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Netflix (NFLX) Q3 Earnings Miss, Shares Down on Weak '21 View

Zacks Equity Research
·7 min read

Netflix NFLX reported third-quarter 2020 earnings of $1.74 per share, missing the Zacks Consensus Estimate by 18.3% and the company’s guidance of $2.09. However, the figure increased 18.4% year over year.

Revenues of $6.44 billion increased 22.7% year over year and also beat the consensus mark by 0.8%. Excluding an unfavorable forex impact of $158 million, streaming ARPU grew 1% year over year.

The streaming giant added 2.2 million paid subscribers globally, which declined 67.5% year over year and missed its guidance of 2.50 million paid-subscriber addition.

At the end of the third quarter, Netflix had 195.15 million paid subscribers globally, up 23.3% from the year-ago quarter, but missed management’s expectation of 195.45 million paid subscribers.

Notably, this Zacks Rank #3 (Hold) company had expected slowdown in the second half due to less demand and absence of new seasons for popular shows. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 

Netflix, Inc. Price, Consensus and EPS Surprise

 

Netflix, Inc. Price, Consensus and EPS Surprise
Netflix, Inc. Price, Consensus and EPS Surprise

Netflix, Inc. price-consensus-eps-surprise-chart | Netflix, Inc. Quote

The company now expects paid net additions to be 6 million compared with the year-ago quarter’s 8.8 million. This means Netflix will add 34 million paid net additions in 2020, much better than the historical high of 28.6 million it achieved in 2018.

Moreover, Netflix expects paid net additions to be down year over year in the first half of 2021 as compared with the big spike in paid net additions in the first half of 2020.

Shares of Netflix fell more than 5% in pre-market trading following the results and disappointing 2021 outlook.

Apart from lower demand for its shows, growing competition from Apple AAPL and Amazon AMZN, along with new streaming service offerings like WarnerMedia’s HBO Max, Disney’s DIS Disney+ and NBCUniversal’s Peacock are hurting Netflix’s growth prospects.

Segmental Revenue Details

United States and Canada (UCAN) reported revenues of $2.93 billion, which rose 11.9% year over year and accounted for 45.6% of total revenues. ARPU grew 3% from the year-ago quarter on a foreign-exchange neutral basis.

Paid-subscriber base increased 8.9% from the year-ago quarter to 73.08 million. The company added 0.18 million paid subscribers, down 70.5% year over year.

Europe, Middle East & Africa (EMEA) reported revenues of $2.02 billion, which surged 41.4% year over year and accounted for 31.4% of total revenues. ARPU grew 3% from the year-ago quarter on a foreign-exchange neutral basis.

Paid-subscriber base increased 31.4% from the year-ago quarter to 62.24 million. The company added 0.76 million paid subscribers, down 75.7% year over year.

Latin America’s (LATAM) revenues of $789 million increased 6.5% year over year, contributing 12.3% of total revenues. ARPU grew 5% from the year-ago quarter on a foreign-exchange neutral basis.

Paid-subscriber base rose 23.6% from the year-ago quarter to 36.32 million. The company added 0.26 million paid subscribers, down 82.6% year over year.

Asia Pacific’s (APAC) revenues of $635 million soared 66.2% year over year and accounted for 9.3% of total revenues. ARPU declined 1% year over year on a foreign-exchange neutral basis.

Paid-subscriber base jumped 62.2% from the year-ago quarter to 23.50 million. The company added 1.01 million paid subscribers, down 34.4% year over year.

Content Details

Netflix’s third-quarter content slate included new seasons of The Umbrella Academy and Lucifer. Apart from Ryan Murphy’s Ratched in mid-September the company also premiered documentaries American Murder: The Family Next Door and The Social Dilemma in the reported quarter.

Netflix continued its heavy investments on developing regional content. Mexican show Oscuro Deseo (Dark Desire) season 1 was the company’s biggest local-language original globally in the third quarter. Indian Matchmaking also witnessed healthy viewership.

The Old Guard, The Kissing Booth 2, Project Power and Enola Holmes were the original films released by Netflix in the reported quarter.

Content slate for the fourth quarter of 2020 includes The Haunting of Bly Manor, Emily in Paris season 1, Adam Sandler’s latest film Hubie Halloween, animated family film Over the Moon, The Crown season 4 and the first season of Selena.

Other noteworthy films include The Midnight Sky, Hillbilly Elegy, Ma Rainey’s Black Bottom, The Christmas Chronicles 2, Jingle Jangle: A Christmas Journey, MANK and The Prom.

Markedly, the company has restarted production on season four of Stranger Things, action film Red Notice and The Witcher season two. The company expects total number of originals in 2021 to be higher than 2020.

Operating Details

Marketing expenses declined 4.7% year over year to $527.6 million. As a percentage of revenues, marketing expenses decreased 240 basis points (bps) to 8.2%.

Moreover, consolidated operating income increased 34.1% year over year to $1.31 billion, driven by higher-than-expected revenue and subscriber growth. Consolidated operating margin expanded 170 bps on a year-over-year basis to 20.4%.

Balance Sheet & Free Cash Flow

Netflix had $8.39 billion of cash and cash equivalents as of Sep 30, 2020, compared with $7.15 billion as of Jun 30, 2020. The company also has an undrawn credit facility worth $750 million, providing it with ample liquidity.

Long-term debt was $15.5 billion as of Sep 30, 2020, up from $15.3 billion as of Jun 30, 2020. Streaming content obligations were $19.1 billion unchanged sequentially and year over year.

Netflix reported free cash flow of $1.15 billion against free cash outflow of $551 million in the year-ago quarter.

Guidance

For the fourth quarter of 2020, Netflix forecasts earnings of $1.35 per share, indicating year-over-year growth of 3.8%. The Zacks Consensus Estimate is pegged at $1.02 per share, lower than the company’s expectation.

Netflix expects to end the fourth quarter of 2020 with 201.15 million paid subscribers globally, indicating growth of 20.4% from the year-ago quarter.

Total revenues are anticipated to be $6.57 billion, suggesting growth of 20.2% year over year. The Zacks Consensus Estimate for revenues stands at $6.58 billion, higher than the company’s expectation.

Operating margin is projected at 13.5%, indicating growth of 510 bps on a year-over-year basis.

For 2020, the company now expects operating margin of 18% (indicating expansion of 500 bps year over year) better than original expectation of 16%. For 2021, Netflix still targets operating margin of 19%.

Moreover, Netflix now expects 2020 free cash flow to be roughly $2 billion up from its previous expectation of break even to positive.

Further, the company expects free cash outflow for 2021 to be -$1 billion to break even.

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