Following the release of Netflix’s Q4 results, we conducted our 3rd survey of online U.S. residents. The purpose of the survey was to determine Netflix’s churn rate, penetration rate and reasons for subscribers leaving. Results from the 500 respondents revealed significant changes in Netflix’s churn rate for the 2nd straight survey.
U.S. subscriber churn continues to plummet at a steady rate – Our survey reveals that subscribers churned at 9.2% over the last year after excluding responses faster than 3 seconds. This compares to a churn rate of 13.3% in September of 2017 and 17% in May of 2017 using the same shorter than three second response time exclusion.
Penetration rate remains surprisingly steady – Netflix has been able to consistently improve its churn while at the same time seeing its U.S. penetration remain consistent. From May of 2017 to January 2018, Netflix’s U.S. penetration rate only increased from 82.5% to 83.4%, well within the 3.5% margin of error.
Exhibit 1: Netflix U.S. Churn Rates and Penetration Rates over time
Source: Perspectec
A lack of exciting content remains the biggest driver of churn: According to our survey, the reasons for churn (ranked in order of impact) are:
- The content got boring (previously #1)
- The free-trial period ended (prevously #4)
- Account-sharing (previously #3)
- The service was too expensive (previously #2)
- Moved to another platform (previously #5)
While the lack of boring content remains the number one issue as to why people unsubscribe to Netflix, the percentage of Netflix users who have left Netflix due to stale content decreased from 4.5% in September to 2.5% this month. The question moving forward is how much lower can this figure go?
Price appears to be a hinderance to just over 1 in 5 online users surveyed. This is down slightly from September despite the price increases – Netflix increased the price of its standard plan (2 simutaneous HD streams) from $9.99 to $10.99 and premium plan (4 simutaneous stream in 4K) from $11.99 to $13.99 in October. However, price increases appear to have a smaller impact on churn than boring content. Netflix knows this and is increasing the amount of spending on content recorded on the P&L from over $6 billion in 2017 (out of a total of $7.5 billion in cost of streaming revenue) to between $7.5 billion and $8 billion in 2018 (we estimate $9.7 billion in cost of revenue).
Certain segments of subscribers appear increasingly willing to pay a higher price for high quality original programming with no ads. However, the free-trial period ending continues to remain a steady source of churn (2% of Netflix users) and slowed penetration for those who like the content but not enough to pay for Netflix. Password-sharing with friends & family and selling of passwords has also remained steady at about 2% of Netflix users. This will be a hinderance to increasing penetration.
Exhibit 2: Reasons why Netflix Subscribers Churn
Source: Perspectec
Higher Gross Margins driven by less amortization of content and lower churn are increasing the value of Netflix’s Customers – Lower churn was likely the primary factor in the increase in Netflix’s average Customer Lifespan from about 3.5 years in Q3 to an estimated 4.1 years in Q1 while maintaining U.S. penetration levels in the mid-80% range. These survey results cause us to increase our forecast for Customer Lifetime Value (CLTV) estimates as shown in Exhibit 3.
Improved Churn has a postive impact impact on Global SaaS Metrics: Netflix’s Marketing Strategy is Paying Off both in terms of Churn and SaaS Metrics
In Q4, Netflix increased its U.S. marketing spend by 52% on a Q/Q basis. The plan is to increase Global Marketing spending from $1.3 billion in 2017 to $2 billion in 2018. The net result is that this will likely help CLTV to a larger extent then it hurt customer acquisition/growth costs. It may also increase the market oppurtunity as according to our survey, we estimate the number of available U.S. subscribers to be 67 million versus Netflix 53 million paid subscribers reported in Q4.
Globally, we estimate Netflix has improved its CLTV/TTM Customer Growth Costs (CGC) ratio from 0.40x in Q3 to 0.59x in Q4. While the company is still earning $0.59 for each dollar it spends on Sales & Marketing and R&D, International subscribers are very early in their market opportunity. We will revisit these metrics once we conduct our next international churn survey in late February. Unlike other SaaS companies, support costs for subscribers are minimal, and added subscribers drop straight down to EBIT.
Exhibit 3: Netflix’s SaaS Metrics- Q3 vs Q4
Source: Perspectec. Company Reports
Price Target Change
With the customer lifetime value of Netflix subscriber base increasing at a faster rate than the company’s cost to acquire / maintain their subscribers along with the number of subscribers continuing to grow, we see the share price continuing to move higher. This is based on how NFLX has traded historically. Exhibit 4 shows this trend over time. Our target has increased from $245 to $292. This target may change depending on our International Survey.
Exhibit 4 – Netflix Share Price vs. Our Target Price Methodology
Source: Perspectec
Exhibit 5 – Financial Forecast
Source: Company Reports and Perspectec
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