The pro-forma cash flows were estimated by taking into consideration the following assumptions:

As the Netflix provided services to 155000 clients in March, out of which 120000 were the paying subscribers, we assumed that 35000
new clients will join to the company each month, and based the retention probabilities (70% after one month, out of which 40% will stay
more than 6 month) we estimated the matrix of clients (Exhibit 1),
Per month subscription pay 17.95$,
Shipment 1$ per DVD,
Each client watches 5 DVDs per month (800000/155555=5 on March),
Cost of each DVD 10$,
DVD stock per subscribe = 4 (620000/155000=4), (CAPX),
New release movie titles 11% of the whole (as in Blockbuster 500/4500),
Tax rate 35%,
Terminal growth year after 5 years 5%.

The pro-forma statements are shown in Exhibit 2 & 3. As the estimated operating margin increases in 2000 by nearly 30%, we assumed that the
trend will continue during the next 4 years. From then on we assumed that the FCFF will grow by 5% perpetuity.

Exhibit 1 Matrix of New Subscribers

0
1
0 35000 24500
1
35000
2
3
4
5
6
7
8
9
10
11
12
Total
clients 35000 59500
Paying
Subscribers
0 24500
New
clients 35000 35000

2
22050
24500
35000

3
19600
22050
24500
35000

4
17150
19600
22050
24500
35000

5
14700
17150
19600
22050
24500
35000

6
12250
14700
17150
19600
22050
24500
35000

7
9800
12250
14700
17150
19600
22050
24500
35000

8
9800
9800
12250
14700
17150
19600
22050
24500
35000

9
9800
9800
9800
12250
14700
17150
19600
22050
24500
35000

10
9800
9800
9800
9800
12250
14700
17150
19600
22050
24500
35000

11
9800
9800
9800
9800
9800
12250
14700
17150
19600
22050
24500
35000

12
9800
9800
9800
9800
9800
9800
12250
14700
17150
19600
22050
24500
35000

81550 101150 118300 133000 145250 155050 164850 174650 184450 194250 204050

46550

66150

83300

98000 110250 120050 129850 139650 149450 159250 169050

35000

35000

35000

35000

35000

35000

35000

35000

Assumption: Out of 35000 new subscribers the 60% will leave the company within 6 month proportionally.

35000

35000

35000

Exhibit 2. Change in Operating Income for 12 months

1

10

11

12

Paying
Subscribers

24,500

46,550

66,150

Revenue

439,775

835,573

1,187,393 1,495,235 1,759,100 1,978,988 2,154,898 2,330,808 2,506,718 2,682,628 2,858,538 3,034,448

CoGS

126,452

240,258

341,419

429,935

GP

313,323

595,314

845,973

1,065,300 1,253,294 1,409,955 1,535,285 1,660,614 1,785,943 1,911,273 2,036,602 2,161,931

Sales and
Marketing

180,645

180,645

180,645

180,645

180,645

180,645

180,645

180,645

180,645

180,645

180,645

180,645

Depreciation 414,000

416,994

419,689

422,085

424,181

425,978

427,475

428,673

429,871

431,068

432,266

433,464

245,639

462,569

648,467

803,332

927,164

1,051,296 1,175,428 1,299,559 1,423,691 1,547,822

Operating
Income

(281,322) (2,325)

83,300

98,000

505,806

110,250

569,032

120,050

619,613

129,850

670,194

139,650

720,774

149,450

771,355

159,250

821,935

169,050

872,516

*Cost of goods sold includes the 1$ costs for shipment of per DVD. As the majority part of the sales and marketing costs were due to the new
subscribers, who did not pay fees, the costs are estimated by taking into consideration that 35000 new subscribers will order 5 DVDs per month.
Depreciation is calculated as the depreciation of the existing assets per month plus the additional depreciation, that will occur due to the
increase in CAPX (life cycle 3 years=36 months). The other costs are assumed unchanged.

Exhibit 3. Estimation of FCFF and Value of the Company

2000
EBIT

2001

(20,729,679) 6,420,479

TAX 35%

2002

2003

2004 Terminal Year

14,829,534 34,252,129 79,112,965

2,247,168

5,190,337

11,988,245 27,689,538

5,105,744

5,580,963

6,056,181

6,531,399

7,006,618

5,702,620

5,702,620

5,702,620

5,702,620

5,702,620

(21,326,555) 4,051,654

9,992,758

23,092,664 52,727,425

(19,746,810) 3,473,640

7,932,573

16,973,797 1,291,874,377

Depreciation

CAPX
change in NWC

FCFF
1,845,459,869

PV
Value of the company

1,300,507,578

*No change in NWC is assumed. CAPX will be the same for each 5 years, and the depreciation will grow as capital expenditures increase. WACC =
8%, the number as in Blockbuster in the same year.