The spike in membership due to COVID-19 continues to boost Netflix’s bottom line. In a letter to shareholders last week, Netflix announced the company saw double-digit growth in total revenue and in new members (paid net additions) during the second quarter of 2020. Netflix reported total revenue of $6.1 billion, a 24.9% increase over the second quarter of 2019. The company added a record 10.09 million new members, compared to 2.7 million paid net adds for the same period last year.
“We live in uncertain times with restrictions on what we can do socially and many people are turning to entertainment for relaxation, connection, comfort and stimulation. 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 vs. prior year of 12 million),” said Netflix in their July 16 letter.
“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 to continuing to improve the quality of our service and bringing new films and shows to people’s screens,” the company added.
Financial and Operational Highlights
Other highlights from the second quarter earnings report include:
- Operating income was $1.36 billion, compared to $706 million in Q2 2019.
- Operating margin was 22.1%, compared to 14.3% in Q2 2019.
- Net cash from operations was $1 billion, and free cash flow was positive for the second quarter in a row.
- The company had net income of $720 million, or $1.59 per share, compared to $271 million, or $0.60 per share, in Q2 2019.
- Ted Sarandos was appointed co-CEO and elected to Netflix’s board of directors. He will co-lead Netflix with Reed Hastings. Sarandos will continue in his role as chief content officer.
- Greg Peters, who is currently chief product officer, will also become chief operating officer.
- The company allocated approximately 2% of their cash holdings, up to $100 million, into financial institutions and organizations that directly support Black communities.
Netflix shared some impressive membership highlights as well. For example, Netflix now has 192.95 million total members worldwide, representing 27.3% growth. This includes 10.09 streaming paid net additions. In the first half of 2020, the company has added 26 million paid memberships, compared to 28 million new paid members for all of 2019. In addition, average streaming paid memberships increased 25% year-over-year, and streaming ARPU increased 0.4% year-over-year. The company estimates they will have 2.5 million paid net adds for the third quarter, compared to 6.8 million in the third quarter of 2019.
“Growth is slowing as consumers get through the initial shock of COVID and social restrictions. Our paid net additions for the month of June also included the subscriptions we cancelled for the small percentage of members who had not used the service recently,” said Netflix. “We continue to view the quarter-to-quarter fluctuations in paid net adds as not that meaningful in the context of the long run adoption of internet entertainment which we believe provides us with many years of strong growth ahead.”
As the world starts reopening, Netflix has been able to resume some content production in certain regions including Asia Pacific, Germany, France, Spain, Poland, Italy and the United Kingdom. It has been more difficult to resume production in the United States, India and Latin American where COVID infection rates are on the rise again. These production slowdowns will not significantly impact Netflix’s 2020 slate of releases, however, says the company, because their production schedule includes long lead times. It will likely impact the company’s 2021 line-up with more content being made available in the second half of the year versus the first.
Content highlights from the second quarter include:
- Never Have I Ever had 40 million households view the program in the first four weeks.
- Space Force also had 40 million viewers also.
- Netflix is estimated that Love is Blind, Too Hot to Handle and Floor is Lava will be viewed by 51 million people, or 37 million households in the first four weeks.
- 27 million viewers watched Spike Lee’s Da 5 Bloods.
- Extraction had 99 million households viewing, and The Wrong Missy was viewed by 59 million households.
- The Willoughbys attracted 38 million households in the first four weeks.
- Though Netflix didn’t share numbers, they reported that older titles about racial injustice and the Black experience in America (e.g., 13th, American Son and Dear White People) had increased viewing too.
During the third quarter, Netflix has already released The Old Guard and will launch the second season of The Umbrella Academy, The Kissing Boot 2, Project Power and Enola Holmes.
Netflix continues to test different pricing options for membership in other countries, using a lower-priced, mobile-only plan, as well as well as bundles with MVPDs and ISPs. The company doesn’t make as much, but the goal is to improve growth and retention for long-term value. Netflix also hopes this will increase word of mouth promotion in the countries where they are testing pricing and products, and they hope they’ll develop a better understanding of the types of content people in those countries want.
Closing Unused Accounts
During the second quarter, Netflix took the proactive stance of closing inactive member accounts. Netflix acknowledged that this did impact their revenue slightly, but they felt it was the right thing to do and that the long-term benefits outweigh the short-term hit.
With WarnerMedia pushing HBO Max, Disney pushing Disney+ and NBCUniversal promoting Peacock, there is a lot of new competition on the block, but Netflix does not seem concerned that it will negatively impact membership.
“Instead of worrying about all these competitors, we continue to stick to or strategy of trying to improve our service and content every quarter faster than our peers. Our continued strong growth is a testament to this approach and the size of the entertainment market,” said Netflix.
It is interesting to see how COVID has impacted Netflix’s business into the second quarter, allowing the company to post record numbers. With millions of people stuck at home, Netflix is able to attract new subscribers and, with a broad catalog of content, they are able to hang onto those subscribers for the short-term. The true test will be what type of churn Netflix, and other SVOD services, will see as the country slowly reopens. Slowed growth is expected, but long-term retention is more elusive.