Netflix Reports Significant Impacts of Coronavirus in First Quarter Results

COVID-19 impacted virtually every aspect of the popular streaming business.

In its April 21 letter to investors, Netflix was humbled by the growth its streaming video subscription service saw in the first quarter of 2020 as a result of the coronavirus pandemic. Global streaming paid memberships grew from 167.09 million in the fourth quarter of 2019 to 182.86 million in the first quarter of this year, representing growth of 22.8%. While impressive, that growth was still down, compared to growth of 25.2% growth in the first quarter of last year. Overall, however, Netflix had paid net additions of 15.77 million, compared to 9.6 paid net additions in the first quarter of 2019.

“In our 20+ year history, we have never seen a future more uncertain or unsettling. 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,” said Netflix in its investor letter.

“At Netflix, we’re acutely aware that we are fortunate to have a service that is even more meaningful to people confined at home, and which we can operate remotely with minimal disruption in the short to medium term,” the company said. “Like other home entertainment services, we’re seeing temporarily higher viewing and increased membership growth. In our case, this is offset by a sharply stronger US dollar, depressing our international revenue, resulting in revenue-as-forecast. We expect viewing to decline and membership growth to decelerate as home confinement ends, which we hope is soon.”

Tiger King is rated in Neflix’s Top 10 programs in the U.S. Image: Courtesy of Netflix

Netflix also explained how the pandemic has changed their company. In addition to the growth in new members, the most significant impacts have been growing their customer team by 2,000 employees – all working remotely – and halting content production. Some production is still occurring in Korea and Iceland, but has been virtually stopped elsewhere, impacting hundreds of thousands of cast and crew in the TV and film industry, as well as the important support services such as electricians, carpenters, drivers, stylists and make-up artists.

To help support those workers, in March, Netflix created a $100 million fund. The majority of the fund will go to impact workers on Netflix productions. The company originally allocated $15 million of those funds to be distributed to third parties and nonprofits who are providing emergency relief to cast and crew who are out of work in the countries where they do the most production. According to the investor letter, they have increased that to $30 million.

Among the donations are $1 million to the SAG-AFTRA Foundation COVID-19 Disaster Fund, the Motion Picture and Television Fund and the Actors Fund Emergency Assistance in the United States, and $1 million to the AFC and Fondation des Artistes in Canada. In total, Netflix now plans to spend $150 million to support the creative community through the COVID-19 crisis. In addition, for every $1 Netflix employees donate to their local communities, Netflix is matching with $2. Other impacts include remote work of their animation production teams, reducing network traffic to members at the request of governments and ISPs.

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Netflix also included a shout out to the front-line workers who are keeping things going in the worst of conditions.

“Last, and most important of all, we want to say thank you on behalf of all our employees to the heroic doctors, nurses and first responders fighting this pandemic on the frontlines and the grocery, restaurant and other essential workers who take risks to make sure our families are fed and taken care of. We are truly inspired and humbled by you,” Netflix said.

Quarterly financial highlights include:

  • Revenue was $5.77 billion, representing 27.6% growth year-over-year.
  • Operating income was $958 million, compared to $459 million in Q1 2019.
  • Operating margin was 16.6%, compared to 10.2% in Q1 2019.
  • Net income was $709 million, or $1.57 diluted earnings per share, compared to $344 million, or $0.76 diluted earnings per share in Q1 2019.
Image: Courtesy of Netflix

Though revenue saw a significant bump, due in part to currency exchange rates, revenue was in line with Netflix’s guidance for the quarter. Netflix reported three notable changes as a result of the coronavirus:

  1. Membership growth has been temporarily accelerated due to home confinement.
  2. International revenue will be down because the value of the dollar has risen sharply.
  3. Cash spending on content will be delayed by at least a quarter, improving cash flow.

Netflix shared the following forecast for the second quarter of 2020:

  • Revenue of $6.0 billion, representing 22.8% growth year-over-year
  • Operating income of $1.1 billion
  • Operating margin of 17.9%
  • Net income of $820 million, or $1.81 diluted earnings per share

“As people shelter at home, our hope is that we can help make that experience more bearable by providing a diverse range of high quality content for our members. While our productions are largely paused around the world, we benefit from a large pipeline of content that was either complete and ready for launch or in post-production when filming stopped,” Netflix added.

Insider Take:

Like so many things, Netflix’s financial report was quite different than their normal investor relations report. They always talk about financials, of course, and they comment on content, the competition and new changes and programs in the works. What was really different this time was dedicating the first two pages of the investor letter to talk about the impacts the coronavirus has had on the company, the film industry and the world. It was an unexpected change to see that it wasn’t all about Netflix, as you’d expect in an earnings report. It was a humble report about their place in the pandemic, their gratitude at being able to serve the global community, and being able to support their industry as well. We wonder if other companies will follow suit.