Netflix started the call with its strengths as usual. It raised prices, and churn actually improved… What’s unspoken is that it managed this while engagement in its stronghold, the US market, wasn’t as strong as it would like.
The numbers
Revenue grew from $11.51 billion to $12.87 billion, up 12%, in line with Netflix’s forecast.
Operating income grew from $3.25 billion to $4.46 billion, up 37%.
But the 37% growth is flattered by last year’s $619 million Brazilian tax charge. If we were to strip it out, operating income actually grew about 15%, and the margin went from about 33.6% to 34.6%.
The beat over Netflix’s own 33.2% margin forecast was mostly “the timing of expenses,” so some of those costs land in Q4 instead.
Earnings per share went from $0.59 to $0.87, up 49%. Free cash flow went from $2.66 billion to $2.88 billion, up 8%. Netflix also bought back a record $4.8 billion of stock, and diluted shares are down 3.3% from a year ago.
Guidance came in soft. Netflix trimmed 2026 revenue to $51.1 billion, 0.2% below the midpoint of its previous range, and cut its ad revenue target from about $3 billion to $2.7 billion.
Free cash flow guidance slipped from $12.5 billion to $12.0 billion, mostly because of a real estate deal closing in Q4. The full-year operating margin target held at 31.5%, even after absorbing the cost of the layoffs.
Q4 margin is guided to 26.0%, up from 24.5% a year ago, including about 1.2 points of layoff costs. Q4 is typically Netflix’s lowest-margin quarter because of big launches, live events and marketing.
Netflix guided Q4 earnings per share to $0.67.
The engagement question
When asked about engagement trends in the US, this is what Co-CEO Greg Peters replied:
“I’ll pick up this one and start with just overall engagement, which we think of is the sum total of actual value that we are delivering to members. So this is quality, quantity and variety of viewing. That remains healthy, and it drives our business model. And the best evidence that we’ve got that we’re delivering that value is churn. We’ve got healthy retention in every region. Q3 churn both globally and in the United States improved year-on-year.”
Normally when we talk about engagement, we mean time spent watching Netflix per member… When management starts coming up with fancy definitions, it’s usually because time spent per member is down. That isn’t ideal, but it isn’t the end of the world either.
Netflix no longer reports membership numbers every quarter, which makes 2025 the last full year we can do this sum for. Memberships grew about 8% that year, from 301.6 million to more than 325 million, while view hours grew 1.5%. Spread 1.5% more hours across 8% more members and each member watched roughly 6% less (my math).
If they’re really delivering more “sum total of actual value,” the telltale sign would be that raising prices doesn’t cause members to drop off. Unfortunately, Netflix doesn’t publish exact churn figures, so we have to take management’s word that churn improved.
But I thought it’s more telling to look at their actions. On 15 October, Netflix announced it was replacing chief content officer Bela Bajaria with Peter Rice, Disney’s former TV chief, whom then-CEO Bob Chapek fired in 2022.
And whenever the discussion of engagement pops up, the topic shifts towards how international is performing well.
So there certainly is a content problem in the US home market. I think it comes from two things. The US content slate has been weak in 2026, and it’s pretty competitive out there, especially with YouTube. Nielsen’s July Gauge had YouTube at a record 14.2% of US TV viewing, against Netflix’s 7.8%.
When asked whether Rice would change the content strategy, here’s what Co-CEO Ted Sarandos said:
“Look, our business and our business flywheel are working. There is no need for a fundamental shift in the strategy. We do need better execution in the U.S. our content around the world is largely working as you heard a couple of examples there from Greg. But we see titles across Latin America, EMEA, APAC, driving engagement, subscriber growth, revenue and profit.”
Look at how fast he shifts the discussion to international, where he says they’re doing better. But the revenue numbers don’t fully back that up.
Growth outside the US and Canada slowed in Q3, and it slowed in every region. Stripping out currency swings so the regions compare like for like, Europe, the Middle East and Africa went from 11% to 9%, Latin America from 16% to 12% and Asia Pacific from 18% to 15%. Put the three together and international grew 10.7% in Q3, down from 13.2% in Q2.
Why Peter Rice
Netflix’s stated reason for hiring Rice is talent. Ted Sarandos on the call: “Peter Rice understands talent relations. And in a competitive market, creative talent, have choices of where they want to work and we want Netflix to always be the place that they love to do the best work of their life.”
Three of Netflix’s most valuable English-language creators have left or are leaving in just over a year:
- The Duffer brothers (Stranger Things) signed a four-year exclusive deal with Paramount in August 2025.
- Noah Baumbach (Marriage Story) signed a first-look deal with Warner Bros. on 17 September 2026.
- David Fincher (House of Cards, Mindhunter) is reportedly not renewing his Netflix deal, which expires in 2027.
Theatrical access is one reason. The Duffers and Baumbach moved to studios that release films in cinemas. Netflix is only now adding “a traditional 45-day window for a handful of films,” starting with Greta Gerwig’s Narnia in February.
Budgets are the other. Page Six reported that Netflix’s original movie output fell by more than half after film chief Dan Lin replaced the free-spending Scott Stuber in 2024. It also reported that the main criticism of Lin was his strained relationships with talent.
Its sources said Fincher chose to leave after clashing with Lin over The Further Mis-Adventures of Cliff Booth, starring Brad Pitt. One said he’d had enough of Lin’s “budgetary shackles.” Lin was out on 19 October.
The competition is also getting bigger. Paramount closed its $81 billion takeover of Warner Bros. Discovery on 6 October, so the Duffers and Baumbach now work for the same company, Skydance.
Lin’s discipline helped margins. It also perhaps cost Netflix talent, at a time when Ted admits the US slate delivered “some really solid doubles and triples this year” instead of the home runs that travel.
Rice has the right profile. He ran Fox Searchlight from 2000 (Slumdog Millionaire, Juno, Little Miss Sunshine), then Fox Networks Group from 2012 to 2019, where he did the NFL, MLB, FIFA and WWE rights deals, then Disney’s TV business from 2019 to 2022, with 300-plus shows a year across ABC, FX, Hulu and Nat Geo. He has worked as a producer since, including on 28 Years Later.
Danny Boyle, who directed that film and whose Slumdog Millionaire Rice released at Searchlight, called him “the best executive I’ve ever worked with” when Disney let him go in 2022.
But he only starts on 26 October, and most of next year’s slate was greenlit before he arrived. The shows we can judge him on won’t land until 2027 or 2028 at the earliest. In the meantime, I’ll watch two things… who he hires to run film, and whether marquee talent starts signing with Netflix again.
Ads fell short
In January, Netflix expected ad revenue to roughly double from just over $1.5 billion in 2025. In July, it said it remained “on track to deliver approximately $3 billion in ads revenue in 2026.” Three months later, the target is $2.7 billion.
The letter blamed a “slightly slower than expected rollout of some ad product capabilities.” Greg Peters said Netflix had set “big growth targets” and is “currently a bit behind our aggressive target for the year,” citing “delays in the rollout and partner integrations for some of those new ads products.”
He also argued that aiming high is deliberate: “pushing for this barely achievable deliverables model tends to maximize our overall velocity.”
I don’t fully buy that. Netflix’s own letter says “the guidance we provide is our actual internal forecast at the time we report.” A forecast built on a road map management itself calls “barely achievable” is closer to a stretch target.
This is also Netflix’s second go at ad tech. It launched ads in 2022 on Microsoft’s technology and only started building its own in 2024. Eric Seufert of Mobile Dev Memo points out that Netflix didn’t announce a conversion API, the tool that ties ads to sales, until March 2026.
Viewing isn’t the bottleneck yet. Greg said better ad tools lift “fill rates,” which means selling more of the ad slots Netflix already has.
But over time, ads can only grow as fast as viewing. You need eyeballs glued to the screen.
Greg said the gap between what an ads-plan member and a Standard member bring in is “narrowing,” but gave no number. At US list prices it’s wide: $8.99 versus $19.99, so ads need to earn about $11 a month per ads-plan member to close it.
To be fair, ads are still growing “over 80% this year,” and they’re only about 5% of 2026 revenue. The $300 million shortfall is roughly 0.6% of revenue, and subscription revenue growth “has outperformed our expectations,” according to the letter.
The fix is mostly product. Netflix extended programmatic buying through connected-TV marketplace deals, signed MercadoLibre in Latin America and AdForm in Europe, the Middle East and Africa, and is building measurement tools inside advertisers’ buying platforms. The ads plan also launches in 15 new countries in 2027, starting in March.
This matters most in the US, where Netflix is already deeply penetrated. Growth there comes mostly from earning more per member, through higher prices or more ads. Netflix calls that ARM, average revenue per membership.
Greg said growth in mature markets will “skew towards ARM and advertising growth.” If ads lag, more of the load falls on raising prices.
The next checkpoint is January, when Netflix gives its 2027 guidance.
Valuation and buybacks
Mr. Market didn’t like the guidance. At $65.04 on 22 October, Netflix is about 51% below its record close of $133.91 in June 2025, and trades at 18.1 times forward earnings.
Netflix bought back $4.8 billion of stock in Q3 at an average of about $75 a share, about 15% above where the stock is now. That’s 63.9 million shares, about 1.5% of the company, in a single quarter. Netflix still has $22.3 billion of buyback authorisation left.
Buying back stock at today’s valuation is a great deal for shareholders, if Netflix fixes its engagement problem in the US.
As a shareholder
At the end of the day, let’s talk about this as a shareholder. Financially, the quarter was solid. Margins expanded, free cash flow grew and Netflix bought back more of its own stock than it ever has in a single quarter.
Underneath, it’s less than ideal. The US slate is weak, top talent is leaving and ads came in behind plan.
I said earlier that we have to take management’s word on churn, and for now I’m willing to, because members responded to the 2026 price increases the way Netflix expected and subscription revenue growth beat its own expectations. That’s the telltale sign I was looking for, and it tells me members still think Netflix is worth what it charges.
It’s far from game over. I think this is still a strong company, and I’m willing to give it more leeway because, after all, businesses don’t go up in a straight line.
What I won’t do is read too much into the next quarter or two. Most of the 2027 slate was greenlit before Rice arrived, so a good or bad Q4 says very little about whether the US content problem is getting fixed. Rice was hired to bring talent back, so what I’m waiting for is an announcement that marquee names are signing with Netflix again, especially for the US market.
What would change my mind is US churn rising after the next price increase, or if management becomes silent about churn, that would be a loud message in itself. That would tell me members no longer think Netflix is worth what it charges.
Compound steadily,
Thomas
Most of this report came from a bit of maths on numbers Netflix already publishes, and from paying attention to who it hired and who walked out the door. That’s the habit I wrote The Lunch Break Investor to build: reading a company’s own numbers and deciding for yourself whether a great business has a temporary problem or a permanent one.
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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).