Revenue grew 4% year over year in Q1 (+8% on a foreign exchange (F/X) neutral basis ), consistent with 1 our beginning-of-quarter forecast. Average paid memberships increased 4% year over year, while ARM2 was -1% vs. Q1’22 (+4% on an F/X neutral basis). Paid net adds amounted to 1.8M for Q1 vs. -0.2M in the year ago quarter. Regional highlights include:

• UCAN revenue grew 8% year over year (both reported and F/X neutral) driven by a 9% increase in ARM (both reported and F/X neutral).
• EMEA revenue was down 2% year over year (+6% on an F/X neutral basis), due primarily to a decline of 6% in ARM (+1% on an F/X neutral basis), offset partially by a 4% increase in average paid memberships.
• LATAM revenue increased 7% year over year (+13% F/X neutral), with a 3% rise in ARM (+8% F/X neutral). Paid membership dipped by 0.4M, which we believe is due to pull forward from Q4 (when we had a big quarter with 1.8M paid net adds) and ongoing macroeconomic softness.
• APAC revenue grew 2% year over year (+10% F/X neutral). Average paid memberships increased 17% year over year. This offset a 13% decrease in ARM (-6% F/X neutral), which was due to plan mix and a higher mix of member growth in countries with lower pricing. Operating income totaled $1.7B vs. $2.0B in Q1‘22 – above our guidance forecast of $1.6B due to ongoing expense management and timing of hiring and content spend. Operating margin was 21% compared to 25% in the year ago period. The year over year decline in operating margin was primarily due to F/X – the appreciation of the US dollar accounted for roughly three percentage points of the year over year change in operating margin. Q1’23 EPS of $2.88 (vs. $3.53 in Q1‘22) was in-line with our guidance of $2.82 and included an $81 million non-cash unrealized loss from F/X remeasurement on our Euro denominated debt.

We forecast Q2’23 operating income of $1.6B (roughly flat year over year) and an operating margin of 19% vs. 20% in Q2’22. The year over year decline in operating margin is attributable to the appreciation of the US dollar against most other currencies over the past year. We expect constant currency revenue growth to accelerate over the course of the second half of 2023 as we continue to improve our service, more broadly roll out paid sharing in Q2 and grow our advertising business. 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’re still targeting a 2023 operating margin of 18%-20%, based on F/X rates as of January 1, 2023.

We believe our ability to deliver on our long term financial targets will hinge on 1) growing engagement and 2) improving our monetization to fuel revenue growth and increased profitability. Engagement

Engagement is important to success in streaming because it drives both retention (increased member 3 satisfaction) and acquisition (greater word of mouth). The third party data in the chart below shows that Netflix and YouTube are the clear leaders in streaming engagement – and that the opportunity ahead is significant as streaming still accounts for the minority of viewing in every country. We remain highly confident that streaming’s share of engagement will continue to grow at the expense of linear since it offers a better experience (on demand, availability across devices). We believe this gives Netflix tremendous room for growth if we can continue to improve our service – increasing our share of total viewing by multi ples higher than today’s 2-4% share in Brazil, Mexico and Poland, or 7- 9% share in the U.S . and UK.

As our Netflix Top 10 lists show, people have very diverse tastes. To please our members we need to connect them with a title they’ll love in that moment – whether it’s an elevated drama, comedy, action adventure or reality show, versus simply engagement for engagement’s sake. The more we can consistently deliver the right titles to the right audiences at the right time, the more our members will choose Netflix when they next turn on their TV or recommend our service to their friends. It’s a virtuous flywheel, which is why our content teams are so focused on working with the best creators, and the variety and quality of our slate.

In March, for example, All Quiet on the Western Front (the Oscar and BAFTA winning film) and Too Hot To Handle Germany hit our German Top 10 – two very different must watch, much loved titles that speak to the breadth of our programming ambitions. In Q1, we had several big returning series and films – demonstrating our growing ability to develop stories across genres – including Outer Banks S3, You S4, Ginny & Georgia S2, Soy Georgina S2, The Glory’s new installment and a big sequel to our hit film Murder Mystery. Building anticipation and buzz before and after titles premiere is a key goal for our Marketing team as it helps drive acquisition and retention. For example, excitement for Murder Mystery 2 drove the original film back into the top 10. For Outer Banks S3, we held our first ever live music event – Poguelandia – to drive fandom, with the title generating 2.2B social impressions to date, just ahead of You S4 with 2.1B.

Our unique ability to connect creators with huge audiences of passionate fans through our near global reach, personalization, innovative marketing and publicity are key reasons storytellers want to tell their stories on Netflix. In addition, we successfully launched big new titles across a broad variety of genres – including The Night Agent, La chica de nieve, Rana Naidu, and the movie Kill Boksoon all in the thriller/action space, the golf docu series Full Swing and new dating show Perfect Match. These series are all being renewed for subsequent seasons.

We’re also starting to find greater success in scripted comedies with the returning  season of The Upshaws and the Q1 debut of That 90’s Show (a spinoff of That 70’s Show), Machos Alfas and En Place. Similarly, our Q1 film offering included You People (with Jonah Hill and Eddie Murphy), the romantic comedy Your Place or Mine (starring Ashton Kutcher and Reese Witherspoon), as well as Murder Mystery 2 (featuring Adam Sandler and Jennifer Aniston). In stand-up, Chris Rock’s Selective Outrage – now the most-streamed comedy special of all time in the US according to Nielsen – was one of our buzziest titles this quarter.

As we improve our member experience with more must watch stories, we also need to improve our monetization. This will not only help reaccelerate revenue growth and increase operating margin, it will also enable us to invest more in great entertainment. We want to be more sophisticated around pricing so that we offer a range of price points and feature sets to suit consumers’ differing needs. For example, when we launched globally in 2016, we took a fairly uniform approach to pricing across most countries given our focus on early adopters. Over time we’ve adapted our prices to meet local needs and to further deepen our penetration, including lowering prices in India by 20%-60% in December ‘21. These reductions – combined with an improved slate – helped grow engagement in India by nearly 30% year on year while F/X neutral revenue growth in 2022 accelerated to 24% (versus 19% in 2021). Learning from this success, we reduced prices in an additional 116 countries in Q1. While they represented less than 5% of our FY‘22 revenue, we believe that increasing adoption in these markets will help to maximize our revenue longer term.

Similarly, our new ads plan allows us to offer consumers a lower price point. While it’s still very early days, we continue to be pleased with our progress across all key dimensions: member experience, value to advertisers and incremental contribution to our business. Engagement on our ads tier is above our initial expectations and, as expected, we’ve seen very little switching from our standard and premium plans. Also, thanks to our most recent set of licensing deals, our ad-supported plan now has on average ~95% content parity globally (by viewing) with our ads-free plans, including all the latest Netflix shows and movies. On the advertiser side, we are launching a programmatic private marketplace to enable more buying options for Netflix ad inventory using Microsoft’s sales platform. Our partnerships with Integral Ad Science and Double Verify are also now live – validating campaign engagement of ads viewership on Netflix. We are pleased with the current performance and trajectory of our per-member advertising economics.

In the US for instance, our ads plan already has a total ARM (subscription + ads) greater than our standard plan. So this month we’ll upgrade the feature set of our ads plan to include 1080p versus 720p video quality and two concurrent streams in all 12 ads markets – starting with Canada and Spain today. We believe these enhancements will make our offering even more attractive to a broader set of consumers and further strengthen engagement for existing and new subscribers to the ads plan. Paid sharing is another important initiative as widespread account sharing (100M+ households) undermines our ability to invest in and improve Netflix for our paying members, as well as build our business.

We’re pleased with the results of our Q1 launches in Canada, New Zealand, Spain and Portugal, strengthening our confidence that we have the right approach. As with Latin America, we see a cancel 5 reaction in each market when we announce the news, which impacts near term member growth. But as borrowers start to activate their own accounts and existing members add “extra member” accounts, we see increased acquisition and revenue.

For example, in Canada, which we believe is a reliable predictor for the US, our paid membership base is now larger than prior to the launch of paid sharing and revenue 4 growth has accelerated and is now growing faster than in the US. With each launch, we learn more about how best to roll out these changes and what matters to members the most, in particular maintaining travel/watching on the go and the ability for people to better control access to their accounts as well as transfer profiles to separate accounts.

We could have launched broadly in late Q1, but we found enough improvement opportunities in these areas to shift a broad launch to Q2 to implement those changes. As noted above, while this will shift some of the membership growth and revenue benefit from Q2 to Q3, we believe it will result in a better outcome for our members and our business. Longer term, paid sharing will ensure a bigger revenue base from which we can grow as we improve our service. As a reminder, as we roll out paid sharing – and as some borrowers stop watching either because they don’t convert to extra members or full paying accounts – near term engagement, as measured by third parties like Nielsen, will likely shrink modestly.

However, we believe the pattern will be similar to what we’ve seen in Latin America, with engagement growth resuming over time as we continue to improve our programming and borrowers sign-up for their own accounts. Competition Competition remains intense as we compete with so many forms of entertainment (linear TV, gaming, user generated content, premium streaming content, and social media to name just a few).

Among our streaming video competitors, our traditional entertainment peers appear to be focused on revenue diversification (across theatrical, linear TV and third party licensing) as they manage through the hard transition from legacy businesses to streaming – whereas we are “all in” on streaming and already generating significant profit and free cash flow. The large tech companies continue to invest heavily in streaming, with a particular focus on live sports recently. We don’t focus too much on the competition because we’ve learned over the years that consistently great execution (better movies, TV series, and now games, better discovery and buzzier, more creative marketing) is the key to our long term success.

We succeed by getting a bit better, a bit faster than the competition every month. Cash Flow and Capital Structure Net cash generated by operating activities in Q1 was $2.2B vs. $0.9B in the prior year period. Free cash flow (FCF) in Q1 totaled $2.1B compared with $0.8B in last Q1. Assuming no material swings in F/X, we 5 now expect at least $3.5B of FCF for the full year 2023, up from our prior expectation of at least $3.0B. This reflects lower cash spend on content than we originally forecasted, resulting in a year over year decrease in cash content spend (bringing our 2023 cash content to content amortization ratio closer to 5 Defined as cash provided by (used in) operating activities less purchases of property and equipment and change in other assets.

Our paid membership count does not include “extra members.” Instead, they lift ARM. 6 1.0x in 2023). For 2024, we still expect our cash content spend to be in the range of roughly $17B, consistent with our prior expectations for the 2022-2024 period. In Q1, Moody’s upgraded our credit rating to Baa3. Combined with our BBB credit rating from S&P, we are now investment grade. Gross debt at quarter end totaled $14.5B, in-line with our targeted range of $10-$15B. With cash and short term investments of $7.8B, net debt totaled $6.7B, or 1.1x LTM EBITDA. 6 Our capital structure policy is unchanged. The first priority for our cash is to reinvest in our core business and to fund new opportunities like gaming and ads, followed by selective acquisitions. We target maintaining minimum cash equivalent to roughly two months of revenue (e.g., about $5.4B based on Q1 revenue).

After meeting those needs, we anticipate returning cash to stockholders through share repurchases. We bought back 1.2M shares for $400M in Q1. We currently expect to accelerate our share repurchases over the course of 2023. Environmental, Social, and Governance (ESG) We recently published an update on progress in our sustainability program. We continue the work to decarbonize our operations and we’ve delivered on our commitment to net all remaining emissions to zero by the end of 2022 through investing in nature-based projects that capture carbon.

After an incredible 25 year run, we’ve decided to wind down DVD.com later this year. Our goal has always been to provide the best service for our members but as the DVD business continues to shrink that’s going to become increasingly hard. So we want to go out on a high, and will be shipping our final DVDs on September 29, 2023. From the very beginning, our members loved the choice and control that direct-to-consumer entertainment offered, including the variety and quality of our titles and the ability to binge watch entire series. DVD paved the way for streaming, ensuring that so much of what we started will continue long into the future. We feel so privileged to have been able to share movie nights with our DVD members for so long, so proud of what our employees have achieved and excited to continue pleasing entertainment fans for many more decades to come. Thanks to all our employees over the years that worked so hard to build the booster rocket that got streaming to a leading position.