Netflix Q1 2021 Earnings Summary (NASDAQ: NFLX)
Press Release and Earnings Interview Summary
Results Summary:
- Revenue: $7.16Bn (+24.1% YoY).
- GAAP EPS: $3.75
- Global streaming paid net additions: 3.98MM.
Q2 Guidance:
- Revenue: $7.3B
- EPS: $3.16.
- Global streaming paid Memberships: 208.64M.
- Global streaming paid net additions: 1M.
Interview Summary
1. Compared to a big Q1 last year with 50mm net adds this quarter came below your and the Street's expectations. Any additional color you can provide?
It really boils down to COVID. We had this huge pull forward of subscriber additions in 2020. Nearly 40mm paid net adds. And we also had a near-global shutdown in production which pushed some key title launches. Those two things create some noise.
Our engagement, viewing per household was up YoY in Q1, and our churn was down. The business remains healthy but you do see some near-term noise. — Spencer Neumann, CFO
Of course we’re wondering if it’s due to competition. But looking through the data, comparing different regions where new competitors launched, and we don’t see any difference in relative growth. The competition has been and remains high. — Reed Hastings, Co-CEO
2. How well is the subscriber base and what are your thoughts on price increases in the current environment?
We’re seeing results similar to what we’ve seen the last 2 years. We’re delivering more value to our members, investing in great stories and better product experiences. If we do that well, occasionally we can ask them to pay a bit more to keep that positive cycle going. But even as we continue to improve the service, we want to make sure we’re accessible to more and more people. — Greg Peters, COO and Chief Product Officer
Our churn is actually below pre-price change levels in the U.S. and most markets where we’ve adjusted prices. — Spencer Neumann, CFO
3. What are you expecting in terms of subscriber growth as some parts of the world reopen?
Many countries have opened and closed over the year, with several in crisis right now. The initial surge in COVID resulted in large subscriber growth and viewing, but since then, openings and closings didn't generate noticeable material effect. — Reed Hastings, Co-CEO
Q2 guidance is very similar to what we saw in Q1, still working through that pull forward demand and the pushed slate of big titles. Also, it’s a seasonally soft period for us. But the good news is the core underlying metrics are very healthy and there’s a clear catalyst to a reacceleration towards the back end of the year as those titles start to launch. — Ted Sarandos, Co-CEO and Chief Content Officer
4. How are you thinking about how the second half might shape up with the additional content as well as maybe some of the pull forward behind us?
We plan our programming 2–3 years out, with a smooth release of high-profile projects. A lot of the projects we had hoped would come out earlier this year got pushed due to COVID. We think we’ll get back to a much steadier state in Q4, with popular shows like The Witcher, You and Corporate High returning, as well as movies like Red Notes with the Rock, Ryan Reynolds and Gaga, and Escape from Spiderhead with Chris Hemsworth. — Ted Sarandos, Co-CEO and Chief Content Officer
5. Shifting to the big picture. With 200mm subscribers around the world, five years into the original content strategy, and coexisting well with possibly the largest direct competitor you might ever see, can you talk about key priorities for the next 2–3 years?
Our largest competitor for viewing time is actually linear TV. And our second largest is YouTube, which is considerably larger than Netflix in viewing time. Disney is considerably smaller. We’re in the middle of the pack.
Our focus remains the same. Member satisfaction drives retention and word of mouth, which drives our growth. — Reed Hastings, Co-CEO
The one thing that we have sharpened our skills over the last years is creating content from anywhere in the world and playing it all over the world. And these stories are more likely to play around the world because people recognize the authenticity of the storytelling. — Ted Sarandos, Co-CEO and Chief Content Officer
We are increasingly looking to understand what our members need, their unique constraints, and their expectations. Whether it’s having the right payment method, or how to present the content regardless of where it comes and what language it’s in. — Greg Peters, COO and Chief Product Officer
What’s helped us over the years is our velocity of decision making. We’re less than 10% of TV view share in our biggest markets, so there’s a big runway of growth. — Spencer Neumann, CFO
6. Bill has been a recent success for Netflix with 36 Oscar nominations. Do you think that it can be the primary or dominant way that people consume films?
“I don’t know about dominant, but I would say it’s going to be a continually material way people view films. This is where the audience is kind of going.” — Ted Sarandos, Co-CEO and Chief Content Officer
“So they’re watching the kind of films, they would have gone out to the theater to see. But in many cases, in the convenience of their timetable and in the comfort of their home, where they can really enjoy a great new film.” — Ted Sarandos, Co-CEO and Chief Content Officer
7. Over the years you’ve been successful at getting a high share of the most watched TV shows. Do you have to do anything fundamentally different in film to achieve that?
Is not dissimilar and people just have very diverse taste. We’ve always set out to do your favorite film, your favorite show, whoever you are, wherever you are, and whatever mood you’re in. So that’s why we go out of from so many different angles. — Ted Sarandos, Co-CEO and Chief Content Officer
We would need to spend more. We spend a lot more on series than on film, but that will grow as the budget grows. — Reed Hastings, Co-CEO
8. Can you share more details about the Sony deal?
We’re going to be producing global original films from Sony’s IP library. Access to that IP is an incredible opportunity, and it is all part of a big global programming strategy over the next 5 years. It complements our growing output of original films. — Ted Sarandos, Co-CEO and Chief Content Officer
9. Willingness to pay is very different by country. Assuming over the long term you can match willingness to pay around the world with price, what do you think about revenue distribution?
Our spread has been growing wider, and we’re trying to find a set of plan types with the right kind of features. Some folks have gigantic TVs while others watch on their phones and some are approaching it as a family and others as individuals.
There are many needs out there and we’re going to try to match those feature sets at the right price points. The broad trajectory is a widening of the breadth of our offerings and price points associated with them. — Greg Peters, COO and Chief Product Officer
10. Investment in content in Asia has ramped up significantly, with $500MM in Korea, 40 new films and series in India, and Japenes anime ramping. What’s giving you the confidence to invest aggressively?
The product market fit is what we’re always looking for. We’re programming in a way the consumers value and love it. The investments get us closer to that product market fit we have on mature markets, and ocasially the content could be of global interest. — Ted Sarandos, Co-CEO and Chief Content Officer
In Japan and South Korea we’ve had success. These are big, developed and rich markets. In India we’re still figuring things out, and the investments take some guts and forward-looking. — Reed Hastings, Co-CEO
The APAC region was 1/3 of our member growth and healthy revenue growth. We’ve recently increased prices in Australia, New Zealand and Japan. — Spencer Neumann, CFO
11. In the lower ARPU markets, are you playing the high-volume strategy? Or expecting incomes and ARPU will rise over the long-term?
We’re still learning, but our focus is on getting a content fit and getting broader content. — Reed Hastings, Co-CEO
Our job is to try to be innovative and push experiments. But one thing that’s been successful in other markets is leveraging go-to-market partners who have existing relationships with consumers as a way to expose them to Netflix.
Jio is a great example of a partner we’ve been working with to bring the service to a new demographic at a very low price associated with low-cost mobile plans. — Greg Peters, COO and Chief Product Officer
India is a tremendous opportunity, and Netflix offers a tremendous opportunity for the creative community to connect with huge audiences. — Ted Sarandos, Co-CEO and Chief Content Officer
12. Can you talk about limiting account sharing in the US?
We’re seeking that flexible approach to make sure that we are providing the plans with the right features and the right price points to meet broad sets of needs. But we want to ensure that the people who are using a Netflix account are the ones that are authorized to do so. That’s what this testing is about. It’s not necessarily a new thing. — Greg Peters, COO and Chief Product Officer
We will test many things, but we will never roll out something that feels like turning the screws. It has to make sense to consumers so that they understand. — Reed Hastings, Co-CEO
13. Is there any market where the user to subscriber ratio has high?
It’s different around the planet, and it’s different within countries.— Greg Peters, COO and Chief Product Officer
14. What is the bigger revenue opportunity in the long term: limiting account sharing or getting everyone to pay a bit more?
“I think the optimal revenue opportunity, optimal business opportunity is trying to figure out a way to best serve our members and trying to figure out the models, the plan types, the right price points, the right features that really work for them in a natural way.” — Greg Peters, COO and Chief Product Officer
15. What will you do with more than $1Bn in cash?
We turned the corner on the cash flow story. We expect to be cashflow breakeven this year and then sustainably free cash flow positive. We don’t intend to build up excess cash. We will maintain debt at around $10–15Bn.
We think buybacks are a way to return value to shareholders while maintaining balance sheet flexibility.
Our #1 priority is investing in growth, and return excess cash to shareholders. — Spencer Neumann, CFO
16. In 10 years you might be well over 500MM subs, which feels like a high level of penetration. How important is it to have a second app versus continuing to let the business mature and focusing on capital return?
Youtube and Facebook are at multibillion users, and the internet is still growing. So if we get to 500MM, we’ll be looking to double that. Outside of China, pay TV peaked at about 800MM households, so there’s room to grow.
Entertainment is the main thing. We’ve got a lot of work to do in terms of different types of entertainment. I don’t think there will be a second act like AWS and Amazon shopping. But we will look at large secondary profit pools, like consumer products, that can support title brands. — Reed Hastings, Co-CEO
17. People view gaming as a natural extension or adjacency for you. In what ways is that true or not? And is there a way to do gaming in Netflix style?
We’ve dabbled in it through some of our interactive programming as well as on the licensing and merchandising side in consumer products. — Spencer Neumann, CFO
We’re in the business of creating amazing deep universes and compelling characters, and people want to immerse themselves more deeply and get to know characters better. So we’re really trying to figure out ways to increase connection and deepen the fandom. There’s no doubt games are going to be an important form of entertainment and modality to deepen fan experience. — Greg Peters, COO and Chief Product Officer
