So this is the quarter Netflix reached into Warner Bros’ cookie jar and pulled out $2.8 billion in termination fees, after Ellison junior decided he wanted it more.
Smart move, in my opinion. Only time will tell, but it gives me confidence that this management team is using its head over its ego on M&A. Co-CEO Ted Sarandos framed it well on the call:
“The most important benefit of this entire exercise though was that we tested our investment discipline. And when the cost of this deal grew beyond the net value to our business and to our shareholders, we were willing to put emotion and ego aside and walk away.”
The Headline Numbers, and the Cleaner Numbers Underneath
Looking at the financials, Netflix delivered another solid quarter. But the reported numbers are flattered by the one-time $2.8 billion termination fee, so let me separate the noise from the signal.
Revenue grew 16% to $12.25 billion, driven by membership growth, higher pricing, and increased ad revenue. Operating income rose 18% to $3.96 billion, with operating margin expanding 60 basis points to 32.3%. Both came in slightly ahead of management’s guidance.
Reported diluted EPS jumped 86% to $1.23, and reported free cash flow nearly doubled to $5.09 billion. But these are enjoying a one-off boost from the $2.8 billion termination fee, which Netflix recognized in “interest and other income.”
Strip out the after-tax fee and underlying EPS was roughly in line with management’s $0.76 guide.
Adjusted free cash flow (FCF) came in at approximately $2.29 billion, actually down 14% from $2.66 billion in Q1 2025.
Adjusted free cash flow came in at approximately $2.29 billion, down 14% from $2.66 billion in Q1 2025.
The FCF decline was large because cash content spend jumped 37% year-over-year to $4.85 billion, while content amortization (a non-cash expense) grew only 10% to $4.22 billion. Content spend isn’t a linear trend; it depends heavily on the content pipeline. So for Netflix subscribers, expect more major hits landing in 2027.
The Black Box Engagement Metric
Last quarter, Netflix introduced a new headline KPI: their “primary internal quality engagement metric.” It hit an all-time high. This quarter, they emphasized it again, with another all-time high in Q1 2026.
When probed on how this metric is calculated, Co-CEO Greg Peters said:
“I am not going to detail how we compose our metrics because they often take quite a time and quite an effort to actually build them and to prove them out. I’m sure our competitors would like to get that cheat sheet, but we’re not going to give it to them.”
Fair enough. But this matters because it’s a deliberate reframe of how Netflix wants to be evaluated.
For years, the discussion around Netflix has centered on view hours and total engagement. The new metric is some composite that captures what management calls “value delivered.” It’s predictive of retention. Beyond that, it’s a black box.
Peters also noted that view hours in Q1 grew at a similar rate to the second half of 2025, even with the Winter Olympics taking 17 days of competing streaming attention. So the volume metric is still healthy. But the quality metric is where management wants the conversation now, and that’s where they’ll allocate capital.
What’s Actually Driving Engagement
The clearest signal of “all engagement is not created equal” came from the World Baseball Classic in Japan. Sarandos on the call:
“The WBC drove the largest single sign-up day ever in Japan, and Japan led our Q1 member growth around the world. And Japan had its highest quarter of paid net adds in our history… we got to flex our new muscle here really, which was streaming multiple games concurrently.”
31.4 million viewers. The most-watched program ever on Netflix in Japan. Largest single sign-up day in country history. Highest quarterly paid net adds Japan has ever delivered.
Netflix has been in Japan for over a decade, and a single live event drove the largest paid net-add quarter ever there.
What stood out further was that this wasn’t a one-off spike. There was a halo. Sarandos again:
“The success of One Piece on the heels of the WBC, too. So it was a really great time for the content and it all just came together with that gigantic halo of the WBC.”
And on the infrastructure side: this isn’t the Netflix that fumbled the Jake Paul vs Mike Tyson stream. They were running multiple WBC games concurrently and the infrastructure held. They’ve grown into the live-streaming game.
The Podcasts Insight That Has Bigger Implications
This one is worth pulling out separately, because I think it’s underappreciated.
Netflix is launching video podcasts. Sarandos described what they’re seeing in early data:
“What we’re seeing is some data that would indicate that we’re gaining incremental engagement to the platform… 2 things really jump out. One is the daytime viewing. So podcast consumption indexes to daytime hours on Netflix, which allows us to capture a time where we historically have less engagement during the day. The other one is that it indexes much more mobile.”
Netflix has been structurally weak in two places: daytime viewing (people watch Netflix mostly in the evening) and mobile (Netflix has historically been a TV-first product).
Notice anything? These two weaknesses overlap exactly with YouTube’s strengths.
So when Sarandos says podcasts “index” on daytime and mobile, he’s saying: podcasts are filling the engagement gaps where YouTube currently beats us.
That’s a meaningful strategic move. Whether it ends up working depends on execution and library quality, but the wedge is well chosen.
Games: Retention, Not Acquisition
On games, management has long talked about the size of the addressable market. The reality is more modest. Co-CEO Greg Peters:
“We have learned that gameplay can have a positive impact on member retention as well as driving acquisition, although the observed effect of that acquisition has really been small to date.”
So games aren’t pulling new subscribers in meaningfully. But they may be helping existing ones stay. Given Netflix’s churn-driven economics, retention improvements compound nicely if they hold up over time.
Pricing Power and Retention
Netflix raised US prices in Q1, and Co-CEO Greg Peters said the early read is “in line with our expectations or similar to the performance that we’ve observed historically with price changes in the United States.” Spain price adjustments were announced today as well.
Same playbook, same outcomes. And the pricing power shows in the retention numbers. CFO Spence Neumann:
“The retention that we’re seeing in the business… we saw it across the board this quarter. Every region was better year-over-year.”
Customers are finding value in their Netflix subscription, so much so that retention improved despite price increases. Peters added more context:
“In the U.S. right now, Netflix subscribers are paying the least per hour of viewing compared to other SVOD offerings. So in some cases, you’d have to pay 2x per hour to get a competitive service. And our ads plan at $8.99 in the United States, we think, is a great entry point, highly accessible and an incredible value.”
Looked at on a price-per-hour basis, Netflix remains the best deal in streaming.
Ads: The Next Leg of Margin Expansion
The advertiser base hit 4,000+ globally, up 70% year-over-year for 2025. Programmatic is on track to become more than 50% of non-live ad revenue. The ads tier represented over 60% of all Q1 sign-ups within ads countries. Full-year ad revenue is still tracking to roughly $3 billion in 2026, doubling from 2025.
Three billion isn’t material to the overall business yet. But the unit economics of ad-supported subscribers, combined with the price-anchor effect of having a cheap entry tier, makes this a structurally important leg of the next several years of margin expansion.
Acquiring Ben Affleck InterPositive
While Netflix walked away from the much larger Warner Bros deal, they did spend $585.7 million in Q1 on a different acquisition: InterPositive, the filmmaking technology company founded by Ben Affleck that develops AI-powered tools built by and for filmmakers. The cash hit the books in Q1 and shows up clearly on the cash flow statement under acquisitions.
Sarandos framed the rationale:
“With our acquisition of InterPositive, we think it accelerates our GenAI capabilities because it’s a proprietary technology that was created specifically for filmmakers and specifically for filmmaking and that’s different than other GenAI video applications.”
A useful framing detail from CFO Spence Neumann: the InterPositive acquisition was already in the original 2026 guide, sitting inside the $275 million of M&A-related expense management had baked in back in January. So this isn’t a guide-busting surprise. It was a planned move.
Regional Performance: EMEA Worth Watching
The geographic story this quarter is mostly strong, with one yellow flag.
UCAN grew 14% (FX-neutral, same as reported). LATAM grew 18% on a constant currency basis. APAC grew 19%, with Japan posting its highest quarter of paid net adds in company history. CFO Spence Neumann pushed back on this being a one-event story:
“APAC was our strongest FX-neutral revenue growth market for the quarter and it wasn’t just because of this. We had a great quarter in India, really strong quarter in Korea, Southeast Asia has showed strength.”
EMEA FX-neutral growth has trended down across the past five quarters: 16% → 16% → 15% → 15% → 12%. Management didn’t address it directly on the call. It’s still healthy growth in absolute terms, and the deceleration could be FX hedging timing or normal market maturity in the U.K. and Germany. But it’s a trend worth watching.
Reed Hastings Steps Off the Board
The other governance development this quarter: founder and Chairman Reed Hastings is not standing for re-election to the board when his current term expires at the June annual meeting. He’s leaving to focus on his philanthropy.
Reed has been off operational duties for years, so day-to-day execution doesn’t change. Co-CEOs Ted Sarandos and Greg Peters have been running the company since January 2023. But Reed has been Netflix’s cultural conscience for nearly three decades, the founder who built the willingness to cannibalize a working business for a better one. DVD to streaming. Licensed to original. No-ads to ad-tier.
That instinct is what’s allowed Netflix to execute pivot after pivot without losing financial discipline.
Sarandos’s tribute on the call was unusually personal:
“Reed is an economist and an engineer in his head, but he’s a teacher in his heart. And Reed not only shared the spotlight a real rarity in Hollywood, by the way, he pushed me into the spotlight and celebrated the wins and coached through the misses and in short, made me the executive that I am today.”
For me personally, I’m not worried about cultural drift. Reed has been building the leadership cohort below him for over two decades. Sarandos and Peters have absorbed enough of his operating philosophy to carry it forward.
Buybacks Resumed
One last capital allocation note. Netflix paused buybacks during the WB negotiations to accumulate cash for the deal. After declining to raise their offer for Warner Bros., they resumed — repurchasing 13.5 million shares for $1.3 billion during the quarter.
With $6.8 billion remaining on authorization, $12.3 billion in cash on the balance sheet, and the $2.8 billion WB termination fee now in hand, Q2 buyback activity should be substantial. Management has guided that capital allocation philosophy is unchanged: reinvest in the business, maintain liquidity, return excess cash to shareholders through repurchases.
The math is meaningfully better than it was six months ago. The stock has come off its summer 2025 highs notably — buying back shares at current prices is a much better use of capital than buying back at the peak of the WB-deal-anxiety period would have been.
My Take
For me personally, nothing material in this quarter changes the thesis. The discipline shown on Warner Bros, the continued execution on live events, how sticky the service is despite price increases, and the ad ramp all reinforce what I already believed about this business.
I’m watching the podcast segment closely. If Netflix continues to see incremental engagement outside their usual viewing hours, that’s a meaningful expansion of the value proposition. For now, they’re sticking to the crawl, walk, run framework, and I’m fine with that pace.
Disclaimer: This research report constitutes the author’s personal views only and is for educational purposes only. It is not to be construed as financial advice in any shape or form. From time to time, the author may hold positions in the below-mentioned stocks consistent with the views and opinions expressed in this article. Disclosure – I hold a position in Netflix at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION).