Third-quarter earnings of 87 cents a share topped forecasts as the operating margin reached 34.6%. But fourth-quarter revenue guidance came in a little below expectations, ad revenue for the year is now expected at about $2.7 billion instead of $3 billion, and shares were indicated about 6% lower.
Netflix had a more profitable quarter than it planned. Investors focused on the quarter it now expects.
Revenue rose 11.8% to $12.87 billion, in line with forecasts. Operating income rose 37% to $4.46 billion, and the operating margin was 34.6%, against the company's own forecast of 33.2%. Netflix said the margin beat was primarily due to the timing of expenses. Diluted earnings were 87 cents a share, up from 59 cents a year earlier and above the 82 cents analysts expected, which matched Netflix's own forecast.
The shares closed Tuesday at $68.69 and were indicated about 6.4% lower near $64.28 at about 5:40 a.m. Eastern on Wednesday.
The guidance
The outlook is where the quarter turned. Netflix guided fourth-quarter revenue to $13.44 billion, up 11.5% and a little below what analysts had expected. It expects a fourth-quarter operating margin of 26.0%, including about 1.2 percentage points of costs from headcount reductions, and earnings of 67 cents a share, also below analysts' expectations.
Full-year revenue is now expected at $51.1 billion, slightly below the midpoint of the prior $51.0 billion to $51.4 billion range. The full-year operating margin target of 31.5% is unchanged.
Two forecasts fell further. Netflix now expects 2026 advertising revenue of about $2.7 billion, down from about $3 billion, citing a slower rollout of some ad product capabilities. Free cash flow for the year is now expected at about $12.0 billion, down from $12.5 billion, mainly because of a real estate transaction expected in the fourth quarter.
Slowing, by the company's own table
Revenue growth has slowed through the year, from 16.2% in the first quarter to 13.4% in the second and 11.8% in the third. The shareholder letter acknowledged "some investor concern about our view hours growth" and said subscriber response to this year's price increases has been consistent with past changes.
That combination, price increases holding while engagement draws questions, is the core of the debate. Netflix said subscription revenue growth is running ahead of its expectations for the year, which suggests pricing is doing more of the work than usage.
Cash going back
Netflix repurchased $4.8 billion of stock in the quarter, up from $1.86 billion a year earlier and about 1.7 times its quarterly free cash flow of $2.88 billion. It ended the quarter with $15.3 billion of gross debt and $8.2 billion of cash. The company also cut about 1,000 jobs last week, about 6% of its workforce, and named Peter Rice chief content officer.
Market implications
One reading is that Netflix is a margin story that the market is mispricing on one soft quarter. Profitability beat its own plan, even if expense timing explains much of the gap, pricing power is intact and the company is returning cash aggressively.
A second reading is that the growth engine is decelerating while the next one is delayed. Revenue growth has slowed in every quarter this year, advertising is now expected to fall short of plan by about 10%, and the expansion of the ad tier to 15 new countries does not begin until March 2027.
What to watch
Engagement data in coming quarters; the timing of the ad product rollout; the fourth-quarter margin after restructuring costs; the pace of buybacks; and first-quarter 2027 guidance in January. Evidence that view hours are growing again would undercut the deceleration argument.