EXHIBITF

EQUITY RESEARCH

Alden Mahabir(646) 472-5216alden@vintageresearch .com

COMPANY & MARKET DATA

Industry Rating (Rental) Underperfor m

Price $33 .6 0

Price Target $26 .00

52-Week Range $6 .76 39 .7 7

Average Volume (mn) 4 . 3

Revenue 2003A (mn) $272 . 2

Market Cap (mn) $2,005 . 6

Enterprise Value (mn) $1,821 . 6

Shares Outstanding (mn) 50 . 1

Free Float (mn) 38 . 3

Disclosures and analyst certificationsare located at the end of this report .

COMPANY UPDAT E

February 26, 2004

Analyst Day Saw Slightly MoreAggressive Guidance

Highlight s

• New guidance shapes positive tone of analyst day. Weexpected a more positive long-term outlook, but thought new 04guidance was going to be saved for the 1Q04 earnings call . That said,there was little doubt that 2004 guidance was headed up, given themagnitude of the recent 1 Q04 guidance revision .

FY 2004 guidance change seems awfully low. The company now

expects 2 .4-2 .7mn year-end 04 subs, up from 2 .225-2.525mn subs .However, the net change of 175k subs seems rather small, consideringearlier in this week the company raised its 1 Q04 net adds guidance by

110k . We find it rather odd that the company is tracking 110k subsover plan for the 1Q, but just 65k over prior plans for the next three

quarters . We currently stand at 2 .9mn subs .

• As we predicted, management tried to support its share pricewith new longer-term guidance. The company now expects to hitits goal of 5mn subs and $1 bn in revenue by 2006 vs . priorexpectations for 2006-2007 . We have the company reaching 5 .3mnsubs in 2006 . The day also saw the CEO speak of one day having---1 Omn subs (no timeframe given) - does this assume competition ?

• No change to recommendation or valuation . Our existingestimates continue to exceed even the revised guidance .

ESTIMATES .2003A Prior 03 2004E 2005E prior 0 5

1Q EPS $0 .00 - ($0 .03) - $0 .3 0

20 EPS $ 0 .08 - $0 .14 - $0 .4 5

3Q EPS $0 .10 - $0 .17 - $0 .4 5

4Q EPS $0.09 - $0.19 - $0 .46

FY EPS (Dec) $0 .27 - $0.48 - $1 .66

Consensus (First Cal!) - $0.62 $1 .23

EV/EBITDA 32 .8x 17 .8x 8 .1 x

P/E 301 .3x 229 .7x 24 .Ox

P/FCF 138 .6x 62 .2x 18 .4 x

Dividend Yield

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HighlightsImproved FY 2004 Guidanc eThe company now expects to have 2 .4-2 .7mn year-end 2004 subscribers up from its prior guidanceof 2 .225-2 .525mn subs . We believe that management may have been a little too conservative . Theincrease in full year sub guidance is only 175k, of which 110K comes from the company's recent1Q04 guidance revision . Clearly if the momentum from 1Q carries through the year, we could see ahigher number than their year-end 2004 guidance . Accordingly, we expect year-end 2004 subs of2 .9mn, thinking that there is a good chance that are number ends up being closer to actual than thecurrent guidance, but then, we do not have an incentive to constantly revise up our expectations . Parfor the course, the company indicated that it would comment on FY 2004 guidance again on its1Q04 earnings call . That would mean that in one week, the company (1) raised its 1Q04 guidance;and two days later, (2) raised its 2004 guidance and then (3) indicated it would revisit that same2004 guidance in less than fifty days (April 15) . We are only left thinking that generals have shownless use of tactics on the battlefield .

Figure 1 : Updated Guidance(millions) Old Current VIt Current VR `

Guidance 2004 Guidance 2004 2QOdi! Guidance 1,,04 1,,

04 E

Ending Subscribers 2,225 - 2,525 2,400 - 2,700 2923 : 1 860 1,935 1,931`

Total Revenue 450 - 475 480 - 505 518 96 - 101 99 '- . -Gross Margin 44% - 46% 43% - 45% 43% - 45%GAAP Net Income (loss) 14.6 - 21 6 4 .0 - 100 9.3 (56) - (81 )Non-GAAP Net Income 38 - 45 NA - NA 32 : _ (0.9) - (34)

Subscriber Acquisition Cost 34 - 36 34 - 36 3 " 34 - 36 35Churn Rate 43% - 53% 4 .3% - 51% 47*- 47% - 57% 47*---

Issued 21-Jan-04 26-Feb-04 23-Feb-04Source : Comoanv and Vintage Researc h

The day also saw Netflix run through a "What if Analysis", which displayed the company with 6 .8 to10.8 min subs in 2007, resulting in $1 .4 to 2 .1 bn in revenue, and 15-17% gross margins .

Tightening the Long-term VisionNetflix continues to bring in its expectation for the company reaching $1 bn in revenue and 5mnsubs . The company now expects to hit the $1bn revenue goal in 2006 . On the Netflix's last earningscall, the company moved this goal to 2006-07 from 2007-09 . Our projections already had thecompany garnering 5 .3mn subs and $1 .12bn in revenue in 2006. However, we continue to believe

that actual long-term achievements, as opposed to the direction and frequency of guidance changes,have more downside potential than upside. We still are concerned about increased competition fornew entrants, VOD, as well as the market's ultimate size . We also believe those risks only intensifywith time and perhaps, our current perception is blinded by the lack of competition on all of thosefronts .

Separately, although not official guidance, CEO Reed Hastings proclaimed that he would not besurprised if Netflix eventually garnered 10% penetration in US households, which would equate toover 10mn subs and $2 .7bn in revenue . If that were to happen, we would be delighted for thecompany. However, we believe that would be a very difficult task, especially if the projectio n

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accounted for competition . Even with competition, we would be skeptical . But without competition,the projection seems borderline ridiculous, as it would imply that the mail-based subscription rentalmarket could easily accommodate 15 million or more subs, assuming just modest success forBlockbuster, Wal-Mart, or any other players . To achieve such a goal, the company would have toeither reduce its churn very significantly or have gross addition grow through the roof . Case in point,our model has Netflix with 8 .263 million subs at year-end 2011, adding 4 .235million gross subs, butonly netting 1 5k subs due to monthly churn of 3 .8%. Other than affecting one's share price, we findit hard to see other motivations for such unadulterated speculation . Normally, early-stage companiesrely on hired consultants for such bold predictions .

SAC's Never Gonna Change ?Netflix management indicated that they did not see per-sub SAC, which now stands at $35,increasing over the next few years . Our forecast has SAC at $35, rising below the rate of inflation, to$37 in the out years, a generous assumption . In order for Netflix to be a much larger company, itsyearly gross add level has to rise dramatically . For that to happen, we think the company would haveto a much larger advertising budget . For instance, Pepsi has considerable brand awareness, but thatdoes not stop it from being one of the world's largest spenders on advertising . The reason being is alarger advertising budget is essential to sustaining a large mass market . EchoStar, a relatively frugalsubscriber company whose advertising budget can hardly be described as excessive, spent $51 persub on new subscriber advertising in 3Q03 ($42 .70 in 1998) . EchoStar's SAC, though not comparablewith Netflix, was $501 in 3Q03 (latest actual) versus roughly $285 in 1998 . Competition could alsoforce Netflix to spend considerably more, while potentially getting a lot less bang for its buck .

We continue to think Netflix's 1 .8mn subs is hardly the litmus test to conclude that the online rentalbusiness is a mass market service . However, Netflix's higher subscriber IRRs is exactly what thecompetition is using as its impetus . It is also the reason why Netflix would likely spend more, if theyhad to . Today, Netflix's message isn't getting lost on as many deaf ears as it would if there weremultiple voices saying the same thing, which is just one reason why increased competition, raises thecost of doing business .

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Valuation Methodology

Because much of Netflix's theoretical value rests in its terminal value and not its accomplishments todate, we used a discounted cash flow (DCF) approach as our primary valuation approach . With somuch so distant, attempting to peg (pun intended) an appropriate current P/E multiple is a rathersuspect practice in our estimation .

Except for the magnitude of overall subscriber growth , the major assumption driving our firm DCFanalysis is the weighted average cost of capital (WACC) . Our 12 .8% WACC is essentially the firm'scost of equity, since Netflix is unlevered . Moreover , our projections do not suggest a future need fordebt . We derived our cost of equity using the standard CAPM formula (see Figure 1) .

Our valuation of the company's terminal value assumes a perpetual growth rate of 2% on 2012 freecash flow, arriving at an implied terminal multiple of 9 .5x . The net result is a per share valuation of$26.00, more precisely $25 .95 .

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Figure 2 : DCF Valuation~• O a1 tK ~7 f ' a-I . A 1 .

Netflix Subscribers 1,487 2,923 4,212 5,311 6,294 7,098 7,738 8,117 8,263 8,278

Discounted Cash Flow Terminal Yea rEBITDA 102,277 226,218 339,583 453,611 547,517 627,559 693985 738,054 761,732 776,966Unlevered Taxes - - (29,098) (79,567) (98,508) (115,744) (130927) (141,580) (147,768) (150,724 )CapEx (PPE & DVD Library) (123 .660) (168,047) (219,021) (276,624) (317,019) (349 .801) (373 .171) (385,526) (389,664) (397,457 )Change in Working Capital 50 .372 45,075 39,816 48,549 30,640 24 .170 14 .374 5,399 226 23 1Unlevered Cash Flow 28 988 103,246 131,281 145,969 162,629 186.185 204 .261 216,347 224,525 229 01 6

PV of Cash Flows 778.275 774,259 $e1~ - 1 .75PV of Terminal Value 938.083 1,057,688 Risk FteeRafe 40%Private Market Value 1716,358 1,831,947 rk jgmtup ;. 5.0%Private-to- Public Discount (171,636) (183,195) CosfafEqu1 ; ; 12.8%Public Enterprise Value 1 .544 .722 1,648,752 Atler-iaxCostolDebt. A00 %Add Proceeds from Warrants and Options 24,282 24,282 Det>i/Capr~I on : 00%Add Cash 184 .045 310,678 WkC`,, . 128 %Less Debt - - Terminal Gzowth 2.0%Market Capitalization 1753050 1,983,713 implied TV Multple 9 .49xShares Outstanding 67 561 71,338 TV/12 EBITDA 9.68xFair Value per Share (Year-end) $25.95 $27 .81 P ivate to-Puhfic.~ts08ui)t 10.0%Current Price $31 .20 S31 .20

_

Implied Upside (168%) (109% )

Valuation Mu lt iple sEV/EBITDA @$25 .95 26 .8x 14 .5x 6 6x 4 .4x 3.3x 2.7x 2 .4x 2lx 2.Ox 19xP/E @ $25 .95 250 6x 188 7x 19 6x 14 .5x 13.9x 116)( 10 2x 9 3x 8 9x 8 7 xP/FCF @ $2595 115.3x 51 68 15 3x 12 .02 10 8x 9.62 8 .3x 7 5x 6 9x 6 6 xP/BV @$2595 148x 12 .02 67x 4 .tx 2.94 2.2x 1 .7x 1 .32 1lx 0.9zEV/SUB @ $25 .95 $1,039 $528 $367 $291 $245 S218 $200 $190 $187 $187

EVIEBITDA @$31 .2 32 8x 178x 8lx 54x 4.0x 3 .32 292 268 2 5x 24xP/E @ $312 301 .3x 226 Six 23 68 17 .4x 16.7x 14 .Ox 12 .3x 11 2x 10 7x 10.5xP/FCF @ $31 .2 138.6x 62 .2x 18 4x 14 .4x 13.02 11 .5x 10 04 9 ox 8 4x 7.04P/BV @ $312 17.82 14 .5x Box 5 .Ox 3.5x 2 .62 2 .02 1 6,x 1 3x l .l xEV/SUB @ $31 .2 $1,225 $623 $432 $343 $289 S257 $235 $224 $220 $220

Per Share Met ri csEPS 50l0 $0 .14 $1 .32 $179 $1 .87 $223 S254 $278 $2.92 $2.97FCF 30 .23 $0.50 $170 $216 $2 .41 $271 5314 $348 $373 $393Book Value S1 75 $216 $390 $626 $8 .81 $1193 $1559 $1972 S2424 $290 1

Source: Vintage Research

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Figure 3 : Annual Subscriber Forecast

Subscri ber Forecas t

US Households 106,008 106,820 107,733 108,544 109457 110,269 111 182 111,982 112,782 113,582 114,382% growth Annual -1.3% 0811. 0.9% 0.8% 0 8% 0.7% 0.8% 07% 0 7% 07% 0 7%US TV Households 104,500 105,300 106,200 107,000 107,900 108,700 109.600 110,300 111,000 111,700 112.400% growth Annual -0 9% 0 8% 0911. 0 8% 0811. 0 7% 0 8% 06% 06% 06% 0 6%Netflix Penetration Rate (US Households) 0.8% 1 .4% 2.7% 3 .9% 4 .9% 53% 64% 6 .9% 7 .2% 73% 7 .2%Nefflix Penetration Rate (US TV Households) 0.8% 1 4% 28% 39% 4 .9% 5 .8% 6.5% 7 .0% 73% 74% 74 %

Y-oY Growth New Trial Subs 101 .4% 37811o 917% 20 0% 125% 10 0% 5.0% 2.5°% -25% -50% -5 0%Y-oY Growth (Net Adds) 144 .5% 571% 1279% -102% -147% -106% -18.2% -20.5% -407% -61 .5% -895 %Y-oY Growth (Total Subs) 87 9% 735% 96.6% 441% 261% 18.5% 12.8% 90% 4 9% 1 .8% 0 2 %

Subsc riber Breakdown :New Trial Subscribers 1,140 1,571 3,011 3,614 4,065 4,472 4 695 4,813 4,692 4,458 4,23 5Churn 739 942 1,575 2,324 2,966 3,489 3,891 4,174 4,313 4,312 4,220Churn Rate 6 .8% 53% 47% 45% 44% 4 .3% 4 .2% 41% 4.0% 3.9% 38%Net Additions 401 630 1,436 1,289 1,099 983 804 639 379 146 .1 5Ending Subsc ribers 857 1 , 487 2 ,923 4, 212 5,311 6,294 7,098 7 ,738 8,117 8,263 8,27 8Free Subscribers 61 71 130 156 175 193 202 208 202 192 18 3% of Free Subscribers 71% 48% 44% 37% 3.3% 31% 29% 27% 2.5% 2 .3% 2.2%Paying Subscribers 796 1,416 2, 793 4, 056 5, 136 6 ,101 6, 896 7,530 7,915 8, 071 8,096Average Paying Subscribers 598 1,106 2,105 3,425 4,596 5,619 6499 7,213 7,722 7,993 8,083

ARPU 21 . 02 20. 37 20 .43 20. 37 20.30 21 .35 21 . 33 21 .32 21 .31 21.30 21 .29

Total Subscri ption Revenue 150 ,818 270,410 516, 005 837,082 1 , 119,883 1,439,510 1 , 663,540 1,845,267 1,974, 712 2,042,956 2, 065,548

Sales Revenue 1,988 1,833 1,833 2,228 2 .708 3,292 4,001 4,863 5,911 7,185 8,734

Total Revenue 152,806 272,243 517, 838 839,310 1 , 122,591 1 , 442,801 1,667,541 1 ,850,130 1,980,623 2,050,141 2,074,281S ou rce : Vinta g e Researc h

Figure 4: Qua rterly Subscriber ForecastY-oY Growth New Trial Subs 388% 337% 386% 383% 41 0% 825% 9501/6 950% 95 0% 200% 200%

Subscri ber Breakdown :New Trial Subscribers 315 417 327 383 444 761 638 747 866 913 76 5Churn 200 222 232 239 250 317 362 416 480 518 55 1Churn Rate 63% 58% 56% 5 .2% 48% 47% 47% 47% 4 7% 4 59/6 45 %Net Additions 115 195 95 144 196 444 275 330 386 395 21 4Ending Subsc ribers 857 1 ,052 1 ,147 1,291 1,487 1 ,931 2,207 2,537 2 ,923 3 ,318 3,53 2Free Subscribers 61 43 46 49 71 114 96 112 130 137 11 5% of New Trial Subscribers 19.4% 10 .3% 14,1% 12 8% 16011. 15.0% 1500% 1500% 1501% 15 0% 150%Paying Subsc ribers 796 1 , 009 1 ,101 1,242 1,416 1 ,817 2, 111 2 ,425 2,793 3 ,181 3,41 7Average Paying Subscribers 752 903 1,055 1,172 1 329 1,616 1 964 2,268 2,609 2,987 3,29 9

ARPU $19.94 $20.41 $19 .93 $20.27 $20 .26 $20.34 $20 .34 $20.34 $20 .34 $20 .34 $20.3 4

Total Subscri ption Revenue 44,978 55,281 63 ,071 71 ,278 80, 780 98,625 119, 823 138,372 159 ,184 182,260 201,306

Sales Revenue 210 388 116 924 405 425 447 469 492 517 54 3

Total Revenue 45 ,188 55,669 63, 187 72, 202 81 , 185 99 ,051 120, 270 138 ,841 159 ,677 182,776 201,849Source: Vintage Research

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Figure 5 : Net Adds., Gross Adds, and ChurnNET SUBSCRIBER ADDITIONS

450400350

300

250

200

150

100 2650

GROSS SUBSCRIBER ADDITION S

900

800

700

600

500

400

300

200

100

CHURN600 11.0%

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400 70%

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Source : Company Documents and Vintage Research

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Figure 6 : Churn vs. Net Adds, ARPU, and SAC

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Subscribers 857 1,487 2,923 4,212 5 311 6,294 7,098 7738 8,117 8,263 8 .278

Revenue

Subscription 150,818 270,410 516,005 837,082 1 .119883 1439 .510 1,663,540 1,845 .267 1,974,712 2,042,956 2 .065.54 8Sales 1,988 1,833 1,833 2,228 2 708 3,292 4,001 4 863 5.911 7,185 8 73 4

Total Revenue 152,806 272 ,243 517,838 839, 310 1 , 122,591 1 ,442,801 1 ,667,541 1,850, 130 1 ,980,623 2 ,050,141 2,074,28 1

Cost of Revenu e

Subscription 77.044 147,736 278 .321 434,650 583589 763,652 888,014 987365 1 .059,178 1,098 .084 1,111 .663Sales 1,092 624 642 780 948 1,152 1,400 1702 2,069 2,515 105 7

Total Cost of Revenue 78,136 148,360 278 ,963 435 ,430 584,537 764, 804 889, 414 989, 068 1,061 ,247 1,100,599 1 , 114,71 9

Gross profit 74,670 123,883 238 ,875 403 ,879 538 ,054 677,997 778, 127 861 , 063 919 ,376 949,542 959,56 2

Operating Expenses .Fulfullment 19,366 31 .274 59,551 96,101 127 .975 164,479 190,100 210.915 225,791 233,716 23646 8Technology and Development 14,625 17,884 28,082 42,229 54 .259 66,864 73,957 78 .364 79,941 78,656 75 .43 9Marketing (SAC) 35,783 49,949 105,562 127,182 143 .653 163,488 172,350 177 .367 173,625 165,605 157,95 5General and Administrative 6,737 9,585 16,571 26,019 33678 43,284 50,026 55504 59,419 61,504 62 .22 8Stock-based Compensation 9,831 10 .719 23,061 23,638 24 229 24,834 25.455 26 .092 26,744 27,413 28 .09 8

Total Opera ting Expenses 86,342 119 ,411 232, 828 315,168 383,794 462,950 511 , 888 548 ,241 565,521 566, 894 560,18 8

Pre-Marke ting Cash Flow 24, 111 54 ,421 111 , 609 215, 893 297,913 378 ,535 438 , 589 490,188 527, 481 548, 253 557,32 8PMCF Margin 16 .0% 20.1% 21 .6% 25 .8% 266% 263% 26 .4% 266% 267% 268% 27.0%

Operating Income (loss) (11,672) 4,472 6,047 88,711 154 260 215,047 266,239 312 .821 353,856 382,648 399 .374

Other Income (loss) .Interest and Other Income 1,697 2 .457 3,419 5,920 9787 14,031 18,862 24 530 30,901 37,804 45,080Interest and Other Expense (11,972) (417) (176) (176) (176) (176) (176) (176) (176) (176) (176)

Pre-tax Income (21,947) 6,512 9,290 94,456 163 872 228,902 284 .925 337 176 384,581 420,277 444,278Taxes - - - - (30911) (84,694) (105,422) (124 755) (142,295) (155,502) (164,383)Effective Tax Rate 0% 0% 0% 0% 19% 37% 37% 37% 37% 37% 37%

GAAP Net Income (loss) (21 ,947) 6 ,512 9 ,290 94, 456 132,961 144,208 179 ,503 212, 421 242, 286 264, 774 279,895

GAAP Net Income (loss) Per ShareBasic $ (0.78) $ 014 $ 018 $ 1 .70 $ 2 30 S 2.39 $ 286 $ 3 25 S 3.57 5 3.75 $ 381Diluted S 10721 S ntn s n1e s 137 it 174 t 1 517 t 777 c 1S,1 c 970 a ') all a 9n7

Weighted Average Common Share sBasic 28,204 47,786 52,712 55,659 57919 60,271 62,718 65.265 67,915 70,672 73,54 2Diluted 28,204 62,884 67,561 71,338 74 .235 77,249 80,385 83,649 87,046 90,580 94,25 8

Non-GAAP Net Income (12,116) 17,231 32,352 118,093 157190 169,043 204,958 238512 269,030 292,187 307,99 3Non-GAAP EPS - Basic $ (0 .43) $ 036 $ 061 $ 212 $ 271 S 280 $ 3 .27 $ 3.65 $ 3 .96 $ 4.13 $ 41 9Non-GAAP EPS - Diluted $ (0 .43) $ 0.27 $ 0 .48 $ 1 .66 $ 2 .12 $ 2. 19 $ 2 .55 $ 2. 85 $ 3 .09 $ 3 .23 $ 327

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N(tn-cash ChHrgW 1W Equity Cienled to irtin~loy s . 4 6TolEaTtU1 1 ),545 ; : 55;463 - 102,27.'{ 2$, 218 339,583, - 453,6,11 547,'17 627,559 699,986 {- 7 8 ,761;73 ,

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Subscriber 857 1,052 1,147 1,291 1 487 1,931 2,207 2537 2923 3,318 353 2

Revenue

Subscription 44,978 55,261 63.071 71 .278 80780 98,625 119,823 138372 159,184 182 .260 201 .30 6Sales 210 388 116 924 405 425 447 469 492 517 54 3

Total Revenue 45,188 55, 669 63, 187 72, 202 81 , 185 99 ,051 120, 270 138 ,841 159 ,677 182 ,776 201,84 9

Cost of RevenueSubscription 23 .246 29.928 35,148 38,326 44 .334 54,582 64,635 74 .216 84,889 94,899 104 42 6Sales 144 79 93 322 130 149 156 164 172 181 19 0

Total Cost of Revenue 23, 390 30 , 007 35, 241 38,648 44 ,464 54,731 64, 791 74 ,380 85 ,061 95,080 104,61 6

Gross Profit 21,798 25 , 662 27,946 33, 554 36 ,721 44 ,320 55, 479 64,461 74 ,615 87 ,697 97,23 3

Operating ExpensesFulfullment 5,449 6 .383 7,221 8,322 9,348 11,391 13,831 15 .967 18,363 20,928 23 11 2Technology and Development 3,960 4,183 4 .123 4,738 4,840 5 .707 6,689 7 444 8,242 9,343 10 21 7Marketing 10,492 13,207 9,957 12,183 14602 26,636 22,340 26 .192 30 .394 32,091 2691 5General and Administrative 1,920 2 .248 2,093 2,678 2,566 3,170 3,649 4 443 5,110 5,666 625 7Stock-based Compensation 2,778 2,406 1,704 2,777 3 .832 4,790 5,389 6 062 6 .820 4,910 5 52 3

Total Opera ting Expenses 24,599 28, 427 25,098 30, 698 35 , 188 51 ,693 52,098 60 , 108 68,929 72 ,938 72,02 5

Pre-Marketi ng Cash Flow 7,691 10, 442 12,805 15, 039 16 , 135 19 ,262 25, 722 30 ,545 36,081 46,850 52,12 4PMCF Margin 171% 18 .90k 20 .3% 21 1% 200% 195% 21 .5% 22.1% 22 7% 251% 25 99%

Operating Income (loss) (2,801) (2,765) 2,848 2,856 1 .533 (7,374) 3,381 4 353 5,687 14 .759 25 20 8

Other Income (loss )Interest and Other Income 486 581 560 534 782 710 797 901 1,011 1,169 1 .36 7

Interest and Other Expense - (191) (95) (87) (44) (44) (44) (44) (44) (44) (44 )

Pre-tax Income (2,315) (2,375) 3.313 3,303 2,271 (6,708) 4 .135 5210 6 .654 15,883 26 53 2Taxes - - - - - - - - - - -Effective Tax Rate 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

GAAP Net Income ( loss) (2, 315) (2,375) 3,313 3, 303 2 ,271 (6 ,708) 4, 135 5,210 6,654 15,883 26,53 2

GAAP Net Income (loss) Per Shar eBasic $ (0 .05) $ (005) $ 0.07 $ 007 $ 0.05 S (013) $ 0.08 $ 010 S 0 .12 $ 0.29 $ 0 4 8Diluted $ (0.05 ) $ (0.05 ) $ 0.05 $ 0.05 $ 0.04 $ ( 0.10) $ 0. 06 $ 0. 06 $ 0 .10 $ 0.23 $ 0 .3 7

Weighted Average Common SharesBasic 44 .446 45,474 47,296 48,172 50,154 51,157 52,180 53 .224 54,288 54,831 55 .37 9

Diluted 44,446 45,474 61,624 62,920 64 .282 65,568 66,879 68 217 69,581 70,277 70 97 9

Non-GAAP Net Income 463 31 5,017 6,080 6103 (1,918) 9,523 11 .272 13,475 20,793 32 .055Non-GAAP EPS - Basic $ 0.01 $ 0.00 $ 0.11 $ 013 $ 0.12 S (0.04) $ 0.18 $ 021 S 0 .25 $ 038 $ 0 58Non-GAAP EPS - Diluted $ 0.01 $ 0.00 $ 0.08 $ 0.10 $ 0.09 $ ( 0.03) $ 0.14 $ 0.17 $ 0 .19 $ 0. 30 $ 0 .45

EBITIIAR6conc~

DeprCC to PP&E 7,33 (.14U 1 ;218 1 128 1,237 -,134,5 7 .453 562 16 0 t77 8Arnort¢ationof DVD1b3ty- 5$ 6,829 x.392 92323 ;9ijyQ 17953 X0295--` 23,12E' 26,'308 286t5 31 20A'

Mrorfirtafen otinF~ngfiies _z

~) ' BDH

.80& 773 ~~ 7bS 766 758 756 : 680.. f

Non oasht~tar tdr> u t C~atded'onoh-9~ 4 Y ORPtotalEB1TDA' ., 5,977 14,1$8, 17;~7A 18208 12,$72 25777 29,691 34,236 ; ; 45,03 58,18 f

Source: Company Documents and Vintage Research

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Figure 9 : Annual Balance Sheet (2002-2012E)e•(r II LI rl . t•r, rl, . .. 1 .1 •:v ,f4' 1 I• I I

ASSET SCurrent Assets

Cash and Cash Equivalents 59,814 89 .894 138 ,748 265,381 423185 597,756 793,251 1 .017 166 1264,545 1,529,817 1 809 .399Short-term Investments 43,796 45,297 45,297 45,297 45.297 45.297 45.297 45297 45,297 45 297

,

45 .29 7Prepaid Expenses 2,753 2,605 5,063 6, 994 8.722 10,865 12.186 13219 13,810

,

14 009 13 989Prepaid Revenue sharing Expenses 303 905 1, 688 2 ,331 2 .907 3,622 4,062 4 406 4 .603

,4,670 4 663

Other Current Assets 409 245 245 245 245 245 245 245 245 245 24 5Total Current Assets 107,075 138,946 191,041 320,248 480 , 356 657 ,785 855 , 040 1 , 080,333 1 ,328,501 1 ,594,038 1 , 873,593

DVD Library, net 9,972 22,238 40,910 61,410 86 .739 118,109 148,845 180 .596 212,024 242,236 271 34 7Intangible Assets, net 6,094 2,948 - - - - - - - - -Property and Equipment, net 5,620 9,772 21,478 31,519 39888 46,578 51 .583 54 896 56,510 56,417 54 61 3Deposits 1,690 1,272 1,272 1,272 1 .272 1,272 1,272 1 .272 1 .272 1 .272 1,27 2Other Assets 79 836 836 8 36 836 836 836 836 836 836 83 6

Total Assets 130,530 176,012 255,537 415, 285 609 ,092 824, 581 1,057,577 1, 317,932 1,599,142 1 ,894,800 2 , 201,66 1

LIABILITITES AND STOCKHOLDERS' EQUITYCurrent Liabilitie s

Accounts Payable 20 .350 32,654 62,440 86,258 107 .573 134,004 150 .291 163 028 170,327 172,777 172 .53 0Accrued Expenses 9,102 11,625 21,938 30,307 37 .796 47,083 52,805 57 .280 59,845 60,706 60 .61 9Deferred Revenue 9,743 18,324 31,837 47,301 60 617 76,306 86,697 95 032 100.331 102,684 103 .21 7Current Portion of Capital Lease Obligations 1,231 416 416 416 416 416 416 416 416 416 41 6

Total Current Liabilities 40,426 63,019 116,631 164,281 206 402 257,809 290,209 315 .756 330,919 336,583 336 .78 2

Deferred Rent 288 241 241 241 241 241 241 241 241 241 24 1Capital Lease Obligations Less Current Portion 460 44 44 44 44 44 44 44 44 44 4 4

Total Liabili ti es 41,174 63 .304 116,916 164,566 206.687 258,094 290,494 316 041 331,204 336,868 337,06 7

Stockholders' EquityCommon Stock 22 25 27 28 29 31 32 33 34 36 37Additional Paid-in Capital 260,067 270,862 287,483 305,124 323 848 343,720 364,812 387 .198 410 .958 436 .176 462.94 1Deterred Stock-based Comp (11,702) (5482) (5,482) (5,482) (5482) (5,482) (5 .482) (5482) (5,482) (5,482) (5482)Accumulated other Comprehensive Inc 774 596 596 596 596 596 596 596 596 596 596Accumulated Deficit (159,805) (153293) (144,003) (49,547) 83414 227,623 407,125 619 .546 861,832 1,126 .606 1,406 .50 1

Total Stockholders ' Equity 89 ,356 112 ,708 138, 622 250,719 402,405 566 ,487 767 ,083 1 , 001,891 1,267 ,938 1 ,557,932 1 , 864,593

Total Liabilities and Stockholders ' Equity 130 ,530 176, 012 255,537 415, 285 609,092 824 ,581 1,057 ,577 1,317,932 1,599,142 1,894,800 2, 201,66 1Source : Company Documents and Vintage Research

\7 i111 I r 1 x 01 'k," , r 1 1 1 , 4 11 ,11 :1 , . 11T!I Fl N .i,., ,r'i .: .,' 1ILull iIIl,l1'2-7)2V ! t, 1!4rii ,i%~,I v' .m .•,anl,''r yearr'hi',,,rr;

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Figure 10: Qua rterly Balance Sheet (4Q02-2Q05E)

ASSET SCurrent Asset s

Cash and Cash Equivalents 59,814 66 .028 71,229 79,170 89 .894 94,276 106,158 121 471 138,748 163,763 195134Short-term Investments 43,796 44,304 45,096 45,237 45.297 45,297 45 .297 45297 45,297 45 .297 45 .297Prepaid Expenses 2,753 2 .066 2,569 1,943 2 .605 3,499 3,843 4 422 5.063 5,524 5 807Prepaid Revenue sharing Expenses 303 622 459 957 905 1,166 1,281 1 474 1 .688 1,841 1 936Other Current Assets 409 174 232 295 245 245 245 245 245 245 24 5

Total Current Assets 107,075 113, 194 119 ,585 127,602 138,946 144,483 156, 823 172 , 909 191 , 041 216,670 248,51 9

DVD Library, net 9,972 9 .740 17,353 18,441 22238 27,166 30,836 35 382 40,910 45,112 50.14 4Intangible Assets, net 6,094 5 .285 4,477 3,704 2948 2,192 1,436 68 0Property and Equipment, net 5,620 4,848 6,108 6,586 9 .772 12,854 15.833 18 708 21,478 24,145 26 70 7Deposits 1,690 1,694 1,684 1,684 1 .272 1,272 1,272 1 .272 1,272 1,272 1 .27 2Other Assets 79 868 858 847 83 6 836 836 836 836 836 83 6

Total Assets 130,530 135,629 150,065 158,864 176,012 188 ,804 207,037 229, 786 255 ,537 288 ,035 327,47 8

LIABILITITES AND STOCKHOLDERS' EQUIT YCurrent Liabilities:

Accounts Payable 20,350 22,218 28,009 28,459 32 .654 43,153 47,396 54 532 62,440 68,128 71 .62 4Accrued Expenses 9,102 9,525 10,294 10,954 11 .625 15,162 16,653 19 160 21,938 23,937 25 .16 5Deferred Revenue 9,743 11,227 12,394 13,771 18324 19,725 23,965 27 674 31,837 36,452 40 .26 1Current Portion of Capital Lease Obligations 1,231 940 835 371 416 416 416 416 416 416 41 6

Total Current Liabili ties 40,426 43,910 51 , 532 53, 555 63, 019 78, 456 88 ,429 101 , 783 116 ,631 128 ,932 137,46 7

Deferred Rent 288 279 271 263 241 241 241 241 241 241 24 1Capital Lease Obligations Less Current Portion 460 376 256 185 44 44 44 44 44 44 44

Total Liabiliti es 41 , 174 44 ,565 52,059 54, 003 63, 304 78,741 88 ,714 102 , 068 116, 916 129,217 137,752

Stockholders' EquityCommon Stock 22 23 24 24 25 26 26 27 27 27 28Additional Paid-in Capital 260,067 264,765 263,761 265,791 270 862 274,925 279,049 283 .235 287,483 291,795 296 .172Deferred Stock-based Comp (11,702) (10,892) (8,243) (6 .508) (5482) (5,482) (5.482) (5 .482) (5,482) (5,482) (5 .482)Accumulated other Comprehensive Inc . 774 902 1,331 1,118 596 596 596 596 596 596 596Accumulated Deficit (159,805) (163 .734) (158,867) (155,564) (153 .293) (160,001) (155,867) (150 .657) (144,003) (128,119) (101,587)

Total Stockholders ' Equity 89 ,356 91 ,064 98, 006 104 ,861 112 ,708 110,063 118,322 127,718 138, 622 158, 817 189,726

Total Liabili ties and Stockholders ' Equity 130 ,530 135, 629 150, 065 158 ,864 176 ,012 188 ,804 207, 037 229 ,786 255, 537 288, 035 327,478

Source: Company Documents and Vintage Researc h

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Figure 11 : Annual Statement of Cash Flows (2003 -2012E)1111 1rr.0'a u s • ear . .r i .rr : rr rn :. r r• .r . r Vilk)

Net Income 6,512 9,290 94,456 132,961 144,208 179,503 212,421 242,286 264,774 279,895Depreciation of PP&E 4,720 5,597 7,332 9,073 10,822 12,577 14,340 16110 17,886 19,670Amortization of DVD Library 43,125 87,685 130,175 176,250 227,742 268,701 300,398 324,020 337,520 342.688Amortization of Intangibles 3,146 2,948 - - - - - - -Funds Flow 57 , 503 105 ,520 231 , 962 318 ,284 382,772 460,781 527,158 582,416 620 , 180 642,253

Accounts Payable 12,304 29,786 23,818 21,315 26,431 16,287 12,737 7 .299 2,450 (247)Accrued Expenses 2,523 10,313 8,368 7,489 9,287 5 .723 4,475 2 .565 861 (87 )Prepaid Expenses 148 (2,458) (11931) (1,728) (2,143) (1,321) (1,033) (592) (199) 2 0Prepaid Revenue sharing Expenses (602) (783) (644) (576) (714) (440) (344) (197) (66) 7Other Current Assets 164 - - - - - - - - -Deferred Revenue 8,581 13,513 15,464 13,317 15,689 10,391 8,335 5,299 2,353 53 3Deferred Rent (47) - - - - - - -Change in Working Capital 23,071 50, 372 45 ,075 39,816 48, 549 30,640 24 ,170 14,374 5 ,399 22 6

Cash from Operations 80,574 155, 891 277 ,038 358,100 431,322 491 ,420 551,329 596,789 625 ,579 642,47 9

Short-lerm Investments (1,501) - - - - - - - - -DVD Library, net (55,391) (106,357) (150,675) (201,579) (259,112) (299,437) (332,148) (355,448) (367,732) (371,799 )Intangible Assets ne tProperty and Equipment, net (8,872) (17,303) (17,373) (17,442) (17,512) (17,582) (17,653) (17 723) (17,794) (17,866 )Deposits 41 8Other Assets (757)Cash From Investing (66,103) (123,660) ( 168,047) (219,021 ) (276,624) (317,019) (349,801 ) (373,171) (385,526) (389,664)

Current Portion of Capital Lease Obligations (815)Capital Lease Obligations, Less Current Portion (416) - - - - - - - - -Common Stock 3 2 1 1 1 1 1 1 1 1Additional Paid-in Capital 10,795 16,621 17,641 18,723 19,872 21,092 22,386 23,760 25,218 26,765Deferred Stock-based Compensation 6,220 - - - - - - - - -Accumulated other Comprehensive Income (178 )Accumulated Deficit - (0) - - - - - - - -Cash From Financing 15 , 609 16 ,623 17 , 642 18, 725 19 ,874 21 ,093 22,387 23,761 25,219 26,767

Change in Cash 30,080 48,854 126,632 157 ,804 174,572 195,494 223,915 247,379 265,272 279,582

Cash at Beginning of Period 59,814 89,894 138,748 265,381 423,185 597,756 793,251 1,017,166 1,264,545 1,529,81 7Cash at End of Period 89,894 138,748 265,381 423,185 597,756 793,251 1,017,166 1,264,545 1,529,817 1,809,399

Free Cash Flow 14,471 32,231 108,990 139,079 154,698 174,401 201528 223,618 240,053 252,81 5Gross CapEx . (PPE & DVD Library) (64,263) (123,660) (168,047) (219,021) (276,624) (317,019) (349,801) (373,171) (385,526) (389,664)

Source : Vintage Research

li it i• Rr ~ _i I .ti . 1 ,;V1 r<rr,nr ,f 11 , -1iur ri,,i-, 11rfi Fly . .•r.'Y•,r'i • . .' 1,,~ti N?.'titln oi -lr~r .i F :,-, r111ri i- !,~H •• .-.h\ .\Il :i : r~`cCi?tr}Le n','

W .:1 v it i ;-• Lr .t ,1L P wi! : ': . Jr-n i bn!rru +ftl ..- a, r', 1r1 1 ,, :,un .

Figure 12: Quarterly Statement of Cash Flows (1Q03 -2Q05E)e' • ;li eR -1 !~1 ~i[ ♦! t R'i .' ~'1 f f t 1" t,t :

Net Income (2,375) 3,313 3,303 2,271 (6,708) 4,135 5,210 6,654 15 .883 26,532Depreciation of PP&E 1,333 1,140 1,118 1,129 1,237 1,345 1,453 1,562 1,670 1,779Amortization of DVD Library 6,620 9,392 12,323 14,790 17,953 20,295 23,129 26,308 28,605 31,204Amortization of Intangibles 809 808 773 756 756 756 756 680 - -Funds Flow 6,387 14, 653 17 ,517 18 ,946 13,238 26, 530 30,548 35 ,204 46 , 158 59,51 4

Accounts Payable 1,868 5,791 450 4,195 10,499 4,243 7,136 7,907 5,688 3,496Accrued Expenses 423 769 660 671 3,537 1,491 2,507 2,778 1,999 1,228Prepaid Expenses 687 (503) 626 (662) (894) (344) (579) (641) (461) (283 )Prepaid Revenue sharing Expenses (319) 163 (498) 52 (261) (115) (193) (214) (154) (94 )Other Current Assets 235 (58) (63) 50 - - - - -Deferred Revenue 1,484 1,167 1,377 4,553 1,401 4,240 3,710 4,162 4,615 3,809Deferred Rent (9) (8) (8) (22) - - - - - ---Change in Working Capital 4,369 7 ,321 2 ,544 8 ,837 14,282 9,515 12,582 13,993 11,687 8,156

Cash from Operations 10,756 21 ,974 20,061 27 ,783 27 ,519 36 ,045 43,130 49 ,197 57 ,845 67,670

Short-term Investments (508) (792) (141) (60) - - - - -DVD Library , net (6,388) (17,005) (13 411) (18,587) (22,881) (23,965) (27,674) (31,837) (32,807) (36235 )Intangible Assets net - - - - - - - - -Property and Equipment, net (561) (2,400) (1,596) (4,315) (4,319) (4,324) (4,328) (4,332) (4,337) (4,341 )Deposits (4) 10 - 412 - - - -Other Assets (789) 10 11 11 - - - - -Cash From Investi ng (8,250 ) (20,177) (15,137) ( 22,539) (27,200) (28,288 ) (32,002) (36,169) (37,143) (40,576 )

Current Portion of Capital Lease Obligations (291) (105) (464) 45 - - - - - -Capital Lease Obligations, Less Current Portion (84) (120) (71) (141) - - - - - -Common Stock 1 1 - 1 1 1 1 1 0 0Additional Paid-in Capital 4,698 (1,004) 2,030 5,071 4,063 4,124 4,186 4,249 4,312 4,37 7Deferred Stock-based Compensation 810 2,649 1,735 1,026 - - - - -Accumulated other Comprehensive Income 128 429 (213) (522) - - - - - -Accumulated Deficit (1,554) 1,554 - (0) 0 - 0 - -Cash From Financing 3, 708 3 ,404 3 ,017 5,480 4 ,064 4,124 4 ,186 4 ,249 4,313 4,37 7

Change in Cash 6 ,214 5 ,201 7 ,941 10,724 4,382 11 , 881 15 ,314 17 2 77 25, 014 31,472

Cash at Beginning of Period 59,814 66,028 71,229 79,170 89,894 94,276 106,158 121,471 138,748 163,763Cash at End of Period 66,028 71,229 79,170 89,894 94,276 106,158 121,471 138,748 163,763 195234

Source: Vintage Research

V'hil air (,ray ilril . T .l - tI "".of .l :r fib 1i'o 1 .1! .1- . 11111 FI„ , ,r k- : t'!~II

DISCLAIMERVintage Research is the marketing name used in equity research reports/models by VintageResearch, LLC . This presentation has been prepared for our institutional clients and is forinformation purposes only. Additional information available upon request .

Information has been obtained from sources believed to be reliable but Vintage Research does notwarrant the accuracy, completeness, reliability, and fitness for a particular purpose ormerchantability of this information . Vintage Research shall have no liability for the use or misuse ofthis information, including the use or misuse by unauthorized recipients . Opinions and estimatesconstitute our judgement as of the date of this material and are subject to change without notice .Past performance is not indicative of future results . This material is not intended as an offer orsolicitation for the purchase or sale of any financial instrument . Securities, financial instruments orstrategies mentioned herein may not be suitable for all investors. The opinions andrecommendations herein do not take into account individual client circumstances, objectives, orneeds and are not intended as recommendations of particular securities, financial instruments orstrategies to particular clients . The recipient of this report must make its own independentdecisions regarding any securities or financial instruments mentioned herein . Vintage Research mayprovide consulting services, including financial advisory services, to companies covered by ormentioned in research, a potential conflict of interest . Vintage Research is not a market maker oran investment-banking firm and as a result, it does not provide equity or debt underwriting .Vintage Research and/or its employees may hold a position in any securities or financial instrumentsmentioned herein . However, the analyst(s) directly responsible for covering a specific company maynot own directly or indirectly securities of that company, per the firm's investment policy .

RISK(s ) DISCLOSUR EBeyond wide-ranging market and economic risks , there are a number of industry and company-specific factors that could cause actual Netflix results to fall short of our expectations : 1) the marketfor mail-based DVD rental is found to be smaller than forecast ; 2) increased competition from newand existing competitors erodes more market share than expected ; 3) price competition could arise;if video rental outlets lower the cost of renting as a defensive move or focus more on in-storesubscriptions; 4) a decline in DVD retail prices could fuel higher DVD sell-through rates and therebynegatively impact movie rentals; 5) the arrival and widespread use of Video -on-Demand (VOD) aswell as subscription Video-on-Demand (SVOD) could increasingly limit interest in all forms of rentalprograms .

VALUATION DISCLOSUR EWe, value Netflix using a DCF valuation that incorporates detailed assumptions about subscribergrowth and profitability. Primary DCF assumptions: 1) the company successfully grows itssubscriber base to 6.3mn subscribers in 2007 and 8 .3mn subs by 2012 ; 2) revenue grows to$1 .44bn by 2007; 3) EBITDA margin improve to 31% by 2007 . If subscriber, revenue and EBITDAwere to grow slower then we predict, or the cost of capital changes, our valuation could benegatively impacted .

Vint r~~ t l c = t t,i ~ I i . I 1 . , ! ; I ! i1 A ri .i, 41L, 1w,ri .?lih Fl N•c

.

V 4r1 .;

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2 11"I,iur ;.^,,J- . :an rth . LA I. V ' I I" .-r, A, 1 , ,1,1 ti r' Ii ;ti it rn .;, iiln in I', m, -:inn

45

40AOutperform

35■ Neutral•Underportorm

30 C

, Dropped Coverage

25

20

15

t0

O

D-ol F-o2 A-o2 J-o2 A-o2 0-02 D-02 F-o3 A-03 J-o3 A-o3 0- 03 D-03

U-2 6

25 Fcb oa

Disclosure Legend : O= Outperform . N=Neutral . U = Und erpform . DC =Dropped Coverage . Each box

shows a stock rating and price target, per the date an analyst made a rating and/or price target

chang e

VINTAGE RESEARCH

Count %Outperform 0 0%

Neutral 1 33%Underperform 2 67%

Analyst - Alden Mahabir

Count %Outperform 0 01/6

Neutral 0 0%Underperform 1 100%

Outperform Expected to outpeform the analyst's specific coverage group on a relative basis as well asthe relevant broader market index over the next six to twelve month sNeutral : Expected to perform in line with the relevant broader market inde xUnderperform: Expected to underperform the relevant broader market index over the next six totwelve monthsIndustry ratings (Positive, Neutral or Negative) reflect an analyst's opinion on the directionof fundamental trends and equity valuation in his or her respective coverage grou p

The views expressed in this report accurately reflect my personal views about the subject company andthe subject security . In addition, no part of my compensation was, is, or will be directly or indirectlyrelated to the specific recommendations or views contained in this repor t

None

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