“Parts of the world like India and some of Latin America are also more challenging and we are hoping to restart later in the year in these regions,” Reed Hastings, co-CEO said in his letter to shareholders. Bigger cities in India like Mumbai, where the majority of Bollywood productions are shot, continue to have thousands of new COVID-19 cases a day.

“Outside of North America, parts of India and Brazil, we’re running pretty much in a normal fashion in terms of our volume around the world, and it’s ramping up in different various stages of preproduction,” Netflix’s newly appointed co-CEO Ted Sarandos said during the company’s earnings call for Q2FY20 on Thursday. Sarandos’s promotion from Chief Content Officer to co-CEO could pave way for a transition into sole CEO later; Hastings, now also a “co-CEO”, said that he would continue working in his full capacity, and that the leadership change was “formalizing how we already run the business today”.

Netflix added over 10 million new paying subscribers, but maintained its stand that the second half of the year would see less-than-spectacular results as lockdowns around the world start easing. That is reflected in the company’s projections, which indicate that it expects to add less than a quarter of the number of subscribers they added in Q2. The company’s results were largely in line with its expectations, except for earnings per share, which came out to $1.59 against investor expectations (and the company’s own forecast) of $1.81.

  • TikTok growth ‘astounding’: Even as the shortform video service faces a ban in India and the US government considers similar action, Hastings praised it as a competitor. “All of the major entertainment companies like WarnerMedia, Disney and NBCUniversal are pushing their own streaming services and two of the most valuable companies in the world, Apple and Amazon, are growing their investment in premium content. In addition, TikTok’s growth is astounding, showing the fluidity of internet entertainment,” he said.
  • New subscribers likely to stay: One concern that might bother Netflix and other subscription services is that after the lockdown ends, people will have less time to stream, and might cancel their subscriptions. But Chief Financial Officer Spencer Neumann said there was reason to be optimistic on that front. “So the nice thing is that those newer members are actually highly engaged. They’re sticking around with us actually as well or better than pre-COVID. And our service keeps getting better. So Netflix 2021 is going to be a much better service than Netflix 2020, which gives those newer members and existing members even more reason to stay highly engaged and stick around and also to entice future members to join,” he said. Neumann added that new subscribers largely behave similarly to existing subscribers pre-COVID. “The retention across every cohort is as good or better than pre-COVID,” Neumann said.
  • Why reduction in traditional marketing spend will continue: Netflix has reduced its spend on traditional marketing, and their spend on marketing was unusually low this quarter, at US$434 million, over 38% lower than what it spent in the same quarter last year. Sarandos indicated that this would continue as spending moves to digital media, saying “In terms of the march towards less traditional media, we’ve been on that for some time, meaning that it’s just a more efficient, more impactful and more global way to talk to our members is not through always through the most traditional channels. So yes, you’re spending less but doing more to attract buzz and attention to our shows, trying to cut through a world where there’s a lot of choices.”
  • On being cash flow positive: The pause in production led to Netflix being temporarily out of the red, but this wouldn’t go on in the medium term, Neumann indicated. “Because of the pause in productions, you can see that basically, that cash spend and expense in content were the same this quarter, essentially at a 1:1 ratio. And as a result — as we said in the letter, resulted in a 15% cash flow — free cash flow margin. Going forward, we do expect to turn cash flow negative again in 2021 and as our business and our production ramps up, but we’re still on that multiyear path to being cash flow positive,” he said.
  • Price increases may happen depending on churn prediction and country-specific context: Chief Operating Officer Greg Peters said that Netflix would evaluate price increases in some markets, but that it was not an immediate priority. Doing so would help Netflix’s reduced ARPU from subscribers outside the US due to fluctuations in foreign exchange rates following the COVID-19 recession. “We’ll look at macro factors country by country. We’ll also look very closely at — on our specific metrics, and it’s metrics like engagement, like churn. […] And it’s not so much sort of an all priority plan that we have but really more using those signs that we’ve done a good job at building more value for our members, which indicate to us, hey, it might be time to go back to them and ask them for a little bit more so that we can then invest that further into amazing stories, great content, better product experiences and create even more value for them,” Peters said. VP of Investor Relations Spencer Wang added, “We don’t narrowly manage towards an ARPU number or an ARPU growth number. Our orientation is really on optimizing for revenue.”
  • Even with tie-ups, direct subscriptions are main source of revenue: Peters said that while tie-ups like those with broadband providers are going to grow, users signing up from Netflix without a third party remain the main source of revenue for the company. “People signing up with us directly is still very much the dominant mode. But we sort of think about the criteria, which we sort of are evaluating these partnerships on 2 fronts. Obviously, we’re looking at it as how much growth acceleration, how much membership acceleration do we get by adding a channel like that but then wanting to understand how large are the revenue impacts, right? There’s some cannibalization. There might be different economics involved. So we want to evaluate that and make sure that we’re doing these on a positive revenue basis.”
  • Asia Pacific least lucrative market: Asia Pacific, which includes India, is Netflix’s least lucrative region, compared to the US & Canada, Latin America, and EMEA (Europe, Middle East & Africa). Its quarterly revenue from that region was US$569 million, around two thirds of what it makes from Latin America, and around a quarter of what it made in EMEA. This is probably due to the fact that Netflix only became available in APAC in a significant way after its near-global expansion in 2016, while some markets in other regions had Netflix already. But on a per-user basis, Latin America has the lowest ARPU, at US$7.44 per user, compared to APAC’s $8.96 — Netflix has an ARPU of $13.25 from North America.
  • No need to seek debt in 2020: Hastings said that Netflix’s strong cash position (driven in part by the increased demand for the service after lockdowns around the world) meant that it would be able to spend money it already has access to for the next year. “With our cash balance, $750 million credit facility (which remains undrawn) and improving FCF profile, we have sufficient liquidity to fund our operations for over 12 months. As a result, we don’t expect to access the debt markets for the remainder of 2020 and we believe our need for external financing is diminishing,” he said.
  • Subscribers added in Q2 2020: 10.09 million (27.3% YoY growth), compared to 15.57 million additions in Q1
  • Revenue for Q2 2020: $6.15 billion (24.9% YoY growth)
  • Operating margin: 22.1% (~54% YoY increase)
  • Average Revenue Per Subscription for the quarter: US$32.22 (~0.46% increase YoY)
  • Marketing costs: US$434 million (down 38.85% YoY)

Letter to shareholders | Transcript | Financials (.xlsx)