Netflix Q1: Record Profit, but $2.8 Billion Came From Walking Away From Warner Bros.

Netflix reported first-quarter revenue of $12.25 billion, up 16% year over year, and net income of $5.28 billion -- nearly double the $2.89 billion it earned a year ago. Diluted earnings per share hit $1.23, crushing the $0.76 consensus estimate by 62%.

Shares fell roughly 10% in after-hours trading.

The gap between the headline beat and the market's reaction comes down to a single line item: "interest and other income," which swelled from $50.9 million a year ago to $2.85 billion. That's the $2.8 billion termination fee Netflix received after declining to raise its offer for Warner Bros. Discovery.

The Numbers

Strip out the WBD termination fee, and the underlying business still grew -- operating income rose 18%, and revenue growth was broad-based across every region. But net income and free cash flow, the two metrics that look most impressive, were each boosted by roughly $2.8 billion that will not repeat.

Why the Stock Dropped

Three factors weighed on shares despite the beat:

Decelerating guidance. Netflix forecast Q2 revenue of $12.57 billion, representing 13% growth -- a step down from Q1's 16.2%. The company expects Q2 operating margin of 32.6%, below Q2 2025's 34.1%. Content amortization will be "first-half weighted" before decelerating in the second half.

The fee flattered the bottom line. Analysts parsing the results can see that operating income -- the line that excludes the WBD fee -- beat by a smaller margin. The $1.23 EPS versus the $0.76 estimate looks like a blowout until you account for a one-time $2.8 billion windfall.

Reed Hastings is leaving. The co-founder and chairman informed the board he will not stand for re-election at the annual meeting in June, ending a 29-year run at the company he built from a DVD-by-mail service into a $300 billion streaming platform.

Hastings' Exit

Hastings, who stepped down as co-CEO in January 2023 and has served as executive chairman since, said he would focus on "philanthropy and other pursuits."

"Netflix changed my life in so many ways, and my all-time favorite memory was January 2016, when we enabled nearly the entire planet to enjoy our service. My real contribution at Netflix wasn't a single decision; it was a focus on member joy, building a culture that others could inherit and improve."

Co-CEO Ted Sarandos called Hastings "a singular source of inspiration" and "a true history maker." Co-CEO Greg Peters said Hastings "will always be Netflix's founder and biggest champion."

The Warner Bros. Deal That Didn't Happen

The shareholder letter addressed the failed acquisition directly: "Warner Bros. would have been a nice accelerant for our strategy, but only at the right price." Netflix declined to raise its offer, triggering the $2.8 billion termination fee.

The company resumed share repurchases after pausing the program during the WBD transaction, buying back 13.5 million shares for $1.3 billion in Q1. It has $6.8 billion remaining on its existing authorization.

Netflix raised its 2026 free cash flow forecast from $11 billion to $12.5 billion, primarily due to the after-tax impact of the termination fee.

What's Working

Beyond the headline numbers, several operational metrics stood out:

• Ad business: The $8.99 ad-supported plan accounted for over 60% of new signups in ad countries. Netflix now has 4,000+ advertising clients, up 70% year over year, and remains on track for $3 billion in ad revenue in 2026 -- double 2025.
• Live events: Netflix aired 70+ live events in Q1. The World Baseball Classic in Japan drew 31.4 million viewers and triggered the platform's largest single-day signup in the country. BTS The Comeback Live reached 18.4 million viewers across 80 countries.
• Regional growth: APAC led with 20% revenue growth (FX-neutral: 19%), followed by LATAM at 20% FX-neutral.

Full-year 2026 guidance is unchanged: $50.7-51.7 billion in revenue (12-14% growth) with a 31.5% operating margin target. Netflix says it accounts for roughly 5% of global TV viewing and has penetrated less than 45% of its addressable market of broadband households.

Regional Revenue