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Netflix (NFLX +3%) is streaming higher following its Q1 report late on Thursday. NFLX reported a huge EPS beat, its largest of any quarter in more than two years. The revenue upside was more modest, but NFLX offered Q2 upside guidance. NFLX only reaffirmed FY25 revenue and operating margin guidance. The strong results eased investors' fears that macro pressures might hurt subscriber retention/growth, especially following a recent price increase, but that was not the case.

• Starting with this Q1 report, Netflix no longer reports paid memberships and ARM on a regular quarterly basis. However, starting in Q2, Netflix will publish a bi-annual engagement report in tandem with its Q2 and Q4 earnings results. Losing the membership metric is a letdown, but it is not a surprise as Netflix let investors know this was coming several quarters ago.
• Revenue in Q1 was modestly above guidance due to slightly higher-than-forecasted subscription and ad revenue (which is still very small). UCAN (US & Canada) revenue was a disappointment with +9% yr/yr growth, down from +15% in Q4. This was due to only a partial quarter impact from its price change, plan mix, and the absence of ad revenue from its Christmas Day NFL games. NFLX expects UCAN revenue growth to reaccelerate in Q2.
• The big EPS upside was driven by huge operating margin of 31.7% in Q1, well above prior guidance of 28.2%, and a step change improvement from the 22.2-29.6% quarters we saw in 2024. NFLX also guided to an even more robust margin in Q2 at 33.3% as Q2 will be the first full quarter to benefit from the price increase. Despite the big upside in Q1 and Q2, NFLX only reaffirmed FY25 guidance at 29% as Q3-Q4 as content expense is expected to ramp.
• Speaking of the recent price increases, they were implemented in large markets (US, UK and Argentina). Importantly, NFLX said they have performed in line with internal expectations. Netflix says its service has been generally quite resilient even in tougher economies, and that was evident again here. Of note, NFLX is boosting its price in France in Q2.

Overall, this was a solid, but not spectacular, Q1 report. We do miss getting the subscriber metrics, but we will need to adjust. NFLX understandably wants analysts to focus on overall revs, margins, EPS etc. The big EPS upside in Q1 and strong Q2 EPS guidance were driven more by lower expenses rather than by upside revs, which we think explains why we are not seeing a bigger move today. On the positive side, Briefing.com had concerns about possible cancellations following the price increases given the macro headwinds. However, that was not an issue in Q1. It's a reminder of how successful Netflix has become even as other streamers struggle to make a profit.