Netflix Plunges After US Revenues Miss, Dismal Q2 Guidance, Hastings Stepping Down As Chairman

After staging a powerful rebound in the past two months, when first weak Q4 earnings sent the stock plunging to multi-year lows, which however was offset by the end of the company’s expensive pursuit of HBO/Warner Bros. Discovery , and which sent the stock almost 50% higher from $75 to $108,moments ago Netflix reported Q1 earnings which were mixed but guidance was especially poor and rekindled the same fears as those unveiled three months ago, and coupled with the news that Reed Hasting was stepping down from the board after 29 years to pursue “philanthropy and personal interested”, NFLX stock tumbled as much as 10% after hours. 

Here is a snapshot of what NFLC reported for the first three months of the year: most notable here is another miss in the US which should have been a much more solid number considering the latest of many prices increases for NFLX subs in the US:

• EPS $1.23 vs. 66c y/y, beating estimates of $0.76
• Revenue $12.25 billion, +16% y/y, beating estimates of $12.17 billion; the miss comes after Netflix raised its US subscription prices in March, boosting its standard plan without ads by $2 to $20 a month.
  • US & Canada revenue $5.25 billion, +14% y/y, missing estimates of $5.28 billion
  • EMEA revenue $4.00 billion, +17% y/y, beating estimates of $3.95 billion
  • Latin America revenue $1.50 billion, +19% y/y, beating estimates of $1.45 billion
  • APAC revenue $1.51 billion, +20% y/y, beating estimates of $1.48 billion
     
• Operating income $3.96 billion, +18% y/y, beating estimate $3.94 billion
• Operating margin 32.3% vs. 31.7% y/y, missing estimate 32.4%
• Cash flow from operations $5.29 billion, +90% y/y, beating estimate $3.29 billion
• Free cash flow $5.09 billion, +91% y/y, beating estimate $2.67 billion

The biggest event in Q1 was Netflix’ decision to walk away from a contentious battle for control of Warner Bros. Discovery in February, netting a nice $2.8 billion termination fee. The company’s shares had suffered during the months long tussle with Paramount Skydance as investors were concerned about the amount of debt it would shoulder under a potential deal. Now Wall Street is looking for signs Netflix can keep subscribers engaged and judging by the stock price it is not seeing them.  

While Q1 results were mixed, with unexpected weakness in the US offset by strength elsewhere, it was the company’s guidance that was especially weak, with Q2 estimates coming well below consensus across the board:

Q2 Forecast

• Sees EPS 78c, missing estimate 84c 
• Sees revenue $12.57 billion, missing estimate $12.64 billion
• Sees operating income $4.11 billion, missing estimate $4.34 billion
• Sees operating margin 32.6%, missing estimate 34.4%

And here is the full year guidance: 

• Sees revenue +12% to +14%
• Sees free cash flow about $12.5 billion, saw about $11 billion, higher than the estimate $12.05 billion
• Still sees revenue $50.7 billion to $51.7 billion, in line with estimate $51.37 billion
• Still sees operating margin 31.5%, missing estimate 32%

Some of the commentary and highlights from the investor letter: 

• Boosted FY FCF outlook due to after-tax impact of Warner Bros. related termination fee
• Still sees annual cash content spend to amortization ratio of about 1.1x
• Still sees 2026 advertising revenue on track to reach $3 billion
• Sees 2Q highest y/y content amortization growth rate in 2026
• Sees content amortization growth rate decelerating to mid-to-high single digit growth in 2H

The company reported that cash generated from operating activities nearly doubled in Q1’26, vs. Q1’25, totaling $5.3BN compared to $2.8B in the prior year. However, much of this increase was thanks to a $2.8B cash receipt from the Warner Bros.-related termination fee. As a result, free cash flow (FCF) rose to $5.1B in Q1’26, up from $2.7B in Q1’25. NFLX now expects 2026 FCF of approximately $12.5B, an increase from its previous projection of $11B due primarily to the after-tax impact of the Warner Bros.-related termination fee.

NFLX ended the quarter with gross debt of $14.4B and cash and cash equivalents of $12.3B. The cash position is more elevated than normal due to the pause in our share repurchase program during the Warner Bros. transaction and the subsequent receipt of the deal. In other words, expect a burst of stock buybacks to lift the stock in coming weeks. 

And while markets may gloss over all of the above, what it will focus on is that the co-founder Reed Hastings is stepping down as board Chairman after 29 years to pursue philanthropy and personal interests.

Hastings’ departure may worry investors given his status as one of the great entrepreneurs of the 21st century. Hastings provided the initial capital to start Netflix as a DVD-by-mail service and replaced co-founder Marc Randolph as chief executive officer in 1999. He guided the company through its battle with Blockbuster and was the driving force behind its move into video streaming. 

Under Hastings’ leadership, Netflix introduced the streaming service to more than 190 territories all over the world, outmaneuvering Hollywood studios to build the most valuable entertainment company in the world. He stepped down as CEO in January 2023, ceding the job to co-CEOs Ted Sarandos and Greg Peters. 

“Netflix changed my life in so many ways, Hastings said in a statement. “A special thanks to Greg and Ted, whose commitment to Netflix’s greatness is so strong that I can now focus on new things.”

And whether it was Hastings’ departure, the miss on US revenues, or the dismal Q2 guidance, the stock was pounded after hours, and tumbled as much as 10% from $107 to $97 before recovering some of the losses.

At just under $100, NFLX stock is unchanged over the past year.