Revenue met estimates and slightly beat company guidance. The beat was driven by slight outperformance in North America, with EMEA slightly below expectations.

Netflix EBIT beat estimates and guidance by 4.5%. Its 34.6% margin was also about a point and a half better than expected. This helped power $0.87 in GAAP EPS compared to $0.82 estimates and guidance. Finally, free cash flow was 8.2% below expectations.

A lot of the profit upside was due to favorable expense timing. A small portion of it was tied to the slight revenue outperformance vs. its own guidance.

For Q4, revenue guidance missed by 1% and represents 11.5% Y/Y growth (11% FX neutral). This means full year revenue guidance is ever so slightly worse than the full year guide leadership offered at the beginning of the year (largely due to the aforementioned ad product delays).

EBIT guidance missed estimates by 6%. Importantly, this includes a 120 bps impact from its headcount reductions. Excluding this item, EBIT would have missed estimates by 1.8%. $0.67 EPS guidance missed estimates by $0.06 ($0.03 miss excluding headcount reductions). Finally, NFLX lowered annual FCF guidance from $12.5B to $12.0B “due primarily to the expected closing of a real estate transaction in Q4.”

For 2027, Netflix did not give a formal outlook but it did strongly hint at 10%+ revenue growth being their goal:

NFLX trades for 23x forward FCF. FCF is expected to grow by 33% this year, 7% next year and 17% the following year. It also trades for 18x forward EPS. EPS is expected to grow by 41% this year, 6% next year and 19% the following year.

U.S. Performance:

Leadership was blunt about growth in the USA, which I appreciated. It started with the comments from Co-CEO Ted Sarandos a few weeks ago, which included wanting to grow faster overall. That messaging was prevalent throughout most of the call as well, with Sarandos saying the U.S. is “not growing as fast as it could or as fast as we’d like.” Revenue in North America is still growing at a healthy 11% Y/Y clip, but that comes with an acknowledgement from management that engagement trends don’t look quite as good as they want them to. Nothing alarmingly bad or terrible… just not as robust as desired on the watch hour growth front. For other similar entertainment businesses, that kind of trend was a precursor to slower revenue growth. It’s the leading indicator and an indicator Netflix is determined to brighten.

There’s no profound shift in strategy coming to make that happen. They’ll continue to predominantly lead with 1st-party scripted content while complementing the library with licensing deals with companies like AMC and Disney. And they do think the Q4 slate has a good chance to foster some better patterns in this market.

While this engagement metric for the U.S. business could look better, another still looks encouragingly great. Churn remains best-in-class and improved Y/Y to elongate that lead vs. the field. Price hikes in the USA (and the UK) this year also went well, reinforcing conviction in the strong value prop that existing members are still receiving. That is all great news and shows that people are still finding enough of what they need to stick around more frequently than they do with any substitute. It also hints at Netflix being right about live sports changing the way we should view watch hour growth. While those titles contribute fewer watch hours per member, they keep people in the door and overindex in terms of delivering membership growth. That is why we continue to see Netflix do more in this arena, as they see how vital it has been for their competitors and know how valuable pairing this content with their library is.

Advertising Business:

This portion of the business is why Netflix will fall just short of its annual revenue target. They set out on a historically aggressive schedule to build an end-to-end ad-tech stack, and they’ve made an admirable amount of progress in a short amount of time. Still, they’re not perfect and a few product launches have taken a bit longer than expected. This impacts their pace of product type, targeting and measurement improvements, which all have a near-term impact on advertiser demand. Not overly important for the long-term trajectory but can have an impact from quarter to quarter and did lead to Netflix revising 2026 ad growth from ~100% Y/Y to 80%+ Y/Y (from $3B to $2.7B in 2026 ad revenue). They’re confident in the path of this business and its clear product roadmap going forward.

Relatedly, the average revenue per member (ARM) gap between ad-based subscribers and ad-free subscribers is shrinking. There’s a wonderfully strong correlation between improving advertiser KPIs through tangible, visible service improvement and seeing ad-based ARM climb.

Performance Everywhere Else:

Current trends outside of the USA look healthy. Retention was healthy in every region, and global churn improved Y/Y and was better than expected. There also wasn’t any mention of engagement issues anywhere besides the States. Instead, they celebrated the building success of their TF1 partnership in France, which is proving to be incremental to existing viewership and showing the power of incorporating the right 3P content at the right time. They’ll continue to allocate ~95% of their spend to 1P content, but this is another great lever that they’ll keep pulling. Other highlights include 24% view hour growth in India, powering almost 20% Y/Y revenue growth in that highly important market as well. NFLX leadership does not see better international performance as a sign of easier competition or a more favorable demand backdrop than in the United States. Instead, they think they’re simply doing a better job on the localized content front, and they need to match that success in the U.S. too. And again, they think they will.

More Notes:

My views of this company remain unchanged. I think Netflix is an iconic enterprise. It disrupted a gigantic industry with levels of pace, precision and success that should be studied in textbooks for generations to come. Their financial trends also still look reasonably good. If NFLX can sustain 10%+ growth in 2027 like they’ve now hinted at, I don’t see a ton of downside risk from here. That revenue result would likely ease some of the current concerns many have over the pace of growth slowing, considering 11% constant currency (CC) growth is their worst result in 3 years.

On the other hand, this isn’t a name I’m currently interested in owning, even at multiples lower than they’ve been in years. This competitive backdrop is as daunting as they come. Alphabet, Amazon and Apple are all pushing hard for streaming market share and all have world-class balance sheets to fund library build-outs. They don’t rely on streaming libraries as profit generators like Netflix does either. They are able to rationally act in ways that Netflix cannot, operate at lower margin and undercut them for as long as they feel like it. That looming threat is not going away… it’s becoming increasingly pressing. This is especially true considering ad businesses will become increasingly reliant on entertainment in a world where agents do the shopping and sponsored listings are no longer shown to the buyer. I think this will cap potential market share gains and stock upside from here. At this time, I’m not interested in owning it.