Subscription Revenue Model (Netflix)

You’ll learn how to project subscription revenue for a Software as a Service (SaaS) or other subscription-based company in this tutorial, which is based on a case study of Netflix.

"Financial Modeling Training And Career Resources For Aspiring Investment Bankers"

Table of Contents:

1:16 Part 1: Key Drivers of a Subscription Revenue Business

5:09 Part 2: Where to Find the Required Information

10:08 Part 3: How to Put It Together in Excel + Add Scenarios

15:32 Recap and Summary

Part 1: Key Drivers of a Subscription Revenue Business

The key revenue drivers for subscription-based businesses include:

1) Existing Subscribers and the Renewal Rate – MOST revenue depends on the existing subscriber base unless the business is growing like a beast.

2) New Subscribers and Their Renewal Rates – As a % of existing subscribers, how many new ones is the company adding each year?

3) Monthly Fees and Pricing Increases – How much will these increase by over time? How much *can* the company can increase fees before driving away members?

The renewal rates often differ for existing vs. new subscribers because new customers tend to cancel more quickly; once someone has been around for a few years, he/she is more likely to stay subscribed.

You should also look at different scenarios – What happens with higher growth, renewal rates, and fee growth and with lower growth, renewal rates, and fee growth?

Part 2: Where to Find the Required Information

Some companies disclose these figures in their filings, but Netflix does not – they only give us the Net Additions, Revenue, and Average Monthly Fees in each business segment.

However, if you run the numbers yourself, you’ll see that the Churn Rate, or Cancellation Rate, can’t possibly be that high because Net Additions have been 17-25% of Subscribers historically.

So with a 30% cancellation rate, the company would have to replenish its subscriber base by 50% with new subscribers each year – not likely!

Also, industry sources like Parks Associates point to a fairly low cancellation rate of ~9% for the company.

So we choose to use a 94% renewal rate for existing subscribers and an 88% renewal rate for new subscribers (the 91% rate in the middle corresponds to the 9% cancellation rate).

We go 2% higher in the Upside Case, 2% lower in the Downside Case, and 2% lower than that in the “Extreme Downside” Case.

Subscriber Additions as a % of Base Subscribers will be higher than the historical numbers but decline over time. Monthly Fee increases will range between the average historical increases.

Part 3: How to Put It Together in Excel + Add Scenarios

Step 1: Set up the Renewal Rate Schedule for New vs. Existing

Step 2: Multiply the Existing Subscribers by the Renewal Rate each year

Step 3: Factor in New Additions each year as a % of Base Subscribers

Step 4: Apply the New or Existing Renewal Rate each year

Step 5: Sum the Total Subscribers and take the yearly average

Step 6: Grow the Monthly Fees and multiply to get Total Revenue

What’s Next?

After setting up the basic schedule, you could check and refine your numbers to make sure the scenarios and capitalized annual growth rates (CAGR) all make sense.

You could also consult other sources, like equity research, and see how your views compare with the consensus estimates for the company.

And then you could build the rest of the model by projecting expenses, Working Capital, CapEx, and other line items required for the full financial statement projections.

RESOURCES:

[zsoltczagany]

Thank you very much you helped me through one of my toughtest seminars this year! All love

[EatDrinkWot]

when you deal with seed companies, you dont do much modelling like this. Excited to put this into practice. ps. i love your neat excel layout as always!

[leeserene]

This is fantastic. Thanks for this video. May I ask how do you do if this is done quarterly instead of annually?

[petrmartinek]

Love your videos! Pls how can I make a „Selected scenario“ drop down menu as you have (14:30 min.)? Is it data validation function, scenario manager or something else? Thanks.

[ThuyDuongT]

Thank you very much for the video. Where can we find the part that you advise the source of funding for Netflix?

[malt]

Quick question on this: your best case scenarios for fee increases and for renewal rates seem like they should have an inverse relationship. I can appreciate that, barring correlation metrics we don’t have on hand, this is difficult data to find.. is there a good way to set up your model to not link the sets of scenarios? For example, 2 variables (best to worst case fee growth, best to worst case renewal rate). Thanks in advance!

[brandonkim]

Thanks for the video!
btw How did you come up with Subscriber Adds % Base in projected years?
Row 60-64.
Any assumptions please?

[quangnoob]

Hi. Thanks for the tutorial. In the video, you said the Subscriber Addition rate will be lower than historical numbers. That number in FY14 was 26% (17% net addition plus 9% estimated chunk rate), the prior years' numbers were even bigger. So please correct me if I misunderstand somewhere but the 19% rate seems too low compared to the past numbers. Thanks

[bjliuyunli]

Thanks for the great video! I have two questions of excel here: At 12:05 how did you edit the formula of the cell with the G32 already been highlighted? And how to set up the selected scenarios menu?

[poli]

Can you continue and post a video on the rest of the case (debt vs. equity financing?) Thanks!

[studiooran]

thanks for the video! how do you recommend in increasing your confidence in using excel and be more efficient with it? thanks

[jaredschepis]

What Happens if churn rate changes by month because of seasonality?

[numbahone]

Great video! Do you have relevant courses for e-commerce specific financial models?

[jeeyolchung]

14:36 How can u set-up excel like this?

[mag]

Could you share the excel template please?

[yashkaushik]

from where i can download the template for this financial model please help

[koRioN]

Is this video from courses you sell at BIWS?

[quanronghu]

Is his what an investment analyst always do ?