Tech

Netflix misses on subscriber additions and EPS

Key Points
  • It's the first report since longtime Chief Content Officer Ted Sarandos was promoted to co-CEO.
  • Netflix told shareholders last quarter that growth was beginning to slow again after an initial uptick when stay-at-home orders proliferated around the world.
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Netflix adds 2.2 million subscribers in Q3

Netflix reported earnings for its third quarter of 2020 after the bell on Tuesday. The company fell short of analyst estimates on earnings per share and global paid net subscriber additions, but exceeded expectations on revenue.

Shares fell more than 6% during after hours trading.

Here are the key numbers:

  • Earnings per share (EPS): $1.74 vs $2.14 expected, according to Refinitiv consensus estimate
  • Revenue: $6.44 billion vs $6.38 billion expected, according to Refinitiv
  • Global paid net subscriber additions: 2.20 million vs. 3.57 million expected, according to FactSet

Netflix said in its letter to shareholders that the slowed subscriber growth was largely expected. In the same quarter last year, Netflix added 6.8 million subscribers, though this time it's dealing with the fallout of a global pandemic.

The company attributed to slowed growth to its "record first half results." The stock was considered a good buy early in the pandemic as stay at home orders left consumers looking for ways to fill their time.

Netflix Vice President of Investor Relations Spencer Wang warned investors not to put too much weight on the subscriber numbers.

"We just really don't over-focus on any 90-day period," Wang said on the company's recorded earnings interview. "And just to give you an example, if the quarter was 48 hours longer, we would have come in slightly above our guidance forecast."

For the fourth quarter, Netflix forecast 6.0 million paid net adds, still well below the 8.8 million it added in the fourth quarter of 2019.

"The state of the pandemic and its impact continues to make projections very uncertain, but as the world hopefully recovers in 2021, we would expect that our growth will revert back to levels similar to pre-COVID," executives wrote in their letter to shareholders.

Subscribers in the Asia-Pacific region were the largest contributor to paid membership growth — a first for the company — accounting for 46% of all global paid net adds.

"We're pleased with the progress we're making in this region and, in particular, that we've achieved double digit penetration of broadband homes in both South Korea and Japan," Netflix said in its letter.

It's the first report since longtime Chief Content Officer Ted Sarandos was promoted to co-CEO alongside long-time CEO Reed Hastings.

Netflix said it still expects the number of Netflix originals it launches next year to still be up year over year each quarter despite delays to production due to global shutdowns. The company said it's begun to restart production on some of its most popular titles, like "Stranger Things."

The company's free cash flow was positive for the third straight quarter, and is at positive $2.2 billion for the first nine months of 2020. It said it expects to be slightly negative on free cash flow in Q4 as production restarts. It expects free cash flow to be about $2 billion for the full year 2020, up from its previous break-even to positive estimate.

For 2021, Netflix said it expects free cash flow to be -$1 billion to break-even.

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