From September 22nd to September 24th we conducted another online U.S. survey with 400 respondents about their Netflix’s (NFLX: NASDAQ) usage. The most notable difference from our previous survey in June was that domestic annual customer churn has moved substantially lower, dropping from 17.3% to 13.3%.
This move has caused our estimate of the value of a U.S. subscriber (U.S. CLTV) to increase from our previous from $330 to $429. In terms of the company wide impact, our company-wide Q3 annual churn rate moves from 28.6% to 26.6%. Netflix’s overall CLTV moves from our previous estimate of $139 to $150.
EXHIBIT 1: Netflix Customer Lifetime Value / Customer Growth Costs over time
Source: Google Surveys, Perspectec
Redundancy of Content now drives the Churn – Our survey reveals the primary reasons why users left Netflix are due to (in order):
- The lack of engaging content (previously #4)
- The price (previously #2)
- Password-sharing (a new option added with this survey)
- Competition (previously #3) and the free trial period ending (previously #1)
It appears Netflix was correct in budgeting $6 billion in content for 2017. As the number of U.S. Netflix subscribers increases and the lack of quality new content wanes, quality content has moved up to be the most significant concern among subscribers. Recall our mid-quarter update pointing towards a disappointing Q3 content offering.
Despite increasing concern about content, Netflix does not seem to be losing subscribers to competitors such as Amazon Prime Video and Hulu to a large extent. We believe the reason behind this trend is that while Netflix offers materially better original content than its competitors, it is increasingly battling subscriber attention to in-direct, free competitors such as YouTube and Facebook.
Another contributing factor is that Netflix has been able to increase retention of subscribers after the one-month free trial.
EXHIBIT 2: U.S. Survey Results
Source: Google Surveys
The exhibit below compares the reasons for customer churn in Q2 and Q3 2017
EXHIBIT 3: Reasons for Churn as a Percentage of Total Churn in Q2 and Q3
Source: Google Surveys, Perspectec
T-Mobile Partnership we believe has improved churn rates – As of September 12th T-Mobile has started offering a standard (2-screen) Netflix subscription with its ONE family accounts. In our previous report we estimate that this translates to 5.8 million T-Mobile U.S. subscribers eligible for a free Netflix account and 0.75 million expected to transfer over from competitors by the end of the year. The higher subscriber figure translates to a lower U.S. churn
Major impact on Global Churn, Global CLTV and Domestic CLTV– Using a 13.3% domestic churn for Q3 and keeping International churn at 40%, we expect Netflix’s global churn to reduce from 29% to 26.6%. This would increase the company’s Global CLTV 9.5% from $137 to $150 and Domestic CLTV a substantial 30% from $323 to $421. These and some other metrics are summarized below.
EXHIBIT 4: Impact of Change in Churn
Source: Google Surveys, Perspectec
The target share price is based on the EV/EBITDA multiple based on 100x the CLTV/trailing 12-month CGC. This translates to our target price increasing from $212 to $225. .
Conclusion – As per our survey, U.S. churn has decreased as price and competition have become less of an issue. The lower churn has increased the customer lifetime value of a Netflix subscriber from $123 to $150 according to our estimates. Our fundamental target has increased by 6% to $225, strengthening our earlier belief that Netflix’s shares should be purchased.
Exhibit 4 – Survey Results
Source: Google Surveys
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