Synopsis

Since governments across much of the western world implemented social distancing rules, companies that offered a way to entertain, educate, and communicate without much interaction saw an explosion in revenues, and active users - both paying and non-paying. Netflix is one of those companies that benefited immensely in at least one dimension, though it suffered in other areas. The number of active users on Netflix has gone up way past the level that management had expected to see at this time of the year. At the same time, many of the company's production sites across the world have had to shut down, which will likely impact the speed at which new titles become available in the future. There are also signs that much of the accelerated growth is tapering off as lockdown measures ease.

User Additions

In Q2 of 2020, Netflix obtained about 10.1Mn paid users after obtaining 15.8Mn users in Q1 of 2020 for a total of 26Mn in the first half of the year. During the same time last year, the company added 12Mn in total, with 2.7Mn in Q2 of 2019 and 9.3Mn in Q1 of 2019. Management had expected the number of paid users to come in at 7.5Mn in Q2 of 2020 and 7.0Mn in Q1 of 2020. The boost to revenue growth was mostly seen in the first quarter, as the growth in Q2 revenues has remained essentially on the same trajectory as before. In Q2-2020, revenues grew 25% over the same time last year to about US$6.1Bn, a growth rate that was lower than the 26% seen in Q2-2019.  At the same time, the growth rate seen in Q1-2020 was about 27.6%, which is higher than the 22.2% seen in the same period a year earlier.

Going forward, management expects the growth in paid users to slow as the second half of the year approaches, with early warning signs showing up in the run rate differential for the month of June 2020 relative to that of the first half of the year. Management is expecting to see paid user additions of 2.5Mn for Q3-2020 relative to the 6.8Mn in the same quarter a year earlier. For the entire second half of the year, management also anticipates total user additions to be less than that of the same time last year.

We forecast 2.5m paid net adds for Q3’20 vs. 6.8m in the prior year quarter. As we indicated in our Q1’20 letter, we’re expecting paid net adds will be down year over year in the second half as our strong first half performance likely pulled forward some demand from the second half of the year. In addition, Q3’19 included the positive impact of new seasons of both Stranger Things and La Casa de Papel (aka Money Heist).
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Content Creation

Netflix had to postpone production at many of its sets late in the first quarter of 2020, as governments around the world implemented social distancing measures to fight the spread of COVID-19. In Q2 of 2020, the company re-opened productions mostly in Asia Pacific markets as these markets were the first affected by the virus and as such the first to recover. According to the company, they are currently shooting season 2 of the Japanese based film The Naked Director.  Productions are also in the early phase of re-opening in such European countries as Germany, France, Spain, Poland, Italy, and the UK. The US, India, and Brazil are further behind as they all experienced peak viral infections much later than the countries in Europe and Asia Pacific.

Most of the films that were scheduled to be released in 2020 are largely on track according to the company, owing to the long lead time that most company-owned titles require for an official launch. Most of the films due for release in 2020 were already shot and are not likely to require huge gatherings of actors, film crews, and directors. On the other hand, films that were scheduled for release in 2021 will be postponed until the later in the year, according to the management team:

For 2021, based on our current plan, we expect the paused productions will lead to a more second half weighted content slate in terms of our big titles.

Between now and 2021 the company expects to release the following movies that were acquired in 2020:

​Netflix will also release The Old Guard starring Charlize Theron, season 2 of The Umbrella Academy, and Project Power starring Jamie Foxx and Enola Holmes.

Top Performing Films During Q2 2020

The company mentioned a number of films that received a notable number of views in the first month of their release in Q2 of 2020. They stretch across a wide variety of genres and include the following:

  • Never Have I Ever, a fun, young adult dramedy from Mindy Kaling - 40m households.
  • Space Force (starring Steve Carell) - 40m households.
  • Too Hot to Handle (unscripted) - 51m households.
  • Floor is Lava (unscripted) - 37m households.
  • Spike Lee’s Da 5 Bloods - 27m households.
  • Extraction (starring Chris Hemsworth) - 99m households.
  • The Wrong Missy comedy starring David Spade and Lauren Lapkus - 59m households.
  • The Willoughbys - 38m households.
  • La Casa de Papel (aka Money Heist): Part 4 - 65m households.

Other Notable Issues

The company has made significant changes to the management team by appointing a 20-year company veteran - Ted Sarandos - as co-CEO of the company. This strategic move is directed at creating depth in the management of the company as the board of directors seeks to build an adequate succession plan for Reed Hastings who is 5 years older than Tad Sarandos. According to the company, Ted will now double as Chief Content Officer and CEO. Greg Peters will assume the role of COO on top of the Chief Product Officer role that he currently holds. With many companies now waking up to the realities of racial equity, Netflix is now putting US$100Mn - into financial institutions and organizations that directly support black communities.

​Featured Podcast: How Netflix Make Films Internationally​

In Closing

​Netflix ​continues to record massive growth in users, and revenues as consumers continue to engage in cord-cutting. At the same time, the number of  streaming platforms in the industry continues to increase with many looking to take a share of a market that likely has a long runway ahead. Companies such as WarnerMedia, Disney, NBCUniversal, Apple, and Amazon have become major players. Netflix on the other hand continues to lead on the back of one key strategy that of becoming the largest content owner in the industry. In 2020 alone, it is estimated that the company will spend about US$17Bn on original content, which far outweighs most of the other competitors. The company is also creating content globally which gives them an enormous competitive advantage relative to those companies that are mostly US-based.