For Q1, revenue guidance missed by 0.7%, EBIT guidance missed by 5.8% & the $5.58 EPS guide missed by $0.39. Q1 weakness came from timing of price hikes and advertising seasonality. To make this even less concerning, the full year guide was quite good:

For 2025, Netflix raised revenue guidance by 1.1%, which beat expectations by 0.9%. This would be positive regardless of the macro backdrop, but it’s even more impressive when considering that context. Since the company’s most recent guidance, FX headwinds have led to an incremental $1 billion in revenue headwinds after hedging. Without this, annual revenue guidance would have been raised by 3.2%. FX headwinds also negatively impact its profit generation. But? It still raised annual EBIT margin guidance from 28% to 29%, which beat 28.4% margin estimates by 60 basis points (bps; 1 basis point = 0.01%). In EBIT dollar terms, this represents a 4.9% raise to previous guidance and a 3.2% beat vs. consensus estimates. Finally, its $8 billion FCF guide missed estimates by $800 million. This guide includes $800 million in unique tax charges mentioned for the first time this quarter. Without this headwind, FCF guidance would have met estimates.

There was some skepticism from a few people about how this annual guidance could be so positive while Q1 was slightly negative. Are they just too optimistic about Q2-Q4? I don’t think so. I think the timing & taxation items make a lot of sense here. I also don’t get worried about this quality team effectively guiding results. They love to underpromise and also run a subscription business with fantastic churn dynamics and decades of operating history. Visibility should be as good as it has been in previous years. If there’s a risk to this annual guide, it’s more likely to the upside than the downside.

Other 2025 guidance notes:

EPS is expected to compound at a 20% clip for the next two years. FCF is expected to compound at a 27% clip for the next two years. Estimates should rise in the coming days following these results.

The Netflix team told us that internal expectations for its Q4 content slate were quite high. Squid Game and Carry-On were just 2 of many items expected to garner significant attention. And? This batch of content did even better than expected. That can be directly seen in it shattering consensus subscriber estimates. The team was bluntly asked if this outperformance was simply a byproduct of having the Jake Paul-Mike Tyson fight and its first two NFL games. The short answer is no. While these titles did lead to positive impacts to top-line metrics, that effect was quite small. Most of the outperformance came from broad-based content success across all categories. Live programming was simply a piece of that compelling puzzle, and furthermore, the quality of these subscribers is encouragingly similar to the rest:

“And what's really been most encouraging is that the retention behavior of those folks who did come in for [the NFL games and the fight] look a lot like the folks who come in for all of our other big titles… they stuck around for [other content]” 

Co-CEO Ted Sarandos

Squid Game season 2 is on pace to be one of its most watched seasons ever; Carry-On became one of its top 10 films ever; Jamie Foxx’s standup was one of many successful releases within that genre as Netflix reinvigorates focus there; two new titles (Bridgerton & Fool me Once) joined the company’s top ten list for most watched seasons all time. A Man on the Inside had a phenomenal debut and was named a top 10 TV series for 2024 by the American Film Institute; Netflix secured more Golden Globe nominations and wins than any other competitor this year… and yes… The Paul-Tyson fight and NFL games set new streaming audience records.

This far-from-exhaustive list of Netflix content wins in Q4 loudly says one thing: Engagement levels are stellar. Specifically, it remains around 2 hours per household per day despite paid sharing restriction headwinds that cut users per account. When eliminating this factor, engagement levels continue to modestly grow. That pattern is expected to endure in the years ahead. Understandably, more engaged users with more to watch will cancel their plans less and less frequently. In turn, that raises revenue quality, visibility and Netflix’s capacity to invest in more great content to keep spinning this flywheel.

Wednesday, Stranger Things and a boatload of more content are coming in 2025 to, Netflix thinks, keep this momentum humming.

With engagement a key focus in the years ahead, one of the best things Netflix can do is create more cancellation objectors. To accomplish this, it needs to continue catering to broad inter-household interests in addition to simply creating great content. 

If it has a great horror film… maybe your kid won’t let you cancel that plan. If it has a cool scripted drama… maybe your other kid won’t let you cancel. You get the idea. By having something for everyone, Netflix raises the likelihood of always having that one member who just will not accept a cancellation. These examples above are how Netflix has created more objectors to date, but there are more areas where it can support this formula even more. We’ve already spoken about sports and live content, but I wanted to mention a few more categories here.

While Netflix has done a lot in children’s content, it can do more to turn that genre into a powerful cancellation objector lever. Along these lines, next week, Ms. Machel will debut on Netflix. For those of you who do not know Ms. Rachel, she’s kind of a big deal (said as Ron Burgundy from Anchorman). My niece and nephew are hooked on her children’s show and I know they are far from the only ones. I think this can be as impactful as Cocomelon has been for Netflix, which is highly notable.

For yet another avenue to deepen subscriber household loyalty, its dive into gaming is going well so far. The Squid Game Unleashed title was number one on app stores for action games across 107 countries. Positive impacts to engagement and retention stemming from it have already been observed. 

Going forward, Netflix will focus on four areas for gaming expansion. Licensing hit titles like Grand Theft Auto is one area, but I find the other three more enticing. First, it plans to keep mining its vault of intellectual property (IP) to deepen the multi-faceted engagement its subscribers have with brands like Stranger Things. This is something Disney has done fabulously well over the years (with partner-created games and parks) to embolden customer passion and engagement. Netflix should be able to mimic this over time. Secondly, the company plans to add party games, which it views as an update to board game nights. Hopefully, I’ll still be able to play Catan. Lastly, the company will debut more children’s games, with no in-app purchases or advertisements to create a safer environment for entertainment. I think all of this work will materially improve its world-class retention levels and create another avenue for top-line growth down the road.

Again… Catering to more interests… creating more engaged users… keeping those users for longer… funding more content… spinning the flywheel. 

Netflix thinks its total addressable market (TAM) is just 6% penetrated from a revenue standpoint and 10% from a screen time point of view. These are key areas to keep boosting market share.

Ad-funded plans continue to support a wider, more accessible top-of-funnel and incrementally support membership growth as planned. This quarter, 55% of new members picked ad-supported plans and total ad-based members rose 30% Q/Q. This follows 35% Q/Q growth in the last report and a continuation of rapid scaling. To that end, Netflix is on pace to reach a critical mass of ad-supported subscribers this year. That’s a vital prerequisite for building advertising products that actually provide value and fetch demand. 

The next step, which will take much longer, is giving these ad buyers better tools to make more informed decisions. It has already made some progress here, which helped it beat internal advertising revenue forecasts for the quarter. For example, its internal advertising exchange is now fully launched in Canada. This “gives buyers more flexibility” on what to purchase and helps them understand what they should want to purchase via better targeting and reporting. It also makes campaign activation more seamless to take more friction out of the buying process.

The Canada launch also significantly expands partner integration by plugging into large buy-side players like The Trade Desk and Google to ensure customers can use the software they know and love. This work should eventually lead to more relevant ad placements… which means higher willingness to pay from buyers… higher revenue per impression for Netflix… and lower average ad-load for consumers. It helps everywhere. Again, there is much more work to do here. And? Progress is palpable. Netflix also doesn’t think this work will be challenging or confusing. It sees the path as wonderfully concrete and knows exactly what it needs to do. Just give it time.

Following the successful Canadian launch, this internal ad platform will launch in the USA this spring and in the rest of its 12 ad-supported countries this year.

In other ad-related news, engagement levels for these members were called healthy and watch time is comparable to ad-free plans. This should mean the fantastic retention numbers Netflix boasts won’t be negatively impacted by this proliferation. I keep saying that Netflix’s churn numbers are very good, and I should quantify that instead of making you take my word for it. Depending on your source, the monthly churn rate for Netflix is between 1%-3%. The industry mean is somewhere around 5%. My newsletter, which enjoys retention numbers well above average per Stripe (thanks readers), has about a 6% monthly churn rate. Netflix is just in a league of its own here.

Considering the hefty investments in bolstering and extending the content library, Netflix continues to deliver more value to subscribers. Based on this, it announced its intent to raise prices across “most plans in the USA, Canada, Portugal and Argentina. All price hikes in 2024 “went smoothly,” and this should be more of the same. 

The Carry-On film’s great success reinforces the idea that Netflix doesn’t need theaters to create buzz. Per leadership, producers on that film told them that the Netflix release felt the same as theatrical releases for hit films. That’s notable and was despite very little marketing spend. While Netflix will save most of its titles for its subscribers first, that won’t be true for everything. Like it has done in the past, the company is initially releasing its Narnia title to iMax theaters. It does things like this periodically to qualify for awards and film festivals, and also because of the unique viewing experience this provides.

Planned upgrades to the homepage to improve subscriber conversion have not been fully implemented yet. This should be a modest tailwind at some point this year. 

The LA Wildfires are not having any material impact on its business or content schedule.

This was another elite quarter from an elite company and an elite team. The only negatives to talk about (and you really need to get picky) are quarterly guidance misses based on FX headwinds, special taxes and business timing. The full-year guidance was stellar despite FX headwinds getting significantly worse and the subscriber momentum is perhaps even more impressive. These two things are what actually matter in my mind. Netflix spent the last two years greatly accelerating its growth while bringing its EBIT margin from 18% to 27%. That is something only world-class companies can achieve, and that is what Netflix is. I view live programming, kid’s content and gaming as three clear, early-innings growth avenues to join advertising and its core niche. The runway for all of these endeavors, even the most mature, remains quite long. 

I think the PEG will be somewhere around 1.7x-1.8x after this report and coinciding estimate revisions. Is that overly cheap? No. But thriving companies with decades of masterful execution rarely are. Well done, Netflix. Your investors should be “chilling.”