Netflix subscriber additions double expectations during Covid-19 lockdown

Streaming service expects viewing and membership to decelerate as home confinement ends.

Netflix: Q1 subscribers grew 22.5% year on year
Netflix: Q1 subscribers grew 22.5% year on year

Netflix added more than double the volume of subscribers it was expecting in the first quarter of 2020 as countries around the world enforced home-confinement measures, but this did not translate into an equivalent spike in revenue.

The streaming service added 15.8 million subscribers globally in the three months ended 31 March 31 – more than double the 7.2 million that were expected and growth of 22.5% year on year.

In its letter to shareholders, Netflix noted that it is "fortunate to have a service that is even more meaningful to people confined at home and which we can operate remotely with minimal disruption in the short to medium term".

It said that membership growth during the first two months of the first quarter was similar to the previous two years, but spiked in March as lockdown orders began being introduced in many countries.

Of the 15.8 million new subscribers, 44% (or seven million) came from EMEA. Asia-Pacific followed with 3.6 million, then Latin America with 2.9 million, and the US and Canada with 2.3 million.

But while the Covid-19 crisis has boosted the company's viewing figures and memberships, revenue has not spiked at the same rate – something that Netflix attributed to a "sharply stronger US dollar, depressing our international revenue".

Revenue was $5.77bn for the quarter, compared with the $5.76bn estimated. Revenue growth of 27.6% in the three months was slower than the previous two quarters at 30.6% and 31.1% respectively.

The company's operating margin of 16.6% was lower than its 18.0% forecast – something that it said was due to $218m incurred in incremental content costs due to paused productions and hardship fund commitments. Netflix has committed to spend $150m supporting the industry through this crisis.

Furthermore, the subscription service also expects "viewing to decline and membership growth to decelerate as home confinement ends, which we hope is soon". Netflix is forecasting an addition of 7.5 million subscribers in the second quarter and 22.8% revenue growth to $6.05bn.

But it added that, given the uncertainty on home-confinement timing, "this is mostly guesswork".

"The actual Q2 numbers could end up well below or well above that, depending on many factors, including when people can go back to their social lives in various countries and how much people take a break from television after the lockdown," Netflix said in its letter to shareholders.

Other financials

Marketing spend in the quarter decreased by a significant 22% year on year to $503.8m. Meanwhile, spend on technology and development increased by the same proportion (22%) to $453.8m.

Content

While Netflix – like every broadcaster – is dealing with the impact of a production pause on its bottom line and release schedule, it appears to be in a stronger content position than many.

"We benefit from a large pipeline of content that was either complete and ready for launch or in post-production when filming stopped," the company said in its letter. It is also acquiring titles in order to "continue to be able to provide a terrific variety of new titles throughout 2020 and 2021".

Interestingly, while Netflix said in its shareholder letter that "almost all filming has now been stopped globally", it named South Korea and Iceland as exceptions. On the analyst call, chief content officer Ted Sarandos said the company is "taking some of those key learnings about how we run those productions today and applying that to our plans to start our productions around the world".

A version of this article first appeared on Campaign Asia-Pacific

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