Netflix CFO Blames COVID-19 ‘Choppiness’ for Failure to Predict Q1 Shortfall

Netflix missing its Q1 target on net subscriber additions by nearly 34% (see 2104200076) “really boils down” to COVID-19, said Chief Financial Officer Spencer Neumann on a quarterly earnings interview Tuesday. The pandemic continues to have a "big impact on the world," and for Netflix, "at a minimum, creates just some short-term kind of choppiness in some of the business trends that we see,” he said.

The “huge pull forward” that Netflix experienced in 2020, coupled with the near-global shutdown in content production, created “some noise” that interferes with the company’s ability to accurately project quarterly performance, said Neumann. The biggest forecast misses have come “in the past five quarters, relative to the past five years, and that was these five quarters of COVID,” he said. “It's just a difficult time to forecast the business.” The stock closed 7.4% lower Wednesday at $508.90.

The underlying Netflix business “remains healthy,” said Neumann. “Our engagement, our viewing per household, was up year over year in Q1,” and churn was down, he said. “The business is still growing” at a rate approaching 40% over the past two years, he said. The big transition from “linear to streaming entertainment” is the long-term driver of the business, “and that remains as healthy as ever,” he said.

Netflix ruled out streaming competition as a factor in the Q1 forecast miss, said co-CEO Reed Hastings. “We really looked through all the data, looking at different regions where new competitors are launched, are not launched, and we just can't see any difference in our relative growth in those regions.” The business is “intensely competitive, but it always has been,” he said. “We've been competing with Amazon Prime for 13 years, with Hulu for 14 years. It's always been very competitive with linear TV, too. So there's no real change that we can detect in the competitive environment.”

The common perception is that Disney+ is Netflix’s largest streaming competitor, “but our largest competitor for TV viewing time is linear TV,” said Hastings. “Our second largest is YouTube, which is considerably larger than Netflix in viewing time, and Disney is considerably smaller, but we're sort of in the middle of the pack.”

The year-over-year decline in Q1 churn gives Netflix confidence that its recent price increases were not to blame for the forecast shortfall, said Neumann. “Our churn is actually below pre-price change levels already in the U.S. and in most of the markets.”

Disruptions in content production took a toll, said co-CEO Ted Sarandos, also chief content officer. In normal times, “you've got a pretty smooth release of high-profile projects and smaller kind of passion projects,” he said. “A lot of the projects we had hoped to come out earlier did get pushed because of the post-production delays and the COVID delays in production, and we think we'll get back to a much steadier state in the back half of the year and certainly in Q4.”