April 23rd, 2012 Dear Fellow Shareholders, Netflix added nearly 3 million streaming members in Q1, bringing our total

to over 26 million global streaming members, and strengthening our position as the world’s leading Internet TV network. We anticipate returning to global profitability in Q2, and plan to launch our next international market in Q4. We are constantly improving our service with better personalization, better user-interfaces, better streaming, and more content. As a result, per-member viewing hours set new records in Q1 and are on track to do so again in Q2, on a year-over-year basis. We launched our service in the UK and Ireland in January and are very pleased that, after the first 90 days, we had substantially more members than we had after the first 90 days of Canada or Latin America.
(in millions except per share data)

Q2 '10 -

Q3 '10 -

Q4 '10 -

Q1 '11 -

Q2 '11 -

Q3 '11

Q4 '11

Domestic Streaming:
Net Subscription Additions Total Subscriptions Paid Subscriptions Revenue Contribution Profit Contribution Margin

Q1 '12 G id

0.22 1.74 21.45 21.67 23.41 20.51 20.15 22.02 - $ 476 $ 507 - $ 52 $ 67 10.9% 13.2%

International Streaming:
Net Subscription Additions Total Subscriptions Paid Subscriptions Revenue Contribution Profit (Loss) - $ - $ 0.13 0.13 - $ (3) $ 0.38 0.51 0.33 4 $ (9) $ 0.29 0.80 0.67 12 $ (11) $ 0.16 0.97 0.86 19 $ (9) $ 0.51 1.48 0.99 23 $ (23) $ 0.38 1.86 1.45 29 $ (60) $ 1.21 3.07 2.41 43 (103)

Domestic DVD:
Net Subscription Additions Total Subscriptions Paid Subscriptions Revenue Contribution Profit Contribution Margin Revenue $ $ 520 $ 130 $ 553 $ 130 $ 592 $ 152 $ 706 $ 187 $ 770 $ 213 $ (2.76) (1.08) 13.93 11.17 10.09 13.81 11.04 9.96 - $ 370 $ 320 - $ 194 $ 146 52.4% 45.6% 799 $ 219 $ 847 $ 246 $ 826 213

Total Domestic (Streaming + DVD, for historical comparison):
Y/Y Change 27% 40% 31% 46% 33% 55% 43% 68% 48% 64% 44% 68% 43% 62% 17% 14%

Contribution Profit
Y/Y Change

Y/Y Change

$ $ $

520 $

553 $

596 $

719 $

789 $

822 $

876 $


Net Income (Loss)
Y/Y Change

44 $

38 $

47 $

60 $

68 $

62 $

35 $


Y/Y Change

0.80 $

0.70 $

0.87 $

1.11 $

1.26 $

1.16 $

0.64 $


Free Cash Flow Buyback Shares (FD)

$ $

34 $ 45 $ 54.3

8 $ 57 $ 53.9

51 $ - $ 54.2

79 $ 109 $ 54.2

60 $ 51 $ 53.9

14 $ 40 $ 53.9

34 $ - $ 55.4

2 55.5


given the same gross add quarterly distribution as in 2010.S. despite Q2 gross adds following the traditional seasonal pattern. In other words. equivalent to a 13% contribution margin. and despite us expecting to match 2010 in annual net additions. that continue to ensure a steady flow of new titles to the service. We exceeded our domestic streaming contribution margin target of around 11%. We have included an appendix at the end of this letter to illustrate this. we are targeting 100 bps of average margin expansion per quarter. and that gross adds will approximately follow the 2010 seasonal pattern. For Q3 onward.Domestic Streaming Q1 Results Domestically. adding 1. We see nothing new or particularly concerning this quarter to date in our member viewing. we have more net add quarterly seasonality this year due to our larger starting membership base for the same amount of annual net adds.7 million total net additions (and 1. acquisition and retention. while also benefiting from our established relationships with all major producers of film and TV in the U. Q2 net adds will be below those of 2010. We think our 2012 domestic streaming net adds will be about the same as in 2010 (about 7 million). streaming contribution margin will expand in Q2 to about 15%. due to slightly lower than expected content. delivery. All are healthy.S. steady improvement to the Netflix user-interfaces and personalization algorithms. and reaching 23. Going forward.9 million paid net additions) in the quarter. we continue to sign new agreements to bolster our content offering. it is inherent that the quarterly variation in net adds is amplified. Outlook – Increased Seasonality in Net Adds We anticipate that U. we achieved strong quarter-over-quarter growth in streaming members. and customer service expenses. Due to this increased net add quarterly seasonality. and the same annual net adds. consistent with our January guidance. As we stated in our January letter. all continue to contribute to incremental improvements in our domestic streaming business and the resulting member growth. New content additions. At the same time. we have meaningfully increased the quantity and quality of the TV shows and movies on the service. and the receding impact of last year’s brand hit. The domestic streaming segment delivered $67 million of contribution profit.4 million total streaming members. we are growing content 2 . Domestic Content Library As a result of the significant investments in our streaming library over the last 18 months.

the most watched episode of “Mad Men” on any given day on Netflix is the first episode of the first season. we continue to add new seasons of existing series every quarter. on Netflix continues to grow. In the past. Meanwhile. “Being Human (U. Notably. “In the Land of Blood and Honey”. we recently announced our first deal with Hasbro. In addition. ended in February. but slower than domestic streaming revenue growth to allow for margin expansion. The Starz deal for 15 Disney Pay TV 1 output titles. We recently announced a new multi-year licensing agreement with The Weinstein Company that will make foreign language. This means we are still growing the fan base for this show nearly 6 years after it first premiered on television. 3 . Meanwhile. and our viewing per member is at a record high level. like “Breaking Bad”. and “Justin Bieber: Never Say Never”. There was no discernible change in churn or viewing levels. our content is stronger than it has ever been. Feature Films In Q1.S.S.)” from Muse Entertainment. the action-thriller “Killer Elite” distributed by Open Road Films will come to Netflix along with several films from Film District including Golden Globe nominee for Best Foreign Language Film. we have said that our licensing of complete back seasons of on-air TV series is not only a great experience for Netflix members. we added several notable new release Pay TV 1 feature film titles to the service. this year’s Academy Award winner for Best Picture “The Artist” and Best Documentary “Undefeated” will be shown in their Pay TV 1 window exclusively on Netflix. titles arriving from Epix are getting even better with “Thor” and “Transformers: Dark of the Moon”. As a result. “Rango”. and Comedy Central’s “Workaholics” from Viacom Media Networks. also coming this quarter. We saw this demonstrated recently with the premiere of Season 5 of “Mad Men” on AMC achieving its biggest audience yet (20% higher than last season’s premiere). Even now. including Academy Award winner for Best Animated Feature. subsequent to the first four seasons becoming available on Netflix last summer. as we added shows like “Supernatural” and “90210” from the CW. TV Content Our selection of TV content also got stronger in Q1. “The Lincoln Lawyer”. and “The Rum Diary” starring Johnny Depp. but can help build the audience for new seasons. the volume of exclusive titles we receive through agreements with several minimajor distributors will steadily increase. our studio partners continue to provide additional high quality catalog product. “Drive”. AMC’s “The Killing” and A&E’s “Breakout Kings” from Fox. On a year-over-year basis. “Criminal Minds: Suspect Behavior” and the Showtime series “United States of Tara” from CBS. the trend towards watching episodic TV. documentary and certain other movies exclusively available for Netflix members in the U. Instead. plus some catalog films. critically acclaimed actiondrama. Looking forward to Q2. Meanwhile. providing Netflix with a wide variety of new kids content including “My Little Pony” and “Transformers: Prime”.spend sequentially every quarter.

Comcast could raise the cap and make it apply equally or just eliminate the caps. While we have ten times more domestic paid members. Comcast caps its residential broadband customers at 250 gigabytes per month.2 million total net additions (and nearly 1 million paid net additions). and data to the Xbox is Internet data. International Streaming We surpassed 3 million total international streaming members this quarter. we do watch them carefully. and has continued its platform (Wii) and country (Japan) expansion. both HBO GO as well as Comcast’s Xfinity application became available on the Xbox. Comcast announced its Streampix streaming service available to current Comcast subscribers. The only difference between the Xfinity Xbox data and Netflix Xbox data is the Xfinity data is favored by Comcast exempting it from the cap. The Xfinity Xbox app “speaks” TCP/IP like any other Internet device. On the Xbox. and authenticated streaming offerings of the MVPDs and cable networks (TV Everywhere). But Comcast has decided that its own Xfinity Xbox app is not subject to this 250 gigabyte cap. Consistent with this view. and the HBO GO app. we believe. DVR. we don’t currently see any meaningful near-term impact on our business from these developments. we began to see the consumer promise of TV Everywhere emerge in Q1. or Not At All.S. Given Amazon’s size and ambitions. and adding 1. Net neutrality principles mean a level playing field for all Internet applications. We think they are still substantially behind Hulu in viewing hours. This is not neutral in any sense. 4 .Domestic Streaming Competition We compete for consumers’ viewing time with a very wide range of video sources. Amazon continues to grow its U. the Hulu app. works over a consumer’s home wifi. we continue to track their progress carefully as well. Just six quarters after our first international market launch. including linear TV (MVPD and free-to-air). members account for nearly 12% of total (and 10% of paid) Netflix streaming members.S. As we’ve often said. growing 65% sequentially. The Xbox is a pure Internet device with a single IP address. When the Xfinity Xbox app uses lots of bandwidth. Additionally. it competes for that bandwidth with all other Internet usage and users in the home. we see the biggest long-term competition for viewing hours from MVPDs and cable networks through their TV Everywhere offerings. our non-U. Hulu launched its first original series. and we added over three times more domestic net additions than Hulu in Q1. Among recent developments. Most of their viewing. are all subject to this cap. Given the superiority of our content selection. video content library available through Amazon Prime. Internet Caps Should Apply Equally. is from current-season broadcast-network content. user interfaces and device ubiquity. the Netflix app. over-the-top (OTT) pure plays such as Hulu and Amazon Prime Instant Video. with all major networks and many MVPDs investing in their Internet applications and taking steps to evolve to Internet TV networks.

“Pulp Fiction”. and “Angels & Demons”. including Pay TV 1 and 2 titles like “Insidious”. From our experience to date. Canada Canada continues to be a strong market for Netflix. In the coming months. whose deals we estimate account for around 6%. Without details on consumer pricing or content selection. In January. such as. we have found that the existence of competition can be beneficial for driving interest and demand in our service. in turn. In the UK and Ireland we launched with our most broad-scale Facebook integration to date.S. Ultimately. “Horrid Henry: The Movie”. “The Godfather”. our upcoming offerings account for 20% of UK box office year to date. From the start. Netflix will be the Pay TV 1 UK home of “21 Jump Street” and “The Hobbit” from MGM. 5 . compared to our competitor LOVEFiLM. we continue to believe our biggest competitors will be Sky Movies and Sky Atlantic (and potentially Sky’s yet-to-be-launched Now TV streaming service). we launched with an impressive and diverse base of movies and TV shows. networks and three key local channels. We are particularly excited to be the UK and Ireland TV premiere destination for shows like. we believe we are well positioned to succeed in the UK and Ireland based on our content selection as well as our superior streaming technology. we’ll be able to add further to the content library. “The Woman in Black” from Momentum and the recent monster hit “Hunger Games” from Lionsgate. Social TV show and movie discovery is heavily used by our Facebook connected members. It is premature to know how it will play out. with previous seasons of current shows from the major U. “Breaking Bad” and “It’s Always Sunny in Philadelphia”. and are pleased with the level of consumer engagement. and we ended the quarter with nearly double the members we had a year ago. Lately. we’ve offered members new movies from our existing deals. as well as LOVEFiLM. as well as iconic catalog titles. that then may provide an opportunity for Netflix to bid earlier for major studio deals than otherwise would have been the case. increases their willingness to try Netflix. we achieved the highest net additions we’ve ever seen in the first 90 days of an international market launch. Collectively. Our TV offering is also strong. Member growth remained healthy in Q1. If the UK Competition Commission eventually forces Sky Movies to not control the Pay TV 1 output from all six major studios. The existence of other over-the-top (OTT) streaming and on-demand services creates a high level of product understanding and acceptance among consumers and that. it remains unclear whether Sky’s Now TV will be a meaningful competitor. While the UK is a very competitive market.UK and Ireland The largest driver of growth in international members in Q1 was the launch of our service in the UK and Ireland at the beginning of January. and as our membership continues to grow. and “Top Gun”.

S. and we are rapidly learning. this lack of OTT competition means that the concept of on-demand streaming video (outside of piracy and YouTube) is nascent. Just this month. “Couples Retreat”. We are also licensing for our members some great Canadian content. we intend to steadily increase our contribution margin in much the same way as we are doing for our U. during the quarter. “Thor”. Even with our continued content investment. with “Kung-Fu Panda II” and “Captain America” coming soon. and “Saving Private Perez” (the top Mexican film of 2011). Finally. streaming business. making it a more challenging environment than our other markets.” three of the top rated shows from the Canadian Broadcasting Company (CBC). For example. including Best Picture winner “The Artist” in June. “The Incredibles”. low device penetration. Long-term. and “Mr. Latin America As mentioned in our January investor letter. Our revenue and membership is growing in Latin America. and “Transformers: Dark Side of the Moon”.Our on-going investment in new content for Canada is driving increased engagement and hours viewed. profitable business in Latin America are very good. under-developed Internet infrastructure and relatively low credit card usage as well as general consumer payment challenges for ecommerce. requiring us to do more work in driving consumer understanding and acceptance of our streaming service. “Twilight: New Moon”. In Q1. through our Pay TV 1 deals we’ve added such blockbusters as. made possible by the continued strength of member growth and increased efficiency of our marketing spend. To offset these challenges and improve the consumer experience. The odds of us building a large. many banks turn down all ecommerce debit card transactions due to fraud risk. we have been continually expanding the content offering. we anticipate a small contribution profit in Canada in Q2 and will remain profitable in this market going forward. but it will take longer than we initially thought. Latin America differs significantly from our other markets. Latin America presents unique infrastructure challenges relative to our other markets. and “Something Borrowed”. we increased our subtitle coverage to nearly 100% of non-kids English language content (in addition to previously available dubbing) to accommodate varying viewing preferences. “Insidious”. including “Dragon’s Den”. In addition. we’re very focused on optimizing our payment processing to continue to improve free trial conversions to paid members. This is a quarter earlier than our January expectations for Canadian profitability. For Q2. as well as exploring adding new payment methods to expand the addressable market of consumers. 6 . we added new series to our TV offerings including. as well a host of popular feature films including. namely. “Arctic Air”. and “From Prada to Nada”. “Ancient Aliens” and “Charmed”. While there is limited current OTT streaming competition in the region (different from the UK). “Gnomeo & Juliet”. we are beginning to ramp up the number of Pay TV 1 titles on our service. In Q1. “Dexter”. D.

representing a 46% contribution margin. We expect subtitling costs to continue to be meaningful as we launch additional non-English markets in the future. international revenue of $43 million was up more than 3X from a year ago. international contribution loss is expected to sequentially improve to a range of between ($98) and ($86) million. As a result. Our early success in Canada – sustainably profitable less than 2 years after launch – is probably unusual given the proximity of Canada to the U.1 million.Total International Results & Outlook In Q1.S. Product Improvement & Partnering We are constantly working to improve the Netflix experience so our members can easily sign up. The domestic DVD segment delivered $146 million of contribution profit in Q1. We expect contribution margin to be roughly flat in coming quarters. we incurred increased subtitling costs in Q1 which have been capitalized into the content library ($5 million. About 7 million of these 10 million also subscribe to our streaming service. Given our expected return to global profitability in Q2. Contribution loss of $103 million was better than anticipated due to slightly higher revenue combined with lower than expected content. while in the UK and Ireland. we believe DVD will continue to decline but at a slower pace than the past few quarters. and how well we’ve been received in the UK. and in-line with expectations. find something great to watch and then relax and enjoy our service. In Q2. As mentioned above. slightly better than our expectations. subtitling and marketing expenses. we improved our Latin American customer experience by increasing subtitle coverage to nearly one hundred percent of non-kids content. such costs were immaterial and expensed as incurred. Going forward. and the growth of members and revenue in Latin America and the UK and Ireland to lower the contribution loss in each of those markets. Assuming continued success. we expect to roughly match the roll-out of new markets to global profitability for the foreseeable future. So. In total. we expect Canada to deliver a small profit. allowing members to share what they watch on 7 . and additional markets we can enter with confidence. our forecast incorrectly assumed $5 million in expense. we launched our most thorough Facebook integration to date. and the broad pre-launch awareness of our brand. net of amortization). we’ve decided to open an additional attractive European market in Q4 of this year. Q1 was no exception in terms of continual improvements to the service. DVD DVD members declined this quarter to 10. we expect Latin America and the UK and Ireland to take longer than 8 quarters to reach sustained profits as we build membership and invest in content improvements. In connection with our Latin American market. Last year.

and can provide a very simple way to add a Netflix line item to the existing bill. and that the integration has gone so well. In particular. has been great. which is how we evaluate content 8 . 8pm on Sunday. based on successful test results. and can use Netflix on multiple devices. The Apple TV relationship covers all of our markets. we are happy to report that in terms of cost per viewing hour. In March. In cases where these firms have an efficient means to generate demand for Netflix. We’ll take it slowly. We’ll take it year by year. and Wii. and others. We’ve been very pleased that this simplification for new users has been popular. to achieve our long-term ambitions. as well as for “Lilyhammer” and “House of Cards”. like international.Facebook and giving them the ability to get great viewing ideas from their friends. we rolled out a smarter personalization algorithm to determine members’ Top 10 suggested title lists. it may make sense for us to let them bill on our behalf. with members discovering these new franchises much in the same way they’ve discovered and come to love shows like “Mad Men” and “Breaking Bad. for the highly anticipated new season of “Arrested Development”. and see how good we can get at originals for our members. major retailers. launching our “Just for Kids” feature on the PS3 as a follow up to the successful launches of this feature on the website. including ISPs. Another way to think of originals is vertical integration. it will elevate our consumer brand and drive incremental members to the service. so we don’t expect overnight results. we can give producers the opportunity to deliver us great serialized shows and we can cost-efficiently build demand over time. Our Apple TV integration is one example where we have accomplished that. Finally. we are now treating it as a capability we should build. can we remove enough inefficiency from the show launch process that we can acquire content more cheaply through licensing shows directly rather than going through distributors who have already launched a show? Our on-demand and personalized platform means that we don’t have to assemble a mass audience at say. to watch the first episode. we launched a deeper integration with the Apple TV. Original Programming When we embarked on original programming. The breadth of media coverage we already get. Apple TV. If we are able to generate critical success for our originals.” In this regard. That took HBO nearly a decade to accomplish. MVPDs. We’ve gained enough confidence and perspective that we now view it as a strategic expansion. it was a strategic experiment. we must make sure we’ve got the right customer support and financial integration. though. Many companies like Apple already have a billing relationship with millions of people. Instead. allowing consumers to sign up for Netflix directly on device and pay via their iTunes account. while maintaining a direct relationship with our members. to ensure the member experience is actually simpler. Members who sign up through Apple TV are full Netflix members. One way to think of originals is in terms of brand halo. What is still uncertain is when or whether we will take it beyond 5% of our large content spend. We also continued our efforts to better serve families.

The show has driven millions of hours viewed.efficiency. As described above. in addition to slightly lower global Tech & Dev and G&A costs than anticipated. we don’t face the same pressure as linear or ad-supported online networks to deliver ratings. FX in this case would seek to monetize prior seasons of their next hit in parallel to how HBO does. In terms of early results. At the same time. Looking forward to Q2. we announced another original premiering in 2013. as well as expedite reaching such global scale that will allow us to license global content rights economically. as well as a very broad and already segmented audience. As a result. and critical acclaim. As long as we can better monetize prior seasons. FX chooses not to license us prior seasons of their next hit as good as “Sons of Anarchy”. we expect to invest the growing profits from our domestic business in additional global expansion in order to both position ourselves to be the first to scale in each of our international markets.08) per share. only on “FX GO”. a one-hour 13 episode series from Eli Roth and Gaumont International TV based on Brian McGreevy’s gothic horror novel. say. we exceeded our targets on “Lilyhammer” in terms of PR. in case. Finally. looking past Q2 and our expected return to international expansion this year. while improvements in profitability in each of the international markets will reduce the international losses by approximately $11 million (based on the midpoint of guidance). a third way to think about originals is as a hedge. viewing. Global Profitability: Q1 Results & Outlook Q1 net loss of ($5) million. “Hemlock Grove”. we have extensive user viewing history and ratings data to allow us to better understand potential appeal of future programs. we will have some advantages relative to our competitors. was better than our expectations. As we build our capability in originals. This is a real advantage over our regional competitors. “Lilyhammer” so far performs in line with similar premium exclusive content that we currently license. we are forecasting a much earlier return to global profitability than anticipated on a Q2 net income / (loss) range of ($6) to $8 million. then this scenario is not likely. is rated highly (4 out of 5 stars on average) and generated hundreds of millions of consumer impressions with a comparatively small PR and marketing spend. through both scale and technology. as well as increased efficiency of our content and marketing spending. we should be able to use our size and international scale to bring the best original and exclusive content from anywhere in the world to anywhere in the world. Namely. predominantly driven by the outperformance in both domestic and international streaming contribution profit. sequential growth in domestic streaming contribution profit will offset the decline in DVD contribution profit from Q1. in other words. We know we have a lot to learn in the originals area. Finally. In the quarter. 9 . except from a premium TV competitor like HBO that is strategically motivated to impede our growth. than anyone else. and ($0. The improvement in the outlook is a result of continued member growth (both domestically and internationally).

95 m to 9. depreciation expense in excess of PP&E purchases. We finished the quarter with $805 million in cash and equivalents.6 m to 24.3 m to 22.0 m 2.8 m to 3. Originals will not materially impact free cash flow until the second half of this year and will ramp in 2013 as we add more original programs.14 10 .Free Cash Flow In Q1.9 m to 9.35 m 8.10) to $0.3 m $287 m to $294 m $126 m to $138 m Consolidated Global: Net Income (Loss) EPS ($6 m) to $8 m ($0.45 m to 4. FCF and net income track each other reasonably closely with the primary exception of payments for original content. Significant sources of cash flow in the quarter (relative to net income) were non-cash stock compensation. which more than offset cash payments for content (in excess of the P&L expense) and cash payments for taxes relative to the P&L benefit for income taxes. we generated positive FCF of $2 million.9 m $526 m to $534 m $72 m to $84 m International Streaming Total Subscriptions Paid Subscriptions Revenue Contribution Profit (Loss) 3. In general. and accrued interest on our notes. Business Outlook Q2 2012 Guidance Domestic Streaming: Total Subscriptions Paid Subscriptions Revenue Contribution Profit 23.2 m 22.25 m $60 m to $67 m ($98 m) to ($86 m) Domestic DVD: Total Subscriptions Paid Subscriptions Revenue Contribution Profit 8. despite our net loss of ($5) million.

of the earnings Q&A session can be accessed at ir. we will also open up the phone lines in case there are additional questions not covered by the email Q&A or letter.Summary We’ve built an early lead in the global race to build the world’s best Internet TV network. Pacific Time today to answer investor questions not addressed in this letter. and the replay. is very gratifying. Reed Hastings. After email Q&A.com. Finance & Investor Relations 408 540-3977 PR Contact: Steve Swasey VP. As we grow.m. enabling further international expansion. Please email your questions to ir@netflix. Our rapid return to profitability.com. Corporate Communications 408 540-3947 11 . CEO David Wells. The live webcast. we are trying to balance prudence and ambition while keeping a strong focus on member satisfaction. Sincerely.netflix. We work hard every day to make our service even better. CFO Conference Call Q&A Session Netflix management will host a webcast Q&A session at 3:00 p. The telephone # for the call is (760) 666-3613. The company will read the questions aloud on the call and respond to as many questions as possible. IR Contact: Ellie Mertz VP.

or other financial measures prepared in accordance with GAAP. maintenance and expansion of device platforms for instant streaming. this nonGAAP measure should be considered in addition to. international segment performance. net income. including Canadian contribution profit and Latin America challenges as well as content investment. Members who are on payment hold will no longer be counted as members. Reconciliation to the GAAP equivalent of this non-GAAP measure is contained in tabular form on the attached unaudited financial statements. including.Metrics evolution As stated in our January letter. operating income and net cash provided by operating activities. our member growth. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release. Management believes that free cash flow is an important liquidity metric because it measures. revenue. fluctuations in consumer usage of our service. including member acquisition. not as a substitute for or superior to. However. the amount of cash generated that is available to repay debt obligations. the continued availability of content on terms and conditions acceptable to us. while members who cancel mid-period will be counted until their service ceases at their period end. and contribution profit (loss) for both domestic (streaming and DVD) and international operations as well as net income and earnings per share for the second quarter of 2012. competition. contribution profit and margin as well as content acquisition. make investments. DVD member losses and contribution profit. 2012. repurchase stock and for certain other activities. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the Securities and Exchange Commission. 12 . we slightly updated our definition of membership starting with the Q1 membership guidance. growth trends. content acquisition. our ability to build back our brand. disruption in service on our website or with third-party computer systems that help us operate our service. our ability to compete effectively. Forward-Looking Statements This shareholder letter contains certain forward-looking statements within the meaning of the federal securities laws. including statements regarding improvements to our service and growth in viewing hours. including original programming and specific title availability. competition and widespread consumer adoption of different modes of viewing in-home filmed entertainment. including total and paid. Use of Non-GAAP Measures This shareholder letter and its attachments include reference to the non-GAAP financial measure of free cash flow. including our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 10. without limitation: our ability to attract new members and retain existing members. free cash flow and usage of cash. net additions for 2012. during a given period. The forward-looking statements in this letter are subject to risks and uncertainties that could cause actual results and events to differ. We estimate the net effect of these changes was that we are reporting 200k fewer domestic streaming members than we would otherwise report in Q1. There is no effect on revenue from this change. return to global profitability.

835 21. March 31.Netflix.162 102.578 62.288 80. 2012 Revenues Cost of revenues: Subscription Fulfillment expenses Total cost of revenues Gross profit Operating expenses: Marketing Technology and development General and administrative Legal settlement Total operating expenses Operating income (loss) Other income (expense): Interest expense Interest and other income (expense) Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) Net income (loss) per share: Basic Diluted Weighted average common shares outstanding: Basic Diluted $ 869.441) (4.974) (116) (7.402 104.08) 55.616 35.575 512.759 54.801 29.992 61.783 34.11 52.246 $ $ $ $ $ $ $ $ $ 13 .007 60.905 22.151 280.858 135.092 247.015 59.439 $ 718.000 238.64 53.935) (4.553 376. 2011 2011 $ 875.219 0.577 575.240 (4.259 50.240 38.582 55. except per share data) March 31.159 438.456 55.233 1.025) (2.456 Three Months Ended December 31.791 564.793 (1.933 245.08) (0.998 178.14 1.942) (95) 56.872 (4. Consolidated Statements of Operations (unaudited) (in thousands.66 0.900 82. Inc.420 114.865) 865 98.584) (0.477 9.155 300.548 61.918 623.

036 86.934 136. 2011.069.330 1.480.013 45.992 408.741 1.810 $ 3.759 2.424 1.480.188 62. Inc.226.000 200.119 706 422.758 919.666 200.046.000 shares authorized at March 31. net Prepaid content Other current assets Total current assets Non-current content library. $0.055 200.053 289.515.443 53.247 3. Consolidated Balance Sheets (unaudited) (in thousands.631 and 55.069. 2012 and December 31.534 1. net Property and equipment. respectively Additional paid-in capital Accumulated other comprehensive income.163.830.386 $ 55 243.000. 2012 and December 31.398.353 55.197 67.628 61.052 $ 3. 2011 2012 Assets Current assets: Cash and cash equivalents Short-term investments Current content library.203 2.703 2.155.796 1.817.274 128.057 $ 935. except share and par value data) As of March 31. 2011.446.615 issued and outstanding at March 31.459 55 219. 55. December 31.602 1.000 908.000 200.709 56.000 739.Netflix.426. net Other non-current assets Total assets Liabilities and Stockholders' Equity Current liabilities: Content liabilities Accounts payable Accrued expenses Deferred revenue Total current liabilities Long-term debt Long-term debt due to related party Non-current content liabilities Other non-current liabilities Total liabilities Stockholders' equity: Common stock.459 508.196 14 .992 54.106 150.577 418.346 663.930 642.007 57. net Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ $ 395.225.839 83.196 $ $ 1.857 1.001 par value. 160.119 49.231 148.402 3.058.

854 159.654 (501) (86.219 $ March 31.334 (135.766) 1.994 11.307) 84.675) 6.736 20.921 $ 116.380) 9. beginning of period Cash and cash equivalents.319 (12.334 2.654) (925) (4.233 (4.528) (4.584) (764.119) (52.609) 1.279 22.656) 2.498 15. equipment and intangibles Stock-based compensation expense Excess tax benefits from stock-based compensation Other non-cash items Deferred taxes Changes in operating assets and liabilities: Prepaid content Other current assets Accounts payable Accrued expenses Deferred revenue Other non-current assets and liabilities Net cash provided by operating activities Cash flows from investing activities: Acquisitions of DVD content library Purchases of short-term investments Proceeds from sale of short-term investments Proceeds from maturities of short-term investments Purchases of property and equipment Other assets Net cash used in investing activities Cash flows from financing activities: Proceeds from issuance of common stock upon exercise of options Financing costs Repurchases of common stock Excess tax benefits from stock-based compensation Principal payments of lease financing obligations Proceeds from public offering of common stock.232 20.053 (192. March 31.710) 20.806 137 19.293 15.754 11. Consolidated Statements of Cash Flows (unaudited) (in thousands) March 31.388 116.937 26. 2012 Cash flows from operating activities: Net income (loss) $ Adjustments to reconcile net income (loss) to net cash provided by operating activities: Additions to streaming content library Change in streaming content liabilities Amortization of streaming content library Amortization of DVD content library Depreciation and amortization of property.741 (1.817) 1.019 6.332 (3.553 339.466 (23.199 508.665 (10.783 1.077 (501) (578) (4.335 8.467) 172.323 (22. 2011 60. end of period $ Three Months Ended December 31. 2011 2011 $ 65.224 (388) 3.826 18.990 9.323 (22. 2011 $ 35.053 395.528) (299.499 150.133) 8.032 615 (112.109 (13.303 $ 19.048 85.046 11.982) (12.997 348.545) 644.826 12. net of issuance costs Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents.Netflix.862 2.643) 15.025 501 (536) 199. 2012 Non-GAAP free cash flow reconciliation: Net cash provided by operating activities Acquisitions of DVD content library Purchases of property and equipment Other assets Non-GAAP free cash flow $ Three Months Ended December 31.109 (13.214) 19.762 (108. net of issuance costs Proceeds from issuance of debt.728) (44.331 19.519) (10.320) 1.275 (4.485 19.046 281.755) (1.466 (23.255 (115.149 $ $ 15 .139 (9.756) 1.662 65.893) 397.961 650 (16.419 79.060 398.656) 2.119) (16.947 198.992 $ (976.255 33.264 (15.419 $ March 31.766) 1.080) 194.061) 508.144) (10.755 (559) 4.266) 14.407) 21. Inc.843) 2.419 (73.320) 1.144) (123.

037) 21.587 600.731 (59.584) $ 26.712 245. March 31.405 706.219 $ 23.233 $ $ $ 16 . Segment Information (unaudited) (in thousands) As of / Three Months Ended March 31.253 176.000) 38.833 109.875 $ 22.958 319.007 60.885 29.157 66.665 440.139 27.641 $ 24.039 370.108 (102.279 23.508 $ 21.Netflix.935) (5.110 3.274 519.133 $ 11. December 31.410 22.671 20.022 506.083 869.568 146.858 846.079 718.305 875.089 9.858 1.132 124. Inc.742) 10.488 193.389 186.701 173.409 43.441) (4.447 28.893 (1.165 11.395 22.765 26.334 424.575 689.725 212.958 111.903 102. 2011 2011 2012 Domestic Streaming Total subscriptions at end of period Paid subscriptions at end of period Revenue Cost of revenues and marketing expenses Contribution profit International Streaming Total subscriptions at end of period Paid subscriptions at end of period Revenue Cost of revenues and marketing expenses Contribution profit (loss) Domestic DVD Total subscriptions at end of period Paid subscriptions at end of period Revenue Cost of revenues and marketing expenses Contribution profit Total Domestic (Streaming + DVD) Total unique subscribers at end of period Paid unique subscribers at end of period Revenue Cost of revenues and marketing expenses Contribution profit Consolidated Total unique subscribers at end of period Paid unique subscribers at end of period Revenue Cost of revenues and marketing expenses Contribution profit Other operating expenses Operating income (loss) Other income (expense) Provision (benefit) for income taxes Net Income (loss) $ $ $ $ $ 23.600 22.240 (4.021 (10.065 2.683) $ 1.791 759.988 88.410 176.153 476.872 (5.553 542.253 24.616 35.366 613.143 73.224 52.797 21.260 61.090) (2.074 24.743) $ 803 674 12.674 826.443 186.425 146.

000.000 3.000 net additions on a base of 10.072 6. but incorrect.000 1.491 30% 20% 21.928 39% Q2 Q3 Q4 Model #2: 5.340 (4. Netflix has a larger starting membership base than it did in 2010.032) 11.000 starting members). But now we add higher churn and higher gross adds.517 1.647) 15. in 2012.072 1.000 Annual Net Adds on 20. and we added that many net adds in 2010.072) 23.517 30% 20% 11.000 Starting Members Q1 Q2 Q3 Q4 Gross Additions Seasonality Starting Members Gross Additions Cancels Ending Members Net Additions Net Adds Seasonality The above table holds churn constant between the two models. whereas with a larger member base (model #2 with 20. But.227 (3.000 Starting Members Q1 Monthly Churn 5% 25% 10.000.202 686 14% 25% 12.491 1. In the first model we show the seasonality of 5. Model #1: 5. In the example below we’ve simplified and abstracted the numbers to illustrate the principles.860 5.549 (2.517 2. given stable seasonal patterns in gross additions.259 (2. 17 . Q2 represents 14% of annual net adds.388 4. yet in the case of a smaller starting base (model #1 with 10.000 1. it is inherent that there is much more seasonality in the 2012 quarterly net adds than in 2010. and also has a higher gross adds.212 24% 30% 23. and in the second model we show the increased seasonality of 5. But in 2012 we have higher churn and higher gross adds than in 2010.000 starting members).Appendix: Mathematical illustration of increased seasonality of net additions. higher churn business for getting to those 7 million net additions.363) 13. to think that the seasonal distribution of quarterly net adds should be the same in both years.000 5. If Netflix is going to add 7 million domestic streaming net additions in 2012.000 Annual Net Adds on 10. Q2 represents only 7% of annual net adds.388 1. even though the seasonality of gross adds is unchanged.860 369 7% 25% 21. The table below has the same net adds (5.491 4. The increased seasonality of net adds is even more pronounced with these factored in.549 (2. Both models have the same churn and same seasonality of gross adds.000 net additions on a base of 20.283 (3.793) 21.412) 25.283 (4. then it is natural.612 32% 25% 20.153) 12. As the math below shows. if Netflix generates 7 million net adds in 2012 (same as 2010).839 (2.202 3.186 24% 30% 13. and the same seasonality of gross adds.000 net adds implies that Q2 is only 2% of the annual net additions. You can see that getting to those 5.858) 21.000) as the two models above.

120 42% Q2 Q3 Q4 Gross Additions Seasonality Starting Members Gross Additions Cancels Ending Members Net Additions Net Adds Seasonality 18 .571 31% 20% 21.766 (6.082) 22.305 (6.657 87 2% 25% 21.880 1.571 5.844 (5.571 1.757) 21.305 (5.223 24% 30% 22.000 Annual Net Adds on 20.880 8.646) 25.000 7.734) 21.Model #3: 5.000 Starting Members Q1 Monthly Churn 7% 25% 20.657 7.000 2.

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