Netflix Q1 Review: Why the Subscriber Miss Was So Surprising

Cheyne Gateley/VIP

Netflix just helped kick off first-quarter earnings season for media and tech companies in a manner that likely elicited surprised sighs of relief from many of those who compete with it for eyeballs. 

That’s because Netflix’s Q1 ’21 subscriber gains of roughly 4 million came in well below its own forecast (6 million), consensus estimates (6.3 million) and, understandably, the monstrous amount added in Q1 ’20 (15.8 million). The streamer is projecting just 1 million net sub adds for Q2, much lower than the 7.5 million it forecast during the comparable 2020 quarter, when the pandemic was just beginning. 

Slightly numbing the pain for investors was the streamer’s revenue and earnings of $7.16 billion and $3.75 per share, respectively, which beat consensus estimates of $7.13 billion and $2.97 per share, respectively.  

But Netflix’s subscriber numbers (the North Star metric to Netflix watchers) still mark a somewhat rare type of post-earnings opportunity for bulls of the company to rejoice. Netflix had surpassed its own guidance for sub additions in five of the eight quarters throughout 2019 and 2020. 

Netflix shares dropped more than 10% in after-hours trading. The last time shares dropped this much post-Netflix earnings was after the company reported its Q2 ‘19 results, which is also the last time Netflix missed its sub guidance by at least 2 million. 

Netflix’s Q1 ’21 results seem surprising even though the streamer has been warning of “pull-forward” effects its sub growth of Q1 ‘20 would cause. Just observe the signs that Netflix was humming along in the recent months. Netflix cancellations fell to a two-year record-low in Q1 ‘21, Insider reported yesterday. 

Netflix’s latest subscriber miss is a reminder of how important Netflix must lean into localized content and international territories for future growth. In Q1, the APAC and EMEA regions remained the streamer’s fastest-growing regions by year-over-year subscriber growth. 

Netflix’s Q1 ‘21 sub numbers bring to mind what intense competition the U.S. SVOD market is becoming. 

Netflix’s 4 million subscriber gain (just 0.5 million of those coming from U.S./Canada) in Q1 encapsulates a time when Discovery+ launched, Paramount+ launched and Warner Bros.’ 2021 slate started going day-and-date à la HBO Max.  

So that’s why it was a bit surprising to see Netflix assert, “We don’t believe competitive intensity materially changed in the quarter,” and confidently play down competitors in its Q1 shareholder letter. 

But Netflix’s 200 million-plus subscriber count helps explain why it wouldn’t feel the need to address its competitors in any other way. Its early entrance to the streaming market means it’s still way out ahead, in terms of U.S. reach, of notable recent SVODs that have sprouted up over the recent years. 

This type of sustained lead in the face of competition might be even more frustrating for some of Netflix’s streaming challengers as the months stretch on from their own launches and time runs out for their signature sub-acquisition strategies. 

Apple TV+ can currently juice usage via free trials until July (if it doesn’t again extend trials), while HBO Max’s big Warner Bros. day-and-date movies will stop coming at the end of the year.  

Of those two, Apple is more badly in need of an engagement boost as its growth stagnated from August 2020 to April 2021, exclusive data from YouGov provided to Variety Intelligence Platform suggests.  

For Netflix, meaningful engagement boosts among groups of consumers could come in the second half of the year. The company noted it has returned to producing content in virtually every major market and sees the 2021 slate being stronger in H2 of the year (Ted Sarandos noted marquee titles such as “The Witcher,” “You” and “Red Notice” as debuting or returning in H2 ‘21).  

Additionally, more consumers getting vaccinated (50% of U.S. adults have received one vaccine dose) ahead of the warmer summer months indicates some SVOD services could experience weaker engagement in Q2 than in the comparable 2020 period, at least in the U.S. 

That opens the door for some streamers to perhaps post weaker-than-anticipated sub gains next quarter, which could mean Netflix competitors seeing disappointing numbers in Q2.  

Of course, that could hurt Netflix in Q2 as well, but at least the streamer has projected a relatively low 1 million adds for next quarter to protect itself from experiencing a subscriber miss of the magnitude it just experienced for Q1.  

So, bask in it while you still can, Netflix schadenfreude-seekers.