Netflix's Q1 shines, highlights company's technology prowess

Netflix’s first quarter shareholder letter highlights strong demand and earnings as well as some savvy tech management.

It’s not surprising that Netflix showed strong first quarter results. The streaming content provider is a go-to COVID-19 pandemic activity amid stay-at-home orders. Netflix added 15.77 million new paid subscribers relative to analyst projections of more than 8 million.

In addition, Netflix reported first quarter earnings of $709 million, or $1.57 a share, on revenue of $5.77 billion. Analysts were expecting earnings of $1.64 a share on revenue of $5.75 billion. What’s unclear is whether Netflix will see a demand drop-off as a new economic normal develops. Netflix said:

At Netflix, we’re acutely aware that we are 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. Like other home entertainment services, we’re seeing temporarily higher viewing and increased membership growth. In our case, this is offset by a sharply stronger US dollar, depressing our international revenue, resulting in revenue-as-forecast. We expect viewing to decline and membership growth to decelerate as home confinement ends, which we hope is soon.

Nevertheless, Netflix pulled off some heavy IT lifts during the quarter. Here are the highlights:

• Product teams refocused new features on ones with most ROI and impact. For instance, parental controls were rolled out during the pandemic. “As a precaution, we have temporarily reduced the number of product innovations we try, while continuing to release features that we know will add meaningful value for our members,” said the company.
• Customer support all moved to work at home and Netflix scaled with 2,000 more agents without sacrificing service levels.
• Animation postproduction moved to work at home with more than 200 projects developed remote.
• Writers rooms went virtual.
• Open Connect, Netflix’s caching service, moved content close to homes and enabled ISPs to keep network congestion at a minimum. When governments and Internet providers asked Netflix to reduce its network traffic, the company was able to use Open Connect to reduce network use by 25% without service degradation.

Netflix is projecting second quarter revenue of $6.05 billion with net income of $820 million. It expects to add 7.5 million net subscribers, but Netflix added the projections are “mostly guesswork.”

There are three primary effects on our financial performance from the crisis. First, our membership growth has temporarily accelerated due to home confinement. Second, our international revenue will be less than previously forecast due to the dollar rising sharply. Third, due to the production shutdown, some cash spending on content will be delayed, improving our free cash flow, and some title releases will be delayed, typically by a quarter.