a. Key Points
- Total watch hours continue to grow at a sluggish pace.
- Removing quarterly watch hour growth disclosures.
- Bought back $5B in stock this quarter, marking a new record.
- Revenue still continues to grow at a solid pace thanks mainly to pricing power and ads.
- The free cash flow miss was noisy. Annual free cash flow expectations were reiterated.
b. Demand
- Slightly missed total revenue estimates. 12% foreign exchange neutral revenue growth met estimates. The tiny miss was related to currency headwinds.
- Ad revenue from rising ad load, price hikes and some member growth drove the Y/Y revenue expansion.
- Missed U.S. + Canada (UCAN) revenue estimates by 1.5%.
- Slightly beat Europe, Middle East & Africa (EMEA) revenue estimates.
c. Profits & Margins
- Beat EBIT estimate by 1.5% & beat guide by 2.1%.
- EBIT margin fell Y/Y as expected due to content amortization timing for 2026. They expect slower cost growth for the rest of the year to enable Y/Y EBIT margin leverage. They also reiterated annual EBIT expectations.
- Beat EPS estimate by $0.02 & beat guide by $0.01. EPS rose by 11% Y/Y.
- Missed FCF estimate by 44%. This metric is very noisy on a quarterly basis due to content spend timing.
- FCF was also hurt by cash tax payment timing related to the Warner Bros. termination fee they collected.
d. Balance Sheet
- $9B cash & equivalents.
- $14.5B total debt.
- -2% Y/Y dilution. They bought back nearly $5B in stock this quarter, marking a record. They have $27B left in buyback capacity.