Case 3:22-cv-03164-JD Document 1 Filed 05/31/22 Page 1 of 25
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`M. Elizabeth Graham, Esq. (Cal. Bar No. 143085)
`GRANT & EISENHOFER P.A.
`201 Mission Street, Suite 1200
`San Francisco, CA 94105
`Telephone: (415) 293-8210
`Facsimile: (415) 789-4367
`Email: egraham@gelaw.com
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`Attorney for Plaintiff the Cleveland Bakers
`and Teamsters Pension Fund
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`[Additional Counsel on Signature Page]
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`UNITED STATES DISTRICT COURT
`NORTHERN DISTRICT OF CALIFORNIA
`SAN JOSE DIVISION
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`CLEVELAND BAKERS AND
`TEAMSTERS PENSION FUND,
`Individually and on behalf of all others
`similarly situated,
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`Plaintiff,
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`v.
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`NETFLIX, INC., REED HASTINGS,
`THEODORE SARANDOS, SPENCER
`NEUMANN, and GREGORY
`PETERS,
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`Defendants.
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`Case No.
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`CLASS ACTION COMPLAINT
`FOR VIOLATIONS OF THE
`FEDERAL SECURITIES LAWS
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`DEMAND FOR JURY TRIAL
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`CLASS ACTION COMPLAINT
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`Case 3:22-cv-03164-JD Document 1 Filed 05/31/22 Page 2 of 25
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`Plaintiff the Cleveland Bakers and Teamsters Pension Fund (“Plaintiff”)
`individually and on behalf of all others similarly situated, by and through its attorneys,
`alleges the following upon information and belief, except as to those allegations
`concerning Plaintiff, which are alleged upon personal knowledge. Plaintiff’s
`information and belief is based upon, among other things, its counsel’s investigation,
`which includes without limitation: (a) review and analysis of regulatory filings made
`by Netflix, Inc. (“Netflix” or the “Company”) with the United States Securities and
`Exchange Commission (the “SEC”); (b) review and analysis of press releases and
`media reports issued by and disseminated by Netflix; and (c) review of other publicly
`available information concerning Netflix.
`NATURE OF THE ACTION AND OVERVIEW
`1.
`This is a class action on behalf of persons and entities that purchased or
`otherwise acquired Netflix common stock between January 19, 2021 and April 19,
`2022, inclusive (the “Class Period”). Plaintiff pursues claims against Defendants for
`violations of the Securities Exchange Act of 1934 (the “Exchange Act”).
`2.
`Netflix is an entertainment company that creates and distributes television
`series, documentaries, and feature films on its eponymous streaming platform. A
`primary metric Netflix uses to measure growth is the net number of new paid
`subscriptions (often referred to as “paid net adds”) on its platform.
`3.
`On January 20, 2022, after the market closed, Netflix reported paid net
`adds of 8.3 million subscribers during the fourth quarter of 2021, shy of its 8.5 million
`forecast. The Company also provided weak paid net add guidance of 2.5 million
`subscribers for the first quarter of 2022, well under the prior year period’s 4.0 million
`paid net adds.
`4.
`On this news, the Company’s stock price fell $110.75, or nearly 22%, to
`close at $397.50 per share on January 21, 2022, on unusually heavy trading volume.
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`CLASS ACTION COMPLAINT
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`Case 3:22-cv-03164-JD Document 1 Filed 05/31/22 Page 3 of 25
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`5.
`On April 19, 2022, after the market closed, Netflix reported that instead
`of gaining 2.5 net subscriptions, it had lost 200,000 subscriptions during the first
`quarter of 2022. The Company disclosed, belatedly, that account sharing and
`competition from other services were hampering growth.
`6.
`On this news, the price of Netflix stock price fell $122.42, or over 35%,
`to close at $226.19 per share on April 20, 2022, on unusually heavy trading volume.
`7.
`Throughout the Class Period, Defendants made materially false and/or
`misleading statements, as well as failed to disclose material adverse facts about the
`Company’s business, operations, and prospects. Specifically, Defendants failed to
`disclose to investors that: (1) account sharing by customers and increased competition
`from other streaming services were becoming significant headwinds; (2) the Company
`was experiencing difficulties retaining customers; (3) as a result of the foregoing, the
`Company’s growth was decelerating; (4) as a result of the foregoing, the Company’s
`financial results were being adversely affected; and (5) as a result of the foregoing,
`Defendants’ positive statements about the Company’s business, operations, and
`prospects were materially false and/or misleading and/or lacked a reasonable basis.
`8.
`As a result of Defendants’ wrongful acts and omissions, and the
`precipitous declines in the price of the Company’s securities, Plaintiff and other Class
`members have suffered significant losses and damages.
`JURISDICTION AND VENUE
`9.
`The claims asserted herein arise under Section 10(b) of the Exchange Act
`(15 U.S.C. § 78j(b)) and SEC Rule 10b-5 promulgated thereunder (17 C.F.R.
`§240.10b-5), and under Section 20(a) of the Exchange Act (15 U.S.C. § 78t(a)). This
`Court has jurisdiction over the subject matter of this action under 28 U.S.C. § 1331 and
`Section 27 of the Exchange Act (15 U.S.C. § 78aa).
`10. Venue is proper in this Judicial District under 28 U.S.C. § 1391(b) and
`Section 27 of the Exchange Act (15 U.S.C. § 78aa(c)) because Netflix’s principal place
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`Case 3:22-cv-03164-JD Document 1 Filed 05/31/22 Page 4 of 25
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`of business lies in Los Gatos, California, which is within this Judicial District. In
`addition, many of the violations of the federal securities laws alleged herein were made
`within this Judicial District.
`11.
`In connection with the acts, transactions, and conduct alleged herein,
`Defendants directly and indirectly used the means and instrumentalities of interstate
`commerce, including but not limited to the United States mail, interstate telephone
`communications, and the facilities of a national securities exchange.
`PARTIES
`12. Plaintiff the Cleveland Bakers and Teamsters Pension Fund, as set forth
`in the accompanying certification, incorporated by reference herein, purchased Netflix
`securities during the Class Period, and suffered damages as a result of the federal
`securities law violations and false and misleading statements and material omissions
`alleged herein.
`13. Defendant Netflix is incorporated under the laws of Delaware and has its
`principal executive offices in Los Gatos, California. Netflix’s common stock trades on
`the NASDAQ under the symbol “NFLX.”
`14. Defendant Reed Hastings (“Hastings”) was the Co-Chief Executive
`Officer (“Co-CEO”), President, and Chairperson of the Company at all relevant times.
`15. Defendant Ted Sarandos (“Sarandos”) was the Co-CEO, Chief Content
`Creator, and a director of the Company at all relevant times.
`16. Defendant Spencer Neumann (“Neumann”) was the Company’s Chief
`Financial Officer (“CFO”) at all relevant times.
`17. Defendant Gregory Peters (“Peters”) was the Company’s Chief Operating
`Officer and Chief Product Officer at all relevant times.
`18. Defendants Hastings, Sarandos, Neumann, and Peters (collectively the
`“Individual Defendants”), possessed and exercised their power and authority to control
`the contents of the Company’s SEC filings, press releases, and other market
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`CLASS ACTION COMPLAINT
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`Case 3:22-cv-03164-JD Document 1 Filed 05/31/22 Page 5 of 25
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`communications. They were provided with copies of the Company’s SEC filings, press
`releases, and statements in earnings calls, which were later shown to be misleading,
`prior to or shortly after their issuance and had the ability and opportunity to prevent
`their issuance or to cause them to be corrected or supplemented so as to not be
`materially misleading or incomplete. Because of their control over the Company, and
`their access to material information available to them but not to the public, the
`Individual Defendants knew that the adverse facts specified herein had not been
`disclosed to and were being concealed from the public, and that the positive
`representations being made were then materially false and misleading. The Individual
`Defendants are liable for the false statements and omissions pleaded herein.
`SUBSTANTIVE ALLEGATIONS
`Background
`19. Netflix primarily operates an entertainment platform that offers TV
`series, documentaries, feature films, and mobile games across a variety of genres and
`languages. It also offers a DVD-by-mail service in the U.S.
`Materially False and Misleading Statements
`20. The Class Period begins on January 19, 2021. On that date, the
`Company reported its fourth quarter 2020 financial results, stating in relevant part:
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`Average paid streaming memberships increased 23% year
`over year in Q4, while average revenue per membership was
`flat year over year both on a reported and foreign exchange
`(F/X) neutral basis. Revenue was 1% higher than our
`guidance forecast, as paid net adds exceeded our 6.0m
`projection by 2.5m. Operating margin of 14.4% (a 600bps
`increase from Q4’19) also came in above our guidance, due
`to higher-than-expected revenue. EPS of $1.19 vs. $1.30 a
`year ago included a $258m non-cash unrealized loss from
`F/X remeasurement on our Euro denominated debt.
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`For the full year, our 37m paid net additions represented a
`31% increase from 2019’s 28m paid net adds. We’re
`becoming an increasingly global service with 83% of our
`paid net adds in 2020 coming from outside the UCAN
`region. Our EMEA region accounted for 41% of our full
`year paid net adds, while APAC was the second largest
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`Case 3:22-cv-03164-JD Document 1 Filed 05/31/22 Page 6 of 25
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`contributor to paid net additions with 9.3m (up 65% year
`over year).
`21. During the earnings call that day, Defendant Hastings claimed that
`consumers are “interested and willing to pay more for more content because they’re
`hungry for great stories,” and that they would “get that content” by going to other
`platforms in addition to Netflix. When an analyst posited that the addition of new
`streaming services “expands the pie . . . for streaming in general” and could
`“accelerate growth,” Defendant Peters responded, “I think you’re right.”
`22. On April 20, 2021, Netflix announced its first quarter 2021 financial
`results, stating in relevant part:
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`Average revenue per membership rose 6% year over year,
`or 5%, excluding a foreign exchange impact of +$80m.
`Operating income of $2 billion vs. $958 million more than
`doubled vs. Q1’20. This exceeded our guidance forecast
`primarily due to the timing of content spend. EPS of $3.75
`vs. $1.57 a year ago included a $253m non-cash unrealized
`gain from F/X remeasurement on our Euro denominated
`debt.
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`The extraordinary events of Covid-19 led to unprecedented
`membership growth in 2020, as it pulled forward growth
`from 2021, and delayed production across every region. In
`turn, we ended 2020 with a bigger membership and revenue
`base than we would otherwise have had, contributing to
`record Q1’21 revenues. And since we were still ramping
`production levels late last year, we had lower content spend
`in Q1’21 - content amortization only grew 9.5% year over
`year in Q1’21 vs. 17% in FY20. The result was a 10
`percentage point year over year jump in our operating
`margin to 27% in Q1, which is an all-time high.
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`As we discussed in past letters, these dynamics are also
`contributing to a lighter content slate in the first half of
`2021, and hence, we believe slower membership growth. In
`Q1, paid net additions of 4m were below our 6m guidance
`(and the 16m net additions in the year ago quarter) primarily
`due to acquisition, as retention in Q1 was in line with our
`expectations. We don’t believe competitive intensity
`materially changed in the quarter or was a material factor in
`the variance as the over-forecast was across all of our
`regions. We also saw similar percentage year-over-year
`declines in paid net adds in all regions . . . , whereas the level
`of competitive intensity varies by country.
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`CLASS ACTION COMPLAINT
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`Case 3:22-cv-03164-JD Document 1 Filed 05/31/22 Page 7 of 25
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`23. During that day’s earnings call, Defendant Neumann assured investors
`that the “business remains healthy” despite “noise in the near term” related to the
`pandemic. Defendant Hastings downplayed concerns over the competitive
`environment, claiming that the industry is “intensely competitive, but it always has
`been.”
`24. On July 20, 2021, Netflix announced its second quarter 2021 financial
`results, stating in relevant part:
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`Revenue growth was driven by an 11% increase in average
`paid streaming memberships and 8% growth in average
`revenue per membership (ARM). ARM rose 4%, excluding
`a foreign exchange (FX) impact of +$277m. Operating
`margin of 25.2% expanded 3 percentage points compared
`with the year ago quarter. EPS of $2.97 vs. $1.59 a year ago
`included a $63m non-cash unrealized loss from FX
`remeasurement on our Euro denominated debt.
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`The pandemic has created unusual choppiness in our growth
`and distorts year-over-year comparisons as acquisition and
`engagement per member household spiked in the early
`months of COVID. In Q2’21, our engagement per member
`household was, as expected, down vs. those unprecedented
`levels but was still up 17% compared with a more
`comparable Q2’19. Similarly, retention continues to be
`strong and better than pre-COVID Q2’19 levels, even as
`average revenue per membership has grown 8% over this
`two-year period, demonstrating how much our members
`value Netflix and that as we improve our service we can
`charge a bit more.
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`We added 1.5m paid memberships in Q2, slightly ahead of
`our 1.0m guidance forecast. The APAC region represented
`about two-thirds of our global paid net adds in the quarter.
`As expected, Q2 paid memberships in the UCAN region
`were slightly down sequentially (-0.4m paid net adds). We
`believe our large membership base in UCAN coupled with
`a seasonally smaller quarter for acquisition is the main
`reason for this dynamic. This is similar to what we
`experienced in Q2’19 when our UCAN paid net adds were
`-0.1m; since then we’ve added nearly 7.5m paid net adds in
`UCAN.
`25. Speaking at the earnings call that day, Defendant Neumann attributed
`the “choppiness” in growth to the after-effect of the “big pull forward in 2020” and
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`reassured investors that the “business is performing well.” Neumann emphasized that
`Netflix was “roughly 20% penetrated in broadband homes,” and with 800 million to
`900 million worldwide that could potentially buy a Netflix subscription there was no
`reason why Netflix could not “be in all or most of those homes over time if we’re
`doing our job.” In the United States and Canada, Neumann said that only 26% of
`viewing consumption was through a streaming service, within which Netflix was only
`7% of consumption.
`26. On October 19, 2021, Netflix announced its third quarter 2021 financial
`results in a letter to shareholders that stated, in relevant part:
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`After a lighter-than-normal content slate in Q1 and Q2 due
`to COVID-related production delays in 2020, we are seeing
`the positive effects of a stronger slate in the second half of
`the year. In Q3, we grew revenue 16% year over year to $7.5
`billion, while operating income rose 33% vs. the prior year
`quarter to $1.8 billion. We added 4.4m paid net adds (vs.
`2.2m in Q3’20) to end the quarter with 214m paid
`memberships. We’re very excited to finish the year with
`what we expect to be our strongest Q4 content offering yet,
`which shows up as bigger content expense and lower
`operating margins sequentially.
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`*
`*
`*
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`We under-forecasted paid net adds for the quarter (4.4m
`actual vs. our 3.5m projection), while ending paid
`memberships of 214m was within 0.4% of our forecast. For
`the second consecutive quarter, the APAC region was our
`largest contributor to membership growth with 2.2m paid
`net adds (half of total paid net adds) as we are continuing to
`improve our service in this region. In EMEA, paid net adds
`of 1.8m improved sequentially vs. the 188k in Q2 as several
`titles had a particularly strong impact. The UCAN and
`LATAM regions grew paid memberships more slowly.
`These regions have higher penetration of broadband homes
`although we believe we still have ample runway for growth
`as we continue to improve our service.
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`As a reminder, the quarterly guidance we provide is our
`actual internal forecast at the time we report and we strive
`for accuracy. For Q4’21, we forecast paid net adds of 8.5m,
`consistent with Q4’20 paid net additions. For the full year
`2021, we forecast an operating margin of 20% or slightly
`better. This means that Q4’21 operating margin will be
`approximately 6.5% compared with 14% in Q4’20. The year
`over year decline in operating margin is due mostly to our
`CLASS ACTION COMPLAINT
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`Case 3:22-cv-03164-JD Document 1 Filed 05/31/22 Page 9 of 25
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`backloaded big content release schedule in this Q4, which
`will result in a roughly 19% year over year increase in
`content amortization for Q4’21 (compared with ~8%
`growth year to date).
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`27. Netflix held a conference call that day to discuss the financial results with
`analysts and investors. During the call, Defendant Neumann stated that “throughout
`the quarter, the business remained healthy as it had been throughout the year with churn
`at low levels, down prior to the comparable periods both in 2020 and two years ago
`pre-COVID in 2019.” He also stated that management “expect[ed] to continue in terms
`of that healthy retention and then this kind of acceleration as we get past those initial
`market reopenings with COVID [and] past the COVID pull forwarding into the
`strength of our slate . . . .”
`28. The above statements identified in ¶¶ 21-28 were materially false and/or
`misleading, and failed to disclose material adverse facts about the Company’s business,
`operations, and prospects. Specifically, Defendants failed to disclose to investors that:
`(1) account sharing by customers and increased competition from other streaming
`services were becoming significant headwinds; (2) the Company was experiencing
`difficulties retaining customers; (3) as a result of the foregoing, the Company’s growth
`was decelerating; (4) as a result of the foregoing, the Company’s financial results were
`being adversely affected; and (5) as a result of the foregoing, Defendants’ positive
`statements about the Company’s business, operations, and prospects were materially
`false and/or misleading and/or lacked a reasonable basis.
`The Truth is Gradually Revealed
`29. On January 20, 2022, after the market closed, Netflix revealed that it had
`“slightly over-forecasted paid net adds in Q4.” In a letter to shareholders, Netflix
`announced its fourth quarter 2021 financial results and stated, in relevant part (all
`emphases herein are added):
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`Full year revenue of $30 billion grew 19% year over year
`while operating income of $6.2 billion rose 35% year over
`year. We finished Q4 with 222m paid memberships (with
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`Case 3:22-cv-03164-JD Document 1 Filed 05/31/22 Page 10 of 25
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`8.3m paid net adds in Q4). Even in a world of uncertainty
`and increasing competition, we’re optimistic about our
`long-term growth prospects as streaming supplants linear
`entertainment around the world.
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`*
`*
`*
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`We slightly over-forecasted paid net adds in Q4 (8.3m
`actual compared to the 8.5m paid net adds in both the year
`ago quarter and our beginning of quarter projection). For
`the full year 2021, paid net adds totaled 18m vs 37m in
`2020. Our service continues to grow globally, with more
`than 90% of our paid net adds in 2021 coming from outside
`the UCAN region.
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`region added 1.2m paid
`Nonetheless, our UCAN
`memberships in Q4’21 (vs. 0.9m last year), marking our
`strongest quarter of member growth in this region since the
`early days of COVID-19 in 2020. In APAC, we increased
`paid memberships by 2.6m (vs. 2.0m in the year ago quarter)
`with strong growth in both Japan and India. EMEA was our
`largest contributor to paid net adds in Q4 (3.5m vs. 4.5m in
`the prior year period) and the region delivered record
`quarterly revenue, exceeding $2.5 billion for the first time.
`LATAM paid net adds totaled 1.0m vs. 1.2m last year.
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`*
`*
`*
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`For Q1’22, we forecast paid net adds of 2.5m vs. 4.0m in
`the year ago quarter. Our guidance reflects a more back-
`end weighted content slate in Q1’22 (for example,
`Bridgerton S2 and our new original film The Adam Project
`will both be launching in March). In addition, while
`retention and engagement remain healthy, acquisition
`growth has not yet re-accelerated to pre-Covid levels. We
`think this may be due to several factors including the
`ongoing Covid overhang and macro-economic hardship in
`several parts of the world like LATAM.
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`*
`*
`*
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`Consumers have always had many choices when it comes to
`their entertainment time - competition that has only
`intensified over the last 24 months as entertainment
`companies all around the world develop their own streaming
`offering. While this added competition may be affecting
`our marginal growth some, we continue to grow in every
`country and region in which these new streaming
`alternatives have launched. This reinforces our view that
`the greatest opportunity in entertainment is the transition
`from linear to streaming and that with under 10% of total
`TV screen time in the US, our biggest market, Netflix has
`tremendous room for growth if we can continue to improve
`our service.
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`30. The same day, Netflix held a conference call to discuss the financial
`results with analysts and investors. During the call, Defendant Neumann stated that
`“overall, the business was healthy. Retention was strong. Churn was down.” He
`continued that “acquisition was growing, just not growing quite as fast as we were
`perhaps hoping or forecasting,” which was “probably a bit of just overall COVID
`overhang that’s still happening . . . [and] some macroeconomic strain in some parts of
`the world . . . .”
`31. On this news, the Company’s stock price fell $110.75, or nearly 22%, to
`close at $397.50 per share on January 21, 2022, on unusually heavy trading volume.
`32. On January 27, 2022, Netflix filed with the SEC on Form 10-K its annual
`report for the period ended December 31, 2021. Therein, the Company provided the
`following risk disclosures:
`If our efforts to attract and retain members are not successful, our
`business will be adversely affected.
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`We have experienced significant membership growth over the past
`several years. Our penetration and growth rates vary between the
`jurisdictions where we provide our service. In countries where we
`have been operating for many years or where we are highly
`penetrated, our membership growth is slower than in newer or less
`penetrated countries. Our ability to continue to attract and retain
`members will depend in part on our ability to consistently provide
`our members in countries around the globe with compelling content
`choices, effectively drive conversation around our content and
`service, as well as provide a quality experience for choosing and
`enjoying TV series, documentaries, feature films and mobile
`games. Furthermore, the relative service levels, content offerings,
`pricing and related features of competitors to our service may
`adversely impact our ability to attract and retain memberships.
`Competitors include other entertainment video providers, such as
`MVPDs, and streaming entertainment providers (including those
`that provide pirated content), video gaming providers, as well as
`user-generated content, and more broadly other sources of
`entertainment that our members could choose in their moments of
`free time.
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`If consumers do not perceive our service offering to be of value,
`including if we introduce new or adjust existing features, adjust
`pricing or service offerings, or change the mix of content in a
`manner that is not favorably received by them, we may not be able
`to attract and retain members. We have recently expanded our
`entertainment video offering to include games. If our efforts to
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`develop and offer games are not valued by our current and future
`members, our ability to attract and retain members may be
`negatively impacted. We may, from time to time, adjust our
`membership pricing, our membership plans, or our pricing model
`itself, which may not be well-received by consumers, and which
`may result in existing members canceling our service or fewer new
`members joining our service. In addition, many of our members
`rejoin our service or originate from word-of-mouth advertising
`from existing members. If our efforts to satisfy our existing
`members are not successful, we may not be able to attract
`members, and as a result, our ability to maintain and/or grow our
`business will be adversely affected. Members cancel our service
`for many reasons, including a perception that they do not use the
`service sufficiently, the need to cut household expenses,
`availability of content is unsatisfactory, competitive services
`provide a better value or experience and customer service issues
`are not satisfactorily resolved. Membership growth is also
`impacted by seasonality, with the fourth quarter historically
`representing our greatest growth, as well as the timing of our
`content release schedules. We must continually add new
`memberships both to replace canceled memberships and to grow
`our business beyond our current membership base. While we
`currently permit multiple users within the same household to share
`a single account for non-commercial purposes, if multi-household
`usage is abused or if our efforts to restrict multi-household usage
`are ineffective, our ability to add new members may be hindered
`and our results of operations may be adversely impacted. If we do
`not grow as expected, given, in particular, that our content costs
`are largely fixed in nature and contracted over several years, we
`may not be able to adjust our expenditures or increase our (per
`membership) revenues commensurate with the lowered growth
`rate such that our margins, liquidity and results of operation may
`be adversely impacted. If we are unable to successfully compete
`with current and new competitors in providing compelling content,
`retaining our existing memberships and attracting new
`memberships, our business will be adversely affected.
`
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`33. The above statements identified in ¶¶ 30-31, 33 were materially false
`and/or misleading, and failed to disclose material adverse facts about the Company’s
`business, operations, and prospects. Specifically, Defendants failed to disclose to
`investors that: (1) account sharing by customers and increased competition from other
`streaming services were becoming significant headwinds; (2) the Company was
`experiencing difficulties retaining customers; (3) as a result of the foregoing, the
`Company’s growth was decelerating; (4) as a result of the foregoing, the Company’s
`financial results were being adversely affected; and (5) as a result of the foregoing,
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`Defendants’ positive statements about the Company’s business, operations, and
`prospects were materially false and/or misleading and/or lacked a reasonable basis.
`34. On April 19, 2022, after the market closed, Netflix reported that it had lost
`200,000 subscriptions during the first quarter of 2022, well under the paid net add
`guidance of 2.5 million. In a letter to shareholders, Netflix explained:
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`Paid net additions were -0.2m compared against our guidance
`forecast of 2.5m and 4.0m in the same quarter a year ago. The
`suspension of our service in Russia and winding-down of all
`Russian paid memberships resulted in a -0.7m impact on paid net
`adds; excluding this impact, paid net additions totaled +0.5m. The
`main challenge for membership growth is continued soft
`acquisition across all regions. Retention was also slightly lower
`relative to our guidance forecast, although it remains at a very
`healthy level (we believe among the best in the industry). Recent
`price changes are largely tracking in-line with our expectations and
`remain significantly revenue positive.
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`In EMEA (-0.3M paid net adds, or +0.4m excluding the Russia
`impact), we saw a slowdown in our business in Central and
`Eastern Europe in March, coinciding with Russia’s invasion of
`Ukraine. Paid net additions in LATAM totaled -0.4M; similar to
`recent quarters, we believe a combination of forces including
`macroeconomic weakness and our price changes (F/X neutral
`ARM grew 20% year over year) were a drag on our membership
`growth. UCAN paid net adds of -0.6M was largely the result of
`our price change which is tracking in-line with our expectations
`and is significantly revenue positive. We’re making good progress
`in APAC where we are seeing nice growth in a variety of markets
`including Japan, India, Philippines, Thailand and Taiwan.
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`As a reminder, the quarterly guidance we provide is our actual
`internal forecast at the time we report. For Q2’22, we forecast
`paid net additions of -2.0m vs. +1.5m in the year ago quarter.
`Our forecast assumes our current trends persist (such as slow
`acquisition and the near term impact of price changes) plus
`typical seasonality (Q2 paid net adds are usually less than Q1
`paid net adds). We project revenue to grow approximately 10%
`year over year in Q2, assuming roughly a mid-to-high single digit
`year over year increase in ARM on a F/X neutral basis. We still
`target a 19%-20% operating margin for the full year 2022,
`assuming no material swings in F/X rates from when we set this
`goal in January of 2022.
`35. The letter to shareholders stated that Netflix is “not growing revenue as
`fast as we’d like.” It further stated: “COVID clouded the picture by significantly
`increasing our growth in 2020, leading us to believe that most of our slowing growth
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`in 2021 was due to the COVID pull forward.” However, Netflix newly attributed the
`slowing revenue growth to four factors, including rampant account sharing and
`competition with other streaming services. Specifically, the letter stated, in relevant
`part:
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`First, it’s increasingly clear that the pace of growth into our
`underlying addressable market (broadband homes) is partly
`dependent on factors we don’t directly control, like the uptake of
`connected TVs (since the majority of our viewing is on TVs), the
`adoption of on-demand entertainment, and data costs. We believe
`these factors will keep improving over time, so that all broadband
`households will be potential Netflix customers.
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`Second, in addition to our 222m paying households, we estimate
`that Netflix is being shared with over 100m additional
`households, including over 30m in the UCAN region. Account
`sharing as a percentage of our paying membership hasn’t changed
`much over