(Bloomberg) – Netflix Inc. attributed the pandemic to delivering record growth in 2020. Now he blames the worst first quarter in eight years.
The streaming service added far fewer new customers than Wall Street expected in the first three months of 2021, and even missed its own prediction by millions of subscribers. And the current quarter will be more challenging, Netflix said Tuesday, predicting a profit of just 1 million new customers – or a fraction of the 4.44 million analysts predict. The gloomy growth raised its shares to 13%.
Netflix has been warning for months that growth will slow after customers came out of their Covid-19 hibernation, but few expected the company to stand still so dramatically. The first quarter of 2020 was the strongest in its history, with 15.8 million new customers and Netflix’s pace remained strong in the fourth quarter.
“We had those ten years in which we became smooth as she did,” Reed Hastings, executive chairman and co-CEO, said in a webcast for investors. “It’s a little shaky now.”
Netflix added 3.98 million subscribers in the first quarter, compared to an average analysis estimate of 6.29 million and its own forecast of 6 million. It was the worst start to a year since 2013, when Netflix added about 3 million customers. If the company’s forecast for the current quarter holds true, it’s going to be the worst three – month long series for Netflix since the early days of its streaming service.
Netflix blamed the ‘Covid-19 pull-forward’ effect, meaning the pandemic accelerated its growth in 2020, while everyone was stuck at home and needed something to watch. Now the boom is taking the toll of the company’s 2021 results.
“It really comes down to Covid,” Spencer Neumann, the company’s chief financial officer, said on the webcast.
The lack of new shows also contributed to the slump, the company said. Although there were popular hits available, such as ‘Bridgerton’ and ‘Cobra Kai’, the new versions declined after mid-January and growth faltered.
Production Snags
The pandemic drove the release of many of the company’s most important titles in the back half of this year. Production was halted in 2020 due to the pandemic. Netflix was able to sustain its release schedule for the first few months of Covid closures because it has already completed many projects. But most movies and shows that were to be filmed last year have been postponed or canceled.
“There was nothing to watch this quarter,” said Michael Nathanson, an analyst at MoffettNathanson LLC.
What Bloomberg Intelligence says
“It is important not to confuse the noise of users in the short term with the long-term thesis of Netflix, which we believe is stronger than ever before.” – Geetha Ranganathan, senior media analyst at BI.
Click here to read the research.
Netflix rejects the idea that competition is offset in the results, noting that growth is slowing worldwide – not just in the crowded US streaming market. Disney +, HBO Max and Peacock are not yet competing with Netflix in many parts of the world. Yet the company faces more competitors than ever before, and some services are cheaper than Netflix, which raised U.S. prices in October. Although production has resumed in every country except Brazil and India, it will only help Netflix later this year. Its lead in the current quarter is also light.
Better shape
The company’s response to the challenges remains the same as always: deliver more shows. Netflix plans to spend $ 17 billion in cash on programming this year, up from $ 12.5 billion last year and $ 14.8 billion in 2019. This is the priority of investing in programming outside the US, where most of its new customers living.
Europe remains a bright spot for Netflix. The streaming service added 1.81 million customers in Europe, the Middle East and Africa, making it the leading region for the company. ‘Lupine’, a French heist thriller, was the most popular new series of the quarter. Asia is the company’s second fastest growing region.
Even with declining growth, Netflix is in the strongest financial position in its history. It reported net income of $ 1.71 billion, more than double a year ago, and generated a free cash flow of $ 692 million during the quarter. Although some of this is due to the curbs in production, it also reflects a stronger foundation. The streaming service is profitable in many new markets, such as in South Korea. Earnings were $ 3.75 per share last quarter, above the $ 2.98 estimate.
Stock repurchase
After years of borrowing to finance production, Netflix said it no longer needed to obtain outside financing to fund its day-to-day operations. The company plans to reduce debt and will buy back up to $ 5 billion worth of shares.
Neither managers nor investors can be sure whether the trajectory in the first half of the year is temporary, or a sign of a mature business. Netflix fell 13% to $ 480 in long-term trading, which would be a 2021 minimum. The stock rose 1.6% this year to the end of Tuesday in New York.
Asked if it was time for the business to expand to a new business, executives insisted there was enough growth in entertainment. But they have been harassing two potential expansion areas in the coming years: consumer products and video games.
Either way, the main focus will be on streaming more hit programs, said Ted Sarandos, co-CEO and content chief.
“What we need to do week in and week out is to deliver programs that our members love,” he said.
(Updates with the comment of the business starting in the fourth paragraph. A 2013 subscription was corrected in an earlier version of this story.)
Visit us at bloomberg.com for more articles like this
Sign up now to stay ahead of the most trusted business news source.
© 2021 Bloomberg LP