Netflix: Inside the Customer Statistics

Jul. 8.11 | About: Netflix, Inc. (NFLX)

Everyone knows Netflix (NASDAQ:NFLX) has been on fire. But what do the company's customer statistics look like? To find out I dove into the historical trends for several key metrics. I looked at the number of customers and free subscriptions, the average subscriber acquisition costs, the average monthly revenue per user and the churn rate.

Number of Customers

There are three main statistics to look at when analyzing the number of customers for Netflix. The first is the number of paid subscribers. Not surprisingly, this number has done nothing but go up over the last five years. At the end of the first quarter of 2011 Netflix had 21,675,500 subscribers. This is a whopping 59% increase over the first quarter of 2010.
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The next customer metric to look at is the number of free subscriptions. The number of free subscriptions shot up from 424,000 in the second quarter of 2010 to over a million in the third quarter. By the fourth quarter the free subscriptions were approaching 1.7 million. Finally, by the end of the first quarter of 2011 the number of free subscriptions dropped to under 1.3 million. Depending on your view, the company's aggressive use of free subscriptions to attract new customers is either a positive or a negative for the stock.
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The third, and to many, the most important customer statistic is the gross addition of paid subscriptions. This takes into account the recent new customers and the customers that canceled subscriptions. While there have been a few bumps in the road during the last five years, the gross additions have been doing nothing but rising since the second half of 2010.
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Acquisition Costs

Over the past five years the average customer acquisition cost has steadily declined. The average acquisition cost hit a high of $47.37 in the first quarter of 2007. By the fourth quarter of 2010 it fell dramatically to $11.30. The average acquisition cost rose slightly in the first quarter of 2011 to $14.80. This is probably due to the rollout of the streaming only Netflix plan which went live at the end of November.

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Revenue Per User

One of the big problems that the Netflix bears point out is that the average revenue per user has been declining. In the first quarter of 2006 the average revenue per user was $17.06. At the end of the first quarter of 2011 this number fell to $11.94. The introduction of the $7.99 unlimited streaming plan may put further pressure on the average revenue per user in the coming quarters.
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Churn Rate

While the bears talk about the declining average revenue per user, the bulls can rejoice that the company's churn rate dropped dramatically. Over the past five years the churn rate has been in the range of 3.8% to 4.5%. Then, in the first quarter of 2011 the churn rate plummeted to 2.8%. This is the first full quarter with the unlimited streaming subscription. Coincidence?
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Netflix reports earnings in a few weeks. Keep an eye on these customer statistics. They are just as important as the EPS.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.