Netflix shares fall after earnings miss, weak subscriber guidance for third quarter – CNBC

Reed Hastings, CEO of Netflix.

Robyn Beck | AFP | Getty Images

Netflix reported its second quarter 2020 earnings after the bell on Thursday, the first full quarter to reflect the impact of the coronavirus pandemic.

The company announced that Netflix Chief Content Officer Ted Sarandos will become co-CEO alongside current CEO Reed Hastings. He will retain his current role and also join the Board of Directors. Chief Product Officer Greg Peters will also serve as COO.

Netflix missed analyst expectations on earnings per share but beat revenue expectations. Shares fell about 10% after hours as the company provided weak subscriber growth guidance for the third quarter.

Here are the key numbers:

  • Earnings per share (EPS): $1.59 vs. $1.81 expected, according to Refinitiv survey of analysts
  • Revenue: $6.15 billion vs. $6.08 billion, according to Refinitiv
  • Global paid net subscriber additions: 10.09 million vs. 8.26 million expected, according to FactSet

Netflix provided third-quarter revenue guidance of $6.33 billion, below analyst estimates of $6.40 billion, according to Refinitiv. It expects Q3 EPS of $2.09 versus analyst estimates of $2.01.

Netflix’s guidance for subscriber net adds fell far below analyst expectations. The company expects 2.5 million net subscriber additions for Q3, while analysts were expecting 5.27 million.

Executives explained the slowdown in their letter to shareholders, saying, “growth is slowing as consumers get through the initial shock of Covid and social restrictions. Our paid net additions for the month of June also included the subscriptions we cancelled for the small percentage of members who had not used the service recently.”

Netflix, which notoriously has named everything from Snapchat to sleep a competitor, now counts TikTok among its rivals.

“TikTok’s growth is astounding, showing the fluidity of internet entertainment,” the company wrote to shareholders. “Instead of worrying about all these competitors, we continue to stick to our strategy of trying to improve our service and content every quarter faster than our peers. Our continued strong growth is a testament to this approach and the size of the entertainment market.”

Netflix said it does not expect its 2020 slate of content to be significantly impacted by production shutdowns created by the pandemic. It expects that current production setbacks will push more of its big titles to the end of 2021, but that the “total number of originals for the full year will still be higher than 2020.” Netflix plans to supplement its original content with other films and shows it’s acquired.

Netflix said it has made the most progress resuming production in Asia Pacific and never fully shut down in Korea. It’s resumed some production in Europe as well as two stop-motion animation projects in Oregon and two films in California. But the company warned that “current infection trends create more uncertainty for our productions in the US. 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.”

The company said its net cash in operating activities was +$1 billion compared to -$544 million in the same period last year. Netflix was free cash flow positive for the second consecutive quarter, coming in at +$899 million versus -$594 million in Q2 last year. The company said its growing operating margin has helped its free cash flow profile continue improving, along with content spending being pushed into the second half of 2020 and into next year. Netflix expects free cash flow for the year to be breakeven or positive, though it expects to dip into the negative again next year.

Netflix revealed some viewership numbers in its earnings report. “Never Have I Ever,” the coming of age series by Mindy Kaling, saw 40 million households choosing to watch the show in its first four weeks on the service, according to Netflix. And Spike Lee’s film “Da 5 Bloods” was viewed by 27 million households, Netflix said. However, Netflix changed the way it counts views last year, and now counts a view as a household watching at least two minutes of a show or movie. In Q3, Netflix expects shows and films with big stars to drive engagement, such as “The Old Guard” with Charlize Theron and “Project Power” with Jamie Foxx.

This story is developing. Check back for updates.

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