Netflix Misses Q1 Subscriber Targets, Blaming Covid-19 Issues, But Beats Financial Forecasts

Already, Netflix's mid-single-digit churn is the envy of the industry. Another advantage the company sees in its service is low churn, with the rate in the quarter dropping below the year-ago level. "As we improve the service, we can charge a bit more," the letter straightforwardly noted. Also, having a stable base of subscribers gives the company pricing power.
Net cash from operations surged to $777 million in the quarter from $260 million and free cash flow of $692 million was up from $162 million. That was a milestone affirmed in the company's January report, and only reaffirmed the bull thesis as the entire entertainment business continues its shift to streaming. Netflix confirmed a key metric — that it's on track to free cash flow break even this year and doesn't need outside financing anymore to fund day-to-day business.
The subscriber shortfall, which caused the stock to drop 11% in aftert-hours trading, was blamed on issues related to the coronavirus pandemic. "We believe paid membership growth slowed due to the big Covid-19 pull forward in 2020 and a lighter content slate in the first half of this year, due to Covid-19 production delays," the company said in its letter to shareholders. "We continue to anticipate a strong second half with the return of new seasons of some of our biggest hits and an exciting film lineup." The letter said "some uncertainty" about Covid would linger in the short-term, but the long-term trend of streaming replacing linear TV remains in effect.
The gain of roughly four million subscribers paled next to the explosion of 15.8 million in the year-ago quarter, when Covid was in its earliest stage.
In all of last year, Netflix added 37 million subscribers, most of that in the first half of the year, as executives conceded that there had been a "pull-forward" of new subscribers. In addition to coming into the pandemic with momentum, Netflix also benefited from shutdowns affecting sports and other live events as well as production. Although its giant wheels of production did briefly grind to a halt, Netflix was able to restart them thanks to its global presence, getting cameras rolling again in South Korea, Iceland and other places less impaired by Covid.” />
Comparisons between the current year and 2020, however, will likely be difficult given the significant tailwind of the pandemic. Lockdowns in Europe and Asia were already well under way at that point. Tiger King, a breakout reality series and maybe the ultimate talisman of quarantine streaming, premiered March 20 of last year. Netflix does not operate in China.
The company's shares are roughly at the break-even point in 2021 to date after a bull run through most of 2020. Skepticism about the company's competitive moat has hampered the stock recently,  Management at Netflix has stayed sanguine, noting they long expected challengers and that the total global market for streaming is in its infancy, with Netflix capturing maybe 10% of it. Even before today's 5% dip in the regular trading day and the after-hours plunge, investors have taken a breather from their long-term Netflix enthusiasm.
Netflix reported 208 million global subscribers as of the end of the first quarter, missing its own prediction for 210 million.
"We don’t believe competitive intensity materially changed in the quarter or was a material factor in the variance as the over-forecast was across all of our regions," the company said. "We also saw similar percentage year-over-year declines in paid net adds in all regions …. whereas the level of competitive intensity varies by country."
Disney, Apple, NBCUniversal, WarnerMedia, Discovery all launching new services over the past 18 months, and ViacomCBS has also expanded and rebranded CBS All Access. In the letter, the company said the results for the period ending March 31 reflected previous advisories that the record-setting gains would not be able to be sustained. The competitive climate has not affected results, executives insisted.
Revenue of $7.16 billion also topped the Street. The streaming giant did beat financial targets, though with earnings per share of $3.75 a dollar ahead of Wall Street analysts' expectations.

Leave a Reply

Your email address will not be published. Required fields are marked *