Netflix: 2020 Q1 Earnings
A recap of Netflix’s 2020 Q1 Earnings, including a summary of major talking points and key data from financial statements.
“So we don't anticipate moving the schedule around much and certainly not in 2020.” – Ted Sarandos
At the start of 2020, one of the main questions was if Netflix could sustain their leading position in the “Streaming Wars” as competitive DTC services were launched by major media companies. But the COVID-19 pandemic has brought the global economy to a screeching halt and forced a reassessment of business plans and strategies by all companies. With hundreds of millions of people around the world quarantined in their home, it was no surprise that media consumption would quickly rise. Netflix shattered expectations, adding 15.8 million new subscribers in Q1, compared to their initial forecast of 7 million just 3 months ago. While this growth is obviously not sustainable over the year, it does highlight the value proposition Netflix offers to consumers. In a declining economic environment, with unemployed rates skyrocketing, discretionary spending will be curtailed, and only the most frequently used services will be kept. Audiences have already been migrating from linear TV to SVOD services due to their lower price, quality of content, and user-friendly features, and this transition should accelerate over the coming years. Netflix, with their abundant variety of content has earned the consumers’ trust and, more importantly, their wallet share over the past decade, and is well positioned to continue its success. Furthermore, for subscription businesses, it is considerably more difficult, and expensive, to acquire customers, than it is to retain to them. This will create a widening gap between Netflix, and new OTT entrants such as Disney+, Quibi, HBO Max, and Peacock. However, all these companies need content, especially new programs to be successful, which brings us back to the quote from Ted Sarandos alluded to earlier.
Netflix, due to their binge-viewing model, produces content differently than many of the legacy media companies who rely on weekly releases. Netflix claims the majority of their releases scheduled for 2020 will not be impacted, which is a stark comparison to the diminished number of original programs included at launch for Peacock and HBO Max. Additionally, animation has been a key focus for Netflix over the past few years, and they’ve made it clear that their animation team is already back up and running remotely as they look to further challenge Disney in the kids’ space. It’s unclear when the health risks will subside and production will return to normal, but the challenge for all these companies is to be well-positioned to hit the ground running. Netflix differentiates themselves again, with their wide-range of local language content across the world, reducing the reliance on just a few geographies to resume production. It would be unexpected for John Stankey, Jeff Shell, or Bob Chapek (or Iger) to mention their production capabilities in Iceland or Korea, but Reed Hastings can. The lifting of stay-at-home orders will be done a country-by-country basis, and should allow Netflix to resume production sooner than most of the other major U.S. media companies.
While the near-term prospects look relatively positive for Netflix, they still face many challenges over the coming years to maintain their market position. All product enhancements have been put on hold, reducing their ability to innovate around new features that can increase engagement and/or drive new subscribers. This may inhibit their ability to penetrate India and other emerging markets in SE Asia with mobile only plans. Disney+, through Hotstar, quickly gained 8 million subscribers in India, and can strengthen their foothold in a country with over 1 billion people. Additionally, the global nature of Netflix’s revenues, exposes them to foreign exchange risk, and could reduce their spending power in a recessionary period. Depending on the severity, a global recession could cause a decline in subscribers as households look to rely only entertainment in bundles (i.e. wireless) or increase their sharing of passwords or piracy. This may result in a pullback on content spend, which would improve their free cash flow, but deplete the volume of new programming and reduce growth opportunities in 2021 and beyond.