Netflix : Fourth Quarter Letter to Shareholders

January 19, 2023

Fellow shareholders,

Summary:

• Q4'22 revenue, operating profit and membership growth exceeded our forecast - we continue to lead the industry in streaming engagement, revenue and profit.
• Our Q4 content slate outperformed even our high expectations:
• • Wednesday was our third most popular series ever, Harry & Meghan our second most popular documentary series, Troll our most popular non-English film, and Glass Onion: A Knives Out Mystery our fourth most popular film1.
• We successfully launched our new, lower priced ad-supported plan in November and are pleased with the early results, with much more still to do.
• We delivered on the high end of our operating profit margin target for full year 2022, and we expect to increase our operating margin in 2023 vs. 2022.
• For 2022, we finished with 231M paid memberships and generated $32B of revenue, $5.6B in operating income, $2.0B of net cash from operating activities and $1.6B of free cash flow (FCF). In 2023, we expect at least $3B of FCF, assuming no material swings in F/X.
• Ted Sarandos and Greg Peters are now co-CEOs of Netflix, with Reed Hastings as Executive Chairman - completing our succession process.

2022 was a tough year, with a bumpy start but a brighter finish. We believe we have a clear path to reaccelerate our revenue growth: continuing to improve all aspects of Netflix, launching paid sharing and building our ads offering. As always, our north stars remain pleasing our members and building even greater profitability over time.

• As defined by cumulative view hours in the first 28 days

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Ted Sarandos and Greg Peters as our co-CEOs

To complete our succession process, Reed Hastings has become Executive Chairman, and Greg Peters has stepped up from COO to become Ted Sarandos' co-CEO, and a member of the Netflix board. Reed, Greg, and Ted have been working closely together for 15 years, and this makes formal externally how we have been operating internally. More details are here on our blog.

Ted said: "I want to thank Reed for his visionary leadership, mentorship and friendship over the last 20 years. We've all learned so much from his intellectual rigor, honesty and willingness to take big bets - and we look forward to working with him for many more years to come. Since Reed started to delegate management to us, Greg and I have built a strong operating model based on our shared values and like-minded approach to growth. I am so excited to start this new chapter with Greg as co-CEO."

Greg said: "I feel humbled and privileged to become co-CEO of Netflix. Ted and I have worked together for many years - building tremendous trust and respect for each other. We're also motivated by the same goal: a desire to better serve our members so that we can continue to grow our business."

In addition to these changes, Bela Bajaria, formerly Head of Global TV, has become Chief Content Officer and Scott Stuber has become Chairman of Netflix Film. Ted said: "Bela and Scott are outstanding creative executives with proven track records at Netflix. In 2022 we premiered many of our most popular series and films in Netflix history, including Wednesday, Glass Onion: A Knives Out Mystery, Purple Hearts, Monster: The Jeffrey Dahmer Story, The Adam Project and Harry & Meghan - a testament to their leadership and creativity. I couldn't be more excited to work alongside them as we seek to delight audiences for years to come."

For full details of Netflix leadership see here.

Q4 Results

Year over year revenue growth of 2% in Q4 (10% on a foreign exchange (F/X) neutral basis2) was driven by a 4% increase in average paid memberships. ARM3 declined 2% year over year, but grew 5% on a F/X neutral basis2. Revenue was slightly above our beginning-of-quarter projection, as paid net adds of 7.7M (vs. 8.3M in Q4'21) came in higher than our 4.5M forecast, due to both strong acquisition and retention, driven primarily by the success of our Q4 content slate. In addition, the US dollar depreciated vs. most other currencies during the quarter, which resulted in slightly higher than projected ARM.

Operating income of $550M in Q4 was down vs. $632M in Q4 '21. This was above our guidance forecast of $330M primarily due to higher than expected revenue as well as slower-than-forecasted hiring. Operating margin for Q4 amounted to 7% compared to 8% in Q4'21. This year over year decline was due to the appreciation of the US dollar. For the full year 2022, our operating margin amounted to 18% vs.

• Excluding the year over year effect of foreign exchange rate movements. Assumes foreign exchange rates
  remained constant with foreign exchange rates from each of the corresponding months of the prior-year period. 3 ARM (Average Revenue per Membership) is defined as streaming revenue divided by the average number of streaming paid memberships divided by the number of months in the period. These figures do not include sales taxes or VAT.

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21% in FY21. Based on F/X rates at the beginning of 2022 and excluding the $150M in restructuring charges in Q2'22, this translates into an operating margin of 20%, at the high end of the 19%-20% target we set in January of 2022.

F/X Neutral Operating Margin (Excluding Restructuring Charges in Q2 2022)

• Based on F/X rates at the beginning of each year (and excluding the $150M of restructuring costs in Q2 2022). Note: Excludes F/X impact on content amortization, as titles are amortized at a historical blended rate based on timing of spend.

EPS in Q4'22 was $0.12 vs. $1.33 in Q4'21. This was below our $0.36 forecast due to a $462M non-cash unrealized loss from the F/X remeasurement on our Euro denominated debt as a result of the depreciation of the US dollar vs. the Euro during Q4'22. As a reminder, our approximately $5B of Euro bonds provides us with some natural hedge on the relative value of the Euro for net income. However, it doesn't affect operating income as unrealized gains or losses are recognized below operating income in "interest and other income." For the full year, we recognized a non-cash unrealized gain of $353M from the F/X remeasurement on our Euro bonds.

Forecast

As we noted in our Q3'22 shareholder letter, revenue is our primary top line metric, particularly as we develop additional revenue streams where membership is just one component of our growth (like advertising and paid sharing). The quarterly guidance we provide is our actual internal forecast at the time we report. As always, we strive for accuracy although the rollout of major new initiatives (paid sharing and ads) plus current uncertain macroeconomic environment leads to less-than-normal visibility.

We forecast Q1'23 revenue growth of 4% (8% on a F/X neutral basis). We expect our F/X neutral revenue growth to be driven by a combination of year over year growth in average paid memberships and ARM. This translates into modest positive paid net adds in Q1 '23 (vs. paid net adds of -0.2M in Q1'22). Our

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expectation of fewer paid net adds in Q1'23 vs. Q4'22 is consistent with normal seasonality and factors in our strong member growth in Q4'22, which likely pulled forward some growth from Q1'23.

In addition, we expect to roll out paid sharing more broadly later in Q1'23 (more details below in the Product and Pricing section). We anticipate that this will result in a very different quarterly paid net adds pattern in 2023, with paid net adds likely to be greater in Q2'23 than in Q1'23. From our experience in Latin America, we expect some cancel reaction in each market when we roll out paid sharing, which impacts near term member growth. But as borrower households begin to activate their own standalone accounts and extra member accounts are added, we expect to see improved overall revenue, which is our goal with all plan and pricing changes.

Our long term financial objectives remain unchanged - sustain double digit revenue growth, expand operating margin and deliver growing positive free cash flow. For the full year 2023, as we continue to improve our service, grow our advertising business and launch paid sharing, we expect constant currency revenue growth to accelerate over the course of the year. We also expect year over year operating profit growth and operating margin expansion for the full year (assuming no material swings in F/X).

We have been targeting a FY23 operating margin of 19%-20% based on F/X rates at the beginning of 2022. We now expect to deliver roughly 21%-22% operating margin on this basis (above the 19%-20% range). Rolling forward to F/X rates as of January 1, 2023, this translates into a FY23 operating margin target of 18%-20%. For Q1'23, we expect operating margin to be down year over year (20% vs. 25%) due primarily to the timing of content spend.

Content and Marketing

People have more choice of films and TV shows than ever so we need to ensure that there's always something great for them to watch on Netflix, regardless of their taste, mood, or who they're watching with. It's why we're so focused on continuing to improve our content and broaden our slate. 2022's successful slate was the result of having the best creative executives working with best in class creators. Last year alone we launched4:

• Five of our Top 10 most popular English language TV seasons ever - Stranger Things 4 and Wednesday (both of which hit 1B hours viewed), Monster: The Jeffrey Dahmer Story, Bridgerton S2 and Inventing Anna - as well as Harry & Meghan, our second most successful doc series ever;
• Four of our Top 10 most popular English language films ever -TheAdam Project, The Gray Man, Purple Hearts and Glass Onion: A Knives Out Mystery - as well as The Sea Beast and The Tinder Swindler, our most successful animated and documentary films respectively;
• Seven of our Top 10 most popular non-English films ever - Troll (Norway), All Quiet on the Western Front (Germany), Black Crab (Sweden), Through My Window (Spain), The Takedown (France), My Name is Vendetta (Italy), and Loving Adults (Denmark);
• Two of our Top 10 most popular non-English TV shows ever - All of Us Are Dead and Extraordinary Attorney Woo, both from Korea.

• For View Hours for these titles, please visitNetflix Top 10.

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We're also pleased with the progress we've made with returning titles. Members watched more Netflix returning seasons and sequels in 2022 than ever before across a broad range of genres - from film (Enola Holmes 2, Lost Bullet 2 and two 365 Days sequels) and unscripted (Selling Sunset S5 and Love is Blind S3) to award winning drama (Ozark S4 and The Crown S5), local language series (Sintonia S3, Young Royals S2 and Alice in Borderland S2, whose success pushed S1 back into the Top 10 after its launch) and animation (Big Mouth S6).

It's hard to think of two titles that more successfully pierced the zeitgeist this year than Stranger Things 4 and Wednesday. Both pushed old songs into the music charts: Kate Bush's Running Up That Hill went to number 1 on Billboard's Global charts for the first time, 37 years after it was first released, and Lady Gaga's Bloody Mary made it onto the Billboard top 40 list for the first time ever, 11 years after it was first released. We get amazing results when we have a Wednesday, Glass Onion or Monster moment with our members. We believe people typically sign up for a streaming service because they've heard about a title "you simply must watch" from a friend, seen the excitement on social media or read about it in the press. Generating conversation is our primary marketing goal because we see that it drives acquisition and encourages existing members to watch more, which in turn helps with retention. For Ryan Murphy's The Watcher, conversation about the series led to fans flocking to the house, a Saturday Night Live spoof and a spike in home security sales. Our Wednesdaycampaign, with all our marketing in Wednesday's iconic voice, generated 1.5B organic social impressions pre-launch, a record for a Netflix season one. Over time, we hope to have more and more of these moments across film and TV, and to replicate these successes on the games side.

It's now slightly over a year since we launched games on the Netflix service. We've made good progressin that time - creating the infrastructure to deliver games to mobile devices, building a portfolio of 50 games across many genres and acquiring four game studios to bolster our internal production capabilities. In Q4, we launched season four of unscripted series Too Hot to Handle, which was a top 10 title for us globally for three consecutive weeks. Simultaneously, we debuted our Too Hot to Handle game, which has been our biggest game launch to date and is another encouraging sign in the long term opportunity to entertain members with Netflix intellectual property (IP) across different mediums. In 2023, we'll continue to expand our offeringwith more games, with a focus on Netflix-related IP.

Product and Pricing

As discussed over the past few quarters, we're working to give people more choice when it comes to price as well as greater control over their Netflix account. In November, we successfully launched our new, lower priced ad-supported plan in 12 countries. We believe branded television advertising is a substantial long term incremental revenue and profit opportunity for Netflix, and our ability to stand up this business in six months underscores our commitment both to give members more choice and to reaccelerate our growth.

While it's still early days for ads and we have lots to do (in particular better targeting and measurement), we are pleased with our progress to date across every dimension: member experience, value to advertisers, and incremental contribution to our business. Engagement, which is consistent with members on comparable ad-free plans, is better than what we had expected and we believe the lower

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