It turns out, there are limits even for Netflix.
The streaming video giant’s shares are trading sharply lower after hours on Thursday amid signs that the company’s Covid-19 driven growth spurt is coming to an end.
In the June quarter reported Thursday, Netflix added 10.1 million net new subscribers, above the company’s forecast of 7.5 million, but falling short of Wall Street estimates that had reached 12 million or higher. Netflix is forecasting just 2.5 million net adds in the September quarter, well shy of analyst expectations.
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In the March quarter, Netflix (ticker: NFLX) added 15.77 million net new subscribers, topping guidance of seven million.
For the second quarter, Netflix posted revenue of $6.15 billion, up 24.9% from a year ago and slightly ahead of the Wall Street analyst consensus of $6.08 billion. Profits were $1.59 a share, falling short of consensus of $1.81 a share, largely due to a pair of nonoperating items.
“In Q1 and Q2, we saw significant pull-forward of our underlying adoption leading to huge growth in the first half of this year (26 million paid net adds versus prior year of 12 million),” the company said in a letter to shareholders. “As a result, we expect less growth for the second half of 2020 compared to the prior year. As we navigate these turbulent circumstances, we’re focused on our members by continuing to improve the quality of our service and bringing new films and shows to people’s screens.”
Netflix generated $1.04 billion in net cash in the quarter, with $899 million in free cash flow, in part the result of lower content development activity due to the Covid-19 pandemic. Adjusted Ebitda (earnings before interest, taxes, depreciation, and amortization) was $1.49 billion. (The company had regularly been operating in the red for net cash, free cash flow and adjusted Ebitda before the pandemic.) Excluding foreign exchange, average revenue per user was up 5%
The company said the lower-than-expected per-share earnings reflects a $119 million noncash unrealized loss related to foreign exchange measurement of euro denominated debt and a $220 million noncash valuation allowance for deferred tax assets related to a change in California law on R&D tax credits.
For the September quarter, Netflix is projecting revenue of $6.3 billion, up 20.6% from a year ago, with profits of $2.09 a share; that is about in line with the Street at $6.39 billion and $2 a share.
Meanwhile, Netflix also announced that Ted Sarandos, who remains chief content officer, would become co-chief executive officer alongside Reed Hastings. The company also named Greg Peters, who remains chief product officer, to the additional post of chief operating officer.
Reed Hastings said on a call with analysts that the management changes announced today do not mean he is stepping back from his leadership role. Hastings said he plans to stay in his current position for the rest of the decade.
Netflix said it is slowly resuming production in many parts of the world. It is furthest along in Asia. In Europe, the company said, it is back in production in many places, including Germany, France, Spain, Poland, Italy, and the UK.
Progress in the U.S. has been slower. “While we recently resumed production on two films in California and two stop-motion animation projects in Oregon and expect some more of our U.S. productions to get going this quarter, current infection trends create more uncertainty for our productions in the U.S.,” Netflix said. The company added that “parts of the world like India and some of Latin America are also more challenging,” with plans to restart later in the year in those regions.
Netflix said that 2020 plans for launching original shows and films continue to be largely intact. “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,” the company said.
Netflix said it expects full-year cash flow in 2020 to be at least break even, compared to a previous forecast for a loss of about $1 billion. For 2021, the company sees negative cash flow again, but below the $3.3 billion level reported in 2019.
The company also said that given its current cash balance, a $750 million undrawn credit facility, and improving free cash flow, it does not expect to access the debt markets for the remainder of 2020 “and we believe our need for external financing is diminishing.”
In after hours trading, Netflix shares are down 9.4%, to $478.00.
Write to Eric J. Savitz at eric.savitz@barrons.com
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