EXHIBIT B-1 Thomas Weisel Partners MERCHAN T BANKIN G Champions of Growth June 17; 2002
Media & Broadcasting NETFLIX, INC .1'2-BUY
Gordon Hodge THE POSTMAN ALWAYS RINGS TWICE . . .WITH YOUR 415 .364 .2575 ghodge@tweisel .co m NETFLIX DVDs!
Sherry Lin Initiating Coverage NASDAQ : NFLX-$13.81 415 .364 .7175 slin@rweisel .com Key Data FY 2001 2002 200 3 Price : . $ 13 .81 EBITDA(mn) 52-Week Range : $14-$17 01 ($3 .6)A $3 .6A $5 .3 E Market Cap .(mn): $422 .5 Q2 ($0 .1)A $6 .OE $8 .8 E Shares Out.(mn) : 30 .6 Q3 $0 .6A $3 .8E $8 .7E Avg Daily Vol . : 192,714 04 $1 .4A $2 .3E $6 .5 E Fiscal Year End : 31-Dec Year ($1 .7)A $15 .7E $29 .3E P/EBITDA NM 0 .88x 0 .47x o M .r .,,irv Debt/Total Capital : N M Revenue(mn ) Price/TTM Sales : 4 .7 x 01 $17 .1A $30 .5A $51 .3E Source : FactSet Net Cash/Share : $-0 .1 0 Q2 $18 .4A $34 .9E $56 .OE Book Value/Share : N M Q3 $18 .9A $38 .6E $59 .5E Price/Book Value : N M Q4 $21 .6A $44 .1E $66 .7E Secular Growth : 50% Year $75 .9A $148 .1E $ 233 .5E TEV/Sales NM 2.3x 1 .5x
Executive Summary • We are initiating coverage of Netflix with a BUY rating . Netflix is a leading interactive, subscriber-based entertainment delivery service offering consumers a deep selection of DVDs for $19 .95 per month . We believe the company is an emerging force in the entertainment distribution business, well positioned to benefit from growth in consumer DVD usage and Internet adoption .
• Netflix has been EBITDA positive in the last three quarters and free cash flow positive in the most-recent quarter . We estimate the company can increase revenues 98% from $75 .9 million in 2001 to $148 .1 million in 2002 . We estimate that EBITDA should grow from a loss of $1 .7 million to a profit of $15 .7 million in 2002. For 2003, we look for $233 .5 million in revenue, $29 .3 million in EBITDA and $0 .42 in free cash flow per share.
• Over the next five years, we look for Netflix to deliver 40% subscriber growth, 47% revenue growth and 58% EBITDA growth, riding the wave of 22% projected DVD household growth and increased awareness of the Netflix service and brand . Our 2006 subscriber estimate of 2 .5 million (2 .2% of U .S . TV Households) could prove conservative as it is below the current 2 .8% penetration of Netflix service in the San Francisco Bay Area .
• We have set a 12-month target price of $25 based on 25x our 2003E EBITDA of $29 .3 million . A discounted cash flow analysis using a 17Yo discount rate and a 10x terminal multiple on 2006E EBITDA of $97 million supports our target price . Netflix is rated BUY .
Company Description : Ne/2tx is a leading interactive, subscriber-bared entertainment deb'veg, service offering consumers a deep .selection of D VDs for predominantly 519 .93 a month . Net/lix's online subscriber relationship is a strategic, competitive advantage now and in the future as filmed entertainment encompasses both tangible and electronic forms. Netflix Penetration of U .S . TV Households : 1999-2006E
3000 - - 3.00 %
2500 2.50% Current Bay Area penetration : 2.8%- 0 2000 - 2.00% O 1500-, 1 .50 ,
QI 5 1000 1 .00% Fj w I 0 500 } 0 .50 % i 0 0 .00 % 1999 2000 2001 2002E 2003E 2004E 2005E 2006E ti Ending subs (000s) --* - Penetration of TV household s
Source: Adams Media Research, Company reports and Thomas Weisel Partne rs LLC est¢rtate s
FINANCIAL MODEL ASSUMPTION S
Revenue Drivers
Revenues are driven by the number of paving subscribers and the average subscrip ti on fees per subscriber . Paying subsc ri bers are simply net subscribers less those enjoying a 10- to 14-day free trial . In 2001, revenue per average paving subscriber was $20.08, slightly above the standard subscription rate of $19 .95 given some heavy user subscri bers in the m ix . In 1Q02, we estimate the average fee increased to $21 .00 . Going forward, we assume an average of $19 .95/ month per paying subsc ri ber .
Subscribers and Chu m
The company ended 1 Q02 with 603,000 total subscribers after adding 312,000 during the quarter on a gross basis and 147,000 on a net basis . Reported churn was 7 .2% a month calculated as churned subscribers of 165,000 divided by the sum of beginning subscribers of 456,000 and gross adds of 312,000, divided by three months . (We also calculate churn
on a compounded basis, which equates to 7 .7% per month.) Reported churn was 10 .2% in the year-earlier period, 1Q0I . (We believe there may be seasonal variance in churn so
we look at it on a year/year basis rather than a sequential basis .) We look for chum to
improve slightly from 8% in 2001 to 7 .4'% in, 2002 and 7 .0% in 2003 as the company benefits from the opening of nine low-cost, regional hub distribution centers, which
improve delivery speed and are expected to increase customer satisfaction levels .
Gordon Hodge 415.364 .2575 6
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Growth Media & Broadcastin g NETFLIX, INC.1'2--BUY Gordon Hodge Q2 ENDING SUBSCRIBERS EXCEED EXPECTATIONS 415 .364 .2575 ghodge@tweisel .com Company Update NASDAQ: NFLX-$15.93 Sherry Li n 415 .364 .7175 Key Data FY 2001 2002 2003 slin@tweisel .com Price : $ 15 .93 EBITDA(mn ) 52-Week Range : $12-$17 Q1 ($3 .6)A $3 .6A $5 .3 E Market Cap . (mn): $487 .4 Q2 ($0 .1)A $6 .OE $8 .8 E Shares Out.(mn) : 30 .6 Q3 $0 .6A $3 .8E $8 .7 E Avg Daily Vol . : 257,062 Q4 $1 .4A $2 .3E $6 .5 E Fiscal Year End : 31-Dec Year ($1 .7)A $ 15 .7E $29 .3 E P/EBITDA NM 1 .02x 0 .54x Debt/Total Capital: NM Revenue(mn) Price/TTM Sales : 5 .5x Q1 $17 .1A $30 .5A $51 .3 E Net Cash/Share : $-0 .10 Q2 $18 .4A $34 .9E $56 .O E Book Value/Share : NM 03 $18 .9A $38 .6E $59 .5 E Price/Book Value : NM 04 $21 .6A $44 .1E $66.7 E Secular Growth : 50% Year $75 .9A $ 148 . 1E $233 .5 E TEV/Sales NM 2.3x 1 .5x Executive Summa ry • Netflix announced Q2 ending subscribers of 670,000 (+118`/c year over year), total new trial subscribers of 236,000 (+ 168% year over year) and average monthly churn of 6 .7%o . All three metrics exceeded our estimates ending subsc ribers of 643,000 (+109 % year over year), new trial subsc ri bers of 210,000 (+ 139`% year over year) and 7 .0 '% average monthly churn . • We are maintaining our Q2 es ti mates but note that the 27,000 subsc ri ber upside could cont ri bute an additional $ 3 million in revenue during FY02 give :a a higher subsc ri ber base . • The current penetration of Netflix service in the San Francisco Bay Area is 3 .1°/u, while national penetration is below 1 % . The rollout of 10 new hubs offering near next-day delive ry in major metropolitan areas (Atlanta , Boston, Denver, Detroit, Houston, Los Angeles, Minneapo li s , New York, Seattle and Washington D.C.) appears to be leading to improved churn of 6 .7% versus 7 .1% in 2Q01 . • Over the next five years , we look for Netflix to de liver 40 % subsc ri ber growth, 47% revenue growth and 58% EBITDA growth . We have set a 12 - month target p ri ce of $ 25 based on 25x our 2003E EBITDA of $ 29 .3 m illion . A discounted cash fl ow analysis using a 17% discount rate and a 10x terminal multiple on 2006E EBITDA . of $97 million supports our target p ri ce . Netflix is rated BUY . Company Description : Netfllx is a leadin,g interactive, subscriber-hated entertainment delivery service offenn~ consumers a deep selection of DVDs for predominantly 519.95 a month . Net~7s'x't online subscriber relationship is c strategic, competitive advantage now and in the future as filmed entertainment encompasses both tangible and electronic Dorn s. 600007 lbnye ( 415) 366-2575 SR6rty Lin (415) 364-7175 sIn SY4 3801 21926 26936 1az 40 926 52+ D! *_- QL 920 525 495 it. 515 022 025 4f5 194 .5 101J 106A 70.. 5 rvrour2tmf 1387) 1013 101.1 105 .1 1%6 106.0 1060 106 .3 106.6 106.9 107 .2 1011 10 r S. 7>V 050 6vwrdfa lam! 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SJ 941 ap .nae SS] 6.7 .I. t II IA a 21,1 l.f > .1 101 1l 123 -4 114 111 .2 Source: Adams Media Research , company reports , public documents and Thomas Weisel Pa rtners LLC estimates 71zro z Gordon Hodge 415 .364 .2575 4 Thomas Weisel Partners LLC Thomas Weisel Partners 'MERCHANT BANKIN G JWy 25, 2002 Champions of Growth Media & Broadcasting NETFLIX, INC .-BUY Gordon Hodge FREE CASH FLOW HIGHER THAN EXPECTED ; HUB 415 .364 .2575 ghodge @tweisel.com STRATEGY REDUCING CHURN Earnings Update NASDAQ : NFLX-$15.60 Sherry Lin 415 .364 .7175 [email protected] Key Data FY 2001 2002 2002 Prv 2003 2003 Pr v Price $ 15.60 EBITDA(mn) 52-Week Range : $12-$18 Q1 ($3 .6)A $3 .6A $3.6A $5 .8E $5 .3E Market Cap . (mn) : $473 .9 Q2 ($0.1)A $6.5A $6 .OE $9 .1E $8 .8E Shares Out.(mn) : 30 .4 Q3 $0 .6A $3.8E $18E $8 .7E $8 .7 E Avg Daily Vol . : 318,063 04 $1 .4A $2.8E $2 .3E $6 .4E $6 .5E Fiscal Year End : 31-Dec Year ($1 .7)A $16. 7E $15 .TE $30 .OE $29 .3E EV/EBITDA NM 25.2x 13 .5 x Debt/Total Capital : 2% Revenue(mn ) Price(TTM Sales : 4 .4x Q1 $17.1A $30.5A $30 .SA $51 .3E $51 .3E Net Cash/Share : NM 02 $18 .4A $36 .4A $34 .9E $56 .OE $56.OE Book Value/Share : $4 .49 Q3 $18.9A $39.3E $38 .6E $59 .4E $59.5E Price/Book Value : 3 .5x Q4 $21 .6A $43 .8E $44 .1E $66 .8E 166 .7E Secular Growth : 50% Year $ 75 .9A $ 150.OE 5148.1E $233 .5E $233 .5 E TEV/Sales NE 2.6x 1 .7 x Executive Summa ry • We are increasing our estimates for Netflix following better-than-expected 2Q02 results . Specifically, we are increasing our 2002 EPS estimate (before ncrn-cash comp) from ($0.63) to ($0 .54), after the company posted break-even results in 2Q02, $0 .05 better than our estimate . Our 2002 EBITDA estimate increases from $15 .7 million to $16 .7 million to reflect $500,000 worth of better results in 2Q02 and a moderate increase in 2H02. Our estimates are within management guidance for 2002 EBITDA of $14 .8-$18 .8 million . Our 2003 estimates are largely unchanged although we have increased EBITDA from $29 .3 million to $30 million even. • Netflix reported better-than -expected results in its first quarter as a public company . Revenue of $36 .4 million increased 98% year/year and was better than our $34.9 million estimate . EBITDA of $6 .5 million was above our $6 .0 million estimate and compared to a loss last year . Free cash flow was a surprising $4.6 million largely because of lower-than- expected disk purchases and better working capital management . As reported earlier, subscribers were 670,000, higher than our 643,000 es timate . 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Gordon Hodge 415 .364 .2575 7 Thomas Weisel Partners LLC Thomas Weisel Partners MERCHANT* BANKIN G gut. t >, 2002 Champions of Growth Media & Broadcasting NETFLIX, INC.-BUY Gordon Hodge CHANNEL CHECKS ON BLOCKBUSTER'S TEST DVD 415364 .2575 [email protected] SUBSCRIPTION SERVICE Company Update NASDAQ : NFLX-$11.36 Sherry Li n 415.364.7175 Key Data FY 2001 200 2 2003 slip a@tweisel .co m Price : $ 11 .36 EBITDA(mn ) 52-Week Range : $10-$18 Q1 (83 .6)A $3 6A $5 .8 E Market Cap .(mn) : $3451 Q2 ($0 .1(A $6 .5A $9 .1 E Shares Out .(mn) : 30 .4 Q3 $06A $3 .8E $87 E Avg Daily Vol . : 363,281 Q4 $1 .4A $2 .8E $6 .4 E Fiscal Year End : 31-Dec Year ($ 1 .7)A $113.7E $30 .O E EV/EBITDA NM 16.1x 8 .9x Debt/Total Capital : 2% Revenue(mn ) Price/TTM Sales : 3 2x Q1 $17 1A $305A $513 E Net Cash/Share : NM Q2 $18 .4A $36 .4A $56 .0E Source : FactSct Book Value /Share : $449 Q3 $18.9A $393E $59 .4E Price/ Book Value : 2 .5x 0 4 $21 .6A $43 .BE $66 .8 E Secular Growth : 50% Year $75 . 9A $150 .0E $233 .5 E TEV/Sales NE 2 .6x 1 .7 x Executive Summary • We recently conducted channel checks of 23 Blockbuster stores in 12 markets, including New York, Chicago, Los Angeles, San Francisco, Boston, Houston, Atlanta, Washington D .C ., Denver, Phoenix and Seattle. We found that currently, only four markets (New York City, Seattle, Houston and Phoenix) are offering a competing monthly subscription-based DVD rental program called "DVD Freedom Pass ." Similar to Netflic's offer, this program allows BBI's customers to rent an unlimited number of DVDs (with two or three out at a time) with no late fees or due dates . New York City, Houston and Seattle initiated this program this past Tuesday, August 6, while Phoenix started the program two weeks ago . • Blockbuster is testing a variety of price points ranging from $19 .99 to $29.99, with a $2 discount if users agree to be billed automatically each month on their credit card ; most markets are offering the program at $24 .99, a premium to NFLX's offer of $19.95. BBI is also testing different usage plans, perhaps to test inventory management ability, allowing users in sonme markets to keep two DVDs out at one time (Phoenix and Seattle), three out at a time (New York City) or a combination of both based on different prices (Houston) . • Based on our brief sampling of stores, we have encountered a variety of conversion . Stores in New York City reported 20-30 subscriptions sold per day, while stores in Houston and Seattle reported as low as less than five subscriptions sold per day up to approximately 20-30 per day. 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TmimrF rq Prrx 1ST e] It 9 R.t 3 -2 10. 3 113 111.3 3] ] 08/09/0 2 Gordon Hodge 415 .364 .2575 6 77fomas Weisel Partners LLC ACC Thomas Weisel Partners MERCHANT BANKING pions of Growth September 26, 2002 Cham Media & Broadcasting NETFLIX, INC.-BUY Gordon Hodge REITERATING BUY ; UPDATE ON BLOCKBUSTER DVD 415 .364 .2575 ghodge@ tweisel .com SERVICE Company Update NASDAQ: NFL-X-$10.50 Sherry Li n 415.364.7175 slin(d> tweisel .com Key Data FY 2001 200 2 2003 Price : $ 1050 EP S 52-Week Range : $10-$18 01 NM ($0 .11)A ($0 .06)E Market Cap .(mn) : $3190 Q2 NM $000A $004E Shares Out .(mn): 304 Q3 NM ($0 12)E $0,01 E Avg Daily Vol . : 220,753 Q4 NM ($0 .19)E ($011)E K PV Fiscal Year End : 31-Dec Year NM ($0.54) E ($0.10) E P/E NM NM NM Debt/Total Capital : 2% Revenue(mn ) PriceI TM Sales: 3 Ox Q1 $171A $30 .5A $51 3 E Source: FactSct Net Cash/Share : NM Q2 $18 .4A $36 .4A $56 .O E Book Value/Share : $4 .49 Q3 $18 .9A $39 3E $59 .4 E Price/ Book Value : 2 .3x Q4 $21 .6A $43 .8E $66.8 E Secular Growth : 50% Year $75 . 9A $150. 0E $233.5 E TEV/Sales NE 1 .6x 1 .0x Note : EPS shown before one- time items and non - cash compensatio n Executive Summary • We reiterate our BUY rating on Netflix based on our comfort with the company's ability to meet or exceed our 3Q02 revenue estimate of $39 .3 million and EBITDA estimate of $3 .8 million . Recent insider buying is also a bullish sign . ` e note that during the quarter, major shareholder Technology Crossover Ventures purchased 853,000 shares and CFO Barry McCarthy purchased shares . • As a follow-up to our August 8, 2002 note, we conducted store checks on competitor Blockbuster (BBI : Not Rated) . According to our research, Blockbuster has not vet rolled out its competing DVD Freedom Pass program nationwide, although the service has been gaining momentum in its four test markets (New York, Seattle, Phoenix and Houston) . Despite this, we believe that pricing and inventory could pose issues for Blockbuster in the future . We note that Blockbuster has recently cancelled its Games Freedom Pass program (a subscription service for electronic games), which was popular with consumers, but according to two stores, was perhaps not profitable for the company . • Store checks at eight stores in the four test markets revealed that a majority of DVD customers were signing up for the monthly DVD Freedom Pass service, according to seven stores, and these customers were renting an average of 6-111 DVDs per month, according to six stores . We include our notes of these store checks as an appendix . Company Description : Net77ic uc a /cadino interarlive, .ubsrriher-based entertainment dekieD se"4,-e oljerin, consumers a deep seler/ion of DJ ,Ds for prrcdonrinard4' S19.93 a month. 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S 32 .19 1 !0 .15 S ]) .16 f 25.41 f 32 .12 1 42,4 1 5 41 .:0 F ]5 .59 $ 10 .60 E I 1 :1 5 41 .60 S 90.50 f 20 .96 Tpul mLrMalino e,Panzr 2- 6] Rf ]4 se 11 .p 19 e.t D .5 1 ]D.T 12? fO.] 123 1e .1 s3 2 souse Neamz Med.Rezmrcn . mmrnr,rnor¢, weli_tlpnz-.ama rMT•vmm w . Fr Panne, r4mmez. 1 I Go'don Hodge 415 .364 .2575 5 Thomas \f'eiscl Partners LLC Media & Broadcasting NETFLIX, INC.-BUY Gordon Hodge NFLX: Q3 SUBSCRIBERS EXCEED EXPECTATIONS 415.364.2575 [email protected] Company Update NASDAQ: NFLX-$9.50 Sherry Lin 415 .364.7175 Key Data FY 2001 2002 200 3 Price : $9 .50 EP S [email protected] m 52-Week Range : $10-$18 Q1 NM ($0 .11)A ($0.06) E Market Cap. (mn): $288 .6 Q2 NM $O .OOA $0.04 E Shares Out .(mn) : 30.4 Q3 NM ($0 .12)E $0.01 E Avg Daily Vol . : 216,667 Q4 NM ($0 .19)E ($0 .11) E Fiscal Year End : 31-Dec Year NM ($0 .54)E ($0.10) E P/E NM NM NM Debt/Total Capital : 2 % Revenue(mn) e - PricefTTM Sales : 2 .7 x Q1 $17 .1A $30 .5A $51 .3E Net Cash/Share : N M Q2 $18 .4A $36 .4A $56.OE Book Value/Share : $4.49 Q3 $18 .9A $39 .3E $59.4E Source : FactSet Price/Book Value : 2 .1 x Q4 $21 .6A $43,8E $66.8E Secular Growth : 50% Year $75 .9A $150 .OE $233.5E TEV/Sales NE 1 .6x 1 .0x Note : EPS shown before one-time items and non-cash compensation. Executive Summary • On Tuesday, Netflix announced Q3 ending subscribers of 742,000 (+122% year over year, +11% sequentially), total new trial subscribers of 277,000 (+159`% year over year, +17`i4 sequentially), ending paying subscribers of 708,000 (+125 /(, year over year, +12% sequentially) and average monthly churn of 7 .2% versus 6 .5% in 3Q01 and 6 .7% in 2Q02 . • Netflix's Q3 ending subs, new trials and paying subs exceeded our estimates of ending subs of 715,000 (+114% year over year, +7 1/o sequentially), new trial subs of 225,000 (+110'/° year over year, -5% sequentially) and ending paying subs of 681,000 (+116%, +7%) . Average monthly churn in Q3 of 7 .2% was higher than our estimate of 6 .7`%b . • In Q3, Netflix penetration of TV households in the San Francisco Bay Area reached 3 .5°/u, up from 3.2% at the end of Q2, while national penetration is currently 0 .63 1/, up from 0 .57% at the end of Q2 . The rollout of 10 new hubs offering near next-day delivery in major metropolitan areas has led to increased national penetration and could eventually lead to lower average monthly churn, in our view . • Based on the just announced subscriber data, we believe our estimates of 3Q02 revenue of $39 .3 million, EBITDA of $3 .8 million and EPS before one-time items and non-cash compensation of ($0 .12) could prove conservative assuming 3Q02 customer acquisition costs come in as planned. We have left our estimates unchanged for now . The company reports earnings on October 17 after the close . Netflix is rated BUY . Company Description : Netf/ix is a leading interactive, subrmiber-bated entertainment delive ry service offering consumers a deep selection of DVDs for predominant// $19 .95 a month. Netflix's online subrmiber relationship is a strategic, competitive advantage non, and in the future a.r filmed entertainment encompasse s both tangib le and electronic forms. 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Gordon Hodge 415 .364.2575 5 Thomas Weisel Partners LLC Thomas Weisel Partners MERCHANT BANKIN G October 18, 2002 Champions of Growth Media & Broadcasting NETFLIX, INC.-BUY Gordon Hodge NFLX: RAISING FREE CASH FLOW ESTIMATE S 415.364.2575 [email protected] Earnings Update NASDAQ : NFLX-$7.70 Sherry Lin Key Data FY 2002 2002 Prv 2003 2003 Prv 415 .364.7175 2001 Price $7 .70 EP S [email protected] m 52-Week Range : $5418 Q1 NM ($0 .11)A ($0.11)A ($0 .13) E ($0 .06)E Market Cap.(mn): $225.6 Q2 NM $O .OOA $O.OOA $0 .08E '$0.04 E Shares Out .(mn) : 29 .3 Q3 NM ($0 .01)A ($0.12)E $0 .06E $0 .01 E Avg Daily Vol . : 285,222 Q4 NM ($0 .13)E ($0.19)E ($0 .11)E ($0 .11)E Fiscal Year End : 31-Dec Year NM ($0 .29)E ($0.54 ) E ($0.04 ) E ($0 .10)E PIE NM NM N M Debt/Total Capital : 2 % Revenue(mn ) Price/TTM Sales : 1 .7 x Q1 $17 .1A $30 .5A $30.5A $51 .3E -$51 .3E Net Cash/Share : $3 .34 Q2 $18.4A $36 .4A $36.4A $57 .2E $56 .O E Book Value/Share : $3 .67 Q3 $18 .9A $40 .7A $39.3E $60 .OE $59 .4 E Source : FactSet Price/Book Value : 2 .1 x Q4 $21 .6A $43 .2E $43.8E $65 .OE $66 .8E Secular Growth : 50% Year $75.9A $150.8E $150 .0E $233 .5E $233 .5E TEV/Sales NE 1 .0x 0 .6x Executive Summary • We are raising our free cash flow estimates for Netflix from $0 .15 to $0.42 in 2002 and from $0 .35 to $0 .60 in 2003 . We are modestly raising our FY02E revenue slightly from $150 .0 million. We are raising our FY02 EPS (before non-cash compensation) estimate from ($0.54) to ($0.29) and our FY03 EPS estimate from ($0.10) to ($0 .04) to reflect better margins, especially in the fulfillment and marketing area . Our FY02 and FY03 EBITDA estimates go from $16 .7 million to $21 .2 million and from $30 .0 million to $33 .0 million, respectively . • Revenue of $40 .7 million (up 116% year over year) was better than our $39 .3 million estimate . EBITDA of $6 .3 million (up 66% year over year) was well above our $3 .8 million estimate . Free cash flow of $5 .8 million far exceeded our $0.1 million estimate because of working capital management and higher EBITDA . As reported earlier, Q3 ending subscribers were 742,000, higher than our 715,000 estimate . • Netflix's total U .S . TV household penetration is an estimated 0 .63%, while its San Francisco Bay Area penetration is 3 .5% and growing, highlighting the market potential for the company, as national penetration could approach Bay Area levels (which continue to grow) . Competing DVD subscription services launched b y Blockbuster (BBI : Not Rated) and Wal- Mart (WMT : Not Rated) during the quarter help to validate Netflix's, in our view . We will continue to monitor competition closely . Company Description : Netflix is a leadin g, interactive, subscriber-based eniertaimnent delivery service offering consumers a deep selection of DVUs for predomrnaeic y 4 /9.95 a month. Neyhx'J online suhscnber relationship is a strategic, competitive advantage nom and in the future as -filmed entertainment encompasses both tangible and electronic forms. Please refer to the end of this,report fora>'li of :im.portant i sclosures Mat81a, IM. 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It it U 1.9 1 9.J 13.3 14 .0 103 12. 19.1 Sa .7 10/16/0 2 Gordon Hodge 415.364.2575 7 Thomas Weisel Partners LLC Thomas Weisel Partners MERCHANT RANKING December 4, 2002 Champion s of G rowth Media & Broadcasting NETFLIX, INC .-BUY Gordon Hodge NFLX: CHURN COMING DOWN ; ESTIMATES 415.364.2575 [email protected] INCREASED ; REITERATE BUY Sherry Lin Raising Estimates NAS]DAQ : NFLX-$9.95 315.364.7175 Key Data FY 2001 2002 2002 F' rv 2003 2003 P rv slin(d.;tweisel .com Price $9.95 EP S 52-Week Range : $5-$18 Q1 NM (SO 11)A ($01')A ($0 .13)E ($013) E Market Cap .(mn) : $2914 Q2 NM $0 OOA $0 0(A $0.08E S0 .08 E Shares Out .(mn) : 293 Q3 NM ($0.01)A ($001)A $0.06E S0 .06E Avg Daily Vol . : 372,417 Q4 NM ($0.05)E ($013(E ($0 .11)E (SO 11)E Fiscal Year End : 31-Dec Year NM (SO .19) E ($0 .29)E ($ 0.03)E ($ 0 .04) E P/E NM NM NM -n rur: Debt/Total Capital : 2% Revenue(mn ) Price/TTM Sales : 23x Q1 $17 1A $30 .5A $30.5A $513E $51 .3 E Net Cash/Share : NM 02 $18 .4A $364A $36 .4A $57 .2E $572 E Source . FactSet Book Value/Share : $367 03 $18 .9A $407A $40 .7A $60 .0E $60.OE Pri ce /Book Value : 2 7x Q4 $21 6A $43 .2E $43.2E. $65 .OE $65-OE Secular Growth : 50% Year $75 .9A $150.8E $150 .81`- $233. 5E $233 .5 E TEV/Sales NE 1 .4x 0 .9 x Executive Summarv • Following higher guidance for 4Q02 issued by the company late Wednesday, we are raising our 4Q02 free cash flow estimate from ($0 .01) to $0 .05 and our EIIITDA estimate from $4 .8 million to $6 .6 million, which may still prove to be conservative as it is at the low end of new management guidance of $6 .5-$7 .5 million . The change in our estimates is due mostly to lower-than-expected subscriber acquisition costs . Our rFhY12 free cash flow estimate increases from $0 .42 to $0 .48 and our FY02 EBITDA estimate increases from $21 .2 million to $22 .9 million . Our FY03 estimates are largely unchanged . • Importantly, NetflLx announced expectations for lower subscriber churn of 6 .6%-7.00, per month, versus previous guidance of 7 .0°/0-7 .4°,o, due partly to better targeting and retention of higher quality subscribers . Our reported chum estimate of 7 .0°%io remains unchanged. As a result of lower expected chum, Netflix expects ending subscribers to range 840,000- 870,000, versus previous guidance of 830,000-860,000. Our ending subscriber estimate remains 848,000 . The company also expects acquisition costs per subscriber to be $34-$38,- lower than previous plan of $40 . As such, we have decreased our SAC from $40 to $36 . • We believe that Netflix is ,in attractive pure-play investment on the replacement of 'VHS with DVD players . Netflix is already free cash flow positive with only 0 .63% penetration of U .S. n, households, a figure that we believe could almost triple in the next five years . For example, San Francisco Bay Area penetration is 3 .5°s and growing, highlighting the market potential for the company. • Netflix shares currently trade at 6x our 2003E EBITDA of $33 million and 17x our 2003 free cash flow estimate of $0.60 . Both multiples are steep discounts to our estimated 50°,, 3- to 5-year growth rates . We reiterate our BUY recommendation on Netflix shares . Company Description : Neifhx is a leading interartit'e, .rubseiherhared entertainrrrent delivery .rewire offering ronsumers a deep selettinn aJ D1 Dr for pr dominanth' 519 .95 a month. 1Ve/Jlix'.s online .ca/,,-fiber reladionship is a strategic, competitive ad:nntage non' and in the firlnm as filmed entertainment enrrirnpasres brtb tangible and e%elronir finis. t~~ the c fart a3 'i~'i~~ M.Mia, In Gorern HOege (4'') 38J 25]5 0 .nme31 in_y Lm )A' 5) 364] 115 rvE 1}n 1 3000 2001 2002E 2003E Ym 216 0 0 970 Q0L 3.-1 t2A 21h fide ➢9E 030. , O2E 032E 067E 21E 3530 U.S . TAeer m2ex U5 . 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Free .0 ,2000 wb .12 $ 9.00 3 8.33 3 1.19 3 :0 .92 E 004 S 8.02 5 836 E e4] S 8.20 S 000 3 9. 1 ] 'o, S 8.11 S 19 0.001 3.0 o1.5-11 9] 0.6 0.1 0.95 IE 00] 01 14 0] 11 0 C)verrnaal9•ms e 4 3 A] sup 4 .31 S 6.6] .26 ].21 ]] 3 3 .]1 1 $ 1, 80 S 2.00 1 _1 2 Subsalser cosu ;rms 00600 wb S 568 S J6 .2: 64E .19 ?0. 3 2511 S 11 .1J 3 9 J]3 S ]20 S 4014 E 11 .00 1 J 1 .223 5 40.15 TqM mnrMelin9 00021 .0 25.] 61 4,1 34 68 93 11 .9 110 10 .2 12 .J te.t Gordon Hodge 415 .364,2575 4 Thomas Weisel Partners LLC Thomas Weisel Partners MERCHANT BANKIN G January 2, 2003 Champions of Growth Media & Broadcastin g NETFLIX, INC.--BUY Gordon Hodge NFLX: 4Q02 SUBS AND CHURN .ABOVE OUR 415 .364.2575 [email protected] m ESTIMATES; REITERATE BUY Company Update NASDAQ : NFLX-$11.01 Sherry Lin 415 .364 .7175 slin@twweisel .co m Key Data FY 2001 2002 2003 Price: $ 11 .01 EPS * 52-Week Range : $5-$18 Q1 NM ($0 .11)A ($0 .13) E Market Cap .(mn) : $322 .5 Q2 NM $O .OOA $0 .08 E Shares Out.(mn) : 29 .3 03 NM ($0 .01)A $0 .06 E Avg Daily Vol . : 407,243 Q4 NM ($0 .05)E ($0 .11) E Fiscal Year End : 31-Dec Year NM ($0 .19)E ($0 .03) E PIE NM NM N M Debt/Total Capital : 2% Revenue(mn ) Price/TTM Sales : 2.5x Q1 $17 .1A $30 .5A $51 .3 E Source: FactSet Net Cash/Share : N M Q2 $18 .4A $36 .4A $57 .2 E Book Value/Share : $3 .6 7 Q3 $18 .9A $40 .7A $60 .O E Price/Book Value : 3 .Ox 04 $21 .6A $43 .2E $65 .O E Secular Growth : 50% Year $75.9A $ 150 .8E $ 233 .5 E TEV/Sales NE 1 .8x 1 .2 x one- ti me items, non-cas h Executive Summary • Netflix reported 4Q02 ending subscribers of 857,000 . This was slightly above our estimate of 848,000, 88% above 4Q01 and 15% above 3Q02 . • The company also indicated that churn was better than expected and plans to release that data when 4Q02 earnings are released January 15 after the market close . Recall on December 4, 2002, the company reduced its churn guidance to a range of 6 .6%-7.0% . We believe churn was better than 6 .6% . Our estimates are based on 7 .0°io churn and, thus, could prove conservative in light of both the higher subscriber count and lower-than-expected churn . • While there are many factors that affect EPS in our model (and therefore we are maintaining our estimates for now), holding all variables constant except subscribers and churn (using 6 .5% instead of 7 .0%) would lead to EPS about $$0 .02-$0 .03 better than our current 4Q02 estimate of ($0.05) . • Perhaps reflecting the lower churn, the number of paying subs was higher than expected at 93%, or 796,000 versus our estimate of 766,000. This could also indicate that pre-Christmas sign-ups were stronger than expected since all post-Christmas sign-ups would still be in the 10-day free trial mode at quarter end . This, too, suggests the company could exceed our EBITDA and EPS estimates of $6 .6 million and a loss of $0 .05 (EPS before non-cas h comp) . Company Desc ri ption : Netflix is a leading interactive, subsc ri ber-bared entertainment delivery service offering consumers a deep selection of DVDs for predominantly $19 .95 a month. Netflrx's online subscriber relationship is a strategic, competitive advantage now and in the future as filmed entertainment encompasses both tangib le and electronic forms. N.6hs, h .c . 000547NOE98 (115)36425)" s5 Inunr . 544rwr1100YSn : Shb L . (S er 0014181. , #40901 Pv snap FYE 121} + 2300 2K + 2K}E 3008E 4+, w 3311 SSA 5u! am 936 am Q4E YA K Q]F 025 331E 1173 U S ivnmeAdrs Imrl 1M2 101 .1 105 .1 105.6 1060 106.0 106 .3 106,6 10.9 101 .2 107 1 107 .5 1016 IN 1 IN A 106 1 0..3. 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(2.116) (0812) (0190) (0 .516) (0 .661) (2 .592) NN I~IIm.M 0811 ifmni ].6 3 .6 ] .] 3 .0 1] .! 1 .2 A .9 69 46 163 6,6 7.1 77 6,3 ]0.0 6lulnny pugra01 eaense (5mn1 10 4 32 25 19 4 .5 12 .1 19 51 8 .1 e3 247 10.5 1.5 90 1] .5 105 11.600.9 8149,17 mU 9r005 402 000 $ 23 80 1241 S 2001 3 17 .65 S 11 7511 21 .31 S 1578 1 23.00 S 32 .00 S 2500 S 21 .10 3 3000 S ]0.00 3 3000 S 3000 S 30.00 Fz I0✓ a Waee (Smn l 2 .5 0.9 0 .9 16 62 26 19 2] 2e 98 29 2.0 2 .5 ] .1 III Free u49 910,0 add.C 0 19,42 $ 9 .00 3 5 .11 1 7.19 9 10 .92 S 0,30 S 602 5 816 S 8 .11 3 5024 S 834 S 8.20 S 8.2] 3 8.15 3 8.2] 040.1010 espetn (Smnl 0 .6 0.6 07 00 2.6 04 07 0 .9 0.9 ]0 06 01 09 0 .9 ] .1 o .3Taa 9100 ,ee sr, 137 S 817 3 6 .21 S 1.21 S 492 3 +]1 S ]+1 S ]]t S 273 3 2 .56 S +60 3 280 S ]00 S 200 5 2 .]2 510,11,00. 0108 .4.4, aa0 9,006 odd 9 0 S 5e 69 16.20 S 16 .10 S 32 .19 S X1 .15 S ]7 .16 S 2511 S N.+] S ]35) 3 .20 S ]] .21 f 4011 $ 4100 3 412] 3 60.15 S 60 .55 ie1Y marh .Yrq .48171 25.7 1.7 41 34 69 2+.0 7.9 6.+ 9.3 44 .9 ]7 .2 14, 0 191 12.1 161 001 Gordon Hodge 415 .364.2575 4 Thomas Weisel Partners LLC Thomas Weisel Partners MERCHANT BANKIN G h January 16, 2003 Champions of Growt Media & Broadcasting NETFLIX, INC.-BU Y Gordon Hodge NFLX: 11N.I .B.: NETFLIX IN (THE) BLACK" ; 415 .364 .2575 ghodge@tweisel .com INCREASING ESTIMATE S Revising Estimates NASDAQ : NFLX-$12.20 Sherry Lin 415 .364 .7175 slin@tweisel .co m Key Data FY 2002 2003 20 03 P rv 2004 2004 P rv Price $12. 20 EPS * 52-Week Range : $5-$18 Q1 ($0.11)A ($0.05)E ($0 .13)E $0.11E NE Market Cap .(mn): $369 .9 02 $O.OOA $0 .10E $0.08E $0.17E N E Shares Out.(mn) : 30 .3 Q3 ($0.01)A $0 .09E $0.06E $0.16E NE Avg Daily Vol . : 368,509 04 $0.02A ($0 .00)E ($0.11)E $0.01E N E Fiscal Year End : 31-Dec Year ($0 .09)A $0 .15E ($0.03)E $0 .45E N E PIE NM 82.43x 26.90 x Debt/Total Capital : 1 % Revenue(mn ) Price/TTM Sales : 2 .4x Q1 $30 .5A $52 .4E $51 .3E $73.3E N E Source: FactSet Net Cash/Share : N M Q2 $36.4A $57 .8E 157.2E $78 .2E N E Book Value/Share : $3 .7 5 Q3 $40.7A $60 .7E 160.0E $82.7E N E Price/Book Value : 3 .3x 04 $45.2A $66 .3E $65.0E $90 .4E NE Secular Growth : 50% Year $ 152.8A $237 .3E $233 .5E $324 .6E N E TEVISales 1 .8x 1 .2x 0.8x *FPS diluted before one-time items, non-cash comp Executive Summary • There are many doubters in the investment community regarding the Netflix story . In our view, the 4Q02 results and guidance for 2003 should put many of the doubts to rest as the company exceeded our estimates for subscribers, revenues, EBITDA, EPS, free cash flow and churn . In fact, the company delivered our $0 .60, 2003 free cash flow estimate a year early and generated its first net profit before non-cash compensation expense . • We are increasing our 2003 free cash flow estimate for Netflix from $0 .60 to $0.70. We are increasing our FY03E revenue slightly from $234 million to $237 million . We now expect EBITDA to be $41 million (up from $33 million) and EPS before non-cash comp to be a $0.15 profit instead of a loss of $0.03 . We are introducing FY04 estimates of revenue of $325 million, EBITDA of $60 million, EPS of $0 .45 and FCF of ,0 .85 . • 4Q02 revenue of $45 .2 million (+109% y/y) was better than our $43 .2 million estimate . EBITDA of $8 .1 million (+476% y/y) was also above our $6 .6 million estimate . Free cash flow of $0.16 far exceeded our $0 .05 estimate . As reported earlier, 4Q02 ending subscribers were 857K, higher than our 848K estimate . Importantly, monthly churn improved sequentially from 7 .2% to 6 .3% and was comparable to 4Q01, which was 6 .2% . • Netflix's total U .S. TV household penetration is an estimated 0 .74%, while its Bay Area penetration is 3 .8% and growing, highlighting the market potential for the company as national penetration could approach Bay Area levels (which continue to grow) . Company Description : Ne/lix is a leading interactive, subscriber-based enter tainment delivery service offering consumers a deep selection of DI/Ds for p redominantly $ 19.95 a month. Netflrx'r mk'ne subscriber relationship is a strategic, competitive advantage now and in the future as filmed entertainment encompasses both tangible and electronic forms. Gddo. 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E, 5 u , .5 „ lo .x .a) l u ~ o-~w ... m~a•r. .d .~ s nw s21 . e s n s 3 s . s ;"",es u s ss ~ s tos s n s o.+ s n s s s n s ~~ .n t s n s s n s a. s ~.ss ~~ . .ae .~ s s r r.W ~.wtrtw ••r^.~V~ xi) , .t 0 ..l • llt at tll 1 tt . sat lt Source: Company reports and Thomas Weisel Partners LLC estimates . 01/16/0 3 Gordon Hodge 415.364.2575 6 Thomas Weisel Partners LLC 4~ Thomas Weisel Partners MERCHANT BANKIN G Champions of Growth February 27, 200 3 Media & Broadcasting NETFLIX, INC .-BUY Gordon Hodge NFLX: NETFLIX HITS ONE MILLION SUBSCRIBERS A 415 .364 .2575 ghodge@tweisel .co m QUARTER EARLY Company Update NASDAQ : NFLX-$14 .55 Sherry Lin 415.364.7175 slin@tweisel .com Key Data FY 2002 2003 2004 Price : $14 .55 EPS 52-Week Range : $5-$18 Q1 ($0.11)A ($0 .05)E $0 .11 E Market Cap .(mn) : $441.2 Q2 $O .OOA $0 .10E $0 .17E Shares Out .(mn) : 30.3 Q3 ($0 .01)A $0 .09E $0 .16E Avg Daily Vol . : 369,347 Q4 $0 .02A ($0 .00)E $0 .01 E Fiscal Year End : 31-Dec Year ($0 .09)A $0 .15E $0 .45E PIE NM 98 .31x 32 .08x Debt/Total Capital : 1% Revenue(mn ) Price/TTM Sales : 2 .9x Q1 $30 .5A $52 .4E $73 .3 E Source: FactSet Net Cash/Share : NM Q2 $36 .4A $57 .8E $78 .2 E Book Value/Share : $3 .75 Q3 $40 .7A $60 .7E $82 .7 E Price/Book Value: 3 .9x Q4 $45 .2A $66 .3E $90 .4 E Secular Growth: 50% Year $152.8A $237.3E $324.6E TEV/Sales 2.3x 1 .6x 1 .1 x Note : EPS shown before one-ti me item s Executive Summary • Netflix announced it has reached the one-million-subscriber mark, which is ahead of our 992,000 estimate for 2Q03 (Mar .) . We believe that this is positive for the stock . • We do not anticipate raising our estimates, as subscriber growth must be weighed against subscriber acquisition costs, DVD purchase decisions, churn, etc ., none of which were reported in the company's release . Having said that, we believe that our estimates for 2003 are conservative in light of the higher subscriber numbers . • The shares currently trade at 8 .3x projected FY03 (Dec .) EBITDA and at 20 . 7x projected FY03 FCF, well below our estimated three- to five -year growth rate of 50 % . We reiterate our BUY rating. • Valuation . Our 12- month target price of $25 is based on approximately 30x our FY04E FCF estimate of $0 .85 and is supported by a three-year DCF analysis assuming a 25% discount rate and an 8x FY06E EBITDA exit multiple . There always are risks that the target price for any security wil l not be reali zed . In addition to general market and macroeconomic risks, for Netflix, these ri sks include, among other things, consumer demand for entertainment, the ability to attract and re tain subscribers , competition, higher-than-expected costs or capital expenditures , the ability to raise additional capital and general business model execution risks . Company Description Net /ox is a leading interactive, subscriber-bared entertainment delivery service offering consumers a deep selection of DVDs for predominantly $19 .95 a month. Netflix's online rubrcriber relationship is a strategic, competitive advantage now and in the future as filmed entertainment encombasses both tangible and electronic forms f~f ~~; Careen ,,, 1 . 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Executive Summary • Netflix reported March quarter 2003 ending subscribers of 1 .052 million (+74% year over year and +23% sequentially), above our estimate of 992,000 ending subscribers and above the upward end of management's guidance of 1 .025 million ending subscribers . (Note that Netflix announced that it had exceeded I million subscribers on February 27) . Paying subscribers of 1 .009 million accounted for 96% of ending subscribers, up from 93% in the March quarter 2002 and above our estimate of 937,000 . • We are raising our March quarter 2003 revenue estimate from $52mn to $54mn, to reflect higher-than-expected ending subscribers . Our Mar quarter 2003 estimates for EBITDA and EPS remain unchanged at $7 .2mn and ($0 .05), respectively, as we await more information on subscriber churn, disk purchases and subscriber acquisition costs . • For 2003, we are modestly raising our estimates for ending subscribers from 1 .277mn to 1 .300 million, revenue from $237mn to $251mn and EBITDA from $41mn to $42mn, within management guidance of $235mn-$255mn in revenue and $40mn-$45mn in EBITDA . Our 2003 EPS and FCF estimates remain $0 .15 and $0.70, respectively . We are also modestly raising our 2004 revenue estimate from $325mn to $339mn and our EBITDA estimate from $60mn to $62mn . Our 2004 FCF and EPS estimates remain $0 .45 and $0.85, respectively . Company Description: Netfkk is a leading interactive, subscriber-based entertainment delivery service offering consumers a deep selection of DVDs for predominantly $19.95 a month. 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Gordon Hodge 415.364 .2575 4 Thomas Weisel Partners LLC Thomas Weisel Partners MERCHANT BANKIN G Champions of Growth April 21, 2003 Media & Broadcasting NETFLIX, INC .-OUTPERFORM Gordon Hodge NFLX: NETFLIX RELOADED ; CHURN BETTER THAN 415 .364.2575 [email protected] EVER; INCREASING ESTS Earnings Update NASDAQ: NFLX-$21.96 Sherry Lin 415.364.7175 slin@rweisel .co m Key Data I FY 2002 2003 2003 P rv 2004 2004 Prv Price $21 .96 EPS 52-Week Range: $5-$2 2 Q1 ($0 .11)A $O .OOA ($0.05)E $0 .04E $0 .04 E Ratings System Market Cap .(mn): $654 . 1 Q2 $O .OOA $0 .09E $0.08E $0.22E $0 .18E Shares Out .(mn) : 29 .8 Q3 ($0 .01)A $0 .09E $0 .09E $0.20E $0 .18 E Sector Ratings Avg Daily Vol . : 605,68 9 Q4 $0 .02A $0 .06E $0.02E $0.04E $0 .05 E OW Overweight Fiscal Year End : 31-De c Year ($ 0 .09)A $0 .25E $ 0 .15E $0 .50E $0 .45 E 44.24 M\V Market Weight Sector Rating : MW PIE NM 88 .58x x Stock Rating : 0 UW Underweigh t Debt/Total Capital: 1% Revenue(mn) Stock Ratings Price/TTM Sales : 3.7 x 01 $30 .5A $55.7A $54 .0E $83 .8E $76.3 E O Outperform Net Cash/Share : N M Q2 $364A $63 .7E $62. 3E $92 . 3E $82 .9 E P Peer Perform Book Value/Share : $3 .7 7 Q3 $40 .7A $69 .4E $65. 3E $95.6E $87 .O E U Underperform Price/Book Value : 5 .8x Q4 $45 .2A $74 .9E $69 . 3E $99 . 8E $92 .3 E S Suspended Rating Secular Growth : 50 % Year $ 152 .8A $ 263.8E $ 250 .9E $371 .6E $ 338.5E 1 .8 NR Not Rate d Price Target: TEV/Sales 4 . 3x 2 .6x x Note : EPS shown before one-Lime items ; nd non-cash compensatio n NC Not Covered Executive Summa ry • Investment thesis . Our OUTPERFORM rating reflects our view that Netflix can increase EBITDA and EPS 50% annua lly over the next 3-5 years . Our growth assumptions are based on an expected twofold growth in set-top DVD player penetration from 38 .8mn U.S. TV households in 2002 to an es ti mated 77.4mn in 2005, which could drive Netfhx's national penetration of TV households, currently 0 .90%, to 2.0% or more . • Netflix reported dramatically better-than-expected Mar Q monthly average subscriber churn of 5 .8%, 120bps better than our estimate of 7 .0% and 140bps better than MarQ'02 of 7 .2% . This is significant because (1) it shows the company's ability to attract and retain customers by providing faster delivery and deep selection and availability of DVD inventory ; (2) it enables the company to keep SAC costs low and increase profitability ; and (3) skeptical investors keep a close eye on this measure and the improvement should appease their concerns . Netflix also announced improved guidance for revenue, EBITDA, net income, churn and SAC costs . Company Description: Netflix is a leading interactive, subscriber-based entertainment deliver- service offering consumers a deep selection of DVDs for predominantly $19 .95 a month. NetEv's online subscri ber relationrhip is a strategic, competitive advantage now and in the future as filmed ente rtainment encompasses both tangible and electro nic forms. 13.00\yc, Coot, Naege 4151364-2515 Yo ° Slr«niv t]r1 ...e : &wly lin Ht `TS 74(31 yl pp wal TE 1L]t ]OW iao]E i216 ➢]E SZeE T!Y Il1E slxi fliF. wE x. Yfr Y!l fflt wA 9L Ya LIB 9~ 6Wea1Mr weM5» .r xwb.r 1W] .] .z foe .0 +011 +N> .x 535 ,ou wu a . 1445 101 4 us . rvnsaNdY lw~l IN .0 rc0 n9 ul We . 141 +541 N.J f] .1 1)0.1 nT U. 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X00 3 ;SW f 1309 3 3500 S EW Ner 1. prq~n ruViFwe .eaw f I]aN f 172]1 f 134 77 33 0 0 1 S 1. 1 11 3 0050 V f 11 .1 ]5 40 1.3 77770 .l3mn1 63 16 9 9 )d 1 .5 44 emre I f ~nev pn.WeW 3 70 .42 f f .]0 f a0] 3 39 f J 3 f 75)1 f 3 a f n t 4209 f r 3 r 3 e f e:a t0 o 1 ,o e .o Je Iw a 1 I f .03 I , .J] f 1 3 f t 3]> S It] ,91 3 144 3 .50 310 { 1.44 S IW I 1150 I t J ]S~.ne~.~.pww~ vp 909377f u S w f .11 r f JO f f ] f 9 i e 3 0E 3 r ]6 " t 1 .] 19 at 1 .J t 1]] 1123 ,L 1 52.3 1)75 tl3 1 S Gordon Hodge 415 .364.2575 6 Thomas Weisel Partners LLC Thomas Weisel Partners MERCHANT BANKIN G Champions of Growth June 9, 200 3 Media & Broadcasting NETFLIX, INC.--OUTPERFORM Gordon Hodge NFL.." : MGMT RAISES JUNQ GUIDANCE ; INCREASING 415 .364.2575 ghodge@tweisel .co m FY03 AND FY04 ESTS Raising Estimates NASDAQ : NFLX-$23.00 Sherry Lin 415 .364 .7175 Key Data FY 2002 2003 20 03 P rv 2004 2004 Prv slin@tweisel .co m Price $23 .00 EP S 52-Week Range : $5-$26 Q1 ($0 .11)A $O .OOA $0 .OOA $0.07E $0 .04E Market Cap.(mn) : $685 .1 02 $O .OOA $0 .15E $0 .09E $0 .23E $0 .22E Ratings Syste m Shares Out .(mn) : 29 .8 Q3 ($0 .01)A $0 .09E $0 .09E $0.19E $0 .20E Avg Daily Vol .: 1,022,985 04 $0 .02A $0 .06E $0 .06E $0.10E $0 .04E . Sector Ratings Fiscal Year End : 31-Dec Year ($ 0.09)A $0.30E $0.25E $0.60E $0 .50 E OW Overweight Sector Rating : MW PIE NM 76 .67x 38 .34 x MW Market Weight Stock Rating : 0 UW Underweigh t DebtlTotal Capital : 1% Revenue(mn ) Price/TIM Sales : 3.9x Q1 $30 .5A $55 .7A $55 .7A $83 .8E $83 .8 E Stock Ratings Net Cash/Share : NM Q2 $36.4A $63.7E $63.7E $92.4E $92.3E 0 Outperform Book Value/Share : $3 .77 Q3 $40 .7A $69 .2E $69 .4E $96 .5E $95.6E P Peer Perform Price/Book Value : 6 .1x Q4 $45 .2A $74 .8E $74 .9E $100.6E $99 .8E U Underperfor m Secular Growth : 50% Year $ 152.8A $263.3E $ 263.8E $373.4E $371 .6E S Suspended Rating Price Target : $30 .00 TEV/Sales 3.9x 2.3x 1 .7 x NR Not Rate d Note : Any price ta rget displayed in the data box above represents either a specific price target or the midpoint of a range . NC Not Covered EPS shown before one- ti me items and non -cash compensation . Executive Summa ry • Investment thesis . Our OUTPERFORM ra ti ng reflects our view that Netfhx can increase EBITDA and EPS 50% annually over the next 3 - 5 years . Our growth assumptions are based on an expected two-fold growth in set -top DVD player penetra ti on from 38.8mn U .S . TV households in 2002 to an es timated 86 .3mn in 2006, which could drive Netflix' s national penetration of TV households, currently 0 .90%, to 2 . 2% or more . We are increasing our 12- month target price to $30 from $25 . • After the market close on Monday, Netflix raised JunQ EBITDA guidance from $10mn - $13mn to $14.5mn - $16 .5mn, and raised its JunQ'03 GAAP net income guidance from a net loss of ($600K) to ($400K) to a profit of $3 .Omn - $4.Omn, due to better than expected operating results and lower than expected stock-based compensation expense . • Management raised guidance for net income before non-cash compensation to $4 .4mn to $5.9mn (previously, $0 .Smn - $3 .Omn) and narrowed guidance for revenue to $62mn - $64mn (previously, $60mn - $64mn) . • In addition, Netflix raised gross margin guidance from 42% - 44% to 43% - 45%, likely driven by lower fulfillment and revenue sharing costs . Subscriber acquisition cost (SAC) guidance improved to $31 - $33 per sub (previously $32 - $36 per sub) and management narrowed chum guidance to 5 .7% - 5 .9% (previously 5 .0% - 6 .25%). The company also narrowed its expectations of JunQ ending subs from 1 .11mn - 1 .16mn to 1.13mn to 1.15mn . Company Description: Netflix is a leading interactive, subscriber-based entertainment debavery senate offering consumers a deep selection of DVDs for predominantly $ 19.95 a month . Netflix's onb'ne subscriber relationship is a strategic , competitive advantage now and in the future as filmed entertainment encompasses both tangible and electronic orms. Fly ~, Go- 1b29. If 15) 364-25)5 wars .•4 p. . 5h .#y In ( . 15)]61-]1]5 If073617 n41Y•rwl 3621E f fYE IMf SKO SY3f ~] fl+F 9if C7E >'N~ TTY Y- 916 97d fl}! QM YTe flL^ 92E fliE 9~ Yfe! s•S.•.6,r ..a .l a9I los] w9I .o Im .2 lo] : +mx wl .x lalz lY . IY . wa . +01.• lY . '091 109] o .s rv+- fn•nl lKx 1K .2 Al At f]] 0 1a0 ]BS fSO .e .9 aJ .e MI 5].5 S5 .• Y• t ] 4) BI US . iddDwlmdwM • Iml A] b .] b .3 U] a61 a .1 ]S.J ]e3 be 423 He 49] Y{ 52.9 b U S. 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Gordon Hodge 415 .364 .2575 4 Thomas Weisel Partners LLC ell; Thomas Weisel Partners MERCHANT BANKIN G Champions of Growth June 10, 2003 Media & Broadcasting NETFLIX, INC.-OUTPERFORM Gordon Hodge NFLX: REITERATE OUTPERFORM; WAL*MART 415.364.2575 [email protected] COMPETITION NOT NE W Company Update NASDAQ: NFLX-$23 .00 Sherry Lin 415.364.7175 [email protected] m Key Data FY 2002 2003 200 4 Price: $23.00 EP S 52-Week Range: $5-$26 Q1 ($0 .11)A $O.OOA $0 .07 E Ratings Syste m Market Cap .(mn) : $685.1 02 $O .OOA $0 .15E $0 .23 E Shares Out.(mn) : 29 .8 Q3 ($0 .01)A $0 .09E $0 .19E Sector Ratings Avg Daily Vol .: 1,033,868 Q4 $0 .02A $0.06E $0.10 E OW Overweight Fiscal Year End : 31-Dec Year ($ 0 .09)A $0 .30E $0 .60 E Sector Rating : MW PIE NM 76 .67x 38.34x MW Market Weight Stock Rating : 0 UW Underweigh t Debt/Total Capital : 1% Revenue(mn ) Stock Ratings Price/TTM Sales : 3 .9x Q1 $30 .5A $55 .7A $83 .8E O Outperform Net Cash/Share : NM Q2 $36 .4A $63 .7E $92.4 E P Peer Perform Book Value/Share : $3 .77 Q3 $40 .7A $69 .2E $96.5E U Underperform Price/Book Value : 6.1x Q4 $45.2A $74.8E $100.6E S Suspended Rating Secular Growth : 50% Year $152.8A $263.3E $373.4E NR Not Rate d Price Target: $30.00 TEVISales 3.9x 2.3x 1.7 x NC Not Covered Note: Any price target displayed in the data box above represents either a specific price target or the midpoint of a range EPS before one- ti me items and non-cash compensation . Executive Summary • This morning Wal*Mart announced an expansion of its DVD rental service (which has been around for almost a year now) to include a 2 DVD, unlimited renal plan at $15 .54/month . This compares to Netflix's "lite" offering of 2 DVDs for $13 .95/month (but limited to 4 rentals/month) . In addition, Wal*Mart shaved a dime off its 3-DVD rental subscription price going from $18 .86 to $18 .76 . This compares to Netflix 3-DVD rental program at $19 .95 . In addition, Wal*Mart announced it has opened distribution centers (DCs) in si x states to improve on its delivery times . • So what is new in this announcement? Not much in our view . WW%al*Mart has been competing with Netflix at a lower price point ($18 .86 vs $19 .95) since last fall . Wal*Mart's new service is actually more expensive than Netflix's 2-DVD program assuming light users only rent 4 movies a month . In addition, Wal*Mart has had a DC in Georgia (since inception) and California (for at least several months) and yet this has not slowed Netflix's growth . Netflix subscribers are expected to be up 71% year/year in 2Q03 . Company Descri ption : Ne'/lix is a leading interactive, subscriber-based entertainment delivery service offering consumers a deep selection of DVD: for predominantly $ 19.95 a month. Net'lixs online subscri ber relationship is a strategic, competitive advantage now and in the future as filmed entertainment encompasses bath tangible and elect ronic forms. ease refP;J ZleF ' o #us e i t;, f3 por at r` sc s> W40~. . lianm no09e ) ]6.-25)5 I~mme Ywwlr. DtMrs ) 51¢rry L . Ills) ] 66.7175 (5 1 ntllurs. .sTl Y+lwe 0YE INt n00 ant HWE - Y ._r Q$1 ¢$0 0.A Yr $10 99 G]$ 0627 Yr $127 flL 49 SSE _ SWSabrweeM Im. 104 1 tm ] 09) +mr us. rvlnaleb r..~l +wx lOfia lO1 l.7 -52z +mW7 .1 1072 f - . . 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Gordon Hodge 415 .364 .2575 4 Thomas Weisel Partners LLC Thomas Weisel Partners MERCHANT BANKIN G Champions of Growth June 24, 2003 Media & Broadcasting NETFLIX, INC.-OUTPERFORM Gordon Hodge NFI.X: PATENT WIN INCREMENTALLY POSITIVE ; 415.364.2575 ghodge@tweisel .com REITERATE OUTPERFOR M Company Update NASDAQ : NFLX-$23.22 Sherry Lin 415 .364 .7175 slin@tweisel .com Key Data I FY 2002 2003 2004 Price : $23 .2 2 EP S 52-Week Range : $5-$2 6 Q1 ($0 .11)A $O .OOA $0 .07 E Ratings System Market Cap .(mn) : $691 .6 Q2 $O.OOA $0 .15E $0 .23 E Shares Out.(mn) : 29. 8 Q3 ($0.01)A $0.09E $0 .19 E Sector Ratings Avg Daily Vol .: 1,206,44 9 Q4 $0 .02A $0 .06E $0 .10 E OW Overweight Fiscal Year End : 31-Dec Year ($0 .09)A $0 .30E $0 .60 E .40x .70 x MW Market Weight Sector Rating : MW PIE NM 77 38 UW Underweigh t Stock Rating : 0 Debtffotal Capital : 1% Revenue(mn) Stock Ratings Price/1TM Sales : 3 .9x 01 $30.5A $55 .7A $83 .8E O Outperform Net Cash/Share : NM Q2 $36.4A $63 .7E $92 .4 E P Peer Perform Book \/ alue/Share : $3.77 Q3 $40.7A $69.2E $96 .5 E U Underperfor m Price/Book Value : 6 .2x Q4 $45.2A $74 .8E $100 .6 E S Suspended Rating Secular Growth : 50% Year $ 152 .8A $263 .3E $373 .4E x NR Not Rate d Price Target: $30 .00 TEV/Sales 3 . 9x 2 .3x 1 .7 NC Not Covered Note: Any price target displayed in the data box above represents either a specific price target or the midpoint of a range EPS are before non cash stock compensation Executive Summary • Investment thesis . Our OUTPERFORM rating reflects our vie'v that Netflix can increase EBITDA and EPS 50% annually over the next 3 - 5 years as DVD player penetration more than doubles from 38 .8mn U .S . TV households in 2002 to an estimated 86 .3mn in 2006 and as Netflix's penetration of DVD households increases from 2 .2% to approximately 2 .8% . Our 12-month target price is $30 . • Today Netflix announced it has won a business method patent covering its computer- implemented subscription rental service . To our legally untrained eye the patent, #6,584,450 appears quite broad but we are still digesting its potential significance . Whether existing competitors, Wal*Mart .com and Blockbuster, have services tha : violate the patent is not clear to us yet but it would appear that they do . Whether they do or not, the more practical question is how are Netflix and its competitors going to respond to the patent win . (Enforcing a patent can take time and can be very expensive .) At the very least, we believe this development is incrementally positive for Netflix as it may deter additional competitors from entering the market in the near-term . Company Desc ription: Netfld is a leading interactive, substrrber-based entertainment debvey service offering consumers a deep selection of DVDs for predominantly $19.95 a month. Netflix's online subscriber relationship is a strategic competitive advantage now and in the future as filmed entertainment encompasses both tangible and electronic 1rnu. y.Mw, Src 0054001009* N151164.2115 Slwr] Ln 1!,51 J6.-), ]5 f3 n rn .o. . .c9 ir.r w .l q .N IYC1Mt ~ ~E ~ :Yr ~ 97~ ~1 ~! Tl[ 415 92E WE ~E' Yll Sil 9tE Gff !1!E T1r ]S9 t0]]Or] +Ox] y+Oe.; +n'0] rvrs..wwYr lmnl ,NS 0 ,0, .3 .I~Imnl A] ~ yr OvD, ... .mla l,ml xu L] u~ Y9 :Z x .TM zM xaY za% m w .r.rrdrx a> 2 3Z " .M zn wP ..rrro.x . v.snw z,xI' ux zra zM n x .x .orS~l00b1 WZ e~• ~se oo , >.s~o .1 !l~ sass ~ .Nli 'NO '. 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Executive Summary • Investment thesis . Our OUTPERFORM rating reflects our view that Netflix can increase EBITDA and EPS 50% annually over the next 3 - 5 years . Our growth assumptions are based on an expected two-fold growth in set -top DVD player penetration from 38 .8mn U .S . TV households in 2002 to an estimated 86 .3mn in 2006, which could drive Netfhx's national penetration of TV households, currently 1 .0%, to 2 .2% or more . • After the market-close on Tuesday, Netflix reported JunQ ending subscribers of 1 .147mn (+71% y/y), roughly in line with our estimate of 1 .149mn . Subs came in at the high end of management guidance of 1 .13 - 1 .15mn . Paying subscribers represented 96% of ending subscribers . In addition, Netflix penetration of San Francisco Bay Area TV households reached 5 .0% at JunQ end, up from 4 .6% last quarter and 3 .2% a year ago . 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CHURN; 2Q 415 .364 .2575 ghodge@tweisel .co m BETTER THAN EXPECTE D Earnings Update NASDAQ: NFLX-$25 .28 Sherry Lin 415.364.7175 slin@tweisel .co m Key Data FY 2002 2003 2003 P rv 2004 2004 Prv Price $25 .28 EP S 52-Week Range : $5-$29 Q1 ($0.11)A $O .OOA $O.OOA $0 .09E $0.07E Ratings Syste m Market Cap .(mn): $778 .9 Q2 $O .OOA $0 .16A $0 .15E $0 .22E $0 .23E Shares Out.(mn) : 30 .8 Q3 ($0.01)A $0 .08E $0.09E $ 0 .19E $0.19E Sector Ratings Avg Daily Vol . : 1,336,065 Q4 $0 .02A $0 .06E $0 .06E $0 .10E $0.10E : 31-Dec 0 .09)A .60E $0.60E OW Overweight Fiscal Year End Year ($ $0 .30E $0 .30E $0 Sector Rating : MW P/E NM 84 .27x 42 .13 x MW Market Weight Stock Rating : 0 UW Underweight Debt/Total Capital: 1% Revenue(mn) Stock Ratings Price/TTM Sales : 3 .8x 01 $30 .5A $553A $55 .7A $85 .2E $83 .8E O Outperform Net Cash/Share : NM Q2 $36AA $63 .2A $ 63.7E $93.7E $92.4E P Peer Perform Book Value/Share : $3 .96 Q3 $40 .7A $69 .4E $ 69.2E $987E :$ 96 .5E U Underperfor m Price/Book Value : 6.4x Q4 $45 .2A $75.7E $74 .8E $103 .8E $100.6E S Suspended Rating Secular Growth : 50% Year $ 152 .8A $264.OE $263 .3E $381 .4E $373.4E P ri ce Target: $30.00 TEV/Sales 4 .4x 2.6x 1 .9x NR Not Rated Note: Any price target displayed in the data box above represents either a specific price target or the midpoint of a range . NC Not Covered EPS shown before non-cash compensation . Executive Summary • Investment thesis . Our OUTPERFORM rating reflects our view that Netflix can increase EBITDA and EPS 50% annually over the next 3-5 years . Our growth assumptions are based on an expected more than two-fold growth in U .S. set-top DVD player penetration from 38.8mn U .S . TV households in 2002 to an estimated 86 .3mn in 2006, which could drive Netflix's national penetration of TV households, currently 1 .1%, to 2 .3% or more. • We are increasing our FY03E ending subs from 1 .400mn to 1 .424mn, within management guidance of 1 .400mn - 1 .475mn, FY03E revenue from $263mn to $264mn, also within guidance, and FY03E EBITDA from $50mn to $58mn to reflect higher depreciation add- back due to increased DVD purchases in JunQ . Our FY03E EPS before non-cash comp remains $0 .30, below First Call consensus of $0 .32 as of tonight . We are also modestly increasing our FY04 ending subs from 1 .848mn to 1 .900mn and FY04E revenue from $373mn to $381mn. Our FY04E EBITDA increases from $78inn to $101mn to reflect higher depreciation add-back due to a shift to greater DVD purchases over revenue sharing arrangements . We are maintaining our FY04E EPS before non-cash comp of $0 .60, above First Call consensus of $0 .52. Company Description : Netflix is a leading interactive, subscriber-based entertainment delivery smite offering consumers a deep selection of DT/Ds for predominantly $19.95 a month . Netfbx's online subscriber relationship it a strategic, competitive advantage now and in the future as filmed entertainment encompasses both tangible and electro nic forms. Gaeen wEBe (1151 ]N35r5 .-P*480 ) Slrry In(415)]N-)115 (]n limo SYE 1]/11 S UKQM BM E YC T- ~ ➢7G 97s m6 T9~ 41 =8 97E 4F Tf! fl!E Yf[ i 10P.r BI.B q.1 A I q .6 1 1.M 1] 11% 1e zB % 640.0 1200 021 1111] sw w . 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Gordon Hodge 415 .364 .2575 9 Thomas Weisel Partners LLC Thomas Weisel Partners MERCHANT BANKIN G Champions of Growth September 15, 2003 Media & Broadcasting NETFLIX, INC.-OUTPERFORM Gordon Hodge NFLX: INCREASING ESTIMATES AND TARGET PRICE 415 .364.2575 ghodge@tweisel .com Raising Estimates NASDAQ: NFLX-$35 .51 Key Data FY 2002 2003 2003 P rv 2004 2004 Prv Sherry Lin Price $3551 EP S 415.364.7175 52-Week Range : $5-$37 Q1 ($0 .11)A $O .OOA $0 .OOA $0 .08E $009E slat@tweisel .com Market Cap .(mn) : $1,0941 02 $0 .00A $0.16A $016A $0 .28E $022E Shares Out .(mn) : 30 .8 Q3 ($0 .01)A $0 .08E $008E $0 .27E $0 19E Avg Daily Vol . : 1,014,498 Q4 $0 .02A $0.07E $O .OGE $0 .22E $010E Ratings System Fiscal Year End : 31-Dec Year ($0 .09)A $0 .32E $0 .30E $0 .85E $0 .60E Sector Rating : MW P/E NM 110 .97x 41 .78x Sector Ratings Stock Rating: 0 OW Overweight Debt/Total Capital : 1% Revenue(mn ) MW Market \x-'eight Price/TTM Sales : 53x 01 8305A $557A $55 .7A $B5 8E $852E UDC' Underweigh t Net Cash /Share : NM Q2 $364A $63 .2A $63 .2A $95 .3E $937E Book Value/ Share : $3 .96 Q3 $407A $69 .4E $694E $101 .2E $99.7E Stock Ratings Price/Book Value : 9 0x Q4 $45 .2A $75 .7E $75:7E $107 .2E 1703 BE O Outperform Secular Growth : 501/0 Year $152 .BA $264. OE $264 .0E $389 .6E $ 381 .4E P Peer Perform Price Target : $42 .00 TEV/Sales 6 .4x 3 .9x 2 .8x U Underperform Note : Any price target displayed in the data box above represents either a specific price target or the midpoint of a range . S Suspended Rating EPS shown before non-cash compensation . Executive Summary NR Not Rate d rt- NC Not Covered _ ; %e are increasing our target price from $30 to $42 and our EPS estimates before non-cash compensation for 2003 from $0 .30 to $0 .32 and for 2004 from $0 .60 to $0 .85 to reflect higher gross margins and somewhat lower subscriber acquisition costs . The company has engaged in several aggressive customer service improvement initiatives in 2003, which have compressed gross margins (which we expect to decline from 48 .9'5, in 2002 to 44 .2'%, in 2(N)3) but have resulted in lower churn and higher returning customer rates . We expect the company and its customers to enjoy the full benefits of these initiatives in 21x14 . • Specifically, we have increased our gross margins for 2003 from 43 .9% to 44 .20/6 and for 2004 from 42 .5% to 44 .0`%6 to reflect improved revenue share terms and network economies from disk purchases as well as a leveling out of disk usage (which has been trending up this year) to reflect subscriber lifestyle constraints rather than distribution constraints . Our gross margin estimate for 2004 could prove conservative . • Valuation . We reiterate our OUTPERFORM recommendation on Netflix shares . Netflix shares currently trade at 42x our 20114E EPS estimate before non-cash comp of $0.85 and 30x our 2004 FCF estimate of $1 .20, both discounts to our 50% 3- to 5-year growth rate estimates . Our 12-month target price of $42 is based on 50x our 2004 EPS before non-cash comp estimate of $0 .85, in line with our estimated 50% three- to five-year growth rate, and is supported by a DCF analysis based on 8x 2007E EBITDA and ,in 15°%o weighted average cost of capital . There always are risks that the target price for any security will not be realized . In addition to general market and macroeconomic risks, for Netflix, these risks include, among other things, consumer demand for entertainment, the ability to attract and retain subscribers, competition, higher-than-expected costs or capital expenditures, the ability to raise additi onal capital, and general business model execution risks . Company Description : ,'\'q/iv is a leai/vg mleradles, subscriber-hareel enler/ainmrvt/ deAte rercire eiritl~g contrmrerr a deep seleclion s DT Dc for predominan/ly 519.95 a month . Ne 7i. 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EPS shown before one-tune items . Executive Summary • After the market close on Wednesday, Netflix reported SepQ ending subscribers of 1 291mn (+74% y/y), above our estimate of 1 .264mn . Subs came in just above the high end of management guidance of 1 .240 - 1 .290mn . Net new subs of 144K were 23°i%% higher than our estimate of 117K . Paying subscribers represented 96° o of ending subscribers . In addition, Netflia penetration of San Francisco Bay Area TV households reached 5 .4°%o at SepQ end, up from 5 .0% last quarter and 3 .5% a year ago. National penetration reached 1 2°io, up from 1 .054, last quarter and 0.6% a year ago . • Assuming no other changes to our model assumptions, the upside in SepQ03 subs could add an additional $0 .03 to our 2004E EPS estimate of $0 .85 . Ilowever, we maintain our FY04 estimates for now . We remain comfortable with our Sep Q estimates of $69m in revenue, $16.5m in EBITDA, EPS of $0.08 . 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S !A r 1 ).I6 3 Y.u 3 iY .t J 3J.5) 3 334) 0 3 31.3 8 -T 3 3Ja5 3 8 N< ! 1 32.51 $ 3C.3S 1 31.03 3 :u 50 3s B12 S 31.39 laN naFallrg wir .m• 2541 ).9 B.1 9.] 1 ]Se 3171 e. n] } 12! 115 1 ).0 1lS 162 1941 61.5 Nal Guslmrer MNws IP nn emml A.n r1e aN D'ua,s uaea c.1 c .9 50 51 SO SO . 1 .7 IJ 5 ) S) ST SB 5.P 5.P Rcmux afwrirc curls 3]I 3 M 3 3 .]< 1 416 $ N 3 ..09 3 41 2 190 S J» 3 110 1 7,90 f 3Y.• i 3.. 1 J35 3 JSS 3 12!• Uex LLpsc0wn 5 1 W S ] .U9 3 220 3 261 5 121 { 1 3 1.tl5 3 131 1 351 3 3. 3 3S 3 34 1 bU 3 S S SMppYg 6 pwrrnnp crcls 1 JB6 1 52 f 5 3 Us 3 56 S { 1 f 1 f 1 1 ) 1 31 S 1 f ) f T S ! i EWShracrr. 1 3]P S 0406 3 > .00 3 298 f 212 3 206 f . .11 3 0 :2 3 2» 1 230 1 2< D 3 ]3U $ 2+1 S 234 1 231 1 231 n9 mwxM/ csMPS 3 3 638 3 140 3 5.8 62 3 3 S .TY 9 265 f S2z 5 S1T f 5.1 8 3 ) f 51 3 5)5 f Pra rnrml •~v eadrPw memui D•.: 3J1n 3J .]% 31 TA3 $ 32-%7 $ J2 .Y 1.1% Mb% 2]]Y 27b1 F% 2]A% Mll% 2D1Y ,175.1. 2057 Gordon Hodge 415.364.2575 4 Thomas 'Weisel Partners LLC Media & Broadcasting NETFLIX, INC.-OUTPERFORM Gordon Hodge NFLX: INCREASING ESTIMATES AND PRICE TARGET ; 415 .364 .2575 ghodge@tweisel .com Q3 HIGHLIGHTS Revising Estimates NASDAQ : NFLX-$44.70 Lauren Grismanauskas 41-5-364 .2607 Key Data FY 2002 2003 2003 P rv 2004 2004 P ry lgrismanauskas(ditweisel .com Price $4470 EP S 52-Week Range: $6-$48 Q1 ($0,11)A $O .OOA $00)A $015E 5008E MarketCap .(mn) : $1,4063 Q2 $000A SO 16A $016A $0 .33E $028E Ratines Syste m Shares Out .(mn) : 31 .5 Q3 ($0 .01)A $0 .19A $0 .08E $032E $0,27E Avg Daily Vol . : 1,102,582 Q4 $0.02A $0 .14E $007E $0 .29E 5022E Fiscal Year End : 31 - Dec Year 0.09)A Sector Ratings ($ $0 .50E $0 .32E $1 .1OE S0 .85E Sector Rating : MW PIE NM 89 .40x 40.64 x OW Overweight Stock Rating : 0 MW Market Weight UW Underweight Debt/Total Capital : NM Revenue(mn ) Price/TTM Sales : 6 .Ox 01 $30 .5A $553A $55 .7A $892E $85 .8E Stock Ratings Net Cash/Share : NM 02 $36.4A $632A $63 .20 $98 9E $95 .3E O Outperform Book Value/ Share : $4 .20 Q3 $407A $722A $6941- $105 .9E $101 2E P Peer Perform Pri ce/Book Value : 10 .6x Q4 $45 .2A $78 .9E 75 .7E $112 .5E $107 .20 U Underperform Secular Growth : 50% Year $152 .BA $269.9E $264. 05 $406 .5E $389.6E Price Target : $55 .00 TEV/Sales 8 .2x 4.7x S Suspended Rating 3 .3 x Note : Any price target displayed in the data box above represents either a specific price target or the midpoint oCa rartge NR Not Rated . NC Not Covered Executive Summar y • Investment thesis. Our OUTPERFORM rating reflects our view that Netflix can increase EBITDA and EPS 50°'i% annually over the next 3 - 5 years . Our growth assumptions are based on an expected more than two-fold growth in U .S . set-top D`,-'D player penetration from 38 .8mn U .S . TV households in 2002 to an estimated 86 .3mn in 2007_, which could drive Netflix's national penetration of TV households, currently 1 .2%, to 3 .5",`6 or more. • We are increasing our FY03E ending subs from 1 .424mn to 1 .457nin, within management guidance of 1 .425mn - 1 .475mn, FY03E revenue from $264tnn to $270mn, also within guidance, and FV03E EBITDA from $59mn to $64mn to reflect increased FY03 guidance and Q3 results above expectations . Our FY03E EPS before non-cash comp increases from $0.32 to $0 .50. We are also increasing our FY04 ending subs from 1 .968mn to 2 .048mn and FY04E revenue from $390mn to $406mn . Our FY04E EBITDA increases from $107mn to $117mn to reflect lower chum assumptions as well as lower SAC . We are increasing our FY04E EPS before non-cash comp from $0 .85 to $1 .10. • Netflix reported SepQ monthly average subscriber chum of 5 .2%, 40bps better than our estimate of 5.6%, management guidance of 5 .3% - 5.8% and junQ'03 of 50'o . Subscriber acquisition cost (SAC) of $31 .81 per sub was better than our estimate of $33 .18 and at the low end of management guidance of $31 - $34 . Revenue of $72mn (+77io v/y) was above our estimate of $69mn, EBTTDA of $19.8mn (+164° %, ),/v) was above our estimate of $17mn, and EPS before non-cash comp of $0.19 was $0 .11 better than our estimate of $0.08 . ;ompany Description : Nel/Izx is a leading interactive, .rubsrriber-eased entertainment delivery .ten.iri' oferinl onsu ers a deep selection of Dt Ds for predominantly ,519 .93 a month. 1Veplza's online vibscriber relalion ch/ is 4 Iratedie, competitive advmilage non- and in Mefiebere as filmed entertainment encompasses b911) tangible and clerlron/s ornac M1 pN~; 44440464246 4151364.2575 Is r. mlrowismmcml cm >. . e; fYE 1Ln TemE :ro3E Yo Yaf 4t9 0528 0532 400 Ym 912 QB Q36 SL 0201207064.) 53 IN I<) 67 SI 115 '01 195 BS 165 100 213 N 130 163 592 EmnB MIrrua (JDI4 ; M 61 Ibnbars 1401 ! 160 ]}1 534 63] }116 )1] 6S5 9N 10MJ 1119 1314 1161 1163 1111 1619 1966 170 5 lrvxa9e pying trpmpv ]Otl 677 SN 6)1 T3] .11 B@ 7613 1113 13116 1109 11 13 1634 1)SA IADS ar•pepryngaw %trm 93[% Bt l% 05].34 Y..WF 9[,]% N.6% B6A% 111% p5.[ %b% K.b% '313.64 rnnar d+xrrY .cmr~:UW 11.4E 10% ]YA 49% - :Sx SAx '2% 4urrpnmmnry ,r•nn % .ry.nrn )1% )2% F3% S.P% f .f.% S1% 51" 52% 52% SM 5.)Y Awpe paFN Urvn % .i9% 11 [15r 21% IWA 16 f'6% 1]% 11% r16•1 16% 40% 16x 164 , Awrapv mpwYVrwnB polar S 15.8 3 21. 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Nwc :INmrrrw... r S 1.477 1 11391 3 IRrt'• 3 70 06. 1 ]om 3 1972] 3 1631 1 19 .1) 1 7949 1 1907 3 19.]] 3 IR9] S IR.I0: 3 IR..t 3 1595 3 79.14 D' 44 .14 1 4.0 0 52 'D 1 1 7 9 0 S B Is f 3 .61 5 321 $ 4.11 3 <4 3 D9. 3 <8 11 90 3 ].]E S 31.14 3 159 3 125 5 ]12 1 2 3 31 3 ]I2 SSU i N f 3712 S 220 3 1 1 [ 1Jt f I.BS S ] 3 B S S +3E t 55 S ]b] S 1 1 SNycg urs : h9 cacla 1 734 f 005 3 J .)5 3 Ol 3 )M I <3] f0 N 45+ 244 1 f 5< ++3 1 54 fuY+rrt.+euie f 3:~8 i + .OS 3 im 3 2N 3 III 3 let f $ 2m f i+s 33 ia6 S ?a< 3 2 [[ 4 2_'u i i ..• 3 is 4 2Y 1 xx 3 243 3 SB 6 69 3 191 3 PN 3 123 t 5IB 3 3.63 S 596 3 5.16 S S.Pf f 5]] 1 5 6 1 3 S6 ] $ 541 3 691 P .erramno cew ow memin 14 .44 3644 31- 1.3% 321% .4% -1 19.61 30.61 -1 3A6k 1- 29_:{ . 29A •n 1R .3x 2B.B% Gordon I Lodge 41 .364 .2575 7 Thomas \X''eisel Partners LLC Media & Broadcastin g NETFLIX, INC .-OUTPERFORM Gordon Hodge NFLX: BENEFICIARY OF DVD PLAYER GROWTH ; 415 .364.2575 [email protected] REITERATE OUTPERFORM Lloyd Walmsley Company Update NASDAQ: NFLX-$46.81 415.364.2584 lwalmsleyC), tweisel .com Key Data FY 2002 2003 2004 Price : $46 .81 EP S 52-Week Range : $10-$61 Q1 ($0 .11)A $0 .00A $015E Ratings System Market Cap .(mn) : $1,472.6 02 $0 00A $0 16A $033E Shares Out .(mn) : 31 .5 Q3 ($0 .01)A $0.19A $0 .32E Sector Ratings Avg Daily Vol . : 1,940,575 Q4 $0.02A $0 14E $0 .29E OW Overweight Fiscal Year End : 31-Dec Year ($ 0.09)A $0 . 50E $1 .10E MW Market Weight Sector Rating : MW P/E NM 93 . 62x 42 .55x U%N' Underweigh t Stock Rating : 0 Debt/Total Capital : 0% Revenue(mn ) Stock Ratings Price/TTM Sales: 6 .2x Q1 $30 .5A $55 7A $89 .2 E O Outperform Net Cash /Share : NM Q2 $36 .4A $63 .2A $98.9 E P Peer Perform Book Value /Share : $4.20 03 $40 .7A $72 .2A $105 .9E U Underperform Pri ce/Book Value : 11 .lx Q4 $45 .2A $789E $112 .5E S Suspended Rating Secular Growth : 50% Year $152 .8A $261I .9E $406.5E NR Not Rate d Price Target: NE TEV/Sales 8 .6x 4 .9x 3 .4x NC Not Covered Note: Any price target displayed in the data box above represents either n specific price target or the midpoint of a range EPS shown before non-cash compensation . Executive Summary • We remain comfortable with our 4Q03 estimates of 1 .457 million ending subscribers (within management guidance of 1 .425m to 1 .475m), $78 .9 million in revenue and $0.14 in EPS before non-cash stock compensation ($0 .02 after stock comp) . We note that consensus is $0.15, an estimate that appears achievable, given recent DVD player sales trends and no signs of increased competition in the online DVD rental niche . • With DMD players selling for as low as $29 this holiday Netflix addressable audience of U .S . television households is likely to exceed 55% by year end, ahead of expectations, and up 40% year/year. Traffic to Netflia's site increased 71% in October (the last month of available data from Nielsen//Netratings) an acceleration from 20% unique user growth in 3Q03, and consistent with projected ending subscriber growth of 70%-o for the fourth quarter. • In our view competition from Wal-Mart or Blockbuster-owned Film Caddy is likely to be discernible in the marketing channels first. Neither Wal-Mart nor Blockbuster appear to be increasing their commitment to online marketing according to our keyword search analysis . Netflix and its affiliates remain the top bidders for DVD rental keywords . While keyword marketing is not a major component of Nctflix's marketing program, it is easily monitored for competitive threats . Company Description: Neg/Zc is a leading interactive, subscriber-based entertainment deliver}' .tennee o iniog consumers a deep selection of DGDs forpredominantly,t19.95 a month . 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Jf .YA S ]21X 32/% E .SY n.bX J0.6'A S ISYA i x829% 9 -1 y 29.]% 1 29./Y 28 .3% 1 zBB 4 Sources: Company reports and Thomas Weisel Partners LLC estimates . 12/15/03 Gordon Hodge 415 .364.2575 5 Thomas \ ciscl Partners LLC Thomas Weisel Partners MERCHANT BANKIN G Champions of G wth December 17, 2003 ro Media & Broadcasting NETFLIX, INC.-OUTPERFORM Gordon Hodge NFLX: COMPANY DELIVERS AN EARLY PRESENT ; 415 .364.2575 ghodge@tweisel .com RAISING ESTIMATES Lloyd Walmsley Raising Estimates NASDAQ: NFLX-$50.49 415.364.2584 Key Data FY 2002 2003 2003 F lwalmsley@tweisel .com 'rv 2004 2004 P rv Price $5049 EP S 52-Week Range : $10-$61 01 ($011)A $000A $0 .00A $01 BE $0 15E Market Cap .(mn) : $1,588 .4 Q2 $O .OOA $0 .16A $0 .1 EA $0.34E $0:33E Ratings System Shares Out.(mn) : 31 .5 03 ($0 .01)A $019A $019A $0 .33E $032E Avg Daily Vol . : 1,934,441 Q4 $0 .02A $0 .16E $01 tE $0 .30E SO29E Sector Ratings Fiscal Year End : 31-Dec Year ($0 .09)A $0 .52E $0 :50E $1 .15E $1 :10E OW Overweight Sector Rating : MW P/E NM 97 .10x 43 .90x M\a' Market Weight Stock Rating : 0 U\Y' Underweigh t Debt/Total Capital : 0% Revenue(mn ) Price/TTM Sales : 6 .7x Q1 $305A $55 .7A $557/, $90 Stock Ratings .6E $89 .28 Net Cash/Share : NM Q2 $36 .4A $63 .2A $63 .2/ $999E $98 9E O Outperform Book Value/Share : $4.20 Q3 $407A $72 .2A $722/, $106 .8E $1059E P Peer Perform Price/Book Value : 12 .0x Q4 $45 .2A $80 .1E $78 .9E $113 .3E 31125E U Underperfor m Secular Growth : 50% Year $152. BA $271 .1E $269. 9E $410.6E $4D6 .5E S Suspended Rating Price Target : NE TEV/ Sales 9 .3x 5.3x 3 .7 x NR Not Rate d Note : Any price target displayed in the data box above represents either a specific price target or the midpoint of a range . NC Not Covered EPS are before one-time items and non-cash compensation expense . Executive Summary • Netflix upwardly revised its Q4 guidance this afternoon . Revenue guidance went to a range of $80-$82 million (from $77-$81 million), non-GAAP net income to a range of $4 .5-$6 .5 million (from $3-$6 million) and GAAP net income to a range of $0 .9-$2 .6 million (from ($0.2)-$2.3 million) . Ending subscribers guidance went to 1,470,000-1,495,000 (from 1,425,000-1,475,000) . Average monthly subscriber chum went to 4 .7%-5 .0° a (from 4.9%'('- 5 .4%) . Subscriber acquisition cost increased to a range of $32 .50-$33.50 (from $30-$33) . • Given that 4Q subscriber adds tend to be seasonally back-end weighted due to gift certificates and DVD player sales (most of which contain a Netflix free trial offer in the box), we view Netflix's increased guidance to be a particularly positive sign reflecting better than expected intra quarter subscriber adds . We are increasing our 4Q03 ending subscriber estimate from 1 .457 million to 1 .480 million, reflecting a lower churn estimate of 4 .8%, down from 5.2% . Our 4Q03 revenue estimate increases from $78 .9 million to $80 .1 million (+77%) an d our EPS before non-cash comp estimate from $0 .14 to $0.16 (consensus was at $0.15) . For the year, our new revenue estimate is $271 .1 million and EPS before non-cash comp estimate is $0.52 . We have also increased our 2004 estimates to reflect the higher subscriber base entering the year. Our 2004 revenue estimate increase's from $406 .5 million to $410.6 million (+51%) and EPS before non-cash comp estimate from $1 .10 to $1 .15 (+120%) . Company Description : Net/?r it a leading interactive, .cubseiber-based entertainment delitco,y service oferin` onrnnren a derv arledron of DT D.r for pmdaminant3 .;19 .93 a month. itietf7iv's online subscriber relationship zr c strategic, competitive adnantaoe now and in the Jntnre as filmed entertainment encompasses both tangible and electronic lo,ms. 9 slats t r rs s z b aG } fi x : ma g G, 944 ..nl Dn ... .: [ ;amn3a4ge 111313s+1515 4400aa09 6014 pu erurcl FYE tLJt ypJE SOME Yer _ 220 ~.K 200 yyv _ ~]6 OLD ME Yr all 422E 2. OIE '1.5 .rrtlffrH (wr; 1011 t0>S 4015 1015 101) aOB.) IM MOVD[nnrV+JSe IrrN JOT .15 5R1 .J lf.} .1 11,]1 1]30 M.J ]RR 1M.7 V.S. 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Gordon Hodge NFLX: 4Q03 SUBSCRIBERS SLIGHTLY ABOVE OUR 415 .364 .2575 ghodge@tweisel .com EXPECTATIONS AT 1.487M Company Update NASDAQ : NFLX-$54 .69 Lloyd Walmslev 415 .364 .2584 [email protected] m Key Data FY 2002 2003 2004 Price : $ 54 .69 EP S 52-Week Range : $10-$61 Q1 ($0 .11)A $O .OOA $0.18 E Ratings Syste m Market Cap.(mn) : $1,720 .5 Q2 $0 .00A $0 .16A $0 .34 E Shares Out .(mn) : 31 .5 Q3 ($0 .01)A $0 .19A $0.33 E Sector Ratings Avg Daily Vol . : 1 .988,157 Q4 $0 .02A $0.16E $0 .30 E OW Overweight Fiscal Year End : 31-Dec Year ($ 0 .09)A $0.52E $1 .15E P/E NM 105. 17x 47 .56x MW Market Weight Sector Rating : MW Stock Rating : 0 UW Underweigh t DebtiTotal Capital : 0% Revenue(mn ) Stock Ratings Price/TTM Sales : 7 .3x 01 $30 .5A $55.7A $90 .6 E O Outperform Net Cash/Share : NM Q2 $36 .4A $63.2A $99 .9E P Peer Perform Book Value/Share : $4 .20 Q3 $40 .7A $72 .2A $106 .8 E U Underperform Price/Book Value : 13 .Ox 04 $45 .2A $80.1E $113.3E S Suspended Rating Secular Growth : 50% Year $152.8A $271 .1E $410 .6 E x NR Not Rated Price Target : NE TEV/ Sales 9 .3x 5 .3x 3 .7 NC Not Covered Note : Any price target displayed in the data box above represents either a specific price target or the midpoint of a range EPS are before one-time items and nun-cash compensation expense . Executive Summary • Reports Ending subscriberscribers : Netflix reported year end 2003 subscribers of 1 .487m (u p 74% y/y) in line with guidance of 1 .470 - 1 .495 million, but slightly exceeded our estimate of 1 .480 million . Paving subscribers represented 95% of the 1 .487m, while 5%, or 71,000 subscribers, were new trial subscribers, in line with our 4 .7% estimate for Q4 . • TV household penetration : 1 .41Yo of 108 .4 million US television households (and 1 .3"/o of total US HH) subscribe to the Netflix service (up from 1 .2% at the end of Q3 and from 0 .8% last year) . Bad' area penetration increased to 5 .9% (from 5 .4% at the end of Q3 and from 3 .8% last year) . We view the Bat Area as indicative of the high end penetration potential for a subscription video service such as Netflix . • No change in estimates : We are not changing our estimates for Netflix at this time as we await key data such as churn, subscriber acquisition cost and disk purchases . We remain comfortable in our current 4Q03 estimates of $80 .1m in revenue, $0 .16 in EPS before non- cash comp and 2004 estimates of $410 .6m in revenue and $1 .15 in EPS before non-cash comp . Company Description : Netly is a leading interactive, subscriber-based entertainment delivery service offering consumers a deep selection of DIIDs for predominantly $19.95 a month. Nefl/ix's online subscriber relationship is a .strategic,, competitive advantage nom and in the future as filmed entertainment encompasses both tangibk and electronic %ovens . Please refer to the end of this report fora list,of important disclosures EXHIBIT B-3 Document9 (10) 003000 30490 (.35) 364-2515 X. g. flL 926 92 2•+_ X. . 920 3515 99 ! 9135 Q 572E M I- USrvlm•nde. 10.,1 ld; t0a.0 1n.1 1011 1n.2 1072 Ina @e . @e . 309 2 109) ,m 109) 911. lb.) US )MYOW Ie.~IHfr IT+) 10.1 YB .l.e 4 1 39 . . 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S 14 f aM a ]3 1 m f 4 i 3 A l t1 f K f 3 Y I A { Rwm•nr.q ~anltr. mYp.~ 4030% 032% . )Y 013% JI1% J3 % A51 A9% 363% 292% AI% IDB% A•x 2B3% 39 .15 3 HOY Sn.n . .mn•Ynu F~awa. anV~7R✓vu, pbc 0401004• N I,ar W 90P65o ~S,39 Gordon Hodge 415 .364.2575 4 Thomas Weisel Partners LLC Thomas 'Weisel-Partners MERCHANT BANKIN G january 21, 2004 Champions =of Growth Media & Broadcasting NETFLIX, INC.-OUTPERFORM Gordon Hodge NFLX: Q4 REVIEW; RAISING ESTIMATES FOR 415 .364.2575 ghodge@tweisel .com ACCELERATING SUB GROWT H Raising Estimates NASDAQ : NFLX-$65 .80 Lloyd Walmsley 415.364.2584 lwalmslev@tweisel .com Key Data FY 2003 2004 :2004 P ry 2005 2005 Prv Price $65.80 EP S 52-Week Range : $11-$69 01 $O .OOA $0 .11E $0 .18E $0 .35E N E Ratings Syste m Market Cap .(mn): $2,114 .9 02 $0 .16A $0 .34E $0 .34E $0 .62E N E Shares Out .(mn) : 32 .1 Q3 $0 .19A $0 .38E $0:33E $0 .63E N E Sector Ratings Avg Daily Vol . : 1,985,596 Q4 $0 .19A $0 .42E $0.30E $0 .59E N E OW Overweight Fiscal Year End : 31-Dec Year $0 .55A $1 .25E $1 .15E $2.20E N E MW Market Weight Sector Rating : MW P/E 119 .64x 52 .64x 29 .91 x Stock Rating : 0 UW Underweigh t Debt/Total Capital : 0% Revenue(mn ) Stock Ratings Price/TTM Sales : 7.8x 01 $55 .7A $95 .7E $90.6E $142.OE N E O Outperform Net Cash/Share : $4 .19 02 $63 .2A $109 .OE $99 .9E $156.1E NE P Peer Perform Book Value/Share : $4 .38 Q3 $72 .2A $118 .9E $106.8E $166.2E N E U Underperfor m Price/Book Value : 15 .Ox Q4 $81 .2A $129 .5E $113.3E $176.OE NE S Suspended Rating Secular Growth: 50% Year $272.2A $453.1E .410.6E $ 640.3E NE NR Not Rate d Price Target : NE TEV/ Sales 7 .1x 4 . 6x 3 .4x NC Not Covered Note: Any price target displayed in the data box above represents either a specific price target or the midpoint of a range EPS are before one-time items and non-cash compensation expense . Executive Summa ry • We are increasing our FY04E ending subs from 2 . lmn to 2. 3mn, within management guidance of 2 .225 mn - 2.525mn, FY 04E revenue from $411mn to $ 453mn, also within guidance of $450 - $475, and FY04E EBITDA from $ 119mn to $133mn to reflect 4Q results above expectations. Our FY04E EPS before non-cash comp increases from $1 .15 to $1 .25 (+128% y/y) . We are establishing an FY05E ending subs estimate of 32mn, FY05E revenue of $640mn and FY05E EBITDA of $200mn . Our FY05 estimate for EPS before non-cash comp is $2 .20 (+76% y/y) . • Netflix repo rted DecQ monthly average subsc ri ber churn of 4. 8%, in line with our estimate and within management ' s guidance of 4 .7 % - 5 .0% and below the SepQ'03 reported churn of 5 .2% . Subscri ber acquisi tion cost (SAC) of $32 . 89 per sub was better than our estimate of $33 .26 and at the low end of management guidance of $32.50 - $33 .50 . Revenue of $ 81mn (+80% y/y) was above our es timate of $80mn, EBITDA of $22mn (+173% y/y) was above our estimate of $21 mn, and EPS before non-cash comp of $0 .19 was $0 .03 better than our es ti mate of $0 .16 . • Valution . Our point estimate for CFV is $75 per share within a range of $51 to $10 9 Company Description : Ne/lix is a leading interactive, subscriber-bared entertainment delivery service offering consumers a deep selection of D 1, Ds for predominantly $19.95 a month. Netflia'i online rubscriber relationship is a strategic, competitive advantage now and in the futut as filmed entertainment encompasses both tangible and electronic forms. Please refer to the end of this repo rt for a list of -imp' ' closures: i iotit Ft, t f 1vil ijieiiri ` € ( s ' i [ rr t tt } F l1111~fftttttii{ 1 Fl~ FT i t [~ tF ~Fi i` {{+ 0 0 0 fltt;'fl Z 0 a 0 A • C, . Y _ C_ R A .e a :Y 3 . a s :G : .° . , R- ~ •c a + S'j F@ SFTF nF6¢Fy°'j~ 3LTF $E Yf YY _ ] r-•"°L6 .6~'. .=': SuST""°t°s _ 6""nE33! 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E :~ :i¢6¢'LJY :1¢¢Byd :Kr SS F &ie¢9% :~ igi : :+ 7¢{~`; j J Media & Broadcasting NETFLIX, INC.-OUTPERFORM Gordon Hodge NFLX: NEW SUB GROWTH ACCELERATING, UP AN 415 .364.2575 ghodge@tnveisel .com ESTIMATED 80% Y/Y Revising Estimates NASDAQ : NFLX-$35 .02 Lloyd Walmsley 415.3642584 Key Data FY 2003 2004 2004 Pry 2005 2005 Prv lwalm slev=(ti nveisel .com Price $3502 EPS 52-Week Range : $7-$40 Q1 $O.OOA (SO 05)E $0OSE $0 13E S0 :18E Market Cap .(mn) : $2,2512 Q2 $0 .08A SO 15E $017E $0.32E $0 .31E Ratings Syste m Shares Out .(mn) : 64.3 Q3 $0 .1OA $0.23E $011E $0.36E S0.32E Avg Daily Vol . : 4,620,737 Q4 $0 .09A S0.25E $021E $0.34E 5030E Fiscal Year End : 31-Dec Year $0.27A $0. 60E $06:2E : $1 .15E $ 1 .10E Sector Ratings Sector Rating : MW PIE 129 .70x 58.37x 30.45 x OW Overweight Stock Rating : 0 M\\' Market Weight U\X' Underweigh t Debt/Total Capital : NM Revenue(mn ) Price/TTM Sales: 8 .3x Q1 $557A $98 .7E $95.7E $155.4E 5142 .0E Stock Ratings Net Cash/Share : $210 Q2 $63 .2A $117.1E $109 .OE $175 .3E $156 .1E 0 Outperform Book Value/Share : $2.19 Q3 $72 .2A $129 4E $118 :9E $188 GE 5166.2E Price/Book Value : 16 .Ox Q4 $81 .2A $140.3E $129 .5b $198.OE 5176 .OE P Peer Perform Secular Growth : 50% Year $272.2A $485.4E $453.1E $717 . 3E $640 .3E U Underperform Price Target: NE TEV/ Sales 7.6x 4 .6x 3.3x S Suspended Rating Note: Any price target displayed in the daut box above represents either a specific price large . or the midpoint of a range . NR Not Rated EPS before stock-based compensation. NC Not Covered Executive Summary • It appears Netflix may have reached a "tipping point" of sorts with consumers as its tests with television marketing and its highly effective Internet marketing campaigns are driving an acceleration in the rate of new subscriber sign-ups in 1Q04, which we estimate are growing 8040 y/y compared to 38% y/v ni 2003 . As a result, Netfhx revised its 1Q04 guidance including substantially higher than expected subscriber growth and the attendant impact on gross margins and marketing spending, which is expensed as incurred . • 1Q04 subscriber guidance was increased by 90k-110k for the quarter to 1 .860mn-1 .935mn with the revenue range up $2mn to $96nin-$lOlnvi . GAAP net loss guidance of ($5 .6mn) to ($8 .1mn) decreased by ($4 .4mn) due to lower expected gross margins (down 100bps to 43%-45%) and in-line marketing (on plan at $34-$36 per sub add) . Subscriber chum appears to be trending down, with churn guidance declining by 10bps We believe the gross margin decline is temporary due to higher disk usage customary when many new users join the service . • We arc increasing our 2004 estimates for subscribers, revenues, E13TTDA and FCF and reducing our GAAP EPS and EPS before non-cash comp for 2004 slightly . Our revenue estimate increases from $453mn to $485mn on 2.5mn ending subscribers (up from 2 .3mn) . Our EBITDA estimate increases from $133mn to $136mn and FCF from $0 .80 to $0 .81 . Our GA.AP EPS estimate declines from $0 .28 to $0 .25 and our EPS estimate before stock compensation from $0.62 to $0.60. For 2005, we have increased our GAAP EPS estimate from $0 .75 to $0 .80 and EPS before stock compensation estimates from $1 .10 to $1 .15 to reflect the benefit of faster sub growth in 20114 . Company Descri ption : Netflix is a leading interactive, subscriber-based enk'rlainrv ent delsrery .tenure I#rino roes imers a deep selection of DT'Ds )or predominantly x'19.95 a month. Net/Iixrs online .nihscr ber relallons/7if is v strutcori, roc etstine udt,zm/uoe now and in the1iibrre as filmed entertainment encompasses Sorb /an, lhle and electronic - 5. NeMb, lnc. wcwnr Swemrrx Onven GaOOn Hodge 1415) 364 257b (S n 778019 e3707, ED, •lam) FOE 12131 2003 2001E 2805E ,QtA (LA 4p Yo_ar ()IF. 2F (V'iF 4F O~ 9 F. 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Mnrmaxa x151 TMnws W 854 7,3rwrs 6 .6.1,98, Gordon I lodge 415 .364.2575 6 Thomas Weisel Pefwers LLC Thomas Weisel Partners MERCHANT BANKING Champions of Growth February 27, 2004 Media & Broadcasting NETFLIX, INC.-OUTPERFORM Gordon Hodge NFLX: ENTERING HYPER GROWTH PHASE ; ANALYST 415 .364.2575 ghodge@tweisel .com DAY HIGHLIGHTS Revising Estimates NASDAQ : NFLX-$33.60 Lloyd Walmslev 415.364 .2584 lwaimsieV@m,eisel.com Key Data FY 2003 2004 2004 P ry 2005 2005 Pry Price $33.60 EP S 52-Week Range : $7-$40 Q1 $O.OOA ($0 .04)E ($0.05)E $ 0 .19E $0 .13E Ratings System Market Cap.(mn): $2,159.9 Q2 $0.08A $0.14E $0.15E $0.37E $0.32E Shares Out .(mn) : 64.3 03 $0.10A $0.14E $0.23E $0 .38E $0 .36E Sector Ratings Avg Daily Vol .: 4,912,314 Q4 $0 .09A $0.20E $025E $0 .40E $0 .34E OW Overweight Fiscal Year End : 31-Dec Year $0.27A $0.45E $0.60E $1.35E $1 .15E : MW .44x 74. 67x 24 .89x MW Market Weight Sector Rating P/E 124 Stock Rating: UW Underweight 0 Debt/Total Capital : NM Revenue(mn) Stock Ratings PriceiTTM Sales : 7 .9x Q1 $55 .7A $99 .9E $98 .7E $164 .7E $155.4E O Outperform Net Cash /Share : $2.10 Q2 $63 .2A $118.5E $117.1E $185. 1E $175.3E' ' P Peer Perform Book Value/Share : $2.19 Q3 $72 .2A $132 .7E $129.4E $200 . 8E $188.6E U Underperform Price/Book Value : 15.4x Q4 $81 .2A $146 . 3E 91140.3E $213. 8E $198.OE S Suspended Rating Secular Growth : 50% Year $272. 2A $497 .4E 5485.4E $764 .4E $717.3E 2 NR Not Rated Price Target : NE TEV/Sales 7 .3x &3x .9 x NC Not Covered Note: Any price target displayed in the data box above represents either a specific price target or the midpoint of a range . EPS before stock-based compensation . Executive Summary • Earlier this week and again at its first annual analyst day yesterday, Netflix announced it wa s experiencing a significant acceleration in consumer demand, with new subscriber sign-up s increasing at an estimated 80% clip up from 38%, in 2003 . As with any subscriber model, hyper growth tends to put pressure near term on profits but once growth moderate s profitability expands dramatically . Netflix is gaining more customers, faster, for the sam e price and keeping them longer, and in our view that kind of growth is -very good indeed an d worth enduring a near term depression in profits . • We are increasing our 2004 estimates for subs and revenues, and reducing our estimates fo r EPS before stock-based comp, FCF and EBITDA . However, we are increasing our 2005 estimates . Our 2004 revenue estimate increases from $485mn to $497mn on 2 .6mn ending subs (up from 2 .5mn) . Our EPS estimate before stock compensation declines from $0 .60 to $0.45, FCF from $0 .81 to $0 .70, and our EBITDA estimate decreases from $136mn t o $129mn . For 2005 we have increased our EPS before stock-based compensation estimate s from $1 .15 to $1 .35, our EBITDA estimate goes from $227mn to $249mn and FCF estimat e from $1 .34 to $1 .56 per share . Company Description : Ne'f7ix is a leaden interactive, subscriber-based entertainmen/ deliver} service offering consumers a deep selection of DI"D.lorl redominantly 3"19.95 a month . Net#Ax-s online subscriber relationship is a strategic, competitive advantage now and in the future as filmed entertainment encompasses both tangible and electronic Please refer'to the end of-this ieport for a,listofunportantdisclosY res .. Ratllls, lnc. ka:om. swm .nl om«s : Gomm Hodge (415) 36C2575 (S kl m9ors, esoepl per vcre) EYE 12131 2003 2896 6 2685E . Q~A CLU OIA 36 Q6 537 r 01 yew WE 9 92E g_IF SRE 921 Q5 Y0a £_61_ a U.S . 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NR Not Rate d EPS are before one-time items and non-cash compensation expense . NC Not Covered Executive Summary • Subscriber growth better than expected: Netflix reported Q1 ending subscribers of 1 .932 million (up 84'io y/y), at the high end of guidance of 1 .860 - 1 .935 million and above our estimate of 1 .900 million . Paving subscribers represented 95°io of the 1 .932m, while 5%, or 90K subscribers, were new trial subscribers at quarter end . • TV HH penetration continues to grow : 1 .8% of 108 .4 million US television households (and 1 .7% of total US HH) now subscribe to the Netflix service (up from 1 .4°.4 at the end of Q4 and from 1 .O% last year) . Bay area penetration increased to 7 .2% (from 5 .9% at the end of Q4 and from 4.6°/o last year) . We view the Bay Area as indicative of the high-end penetration potential for a subscription video service such as Netflsx . We note that other, more mature subscription video services such as Showtnne (31%) and HBO (37%) enjoy much higher US TV HH penetration, suggesting even the Bay Area penetration may not he the upper bound . • No change in estimates: We are not changing our estimates for Netflix at this time as we await key data such as chum, subscriber acquisition cost and disk purchases . We remain comfortable it our current 1Q04 estimates of $99 .9m in revenue, ($0.04) in EPS before non-cash comp and 2004 estimates of $497 .4m in revenue and $0 .45 in EPS before non- cash comp . We look for 2005 EPS before non-cash comp of $1 .35 and FCF of $1 .56 . Company Description : NetJ7ia is a leading interactive, fubsrriber-based entertainment delivery service offering consumers a deep selection of DT `Ds for predominantly $19 .95 a month . 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NC Not Covered Note : Any price target displayed in the data box above repres EPS are before one-time items and non- cash compensation expense . Executive Summary • Uncertainty about usage trends and a p ri ce increase rattled Netfl ix's stock price after hours with it down 12% in late trading . We too were surprised by the increase in DVD usage by Netfl ix subsc ri bers, which is nea ri ng 7 disks / month, up from around 6/month last year. This higher usage has significant negative margin implications for Netflix as it receives a flat fee for its service an d pays on a variable basis for its DATDs . As such, it is not surprising the comp any has elected to increase its price for the basic se rvice from $19.95 to $21 .99 effecti ve June 15th . These two changes in troduce new short-term ri sks for the stock but it is our belief they could lead to a substantial increase in shareholder value long-term based on our discounted cash flow analysis . • Little noticed in the 1Q04 results, was the 102 °%o y/y growth in ending new fre e tri al subsc ribers which su ggests the company is expe ri encing accelerating growth in its new subsc ri ber volume when compared to the 82% growth for Q1 overall . In addition , repo rted chuni continues to improve to levels we did not believe possible of 4 .7% in the quarter compared to other premium subsc ri p tion video services (Showtime, HBO, etc .) which we estimate have monthly chum rates at 5%-7% levels . Revenues of $100.4m and GAt1P EPS of ($0.11 ) slightly exceeded our es ti mates of $99 . 9m an d ($0. 14), respectively. Company Desc ri ption : :Ve //i,: is a leading interactive, sabsoiber-based entertainment delnieej service offering consumer s a deep selection of Dt'Dc for predominantly $19.95 a month. iNe5fk'v's online subscriber relationship is a strategic, competitive advantage non, and in the firtnre as filmed entertainmevn encompasses both tangible and electronic /o rms . .. ✓ R14~Y'G iH? , g~ ~t, "~S ~vT. SJT Nk P¢yd j' tK 4,C`LSy 0 :ul i 2 1 06t , y ail l~ f f9.. „` i .}~t+ . it' `f .tea .',, C t~C' ~CI a r~^.- .r tt ~ ~,` Ne1116, 1rc. Yrc:mr 9rmlwn Wwmr GaCOn in5pe N151364-P575 (S h Mlars, e00, per Wgel 835 1NJ1 2243 2904E 2605E 809 5775 572 415 129! 92 572E 925 570E Y- Q1E 570E va 571E 5. 0 $u66u- mo4N US. 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($0 .03)A $0 .15 E Ratings System Market Cap .(mn) : $1,743 .6 Q2 $008A $0 .12E $034 E Shares Out.(mn) : 51 .3 Q3 SO 10A $0 .20E $0 .41 E .17E $0 .44E Sector Ratings Avg Daily Vol .: 2,375,416 04 $009A $0 .27A $0 . 47E $1 .35 E OW Overweight Fiscal Year End : 31-Dec Year $0 MW P/E 125 .93x 72 . 34x 25 .19x MW Market Weight Sector Rating : Stock Rating : 0 Ugh' Underweigh t Debt/Total Capita l* 0% Revenue(mn ) Stock Ratings PriceITTM Sales : 5 .5x Q1 $55.7A $100 .4A $172 .3E O Outperform Net Cash/Share : $284 Q2 $63.2A $119 .6E $196 .1 E P Peer Perform Book Value/Share : $217 03 $72.2A $138,1E $2144E $232.2E U Underperform Price/ Book Value : 15 .7x Q4 $81 .2A $151 1E .0 E S Suspended Rating Secular Growth : 50% Year $272.2A $509.2E $815 TEV /Sales 8. lx 4.6x 3.i x NR Not Rated Price Target : NE Note : Any price target displaved in the data box above represents either a specific price target or the midpoint of 2 range . NC Not Covered EPS are before non- cash compensatio n expense and one-time items . Executive Summary • We believe new subscriber growth is tracking to our estimate and see potential upside from a seasonal decline in disk usage . Netflix reports June quar ter ending sub numbers pre-market open on Thursday, July 1 and reports earnings after the market close on duly 15 . • New Sub Growth on Track. We look for ending subscribers of 2 .065mn, based on 60% year-over-year growth in gross new sub adds (down from 82% year-over-year growth in the _vlarch quarter) and reported churn of 5 .3`%% (up from 4.74 in the March quarter) . Comments from management at our Internet Conference (May 4), in company visits and in press reports (June 21 Reuters interview with CEO) affirm that current subscribers surpassed the 2mn mark, versus March quarter's ending subs of 1 .932 and management's guidance for June quarter ending subs of 1 .935mn - 2.140hnn . Thus, despite the company's recent price like, growth appears on track . We believe that the company exited Q1 with new sub growth of 100%+ year over year, so our estimate assumes a seasonal deceleration and some reaction to the price increase, but could be conservative . If ending subs come in at the high end of guidance at 2 .140 million, we estimate that it could weigh on June quarter earnings by about $0 .02 but that it would lead to upside to the 2004 and 2005 EPS, which we would view positively . Company Description : Net/7iv is a leading interactive, subscriber-based entertainment dc/wee3: serviir afering consumers a de p selection of DVDs for predominemty ,821 .95 a month. itiet Rx's online subscriber relationship rs a strategic, competitive advantage now and in the future as filmed entertamment encompasses both tangible and electronic farms. xoa~ ri r~~k M E== N.M .M bcomn ieatemenl Drfven: GOrdOn Hodge (416) 364-2b75 K 01 0Nblr. osmpl por slur.) - lVE12031 200] 2084E 2003E 2)1A QU 0 3A SOP Y8x OIA C2E ~3E 04E Veer 01 C)2E 3E Q(E4 X.- US. 11. 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5.96 1 5 .66 3 677 $ 4.86 3 5 .11 S 6.21 f 6 .02 1 5.82 f 6.05 S 6.12 $ 624 9 5 .97 S 6 .10 Pram 951537 eBeh 5)00057,07 29.5% 217.6% 306% 792% 79 MG 250% 25 04 .9% 293% 28 .6% 2]4 29014 241% 29.3% 264 14 269% 95912004 Gordon Hodge 415 .364 .2575 4 Thomas Wciscl Partners LLC Media & Broadcasting NETFLIX, INC .-OUTPERFORM Gordon Hodge NFLX: INCREASING Q2 AND 2004 ESTIMATES ; 415364.2575 ghodge@tweisel .com REITERATE OUTPERFORM Raising Estimates NASDAQ : NFLX-$35 .95 Lloyd Walmsley 415.364 2584 lwalmsley(ritw ei sel .com Key Data FY 2003 2004 2004 P rv 2uuo zuus r rv Price $3595 EP S 52-Week Range : $11-$40 Q1 $0 .00A ($0 .03)A ($0 .03)A $0 .15E $015 5 Ratings Syste m Market Cap .(mn) : $1,8436 Q2 $0 .08A $0 .14E $0125 $0 33E $0 .34 5 Shares Out .( mn) : 51 3 Q3 $0 .10A $0 .215 $0 :205 $0 .42E $0 .41 5 Sector Ratings Avg Daily Vol .: 2,325,013 Q4 $0 .09A $0 16E $0 .17E $0 .44E $044E ,47E $1 .35E $1 .35E OW Overweight Fiscal Year End : 31-Dec Year $0 . 27A $0 .50E $0 133 . 15x 71 .90x 26 .63x MW Market Weight Sector Rating : MW P/E 0 U%\' Underweigh t Stock Rating : Debt/Total Capital : NM Revenue(mn ) Stock Ratings Price/TTM Sales: 5.8x Q1 $553A $100 4A $100 .ilA $172.OE $172 .3 5 O Outperform Net Cash/ Share : $2 .84 Q2 $632A $120 .8E $119 .6E $197 .1E $1961 5 P Peer Perform Book Value / Share : $217 03 $72 .2A $1390E $138 .15 $215 3E $2144 5 U Underperform Price /Book Value : 16 .6x 0 4 $81 .2A $150 4E $151 tE $231 .4E 5232.2 E 5015 .0E S Suspended Rating Secular Growth : 50% Year $272.2A $510 .6E $5092E $815 .7E TEV / Sales 7 .8x 4. 5x 3 .0x NR Not Rated Price Target: NE NC Not Covered Note : Any price target displayed in the data box above represents either a specific price Large- or the midpoint of q range EPS are before one-tune items and non-cash compensation expense . Executive Summa ry • Increasing Q2 estimates . We are increasing our estimates for Q2 as follows : EPS before non-cash compensation expense goes from $0. 12 to $0 .14, revenue goes from $119 .6mn to $120.8mn and FCF remains $0 .19 . Our estimate in creases re flect higher subs as well as a seasonal decrease in disk usage in Q2. W e are increasing our estimates for 2004 as follows : FPS before non-cash compensa tion expense goes from $0 .47 to $0.50, FCF goes from $0.80 to $0.83 , and revenue goes from $509mn to $51lmn . For 2005, our estimates are for FPS before non -cash comp of $1 .35, FCF of $1 .57, and revenue of $816mn . • Subscriber growth better than expected . Netfl ix reported Q2 ending subscri bers of 2 .093mn (up 82` o y/y), towards the high end of guidan ce of 1 .935 - 2. 140 million an d above our estimate of 2 .1)65 million . Paving subscribers represented 97° i (or 2 .024mn) of the 2.093mn , while 3`io, or 69K subscribers , were new trial subsc ribers at quarter end . The company exited the quarter with free t rial growth of 50 % y/y giving us confidence in our estimate for gross sub adds of 50% for the second half of the year , despite the p rice hike. Company Description : JVef/7zv is a leading mleracttre, subscriber-based entertainment rdehvep' service oferim ronsrmierr a deep selection of DI 'Di for predonnnantlyy ,121 .95 a month. 11 ety7iv's online snbxniber relation .tbip it a rtrategic, congeti/sve advantage now and in the fi Lure as filmed entertainment encompasses both tangible and electrnni. forms. WRON A, WIN Ne11111 mc. .40,1 Hods. 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Sector Ratings Avg Daily Vol . : 2,313,502 04 $0 .09A $0 .19E 30ta6E $0 .42E °'30 .44E , OW Overweight Fiscal Year End : 31-Dec Year $0 .27A $0 .45E 050E $1 .30E '$1 35E MW Market Weight Sector Rating : MW P/E 118 .52x 71 .11x 24.62x Stock Rating : 0 UW Underweigh t Debt/Total Capital : NM Revenue(mn ) Stock Ratings Price/TTM Sales: 5 .6x Q1 $55 .7A $100.4A bq-01 $172.9E' 172 :O E O Outperform Net Cash/Share: $2 .36 Q2 $63.2A $120.3A 4120 .8E $198.5E 4197a E P Peer Perform Book Value/Share : $2 .31 03 $722A $139.5E 0E $218.5E $215.3 E U Underperform Price/Book Value : 13 .8x Q4 $81 .2A $151.3E i 4E $235.7E 2314 E S Suspended Ra ti ng Secular Growth : 50% Year $272.2A $511.5E 5f0 .6E* $825.7E S 15 .7E NR Not Rate d Price Target : NE TEV/Sales 6. 9x 3.8x 2.3x .' : .. NC Not Covered Note: Any price target displayed in the data box above represents either a specific price target or the midpoint of a range . EPS before one-ti me items and non-cash compensation expense. Executive Summary • Shame on us . We overshot in our assumptions for churn and disk usage and thus our 2Q GAAP EPS estimate of $0 .06 was above the $0.04 reported. Chum was 5 .6% vs . our 5 .4% and disk usage, while down from 1Q, was 6 .6 vs . our 6 .5 estimate . (Recall that each 0 .1/sub change in usage = $0.015 in EPS in our model .) These are not catastrophic misses in our view and both churn and usage appear to have stabilized and are behaving in a predictable fashion again. New sub growth of 78% was better than our estimate of 73% and supports our view that Netflix offers a compelling new consumer proposition even after a $2.00/month price increase . Thus, we reiterate our Outperform rating on the stock and current fair value estimate of $50 within a range of $44 to $70. • Revising. Estimates. We are changing our 2004 estimates as follows : ending subs go from 2.500mn to 2 .515mn, revenue from $511mn to $512mn, EBITDA from $132mn to $126mn, EPS before non-cash comp from $0 .50 to $0 .45 and FCF goes from $0 .83 to $0.63. Our 2005 estimates change as follows: ending subs go from 3.833mn to 3 .896mn, revenue from $816mn to $826mn, EBITDA from $259mn to $245mn, EPS before non- cash comp from $1 .35 to $1 .30 and FCF from $1 .57 to $1 .45. Company Description: Netflix is a leading interactive, subscriber-based entertainment delivcy service offering consumers a deep selection of DVDs for predaminantly ;21 .95 a month. 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Gordon Hodge 415.364.2575 6 Thomas Weisel Partners LLC Thomas Weisel Partners MERCHANT BANKIN G Champions of Growth July 19, 2004 Media & Broadcasting NETFLIX, INC.-PEER PERFORM Gordon Hodge NFLX: BLOCKBUSTER BETA PRICE MORE AGGRESSIVE 415 .364.2575 ghodge @tweisel.com THAN EXPECTED; DOWNGRADING RATIN G Rating Downgrade TIASDAQ : NFLX-$23.02 Lloyd Walmsley 415.364.2584 lwalrnsley@tweisel .co m Key Data FY 2003 2004 2004 Prv 2005 2005 Prv Price $23.02 EPS 52-Week Range : $11-$40 Q1 $0 .00A ($0 .03)A '($0 .03)A $0 .16E 5014E Ratings Syste m Market Cap .(mn): $1,495.7 Q2 $0 .08A $0.11A $0 .11A $0 .30E S015E Shares Out.(mn): 65.0 Q3 $0 .10A $0 .18E ' '_$0 .18E $0 .26E •, $0 .39 E' Sector Ratings Avg Daily Vol . : 2,147,265 04 $0 .09A $0.19E $019E $0 .27E $0 42 E OW Overweight Fiscal Year End : 31-Dec Year $0 .27A $0.45E $0 .45E $1 .00E S1 .30 E MW Market Weight Sector Rating : MW P/E 85 .26x 51 . 16x 23 .02x Stock Rating : P UW Underweigh t Debt/Total Capital : 0% Revenue(mn ) Stock Ratings Price)TTM Sales : 4.Ox Q1 $55.7A $100 .4A - $100.4A $167.0E $172'9E O Outperform Net Cash/Share: $2 .36 02 $63 .2A $120.3A $1203A $180.7E $198.5E P Peer Perform Book Value/Share: $2.31 Q3 $72.2A $ 139.5E $139.5E $ 188.1E ~ $218 :5E U Underperform Price/Book Value : 10 .0x 04 $81 .2A $151 .3E $1511E`- $192.8E 1235 .7 E S Suspended Rating Secular Growth : 40% Year $27 2. 2A $511.5E $511 .5E _1 ' $728. 6E 5825 .7 E NR Not Rated Price Target: NE TEVISales 4.8x 2.6x 1.8 x NC Not Covered Note : Any price target displayed in the data box above represents either a specific p ri ce target or the midpoint of a range . EPS before one- time items and non-cash compensation expense . Executive Summary • We are downgrading Netflix from Outperform to Peer Perform until we can better assess a potentially more competitive pricing strategy by Blockbuster. According to its just launched beta site, Blockbuster appears more aggressive in pricing its beta online service ($19 .99/month) than we expected, which raises uncertainty and could slow Netflix's growth somewhat. • While it is unclear how aggressive Blockbuster may be once it gets out of beta, both in terms of marketing the service and pricing it, we believe it prudent to assume the worst and are therefore cutting our 2005 estimates of EPS before non-cash comp from $1 .30 to $1 .00 and FCF from $1 .45 to $1.00 to reflect slightly higher churn and slower new subscriber addition growth in 2005 (from 30% to 10%) as we believe some consumers may at least "sample" the Blockbuster offering at the $19 .99 price point, even if they ultimately return to"the Netflix premium service . Our EPS estimate of $1 .00 is now below consensus of $1 .29 and low on the street . Company Description: Netflix is a leading interactive, subscriber-based entertainment delivery service offering consumers a deep selection of DVDs forprrdominant# $21 .95 a month. Netflixs online subscriber relationship is a strategic, competitive advantage now and in the future as filmed entettainnnnt encompasses both tangible and electronic forms. RMIW%O , Gatmn 1 4045. (415) 364-2575 K„mrm .. .tlpt pr an-'( 7751201 2005 2ME 20800 SIs 576 C36 !>L Ysx 313. 323. 936 3 S. 2.39[ 315 925 332. 305 209 it e .1 30e.. 108 .1 1001 10e. 109.7 109 .7 109.7 109.7 109 .7 n 0 .8 110.6 89 .9 1113 7106 us. rvAa/r8 Pm) 108 : .6 03 .5 50.0 09A 92J 87.5 u. S. T4*000*9SYd6f (wn1 613 643 672 70.1 70.1 73.0 76 .0 70.9 all .3 518 52.8 56.3 69 3 633 86.0 00 .0 72 .1 75.8 79.1 .82.5 02.1 u. a 3 .430 Ow IweMN. 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S 5.70 3 6.85 f 6." 5 5,66 5 in f 431 S 511 f 523 3 4,12 f 6 .85 3 535 3 5.40 f 030 6 sm 1 0.1 6 P--. 203% 203% 27 .7% 29.1 % 75601886 -, .. 9*1. 1185. 29.5% 29.8% 306% 292% 29.8% 25.0% 257% 29.3% 29 .1% 27 .6% 30116 Gordon Hodge 415 .364.2575 5 Thomas Weisel Partners LLC Thomas Weisel Partners MERCHANT BANKING Champions of Growth October 4,2004 Media & Broadcasting NETFLIX, INC.-PEER PERFORM Gordon Hodge NFLX: SUBS LIGHT BUT PROFITS Up; ACCOUNTING 415 .364.2575 ghodge®tweisel .com CHANGE BOOSTS EP S Revising Estimates NASDAQ: NFLX-$17.25 Lloyd W almslev 415.364.2584 lwalmsleyCftwei sel .com Key Data FY 2003 2004 2004 Pry 2005 2005 P rv Price $17 .25 EP S 52-Week Range : $14-$40 01 $O .OOA (SO 03)A ($0 .03)A $017E S0,16E Ratings Syste m Market Cap .(mn ) : $1,120 .8 Q2 $0 .08A $0 11A $011A $036E 3030E Shares Out .(mn) : 65 .0 Q3 $0 .1OA 60 .31E $0 .130 $0 .31E SC 26E Sector Ratings Avg Daily Vol . : 2,736,633 Q4 $0 .09A $025E $0.19E $030E $027E OW Overweight Fiscal Year End : 31-Dec Year $0 .27A $0 . 65E $0.45E $1 .15E S1 .00E MW Market Weight Sector Rating : MW P/E 63 .89x 26 . 54x 15.00x UW' Underweigh t Stock Rating : P Debt/Total Capital : NM Revenue(mn ) Stock Ratings Price/TTM Sales: 3 .Ox 01 $55 .7A $100 .4A $100.4A $163 7E 3167 .00 O Outperform Net Cash /Share : $236 02 $63 .2A $120 .3A $120 .3A, ; $179 OE 01807E P Peer Perform Book Value / Share : $2 .31 Q3 $72 .2A $137 .7E $139 .50 $1872E 5188 1E U Underperform Pri ce /Book Value : 7 .5x Q4 $81 .2A $147 .4E $151 :30 $192 .4E $19580 S Suspended Rating Secular Growth : 35% Year $272.2A $505.8E $511 .5E' . $722 .3E $728 .6E NR Not Rate d Pri ce Target : NE TEV/Sales 3 .5x 1 .9x 1 .3x NC Not Covered Note : Any price target displayed in the data box above represents either n specific price target or the midpoint of a range. EPS before non-cash compensation expense Executive Summary • Subscriber growth lower than expected: Netfli-x reported Q3 ending subscribers of 2 .229 million (up 73% y/y), within guidance of 2 .150 - 2 .3511inn and below our estimate of 2 .269 million . Paving subscribers represented 96% of the 2 .2 million, while 4%, or 94K subscribers, were new trial subscribers at quarter end . • TV HH penetration continues to grow: 2 .1°/0 of 108 .4 million US television households (and 1 .9% of total US HH) now subscribe to the Netflix service (flat with 1 .9°6 at the end of Q2 and up from 1 2°./o in 3Q03) . Bay Area penetration increased to 8 .1°/0 (from 7.2% at the end of Q2 and from 5.4%o in 3Q03) . We view the Bay Area as indicative of the high-end penetration potential for a subscription video service such as Netflix . • SAC (midpoint) and Churn ( high end) Within Guidance . In conjunction with its subscriber release , Netflix reported that subscriber acquisition costs came in towards the mid-point of its guidance of $37-$39 . This is positive, in our view, as we have gathered anecdotal evidence that online ad pricing has been trending up and feared that Netflix would not be able to stay within guidance in light of that trend . Furthermore the company indicated churn would be at the high end of its guidance of 4 .8`%, to 5 .6'1%,, which is somewhat disappointing and may relate to subscribers sampling Blockbuster's competing offering. Company Description : Nettliv is a leading interartire, subscriber-based entertainment delivery service oflemi~ ronsrmrers a deep selection of D1, Ds ror predominantly 521 .95 a month. 1'1 etJ7ix's online ralbseriber relationship it a strateair, ron etitim adzwnline non and in the future as filmed entertainment encompasses loth tangible and electrmtis forms . N.MIa, lac . 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A .am61.%Dla Re60x11 , cgn0a0ryr6p40. punlc00qmem6anc T1»mas Woa O 6701176052600156,5 10)411091 Gordon }lodge 415 .364.2575 4 Thomas Weisel Partners LLC