Netflix leans into scale – and Warner Bros – as margins fatten and ads accelerate

Financial performance: growth with discipline

Netflix's management came to this call intent on one message: the business is growing faster, and more profitably, than many had assumed – and that is before Warner Bros. and HBO are folded in.

For 2025, co‑CEO Greg Peters said the company "met or exceeded all of our financial objectives":

• Revenue grew 16% year on year.
• Operating profit grew roughly 30%, implying solid margin expansion.
• Free cash flow was "key" and robust, though the company did not put a precise number on 2025 in the discussion.
• The ad business grew 2.5x in 2025, with management targeting another near‑doubling in 2026 to about $3B of revenue.

Looking ahead to 2026, Netflix guided to:

• Revenue of $51B, +14% YoY, above Street expectations at the midpoint.
• Operating margin of 31.5%, about +200 bps YoY. Excluding an estimated 50 bps drag from M&A‑related costs, underlying expansion is closer to +250 bps, in line with the company's multi‑year track record of roughly 2 pts of margin gain per year.

The margin story is as much about restraint as reach. CFO Spencer Neumann repeatedly stressed that content spend will continue to grow slower than revenue, allowing content investment to remain the primary engine of margin expansion. He also reaffirmed the 2024 operating margin target of 26% (up from a prior 25% guide and up around 500 bps YoY), while holding to ~$6B of free cash flow for the year, despite currency and tax timing noise.

On a pro forma basis, once Warner Bros. Discovery's assets are folded in, Netflix estimates that about 85% of revenues in the combined entity will still be drawn from the "core business we're in today" – streaming subscriptions and related advertising – underscoring management's framing of the deal as a strategy accelerant rather than a business pivot.

Revenue drivers: members, pricing and a maturing ad engine

Neumann broke 2026's revenue engine into familiar components:

• Membership growth, driven by content breadth and better product‑market fit in markets such as India.
• Pricing, governed by the now explicit doctrine that Netflix raises prices only when it is clearly delivering more value (and can see that in acquisition, engagement and churn data).
• Advertising, where revenues are expected to roughly double to about $3B in 2026, is a rising but still secondary contributor.

On churn and engagement, the signals are unambiguously positive. Churn improved year on year in recent quarters, and management claims Netflix's retention remains "among the best in the industry". Customer satisfaction, they said, is at an all‑time high.

The paid‑sharing crackdown has now been fully operationalised into the product and pricing stack rather than treated as a one‑off initiative. Peters stressed it is now "just a standard part of our product experience", one lever among many for "value translation" – converting improved service quality into actual revenue.

Engagement metrics are more nuanced. Total viewing hours in 2025 rose 2% YoY, adding around 1.5 billion hours, up from 1% growth the year before. The mix matters:

• Viewing of Netflix's branded originals increased 9% YoY in 2H 2025 (versus +7% in 1H) and now represents roughly half of all viewing.
• Second‑run/licensed title viewing fell, reflecting a normalization after the 2023‑24 strike window, when Netflix bulked up on licensed content while Hollywood production stalled.

Yet what the company increasingly wants investors to focus on is "quality of engagement" rather than raw hours. Netflix has developed an internal quality metric that hit an all‑time high in 2025, and which management argues correlates more closely with acquisition, retention and pricing power.

Peters also cautioned against reading too much into headline hours per member, given structural mix shifts. In lower‑TV‑consumption markets such as Japan, subscribers watch roughly half to two‑thirds the TV minutes of Americans, so growth in these territories inherently drags on global per‑member hours while still being economically attractive.

Content economics: 10% amortization growth, global hits from local roots

On the cost side, Netflix expects content amortization to rise about 10% year on year in 2026, off a lighter first‑half 2025 base, as the slate normalizes from last year's back‑half skew. The company intends to maintain its cash‑to‑amortization ratio around 1.1x, preserving cash discipline even as it leans into new categories.

Crucially, the company is now running what amounts to a distributed global studio system:

• Local teams in India, Korea, France, Spain, the UK, Latin America and elsewhere are tasked with super‑serving domestic audiences first, with the upside that true local hits may break out globally.
• That model is now producing a stream of shows where more than half of local members watch the title, even as it travels worldwide. Examples cited include:
  • "Baby Reindeer" and "The Gentlemen" from the UK, both Emmy‑nominated and watched by over 50% of UK subscribers.
  • "Under Paris" in France, with about 90m views globally and more than half of French members watching.
  • "The Osunte Case" in Spain and "Queen of Tears" in Korea, each commanding majority reach in their home markets and strong viewing abroad.

The architecture is intended to smooth out what Sarandos called the natural "hot streaks and cold streaks" of creative industries: a many‑headed pipeline of local slates reduces reliance on any one region or genre.

The forward‑looking slate remains dense, though management avoided issuing numbers. For investors, the key takeaway is less the name‑checking of upcoming seasons – from "Stranger Things" and "Wednesday" to "Squid Game" – and more the reassurance that $17B of 2024 cash content spend (a figure reiterated on the Q2 2024 portion of the transcript) already fully incorporates live sports, live events, games and podcasts. As Neumann underlined, that budget is intended to grow more slowly than revenue over time.

Warner Bros. and HBO: vertical deal, horizontal ambitions

If Netflix's early life was defined by disrupting studios, its next phase may rest on running one of Hollywood's most storied.

Both Sarandos and Peters pushed back against the idea that the acquisition of Warner Bros. and HBO represents an admission of stagnation. Peters insisted that the company's organic engagement and growth prospects remain robust; the Warner deal is framed as "an accelerant to our strategy", not a rescue.

What changed in due diligence?

• Theatrical film business: Netflix has long debated whether to build its own theatrical distribution arm, but repeatedly chose to allocate capital elsewhere. Warner brings a "mature, well‑run theatrical business" with over $4B in global box office, which Netflix now intends to "maintain and further strengthen". Management is comfortable with 45‑day theatrical windows before films head to streaming.
• Television studio: Owning a healthy, scaled TV production business allows Netflix to continue supplying third parties even as it feeds its own platforms, deepening relationships with producers and developers and diversifying revenue streams.
• HBO brand and streaming footprint: HBO is described as "an amazing brand" that "says prestige TV better than almost anything". Integrating HBO gives Netflix scope to re‑architect its plan structure, layering HBO's library and new output alongside Netflix originals, with the help of Netflix's global distribution reach and streaming expertise.

From a regulatory perspective, Sarandos painted the transaction as primarily vertical: Netflix is acquiring upstream content and IP rather than eliminating a direct streaming rival of similar scale. He emphasised:

• Netflix currently lacks the three core Warner businesses (theatrical film, TV studio, and HBO's branded streaming IP).
• The deal is "pro‑consumer, pro‑innovation, pro‑worker, pro‑creator and pro‑growth", expanding rather than consolidating production capacity and creative jobs.
• The wider TV and video landscape is already highly fragmented, with YouTube, Amazon, Apple, linear networks and social platforms all competing for talent, attention and ad dollars.

For investors, the core question will not be philosophical but financial: can Netflix extract synergies without allowing Warner's cost base or theatrical cyclicality to erode its hard‑won margin discipline? Neumann's comment that 85% of pro forma revenues remain in Netflix's core swim lane is meant to reassure on that front.

Ads: from reach to monetization

The ad‑supported tier remains small in the context of Netflix's overall P&L, but it is starting to show the contours of a scalable engine.

The company has spent the past 18 months prioritizing scale – building enough ad‑tier subscribers and viewing hours to be relevant to major buyers. Peters said Netflix is "on track to achieve our critical scale goals for all of our ads countries in 2025", after going from zero to meaningful reach in a short period.

Two realities coexist:

• Engagement on ad plans is broadly similar to ad‑free, around two hours per member per day.
• Ad‑tier ARM (subscription + ads) is currently below the standard ad‑free tier ARM, because fill rates and monetization are still catching up.

Management is explicit that the ARM gap is both a current drag and a future opportunity. As Netflix improves its ad tech and demand access, it expects to close that gap and unlock incremental revenue from existing hours.

Key building blocks:

• Go‑to‑market and demand access: Netflix is hiring more sales and ad‑operations staff and integrating with multiple demand sources so that agencies can buy Netflix inventory through their existing pipes. Peters described this as table stakes: in some cases, it was a prerequisite for advertisers to come on board.
• In‑house ad tech stack: Netflix is transitioning to its own ad server (initially in Canada), with rollout across all ad markets scheduled by 2025. The aim is to:
  • Improve targeting and relevance.
  • Offer richer measurement (incrementality, ROI/ROAS).
  • Support new formats and interactivity, such as modular interactive video ads where creative elements can be mixed and matched dynamically.

Advertisers' main complaint, per Peters, is not pricing but speed of feature delivery; they want the full digital TV toolset now. From Netflix's perspective, that impatience is confirmation there is demand ready to meet new supply.

On pricing, the company intends to treat the ad tier like any other product: it values having a low entry price point ($6.99 in the US) to drive accessibility, and will only raise prices when it feels it has demonstrably increased value. In other words, monetization will be driven first by better ad yield and fill, not immediate plan price hikes.

Live, sports‑adjacent and the new theatrical religion

For a company that once portrayed the theatrical window and live sports as relics, Netflix's current posture is strikingly pragmatic.

Sarandos was disarmingly blunt: "This is a business and not a religion." Where live sports and theatrical once sat outside Netflix's capital allocation priorities, M&A and market conditions have altered the equation.

On live:

• Netflix has executed over 200 live events, ranging from Chris Rock's stand‑up special to the Tom Brady roast, from golf and tennis one‑offs to the expanding WWE weekly slate.
• It has secured two NFL games on Christmas Day, which management framed as event‑ized sports rather than an entry into full‑season rights.
• Live programming still represents a small fraction of total viewing hours and content spend, but the company argues these events have outsized impact on acquisition, conversation and, increasingly, retention.

On sports rights, the strategy is to avoid being trapped by league economics. Sarandos was explicit that Netflix wants to "make these games events" – a day of NFL football, or a marquee fight, rather than entire seasons on onerous terms. The 20‑year WWE deal is positioned as a template: long‑term, but on "economics we like and can grow into".

On theatrical, the Warner deal is the pivot:

• Netflix will inherit a scaled, global theatrical distribution system and intends to respect the 45‑day window before films land on streaming.
• Historically, Netflix chose not to build this infrastructure in‑house given other capital priorities. Now, it will simply step into an operating business that already throws off $4B+ of box office.

For investors, the implication is that Netflix is moving from a purely streaming‑native cost structure to a mixed media conglomerate model, with all the diversification – and execution risk – that entails.

Games, podcasts and vertical video: widening the engagement surface

Netflix's dashboard is no longer confined to film and series. Management is deliberately expanding the "surface area" of engagement with lower‑ticket, high‑frequency formats.

Games

The games business is small but growing quickly:

• Industry addressable market: ~$140–150B of consumer spend, excluding ad‑supported models where Netflix does not currently participate.
• Games engagement tripled in 2023, and is on track for "very aggressive" growth through 2024–26, though off a small base.
• Investment remains a small fraction of overall content spend, and is being scaled in tandem with demonstrated impact.

Three pillars stand out:

• Cloud‑based TV games: Around a third of members now have the updated TV client needed, and early data from party games such as Boggle, Pictionary and LEGO titles show significant engagement uplift among those exposed.
• Narrative IP‑linked games: Netflix is leaning into interactive narrative experiences tied to its shows, aggregated in a "Netflix Stories" hub. Titles linked to "Virgin River", "Perfect Match", "Emily in Paris" and "Selling Sunset" are either live or queued, with roughly one new title per month planned.
• Franchise extensions: Sarandos highlighted the role of games in serving superfans between seasons, introducing characters or plotlines that then surface in subsequent TV seasons or films. This is classic flywheel logic: narrative loops across media to deepen fandom and reduce churn.

Podcasts and vertical video

Netflix has also begun experimenting with video podcasts, working with partners such as Spotify's The Ringer, iHeartMedia and Barstool. Management likens these to a "modern talk show", but in a broad, multi‑brand feed rather than a single flagship.

The company has simultaneously rolled out a vertical‑video clip feed on mobile, populated with clips from shows, films and, eventually, podcasts. This sits alongside a broader redesign of the mobile UI, mirroring the recent overhaul of the TV interface. The goal is to make Netflix better at:

• Surfacing the right content for differing use‑cases and moods (family movie time vs late‑night binge).
• Flexibly featuring different content formats (live events, games, sports‑adjacent programming) without breaking the discovery flow.

Generative AI, meanwhile, is seen first as a discovery and tooling opportunity: improving personalization and giving creators more efficient production tools. Sarandos was keen to stress that audiences ultimately care about connection to story and characters more than technology per se; AI is framed as a new brush, not a new painter.

Competitive landscape: coexisting and competing with YouTube

In the battle for the living room, Netflix increasingly sees YouTube as its primary "passive home entertainment" competitor, at least in markets like the US where measurement is robust.

Referencing Nielsen's June data, Sarandos said that Netflix and YouTube together account for about 50% of all TV streaming in the US, while still only representing around 10% of total TV time each when linear is included. The company's strategic focus is therefore on the 80% of TV time that is neither Netflix nor YouTube, notably the linear and legacy cable universe still in secular decline.

The relationship with YouTube is not purely adversarial:

• Netflix relies heavily on YouTube for trailers, clips and behind‑the‑scenes content that feeds fandom and discovery.
• But both platforms compete fiercely for creator time, ad budgets and consumer attention.

Peters argued that Netflix's differentiated role is to finance large‑scale, risky bets – the next "Stranger Things", "Wednesday" or "Outer Banks" – that are structurally difficult to originate within a UGC‑dominated, ad‑only model. For investors, the question is whether this higher‑risk capital allocation continues to translate into superior unit economics as content costs and competition rise. For now, the numbers remain on Netflix's side. Revenue is growing double digits, margins are stepping up, cash is plentiful, and the company is preparing to ingest a century of Warner Bros. IP without (yet) loosening its grip on cost discipline. The next test, as the integration unfolds and the ad machine matures, will be whether Netflix can keep behaving like a capital‑light platform while owning more of the heavy industry it once disrupted.