- Netflix Adds the Most Quarterly Subscribers in Its History
- Show me the money
- What are we gonna watch?
- A nod to the competition
- Taxes and forecasting
- Netflix’s pandemic boom continues: Five reasons why the 2020s will be the Netflix decade
- Unbound ambition
- A holistic view of serving its customer
- One-click shopping
- Fresh franchises
Netflix Adds the Most Quarterly Subscribers in Its History
Expectations were muted going into Netflix's (NASDAQ:NFLX) first-quarter earnings report on Tuesday.
Two potentially formidable competitors, Disney and Apple, had recently released additional details about their upcoming streaming offerings.
In the two market days after Disney's reveal last week, Netflix stock fell nearly 7% over concerns that the lower price point offered by the House of Mouse — $6.99 per month — might eat into Netflix's subscriber base once it launches in November.
For now, those concerns don't seem to be stopping Netflix from continuing to post unfettered growth, even in the face of looming competition. The streaming giant reported nearly 149 million subscribers worldwide, an increase of 25.2% year over year.
Just in Q1, Netflix added a record 9.6 million new subscribers, the highest quarterly rate for paid additions in its history and a jump of 16% year over year. That number included 1.74 million new U.
S. customers, pushing the total to 60 million, a threshold Netflix has long said it would reach. The company added 7.86 million new members internationally, growing the total to nearly 89 million.
Kevin Costner and Woody Harrelson in a scene from the Netflix original, The Highwaymen. Image source: Netflix.
Show me the money
The strong subscriber growth resulted in strong financial metrics. Revenue grew to $4.521 billion, up 22.2% year over year. That was just above analysts' consensus estimates of $4.5 billion. Net income of $344 million produced earnings per share (EPS) of $0.76, up 16% compared to the prior-year quarter and sailing past expectations of $0.57 EPS.
Contribution profit in the U.S., Netflix's most mature market, was 34.4%, down slightly from the 34.8% achieved at the same time last year. Even with significant content investment, international contribution margin grew to 11.6%, up from 9.8% in the year-ago quarter.
Free cash flow (FCF), another area of perennial interest, was negative $460 million compared to negative $287 million in the prior-year quarter, driven by continued investment in original programming.
As a reminder, original content costs more upfront than licensed programming. The latest projections by Netflix indicate that FCF will be worse in 2019 and reach negative $3.5 billion, up from the negative $3.0 billion it originally expected.
The company still anticipates an improvement in 2020 and every year thereafter.
What are we gonna watch?
As it did last quarter, Netflix spent a bit of its missive giving investors updates on some of its hit shows.
Triple Frontier, the action-heist movie starring Ben Affleck was viewed by over 52 million member households during the first four weeks of its release.
The Highwaymen, starring Kevin Costner and Woody Harrelson as lawmen on the hunt for Bonnie and Clyde, is on track to top 40 million viewings in its first month.
The company also gave a nod to Our Planet, which it called “our most ambitious entry into the popular nature documentary genre.” The program, which was shot in 50 countries and was four years in the making, is projected to be seen by 25 million households in its first month.
It's important to note that some feel these metrics — which occasionally use projected figures and can't be independently verified — are virtually meaningless without context. However, since Netflix isn't beholden to advertisers, the company doesn't feel the need to further detail its viewer metrics to the naysayers.
A scene from Netflix original Our Planet. Image source: Netflix.
A nod to the competition
In its first-quarter shareholder letter, Netflix acknowledged the looming competition. “Recently, Apple and Disney each unveiled their direct-to-consumer subscription video services.
Both companies are world class consumer brands and we're excited to compete …
We don't anticipate that these new entrants will materially affect our growth,” the letter said, citing the transition from broadcast and cable TV to streaming being “so massive” that it can support multiple competitors.
Netflix also said the beneficiaries of the growing competition would be content creators and consumers “who will reap the rewards of many companies vying to provide a great video experience for audiences.”
Taxes and forecasting
For the upcoming second quarter, Netflix is forecasting revenue of $4.93 billion (up 26.1% year over year), operating margins of 12.5% (up 400 basis points), and EPS of $0.55 (down 16% compared to the prior-year quarter). The company is also guiding for global subscriber gains of 5 million, down from 8.26 million at the same time last year.
Wall Street seemed disappointed with the forecast. Analysts' consensus estimates were calling for revenue of $4.95 billion (up 26.6%), and EPS of $0.99.
This is significantly higher than management's estimate, which accounts for the market's disappointment.
A close look at the details, however, reveals the culprit: Netflix is anticipating an effective tax rate of 48% in Q2 — the result of one-time discrete events — which more than accounts for the difference.
You'd think a record quarter of subscriber growth would receive a more positive response. In-the-know investors will ignore the short-term gyrations of the market and keep their eyes on the long growth runway ahead for Netflix.
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Netflix’s pandemic boom continues: Five reasons why the 2020s will be the Netflix decade
Those five words from Netflix CEO Reed Hastings—on the heels of announcing that the company just added more subscribers in April through June than it has ever added in the second quarter in its history, more than 10 million, and that he’d be sharing the CEO role with chief content officer Ted Sarandos—should send terror into the rest of Hollywood. This team has consistently kicked the butt of traditional Hollywood for the last 20 years, so the notion that they have another 10 years of being pushed into the dirt by these two has to be nothing less than terrifying.
To give you a handful of examples of why Netflix is now an essential service and only perhaps Disney Plus deserves to be in any conversation as a serious contender:
Netflix wants consumers “never [to] have to think about any of those other services,” Hastings said during the company’s quarterly earnings video. “Occasionally, there’s a Hamilton, and you’re going to go to someone else’s service for an extraordinary film,” but the goal is to obviate the need to consider any alternative barring something truly special.
While would-be rivals downplay even the existence of a “streaming war,” one company—Netflix—can say whatever it wants, because what matters is that it’s the only one acting as if there is a war for people’s entertainment budget and attention and it’s determined to win.
To learn today that even amid COVID-19-related production delays, Netflix still expects to release more content in 2021 than 2020 is jaw-dropping.
Its two most recent competitors, HBO Max and Peacock, opted for a slimmed-down effort to launch their services, with one betting on a Friends reunion and the other betting on the Summer Olympics, both of which blew up once the global pandemic took hold.
A holistic view of serving its customer
One thing that has hamstrung both HBO Max and Peacock are their collective inability to negotiate with two of the primary devices customers use to enjoy streaming TV: Amazon and Roku.
Perhaps it’s the “old TV mindset” that these new streamers’ legacy company parents (WarnerMedia and Comcast) are bringing to the table, according to Variety.
They have long gotten used to either hijacking other content providers who want access to its platforms or trying to hijack rival ones to pay a premium for their content.
What you’re not hearing from either company is what you heard from Netflix executives on Thursday evening when asked about the aggregators-as-gatekeepers debate.
Newly named chief operating officer Greg Peters went on at length about “working together to create better Netflix experiences” on devices around the world.
“It’s great for the device manufacturers because those experiences make those devices more attractive, and most importantly and ultimately it’s a win for consumers to be the benefactors” of those collective efforts.
“We have whole teams working [to help device makers] to ingest the technology that we produce for those experiences and how do we leverage the qualities and features of those devices that those manufacturers are investing in on their side to really show off those benefits.”
In other words, one doesn’t need to treat these negotiations yet another cable-customer stickup.
“The billboard on the front of that UI, you just click it and watch it and trust that result.”
That’s what Hastings stated as the company’s goal when consumers open the Netflix app.
One can quibble with the lihood of the company ever achieving this goal, but because Netflix is the only streaming service with no additional business motive than keeping you as a customer of its app, it’s an algorithmic North Star that’s far less suspect than anyone selling advertising, merchandise, theme-park tickets, broadband, or paper towels.
If Netflix learns what it can about you to keep you happy, it’s a closed-loop virtuous feedback system. It’s not an on-ramp to a bevy of other stuff. Seemingly no one else comes to streaming determined to make money from . . . streaming. And that appears to drive Netflix in a way that has made it nigh impossible to compete with.
The last thing of note that Hastings and Sarandos—who appeared to be in Netflix’s famed lobby in its L.A.
headquarters but socially distanced enough that the two didn’t even acknowledge that they were within the same room—discussed on Thursday’s video was the company’s perspective on franchise building.
Sarandos framed it as simply “the act of successful world building” and then cited two examples that upend traditional notions of what constitutes a franchise.
The Old Guard, which just debuted on Netflix last week, does emanate from a comic book, but it brings along enough surprises to the superhero genre that it feels completely fresh. Sarandos suggested that it was the company’s “first attempt at it here . . . a new flavor of that kind of storytelling that I think has got a world and stories for some time to come.”
He then went on to cite La Casa de Papel (aka Money Heist), which is a Netflix original and as Sarandos stressed, the single most-watched new season of TV on Netflix.
There may be more premium streaming services than ever before, but really, there remains only one.
“,”author”:”David Lidsky”,”date_published”:”2020-07-16T19:55:06.000Z”,”lead_image_url”:”https://images.fastcompany.net/image/upload/w_1280,f_auto,q_auto,fl_lossy/wp-cms/uploads/2020/07/p-1-netflix-q2-2020-earnings-analysis.jpg”,”dek”:null,”next_page_url”:null,”url”:”https://www.fastcompany.com/90528144/as-netflix-adds-more-than-10-million-subscribers-heres-why-its-an-essential-service”,”domain”:”www.fastcompany.com”,”excerpt”:”Another blowout quarter for the streaming giant, and as Reed Hastings and his new co-CEO, Ted Sarandos, discuss it, a vision emerges for why itâs the leader.”,”word_count”:854,”direction”:”ltr”,”total_pages”:1,”rendered_pages”:1}