Netflix Sign up Surge Tempered by FX Risk

FX risk is proving to be a thorn in the side for even a company like Netflix. Although the world’s leading tv and movie streaming company is in the enviable position of being one of only a few whose business is able to reap the benefits of a global lockdown, as people stay at home and look for entertainment the viewership of the service has massively increased with paid subscriptions growing well above predicted levels.

After its Q1 2020 earnings were released on Wednesday, a letter to shareholders stated that coronavirus was impacting its business in three clear ways. Naturally one of them is the inability to make new productions and resulting in a slowdown of new material. The next saw the company announce it had added 15.77 million new paid international subscribers, versus the 7.2 million forecasted. An increase in sales that would make any company very envious right now.

USD dominates

This was not all good news for the US company however, as international subscribers mean revenues across many different currencies. In the letter, it stated that its “international revenue will be less than previously forecast due to the dollar rising sharply”.

The company gave the example of its Brazilian business where on a dollar basis its subscription plan used to cost $8.50 but is now only producing $6.50 of revenue. That 23.50% fall is down to the fall in the value of the Brazilian Real versus the US Dollar.

Extreme financial stresses

Although not all US Dollar movements have been as stark as that of the Real, it is a market phenomenon that is impacting all currencies.

At the moment, the clear trend in FX markets is the reaction of the US Dollar to extreme financial stresses. Since the global spread of the coronavirus, to me, the market has significantly reacted on two occasions. First was the massive global equity sell-off at the start of March that saw the likes of the S&P500 fall a record breaking 30% in a matter of days. This “great liquidity sell-off” saw the US Dollar surge as investors scrambled for safety.

The most recent unprecedented event was the collapse in oil prices which saw some oil futures hit negative prices, something that many investors never even thought was possible. Again, the FX market reacted with a flight to safety and we saw more US Dollar demand again. If these market movements can have such a dramatic impact on a company of Netflix’s scale, then what lessons should the corporate and SME market take from that?

What can be done

How can companies including the likes of Netflix protect themselves against such detrimental currency movements. One simple method is protecting by fixing your future rates of exchange via a Forward Contract. For such contracts, it is important to make the right hedge decision including what amount, percentage mix and timings of your expected revenues.

A lot of clients at Clear Treasury are reacting to this uncertainty by reviewing their historic FX hedging decision making. Typically we are now seeing these companies taking a more conservative approach seeking to create certainty on their future rates of exchange by hedging 50% of their future expected cash flows with Forward Contracts, which results in halving their exposure to future volatility whilst remaining flexible should the business landscape further deteriorate and impact business revenues.