Netflix and Snap Inc. will report quarterly financial results Tuesday, kicking off what is likely to be one of the most closely watched earnings seasons in recent memory for media and tech companies managing through the COVID-19 crisis.
The effects of the coronavirus will show up in only part of the January-to-March quarter, especially for companies with significant operations in the U.S., where the pandemic’s effects kicked in just a few weeks ago. Even so, the quarterly numbers — and the commentary by management teams — will offer the most definitive look yet at the financial impact of the virus.
Netflix and some other tech firms are expected to put up strong numbers, and their highflying stock prices attest to their momentum during the virus-related shutdown. With most of Netflix’s 167 million subscribers facing some form of stay-at-home order and high-profile titles including Tiger King and Money Heist debuting in the period, the streaming giant has solidified its position. “As an increasing number of people experience Netflix, at an especially high rate of usage, they will be loath to go back to life without it,” wrote Todd Juenger of Bernstein Research in a note to clients this month. “The adoption of streaming will be accelerated and further ingrained into the culture.”
The dramatic earnings miss by Netflix last summer, which caused a sustained selloff of shares, seems like a distant memory. Perhaps intent on not overpromising, the company is projecting a total of 174 million subscribers worldwide by the end of the first quarter, with revenue reaching $5.7 billion and earnings per share coming in at $1.66. Those targets are in line with Wall Street expectations.
While the complete shutdown in production is a threat to Netflix and likely will affect future quarters, its sheer volume of hundreds of original titles and global cross-pollination of content give it key advantages. The widespread view on Wall Street is that the streaming giant has enough programming to get to the end of the year without customers sensing the well is running dry.
Also reporting Tuesday, Snap Inc. should be a bellwether of note, especially for brand marketers and the social platform’s Hollywood content partners. In February, before Western countries experienced the worst of COVID-19, Snap said it would report about 225 million daily active users in the first quarter, with revenue of $450 million to $470 million. Wall Street has more modest expectations, but third-party data on quarantine media usage trends could mean Snap will extend its streak of beating most analysts’ estimates in each quarter since it first went public in 2017.
Amazon, meanwhile, also should have a knockout report next week. John Blackledge of Cowen & Co. sees its e-commerce business thriving due to “holiday-like” demand, with web services and advertising also apt to contribute to strong results. Amazon reports April 30, the same day as Apple, Comcast, Twitter, Imax and Altice USA.
Looming over the entertainment business is the question of consumer spending, which is undergoing a dramatic change given the tens of millions of workers who suddenly have become unemployed and widespread economic uncertainty for others. One major investment bank, UBS, forecasts consumer consumption in the U.S. falling nearly 30% in the second quarter (April to June) and 6.4% for the full calendar year.
Veteran media analysts Craig Moffett and Michael Nathanson held a conference call for clients this month in an effort to assess the rapidly shifting environment. Moffett said he couldn’t envision “any scenario where cord-cutting doesn’t accelerate,” though the effects will be felt in later quarters. Nathanson said the full-year outlook for traditional media companies depends to a large extent on when live sports returns. Games went dark the second week of March, gouging a large hole in the estimated $19 billion annual sports business in the U.S., much of that being television rights. “I think the real risk here is that the longer this goes on into the fourth [fiscal] quarter, there will be a real lack of original content production,” he said. “I just don’t see a lot of original content hitting this year.”
Top companies including WarnerMedia, Disney and Comcast, which have production capabilities as well as nascent direct-to-consumer streaming operations, likely will shift more programming toward streaming, he predicted. That delicate balancing act has been under way for the past couple of years. The dilemma is that legacy broadcasting and cable operations may be in secular decline but still generate significant revenue from affiliate fees and advertising. Even so, “they will pivot more to protect those [newer] businesses because they’re the long-term growth possibilities,” Nathanson predicted.
Media companies — unlike Netflix — will be pummeled by falling advertising revenue as many brands pull campaigns entirely or scale them back. A study by IAB last month showed 70% of advertisers interviewed were adjusting ad spend for the March-to-June period. That austerity runs counter to rising ratings across every media platform as people shelter in place but it acknowledges the economy’s swan dive into recession. With businesses closed except those deemed essential, the IAB study showed buyers anticipated spending an estimated 38% on linear TV with the biggest drops in travel and tourism, retail brick and mortar, and restaurants. The estimated spend was down 32% for digital video, 28% for social media and 25% for paid search.
Twitter a month ago withdrew its first-quarter revenue and profit forecast, citing the impact of the pandemic on advertising. Facebook said a day later that it was seeing advertising slow in impacted areas. Digital ads are faster and easier to pull, with the impact on broadcast taking a bit longer and thrown into relief by the uncertainty of the upfronts where the networks sell 70% of their inventory. With traditional presentations canceled and pilot season halted, Wall Street will be looking for executives’ sentiments as to how that will unfold. Local TV station groups, while still holding out hope for presidential campaign spending, will reveal the toll on their ad operations when they report on May 6 and May 7.
Disney and Comcast are receiving zero revenue from their shuttered theme parks, another massive hit — especially for Disney, which has raised an $11 billion cash cushion. Investors will be paying close attention to companies’ cash on hand and debt obligations. The higher the liquidity and the lower the leverage, the better. UBS analyst John Hodulik, in a downgrade of Disney shares from “buy” to “neutral” on Monday, estimated the company’s leverage soon will balloon to 5.4 times earnings, compared with the previous level of 3.7 times. Theme parks, he predicts, won’t open until January. Assuming a vaccine is not developed in the near term, “the lingering effects of the COVID-19 outbreak will be felt for a number of years,” he wrote.
Speaking of leverage, AT&T, still working to pay down debt from its $81 billion Time Warner acquisition, also has a worrisome amount of it. The company’s quarterly numbers on Wednesday are apt to shed important light on the company’s progress, or lack thereof, during the onset of the virus.
Most media and entertainment companies have by now warned officially — via SEC fillings or carefully worded statements — that the pandemic will have an as-yet unquantified “adverse material impact.” Starting on Tuesday, the upcoming crop of earnings reports will give the first indications of how executives plan to parry a question from investors that once seemed routine: How’s business?