Netflix Tops 10M Subscribers in Latest Quarter, Besting Forecast

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Netflix co-CEO Reed Hastings

Netflix also cautioned that the pandemic-fueled production shutdowns will begin to hit the company in 2021, with "a more second half weighted content slate in terms of our big titles."

Netflix kept up its strong subscriber growth momentum this spring as the novel coronavirus disrupted the lives and routines of people around the world.

The streaming giant added 10.09 million subscribers during its second quarter, boosting its global base to nearly 193 million. It follows a record-breaking first quarter for the company, when it added 15.8 million subscribers as people gobbled up more entertainment programming during the early days of the pandemic.

Netflix had cautioned that it might not be able to maintain its subscriber momentum, forecasting that it would add a more earthbound 7.5 million subscribers during the second quarter because “we expect viewing to decline and membership growth to decelerate as home confinement ends, which we hope is soon.” Many analysts didn’t take much stock in the forecast, however, because Netflix itself said it was “mostly guesswork” given the uncertainty surrounding business conditions amid the pandemic.

The second quarter subscriber haul handily topped the company's forecast, though it was in line with Wall Street's expectations.

In a letter to shareholders, the company attributed the additional subscription additions to "better-than-forecast acquisition and retention." In the first half of the year, the company added 26 million paid memberships, not far off from the 28 million it added in all of 2019.

However, the company warned, "growth is slowing as consumers get through the initial shock of Covid and social restrictions." The company is forecasting a relatively modest 2.5 million new subscribers in the third quarter, down from 6.8 million a year ago.

Though Netflix, like its traditional entertainment peers, was forced to pause production on its slate of original TV shows and films, it has continued to release a steady pipeline of completed projects for programming hungry streamers. During the April to June period, Netflix debuted Ryan Murphy period drama Hollywood, new seasons of Dead to Me and 13 Reasons Why, surprise reality hit Floor is Lava and films Extraction and Da 5 Bloods. It’s traditional entertainment rivals, meanwhile, watched their primetime lineups shrink and were forced to pull marquee titles from theaters.

The company cautioned that the pandemic-fueled production shutdowns will begin to hit the company in 2021. 

"Since our content production lead time is long, our 2020 plans for launching original shows and films continue to be largely intact," the company's earnings letter said. "For 2021, based on our current plan, we expect the paused productions will lead to a more second half weighted content slate in terms of our big titles, although we anticipate the total number of originals for the full year will still be higher than 2020."

Netflix added that it is hunting for outside acquisitions, like the Spongebob movie and Cobra Kai to add fresh content to its service.

On a pre-taped call with investors released later in the afternoon, newly minted co-CEO Ted Sarandos said that the company is still expecting to have a steady cadence of releases next year because many projects have already been partially shot and will be easy to restart once production can resume. Netflix has also resumed production on titles filming in other parts of the world. 

In terms of originals, the company said that the comedy Space Force was viewed by 40 million viewers, and Spike Lee's Da 5 Bloodz was viewed by 27 million members.

Netflix addressed its mobile-only plans in developing markets like India, which have been criticized by some Wall Street analysts for their lower ARPU (average revenue per user). Netflix says that it is trying to price the services to be "neutral-to-better short term revenue" and that the goal is to grow subscribers in these countries as quickly as possible to "generate more word-of-mouth around our content and help us better understand peoples’ needs in that country - so that we can more quickly improve our catalog and product experience, which would then lead to higher member satisfaction and growth as well as improved long term retention."

It also said that it expects to be free-cash-flow positive in 2020, thanks to the higher-than-expected subscriber additions, combined with lower production costs due to Covid lockdowns. The company says it expects its free-cash-flow to go negative again in 2020.

Two new Netflix rivals launched during the second quarter, WarnerMedia's HBO Max and NBCUniversal's Peacock. During the investor call Co-CEO Reed Hastings acknowledged the competition by saying that he wanted Netflix to be "your best friend." He continued, "occasionally there's a Hamilton and you're going to go to someone else's service for an extraordinary film, but for the most part we want to be the one that can just always please you." 

Despite major stock market swings, Netflix shares have traded consistently higher during the period, pushing its market cap well above that of Disney. That being said, the stock dropped more than 10 percent after hours in the wake of the conservative third-quarter forecasts in Thursday's earnings release.

4:45 p.m. Updated with comments from the investor call.