With almost everyone stuck at home thanks to the COVID-19 pandemic, Netflix was widely expected to do well in the first quarter of 2020 — but it did even better than anticipated.
Before the current crisis, Netflix had forecast 7 million net new paid subscribers for its just-released earnings. With the dramatically changed landscape, growth was obviously going to beat the forecast, but Q1 came in at more than double expectations, with 15.77 million paid net additions. That brings Netflix’s total paid subscriber count to 182.86 million.
Meanwhile, the company also reported revenue of $5.77 billion and earnings per share of $1.57 — roughly in line with Wall Street predictions on revenue and slightly behind EPS predictions of $1.65.
In its investor letter, Netflix outlines three main impacts that the pandemic has had on its finances:
First, our membership growth has temporarily accelerated due to home confinement. Second, our international revenue will be less than previously forecast due to the dollar rising sharply. Third, due to the production shutdown, some cash spending on content will be delayed, improving our free cash flow, and some title releases will be delayed, typically by a quarter.
For now, Netflix is treating this growth as a short-term spike, with viewing and growth declining as “progress against the virus will allow governments to lift the home confinement soon.” So it’s forecasting a mere 7.5 million global net additions in Q2.
As for how the global halt to movie and TV production might affect the service’s content plans, the company says there will only be a “modest” impact in Q2, mostly in language dubbing. This quarter will also see the launch of just-announced acquisitions like the Kumail Nanjiani-Issa Rae comedy “The Lovebirds” (originally slated for a theatrical release) and the Millie Bobby Brown mystery “Enola Holmes,” as well as new shows like “Space Force” and “Hollywood.”
“No one knows how long it will be until we can safely restart physical production in various countries, and, once we can, what international travel will be possible, and how negotiations for various resources (e.g., talent, stages, and post-production) will play out,” the investor letter says. “The impact on us is less cash spending this year as some content projects are pushed out. We are working hard to complete the content we know our members want and we’re complementing this effort with additional licensed films and series.”
The letter also includes viewership numbers about some recent releases, using the “chose to watch” metric that Netflix announced last quarter — it’s now counting everyone who chose to watch a given show or movie and watched for at least two minutes. An impressive 64 million people chose to view “Tiger King.” But somehow, that didn’t quite match the 85 million people who chose to view the new Mark Wahlberg action movie “Spenser Confidential.”
As of 4:35pm Eastern, Netflix shares were fluctuating between a slight gain and a slight loss in after-hours trading — a sign, perhaps, that that spectacular growth is exactly what investors were expecting.
Update: During the earnings interview, Chief Content Officer Ted Sarandos spoke about how workflow of the company and its production partners has changed dramatically.
“Our productions, our post productions, our offices are now distributed into people’s living rooms and bedrooms and kitchens around the world,” Sarandos said. “It’s just an incredible testimony to the innovation that literally within a few hours, but certainly within a few days of the shutdowns, we had production up and running remotely, post-production up and running remotely, animation up and running remotely, pitch meetings happening virtually, writers rooms assembling virtually.”
Meanwhile, CEO Reed Hastings emphasized the unpredictability of the long-term effects of the pandemic on Netflix’s growth.
“We don’t use the words ‘guess’ and ‘guesswork’ lightly,” he said. “We use them because it’s a bunch of us feeling the wind, and it’s hard to say. But again, will internet entertainment be more and more important in the next five years? Nothing’s changed in that.”