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  • Writer's pictureHahn Lee

Netflix 2Q CY20 Earnings

Updated: Jul 17, 2020

July 17, 2020


Highlights

  • Added 10.1 million (net) paying streaming members during the quarter (vs. 2.7 million in the prior year)

  • 2Q CY20 streaming revenue up 26% YoY to $6.1 billion, driven by 63% growth in APAC, 43% growth in EMEA and 14% growth in the US and Canada.

  • 192 million paid memberships (+27% vs. prior year) at the end of the period, with 73 million in the US and Canada (+10% YoY).

  • Positive cash flow metrics (FCF of $899 million vs. -$594 in the prior year) due to increasing operating margins and favorable timing related to programming production investments.

  • Conservative outlook for 3Q CY20. Expecting only 2.5 million net paying streaming member additions (down vs. 6.8 million net additions in the prior year), citing a pull forward of growth that was expected throughout CY20.

  • Ted Sarandos appointed Co-CEO and Board Member. Mr. Sarandos will continue to serve as the Company’s Chief Content Officer.

  • Greg Peters elevated to COO, in addition to maintaining CPO post.


 
 

Commentary

With the shelter-in-place tailwinds, Netflix provided another solid quarter. Through the first six months of CY20, the Company reported 26 million net paid adds vs. 12 million in 1H CY19 and 28 million in all of CY19. P&L and subscriber-related metrics were all up YoY, except for the total revenue growth rate which was off by 110 bps and average monthly revenue per paying membership, which was lower in LatAm (down $0.70) and APAC (down $0.33).


Despite the positive momentum, the stock is currently trading down -7% due to a modest outlook provided for 3Q FY20. The company guided to $6.3 billion in revenue for the upcoming quarter, which represents 20.6% YoY growth. In most situations 20.6% revenue growth would be applauded, but in this case, it is the lowest revenue growth rate the Company will have seen since 2Q CY13 (yes, you read that correctly -- CY13) when Netflix reported 20.3% growth. Seems like management is being conservative, but we will see... So far 2020 has turned out to be extremely unpredictable in general, so perhaps a cautious approach is warranted.


Beyond the Numbers

I like the long-term prospects for Netflix. Short term investors may get spooked by the 3Q guidance, but I am encouraged by the Company’s consumer-first orientation. Below are two excerpts from the 2Q FY20 Shareholder Letter that should not be overlooked.


Excerpt #1

“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.”


Excerpt #2

“A very small percentage of our members have not watched anything for the last two years and although we make it easy for people to cancel their subscriptions with just a few clicks, they have not taken advantage of that ability. So we decided to stop billing them and will do so for members meeting the same criteria going forward. Like all of our former members, they can easily restart their membership in the future. While this change resulted in a slight hit to revenue, we believe that pro-consumer policies like this are the right thing to do and that the long term benefits will outweigh the short term costs. In a world where consumers have many subscriptions, auto-pause on billing after an extended period of non-use should be how leading services operate.”


Both excerpts speak to improving the Netflix service or processes in favor of its members. These choices may have near term financial implications, but in the long haul, if consumers feel valued, they will remain brand loyal.


More next time…


Hahn.


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