Earnings Recaps
July 16, 2020

Netflix: 2020 Q2 Earnings

A recap of Netflix’s 2020 Q2 Earnings, including a summary of major talking points and key data from financial statements.

“Outside of North America, parts of India and Brazil, we're running pretty much in a normal fashion in terms of our volume around the world, and it's ramping up in different various stages of pre-production.” – Ted Sarandos

Netflix added 27.8M subscribers in 2019.  In the first 6 months of the year, they have added another 25.8M subscribers.  Obviously, the coronavirus has had a massive impact as people around the world have been confined to their home, but that shouldn’t discount the achievement.  The subscriber growth was across all regions, but most notably, the U.S. and Canada, which is their most penetrated market, added the most new subscribers in Q2.  Netflix has long believed the total market for the US is between 60 to 90 million subscribers, and they now have about 65M subscribers.  Domestic growth had been slowing down in 2019, and it’s unlikely that this is the start of a new wave of growth.  Cord-cutting continues to accelerate, with over 2 million customers disconnecting from MVPD/vMVPDs in Q1, but many of these people are likely existing Netflix subscribers (or have access through password sharing).  As the “Streaming Wars” start to pick up, the challenge for Netflix will be retaining their subscribers, rather than acquiring new ones.  However, focusing only on Netflix’s performance in the U.S. is misguided, as this is a truly global service, and the next stage of growth will be coming primarily from international markets.

Over the past few years, Netflix has placed an emphasis on local-language content with productions all over the world.  With the coronavirus having a different impact in every region, this diversity of locations has allowed them to be nimble and quickly re-start productions where it was safe and feasible.  On the other hand, many of the other major media companies have limited (if any) opportunities to resume their productions due to the latest surge in cases in the U.S.  And with movie theaters still closed, studios are struggling to figure out a way to release completed content that makes economic sense.  Many films have delayed theatrical releases multiple times (See EMC Chart of the Week), while others have been moved straight to on-demand or OTT services.  And just this week, Netflix acquired international rights to the ViacomCBS film SpongeBob: Sponge on the Run, where they will be able to make it available to their 120M subscribers simultaneously.  Hollywood content is important as it has better success traveling globally than foreign, local-language content.  Netflix has realized this, and their investments in blockbuster movie content are starting to proliferate at an opportune moment.  While their “viewership” metrics provide more questions than answers, their recently released top 10 original movies (link) highlights their ability to learn and improve with several of these titles being released this year.  The scale of their audience provides massive amounts of data and feedback that can be incorporated in order to continually improve the product and content offerings.

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Read Last Quarter’s Earnings Recap (2020 Q1)