Netflix packed a lot into its second-quarter letter to shareholders on Thursday. First, the streaming giant said it added another 10.1 million new subscribers — easily topping analyst estimates. But the real news was that Netflix Chief Content Officer Ted Sarandos was being appointed to co-CEO alongside current chief Reed Hastings. Netflix shares dropped more than 10% in early after-hours trading after the company reported it topped Wall Street revenue estimates but fell short of earnings per share projections.
After adding its new subscribers, Netflix now has 192.9 million global customers.
Netflix had estimated it would add 7.5 million new subscribers during the quarter, although the company said that projection was “mostly guesswork” in its Q1 letter to shareholders. Most analysts expected Netflix to top its projection — Goldman Sachs analyst Heath Terry estimated the company would add at least 12.5 million subscribers during Q2, for instance — due in large part to the coronavirus pandemic forcing people to stay at home.
Similarly, investors have been betting on Netflix weathering the pandemic better than most entertainment companies, with the company’s stock price increasing 45% since the beginning of April. (The company closed Thursday’s trading session with a market cap about $15 billion higher than Disney’s valuation.) Netflix shares sank 10.6% a few minutes after the closing bell, hitting $471 per share.
The stock drop came after the company’s earning per share of $1.59 came up short of analyst projections of $1.81 EPS. Netflix posted $6.15 billion in revenue for Q2, surpassing analyst estimates of $6.08 billion; sales increased 25% year-over-year.
Netflix, in its letter to shareholders, said its seen record-setting subscriber growth during the first half of 2020 but warned it doesn’t expect that trend to continue during the third and fourth quarters.
“We live in uncertain times with restrictions on what we can do socially and many people are turning to entertainment for relaxation, connection, comfort and stimulation. In Q1 and Q2, we saw significant pull-forward of our underlying adoption leading to huge growth in the first half of this year (26 million paid net adds vs. prior year of 12 million). As a result, we expect less growth for the second half of 2020 compared to the prior year.”
The biggest news of the day, though, ended up being the unexpected announcement Sarandos would be elevated to co-CEO, while also continuing on as head of content. Hastings said the move “makes formal what was already informal — that Ted and I share the leadership of Netflix.”
Netflix said it has been “slowly resuming productions in many parts of the world,” and particularly in Asia, as it looks to bounce-back from the pandemic.
On the money side, free cash flow was $899 million — a noticeable change from the same time last year, when it was negative $594 million. This is due largely to production stoppages, and the company said it expects to be breakeven or positive FCF for 2020.
For Q3, Netflix projected $6.3 billion in revenue, coming in about $100 million short of what analysts had been looking for.