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People watching more entertainment programming while sheltering at home propelled Netflix to a strong first three months of 2020, the company announced Tuesday
The streaming giant added 15.8 million subscribers during the first quarter of the year, a period of record growth that has rocketed its global base to nearly 183 million.
Netflix had expected to add just 7 million subs during the period, but the company forecast that growth before the full effects of the pandemic had been felt globally.
In spite of the strong period, CEO Reed Hastings hit a somber note in his letter to shareholders. “In our 20+ year history, we have never seen a future more uncertain or unsettling,” he wrote. “The coronavirus has reached every corner of the world, and, in the absence of a widespread treatment or vaccine, no one knows how or when this terrible crisis will end. What’s clear is the escalating human cost in terms of lost lives and lost jobs, with tens of millions of people now out of work.”
He continued by explaining that Netflix is seeing “temporarily higher viewing and increased membership growth,” but “we expected viewing to decline and membership growth to decelerate as home confinement ends, which we hope is soon.” The company is forecasting that it will add 7.5 million subs during the second quarter, which spans the April-to-June period during which people largely have been sheltering at home. But the company noted that the figure is “mostly guesswork” given the uncertainty around how long the shutdown will last.
The strength of the U.S. dollar during the global pandemic hurt the company’s revenue growth during the period despite its higher-than-expected subscriber growth. Internationally, where Netflix added nearly 13.5 million subs driven by strong growth in Europe, the Middle East and Africa, was less than forecast due to the dollar’s sharp rise.
During the shutdown, the breakout Tiger King: Murder, Mayhem and Madness has been popular with viewers. Netflix projects that 64 million members will “choose to watch” the show during its first four weeks of availability. The Spanish drama Money Heist also has been a draw, with 65 million member accounts expected to watch the series. (Netflix counts an account that selects a title and watches it for two minutes as a viewer.)
Netflix content chief Ted Sarandos noted on a pretaped investor video that Tiger King “turned out to be an unbelievably well-timed distraction.” He added that Netflix plans to continue to push into new genres, including adding to its unscripted slate with more programming in the home improvement and real estate categories.
Netflix’s strong quarter comes amid a flurry of new competition. Apple and Disney both entered the streaming business at the end of 2019, and NBCUniversal and WarnerMedia are launching products this year. During the investor video, Hastings reiterated that the increased competition would lift the streaming category. But he acknowledged that Netflix would up its kids and family programming to compete with newcomer Disney+.
“I’ve been so impressed with the Disney+ execution,” said the exec. “I’ve never seen such a good execution of the incumbent learning the new way and mastering it.”
Netflix also provided new details about how the shutdown has impacted its operations, stating that the product team has been unaffected but that product innovation has slowed as the company focuses on releasing features that “we know will add meaningful value for our members, such as improved parental controls.”
One area where Netflix has been most impacted is in the production of its upcoming projects. Like all entertainment companies, Netflix has had to put filming of most of its shows and movies on hold. (A few projects remain in production in Korea and Iceland.) The company said that production on its animation projects is continuing through work-from-home setups and that more than 200 projects are in postproduction.
Netflix has created a $150 million fund to support workers whose livelihoods have been impacted by the shutdown and has said it will pay those crews for seven weeks.
But the company said its content slate wouldn’t be impacted in the near term. In the second quarter, Netflix plans to release all of its planned shows and films, though the language dubbing on some projects will be impacted. And Sarandos noted that most of the service’s 2020 shows — including the fourth season of The Crown and the animated film Over the Moon — have been shot and are in postproduction.
Netflix will supplement its lineup with acquisitions of titles that originally were intended for theatrical release, including Paramount’s The Lovebirds. (The Lovebirds was produced by MRC, which shares a parent company with The Hollywood Reporter.) The company also recently bolstered its release lineup by acquiring Millie Bobby Brown starrer Enola Holmes from Legendary.
Netflix also said that its customer support teams were disrupted by the shift to work-from-home but largely have recovered. The company has added 2,000 customer support agents to account for increased demand.
Netflix, which has burned through cash to sustain its levels of high growth in recent years, has been moving toward becoming cash flow positive. The pausing of productions means that it currently is investing less cash up front. As a result, it now expects to have negative free cash flow of $1 billion for the year, compared with its previously forecast $2.5 billion in negative free cash flow.
Netflix stock closed the day flat at $433.83. The company’s shares, which jumped during after-hours trading on Nasdaq, are up nearly 32 percent since the beginning of the year.
April 22, 10:55 a.m. Updated to clarify that Legendary’s Enola Holmes was not previously dated for a theatrical release.
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