What’s the outlook as Netflix delivers substantial Q1 subscriber beat?

We examine the impact Covid-19 has had on some of Netflix’s key first quarter performance metrics.

Netflix share price volatile in after-hours trade

According to Bloomberg, prior to the release of Netflix’s latest quarterly results, analysts were estimating that the streaming giant would add approximately 8.47 million new paid subscribers in Q1.

On 21 April, GMT-4, Netflix delivered a solid beat on those estimates, revealing it had added 15.77 million new paid subscribers during the first quarter of 2020.

The catalyst behind this surge in subscribers, as Netflix described is a relatively straight forward one: with substantially more people staying at home due to the coronavirus (Covid-19) pandemic, many look to have turned to Netflix as a key source of entertainment.

Will this trend continue though?

Netflix’s management appears doubtful. Indeed, as it stands, the company is forecasting modest Q2 paid subscriber growth of 7.5 million – which would take Netflix’s total paid subscriber-base to a staggering 190 million.

Yet this figure, due to the uncertainty surrounding the current Covid-19 situation, has been described as ‘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,’ the company flagged.

Interestingly, although the Netflix share price initially spiked in after-hours trade, optimism quickly eased off.

As of 7:59 pm GMT-4, Netflix traded at US$434.40 per share.

Currency fluctuations weigh on top-line growth

Mind you, though the streaming giant delivered a substantial subscriber beat in the latest quarter – its Q1 revenue came in-line with guidance – as many international currencies have depreciated in value over the last few months.

This, as the company noted, ‘creates a drag on international revenue growth.’

To illustrate that point, Netflix’s standard plan in Brazil, which last year would yield the company US$8.5 per subscriber now only yields the company US$6.5 per subscriber – based on current FX rates. Problematically, this creates a ‘~25% decline in US dollar average subscription price from Brazil, which offsets strong membership growth.’

All up, this saw Netflix post Q1 revenue figures of US$5,768 million – representing year-over-year (YoY) growth of 27.6%.

Netflix is currently forecasting that its Q2 revenue will come in at US$6,048 million, implying a year-over-year growth rate of 22.8%.

The streaming giant also reported Q1 net income of US$709 million, diluted EPS of US$1.57 and free cash flow (FCF) of US$162 million.

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