Netflix cuts advertising revenue forecast to $2.7 billion as product development lags
Key Facts
Netflix cut its 2026 advertising revenue forecast to about $2.7 billion, according to the shareholder letter accompanying its third-quarter results released on Tuesday evening, October 20. The company had previously expected about $3 billion in revenue from the business this year. It attributed the revision to a slightly slower-than-expected rollout of some advertising product capabilities, linking the lower target to execution on product development. During the earnings discussion, co-Chief Executive Ted Sarandos acknowledged room for improvement, saying: "I know we can do better." The revised advertising target came alongside results that combined revenue growth with earnings per share that beat analysts' expectations.
Netflix's third-quarter revenue rose 11.8% from the same period a year earlier, according to Reuters' reporting on the results. Quarterly revenue reached $12.87 billion, in line with Wall Street expectations for the period. Earnings per share were 87 cents, exceeding the average analyst forecast of 82 cents compiled by the London Stock Exchange Group. The company posted a quarterly operating margin of 34.6%, according to the shareholder letter. Netflix said the margin exceeded its internal forecast primarily because of the timing of expenses, explaining the gap between actual operating performance and its estimates for the period.
On cash flow, Netflix lowered its 2026 free cash flow forecast to about $12.0 billion, according to the same letter. The company attributed the revision primarily to the expected closing of a real estate transaction in the final quarter of the year. Alongside the revised cash flow target, Netflix continued repurchasing shares during the third quarter. It spent $4.8 billion on buybacks, according to figures in the shareholder letter for the period. The company described the purchases as its largest quarterly buyback on record, while attributing the lower cash flow forecast primarily to the pending real estate transaction.
In a separate advertising product update dated October 20, Netflix announced enhancements to its conversions data interface and the launch of the "Netflix Pixel" tool for advertisers. It said the new capabilities allow advertisers to feed in more than 20 types of conversion events associated with stages closer to completing a purchase. The updates also allow advertisers to build audience segments using their own conversion data, according to the company's announcement of its advertising toolkit. It added that advertisers buying Netflix ads programmatically through Yahoo's platform can now measure single-publisher attribution. The addition relates to measuring the results of their Netflix advertising purchases through the platform, according to the company's description of the capabilities made available to advertisers.
Netflix said in a disclosure dated May 13 that its ad-supported service reaches more than 250 million monthly active viewers worldwide. In the same disclosure, it said more than 80% of ad-tier members actively watch the service every week. Both figures appeared in the company's presentation of its advertising business before the third-quarter results and the revision to the business's annual revenue forecast. Netflix shares fell about 6% in after-hours trading on Tuesday evening, October 20, following the results, according to Reuters. The shares moved in trading after the regular session ended, as the results and revised forecasts were released.
For the fourth quarter of 2026, Netflix expects an operating margin of 26.0%, including the impact of job cuts, according to the shareholder letter. Starting in November, advertisers using The Trade Desk's "Kokai" platform will be able to use their own data and third-party data to target Netflix audiences, according to the partnership statement. On geographic expansion, Netflix plans to extend its ad-supported tier to 15 new countries during 2027. The company set March 2027 as the start of a new wave of launches in additional markets. That wave includes Austria, Belgium, Colombia, Peru and other European markets, according to the company's advertising services update.