October 20, 2020
Fellow shareholders,
As we expected, growth has slowed with 2.2m paid net adds in Q3 vs. 6.8m in Q3’19. We think this is
primarily due to our record first half results and the pull-forward effect we described in our April and
July letters. In the first nine months of 2020, we added 28.1m paid memberships, which exceeds the
27.8m that we added for all of 2019. In these challenging times, we’re dedicated to serving our
members.
Q3 Results and Q4 Forecast
Q3 average streaming paid memberships rose 25%, while streaming ARPU decreased 1.6% year over
year. Excluding a foreign exchange (F/X) impact of -$158m, streaming ARPU increased 1% vs. prior year.
Revenue was 2% above our beginning-of-quarter guidance primarily due to slightly higher than expected
ARPU (favorable plan mix in our UCAN, LATAM and APAC regions plus intra-quarter appreciation in the
Euro and British pound which helped lift EMEA ARPU). As a result, operating margin of 20% (up 170bps
year over year) exceeded our guidance forecast as well. EPS of $1.74 vs. $1.47 a year ago included a
$249m non-cash unrealized loss from F/X remeasurement on our Euro denominated debt, which
accounted for the variance with our EPS guidance.
We added 2.2m net memberships in Q3, compared with our 2.5m guidance. Retention remains healthy
and engagement per member household was up solidly year over year in Q3’20. As a reminder, our
1
guidance is our internal forecast and we strive for accuracy. That means in some quarters our results will
be high relative to our guidance forecast and, in others, it will be low.
Our APAC region was the largest contributor to our paid membership growth this quarter (46% of Q3
global paid net adds) and APAC revenue rose 66% year over year. We’re pleased with the progress we’re
making in this region and, in particular, that we’ve achieved double digit penetration of broadband
homes in both South Korea and Japan. While this is encouraging, we still have much work to do and
we're working hard to replicate this success in India and other countries.
For Q4‘20, we forecast 6.0m paid net adds vs 8.8m in Q4‘19. As we have highlighted in our recent
investor letters, we believe our record first half paid net additions would result in slower growth in the
back half of this year. If we achieve our forecast, it will put us at a record 34m paid net adds for 2020,
well above our prior annual high of 28.6m in 2018.
The state of the pandemic and its impact continues to make projections very uncertain, but as the world
hopefully recovers in 2021, we would expect that our growth will revert back to levels similar to
pre-COVID. In turn, we expect paid net adds are likely to be down year over year in the first half of 2021
as compared to the big spike in paid net adds we experienced in the first half of 2020. We continue to
view quarter-to-quarter fluctuations in paid net adds as not that meaningful in the context of the long
run adoption of internet entertainment, which we believe is still early and should provide us with many
years of strong future growth as we continue to improve our service.
2
We forecast Q4 operating margin of 13.5% vs. 8.4% last year, which means we’ll over-deliver this year
on our original full year margin target; our FY20 operating margin is now expected to be 18% (vs. 16%
originally) or a 500 basis point increase year over year. Since 2016, we will have more than quadrupled
our annual GAAP operating margin (which is our primary profitability metric).
As in the past, we intend to continue to grow our operating margin each year and at an average rate of
300 basis points per year over any few-year period, but we anticipate more lumpiness. Some years we’ll
be a little over (like this year when we expect to grow operating margin 500bps), some years a little
under, but we are trying to keep on a 300 bps per year long-term trajectory. The increased lumpiness is
due to increased F/X exposure from our international success and COVID’s impact on the timing of
spending. By moving to this multi-year model, we’ll be able to manage our short term expenses more
smoothly as well as grow slightly more efficiently than in the past. As we wrote last quarter, for 2021,
we’re targeting a 19% operating margin.
Content
We are making good and careful progress returning to production, particularly in EMEA and APAC, but
also across much of LATAM and UCAN. We’ve restarted production on some of our biggest titles
including season four of Stranger Things
, action film Red Notice
(starring Dwayne Johnson, Gal Gadot
and Ryan Reynolds) and The Witcher
season two. Since the almost-global shutdown of production back
in mid-March, we have already completed principal photography on 50+ productions and, while the
course and impact of C-19 remains unpredictable, we’re optimistic we will complete shooting on over
150 other productions by year-end.
For our 2021 slate, we continue to expect the number of Netflix originals launched on our service to be
up year over year in each quarter of 2021 and we’re confident that we’ll have an exciting range of
programming for our members, particularly relative to other entertainment service options. As
3
discussed last quarter, some of our most popular returning titles are expected to launch in the second
half of next year.
This past quarter, the breadth of our programming was demonstrated with standout titles across many
genres. In English language series, we debuted new seasons of The Umbrella Academy
and Lucifer
; 43m
and 38m member households chose to watch these titles in the first 28 days, respectively. In
mid-September, we also premiered Ryan Murphy’s Ratched
, a thriller based on the character from One
Flew Over the Cuckoo’s Nest
. In its first four weeks, 48m member households chose to watch Ratched
.
Our #1 and #2 most watched documentary feature films ever were released in Q3. American Murder:
The Family Next Door
is projected to have 52m members households choose the title in its first 28 days
and The Social Dilemma
had 38m in its first 28 days.
We continue to invest heavily in local language content because we believe that great stories are
universal: they can come from anywhere and be loved everywhere. Season one of the Mexican
telenovela Oscuro Deseo
(Dark Desire
) was our biggest local language original globally this quarter. Our
slate of Korean dramas continue to travel well throughout APAC and beyond, while anime is another
category of content with fans all over the world.
Another example of our content traveling around the globe is our non-fiction series Indian
Matchmaking
, which was watched by a quarter of our members in India and millions of members
outside of India in its first four weeks.
Original film continues to be an area of opportunity for us and we had several big hits in Q3. Action
thriller The Old Guard
(starring Charlize Theron and directed by Gina Prince-Bythewood) was our most
popular title of the quarter with 78m member households choosing to watch in its first four weeks. Our
romantic comedy The Kissing Booth 2
received strong reception (66m member households chose to
watch in the first 28 days), while action film Project Power
(starring Jamie Foxx) was also very popular
(75m member households chose to watch in the first four weeks). Late in September, we debuted Enola
Holmes
, starring Millie Bobby Brown and Henry Cavill as her famed detective brother. We estimate 76m
member households will have chosen this film in the first 28 days.
Our content successes highlight our ability to tap into our global audience of nearly 200m members and
underscore the notion that content is discovered
on Netflix. This applies not only to Netflix originals, but
also to second run programming, like Schitt’s Creek
and earlier seasons of Lucifer
, both of which are very
popular with our members. The latest example is Cobra Kai
(based on The Karate Kid
films), which
originally debuted on YouTube’s subscription service in May 2018 and recently launched on Netflix on
August 28. In its first four weeks of release on Netflix, 50m member households chose to watch season
one, dramatically expanding its audience.
We’re looking forward to season 3 of Cobra Kai
premiering exclusively on Netflix on January 8, 2021. In
addition to the recently released The Haunting of Bly Manor
(a follow up to the acclaimed The Haunting
of Hill House
), season one of Emily in Paris
and Adam Sandler’s latest film Hubie Halloween
, other
notable Q4 titles include our animated family film Over the Moon
from legendary creator Glen Keane
(premiering this weekend), season four of our award-winning series The Crown
and the first season of
Selena
. We’ll also have a great slate of films, including The Midnight Sky
(directed by and starring George
4
Clooney), Hillbilly Elegy
(from Ron Howard), Ma Rainey’s Black Bottom
(with Viola Davis and Chadwick
Boseman), The Christmas Chronicles 2
(from Chris Columbus), Jingle Jangle: A Christmas Journey
(with
Forest Whitaker), MANK
(David Fincher’s first feature at Netflix) and Ryan Murphy’s The Prom
(starring
Meryl Streep, Nicole Kidman, James Corden and Kerry Washington).
Product and Partnerships
We strive to be a global entertainment service that can satisfy the needs of members all over the world.
Commissioning and producing local language content is an important part of that. But we also invest
heavily into improving our product, partnerships and overall consumer experience. For example, in India
in Q3, we localized our service to support Hindi in our user interface.
We’re also working with local partners like Reliance Jio, India’s largest mobile operator, where in Q3 we
launched a bundle with their mobile and fiber broadband plans. As part of this broad partnership, we’ll
integrate Netflix with two of Jio’s set top boxes. We’ve also partnered with financial institutions in India
to make payment processing easier and more seamless for our members, which we expect will have
retention benefits. All of these initiatives are important and work in concert with our big investment in
local originals to improve the Netflix experience for our members.
Competition
Competition for consumers’ time and engagement remains vibrant. Linear television and other big
categories of entertainment, like video games and user generated content from YouTube and TikTok are
all vying for consumers’ attention and are strong drivers of screen time usage. We remain quite small
relative to overall screen time.
This past quarter, we saw the debut of Comcast’s Peacock, which comes on the heels of the launch of
HBO Max and Disney+. Disney’s recent management reorganization signals that it is embracing the shift
to streaming entertainment. We’re thrilled to be competing with Disney and a growing number of other
5
players to entertain people; both consumers and content creators will benefit from our mutual desire to
bring the best stories to audiences all over the world.
We’ll continue to focus on pleasing our members and improving our service as quickly as possible so
that we can be everyone's first choice for online entertainment.
Cash Flow and Capital Structure
Net cash generated by operating activities in Q3 was +$1.3 billion vs. -$502 million in the prior year
period. Free cash flow (FCF) was positive for a third consecutive quarter at +$1.1b vs. -$551 million in
1
Q3‘19. Year to date free cash flow is +$2.2 billion vs. -$1.6 billion in the first nine months of 2019.
As productions increasingly restart, we expect Q4’20 FCF to be slightly negative and therefore, for the
full year 2020, we forecast FCF to be approximately $2 billion, up from our prior expectation of
break-even to positive. This change is due primarily to our higher operating margin expectation for 2020
and the timing of cash spending on content. We expect our FCF profile over the coming years to
continue to improve as we increase our profitability and our transition to the production of Netflix
originals (which requires more cash upfront vs. second run content) matures. For 2021, we currently
expect free cash flow to be -$1 billion to break-even.
With $8.4 billion in cash on our balance sheet at the end of the quarter plus our $750m credit facility
(which is undrawn), our need for external financing is diminishing. As indicated last quarter, we don’t
have plans to access the capital markets this year.
Reference
For quick reference, our eight most recent investor letters are: July 2020, April 2020, January 2020,
October 2019, July 2019, April 2019, January 2019, October 2018.
1
For a reconciliation of free cash flow to net cash provided by (used in) operating activities, please refer
to the reconciliation in tabular form on the attached unaudited financial statements and the footnotes
thereto.
6
Regional Breakdown
October 20, 2020 Earnings Interview, 3pm PT
Our video interview with Kannan Venkateshwar of Barclays Capital will be on youtube/netflixir at 3pm
PT today. Questions that investors would like to see asked should be sent to
[email protected]. Reed Hastings, co-CEO, Ted Sarandos, co-CEO & Chief
Content Officer, Greg Peters, COO & Chief Product Officer, Spence Neumann, CFO, and Spencer Wang,
VP of IR/Corporate Development will all be on the video to answer Kannan’s questions.
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IR Contact:
Spencer Wang
VP, Finance/IR & Corporate Development
408 809-5360
PR Contact:
Richard Siklos
VP, Communications
408 540-2629
Use of Non-GAAP Measures
This shareholder letter and its attachments include reference to the non-GAAP financial measure of free
cash flow and adjusted EBITDA. Management believes that free cash flow and adjusted EBITDA are
important liquidity metrics because they measure, during a given period, the amount of cash generated
that is available to repay debt obligations, make investments and for certain other activities or the
amount of cash used in operations, including investments in global streaming content. However, these
non-GAAP measures should be considered in addition to, not as a substitute for or superior to, net
income, operating income, diluted earnings per share and net cash provided by operating activities, or
other financial measures prepared in accordance with GAAP. Reconciliation to the GAAP equivalent of
these non-GAAP measures are contained in tabular form on the attached unaudited financial
statements.
Forward-Looking Statements
This shareholder letter contains certain forward-looking statements within the meaning of the federal
securities laws, including statements regarding the timing and business impact of the global recovery
from the affects of the COVID-19 pandemic; future content offerings and the number and timing of such
offerings; our content production schedules and return to production, including the course and impact
of the COVID-19 pandemic on content production; watch metrics for certain titles; partnerships;
adoption of internet entertainment; impact of competition; future capital raises and external financing
needs; global streaming paid members, paid net additions and membership growth; paid net additions,
consolidated revenue, revenue growth, operating income, operating margin, net income, and earnings
per share; and free cash flow. The forward-looking statements in this letter are subject to risks and
uncertainties that could cause actual results and events to differ, including, without limitation: our
ability to attract new members and retain existing members; our ability to compete effectively;
maintenance and expansion of device platforms for streaming; fluctuations in consumer usage of our
service; service disruptions; production risks, including those related to the coronavirus pandemic; and,
competition, including consumer adoption of different modes of viewing in-home filmed entertainment.
A detailed discussion of these and other risks and uncertainties that could cause actual results and
events to differ materially from such forward-looking statements is included in our filings with the
Securities and Exchange Commission, including our Annual Report on Form 10-K, filed with the Securities
and Exchange Commission (“SEC”) on January 29, 2020, as updated in our Quarterly Report on Form
10-Q for the quarter ended March 31, 2020. The Company provides internal forecast numbers. Investors
should anticipate that actual performance will vary from these forecast numbers based on risks and
uncertainties discussed above and in our Annual Report on Form 10-K, as updated by Form 10-Q for the
quarter ended March 31, 2020. We undertake no obligation to update forward-looking statements to
reflect events or circumstances occurring after the date of this shareholder letter.
8
Netflix,Inc.
ConsolidatedStatementsofOperations
(unaudited)
(inthousands,exceptpersharedata)
ThreeMonthsEnded NineMonthsEnded
September30,
2020
June30,
2020
September30,
2019
September30,
2020
September30,
2019
Revenues
$ 6,435,637 $ 6,148,286 $ 5,244,905 $ 18,351,614 $ 14,689,013
Costofrevenues
3,867,751 3,643,707 3,097,919 11,111,159 8,974,190
Marketing
527,597 434,370 553,797 1,465,797 1,773,525
Technologyanddevelopment
453,802 435,045 379,776 1,342,664 1,135,773
Generalandadministrative
271,624 277,236 233,174 800,947 659,783
Operatingincome
1,314,863 1,357,928 980,239 3,631,047 2,145,742
Otherincome(expense):
Interestexpense
(197,079) (189,151) (160,660) (570,313) (448,222)
Interestandotherincome(expense)
(256,324) (133,175) 192,744 (367,802) 215,378
Incomebeforeincometaxes
861,460 1,035,602 1,012,323 2,692,932 1,912,898
Provisionforincometaxes
71,484 315,406 347,079 473,693 632,952
Netincome
$ 789,976 $ 720,196 $ 665,244 $ 2,219,239 $ 1,279,946
Earningspershare:
Basic
$ 1.79 $ 1.63 $ 1.52 $ 5.04 $ 2.93
Diluted
$ 1.74 $ 1.59 $ 1.47 $ 4.89 $ 2.83
Weighted-averagecommonsharesoutstanding:
Basic
441,526 440,569 438,090 440,486 437,547
Diluted
455,088 453,945 451,552 453,846 451,896
9
Netflix,Inc.
ConsolidatedBalanceSheets
(inthousands)
Asof
September30,
2020
December31,
2019
(unaudited)
Assets
Currentassets:
Cashandcashequivalents
$ 8,392,391 $ 5,018,437
Othercurrentassets
1,434,089 1,160,067
Totalcurrentassets
9,826,480 6,178,504
Contentassets,net
25,067,633 24,504,567
Propertyandequipment,net
828,118 565,221
Othernon-currentassets
2,900,312 2,727,420
Totalassets
$ 38,622,543 $ 33,975,712
LiabilitiesandStockholders'Equity
Currentliabilities:
Currentcontentliabilities
$ 4,599,654 $ 4,413,561
Accountspayable
541,298 674,347
Accruedexpensesandotherliabilities
1,259,124 843,043
Deferredrevenue
1,040,202 924,745
Short-termdebt
499,517 —
Totalcurrentliabilities
7,939,795 6,855,696
Non-currentcontentliabilities
2,926,574 3,334,323
Long-termdebt
15,547,616 14,759,260
Othernon-currentliabilities
1,875,235 1,444,276
Totalliabilities
28,289,220 26,393,555
Stockholders'equity:
Commonstock
3,303,482 2,793,929
Accumulatedothercomprehensiveloss
(1,147) (23,521)
Retainedearnings
7,030,988 4,811,749
Totalstockholders'equity
10,333,323 7,582,157
Totalliabilitiesandstockholders'equity
$ 38,622,543 $ 33,975,712
10
Netflix,Inc.
ConsolidatedStatementsofCashFlows
(unaudited)
(inthousands)
ThreeMonthsEnded NineMonthsEnded
September30,
2020
June30,
2020
September30,
2019
September30,
2020
September30,
2019
Cashflowsfromoperatingactivities:
Netincome
$ 789,976 $ 720,196 $ 665,244 $ 2,219,239 $ 1,279,946
Adjustmentstoreconcilenetincometonetcashprovided
by(usedin)operatingactivities:
Additionstocontentassets
(2,653,886) (2,510,782) (3,648,292) (8,458,943) (9,971,141)
Changeincontentliabilities
(379,458) (108,432) (95,548) (228,945) (122,660)
Amortizationofcontentassets
2,733,743 2,607,159 2,279,977 7,824,287 6,636,578
Depreciationandamortizationofproperty,equipment
andintangibles
28,589 26,661 26,704  83,767 75,761
Stock-basedcompensationexpense
106,357 104,210 100,262 307,586  305,310
Othernon-cashitems
83,851 70,301 57,934  219,600 164,337
Foreigncurrencyremeasurementloss(gain)ondebt
249,194 119,161 (171,360) 275,295 (167,676)
Deferredtaxes
(40,277) 223,308  52,105 229,650 94,251
Changesinoperatingassetsandliabilities:
Othercurrentassets
(22,974) 3,066  145 (147,261) (56,162)
Accountspayable
111,677 (112,027) (7,643) (149,503) (134,784)
Accruedexpensesandotherliabilities
266,027 (105,450) 260,872 374,768 391,814
Deferredrevenue
10,941 42,508 22,729  115,457 154,607
Othernon-currentassetsandliabilities
(19,999) (38,803) (44,923) (100,248) (75,528)
Netcashprovidedby(usedin)operating
activities
1,263,761 1,041,076 (501,794) 2,564,749 (1,425,347)
Cashflowsfrominvestingactivities:
Purchasesofpropertyandequipment
(109,811) (141,741) (45,333) (349,567) (145,298)
Changeinotherassets
(8,840) (260) (4,021) (9,388) (34,195)
Netcashusedininvestingactivities
(118,651) (142,001) (49,354) (358,955) (179,493)
Cashflowsfromfinancingactivities:
Proceedsfromissuanceofdebt
— 1,009,464 —  1,009,464 2,243,196
Debtissuancecosts
— (7,559) —  (7,559) (18,192)
Proceedsfromissuanceofcommonstock
68,665 89,060 11,989  201,419 56,857
Netcashprovidedbyfinancingactivities
68,665 1,090,965 11,989 1,203,324 2,281,861
Effectofexchangeratechangesoncash,cashequivalents,
andrestrictedcash
28,459 11,819 (29,325) (30,624) (29,341)
Netincrease(decrease)incash,cashequivalents,and
restrictedcash
1,242,234 2,001,859 (568,484) 3,378,494 647,680
Cash,cashequivalentsandrestrictedcashatbeginningof
period
7,180,046 5,178,187 5,028,205 5,043,786 3,812,041
Cash,cashequivalentsandrestrictedcashatendofperiod
$ 8,422,280 $ 7,180,046 $ 4,459,721 $ 8,422,280 $ 4,459,721
ThreeMonthsEnded NineMonthsEnded
September30,
2020
June30,
2020
September30,
2019
September30,
2020
September30,
2019
Non-GAAPfreecashflowreconciliation:
Netcashprovidedby(usedin)operatingactivities
$ 1,263,761 $ 1,041,076 $ (501,794) $ 2,564,749 $ (1,425,347)
Netcashusedininvestingactivities
(118,651) (142,001) (49,354) (358,955) (179,493)
Non-GAAPfreecashflow
$ 1,145,110 $ 899,075 $ (551,148) $ 2,205,794 $ (1,604,840)
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Netflix,Inc.
Non-GAAPInformation
(unaudited)
(inthousands)
September30,
2019
December31,
2019
March31,
2020
June30,
2020
September30,
2020
Non-GAAPAdjustedEBITDAreconciliation:
GAAPnetincome
$ 665,244 $ 586,970 $ 709,067 $ 720,196 $ 789,976
Add:
Otherexpense(income)
(32,084) 309,179 162,386 322,326 453,403
Provisionfor(benefitfrom)incometaxes
347,079 (437,637) 86,803 315,406 71,484
Depreciationandamortizationofproperty,
equipmentandintangibles
26,704 27,818 28,517  26,661 28,589
Stock-basedcompensationexpense
100,262 100,066 97,019 104,210 106,357
AdjustedEBITDA
$ 1,107,205 $ 586,396 $ 1,083,792 $ 1,488,799 $ 1,449,809
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