Netflix shares fell on Tuesday, after the streaming giant disclosed that it had added only 3.98 million subscribers worldwide during the first quarter of 2021. The company says it expects to add only 1 million new subscribers for the current quarter.
Its management team, led by co-CEOs Reed Hastings and Ted Sarandos, had forecast a gain of 6 million, compared with an increase of 15.8 million in the year-ago quarter, which had been fueled in part by stay-at-home orders due to the coronavirus pandemic.
“We had those 10 years that were smooth as silk, and we are just a little bit wobbly right now,” co-CEO Reed Hastings said on the company’s earnings call.
“It really boils down to COVID, frankly,” Netflix CFO Spencer Neumann added on the call. “For us, at a minimum it creates some short term choppiness in the business trends.”
“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 wrote in its quarterly 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. In the short-term, there is some uncertainty from Covid-19; in the long-term, the rise of streaming to replace linear TV around the world is the clear trend in entertainment.”
The letter adds that it expects subscriber growth “will re-accelerate in the second half of 2021,” as some of its tentpole films and most popular series debut on the service.
One thing that the company insists was not a factor: Competition from competitors like Disney+, Paramount+, Peacock, or other streaming offerings. Hastings said they “looked through the data” to make sure competition wasn’t a factor in the miss.
“There is no real change that we can detect in the competitive environment, it has always been high and it remains high,” he added.
Even as its subscriber numbers underperform, the company is in its best financial position ever, with lower marketing and content spend combined with its record existing subscriber base. As a result the company had revenue of $7.16 billion with operating margins of 27 percent, the best in the company’s history.
Those operating margins are also leading Netflix to do something it hasn’t done in more than 15 years: buy back its stock. In a separate filing with the SEC Tuesday, the company said that its board authorized the repurchase of up to $5 billion in company stock.
“We think share buybacks are a way to return value to shareholders in a way that is as a responsible steward of capital,” Neumann said.
On the content front, the company says it expects to spend more than $17 billion on content this year, and that productions are up and running in every country in the world except Brazil and India, which are seeing new coronavirus waves.
For comparison, Netflix spent $11.8 billion on content last year, with the pandemic shuttering many productions, and $13.9 billion in 2019.
The company early in the year touted that it would release 71 films in 2021, equating to at least one new movie every week. “They are watching the kind of films that that would go to the theater to see, but at the convenience of their timetable, their home, where they can really enjoy a great new film,” co-CEO Ted Sarandos said on the company’s earnings call.
Last week, Netflix handed out a third and fourth season renewal for hit period drama Bridgerton from executive producer Shonda Rhimes. Going forward, Sarandos teased more “very large scale” action films, as well as mining series and films from Sony’s IP as part of that recently announced theatrical deal.
Although Netflix remains the clear streaming leader, Wall Street has started to question just how long its dominance can last. Hollywood has spent the past few years mobilizing for the streaming future, with The Walt Disney Co., Comcast’s NBCUniversal, AT&T’s WarnerMedia and Discovery having launched streaming services with high-profile originals and classic hits that once made up the bread and butter of Netflix’s library.
Netflix, meanwhile, has focused on growth in foreign markets given the more mature U.S. market and increasing its prices due to its expanding lineup of original fare and signs that subscriber engagement with its service remains high.
“Over the years media companies have been really great at exporting content around the world,” Sarandos said. “But the one thing that we really have sharpened our skills on is creating content from anywhere in the world, and playing it all over the world.”
He added that the global scale of its content has also been attractive to creators in some of those other countries, including Japan and South Korea.
“As you tell stories from around the world, the more authentically local they are, the better they play around the world because people recognize the authenticity of storytelling,” he said.