Netflix : Second Quarter Letter to Shareholders

July 19, 2022

Fellow shareholders,

Q2 was better-than-expected on membership growth, and foreign exchange was worse-than-expected (stronger US dollar), resulting in 9% revenue growth (13% constant currency). Our challenge and opportunity is to accelerate our revenue and membership growth by continuing to improve our product, content, and marketing as we've done for the last 25 years, and to better monetize our big audience. We're in a position of strength given our $30 billion-plus in revenue, $6 billion in operating profit last year, growing free cash flow and a strong balance sheet. Our summary results and forecast are below.

Q2 Results

Revenue in Q2 grew 9% year over year (or 13% excluding a -$339 million foreign currency impact), driven by a 6% and 2% increase in average paid memberships and ARM1, respectively. Excluding the impact of foreign exchange (F/X), ARM rose 7% year over year. The appreciation of the US dollar (USD) vs. most other currencies since our April earnings report was the primary reason for the variance to our revenue guidance forecast. We slightly under-forecasted global paid net adds in Q2 (-1.0m vs. -2.0m forecast and compared to +1.5m in the year ago quarter).

• In APAC, revenue grew 23% year over year, excluding F/X. At over $900 million of revenue, APAC is approaching the size of our LATAM business. We added 1.1m paid memberships in the region (vs. 1.0m last Q2). ARM in APAC was -2% year over year on a F/X neutral basis, due to the impact from our price decrease in India last December as well as plan mix, which was partially offset by

• 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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higher ARM in Korea and Australia. Excluding India, APAC ARM grew 4% year over year on a constant currency basis.

• Excluding F/X, EMEA revenue and ARM increased 13% and 6% year over year, respectively, while paid net additions totaled -0.8m vs. 0.2m in the year ago quarter.
• Revenue in LATAM grew 19% year over year excluding F/X and surpassed the $1 billion quarterly mark for the first time, helped by constant currency ARM growth of 15%. Paid memberships were flat sequentially (compared to 0.8m paid net adds in Q2'21).
• In UCAN, ARM and revenue each increased 10% year over year, excluding the impact of F/X. Paid net adds were -1.3m vs. -0.4m in the year ago period. Retention improved over the course of the quarter and, while churn remains slightly elevated, it is now back near pre-price change levels.

We've adjusted our cost structure for our current rate of revenue growth. This resulted in approximately $70 million of severance costs and an $80m non-cash impairment of certain real estate leases primarily related to rightsizing our office footprint. Excluding these items totaling $150 million, and the F/X impact of the stronger US dollar since our April report, operating profit and operating margin were slightly ahead of our guidance forecast.

EPS of $3.20 vs. $2.97 a year ago exceeded our guidance forecast of $3.00 due to a $305 million non-cash unrealized gain from F/X remeasurement on our Euro denominated debt, which is recognized below operating income in "interest and other income." Our approximately $5 billion of Euro bonds provides us with some natural hedge against the Euro for net income, but doesn't affect operating income. Year to date, our gain from F/X remeasurement on our Euro debt is $467 million.

Q3 Forecast

As a reminder, the quarterly guidance we provide is our actual internal forecast at the time we report. As always, we strive for accuracy although the current uncertain macro-economic environment leads to less-than-normal visibility.

The US dollar continues to strengthen meaningfully against most currencies at a historic pace, with the Euro recently falling below the US dollarfor the first time in two decades, a significant headwind for all multinational US companies. We have high exposure to this unprecedented appreciation in the USD because nearly 60% of our revenue comes from outside the US and swings in F/X have a large flow through to operating profit as most of our expenses are in USD and don't benefit from a stronger USD.

Our Q3 revenue growth forecast of 5% translates into 12% year over year revenue growth on a constant currency basis. Similarly, excluding the impact of currency, operating profit growth would be -3% year over year (vs our forecast decline of -29%) and operating margin would be 20% (vs our forecast of 16%). As we have written in the past, over the medium term, we intend to continue to adjust our business as appropriate given the relative strength of the USD to protect our operating margin and try to avoid immediate actions that we believe could be detrimental to the business.

We forecast paid net adds for Q3 of +1.0m vs. 4.4m in the year ago quarter. We continue to expect full year 2022 operating margin of 19%-20%, excluding the unanticipated $150m of restructuring costs in Q2

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noted above and the material movement in F/X from January 2022, as our guidance was set based on F/X at that time (see our Q4'21 letter).

Content, Marketing, and Product

Last quarter, we discussed our slowing revenue growth, which we believe is the result of connected TV adoption, account sharing, competition, and macro factors such as sluggish economic growth and the impacts of the war in Ukraine.

We've now had more time to understand these issues, as well as how best to address them. First and foremost, we need to continue to improve all aspects of Netflix. This focus on improving our core service has served us well over the past 25 years, and remains our north star to drive continuous growth. It's why we strive for an ever better content, marketing and product experience. Also as a pure play streaming business, we're unencumbered by legacy revenue streams. This freedom means we can offer big movies direct-to-Netflix, without the need for extended or exclusive theatrical windows, and let members binge watch TV if they want, without having to wait for a new episode to drop each week. This focus on choice and control for members influences all aspects of our strategy, creating what we believe to be a significant long term business advantage.

Our content offering is designed to satisfy a broad range of member tastes by providing an unmatched variety and quality of titles. Our Q2 slate is emblematic of this approach, headlined by season four of Stranger Things, which returned to tremendous fan reception and was a smash hit by all measures - including an outstanding drama Emmy nomination (along with Ozark season 4 and Squid Game). In its first four weeks, Stranger Things season four generated 1.3 billion hours viewed2, making it our biggest season of English TV ever. Season four also re-ignited interest in past episodes with season one through three experiencing a greater than five-fold increase in viewing in the month after the release of season four (vs. the prior month).

Season four of Stranger Things also showcased the effectiveness of our marketing strategy in driving conversation around our titles. When we deliver shows and movies that members are talking about in large numbers, we can influence pop culture, build passion for Netflix and create an experience that is differentiated and difficult-to-replicate. For example, the show catapulted the 1985 song Running Up That Hill to the top of the music charts. Metallica also enjoyed a return to the charts in the US and UK with their 1986 song Master of Puppetsafter being featured in the new season of Stranger Things. The cumulative Twitter volume for Stranger Things continues to outpace both Obi-WanKenobi and Top Gun Maverick, highlighting the big conversation around this title and reinforcing that our binge versus one week at a time release strategy drives lots of "water cooler conversation."

• Hours viewed data is based on the first 28 days of release for each title; since some titles have multiple premiere dates, whether weekly or in parts, we count the 28 days from each episode premiere date in each country. For titles released less than 28 days (denoted with an asterisk), data is from launch date through July 17, 2022. We publish weekly our top titles based on hours viewed atNetflix Top 10.

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Source: Twitter.

We also delivered a wide variety of other English language series hits in Q2, including season three of The Umbrella Academy (284m view hours*) and season one of The Lincoln Lawyer, a legal drama, which generated 277m hours viewed and has been renewed for a second season. We've also renewed the endearing, UK-produced young adult drama Heartstopper (67m view hours) for another two seasons. In unscripted, audiences embraced season five of Selling Sunset, which recorded 95m view hours in its first four weeks, while the debut season of marriage reality show The Ultimatum had 148m view hours.

In unscripted, we are also taking global formats and creating local versions. This quarter, we had Rhythm

• Flow France, our rap competition show, which was a big local success. The winner of season one, Fresh, was formerly unknown, working in a gym. But since his appearance on the show, he has become a star with his song CHOP that he performed in the finale hitting #1 on every streaming service in France. He was also invited to the Les Ardentes music festival where he performed for an audience of 15,000 people - another example of "The Netflix Effect."

We're making good progress in film. The basketball drama Hustle (starring Adam Sandler) was our biggest Netflix movie in Q2 (186m hours viewed) and was loved by critics and audiences alike, followed by the comedy Senior Year, starring Rebel Wilson, with 161m view hours.

We continue to invest in animated features; building off our initial titles like Over the Moon and Back to the Outback, we released The Sea Beast(102m hours viewed*) early in Q3 to audience and critical acclaim. Today, we announced that we will be acquiring leading animation studio Animal Logic, with ~800 amazing people mostly in Sydney and Vancouver, which will help us accelerate the development of our animation production capabilities and reinforces our commitment to build a world-class animation studio. We've been partnering with Animal Logic for two years now, working on The Magician's Elephant (directed by Wendy Rogers) and the recently announced The Shrinking of the Treehorns (directed by Ron Howard). Together, we'll create an animation studio that will produce some of our largest animated

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feature films. We'll fund the purchase from our existing cash balance. The deal is subject to certain regulatory approvals and we anticipate closing later this year.

We're building on our lead in non-English programming. We want Netflix to be relevant to audiences all over the globe and our local language titles are a differentiator for us. We focus first on telling authentic stories for local impact, but we see that great stories can travel everywhere. Another example of this In Q2 was The Marked Heart, a Colombian series, which found a global audience and ended up in the top 10 in 81 countries around the world by its second week. Similarly, The Takedown, a French film, was in the top 10 in 91 countries around the world by its second week, again showing the power of an authentic story and our ability to serve those stories - with subtitling, dubbing, and personalized discovery - for members to enjoy around the world.

While we always have room to improve, we're very pleased with how far we've come in providing so much satisfaction and enjoyment to our members. For instance, in the US, which is one of the most competitive markets in the world, we drew more TV viewing time than any other outletduring the

2021-22 TV season (see chart below), nearly matching the combined total of the two most watched broadcast networks. And, as Nielsen will announce on Thursday, our share of US TV viewing reached an all-time high of 7.7% in June (vs. 6.6% in June 2021), demonstrating our ability to grow our engagement share as we continue to improve our service.

Source: Nielsen.

Since our launch of a small selection of licensed mobile games last November, we've released new games every few weeks, with the portfolio growing to the current total of 24. The games are all intended to be accessible to broad audiences, and span several genres and categories, including racing with Asphalt Xtreme, the digital version of the irreverent card game Exploding Kittens, zombies in Into the Dead 2 and the knitting for cats in Knittens. We've had millions of our members play games through the service and we are learning about what games work for different audiences. We're adapting our

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