Netflix : Q4 17 Letter to shareholders

January 22, 2018

Fellow shareholders,

We had a beautiful Q4, completing a great year as internet TV expands globally. In 2017, we grew

streaming revenue 36% to over $11 billion, added 24 million new memberships (compared to 19 million

in 2016), achieved for the first time a full-year positive international contribution profit, and more than

doubled global operating income.

.1Q4 ResultsAverage paid streaming memberships rose 25% year over year in Q4. Combined with a 9% increase in

ASP, global streaming revenue growth amounted to 35%. Operating income of $245 million (7.5%

margin) vs. $154 million prior year (6.2% margin) was slightly above our $238 million forecast. Operating

margin for FY17 was 7.2%, on target with our goal at the beginning of this year.

EPS was $0.41 vs. $0.15 last year and met our forecast of $0.41. There were several below the line items

that affected net income, including a pre-tax $26 million non-cash unrealized loss from F/X

remeasurement on our Eurobond. Our tax rate was helped by a $66 million foreign tax benefit, which

partially offset a revaluation of our deferred tax assets and the impact from the mandatory deemed

repatriation of accumulated foreign earnings related to the recent US tax reform.

In Q4, we registered global net adds of 8.3 million, the highest quarter in our history and up 18% vs. last

year's record 7.05 million net adds. This exceeded our 6.3m forecast due primarily to stronger than

expected acquisition fueled by our original content slate and the ongoing global adoption of internet

entertainment. Geographically, the outperformance vs. guidance was broad-based.

In the US, memberships rose by 2.0 million (vs. forecast of 1.25m) bringing total FY17 net adds to 5.3

million. ASP rose 5% year-over-year. Domestic contribution profit increased 5% year-over-year although

contribution margin of 34.4% declined both on a year-over-year and sequential basis due to the

marketing spend we noted in last quarter's investor letter.

Internationally, we added 6.36 million memberships (compared with guidance of 5.05m), a new record

for quarterly net adds for this segment. Excluding a F/X impact of +$43 million, international revenue

and ASP grew 59% and 12% year over year, respectively. The increase in ASP reflects price adjustments

in a wide variety of our markets over the course of 2017. With contribution profit of $227 million in 2017

(4.5% contribution margin), the international segment delivered its first full year of positive contribution

profit in our history.

We took a $39m non-cash charge in Q4 for unreleased content we've decided not to move forward

with. This charge was recognized in content expense in cost of revenues. Despite this unexpected

expense, we slightly exceeded our contribution profit and operating income forecast due to our stronger

than expected member growth and the timing of international content spend.

ForecastThe guidance we provide is our internal forecast at the time we report. For Q1, we project global net

adds of 6.35 million (vs. 5.0m in the year ago quarter), with 1.45m in the US and 4.90m internationally.

As we wrote last quarter, our primary profit metric is operating margin and we are targeting a full year

2018 target of 10%, up about 300 basis points year over year, as in the prior year.

We believe our big investments in content are paying off. In 2017, average streaming hours per

membership grew by 9% year-over-year. With greater than expected member growth (resulting in more

revenue), we now plan to spend $7.5-$8.0 billion on content on a P&L basis in 2018.

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Big hits like13 Reasons Why,Stranger ThingsandBrightresult from a combination of great content and

great marketing. We're taking marketing spend up a little faster than revenue for this year (from about

$1.3B to approximately $2B) because our testing results indicate this is wise. We want great content,

and we want the budget to make the hits we have really big, to drive our membership growth. We'll

grow our technology & development investment to roughly $1.3 billion in 2018.

ContentQ4 capped an amazing year for Netflix original content with returning seasons ofThe CrownandBlack

Mirroras well asStranger Things, which cemented its place as a global phenomenon.In the quarter, we

also successfully launched new titles like the limited seriesGodless,Marvel's The Punisherand

Mindhunter(from director David Fincher), the latter two of which are renewed for a second season. It's

amazing to think that in only 5 years since launching our first original series, Netflix had three of the Top

5 most searched TV shows globally for the second year in a row.

Our largest investment in original films to date,Bright,a fantasy action movie starring Will Smith, was a

major success and drove a notable lift in acquisition. In its first month,Brighthas become one of our

most viewed original titles ever. We're thrilled with this performance and are planning a sequel as well

as additional investment in original films.

We're finding continued success with international originals and in Q4 we released: season 3 ofClub de

Cuervosas well asThe Day I Met El Chapo,both of which are from Mexico;Suburrafrom Italy; and an

unscripted series from the UK,Jack Whitehall: Travels with My Father. We also debutedDark, our first

German original drama series. High-quality content can travel globally, irrespective of language; for

instance,Dark, in addition to being well-received in its home country, has also been viewed by millions

of members in the US and has outsized watching throughout Europe and Latin America. Combined with

attractive economics and a positive impact on our business in local markets, we will expand this

initiative with over 30 international original series this year, including projects from France, Poland,

India, Korea and Japan.

We are increasingly self-producing our original content. As part of this initiative, in Q4 we signed overall

deals withStranger Thingsproducer Shawn Levy andOrange is the New BlackandGLOWcreator Jenji

Kohan. Our goal is to work directly with the best talent to bring amazing stories to our members all over

the world.

Product and PartnershipsWe are partnering with a growing number of MVPDs and ISPs across the world to the benefit of our

mutual customers. These partnerships make it easier for consumers to sign up, enjoy and pay for Netflix,

while our service allows our partners to deepen their relationships with these subscribers. Examples of

these types of partnerships that we struck in Q4 include an expanded global partnership with Deutsche

Telekom and with Cox Communications and Verizon Communications in the US. As expected, the FCC

removed the US net neutrality rules. We believe that a strong internet should have enforceable net