Netflix kicks off earnings season with a warning shot

Shares opened nearly 12% lower after the streaming giant missed second-quarter revenue estimates and guided below Street expectations for the third quarter, the clearest sign yet that its post-password-crackdown growth spurt is fading. The company narrowly missed on revenue, posting $12.56 billion against Wall Street's $12.59 billion forecast, even as membership gains, price hikes and ad sales all moved in the right direction. What spooked investors was the outlook: third-quarter revenue guidance of 11% constant-currency growth came in below the Street's 12% call, and full-year guidance was narrowed rather than raised. Netflix now expects 2026 revenue of $51 billion to $51.4 billion, growth of 13% to 14%, with a 31.5% operating margin and roughly $12.5 billion in free cash flow. For the third quarter, it guided to revenue of $12.86 billion, a 33.2% operating margin and earnings per share of $0.82. The quarter itself was solid by most measures. Operating income of $4.19 billion beat consensus, and the 33.4% operating margin came in ahead of guidance despite slipping about 70 basis points from a year earlier. Diluted earnings per share rose 11% to $0.80, also topping guidance. Free cash flow was the soft spot, falling to $1.5 billion from $2.2 billion a year ago, which the company linked in part to higher cash taxes tied to the Warner Bros. termination fee. The bigger story for investors is engagement, long the central point of contention in the bear case on Netflix. First-half viewing hours grew about 2% year-over-year, an impr