Netflix subscriber growth downshifts in Q1

Netflix
Netflix reported net income $1.7 billion on $7.16 billion in revenue, for diluted earnings per share of $3.75—well above the consensus estimate of $2.97 in earnings per share. (Netflix)

Netflix gained about a third fewer subscribers in the first quarter of 2021 than it had predicted—3.98 million, not the 6 million forecast in its previous quarter, bringing it to 207.6 million paid memberships worldwide.

In the shareholder letter and earnings interview accompanying its announcement Tuesday afternoon, the Los Gatos, Calif., company leaned into a “pull forward” explanation: Netflix fell a little short in Q1 because the COVID-19 pandemic’s enforced confinement drew it so many new subscribers in last year.

“It really boils down to COVID, frankly,” said chief financial officer Spencer Neumann in the interview. “We had this huge pull forward in 2020, in terms of our subscriber additions—nearly 40 million paid net adds in 2020.”

He also cited the pandemic’s effect on production, forcing a “near-global shutdown” that pushed the release of some titles back into later in 2021.

Netflix reported net income $1.7 billion on $7.16 billion in revenue, for diluted earnings per share of $3.75—well above the consensus estimate of $2.97 in earnings per share.

This earnings season has seen substantial growth at competing services—Amazon reported it had exceeded 200 million Prime members worldwide, while Kantar data showed HBO Max, Prime Video, Paramount+, Disney+ and Hulu all outpacing Netflix in new subscriptions. But Netflix said those rivals did not factor into its slower growth.

“We had those 10 years where we were growing smooth as silk, and it’s just a little wobbly right now,” founder and co-CEO Reed Hastings said in the interview. “We really looked through all the data, you know, looking at different regions where competitors are launched or not launched, and we just can’t see any difference, you know, in our relative growth in those regions.”

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Later in that 40-minute program, Hastings noted that Netflix’s largest competitor for TV viewing time remains linear TV (unsaid: most cord-cutting-battered distributors there can only wish for subscriber growth as “slow” as Netflix’s), followed by YouTube.

This quarter has also seen a renewed focus on the business risks of account sharing—something Netflix has brushed off in the past, but which Citi analyst Jason Bazinet recently estimated cost it $6 billion a year in revenue. Netflix has begun testing prompts shown to people that its system thinks don’t have their own account.

In the interview, chief operating officer and chief product officer Greg Peters called that “not necessarily a new thing” and part of its iterative workflow.

“We would never roll something out that feels like turning the screws,” Hastings added. “It’s gotta feel like it makes sense to consumers, that they understand.”

In a note posted Wednesday morning, the market-research firm MoffettNathanson called Netflix’s ability to add new subscribers “a significant issue” and lowered its estimate of year-end total subscriptions to 223.9 million, down from 230.7 million. But it also commended Netflix for achieving sufficiently positive cash flow to finance a stock buyback program budgeted at up to $5 billion.

That note listed such possible upsides as better growth internationally and growing profit margins, weighed against downside risks that include data caps from internet providers, tougher competition from other SVOD services, and new titles not delivering a sufficient return on their production costs. It did not mention password sharing.