Netflix (NASDAQ:NFLX), like every major media company in the world, has halted production on most of its shows and films amid the coronavirus pandemic.
With productions halted, Netflix expects its cash spending to come in much lower than originally expected for 2020. It originally anticipated negative $2.5 billion in free cash flow for the year, but management now expects cash burn to total less than $1 billion. In other words, it's suspending about $1.5 billion in planned content spend for the year -- about 10% of its $15 billion content budget.
The move certainly isn't ideal; management would much rather spend that extra $1.5 billion. But management believes it's in a much better position to weather the production delays than competitors such as Disney (NYSE:DIS).
More Netflix originals in 2020 than 2019
Netflix's binge-watching release strategy is a saving grace for the company right now. Releasing every episode at once means the timeline from when Netflix starts productions to when it releases shows is typically very long. Production studios releasing episodes over several months may have much shorter windows between when a series begins filming and when the first episode debuts.
As a result, Netflix has finished filming for many of its planned 2020 releases. It's having teams work on post-production at home. And you'll still be able to watch the fourth season of The Crown this fall.
"We'll actually have more branded Netflix Originals on our service this year than we had last year," CFO Spence Neumann said on the company's first-quarter earnings call.
The flip side of the matter is that Netflix could fall behind on releases in 2021 if production doesn't start up again soon. Management says it's already started filming again in Korea and Iceland, where coronavirus testing is more available than in other parts of the world. But until the environment becomes safer, it's not going to get back to its regular output.
The halt on production could be much worse for traditional media companies than for Netflix.
Disney could face challenges if production is pushed out through the summer. While The Mandalorian season 2 finished its filming in March, just before the world shut down, WandaVision had to halt production mid-filming. WandaVision will be an integral part of phase four of the Marvel Cinematic Universe, and it was supposed to be released in December. Not to mention, Disney has a broadcast network and a lot of cable networks to fill the schedule for this fall.
What will 2021 cash flow look like?
Netflix isn't actually cutting any planned projects. That $1.5 billion in content spending will likely all show up next year. That'll produce significant drag on free cash flow.
Still, management reiterated expectations that 2019 was the peak of its cash burn, when it spent $3.3 billion more in cash than it produced at the end of the day. It wouldn't be a surprise, though, if cash burn exceeds the $2.5 billion management originally anticipated for 2020 as Netflix looks to ramp up production as quickly as possible when studios open again.
Cash burn may be further pressured by foreign exchange rates, as the dollar has appreciated considerably in recent weeks against foreign currencies. With the vast majority of Netflix's revenue coming from international markets, a sustained strong dollar would negatively affect its revenue growth. Without more cash coming in at the top of the funnel, it'll be hard to maintain improvements in free cash flow.
Meanwhile, Netflix will need to maintain its churn rate in the United States. And if production doesn't restart and ramp quickly, Netflix subscribers may churn out as they're greeted with several new streaming options. That would further pressure revenue growth.
Netflix is well positioned to keep growing its subscriber base and its content catalog in the near term. But investors will want to keep an eye on when production can really resume for the company, as it will have a big impact on its 2021 results.