Netflix added 15.77 million new paid streaming subscribers in the first quarter as coronavirus shelter-in-place measures have led to a surge in streaming.
The figure dramatically exceeded the 7 million net additions that Netflix had forecast at the end of the fourth quarter. The company ended the quarter with 182.86 million paid subscribers. However, the company said that the spike in membership growth is only temporary and predicted it would add 7.5 million new subscribers in the second quarter. The company said that due to the uncertainty surrounding the timing of home confinement, the subscriber forecast is “mostly guesswork.”
“Like other home entertainment services, we’re seeing temporarily higher viewing and increased membership growth,” wrote Netflix in a letter to shareholders. “In our case, this is offset by a sharply stronger U.S. dollar, depressing our international revenue, resulting in revenue-as-forecast. We expect viewing to decline and membership growth to decelerate as home confinement ends, which we hope is soon.”
Netflix warned that some of its lockdown subscriber growth will pull forward from its multi-year organic growth and result in slower growth after the lockdown is lifted country-by-country. The company guessed that the third and fourth quarters of 2020 will have lower net additions than last year due to these effects.
Despite more than doubling its projected subscriber additions, Netflix’s first-quarter revenues came in as advertised at approximately $5.77 billion. Operating income totaled $958 million and operating margins expanded to 16.6%. That was lower than the 18% the company had anticipated, which was due to $218 million in incremental content costs due to paused productions and hardship fund commitments (a 3.8 percentage point impact to operating margin).
Netflix said it’s still targeting a 16% operating margin for the full year 2020.
“As a reminder, more than half of our revenue is not denominated in U.S. dollars and we don’t hedge our foreign exchange exposure. If the U.S. dollar remains at these elevated levels (or strengthens further), we may target modestly slower growth in our annual operating margin progression next year. Given that lead time, we believe we can readjust our model to be appropriate in that new stronger U.S. dollar world,” the company wrote.