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Summary

  • Angie's List has been unable to significantly improve its key metrics. Retention is essentially unchanged, revenue per member isn't growing, and cost per member is nearly the same as before.
  • User churn costs are increasing. Angie's List spent $27.9 million in marketing expenses to offset user churn in 2012. This increased to $37.5 million in 2013.
  • Net membership growth is slowing due to the increasing effects of user churn.

Angie's List (NASDAQ:ANGI) is stuck in neutral and is not making significant progress in improving most of its key metrics. User churn is declining in percentage terms, but that appears to be more due to changes in user base composition (such as a smaller percentage of monthly members) than an actual improvement in comparable retention rates. As well, membership revenue is continuing to decline, while service provider revenue growth per member has appeared to stall. As Angie's List increases its membership base, user churn will become an increasingly large factor, with Angie's List spending more and more just to maintain its user base. For example, Angie's List spent $27.9 million just to offset membership churn in 2012, and this cost increased to $37.5 million in 2013.

The Problem With Churn

Angie's List added 1,218,258 gross paid memberships in 2013, up 11% from 1,092,935 gross paid memberships in 2012. The marketing cost per acquisition went down slightly from $73.41 to $71.81. While these numbers appear to show a slight improvement from 2012 to 2013, once you add factor in membership churn/cancellations, the results look significantly weaker.

Churn increased from 380,298 users in 2012 to 521,593 users in 2013. As a result, net paid memberships added actually decreased from 712,637 in 2012 to 696,665 in 2013. This comes despite increased marketing spend, and as a result the cost per net paid membership increased by 12%.

 

2012

2013

Gross Paid Memberships Added

1,092,935

1,218,258

Total Marketing Cost ($000s)

$80,230

$87,483

Marketing Cost Per Paid Membership Acquisition

$73.41

$71.81

Membership Churn

380,298

521,593

Net Paid Memberships Added

712,637

696,665

Marketing Cost Per Net Paid Membership Acquisition

$112.58

$125.57

Another way to look at it was that Angie's List paid $27.9 million just to keep membership levels stable in 2012, and this cost increased to $37.5 million in 2013.

This situation is likely to get worse in future years as Angie's List has not made significant progress with renewal rates. The average membership renewal rate was 78% in both 2012 and 2013, while first-year renewal rates actually fell from 75% to 74%. Angie's List has appeared to hit a wall in terms of improving renewal rates.

A Review Of Q1 Results

As mentioned, Angie's List did show a decline in user churn percentage from Q1 2013 to Q1 2014. However, I'd attribute the decline to having a smaller percentage of high-churn monthly users and a more mature user base that has a smaller percentage of first year renewals coming up. The first year renewal rate in Q1 2014was unchanged versus last year and unchanged versus 2012 as well, so there does not appear to be a significant improvement in retention other than what would be predicted by user base composition changes.

 

Q1 2013

Q1 2014

Average Paid Memberships

1,869,584

2,556,382

Cancellations

110,516

141,981

User Churn

5.91%

5.55%

Membership revenue per subscriber continues to decline. This metric has declined by $0.67 over the last year and $0.12 since Q4 2013, and has been in a continual decline over the last couple years. It is uncertain where the decline in membership revenue will also bottom out.

 

Q1 2013

Q1 2014

Average Paid Memberships

1,869,584

2,556,382

Membership Revenue ($000's)

$14,637

$18,300

Revenue Per Member

$7.83

$7.16

New service contract revenue per member also declined in Q1, from $27.03 in Q1 2013 to $25.45 in Q1 2014, a decrease of 6%. Angie's List appears to have generally hit a wall in terms of getting more revenues out of its service providers relative to the size of its membership base.

 

Q1 2013

Q1 2014

Service Provider Revenue ($000's)

$37,534

$54,357

Contract Backlog ($000's)

$95,100

$132,100

New Service Contracts ($000's)

$50,534

$65,057

Average Paid Memberships

1,869,584

2,556,382

New Service Contract Revenue Per Member

$27.03

$25.45

Selling expenses have declined as a percentage of service provider revenue, from 52.3% in Q1 2013 to 48.1% in Q1 2014, so there is some improvement there. However, the rate of this improvement is not enough to significantly influence the financial performance of Angie's List yet.

 

Q1 2013

Q1 2014

Service Provider Revenue ($000's)

$37,543

$54,357

Selling Expenses ($000's)

$19,645

$26,122

Selling as % of New Service Contracts

52.3%

48.1%

As for other costs, operations and support and technology expense per member have remained roughly the same, while general and admin expense has declined compared to last year. Angie's List is increasing capital expenditures in Q2 2014, which will translate into higher expenses in future quarters as well.

 

Q1 2013

Q1 2014

Average Paid Memberships

1,869,584

2,556,382

Operations and Support ($000's)

$8,298

$11,548

Operations and Support Per Member

$4.44

$4.52

Technology Expense ($000's)

$5,595

$7,457

Technology Expense Per Member

$2.99

$2.92

General and Admin Expense ($000's)

$6,380

$7,356

General and Admin Expense Per Member

$3.41

$2.88

Conclusion

Angie's List has failed to make meaningful improvements in many of its key metrics over the past couple years. While the average churn rate (in percent) has gone down due to a smaller percentage of monthly memberships and new members, churn is becoming increasingly costly to offset. As a result, net membership growth is slowing despite increased marketing spend.

Membership revenue is constantly declining and new service contract revenue per member appears to have stalled out in terms of growth. Meanwhile, Angie's List is not achieving significant economies of scale with respect to cost. Non-marketing expenses per member have gone down only 3.8% year over year despite having 35% more members compared to last year. As well, Angie's List mentioned on its Q1 2014 conference call that it expects "meaningful increases in both selling expense and product and technology expense".

I have been bearish on Angie's List before and see little reason to change that stance. Angie's List needs to show that it can improve retention and demonstrate economies of scale before a higher valuation could possibly be assigned to it.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in ANGI over the next 72 hours. 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: Stuck In Neutral And Facing Increasing User Churn Costs