Why Netflix Has to Worry Despite a Boom in Subscribers

April 21, 2020
Stay-at-home orders seem to be leading to more Netflix and chill sessions, but there are still things to watch out for as the company weathers the coronavirus pandemic. 
The streaming service reported its earnings after the bell on Tuesday, posting diluted earnings per share of $1.57. It earned $5.77 billion in revenue, ahead of the $5.74 billion estimated established by Refinitiv analysts. What's more, the company added 15.77 million global subscribers, ahead of the 9.6 million estimate. 
While there are more paying members, Netflix will have to closely monitor some other aspects of its business as the crisis continues. The company said in a letter to shareholders the dollar continues to increase in strength, meaning international revenue is decreasing and will continue to do so. For example, the standard plan price in Brazil is R$33, which was equivalent to $8.50 last year. But, it's only worth $6.50 cents based on April's foreign exchange rates. The 25 percent decline in value was not "offset" by any additional subscriber growth.
The company is also projecting an additional 7.5 million global paid net additions next quarter, with a lot of contingencies. This past quarter only included data up to the end of March. Shelter-in-place orders only began the week of March 17 in the U.S., meaning a boost in American subscriptions may not be accounted for since it was only the beginning of social distancing. European stay-at-home orders began as early as late February when Italy put 10 towns on lockdown to stem the spread of the coronavirus, so Netflix was likely to have experienced its boost from foreign markets last quarter. 
At the same time, Netflix admitted it isn't sure how long people will be ordered to stay at home — or if they'll want to turn off the television once they are allowed to go outside again. 
"Given the uncertainty on home confinement timing, this is mostly guesswork," Netflix said in a letter to shareholders. "The actual Q2 numbers could end up well below or well above that, depending on many factors including when people can go back to their social lives in various countries and how much people take a break from television after the lockdown."
In addition, Netflix has to worry about delays and halts in production. As of now, almost all of its production has stopped except for those filming in some countries including Korea and Iceland. It was able to allow more than 200 projects to work remotely, including some animation work. This has allowed it to have a strong slate for next quarter, and the only major delays were language dubbing. 
But if social distancing persists, Netflix like other media companies could run into a lack of content for the rest of the year. It also had huge hits like new seasons of "Money Heist" and "Stranger Things" during the third quarter of last year, so without big titles it could be hard to replicate that success. 
There is some bright side for production for Netflix. Because of their large subscriber base of 182 million subscribers worldwide, many companies are thinking about Netflix as a viable distribution replacement while movie theaters are closed. Paramount's "The Lovebirds," for example, is going straight to the service. However, as those movies and TV shows get sold or released on media companies' own streaming services, Netflix could face bigger troubles as content streams dry up. 
"No one knows how long it will be until we can safely restart physical production in various countries, and, once we can, what international travel will be possible, and how negotiations for various resources (e.g., talent, stages, and post-production) will play out," Netflix wrote. "The impact on us is less cash spending this year as some content projects are pushed out. We are working hard to complete the content we know our members want and we're complementing this effort with additional licensed films and series. Our content competitors and suppliers will be impacted about as much as we are, in terms of new titles. Since we have a large library with thousands of titles for viewing and very strong recommendations, our member satisfaction may be less impacted than our peers' by a shortage of new content, but it will take time to tell." 
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