[Live Playback: Netflix 2026Q1 Earnings Conference Call]

Netflix reported good first-quarter earnings results Thursday afternoon, but the numbers were overshadowed by disappointing guidance for the second quarter. Its shares were down about 9% in after-hours trading.

Earnings per share were $1.23, well ahead of Wall Street's consensus estimate of 76 cents, and up from 66 cents last year. Revenue for the quarter reached $12.25 billion, just above expectations of $12.18 billion, and up 16% on the year.

The EPS beat was driven by a $2.8 billion breakup fee given to Netflix after the termination of its proposed merger with Warner Bros. Discovery. Without the fee, Netflix would have earned 58 cents per share.

Though the company's annual guidance didn't change from last quarter, management's second-quarter outlook didn't sit well with investors. The company said the weak profitability guidance is a function of 2026 content amortization expense schedules that are heavily weighted toward the second quarter. It said it expects operating margins to strengthen in the second half of the year.

Netflix also announced that co-founder and chairman of the board Reed Hastings will be stepping down "in order to focus on his philanthropy and other pursuits," according to a letter to shareholders.

"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, and building a company that could be both beloved by members and wildly successful for generations to come," Hastings said in the letter.

"I've had the privilege of working for, and alongside, a true historymaker and I look forward to marveling at all he will do next," added co-CEO Ted Sarandos.

It's been a busy time for Netflix over the past few months. The company announced in December that it had agreed to buy Warner Bros. studios and HBO Max. That set off a bidding war with Paramount Skydance, which was also highly interested in taking over the studio responsible for Harry Potter and Game of Thrones.

Netflix shareholders weren't excited about the deal, and the stock took a hit. Shares have bounced back since the company announced in February it was backing out of the bidding war by not matching Paramount's last offer. Eric Clark, chief investment officer at Accuvest Global Advisors, says Netflix now can focus on delivering what shareholders care most about.

"Now that the WBD deal is behind them, investors can get back to what matters most: content strategy, pricing levers and guidance, ad-tier growth, any new ways to drive viewership totals," he wrote on Wednesday.

Growing viewership is key for Netflix. The company no longer reports subscriber numbers, but Wall Street tracks viewership in other ways, including its biannual engagement report. The streamer has already seen exceptional growth and needs to prove to investors that it isn't slowing down. That's especially important as the economic environment becomes shaky, with rising inflation risking consumer spending on nonessentials, like entertainment.

Having a lower-priced ad-tier is a positive for Netflix, as the company can prevent users from canceling outright if they are feeling economically pressured. The company expects $3 billion in 2026 ad sales, double last year.

Netflix announced in March that it was raising prices again.

Even after the latest price hike, Netflix may have more room to tap that source of sales growth. Research from MoffetNathanson shows that Netflix has the lowest cost-per-hour-watched among the major paid streamers.

"We look to provide more and more value to our members," said co-CEO Greg Peters in the first-quarter earnings call. "Occasionally when we've added more value, we ask our members to contribute more so that we can invest that into delivering them even more entertainment value, and we think we are delivering one of the best entertainment values that has ever existed."