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Angie's List (NASDAQ:ANGI) has declined approximately 36% since we reviewed it on October 2nd. At the time, we concluded that the net lifetime value of its current member base was only $322 million and set a $12.35 price target on the stock based on Angie's List's expected membership base at the end of 2015.

Angie's List's recent quarterly results have caused us to revisit our model. Generally results were as expected. However, Angie's List is also facing faster than expected membership revenue declines, and is struggling to maintain user growth. As well, general and administrative costs are increasing as a percentage of revenue, while we originally had them modeled as a fixed cost that increased slower than revenues. As a result we have revised our price target down to $9 from $12.35. Below are some of the key results to look at.

User Churn

Angie's List appears at a glance to be making some progress in reducing churn, as the quarterly churn rate has dropped from 7.50% to 6.83%. As well, churn for the first nine months of 2013 is 6.49% per quarter versus 6.97% per quarter for the first nine months of 2012.

However, it appears from a closer look that this improvement is primarily due to natural aging of the membership base (renewal rates are several percent higher after the first year) and a lower percentage of monthly members. There has been no improvement in comparable renewal rates, as first year renewal percentages dropped slightly from 76% to 75% over the first nine months of 2013 versus the first nine months of 2012, while the average membership renewal rate has remained at 78%. Conversion of monthly members into marginal annual members has also likely contributed to the renewal rate stagnation. We see no need to adjust the 5.88% quarterly churn percentage that we have in our model.

 

 

 

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Average Paid Memberships

1,148,072

1,326,230

1,543,921

1,722,081

1,869,584

2,057,188

2,270,734

Cancellations

68,711

95,465

115,827

100,295

110,516

136,515

155,052

User Churn (Quarterly)

5.98%

7.20%

7.50%

5.82%

5.91%

6.64%

6.83%

Membership Revenue

Average quarterly revenue per member has been on a downward trajectory, decreasing from $8.69 in Q1 2012 to $7.51 in Q3 2013. After the decline in revenue per member slowed for a couple quarters, Q3 2013 dropped by $0.22 versus Q2 2013. This may have been due to the price cuts that were being tested, although most of that impact would affect deferred revenue.

With the accelerated decline in membership revenue per user, we are going to use $7.00 in our model for quarterly revenue per user.

 

 

 

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Average Paid Memberships

1,148,072

1,326,230

1,543,921

1,722,081

1,869,584

2,057,188

2,270,734

Membership Revenue ($000's)

9,975

11,292

12,769

13,681

14,637

15,911

17,050

Revenue Per Member

$8.69

$8.51

$8.27

$7.94

$7.83

$7.73

$7.51

Since the average membership length is 17 quarters based on the churn number above, the average lifetime membership revenue will be now be $119.00 instead of $127.50 per member.

Service Provider Revenue

New service contracts are calculated as service provider revenue during the quarter plus the change in contract backlog. Angie's List added $60.55 million in new service contracts during the quarter, which is a solid increase from the $50.4 million in Q2 2013. However, when expressed as new service contract revenue per member, Q3 2013 came out to $26.67 versus $27.63 in Q3 2012. Hence the improvement versus Q2 may have only reflected seasonality. We are going to keep the $26.00 per member per quarter in service provider revenue that we had in our model.

 

 

 

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Service Provider Revenue ($000's)

$21,119

$25,212

$29,253

$32,498

$37,534

$43,304

$48,450

Contract Backlog ($000's)

$55,100

$61,500

$74,900

$82,100

$95,100

$102,200

$114,300

New Service Contracts ($000's)

$30,019

$31,612

$42,653

$39,698

$50,534

$50,404

$60,550

Average Paid Memberships

1,148,072

1,326,230

1,543,921

1,722,081

1,869,584

2,057,188

2,270,734

New Service Provider Revenue Per Member

$26.15

$23.84

$27.63

$23.05

$27.03

$24.50

$26.67

Slowdown in Membership Growth

While Angie's List is still increasing its gross membership adds year over year, its failure to reduce churn rates beyond the improvements associated with a more mature membership base means that net membership adds are slowing. Unless Angie's List starts to increase gross membership adds by a larger amount or suddenly figures out how to meaningfully reduce churn rates, its net membership growth will continue to slow.

 

 

 

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Gross Membership Adds

215,341

305,151

341,522

230,921

274,896

347,342

371,318

Cancellations

68,711

95,465

115,827

100,295

110,516

136,515

155,052

Net Membership Adds

146,630

209,686

225,695

130,626

164,380

210,827

216,266

Treating General and Administrative Expense As Variable

Previously we had treated general and administrative expense as a fixed expense, assuming that it would continue to decline as a percentage of revenue as Angie's List grew. However, it appears from the latest quarterly report that Angie's List expects that general and administrative expense will increase as a percentage of revenue in the near term to support the growth of the company. We have therefore decided to peg general and administrative expense at 11% of revenue (it was 13% in Q3 2013) and factor it into the model as a variable expense.

Updated Lifetime Revenue Model

In that previous article, we had estimated the lifetime value of the average member to be $196.20. This has now decreased to $125.99 due to two factors. The first is the reduction in lifetime membership revenue to $119.00 from $127.50 due to increasing declines in average membership revenue. The second factor is that we are now treating general and administrative expense as a variable expense as noted above. There are no fixed expenses in the model now.

Lifetime Membership Revenue

$119.00

Lifetime Service Provider Revenue

$442.00

Lifetime Revenue Per Member

$561.00

  

Member Acquisition Cost

$69.00

Selling Expense

$176.80

Operations and Support

$76.50

Technology Expense

$51.00

General and Administrative Expense

$61.71

Total Variable Expense Per Member

$435.01

  

Member Lifetime Value

$125.99

We have also revised the paid membership projections downwards due to the apparent slowdown in net adds. As a result, 2015 year end paid memberships are estimated at 4 million now compared to 4.4 million in the prior iteration of the model. Combined with the changes to the lifetime value of the average member, this reduces the lifetime value of Angie's List's current member base to $299.7 million.

 

 

 

Q3 2013

Q4 2013

Q4 2014

Q4 2015

Q4 2016

Q4 2017

Paid Memberships

2,378,867

2,510,000

3,250,000

4,000,000

4,800,000

5,600,000

Member Lifetime Value ($000's)

$299,713

$316,235

$409,468

$503,960

$604,752

$705,544

Conclusion

Angie's List's slowing membership growth and declining membership revenues have reduced our projections for its lifetime member value. Despite the substantial declines in its share price recently, it appears that it will take until 2018 for Angie's List to gain enough members to justify its current valuation, and that assumes that business metrics do not suffer from increased competition or otherwise show further signs of decline.

We have set a new price target of $9.00 based on the projected lifetime member value (plus net cash) at the end of 2015.

Disclosure: I am short ANGI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Angie's List: Worth $9 Based On Expected Lifetime Member Value In 2015