netflix, inc. securities litigation 04-cv-2978-declaration of cameron p. hoffman in support of
TRANSCRIPT
EXHIBIT
B-1
Thomas Weisel PartnersMERCHANT BANKIN G
June 17; 2002Champions of Growth
Media & Broadcasting
Gordon Hodge
415 .364 .2575
ghodge@tweisel .co m
Sherry Lin
415 .364 .7175
slin@rweisel .com
o M .r .,,irv
Source : FactSet
NETFLIX, INC .1'2-BUY
THE POSTMAN ALWAYS RINGS TWICE . . .WITH YOUR
NETFLIX DVDs!
Initiating Coverage
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 EMarket Cap .(mn): $422 .5 Q2 ($0 .1)A $6 .OE $8 .8 EShares Out.(mn) : 30 .6 Q3 $0 .6A $3 .8E $8 .7EAvg Daily Vol . : 192,714 04 $1 .4A $2 .3E $6 .5 EFiscal Year End : 31-Dec Year ($1 .7)A $15 .7E $29 .3E
P/EBITDA NM 0 .88x 0 .47x
Debt/Total Capital : NMPrice/TTM Sales : 4 .7 xNet Cash/Share : $-0 .1 0Book Value/Share : N MPrice/Book Value : N MSecular Growth : 50%
NASDAQ : NFLX-$13 .8 1
Revenue(mn )01 $17 .1A $30 .5A $51 .3EQ2 $18 .4A $34 .9E $56 .OE
Q3 $18 .9A $38 .6E $59 .5EQ4 $21 .6A $44 .1E $66 .7EYear $75 .9A $148 .1E $ 233 .5ETEV/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 -
2500
2000 -
1500-,
QI5 1000
w I500 }
i0
Current Bay Area penetration : 2.8%-
- 3.00 %
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O
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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
Thomas Weisel Partners LLC
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007000 Motlge (415) 351-2575
$09777 Lln (415) 364-7775
ACC Thomas Weisel PartnersMERCHANT BANKIN G
Champions of . Growth
Media & Broadcastin g
Gordon Hodge
415 .364 .2575
ghodge@tweisel .com
Sherry Li n
415 .364 .7175
slin@tweisel .com
NETFLIX, INC.1'2--BUY
Q2 ENDING SUBSCRIBERS EXCEED EXPECTATIONS
Company Update NASDAQ: NFLX-$15.93
Key Data FY 2001 2002 2003Price : $ 15 .93 EBITDA(mn )52-Week Range : $12-$17 Q1 ($3 .6)A $3 .6A $5 .3 EMarket Cap . (mn): $487 .4 Q2 ($0 .1)A $6 .OE $8 .8 EShares Out.(mn) : 30 .6 Q3 $0 .6A $3 .8E $8 .7 EAvg Daily Vol . : 257,062 Q4 $1 .4A $2 .3E $6 .5 EFiscal 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 ENet Cash/Share : $-0 .10 Q2 $18 .4A $34 .9E $56 .O EBook Value/Share : NM 03 $18 .9A $38 .6E $59 .5 EPrice/Book Value : NM 04 $21 .6A $44 .1E $66.7 ESecular 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 timates 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
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Gordon Hodge 415 .364 .2575 4
Thomas Weisel Partners LLC
Thomas Weisel Partners'MERCHANT BANKIN G
JWy 25, 2002 Champions of Growth
Media & Broadcasting
Gordon Hodge
415 .364 .2575
Sherry Lin
415 .364 .7175
NETFLIX, INC.-BUY
FREE CASH FLOW HIGHER THAN EXPECTED ; HUB
STRATEGY REDUCING CHURN
Earnings Update NASDAQ: NFLX-$15 .6 0
Key Data FY 2001 2002 2002 Prv 2003 2003 Pr vPrice $ 15.60 EBITDA(mn)52-Week Range : $12-$18 Q1 ($3 .6)A $3 .6A $3.6A $5 .8E $5 .3EMarket Cap . (mn) : $473 .9 Q2 ($0.1)A $6.5A $6 .OE $9 .1E $8 .8EShares Out.(mn) : 30 .4 Q3 $0 .6A $3.8E $18E $8 .7E $8 .7 EAvg Daily Vol . : 318,063 04 $1 .4A $2.8E $2 .3E $6 .4E $6 .5EFiscal 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 .3ENet Cash/Share : NM 02 $18 .4A $36 .4A $34 .9E $56 .OE $56.OEBook Value/Share : $4 .49 Q3 $18.9A $39.3E $38 .6E $59 .4E $59.5EPrice/Book Value : 3 .5x Q4 $21 .6A $43 .8E $44 .1E $66 .8E 166 .7ESecular 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 .
Company Descri ption: Nei. fliix is a leading interactive, subscriber-bared entertainment delivery service offering
consumers a deep selection of D VDs for predominantly d 19.95 a month. Ne/lix5 online subscriber re lationsbip is a
strategic, competitive advantage now and in the future as filmed entertainment encompasses both tangible and electro nic
forms.
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Gordon Hodge 415 .364 .2575 7
Thomas Weisel Partners LLC
Thomas Weisel PartnersMERCHANT* BANKIN G
gut. t >, 2002 Champions of Growth
Media & Broadcasting
Gordon Hodge415364 .2575ghodge@tweisel .com
Sherry Li n415 .364.7175slip a@tweisel .co m
Source : FactSct
NETFLIX, INC.-BUY
CHANNEL CHECKS ON BLOCKBUSTER'S TEST DVD
SUBSCRIPTION SERVICE
Company Update NASDAQ : NFLX-$11 .36
Key Data FY 2001 200 2 2003Price : $ 11 .36 EBITDA(mn )52-Week Range : $10-$18 Q1 (83 .6)A $3 6A $5 .8 EMarket Cap .(mn) : $3451 Q2 ($0 .1(A $6 .5A $9 .1 EShares Out .(mn) : 30 .4 Q3 $06A $3 .8E $87 EAvg Daily Vol . : 363,281 Q4 $1 .4A $2 .8E $6 .4 EFiscal Year End : 31-Dec Year ($ 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 ENet Cash/Share : NM Q2 $18 .4A $36 .4A $56 .0EBook Value /Share : $449 Q3 $18.9A $393E $59 .4EPrice/ Book Value : 2 .5x 0 4 $21 .6A $43 .BE $66 .8 ESecular 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. Phoenix, which has had the program in place the longest, reported that
approximately one-third of incoming DVD rental customers were converting we note that
Phoenix offers the lowest price program at $19 .99, with a $2 discount for automatic credit
card payment .
3Companl Description : Netfli".- is a leading in/erar/ive, subsnxber-bared en/ertainment deliteij snn.ire offeringronsumer r a deep selection of DT Ds for predrmrinantly 11 .9.9 .5 a month. Ne 1ix s online rrwb.renber relatzonshzp is a
strategic, ronmeti/nc advaniaJe nor and in the fiit0re as finned enter/ainnien/ enronpasses boll, /aooible and electronic
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Gordon Hodge 415 .364 .2575 6
77fomas Weisel Partners LLC
ACC Thomas Weisel PartnersMERCHANT BANKING
September 26, 2002 Champions of Growth
Media & Broadcasting
Gordon Hodge
415 .364 .2575
ghodge@ tweisel .com
Sherry Li n
415 .364 .7175slin(d> tweisel .com
K PV
Source: FactSct
NETFLIX, INC.-BUY
REITERATING BUY ; UPDATE ON BLOCKBUSTER DVD
SERVICE
Company Update NASDAQ: NFL-X-$10.5 0
Key Data FY 2001 200 2 2003Price : $ 1050 EP S52-Week Range : $10-$18 01 NM ($0 .11)A ($0 .06)EMarket Cap .(mn) : $3190 Q2 NM $000A $004EShares Out .(mn): 304 Q3 NM ($0 12)E $0,01 EAvg Daily Vol . : 220,753 Q4 NM ($0 .19)E ($011)EFiscal 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 ENet Cash/Share : NM Q2 $18 .4A $36 .4A $56 .O EBook Value/Share : $4 .49 Q3 $18 .9A $39 3E $59 .4 EPrice/ Book Value : 2 .3x Q4 $21 .6A $43 .8E $66.8 ESecular Growth : 50% Year $75 . 9A $150. 0E $233.5 E
TEV/Sales NE 1 .6x 1 .0xNote : EPS shown before one- time items and non - cash compensatio n
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. Nc' 0c online sabscriber relationship is ,
v/ra/eoir, rrmipe/itire ad[nntaoe now and in the jir /ure as filmed e.n/er/aznmen/ emonrsa.uec ho/h langihle and elceironi
(ormc
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 .
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Go'don Hodge 415 .364 .2575 5
Thomas \f'eiscl Partners LLC
Media & Broadcasting
Gordon Hodge
415.364 [email protected]
Sherry Lin
415 .364.7175
e -
Source : FactSet
NETFLIX, INC.-BUY
NFLX: Q3 SUBSCRIBERS EXCEED EXPECTATIONS
Company Update NASDAQ: NFLX-$9 .50
Key Data FY 2001 2002 200 3Price : $9 .50 EP S52-Week Range : $10-$18 Q1 NM ($0 .11)A ($0.06) EMarket Cap. (mn): $288 .6 Q2 NM $O .OOA $0.04 EShares Out .(mn) : 30.4 Q3 NM ($0 .12)E $0.01 EAvg Daily Vol . : 216,667 Q4 NM ($0 .19)E ($0 .11) EFiscal Year End : 31-Dec Year NM ($0 .54)E ($0.10) E
P/E NM NM NM
Debt/Total Capital : 2%PricefTTM Sales : 2 .7 xNet Cash/Share : N MBook Value/Share : $4.49Price/Book Value : 2 .1 xSecular Growth : 50%
Revenue(mn)Q1 $17 .1A $30 .5A $51 .3EQ2 $18 .4A $36 .4A $56.OEQ3 $18 .9A $39 .3E $59.4EQ4 $21 .6A $43,8E $66.8EYear $75 .9A $150 .OE $233.5ETEV/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.
Please refer to the end ofxhis report for' a list of important disclos re , :`
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10/1102
Gordon Hodge 415 .364 .2575 5
Thomas Weisel Partners LLC
Thomas Weisel PartnersMERCHANT BANKIN G
October 18, 2002 Champions of Growth
Media & Broadcasting
Gordon Hodge
415 .364 .2575
NETFLIX, INC.-BUY
NFLX: RAISING FREE CASH FLOW ESTIMATE S
Earnings Update NASDAQ: NFLX-$7.7 0
Sherry Lin
415 .364.7175
Source : FactSet
Key Data FY 2001 2002 2002 Prv 2003 2003 PrvPrice $7 .70 EP S52-Week Range : $5418 Q1 NM ($0 .11)A ($0.11)A ($0 .13) E ($0 .06)EMarket Cap.(mn): $225.6 Q2 NM $O .OOA $O.OOA $0 .08E '$0.04 EShares Out .(mn) : 29 .3 Q3 NM ($0 .01)A ($0.12)E $0 .06E $0 .01 EAvg Daily Vol . : 285,222 Q4 NM ($0 .13)E ($0.19)E ($0 .11)E ($0 .11)EFiscal 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%Price/TTM Sales : 1 .7 xNet Cash/Share : $3 .34Book Value/Share : $3 .67Price/Book Value : 2 .1 xSecular Growth : 50%
Revenue(mn )Q1 $17 .1A $30 .5A $30.5A $51 .3E -$51 .3EQ2 $18.4A $36 .4A $36.4A $57 .2E $56 .O EQ3 $18 .9A $40 .7A $39.3E $60 .OE $59 .4 EQ4 $21 .6A $43 .2E $43.8E $65 .OE $66 .8EYear $75.9A $150.8E $150 .0E $233 .5E $233 .5ETEV/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
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10/16/0 2
Gordon Hodge 415.364.2575 7
Thomas Weisel Partners LLC
Thomas Weisel PartnersMERCHANT RANKING
December 4, 2002 Champions of G rowth
Media & Broadcasting
Gordon Hodge
415 .364 .2575ghodge@tweisel .com
Sherry Lin315 .364 .7175
slin(d.; tweisel .co m
-n rur:
Source . FactSet
NETFLIX, INC.-BUY
NFLX: CHURN COMING DOWN; ESTIMATES
INCREASED ; REITERATE BUY
Raising Estimates NAS]DAQ : NFLX-$9 .9 5
Key Data FY 2001 2002 2002 F' rv 2003 2003 P rvPrice $9.95 EP S52-Week Range : $5-$18 Q1 NM (SO 11)A ($01')A ($0 .13)E ($013) EMarket Cap .(mn) : $2914 Q2 NM $0 OOA $0 0(A $0.08E S0 .08 EShares Out .(mn) : 293 Q3 NM ($0.01)A ($001)A $0.06E S0 .06EAvg Daily Vol . : 372,417 Q4 NM ($0.05)E ($013(E ($0 .11)E (SO 11)EFiscal Year End : 31-Dec Year NM (SO .19) E ($0 .29)E ($ 0.03)E ($ 0 .04) E
P/E NM NM NM
Debt/Total Capital : 2% Revenue(mn )Price/TTM Sales : 23x Q1 $17 1A $30 .5A $30.5A $513E $51 .3 ENet Cash/ Share : NM 02 $18 .4A $364A $36 .4A $57 .2E $572 EBook Value/ Share : $367 03 $18 .9A $407A $40 .7A $60 .0E $60 .OEPri ce /Book Value : 2 7x Q4 $21 6A $43 .2E $43.2E. $65 .OE $65-OESecular 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 'VHSwith DVD players . Netflix is already free cash flow positive with only 0 .63% penetration ofU .S. n, households, a figure that we believe could almost triple in the next five years . Forexample, San Francisco Bay Area penetration is 3 .5°s and growing, highlighting the marketpotential 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 offeringronsumers a deep selettinn aJ D1 Dr for pr dominanth' 519 .95 a month. 1Ve/Jlix'.s online .ca/,,-fiber reladionship is astrategic, competitive ad:nntage non' and in the firlnm as filmed entertainment enrrirnpasres brtb tangible and e%elronirfinis.
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Gordon Hodge 415 .364,2575 4
Thomas Weisel Partners LLC
Thomas Weisel PartnersMERCHANT BANKIN G
January 2, 2003Champions of Growth
Media & Broadcastin g
Gordon Hodge
415 .364.2575
Sherry Lin
415 .364 .7175
slin@twweisel .co m
Source: FactSet
NETFLIX, INC.--BUY
NFLX: 4Q02 SUBS AND CHURN .ABOVE OUR
ESTIMATES; REITERATE BUY
Company Update NASDAQ : NFLX-$11.0 1
Key Data FY 2001 2002 2003Price: $ 11 .01 EPS *52-Week Range : $5-$18 Q1 NM ($0 .11)A ($0 .13) EMarket Cap .(mn) : $322 .5 Q2 NM $O .OOA $0 .08 E
Shares Out.(mn) : 29 .3 03 NM ($0 .01)A $0 .06 EAvg Daily Vol . : 407,243 Q4 NM ($0 .05)E ($0 .11) EFiscal Year End : 31-Dec Year NM ($0 .19)E ($0 .03) E
PIE NM NM N M
Debt/Total Capital : 2%Price/TTM Sales : 2.5xNet Cash/Share : N MBook Value/Share : $3 .6 7Price/Book Value : 3 .OxSecular Growth : 50%
Revenue(mn )Q1 $17 .1A $30 .5A $51 .3 EQ2 $18 .4A $36 .4A $57 .2 EQ3 $18 .9A $40 .7A $60 .O E04 $21 .6A $43 .2E $65 .O EYear $75.9A $ 150 .8E $ 233 .5 ETEV/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 offeringconsumers 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.
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4
Thomas Weisel Partners LLC
Thomas Weisel PartnersMERCHANT BANKIN G
January 16, 2003Champions of Growth
Media & Broadcasting
Gordon Hodge
415 .364 .2575
ghodge@tweisel .com
Sherry Lin
415 .364 .7175
slin@tweisel .co m
Source: FactSet
NETFLIX, INC.-BU Y
NFLX: 11N.I .B.: NETFLIX IN (THE) BLACK" ;
INCREASING ESTIMATE S
Revising Estimates NASDAQ : NFLX-$12 .20
Key Data FY 2002 2003 20 03 P rv 2004 2004 P rvPrice $12. 20 EPS *52-Week Range : $5-$18 Q1 ($0.11)A ($0.05)E ($0 .13)E $0.11E N EMarket Cap .(mn): $369 .9 02 $O.OOA $0 .10E $0.08E $0.17E N EShares Out.(mn) : 30 .3 Q3 ($0.01)A $0 .09E $ 0.06E $0.16E N EAvg Daily Vol . : 368,509 04 $0.02A ($0 .00)E ($0.11)E $0.01E N EFiscal 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 %Price/TTM Sales : 2 .4xNet Cash/Share : N MBook Value/Share : $3 .7 5Price/Book Value : 3 .3xSecular Growth : 50%
Revenue(mn )
Q1 $30 .5A $52 .4E $51 .3E $73.3E NEQ2 $36.4A $57 .8E 157.2E $78 .2E NEQ3 $40.7A $60 .7E 160.0E $82.7E NE04 $45.2A $66 .3E $65.0E $90 .4E NEYear $ 152.8A $237 .3E $233 .5E $324 .6E NETEVISales 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.
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Source: Company reports and Thomas Weisel Partners LLC estimates . 01/16/0 3
Gordon Hodge 415.364.2575 6
Thomas Weisel Partners LLC
February 27, 200 3
Media & Broadcasting
Gordon Hodge
415 .364 .2575
ghodge@tweisel .co m
Sherry Lin415 .364 .7175
slin@tweisel .com
Source: FactSet
4~
NETFLIX, INC.-BUY
Thomas Weisel PartnersMERCHANT BANKIN G
Champions of Growth
NFLX: NETFLIX HITS ONE MILLION SUBSCRIBERS A
QUARTER EARLY
Company Update NASDAQ : NFLX-$14 .5 5
Key Data FY 2002 2003 2004
Price : $14 .55 EPS52-Week Range : $5-$18 Q1 ($0.11)A ($0 .05)E $0 .11 EMarket Cap .(mn) : $441 .2 Q2 $O .OOA $0 .10E $0 .17EShares Out .(mn) : 30.3 Q3 ($0 .01)A $0 .09E $0 .16EAvg Daily Vol . : 369,347 Q4 $0 .02A ($0 .00)E $0 .01 EFiscal 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 ENet Cash/Share : NM Q2 $36 .4A $57 .8E $78 .2 EBook Value/Share : $3 .75 Q3 $40 .7A $60 .7E $82 .7 EPrice/Book Value: 3 .9x Q4 $45 .2A $66 .3E $90 .4 ESecular Growth: 50% Year $152.8A $237.3E $324.6E
TEV/Sales 2.3x 1 .6x 1 .1 xNote : 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 risks 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
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3Gordon Hodge 415 .364 .2575
Thomas Weisel Partners LLC
Thomas Weisel PartnersMERCHANT BANKIN G
April 2, 2003Champions of Growth
Media & Broadcastin g
Gordon Hodge
415.364.2575
ghodge@tweisel .com
Sherry Lin415 .364 .7175
slin@tweisel .com
Source: FaetSet
NETFLIX, INC.-BUY
NFLX: MARCH QUARTER SUBSCRIBERS AHEAD OF
ESTIMATE
Raising Estimates NASDAQ : NFLX-$18 .96
Key Data FY 2002 2003 2003 P rv 2004 2004 P rv
Price $ 18.96 EPS52-Week Range : $5-$22 Q1 ($0.11)A ($0 .05)E ($0 .05)E $0 .04E $0.11 E
Market Cap.(mn) : $574 .9 02 $O.OOA $0 .08E $0 .10E $0 .18E $0.17 E
Shares Out .(mn) : 30.3 03 ($0.01)A $0 .09E $0 .09E $0 .18E $0.16 E
Avg Daily Vol . : 575,612 04 $0.02A $0 .02E ($0.00)E $0 .05E $0 .01 E
Fiscal Year End : 31-Dec Year ($ 0 .09)A $ 0 .15E $0 .15E $0 .45E $0.45E
P/E NM 125 .98x 41 .83x
Debt/Total Capital : 1 %Price/TTM Sales : 3 .8 x
Net Cash/Share: N MBook Value/Share : $3 .75Price/Book Value : 5 .1 xSecular Growth : 50%
Revenue(mn)
Q1 $30 .5A $54 .OE $52.4E $76 .3E $73 .3 E
Q2 $36 .4A $62.3E $57.8E $82 . 9E $78 .2 E
Q3 $40 .7A $65. 3E $60.7E $87 .OE . $82 .7 E
Q4 $45 .2A $69. 3E $66.3E $92 .3E $90 .4 E
Year $ 152.8A $ 250 .9E 1237 .3E $338 .5E $324.6 E
TEV/Sales 3 .1x 2.Ox 1 .4x
Note : EPS shown before one-time items and noncash compensa ti on expense .
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. Netfkx'r online subscriber relationship is a
strategic, competitive advantage noun and in the futu re as filmed entertainment encompasses both tangible and electronic
forms.
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Gordon Hodge 415.364 .2575 4
Thomas Weisel Partners LLC
Thomas Weisel PartnersMERCHANT BANKIN G
April 21, 2003Champions of Growth
Media & Broadcasting
Gordon Hodge415 .364 .2575
Sherry Lin
415 .364.7175slin@rweisel .co m
Ratings System
Sector Ratings
OW Overweight
M\V Market Weight
UW Underweigh t
Stock RatingsO OutperformP Peer PerformU UnderperformS Suspended Rating
NR Not Rate d
NC Not Covered
NETFLIX, INC.-OUTPERFORM
NFLX: NETFLIX RELOADED ; CHURN BETTER THAN
EVER; INCREASING EST S
Earnings Update NASDAQ: NFLX-$21.96
Key Data I FY 2002 2003 2003 Prv 2004 2004 Prv
Price $21 .9652-Week Range: $5-$2 2Market Cap .(mn): $654 . 1Shares Out .(mn) : 29 .8Avg Daily Vol . : 605,68 9Fiscal Year End : 31-De cSector Rating : MWStock Rating : 0
Debt/Total Capital: 1%Price/TTM Sales: 3.7 xNet Cash/Share : N MBook Value/Share : $3 .7 7Price/Book Value : 5 .8xSecular Growth : 50 %Price Target:
Note : EPS shown before one-Lime items ;
EPS
Q1 ($0 .11)A $O .OOA ($0.05)E $0 .04E $0 .04 EQ2 $O .OOA $0 .09E $0.08E $0.22E $0 .18EQ3 ($0 .01)A $0 .09E $0 .09E $0.20E $0 .18 EQ4 $0 .02A $0 .06E $0.02E $0.04E $0 .05 EYear ($ 0 .09)A $0 .25E $ 0 .15E $0 .50E $0 .45 EPIE NM 88 .58x 44.24 x
Revenue(mn)01 $30 .5A $55 .7A $54 . 0E $83 .8E $76 .3 EQ2 $364A $63 .7E $62. 3E $92 . 3E $82 .9 EQ3 $40 .7A $69 .4E $65. 3E $95.6E $87 .O EQ4 $45 .2A $74 .9E $69 . 3E $99 . 8E $92 .3 EYear $ 152 .8A $ 263.8E $ 250 .9E $371 .6E $ 338.5ETEV/Sales 4 . 3x 2 .6x 1 .8x
nd non-cash compensatio n
Executive Summa ry
• Investment thesis . Our OUTPERFORM rating reflects our view that Netflix can increase
EBITDA and EPS 50% annua ll y 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 na tional
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.
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Gordon Hodge 415 .364.2575 6
Thomas Weisel Partners LLC
Thomas Weisel PartnersMERCHANT BANKIN G
June 9, 200 3
Media & Broadcasting
Gordon Hodge
415.364.2575
Sherry Lin
415 .364 .7175
slin@tweisel .co m
Ratings Syste m
Sector RatingsOW OverweightMW Market WeightUW Underweigh t
Stock Ratings0 OutperformP Peer PerformU Underperfor mS Suspended RatingNR Not Rate dNC Not Covered
Champions of Growth
NETFLIX, INC .--OUTPERFORM
NFL.." : MGMT RAISES JUNQ GUIDANCE ; INCREASING
FY03 AND FY04 ESTS
Raising Estimates NASDAQ : NFLX-$23.00
Key Data FY 2002 2003 20 03 P rv 2004 2004 PrvPrice $23 .00 EP S52-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 .22EShares Out .(mn) : 29 .8 Q3 ($0 .01)A $0 .09E $0 .09E $0.19E $0 .20EAvg Daily Vol . : 1,022,985 04 $0 .02A $0 .06E $0 .06E $0.10E $0 .04E .Fiscal Year End : 31-Dec Year ($ 0 .09)A $0 .30E $0 .25E $0 .60E $0 .50 ESector Rating : MW PIE NM 76 .67x 38 .34 xStock Rating : 0
DebtlTotal Capital : 1% Revenue(mn )Price/TIM Sales : 3.9x Q1 $30 .5A $55 .7A $55 .7A $83 .8E $83 .8 ENet Cash/Share : NM Q2 $36 .4A $63 .7E $63 .7E $92 .4E $92.3EBook Value/Share : $3 .77 Q3 $40 .7A $69 .2E $69 .4E $96 .5E $95.6EPrice/Book Value : 6 .1x Q4 $45 .2A $74 .8E $74 .9E $100.6E $99 .8ESecular Growth : 50% Year $ 152.8A $263.3E $ 263.8E $373.4E $371 .6EPrice Target : $30 .00 TEV/Sales 3.9x 2.3x 1 .7 x
Note : Any price ta rget displayed in the data box above represents either a specific price target or the midpoint of a range .
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 astrategic , competitive advantage now and in the future as filmed entertainment encompasses both tangible and electronic
orms.
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Gordon Hodge 415 .364 .2575 4
Thomas Weisel Partners LLC
ell; Thomas Weisel PartnersMERCHANT BANKIN G
June 10, 2003
Media & Broadcasting
Gordon Hodge
Sherry Lin415 .364 .7175
Ratings Syste m
Sector RatingsOW OverweightMW Market WeightUW Underweigh t
Stock Ratings
O Outperform
P Peer Perform
U Underperform
S Suspended RatingNR Not Rate d
NC Not Covered
Champions of Growth
NETFLIX, INC.-OUTPERFORM
NFLX: REITERATE OUTPERFORM; WAL*MART
COMPETITION NOT NE W
Company Update NASDAQ: NFLX-$23 .00
Key Data FY 2002 2003 200 4
Price: $23.00 EP S52-Week Range : $5-$26 Q1 ($0 .11)A $O.OOA $0 .07 EMarket Cap .(mn) : $685 .1 02 $O .OOA $0 .15E $0 .23 EShares Out.(mn) : 29 .8 Q3 ($0 .01)A $0 .09E $0 .19E
Avg Daily Vol . : 1,033,868 Q4 $0 .02A $0.06E $0.10 EFiscal Year End : 31-Dec Year ($ 0 .09)A $0 .30E $0 .60 ESector Rating : MW PIE NM 76 .67x 38.34xStock Rating : 0
Debt/Total Capital : 1% Revenue(mn )Price/TTM Sales : 3 .9x Q1 $30 .5A $55 .7A $83 .8ENet Cash/Share : NM Q2 $36 .4A $63 .7E $92.4 EBook Value/Share : $3 .77 Q3 $40 .7A $69 .2E $96.5EPrice/Book Value : 6 .1x Q4 $45 .2A $74.8E $100.6ESecular Growth : 50% Year $152 .8A $263. 3E $373.4EPrice Target: $30 .00 TEVISales 3 .9x 2.3x 1 .7 x
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
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Gordon Hodge 415 .364 .2575 4
Thomas Weisel Partners LLC
Thomas Weisel PartnersMERCHANT BANKIN G
June 24, 2003
Media & Broadcasting
Gordon Hodge415 .364 .2575ghodge@tweisel .com
Sherry Lin
415 .364 .7175
slin@tweisel .com
Ratings System
Sector RatingsOW OverweightMW Market WeightUW Underweigh t
Stock RatingsO OutperformP Peer PerformU Underperfor mS Suspended RatingNR Not Rate dNC Not Covered
Champions of Growth
NETFLIX, INC .-OUTPERFORM
NFI.X: PATENT WIN INCREMENTALLY POSITIVE ;
REITERATE OUTPERFOR M
Company Update NASDAQ : NFLX-$23 .22
Key Data I FY 2002 2003 2004Price : $23 .2 252-Week Range : $5-$2 6Market Cap .(mn) : $691 .6Shares Out.(mn) : 29. 8Avg Daily Vol . : 1,206,44 9Fiscal Year End : 31-DecSector Rating : MWStock Rating : 0
EPSQ1 ($0 .11)A $O .OOA $0 .07 EQ2 $O .OOA $0 .15E $0 .23 EQ3 ($0.01)A $0.09E $0 .19 EQ4 $0 .02A $0 .06E $0 .10 EYear ($0 .09)A $0 .30E $0 .60 EPIE NM 77 .40x 38 .70 x
Debtffotal Capital : 1% Revenue(mn)Price/1TM Sales : 3 .9x 01 $30.5A $55 .7A $83 .8ENet Cash/Share : NM Q2 $36.4A $63 .7E $92 .4 E
Book \/ alue/Share : $3.77 Q3 $40.7A $69.2E $96 .5 EPrice/Book Value : 6 .2x Q4 $45.2A $74 .8E $100 .6 E
Secular Growth : 50% Year $ 152 .8A $263 .3E $373 .4EPrice Target: $30 .00 TEV/Sales 3 . 9x 2 .3x 1 .7x
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
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Gordon Hodge 415 .364.2575 4
Thomas Weisel Partners LLC
EXHIBITB-2
Thomas Weisel PartnersMERCHANT BANKIN G
July 1, 2003Champions of Growth
Media & Broadcasting
Gordon Hodge
415 .364 .2575
ghodge@tweisel .co m
Sherry [email protected]
Ratings System
Sector RatingsOW OverweightMW Market WeightUW Underweigh t
Stock RatingsO OutperformP Peer PerformU UnderperformS Suspended RatingNR Not RatedNC Not Covered
NETFLIX, INC.-OUTPERFORM
NFLX: NETFLIX Q2 SUBS IN LINE WITH ESTIMATES ;
REITERATE OUTPERFORM
Company Update NASDAQ : NFLX-$24 .7 5
Key Data FY 2002 2003 200 4
Price : $24 .75 EPS52-Week Range : $5-$26 Q1 ($0 .11)A $O .OOA $0 .07 EMarket Cap .(mn) : $737.2 Q2 $O .OOA $0 .15E $0 .23 EShares Out .(mn) : 29.8 03 ($0 .01)A $0 .09E $0 .19EAvg Daily Vol . : 1,245,172 Q4 $0 .02A $0 .06E $0 .10 EFiscal Year End : 31-Dec Year ($0 .09)A $0 .30E $0 .60 E
Sector Rating : MW PIE NM 81 .60x 41 .60 xStock Rating : 0
Debt/Total Capital : 1% Revenue(mn )Price/TTM Sales : 4 .1x Q1 $30 .5A $55 .7A $83 .8ENet Cash/Share : NM Q2 $36 .4A $63 .7E $92 .4 EBook Value/Share : $3 .77 Q3 $40 .7A $69 .2E $96 .5 EPrice/Book Value : 6 .6x Q4 $45 .2A $74 .8E $100 .6ESecular Growth : 50% Year $ 152 .8A $ 263 .3E $373 .4EPrice Target: $30 .00 TEV/Sales 3 .9x 2 .3x 1 .7x
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 . National
penetration reached 1 .0%, up from 0 .9% last quarter and 0.6% a year ago .
• We remain comfortable with our estimates of $64mn in revenue, $14 .4mn in EBITDA, EPS
of $0.15 and FCF $0 .27 for JunQ . Netflix reports 2Q earnings on Thursday July 17, 2PM
PDT/ 5PM EDT .
Company Desc ri ption : NeJ7ix is a leading interactive, subscriber-based entertainment delivery service offering
consumers a deep selection of DVDs for predominantly 519.95 a month. Netflix's online subscriber re lationship is a
strategic, competitive advantage now and in the future as filmed entertainment encompasses both tangible and electronic
forms.
Note : Any price target displayed in the data box above represents either a specific price target or the midpoint of a range
EPS shown before non-cash compensation .
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Gordon Hodge 415 .364 .2575 4
Thomas Weisel Partners LLC
Thomas Weisel PartnersMERCHANT BANKIN G
July 17, 2003Champions of Growth
Media & Broadcasting
Gordon Hodge
415 .364.2575
ghodge@tweisel .com
Sherry Lin415 .364 .7175slin@tweisel .co m
Ratings System
Sector RatingsOW OverweightMW Market WeightUW Underweight
Stock RatingsO OutperformP Peer PerformU Underperfor mS Suspended RatingNR Not RatedNC Not Covered
NETFLIX, INC.-OUTPERFORM
NFLX: HIGHER BURN LEADS TO LOWER. CHURN; 2Q
BETTER THAN EXPECTED
Earnings Update NASDAQ: NFLX-$25 .2 8
Key Data FY 2002 2003 2003 P rv 2004 2004 PrvPrice $25.28 EPS52-Week Range: $5-$29 Q1 ($0.11)A $O .OOA $O.OOA $0 .09E $0.07EMarket Cap .(mn): $778.9 Q2 $O.OOA $0 .16A $0 .15E $0 .22E $0 .23EShares Out.(mn): 30.8 Q3 ($0.01)A $0 .08E $0.09E $ 0 .19E $0.19EAvg Daily Vol .: 1,336,065 Q4 $0.02A $0 .06E $0 .06E $0 .10E $0.10EFiscal Year End: 31-Dec Year ($ 0 .09)A $0 .30E $0 .30E $0 .60E $0.60ESector Rating : MW P/E NM 84.27x 42.13 x
Stock Rating : 0
Debt/Total Capital: 1% Revenue(mn)Price/TTM Sales: 3.8x 01 $30.5A $553A $55.7A $85.2E $83 .8ENet Cash/Share: NM Q2 $36AA $63.2A $ 63.7E $93.7E $92.4EBook Value/Share : $3.96 Q3 $40.7A $69.4E $ 69.2E $987E :$ 96 .5EPrice/Book Value: 6.4x Q4 $45.2A $75.7E $74 .8E $103 .8E $100.6ESecular Growth: 50% Year $ 152 .8A $264.OE $263 .3E $381 .4E $373.4EP ri ce Target: $30.00 TEV/Sales 4 .4x 2.6x 1 .9x
Note: Any price target displayed in the data box above represents either a specific price target or the midpoint of a range .
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 offeringconsumers a deep selection of DT/Ds for predominantly $19.95 a month . Netfbx's online subscriber relationship it astrategic, competitive advantage now and in the future as filmed entertainment encompasses both tangible and electro nicforms.
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Gordon Hodge 415 .364 .2575 9
Thomas Weisel Partners LLC
September 15, 2003
Thomas Weisel PartnersMERCHANT BANKIN G
Champions of Growth
Media & Broadcasting
Gordon Hodge415 .364 .2575ghodge@tweisel .com
Sherry Lin
415 .364 .7175slat@tweisel .co m
Ratings System
Sector RatingsOW Overweight
MW Market \x-'eight
UDC' Underweigh t
Stock RatingsO OutperformP Peer PerformU UnderperformS Suspended RatingNR Not Rate dNC Not Covered
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. '.r online subscriber relat onshzp is a
strategic, competitive advantage noun and in the /iibrre as limed entertainment enromtia .rres uolh lanozhle and electronic
rrorrtu .
NETFLIX, INC.-OUTPERFORM
NFLX : INCREASING ESTIMATES AND TARGET PRICE
Raising Estimates NASDAQ: NFLX-$35 .51
Key Data FY 2002 2003 2003 P rv 2004 2004 PrvPrice $3551 EP S52-Week Range: $5-$37 Q1 ($0.11)A $O .OOA $0 .OOA $0 .08E $009EMarket 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 19EAvg Daily Vol .: 1,014,498 Q4 $0.02A $0.07E $O.OGE $0 .22E $010EFiscal Year End : 31-Dec Year ($0 .09)A $0 .32E $0 .30E $0 .85E $0 .60ESector Rating : MW P/E NM 110 .97x 41 .78xStock Rating: 0
Debt/Total Capital : 1% Revenue(mn )Price/TTM Sales: 53x 01 8305A $557A $55.7A $B5 8E $852ENet 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
Price/Book Value: 9 0x Q4 $45.2A $75.7E $75:7E $107 .2E 1703 BESecular Growth: 501/0 Year $152.BA $264. OE $264 .0E $389 .6E $ 381 .4E
Price Target: $42.00 TEV/Sales 6.4x 3 .9x 2 .8x
Note : Any price target displayed in the data box above represents either a specific price target or the midpoint of a range .
EPS shown before non-cash compensation .
Executive Summaryrt-_ ; %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 .
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Gordon Hodge 415 .364.2575 7
Thomas Weisel Partners LLC
NETFLIX, INC.-OUTPERFORMMedia & Broadcasting
Gordon Hodge415 .364 .2575ghodge@tweisel .co m
Sherry Lin
415 .364 .7175slm @tweisel .co m
Ratings System
Sector RatingsOU- OverweightMW Market WeightU\WW Underweigh t
Stock Ratings0 OutperformP Peer PerformU UnderperformS Suspended RatingNR Not RatedNC Not Covered
NFLX: SEPQ ENDING SUBS ABOVE EXPECTATIONS;
REITERATE OUTPERFORM
Company Update
cl Thomas Weisel PartnersMERCHANT BANKIN G
Champions of Growth
NASDAQ: NFLX-$34 .5 1
Key Data FY 2002 200 3 2004Price : $ 34 .51 EP S52-Week Range : $5-$40 Q1 ($0 .11)A SHOA $0 .08 EMarket Cap.(mn ) : $1,063 .3 Q2 $000A SO 16A $0 .28 EShares Out .( mn): 30.8 Q3 ($0 .01)A $0.08E $0 .27 EAvg Daily Vol . : 976,820 Q4 $0 .02A $0.07E $0 .22 EFiscal Year End : 31 -Dec Year ($0 .09)A S0 .32E $0.85ESector Rating : MW P/E NM 107 . 64x 40.60xStock Rating : 0
Debt/Total Capital : 1% Revenue(mn )Price/TTM Sales: 5 .2x Q1 $30 .5A $55.7A $85.8ENet Cash/Share : NM Q2 $36 .4A $63.2A $95 .3EBook Value/ Share : $3.96 03 $40 7A $69 4E $101 .2EPrice /Book Value : 8 .7x Q4 $45 .2A $75 7E $107 .2ESecular Growth '. 501/6 Year $ 152 .8A $2641.0E $389.6 EPri ce Target : $4200 TEV/Sales 6 .4x 3 .9x 2.Bx
Note ; Any price target displayed in the data box above represents either a specific price target or the midpoint of a range .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 . Netflix reports Sep Q earnings on Wednesday
October 15, 2PM PDT/ 5PM EDT .
Company Description : Veff7ia i.r a leading interactive , subscrz er- based entertainment delivery sendee o11erini
consumers a deep scler/ion of DT-'Ds for predominantly ,119.95 a month . Netflix's online .tnbsc fiber relationsbp it a
strategic, conspetilive ads'antaoe nog' and in the .Jiihure at fdn;ed entertainment enronpas.res both tangibkc and electronic
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Gordon Hodge 415.364.2575 4
Thomas 'Weisel Partners LLC
Media & Broadcasting
Gordon Hodge
415 .364 .2575
ghodge@tweisel .com
Lauren Grismanauskas
41-5-364 .2607
lgrismanauskas(ditweisel .com
Ratines Syste m
Sector RatingsOW Overweight
MW Market Weight
UW Underweight
Stock RatingsO OutperformP Peer PerformU UnderperformS Suspended RatingNR Not RatedNC Not Covered
NETFLIX, INC.-OUTPERFORM
NFLX: INCREASING ESTIMATES AND PRICE TARGET ;
Q3 HIGHLIGHTS
Revising Estimates NASDAQ : NFLX-$44 .70
Key Data FY 2002 2003 2003 P rv 2004 2004 P ryPrice $4470 EP S52-Week Range: $6-$48 Q1 ($0,11)A $O.OOA $00)A $015E 5008EMarketCap .(mn) : $1,4063 Q2 $000A SO 16A $016A $0 .33E $028EShares Out .(mn): 31.5 Q3 ($0.01)A $0 .19A $0 .08E $032E $0,27EAvg Daily Vol .: 1,102,582 Q4 $0.02A $0.14E $007E $0 .29E 5022EFiscal Year End: 31 -Dec Year ($ 0.09)A $0 .50E $0 .32E $1 .1OE S0 .85ESector Rating : MW PIE NM 89.40x 40.64 xStock Rating : 0
Debt/Total Capital : NM Revenue(mn )Price/TTM Sales: 6.Ox 01 $30.5A $553A $55.7A $892E $85 .8ENet Cash/Share : NM 02 $36.4A $632A $63.20 $98 9E $95 .3EBook Value/ Share : $4.20 Q3 $407A $722A $6941- $105.9E $101 2EPri ce/Book Value : 10.6x Q4 $45.2A $78.9E 75.7E $112 .5E $107 .20Secular Growth : 50% Year $152 .BA $269.9E $264. 05 $406 .5E $389.6EPrice Target: $55.00 TEV/Sales 8 .2x 4.7x 3 .3 x
Note : Any price target displayed in the data box above represents either a specific price target or the midpoint oCa rartge .
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' oferinlonsu ers a deep selection of Dt Ds for predominantly ,519 .93 a month. 1Veplza's online vibscriber relalion ch/ is 4Iratedie, competitive advmilage non- and in Mefiebere as filmed entertainment encompasses b911) tangible and clerlron/sornac
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Gordon I Lodge 41 .364 .2575 7
Thomas \X''eisel Partners LLC
Media & Broadcastin g
Gordon Hodge415 .364 .2575ghodge@tweisel .com
Lloyd Walmsley415 .364 .2584
lwalmsleyC), tweisel .com
Ratings System
Sector RatingsOW OverweightMW Market WeightU%N' Underweigh t
Stock Ratings
O Outperform
P Peer Perform
U Underperform
S Suspended RatingNR Not Rate dNC Not Covered
NETFLIX, INC .-OUTPERFORM
NFLX: BENEFICIARY OF DVD PLAYER GROWTH ;
REITERATE OUTPERFORM
Company Update NASDAQ: NFLX-$46 .81
Key Data FY 2002 2003 2004Price : $46 .81 EP S52-Week Range : $10-$61 Q1 ($0 .11)A $0 .00A $015EMarket Cap .(mn) : $1,472.6 02 $0 00A $0 16A $033EShares Out .(mn) : 31 .5 Q3 ($0 .01)A $0.19A $0 .32EAvg Daily Vol . : 1,940,575 Q4 $0.02A $0 14E $0 .29EFiscal Year End : 31-Dec Year ($ 0.09)A $0 . 50E $1 .10ESector Rating : MW P/E NM 93 . 62x 42 .55xStock Rating : 0
Debt/Total Capital : 0% Revenue(mn )Price/TTM Sales: 6 .2x Q1 $30 .5A $55 7A $89 .2 ENet Cash /Share : NM Q2 $36 .4A $63 .2A $98 .9 EBook Value /Share : $4.20 03 $40 .7A $72 .2A $105 .9EPri ce/Book Value : 11 .lx Q4 $45 .2A $789E $112 .5ESecular Growth : 50% Year $152 .8A $261I .9E $406.5EPrice Target: NE TEV/Sales 8 .6x 4 .9x 3 .4x
Note: Any price target displayed in the data box above represents either n specific price target or the midpoint of a rangeEPS 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 iniogconsumers a deep selection of DGDs forpredominantly,t19.95 a month . Net/ha".( online subscriber relationship is astrategic, conrpetitire adianwae nose' and i the Jnture as filmed enter/ainnnnt enrompa ses both tangible and ekrtronirforms.
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Gordon Hodge 415 .364.2575 5
Thomas \ ciscl Partners LLC
December 17, 2003
Thomas Weisel PartnersMERCHANT BANKIN G
Champions of G rowth
Media & Broadcasting
Gordon Hodge
415 .364 .2575ghodge@tweisel .com
Lloyd Walmsley415.364 .2584lwalmsley@tweisel .co m
Ratings System
Sector RatingsOW OverweightM\a' Market WeightU\Y' Underweigh t
Stock Ratings
O Outperform
P Peer Perform
U Underperform
S Suspended RatingNR Not Rate dNC Not Covered
NETFLIX, INC.-OUTPERFORM
NFLX: COMPANY DELIVERS AN EARLY PRESENT ;
RAISING ESTIMATES
Raising Estimates NASDAQ: NFLX-$50 .4 9
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 cstrategic, competitive adnantaoe now and in the Jntnre as filmed entertainment encompasses both tangible and electronic
lo,ms.
Key Data FY 2002 2003 2003 F 'rv 2004 2004 P rvPrice $5049 EPS52-Week Range : $10-$61 01 ($011)A $000A $0 .00A $01 BE $0 15EMarket Cap .(mn) : $1,588.4 Q2 $O.OOA $0 .16A $0 .1 EA $0.34E $0:33EShares Out.(mn): 31.5 03 ($0.01)A $019A $019A $0 .33E $032EAvg Daily Vol .: 1,934,441 Q4 $0.02A $0.16E $01 tE $0.30E SO29EFiscal Year End: 31-Dec Year ($0 .09)A $0 .52E $0 :50E $1 .15E $1 :10ESector Rating : MW P/E NM 97.10x 43.90xStock Rating : 0
Debt/Total Capital : 0% Revenue(mn )Price/TTM Sales: 6.7x Q1 $305A $55.7A $557/, $90 .6E $89 .28Net Cash/Share : NM Q2 $36.4A $63.2A $63.2/ $999E $98 9EBook Value/Share : $4.20 Q3 $407A $72.2A $722/, $106 .8E $1059EPrice/Book Value : 12.0x Q4 $45.2A $80.1E $78 .9E $113 .3E 31125ESecular Growth: 50% Year $152. BA $271 .1E $269. 9E $410.6E $4D6 .5EPrice Target: NE TEV/Sales 9.3x 5.3x 3 .7 x
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 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%) and 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%) .
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Gordon Hodge 415 .364 .2575 4
Thomas Weisel Partners LLC
Thomas Weisel PartnersMERCHANT BANKIN G
Champions of Growth
Media & Broadcasting
Gordon Hodge
415 .364 .2575
ghodge@tweisel .com
Lloyd Walmslev
415 .364 .2584
Ratings System
Sector RatingsOW Overweight
MW Market Weight
UW Underweigh t
Stock RatingsO OutperformP Peer PerformU UnderperformS Suspended Rating
NR Not Rated
NC Not Covered
NETFLIX, INC.-OUTPERFORM .
NFLX: 4Q03 SUBSCRIBERS SLIGHTLY ABOVE OUR
EXPECTATIONS AT 1.487M
Company Update NASDAQ : NFLX-$54 .69
Key Data FY 2002 2003 2004
Price : $ 54 .69 EP S52-Week Range : $10-$61 Q1 ($0 .11)A $O .OOA $0.18 EMarket Cap.(mn) : $1,720 .5 Q2 $0 .00A $0 .16A $0 .34 EShares Out .(mn) : 31 .5 Q3 ($0 .01)A $0 .19A $0.33 EAvg Daily Vol . : 1 .988,157 Q4 $0 .02A $0.16E $0 .30 EFiscal Year End : 31-Dec Year ($ 0 .09)A $0.52E $1 .15ESector Rating : MW P/E NM 105. 17x 47 .56xStock Rating : 0
DebtiTotal Capital : 0% Revenue(mn )Price/TTM Sales : 7 .3x 01 $30 .5A $55.7A $90 .6 ENet Cash/Share : NM Q2 $36 .4A $63.2A $99 .9E
Book Value/Share : $4 .20 Q3 $40 .7A $72 .2A $106 .8 EPrice/Book Value : 13 .Ox 04 $45 .2A $80.1E $113 .3ESecular Growth : 50% Year $152.8A $271 .1E $410 .6 EPrice Target : NE TEV/ Sales 9 .3x 5 .3x 3 .7x
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 subscribers :cribers : 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
EXHIBITB-3
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Gordon Hodge 415 .364.2575 4
Thomas Weisel Partners LLC
Thomas 'Weisel-PartnersMERCHANT BANKIN G
Champions =of Growthjanuary 21, 2004
Media & Broadcasting
Gordon Hodge
415 .364 .2575
ghodge@tweisel .com
Lloyd Walmsley415 .364 .2584lwalmslev@tweisel .co m
Ratings System
Sector RatingsOW OverweightMW Market WeightUW Underweigh t
Stock RatingsO Outperform
P Peer Perform
U Underperfor m
S Suspended RatingNR Not Rate dNC Not Covered
NETFLIX, INC.-OUTPERFORM
NFLX: Q4 REVIEW; RAISING ESTIMATES FOR
ACCELERATING SUB GROWT H
Raising Estimates NASDAQ: NFLX-$65 .8 0
Key Data FY 2003 2004 :2004 P ry 2005 2005 PrvPrice $65.80 EP S52-Week Range : $11-$69 01 $O .OOA $0 .11E $0 .18E $0 .35E N EMarket Cap .(mn): $2,114 .9 02 $0 .16A $0 .34E $0 .34E $0 .62E N EShares Out .(mn) : 32 .1 Q3 $0 .19A $0 .38E $0:33E $0 .63E N EAvg Daily Vol . : 1,985,596 Q4 $0 .19A $0 .42E $0.30E $0 .59E N EFiscal Year End : 31-Dec Year $0 .55A $1 .25E $1 .15E $2.20E N ESector Rating : MW P/E 119 .64x 52 .64x 29 .91 xStock Rating : 0
Debt/Total Capital : 0% Revenue(mn )Price/TTM Sales : 7.8x 01 $55 .7A $95 .7E $90.6E $142.OE N ENet Cash/Share : $4 .19 02 $63 .2A $109 .OE $99 .9E $156.1E NEBook Value/Share : $4 .38 Q3 $72 .2A $118 .9E $106.8E $166.2E N EPrice/Book Value : 15 .Ox Q4 $81 .2A $129 .5E $113.3E $176.OE NESecular Growth: 50% Year $272.2A $453.1E .410.6E $ 640.3E NEPrice Target : NE TEV/ Sales 7 .1x 4 . 6x 3 .4x
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:
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Media & Broadcasting
Gordon Hodge415 .364 .2575
ghodge@tnveisel .com
Lloyd Walmsley415 .3642584lwalm slev=(ti nveisel .co m
Ratings System
Sector RatingsOW OverweightM\\' Market WeightU\X' Underweigh t
Stock Ratings0 Outperform
P Peer Perform
U Underperform
S Suspended RatingNR Not RatedNC Not Covered
NETFLIX, INC.-OUTPERFORM
NFLX: NEW SUB GROWTH ACCELERATING, UP AN
ESTIMATED 80% Y/Y
Revising Estimates NASDAQ: NFLX-$35 .02
Key Data FY 2003 2004 2004 Pry 2005 2005 Prv
Price $3502 EPS52-Week Range: $7-$40 Q1 $O.OOA (SO 05)E $0OSE $0 13E S0 :18EMarket Cap .(mn): $2,2512 Q2 $0.08A SO 15E $017E $0.32E $0 .31EShares 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 5030EFiscal Year End: 31-Dec Year $0.27A $0. 60E $06:2E : $1 .15E $ 1 .10E
Sector Rating: MW PIE 129.70x 58.37x 30.45 xStock Rating : 0
Debt/Total Capital : NM Revenue(mn )Price/TTM Sales: 8.3x Q1 $557A $98.7E $95.7E $155.4E 5142 .0ENet Cash/Share: $210 Q2 $63.2A $117.1E $109 .OE $175 .3E $156 .1EBook Value/Share : $2.19 Q3 $72.2A $129 4E $118 :9E $188 GE 5166.2EPrice/Book Value : 16.Ox Q4 $81 .2A $140.3E $129 .5b $198.OE 5176 .OESecular Growth: 50% Year $272.2A $485.4E $453.1E $717 . 3E $640 .3EPrice Target: NE TEV/Sales 7.6x 4 .6x 3.3x
Note: Any price target displayed in the daut box above represents either a specific price large . or the midpoint of a range .
EPS before stock-based compensation.
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 drivingan acceleration in the rate of new subscriber sign-ups in 1Q04, which we estimate aregrowing 8040 y/y compared to 38% y/v ni 2003 . As a result, Netfhx revised its 1Q04guidance including substantially higher than expected subscriber growth and the attendantimpact 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)
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Gordon I lodge 415 .364.2575 6
Thomas Weisel Pefwers LLC
Thomas Weisel PartnersMERCHANT BANKING
February 27, 2004Champions of Growth
Media & Broadcasting NETFLIX, INC.-OUTPERFORM
Gordon Hodge NFLX: ENTERING HYPER GROWTH PHASE ; ANALYST415.364.2575
DAY HIGHLIGHTSghodge@tweisel .com
Revising Estimates NASDAQ: NFLX-$33.60Lloyd Walmslev415.364 .2584
lwaimsieV@m,eisel.com Key Data FY 2003 2004 2004 P ry 2005 2005 PryPrice $33.60 EP S52-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 .32 EShares 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 Market Weight Sector Rating : MW P/E 124.44x 74.67x 24.89x
UW UnderweightStock Rating : 0
Debt/Total Capital : NM Revenue(mn)Stock Ratings PriceiTTM Sales: 7.9x Q1 $55.7A $99.9E $98 .7E $164 .7E $155.4EO 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 $188.6EU 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
NR Not Rated Price Target : NE TEV/Sales 7.3x &3x 2 .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 same
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 electro nic
Please refer 'to the end of-this ieport for a,listofunportantdisclosY res . .
Ratllls, lnc.ka:om. swm .nl om«s: Gomm Hodge (415) 36C2575
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2/27/04
Gordon Hodge 415 .364.2575 8
Thomas Weisel Partners LLC
April 1, 2004
Media & Broadcastin g
Gordon Hodge
415 .364.2575ghodge@ twveisel .com
Lloyd Walmsley415 .364 .2584lwalmslev(dtweise1 .co m
Ratings System
Sector RatingsOW OverweightMW Market WeightUW Underweigh t
Stock RatingsO OutperformP Peer PerformU UnderperformS Suspended RatingNR Not Rate dNC Not Covered
Thomas Weisel PartnersMERCHANT BANKIN G
Champions of Growth
NETFLIX, INC .-OUTPERFORM
NFLX: SUBS BETTER THAN EXPECTED AT 1 .932M ;
REITERATE OUTPERFORM
Company Update NASDAQ: NFLX-$34 .1 2
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 . Net/lia's online subscriber relationship it a
strategic, competitive advantage now and in the firture as filmed entertainment encompasses both tangible and electronic
forms .
Key Data FY 2003 2004 NO
Price: $34.12 EPS52-Week Range : $9-$40 Q1 $0.00A ($0.04)E $019E
Market Cap .(mn) : $2,193.3 Q2 $0.08A 10.14E $0.37E
Shares Out .(mn): 64.3 Q3 $0.1OA $014E $0.38E
Avg Daily Vol . : 4,796,114 Q4 $0.09A $0.20E $0.40E
Fiscal Year End: 31-Dec Year $0 .27A $0.45E $1.35E
Sector Rating : MW PIE 124 .5x 75.3x 25.27x
Stock Rating : 0
Debt/Total Capital : NM Revenue(mn )
PricefTTM Sales: 8.lx Q1 $557A $99.9E $164.7E
Net Cash / Share: $210 02 $63.2A $118.5E $185.1E
Book Value / Share : $219 Q3 $72.2A $1327E $200 .8E
Pri ce/Book Value: 15.6x 04 $81.2A $1463E $213 .8E
Secular Growth : 50% Year $2722A $497.4E $764.4E
Price Target: NE TEV/Sales 7-3x 4.3x 2.9 x
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 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 .
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Gordon I Iodge 415.364 2575 4
Thomas V eisel Partners LLC
cl Thomas Weisel PartnersMERCHANT BANKIN G
Ap ril 16, 2004Champions of Growth
Media & Broadcasting
Gordon Hodge415 .364 .2575ghodge@tweisel .co m
Lloyd Walmsley
415.364 2584l walm sl ey~!tw ei s el . com
Ratines Svstem
Sector RatingsOW Overweight
MW Market Weight
UW Underweigh t
Stock Ratings0 Outperform
P Peer Perform
U Underperform
S Suspended Rating
NR Not Rated
NC Not Covered
NETFLIX, INC.-OUTPERFORM
NFLX: TRADING SHORT TERM UNCERTAINTY FOR
LONG TERM VALU E
Revising Estimates NASDAQ: NFLX-$37 .0 2
Key Data FY 2003 2004 2004 P rv 2005 2005 Prv
Price $37 .02 EP S52-Week Range : $9-$40 Q1 $0 .00A ($0 .03)A ($0 C4)E $0.15E $019E
Market Cap .( mn) : $1,898 .5 02 $0 .08A $012E $0 14 $0 .34E $037E
Shares Out .(mn) : 51 .3 Q3 $0 .1OA $0 .20E $0 :14E $0 .41E $0 .38E
Avg Daily Vol . : 4,363,613 Q4 $0 .09A $0 .17E $030E $0 .44E $0,40 E
Fiscal Year End : 31- Dec Year $0 .27A $0 .47E $0 . 45E $1 .35E $1 .35 E
Sector Rating : MW PIE 137 .11x 78 .77x 27.42 x
Stock Rating : 0
Debt/Total Capital : 0% Revenue(mn )
Price/TTM Sales : 6 Ox 01 $55 .7A $100 .4A $9990 $172 .3E $1647 E
Net Cash/Share : $2 .84 Q2 $63 .2A $119 .6E $118.:0E $196 .1E $1851 E
Book Value/Share : $217 03 $72 .2A $138 1E $1327E $2144E $200 B E
Price/Book Value : 17 .1x 04 $81 .2A $151 .1E $1463E $232 .2E $213.8E
Secular Growth : 50% Year $272 .2A $509.2E $497.4E $B15 .OE $764.4E
Price Target : NE TEV/ Sales 8. lx 4 .6x 3 .1 x
Note : Any price target displayed in the data box above repres ents either a specific. price target or the midpoin t of a range .
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 free 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
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4)16103
Gordon Hodge 415 .364.2575 7
Thomas Weisel Partners LLC
June 29, 200 4
Media & Broadcasting
Gordon Hodge
415 .364 .2575ghodge@rweisel .com
Lloyd Walmsley
415 .364 2584
lwalmsley@;tweisel .co m
Ratings System
Sector RatingsOW Overweight
MW Market Weight
Ugh' Underweigh t
Stock RatingsO Outperform
P Peer Perform
U Underperform
S Suspended RatingNR Not RatedNC Not Covered
Thomas Weisel PartnersMERCHANT BANKIN G
Champions of Growth
NETFLIX, INC.-OUTPERFORM
NFLX: Q2 PREVIEW; POTENTIAL UPSIDE .FROM DISK
USAGE DOWNTICK
Earnings Preview NASDAQ : NFLX-$34 .00
Key Data FY 2003 20 04 2005
Price : $34 .00 EP S52-Week Range : $11-$40 QI $0 00A. ($0 .03)A $0 .15 E
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
Avg Daily Vol . : 2,375,416 04 $009A $0.17E $0 .44EFiscal Year End : 31-Dec Year $0 .27A $0 . 47E $1 .35 E
Sector Rating : MW P/E 125 .93x 72 . 34x 25 .19x
Stock Rating : 0
Debt/Total Capita l* 0% Revenue(mn )PriceITTM Sales : 5 .5x Q1 $55.7A $100 .4A $172 .3E
Net Cash/Share : $284 Q2 $63.2A $119 .6E $196 .1 E
Book Value/Share : $217 03 $72.2A $138,1E $2144E
Price/ Book Value : 15 .7x Q4 $81 .2A $151 1E $232.2E
Secular Growth : 50% Year $272.2A $509.2E $815 .0 E
Price Target : NE TEV /Sales 8. lx 4.6x 3.i x
Note : Any price target displaved in the data box above represents either a specific price target or the midpoint of 2 range .
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
er ending sub numbers pre-marketa seasonal decline in disk usage . Netflix reports June quar t
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.
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95912004
Gordon Hodge 415 .364 .2575 4
Thomas Wciscl Partners LLC
Media & Broadcasting
Gordon Hodge
415364.2575ghodge@tweisel .com
Lloyd Walmsley415 .364 2584lwalmsley(ritw ei sel .com
Ratings System
Sector RatingsOW OverweightMW Market WeightU%\' Underweigh t
Stock RatingsO OutperformP Peer PerformU UnderperformS Suspended RatingNR Not RatedNC Not Covered
NETFLIX, INC.-OUTPERFORM
NFLX: INCREASING Q2 AND 2004 ESTIMATES ;
REITERATE OUTPERFORM
Raising Estimates NASDAQ: NFLX-$35 .9 5
Key Data FY 2003 2004 2004 P rv 2uuo zuus r rv
Price $3595 EP S52-Week Range : $11-$40 Q1 $0 .00A ($0 .03)A ($0 .03)A $0 .15E $015 5
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
Avg Daily Vol .: 2,325,013 Q4 $0 .09A $0 16E $0 .17E $0 .44E $044E
Fiscal Year End : 31-Dec Year $0 . 27A $0 .50E $0 ,47E $1 .35E $1 .35E
Sector Rating : MW P/E 133 . 15x 71 .90x 26 .63x
Stock Rating : 0
Debt/Total Capital : NM Revenue(mn )Price/TTM Sales: 5.8x Q1 $553A $100 4A $100 .ilA $172.OE $172 .3 5
Net Cash/ Share : $2 .84 Q2 $632A $120 .8E $119 .6E $197 .1E $1961 5
Book Value / Share : $217 03 $72 .2A $1390E $138 .15 $215 3E $2144 5
Price /Book Value : 16 .6x 04 $81 .2A $150 4E $151 tE $231 .4E 5232.2 E
Secular Growth : 50% Year $272.2A $510 .6E $5092E $815 .7E 5015 .0E
Price Target: NE TEV / Sales 7 .8x 4. 5x 3 .0x
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. We 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 guidance of 1 .935 - 2. 140 million and 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
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2006E
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1709 2012 2172 2316 208 71630 1934 21
an2272 1984
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f t 57 1 49 S 134 S 140S 143 S 1.35 S 135 S 1 .35 S 1,35 S 1.35 S 125 S ' 25 S 1,25 S 1 .25 S 125
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36 3.0 36 04 14.5 70 5.2 53 6.2 23.5 92 69 I2 6.3 31 .6S 6.71 S
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06 08 1.0 12 3.9 1.3 1.3 13 1.3 5.0S t1T f 243
$
261 $ 27 L4 3 f 1 .61 S 222 f 2.19 S 1 .68 f 1 .95 f 1'39 S 187 S 110.0 S "x .59 S 1653 318' $ 30.45 f 31 (1 5 3269 f 3512 35 f 3521 $ 301f 3 SF2 S 0
3 10.0 12,2 4,6 9 26.7 203 20.4 234 90.8 34.6 263 269 300 116.6
f 1940 $ 9.12 S 1949 $ 19 .36 f 1933 $ 1941 S 19,93 9 21 .26 $ 21 .00 $ 2050 $ 2064 $ 2105 $ 21 .30 $ 2" OS $ 2107
v9f 4 M f 3.90 f I" I S 3.70 Sf 231 S 265 S 337 S 3 .55 f1 431 f 4 .37 f 454 f 4.54 fS 259 5 238 $ 245 S 243 S
S 5.70 f 5 .65 S 596 f 5.66 f2956 29 .6% 306% 29.214
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365 S
308 f
4 .45 S
2 .44 S
5.n 6
296%
5T
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353 S
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231 S
4.66 f
250%
6 G6
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3SC S 3,1 S
501 S 524 5
229 $ 233 f
559 S 6 .26 S261% 2940
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5.96 S284%
60.40,1 Hods. (415) 3642575
360 S
388 S
516 S
232 $
5.74 f25 0%
fib 08 663.40 $ 340 S 340 1
364 f 3% S 410 $524 1 5 24 S 5.24 1
2.33 $ 2 33 S 2 .54 1
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6B G
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4 S 402524 S 524
2 .33 $ 23 3
5.95 S 6 .0628.3% 289 %
Gordon Hodge 415 .364 .2575 4
Thomas Wciscl Partners LLC
Media & Broadcasting
Gordon Hodge
415.364 .2575
ghodge@tweisel .com
Lloyd Walmsley415 .364.2584
Ratings Syste m
Sector RatingsOW Overweight
MW Market Weight
UW Underweigh t
Stock RatingsO Outperform
P Peer PerformU UnderperformS Suspended Ra ting
NR Not Rate d
NC Not Covered
NETFLIX, INC.-OUTPERFORM
NFLX: DON'T NITPICK NETFLIX; CONSUMER
DEMAND SUPPORTS OUTPERFORM
Revising Estimates NASDAQ: NFLX-$32 .00
Key Data FY 2003 2004 2004 Prv 2005 2005 PrvPrice $32.00 EPS52-Week Range : $11-$40 Q1 $O .OOA ($0 .03)A kt3 $0 t5E$0 .14EMarketCap.(mn) : $2,079 .2 02 $0 .08A $0 .11A 074)= $0 .35E 033E ,Shares Out.(mn) : 65 .0 Q3 $0 .10A $0 .18E , a`$021E' ?3 d2E.$0.39EAvg Daily Vol . : 2,313,502 04 $0 .09A $0 .19E 30ta6E $0 .42E °'30 .44E ,Fiscal Year End : 31-Dec Year $0 .27A $0 .45E 050E $1 .30E '$1 35ESector Rating : MW P/E 118 .52x 71 .11x 24.62xStock Rating : 0
Debt/Total Capital : NM Revenue(mn )Price/TTM Sales: 5 .6x Q1 $55 .7A $100.4A bq-01 $172.9E' 172 :O ENet Cash/Share: $2 .36 Q2 $63.2A $120 .3A 4120 .8E $198.5E 4197a EBook Value/Share : $2 .31 03 $722A $139.5E 0E $218.5E $215 .3 EPrice/Book Value : 13 .8x Q4 $81 .2A $151.3E i 4E
5$235.7E 2314 E
Secular Growth : 50% Year $272 .2A $511 .5E f0 .6E* $825.7E S 15 .7EPrice Target : NE TEV/Sales 6. 9x 3.8x 2.3x .' : ..
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 offeringconsumers a deep selection of DVDs for predaminantly ;21 .95 a month. Netf1tx' 'r online subscriber relationsbip is a
strategic, competitive advantage now and in the .future as filmed entertainment encompo res both tangible and electronic
forms.
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Gordon Hodge 415.364.2575 6
Thomas Weisel Partners LLC
Thomas Weisel Partners
July 19, 2004
MERCHANT BANKIN G
Champions of Growth
Media & Broadcasting
Gordon Hodge
415 .364.2575
Lloyd Walmsley
415 .364 .2584
lwalrnsley@tweisel .co m
Ratings System
Sector RatingsOW OverweightMW Market WeightUW Underweigh t
Stock RatingsO Outperform
P Peer PerformU UnderperformS Suspended RatingNR Not RatedNC Not Covered
NETFLIX, INC.-PEER PERFORM
NFLX: BLOCKBUSTER BETA PRICE MORE AGGRESSIVE
THAN EXPECTED; DOWNGRADING RATIN G
Rating Downgrade TIASDAQ: NFLX-$23.02
Key Data FY 2003 2004 2004 Prv 2005 2005 PrvPrice $23 .02 EP S52-Week Range : $11-$40 Q1 $0 .00A ($0 .03)A '($0 .03)A $0 .16E 5014EMarket 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 EAvg Daily Vol . : 2,147,265 04 $0 .09A $0.19E $019E $0 .27E $0 42 EFiscal Year End : 31-Dec Year $0 .27A $0.45E $0 .45E $1 .00E S1 .30 ESector Rating : MW P/E 85 .26x 51 . 16x 23 .02xStock Rating : P
Debt/Total Capital : 0% Revenue(mn )Price)TTM Sales : 4 .Ox Q1 $55 .7A $ 100 .4A - $100.4A $ 167.0E $172'9ENet Cash/ Share: $2 .36 02 $63 .2A $120 .3A $1203A $180.7E $198 .5EBook Value/Share: $2.31 Q3 $72.2A $ 139.5E $139.5E $ 188.1E ~ $218 :5EPrice/Book Value : 10 .0x 0 4 $81 .2A $151 .3E $1511E`- $ 192.8E 1235 .7 ESecular Growth : 40% Year $27 2. 2A $511.5E $511 .5E _1 ' $728. 6E 5825 .7 EPrice Target : NE TEVISales 4 .8x 2 . 6x 1 .8 x
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.
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Gordon Hodge 415 .364.2575 5
Thomas Weisel Partners LLC
Thomas Weisel PartnersMERCHANT BANKING
October 4,2004Champions of Growth
Media & Broadcasting
Gordon Hodge415 .364 .2575ghodge®tweisel .com
Lloyd W almslev415.364 .2584lwalmsleyCftwei sel .com
Ratings System
Sector RatingsOW OverweightMW Market WeightUW' Underweigh t
Stock RatingsO OutperformP Peer PerformU UnderperformS Suspended Rating
NR Not Rated
NC Not Covered
NETFLIX, INC.-PEER PERFORM
NFLX : SUBS LIGHT BUT PROFITS Up; ACCOUNTING
CHANGE BOOSTS EPS
Revising Estimates NASDAQ: NFLX-$17 .2 5
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 astrateair, ron etitim adzwnline non and in the future as filmed entertainment encompasses loth tangible and electrmtis
forms .
Key Data FY 2003 2004 2004 Pry 2005 2005 P rvPrice $17.25 EPS52-Week Range: $14-$40 01 $O.OOA (SO 03)A ($0 .03)A $017E S0,16EMarket Cap .(mn ) : $1,120.8 Q2 $0.08A $0 11A $011A $036E 3030EShares Out .(mn): 65.0 Q3 $0 .1OA 60 .31E $0 .130 $0.31E SC 26EAvg Daily Vol . : 2,736,633 Q4 $0.09A $025E $0.19E $030E $027EFiscal Year End: 31-Dec Year $0 .27A $0 . 65E $0.45E $1 .15E S1 .00ESector Rating : MW P/E 63 .89x 26 .54x 15.00xStock Rating : P
Debt/Total Capital : NM Revenue(mn )Price/TTM Sales: 3.Ox 01 $55.7A $100 .4A $100.4A $163 7E 3167 .00Net Cash /Share: $236 02 $63.2A $120 .3A $120 .3A, ; $179 OE 01807EBook Value / Share: $2.31 Q3 $72.2A $137 .7E $139 .50 $1872E 5188 1EPri ce /Book Value : 7.5x Q4 $81.2A $147 .4E $151 :30 $192 .4E $19580Secular Growth : 35% Year $272.2A $505.8E $511 .5E' . $722 .3E $728 .6EPri ce Target : NE TEV/Sales 3.5x 1 .9x 1 .3x
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.
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Gordon }lodge 415 .364.2575 4
Thomas Weisel Partners LLC