Despite Q2 being very profitable for Netflix, thanks to a record record 15.8 million subs being added (due to COVID-19), Q3 was the direct opposite.
Despite an optimistic first 6 months of 2020 for NFLX, one which saw its share price soar over 60% this year and trade near its all time high of $556, there have been cracks beginning to from in its foundation (ex. the ongoing pandemic has shut down TV and film production).
These cracks were evident in the streaming giants earnings release earlier today, as despite options contracts on Netflix shares expiring this week beings heavily skewed toward calls (a bullish indicator), the results were not good.
Consensus expects 3.32 million new subs this quarter, higher than the company’s own guidance of 2.5 million, and a sharp slowdown from the 10.1 million new subs added in Q2. However, despite riding a hot streak since the pandemic began, many other competitors have crowed the market, including Comcast’s Peacock platform, Quibi, and HBO Max.
Here was the Q3 earnings data:
- Q3 Streaming Paid Net Change +2.2MM, Est. +3.3M, down from +10.09MM in Q2 2020 and down from +6.8MM a year ago
Shockingly, NFLX added just 180K net subs in the US, one of the worst quarters in recent history and almost certainly a function of the blowback over Cuties.
While the company’s financials are traditionally secondary, the company again beat on the top line but missed on earnings:
- Q3 Revenue $6.436B, Est. $6.38B
- Q3 EPS $1.74, Est. $2.37
The silver lining in the data was the APAC region (specifically Japan and South Korea) representing the biggest contributor to subscriber growth for Q3, representing 46% of global customer additions, and revenue in that region rose 66% year-over-year.
Additionally, Netflix reported third quarter cash flow of a record $1.145BN vs. -$502 million in the prior year period. However, this was largely due to the company shutting down production on content in the past two quarters as a result of the pandemic.
Netflix also added these counting numbers:
- Streaming paid memberships 195.2 million, +23% y/y, estimate 196.3 million
- Streaming content obligations $19.1 billion vs. $19.1 billion y/y
- UCAN streaming paid net change +180,000, -94% q/q, estimate +260,510
- EMEA streaming paid net change +760,000, -72% q/q, estimate +1.25 million
- LATAM streaming paid net change +260,000, -85% q/q, estimate +705,340
- APAC streaming paid net change +1.01 million, -62% q/q, estimate +1.10 million
- Operating margin 20.4% vs. 22.1% q/q
- Operating income $1.31 billion, -3.2% q/q, estimate $1.27 billion
- Free cash flow $1.15 billion, +27% q/q, estimate $245.9 million
The “weak” 2.2 million subs being added represents the worst number in a quarter since 2015. Once has to wonder if the bad press surrounding Netflix’s’ release of Cuties is partly to blame…
The outlook for Netflix did not get any better:
- Netflix Sees Q4 Streaming Paid Net Change +6.00M, Est. +6.54MM
- Sees Q4 streaming paid memberships 201.2 million, estimate 202.8 million
- Sees Q4 operating margin 13.5%, down from 20.4%
In terms of its content, Netflix said its most popular title in the third quarter was the action thriller “The Old Guard,” starring Charlize Theron, watched by 78 million households. Closely behind was another action flick, “Project Power,” starring Jamie Foxx, and mystery movie “Enola Holmes,” which were each watched by roughly 75 million subscribers.
The company also mentioned that it had restarted production on some of its biggest titles, including season four of Stranger Things, Red Notice (starring Dwayne Johnson, Gal Gadot and Ryan Reynolds) and The Witcher season two (more good news).
Interestingly, the company also spoke about growing competition in its market, saying that “linear television and other big categories of entertainment, like video games and user generated content from YouTube and TikTok are all vying for consumers’ attention and are strong drivers of screen time usage. We remain quite small relative to overall screen time.” (may lead to more price cuts?)
This will likely get worse as the release of the next gen consoles rolls out (PS5 and Xbox Series X).
Looking ahead, NFLX said that “as productions increasingly restart, we expect Q4’20 FCF to be slightly negative and therefore, for the full year 2020, we forecast FCF to be approximately $2 billion, up from our prior expectation of break-even to positive. This change is due primarily to our higher operating margin expectation for 2020 and the timing of cash spending on content.”
Looking even further out, the company expects its FCF to “continue to improve as we increase our profitability and our transition to the production of Netflix originals (which requires more cash upfront vs. second run content) matures. For 2021, we currently expect free cash flow to be -$1 billion to break-even.”
That said, with $8.4 billion in cash plus a $750m undrawn credit facility, Netflix sees no need for external financing and has no plans to access the capital markets this year.
NFLX closed down nearly 6% in after hours trading.
Works Cited: