was “mostly guesswork” because of uncertainty about the status of stay-at-home orders around the world.
While Netflix stock showed some vulnerability in 2019 as the company saw domestic growth flatten and Disney and Apple launched new streaming services, in 2020 it has been a juggernaut. Rising 60% in the year to date, it has been one of the top performers in the S&P 500 even as HBO Max and Peacock have also joined the fray.
One weapon in the company’s arsenal in this challenging year has been the volume and geographic diversity of its original productions. The company has greater global reach in streaming than any competitor, enabling it to face minimal effects thus far from widespread shutdowns during the pandemic.
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