Netflix Inc more than doubled its own projections for new customers as people stayed at home due to the COVID 19 cuarantine, but the company predicted a weaker second half of the year if stay-at-home orders to fight the coronavirus are lifted.
The world’s largest streaming service gained 15.8 million paying customers from January through March, bringing its global total to 182.9 million. Netflix had predicted it would add 7 million during the period.
The company warned that it expected fewer new subscribers from July to December compared with a year earlier, however. Many people who would have joined then are likely to have already signed up, executives said.
Here is what the company wrote in a letter to shareholders:
Despite paid net additions that were higher than forecast, revenue was in-line with our guidance due to the appreciation in the US dollar vs. other currencies.
Excluding a -$115m impact from F/X, streaming ARPU grew 8% year over year. Operating margin of 16.6% (vs. 10.2% in the prior year quarter) was lower than our 18.0% forecast as we incurred $218m in incremental content costs due to paused productions and hardship fund commitments (a 3.8 percentage point impact to operating margin).
There are three primary effects on our financial performance from the crisis.
First, our membership growth has temporarily accelerated due to home confinement. Second, our international revenue will be less than previously forecast due to the dollar rising sharply. Third, due to the production shutdown, some cash spending on content will be delayed, improving our free cash flow, and some title releases will be delayed, typically by a quarter.
During the first two months of Q1, our membership growth was similar to the prior two years, includingin UCAN. Then, with lockdown orders in many countries starting in March, many more households joined Netflix to enjoy entertainment. This timing of paid membership additions also affected our Q1’20 global streaming ARPU; this was the primary driver of the sequential decline in streaming ARPU as the revenue impact from these additions late in the quarter will be mostly felt in Q2’20 and beyond.
Hopefully, progress against the virus will allow governments to lift the home confinement soon. As that happens, we expect viewing and growth to decline. Our internal forecast and guidance is for 7.5 million global paid net additions in Q2. Given the uncertainty on home confinement timing, this is mostly guesswork. The actual Q2 numbers could end up well below or well above that, depending on many actors including when people can go back to their social lives in various countries and how much peopletake a break from television after the lockdown.
Some of the lockdown growth will turn out to be pull-forward from the multi-year organic growth trend, resulting in slower growth after the lockdown is lifted country-by-country. Intuitively, the person who didn’t join Netflix during the entire confinement isnot likely to join soon after the confinement. Plus, last year we had new seasons of Money Heist and Stranger Things in Q3, which were not planned for this year’s Q3. Therefore, we currently guess that Q3’20 and Q4’20 will have lower net additions than last year due to these effects.
Netflix said the shutdown of film and TV production around the world had temporarily increased its free cash flow but could delay some programming by a quarter. In the second quarter, the impact will be “modest” and mostly will affect dubbing in various languages, the company said.
Most programming for 2020, and much of 2021, already has been filmed and is being finished remotely in post-production, Chief Content Officer Ted Sarandos said .
For the just-ended quarter, Netflix posted diluted earnings per share of $1.57.
Total revenue rose to $5.77 billion from $4.52 billion.
The most popular Netflix plan in the United States costs $13, nearly double the $7-per-month cost for rival Disney+ service.