Analysis: Can MoviePass Really Earn $6 Per Customer?

This article continues with the long-term theme I started in my post from a few days ago.

Bulls have suggested that my analyses have only focused on the short-term view of things. While I might find that insulting (because my 20+ year career was built on helping Wall Street institutions figure out the long-term prospects of public companies), I have to respect it if my writing appears a certain way to someone.

So, I’ve been trying extra hard to focus on the long-term view of thing.

Let’s jump in…

In the long-term, MoviePass CEO Mitch Lowe expects the company to earn $6 of profit per month per customer. This is the #1 reason to own the stock. That figure equates to $72 per customer per year. Based on the long-term expectations for 20 million subscribers, this would add up to about $1.4 billion in annual profits for MoviePass over the long-term (about $1 billion after tax).

Assuming a P/E of 20 and a share count of 100 million for $HMNY (the current fully-diluted share count is ~90 million, up from about 7 million in August) the stock could eventually go to $200. Wow!

But the devil is in the details.

First, Canaccord has them attracting 12 million customers by the end of 2022, up from 11 million in 2021. At that point, they see growth and customer adds falling. This implies that it will take at least until 2030 to reach 20 million customers (and the $200 valuation)… and remember, Canaccord is bullish, so this is a bullish forecast.

Maxim is also bullish… and they assign a discount rate of 24% to HMNY. Thus, we have to discount the $200 valuation back to 2018 at 24% per annum in order to see what $200 in 2030 is worth today, given HMNY’s risk profile. I’ll save you the math and tell you that the answer is $15.13.

Coincidentally (or not), that’s about halfway between Canaccord and Maxim’s price targets ($15 and $16, respectively).

So, if you believe everything is going to perfectly for MoviePass (20 million subs and $72 of annual profit per sub), then you also believe that today’s price of $4.68 is a bargain. $4.68 per share implies that MoviePass will “only” earn $22 from each of its 20 million subscribers in 2030.

But again, the devil is in the details. So, let’s examine if that’s really possible:

First of all, there’s something you need to understand about forecasts (if you don’t already know). Before retiring, I was a professional consultant to investors, along with companies building business plans and/or seeking funding. In that business, among the first things you learn are 1) everyone’s models predict a bright future and 2) most of those models are based on assumptions that don’t come to pass.

In other words, you can’t just assume that a model will prove accurate. You have to assess the assumptions and test them for viability.

So, for those who wish to understand the MoviePass business model, let’s go through a simple exercise to test its viability. In doing so, I’m going to make one big leap of faith — that MoviePass WILL generate ALL of third-party revenues that Mr. Lowe expects.

Why would I do that? Simple. I’m conceding the point because, if the model doesn’t work under that assumption, it simply can’t ever work. If that’s the case, analyzing the viability of those future third-party revenue sources becomes unnecessary.\

So, let’s begin…

First and foremost, Lowe believes that MoviePass will eventually earn $6 of profit per month per customer because he also believes that his average subscriber will eventually attend just 1.3 movies per month. Right now, that number is closer to 3, but he sees that coming down as infrequent moviegoers become a bigger part of their customer base. In his last interview, he says that will happen in the next 12 months.

On paper, I can see why this makes sense. In fact, I once believed it to be true. However, we need to constantly test this assumption against the ongoing reality to assess if it can really happen.

We can track the progress of that eventuality based on their performance since introducing the $9.95 pricing and industry data. From there, you can incorporate your personal belief of how things will play out (since nobody has a crystal ball). No matter what, everyone should start with an analysis of the data so they don’t decide to buy, sell, hold, or short the stock with blinders on.

The first thing we have to do is back into Lowe’s expense assumptions, using his 1.3 movie per month assumption.

At present, they are getting about $8 per subscriber. They are only offering an annual deal right now, which generates $8.77 in revenue per month. However, I believe that most subscribers have been signing up through Costco, which is likely taking a 20% cut. That leaves $7 per month for MoviePass, which is why I’m assuming the customer-wide average to be $8.

Now, the expectation is that they will eventually get the pricing up to a full $10 per month. Going with that, we can calculate that 20 million subs will bring in $2.4 billion in annual subscription revenue.

Next… they are currently paying over $11 per movie. That number should also trend up over time, since movie tickets have risen by 4% annually for many years. Nonetheless, we’ll leave it right there at $11 (again, to concede as many bullish points as possible).

At 20 million subscribers and Mr. Lowe’s 1.3 movies per month, MoviePass will be buying 15.6 tickets per subscriber per year and therefore dishing out $171.60 per subscriber per year. For its 20 million subscribers, that will equal a grand total of $3.432 billion in ticket expense.

From there, we have to add operating expenses of about $8 per subscriber per year, which brings us up to $3.6 billion in total expenses.

So, thus far, we have $2.4 billion in revenue and $3.6 billion in expenses. So, in order for MoviePass to achieve the $1.4 billion in total profits discussed above, we can assume that Lowe expects to generate $2.6 billion from other revenue ($2.4B – $3.6 + 2.6B = $1.4B).

That’s close to $11 per subscriber per month.

One of my recent posts showed why I don’t see that happening. However, once again, I’ll go with it.

With these numbers calculated, we now have a framework to assess all of the key moving pieces in the MoviePass puzzle. It looks like this:

Subs (M) 20
$/Sub $10
Annual Subscription Revenue ($B) $2.40
Movies / Month 1.3
$/Movie $11
Annual Ticket Expense ($B) $3.43
Annual OpEx/Sub $8
Annual Operating Expenses ($B) $0.16
OtherRevs/Sub Per Month $11
Annual Other Revs ($B) $2.60
TOTAL ANNUAL OPERATING PROFIT $1.41

 

This gives us a nice view of the big variables. As you can see, operating expenses per subscriber won’t have any real impact on the model. So, while $8 is probably a good number to use, you can call it zero for all I care.

Similarly, the monthly fee for MoviePass isn’t likely to move materially above $10 (from $8 currently) because the company has already determined that this is the optimum price to make the model work. Any increase will scare away some of the uber-important infrequent moviegoers without scaring any of the money-draining frequent moviegoers.

I can see prices rising with inflation, but so will ticket prices. That’s a bad thing, because ticket expense is a bigger number than subscription revenue, per Lowe’s assertions.

Thus, the only real ways to improve per-customer utilization is to 1) attract a higher proportion of infrequent customers and/or 2) place limits on how many movies customers can go see.

For the record, I’ve conducted surveys and even held a live round table (a couple night ago) which led me to believe that usage limits may have just as much impact on discouraging infrequent users as it does on lowering frequent-customer utilization. It all depends on the limit. At a 2 movie limit, virtually every infrequent moviegoer said that the deal wouldn’t appeal to them (with different reasons cited by each individual).

As we move up to 3, 4, or 5 movie-per-month limits, we see the infrequent moviegoers becoming more interested. However, it gives the frequent moviegoers a bigger limit. Overall, less movies is bad for attracting infrequent moviegoers, while more movies is bad for cutting frequent moviegoer usage. It’s a bit of a catch-22.

My sense is that the optimal limit would be somewhere around 3 movies per month. That’s enough for most infrequent customers to do the math and believe they’ll surely get value.

The problem with that is that the average frequent MoviePass customer only goes to 3 movies per month. So, while such a limit might help in the short-term, it likely won’t make much difference in the long-term as the service moves toward penetrating 100% of frequent moviegoer. Any sane person should agree that anyone who goes to three movies per month should want to be a MoviePass customer.

…AND THIS IS WHERE THE BULLS SHOULD SEPARATE FROM THE BEARS.

HERE’S WHY:

So far, I haven’t deviated from any of the bulls assumptions. That’s because I want to everyone to focus on THE MOST IMPORTANT issue when it comes to MoviePass.

If you listened to Lowe’s interview, you heard him say it.

He’s counting on more infrequent users signing up, thus becoming a bigger proportion of the overall base, thus lowering the average movies per customer per month.

If you look at the math I presented above, you can see why.

Annual ticket expense is their biggest long-term line-item. Further, if you look at the other line items, there isn’t much room for anything else to offset that ticket expense if their ticket-buying assumptions prove to be too conservative (because the revenue numbers above already acquiesce to their optimistic assumptions)…

 

The latest iteration of my cohort analysis demonstrates why Mitch Lowe has reason for optimism. If utilization drops as predicted by the model, things should eventually be ok:

mar 6 cohort

There’s one problem with this – the latest commentary from Mitch Lowe (Recode on Feb 18 / Screen Junkies on Mar 1) and AMC’s CEO (earnings call on Mar 1) all suggest that the company bought more than 5.5% of all U.S. movie tickets in February.

First of all, MoviePass still hasn’t signed 1% of all U.S. moviegoers. Yet, they are buying over 5.5% of all tickets. That means that the average MoviePass customer is going to the movies about 6x more often than the rest of the population (which goes about 0.4 times per month). That means that MoviePass customers went to an average of 2.4 movies in February, blowing my cohort model out of the water…

…and we can’t blame it on Black Panther, because my seasonal adjustment incorporates February’s actual results, regardless of what drove those results!

That’s not good. It implies that frequent moviegoers are signing up faster than casual moviegoers. The impact on MoviePass’ income statement and business model is fairly easy to calculate:

The box office generated about $890 million in February, representing about 100 million tickets. MoviePass presumably bought over 5.5 million of these, but paid over $11 a pop (versus the national average, which is below $9). That adds up to $60 million in ticket spending in February. To that, I would add a million for operating expenses.

Looking at the monthly sign-up numbers, I estimate that about 900,000 customers are on monthly plans (generating about $8.5 million per month), with the rest (substantially) on annual plans. I estimate that February brought in 400,000 customers at a total of $35 million (due to the mix of Costco customers, which produce less net-revenue for MoviePass). So that’s about $43.5 million of cash inflow versus $61 million of cash outflow, resulting in $17.5 million in net cash burn for the month.

I estimate that will take their cash balance down to $25 million (despite raising $105 million just three weeks ago). UPDATE: This number warrants further investigation, as there are multiple conflicting reports. So don’t take it at face value.

Assuming that is correct, one more month like that and they’ll have to start the fund raising process again.

Luckily, the March /April slate doesn’t look too daunting (see below). For March, my model calls for 3.2 million ticket purchases, totaling $36 million in total outlays, including operating expenses. However, I also see a lower number of new subscriber additions, resulting in $30 million in total revenue.

But that’s still $6 million in cash burn, taking cash down to $19 million… and that’s only if utilization doesn’t blow away my model’s estimate, as it did in February.

April should be easier, but I haven’t run any numbers beyond March. Regardless of that, the May and June release schedule is an absolute monster.

February had Black Panther, but April / June will have Avengers: Infinity War, Solo: A Star Wars Story, Deadpool 2, Ocean’s Eight, The Incredibles 2, and Jurassic World: Fallen Kingdom.

IMDB forecasts that this two-month slate will generate $2.5 billion. In contrast, Black Panther did $500 million in February (with Fifty Shades and Peter Rabbit chipping in another $180 million, combined).

This should come as no surprise. As you may have heard from theater executives this earnings season, 2018 is off to a huge start (up 12% year-to-date). The industry is optimistic for a rebound year, as has been the case after every down year (except 2011) since 1991.

Past data isn’t the only reason for their optimism. The 2018 schedule is packed and particularly loaded in the first half of the year. This only increases the odds that MoviePass will require more funding before summer:

DATE MOVIE TITLE NOTE / IMDB ESTIMATE
Jan. 26 Fox’s “Maze Runner: The Death Cure” $57M to date
Feb. 9 Universal’s “Fifty Shades Freed” $96M to date
Feb. 16 Disney-Marvel’s “Black Panther” $500M+ (est was $350M!)
Mar. 2 Fox’s “Red Sparrow” Jennifer Lawrence
Mar. 9 Disney’s “A Wrinkle in Time” Oprah – $180M est.
Mar. 23 Universal-Legendary’s “Pacific Rim Uprising” Original did $450M ($100M est)
Mar. 30 Warner Bros.’ “Ready Player One” $260M est. Popular book; Spielberg movie.
Apr. 13 Fox’s “The New Mutants” $160M est.
Apr. 20 New Line’s “Rampage” Dwayne “The Rock” Johnson
May. 4 Disney-Marvel’s “Avengers: Infinity War” $600M
May. 25 Disney-Luscasfilm’s “Solo: A Star Wars Story” $450M
Jun. 1 Fox’s “Deadpool 2” $350M
Jun. 8 Warner Bros.’ “Ocean’s Eight” ?
Jun. 15 Disney-Pixar’s “The Incredibles 2” $550M
Jun. 22 Universal’s “Jurassic World: Fallen Kingdom” $500M
Jul. 6 Disney-Marvel’s “Ant-Man and the Wasp” $200M
Jul. 13 “The Nun” ?
Jul. 13 Universal-Legendary’s “Skyscraper” ?
Jul. 20 Fox’s sci-fi tale “Alita: Battle Angel” ?
Jul. 20 Universal’s “Mamma Mia! Here We Go Again” ?
Jul. 27 Paramount’s “Mission: Impossible 6” $200M
Aug. 8 Sony’s “Barbie” ?
Aug. 10 Warner Bros.’ “The Meg” ?
Aug. 17 Warner Bros.’ “Crazy Rich Asians” ?
Sept. 21 Lionsgate’s “Robin Hood” ?
Sept. 28 Universal’s comedy “Night School” ?
Oct. 5 Warner Bros.’ “A Star is Born” ?
Oct. 5 Sony-Marvel’s “Venom” $180M
Oct. 12 Universal’s “First Man” ?
Oct. 19 Sony’s “The Girl in the Spider’s Web” ?
Nov. 2 Fox’s “Dark Phoenix” $200M
Nov. 16 Warner Bros.’ “Fantastic Beasts: Crimes of Grindelwald” $350M
Nov. 21 Disney’s “Ralph Breaks the Internet: Wreck-It Ralph 2” $200M
Dec. 14 Universal’s dystopian “Mortal Engines” ?
Dec. 21 Warner Bros.-Marvel’s “Aquaman” $350M
Dec. 21 Paramount’s “Bumblebee” $110M
Dec. 25 Disney’s “Mary Poppins Returns” ?
Other Mowgli; Nutcracker $175M / $170M

 

CONCLUSIONS: Mr. Lowe says that the excessive usage issue will remedy itself in 12 months. However, February utilization blew my model out of the water despite there only being one big movie to drive it. This begs the question – why isn’t utilization pulling back as expected?

This is not a February issue, nor is this year’s slate a 2018 issue. This is a long-term issue, because big movies and strong slates will occur in most years for the foreseeable future.

Even if that weren’t the case, this would still be a long-term issue in my opinion because I believe that frequent moviegoers are to blame. They are skewing the utilization numbers. If you listened to Lowe’s last interview, you heard him say it.

He believes that they will become a small enough percentage of his total base, but 6+ months of data doesn’t support that notion. If anything, things may only be getting worse. There are at least 33 million frequent moviegoers out there who haven’t subscribed to MoviePass yet.

By all rights, all of them should sign up and renew their subscription at a higher rate than their casual counterparts. The problem is this — if just 30% of them sign up by the end of 2030, they will continue to dominate MoviePass’ customer base and expense load.

You see, when 50%+ of your base sees more than 3 movies per month, the rest have to see zero just to get the average down to 1.5 movies per month. The more likely number under this scenario would be 2.0, much higher than the 1.3 needed to make the model work (because an extra 0.7 movies adds up to an extra $154 million in monthly expenses in 2030).

That’s an annualized $1.84 billion, resulting in a total net loss of $430 million for 2030.

And remember, aside from the utilization number, this analysis went along with all of Mr. Lowe’s presumably-optimistic expectations, including the acquisition of 20 million customers and every penny he hopes to generate from third-parties and MoviePass Studio.

In other words, perfect execution in a perfect storm.

It just goes to show how critical the utilization number is… and how much MoviePass needs it to come down to 1.3 movies per month.

I’m not saying it can’t be done. However, given what we’ve witnessed so far (and how many more frequent moviegoers there are out there) I can’t help but remain worried about the company’s long-term prospects.

Nonetheless, because of the opportunity for upside, I will continue doing my homework in hopes of seeing signs that utilization finally comes down to the levels that got me interested about HMNY in the first place.

Believe it or not, I’d love to see it.

I’m not a bear. Nor was I a bull in September. I’m just an analyst doing my research and collaborating with other analysts. I don’t just take sides. I keep my mind open to what I see and act accordingly… because it’s not about “being right”.

It’s about figuring out the truth, because that’s what makes money.

That’s why I have favored the theater owners over Helios. Considering recent trends and the Spring movie slate, I see no reason to change that stance.

 

p.s. To get my posts in real-time, just subscribe to this free blog. If you don’t to get all of my posts via email, just get on my MailChimp mailing list instead. To that list, I only send key articles and occasional recaps of all the work I’ve recently done.

Disclosures / Disclaimers: I have no position in HMNY. Nor is this is a solicitation to buy, sell, or otherwise transact the stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.

I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.

I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter.  Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.

I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

The sole purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

53 thoughts on “Analysis: Can MoviePass Really Earn $6 Per Customer?

  1. Mark. I can’t comment on most of your numbers yet as I haven’t had a chance to match them against mine, but your 25 million cash balance is way low unless you know something I do not. Where did you get that? It should be 85m at worst right now. Maybe a little higher.

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    1. They paid back debt etc. Even Canaccord has them exiting the quarter with $42M.

      I’ll be happy to be corrected if someone knows better. That’s what collaboration is all about 🙂

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      1. Yes they did pay back debt, but Ted reportedly stated to the Maxim investor event that after repaying that debt they still had 105m remaining. Of course, that could be false too, so I don’t know for sure. I do think you have already proven Canaccord cannot be relied upon. At least you’ve proven that case to me. So my approach with anything in their report is that it can’t be relied upon.

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        1. CORRECT and good point. This is definitely a short-term item that warrants further investigation. Until we can get it sorted out I will make a note in the post that it is pending further investigation.

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  2. Mark, thanks for your write-up. You seem to repeatedly (this article and past as well) use the entire U.S. population to then calculate movie-going population percentages. ‘33 million frequent movie goers’ is about 11% of the U.S. 310 Million population count. Is this what you’re doing? Of course, way off if so. Babies and elderly to start are not movie goers period. Or, are you getting total movie-goer and frequent movie goer numbers elsewhere?

    Michael

    >

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    1. Let me double check that number. I’ve been using it for a while and nobody has corrected me. THANKS!

      By the way, even if your number proves to be correct, it doesn’t make much difference because my frequent-moviegoer penetration assumptions are very conservative, in my opinion.

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      1. Would you have the breakdown of your 90 million fully diluted shares? Co said there was currently 38 million non-diluted shares outstanding. It would be nice to see all your warrant numbers.

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  3. Hey Mark, appreciate this analysis. It’s the best one I’ve seen yet. However, you are missing some very key pieces in making assumptions about future makeup of users vs current.

    Missing entirely from your analysis is that it’s EXPECTED that avid users would sign up in the early months. Your supposition that only avid users will join is absurd. My entire circle of family and friends who join are watching 0-2 movies a month with an average close to 1. Just because it’s more valuable to avid users, doesn’t mean only avid users will sign up first.

    The brand, price, and “unlimited” nature of the deal is good enough for casual users to sign up even if the math doesn’t work! It’s really a matter of marketing and partnerships. Have you seen the recent promotions between Netflix and Verizon and Netflix and TMobile? Verizon and TMobile give away a free NFLX subscription for a year. Verizon/T-Mobile are purchasing these subscriptions at a discount from Netflix but then the upside for NFLX is that people who get something for free – barley use it.

    At the most recent shareholder meeting, Mitch mentioned that getting these sorts of partnerships and encouraging companies to give free MP subscriptions as an employee-benefit is just one of the ways they will look to decrease utilization rates and it will be a significant focus for them. You would have known this if you were at the meeting.

    Further a few other issues with your assumptions…

    1. putting a limit on # of movies seen will NOT deter avid moviegoers at all yet it can dramatically bring down the average. I have surveyed dozens of avid movie-goers and they all said they would keep the service at 2 movies a month and most said they would keep it at one movie a month
    2. The “unlimited” slogan is a gimmick and doesn’t bring true value to casual users yet this unlimited aspect will remain for some time because the gimmick works. It gives the perception of value and is great for free PR.
    3. MP can do other things like remove ability to see the same movie more than once. In my estimation this will not harm growth at all or impact churn.
    4. There is plenty of other things MP can do to deal with the unit cost issue. They can have an annual limit of movies and then charge a small unit cost per movie after this or even a monthly limit with the same unit cost approach.

    It ALL comes down to the size of the brand and the leverage they have.

    Regarding that, why would you place any faith whatsoever in the sub growth # at cannacord? You’ve bashed the report nicely so why is this # reliable? The truth is subscriber growth has consistently exceeded expectations and I believe the 5M number by end of year is because that’s the # they HAD to put in to try to sell the idea that MP may not need to raise money anymore. MP is going through some growing pains right now and so I believe they’ve done a couple things to purposely slow growth while they improve their technology and customer service. But growth has only slightly declined. Once their app and customer service is up to speed, we’ll be back on pace for 5M by September and 20M in a 2-3 years.

    Also, I’d like to see how you get from 105M cash to $25M after losing $17.5M for one month. Care to clarify and are you considering the upfront annual payments?

    Oh another thing you missed in your basic income statement for the bullish model is that $6 is ancillary revenue. Ticket cost should be lower than what you plugged in as they get increased % of ticket kick-back from theaters including concession sales. Something interesting about the Cannacord model (the excel, not the pdf), it only includes ramping up of indie theaters. Once any of the big 3 sign, this will represent incremental upside to the ticket cost modeling.

    I still expect a total of $1B in financing until they get to 20M subs but I don’t expect any financings this month. With some digging around, I’ve been able to discern that MP is in the process of setting up “non-deal” road shows for later this month. Non-deal means they aren’t looking to raise money now. That will come after a merger and name change IMO so we have some positive short-term catalysts coming. At the end of the day I’m making a bet on brand, industry, management, and moat… but I do recognize it won’t be until the end of this year until wall street is convinced because they would want to see 3 consecutive quarters of avg # of movies going down before they buy in. So during this time, I plan on aggressively trading around a core.

    You’re getting closer.

    #research

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    1. Hey Ben,

      1. Thanks again for chiming in. FYI, I haven’t said that frequent users will be the only ones to sign up. To the contrary, in fact. I only see the frequent moviegoers representing around 50% of the customer base over the long haul, which only requires about 30% penetration (which should be closer to 100% than 30% by all rights). I recommend that you reread what I wrote. I think it’s very clear. But if not, let me know and I will try to reword it.

      2. This is a good point, but just talk at this point. There are many things that companies can give to their employees, so we have to wonder if MoviePass is super high on that list. Looking forward to seeing what else they can do to establish profitable marketing partnerships, because like Costco don’t excite me.

      As for your other points:

      1. Agree 100%, but I believe I said that limits will impact demand from the casual moviegoer, not the frequent.
      2. Agree again
      3. Agree again
      4. Agree again, but see point #1.

      I use Canaccord numbers when I want to acquiesce to the bullish. I think the report was bad, but based on many assumptions provided by management. If I assume them to be correct and still see failure, then at the very least there’s little room for error.

      As for selling the idea that they won’t have to raise money anymore, ABSOLUTELY! If retail investors abandon the stock, their ability to raise another $50-100M might become an impossible task, because they won’t be able to offer as juicy a warrant cherry on top. I’ll find the segment of Mitch’s last interview that made me realize that they may be INTENTIONALLY funding the company on the backs of retail investors.

      See my earlier comment re: the cash balance. As always, I’m open to correction.

      If the $6 is pure ancillary revenue, I’ll adjust. THANKS!

      The “closer” I get, the more fearful I become. LOL. Seriously though, I won’t get into a taunting match with you (nor mention the decades of professional investment research experience I have over you… oops, I just did. Again, LOL). Seriously though, this is collaboration. We debate hard and that’s a good thing. The ultimate hope is that we both come to realize all of the truths (by picking off the errors one by one and looking at it from all angles). From there, we can incorporate our personal opinions to make a final investment decision.

      I appreciate your participation. Hopefully we all benefit from the collaborative environment. Cheers!

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      1. “As for selling the idea that they won’t have to raise money anymore, ABSOLUTELY! If retail investors abandon the stock, their ability to raise another $50-100M might become an impossible task, because they won’t be able to offer as juicy a warrant cherry on top. I’ll find the segment of Mitch’s last interview that made me realize that they may be INTENTIONALLY funding the company on the backs of retail investors.”

        Which is why they should treat their retail investors better when they do raise funds. I think the current stock price proves they’ve shaken the trust with many. No argument from me on that point. On the last part of your comment, are you talking about where he said something about losing tens of millions per month as their approach to investing rather than raising 1 billion up front? If something else, I may have missed it and would be interested in what you heard if you don’t mind sharing.

        Thanks

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      2. Ok, so that said, no question the equity raises hurt shareholders, but you seem to be implying something more than that or am I misreading your comment?

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        1. Maybe Ben was onto something. To be clear, I don’t insinuate, especially negative things. If I have something to say I come right out and say it (or at least use a wink… LOL).

          I was simply re-canting from what I heard in the interview. Instead of raising a ton of money upfront from venture capitalists, his plan is to lose tens of millions of dollars (raising the capital via equity raises).

          Yes absolutely 100% NOTHING wrong with that. However, very few professional investors are willing to get involved with a company that is expected to continue diluting shareholders well in advance of demonstrating the likely efficacy of its business model.

          If I was wrong, stock would be much higher right now. After all, I think it’s safe to say that almost every institutional investor in a theater stock has now heard of MoviePass…

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      3. I can’t speak for Ben, but for me, I have long been suspicious of Ted and the proxy nature of the investment. So when you said that, my ears perked up. I wanted to make sure there was not something more you were picking up on than what I was. That is why I asked.

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      4. If the player is honest in his effort to maximize shareholder value, then I can concur. That is the least we should expect from the management of our public companies.

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    2. p.s. IMHO, the rebate/ancillary figures to which I acquiesces are absurd. To be honest, I don’t think they will achieve a third of those figures, but that’s just opinion. There’s really no data to support the notion that they will or will not make material progress in that regard (yet). Cheers.

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      1. Obviously I disagree on this. What else did you expect? 🙂

        In my initial investment thesis, I thought the company would focus only on growth until they reached at least 5M subscribers. Onboarding studios occurred much sooner than I thought and they are already up to a dozen. Then on top of that they got into Ventures which I believe is brilliant. Did you know for Ventures they don’t upfront any cash? They make a commitment as to min # of tickets sold and if there is a shortfall between that target and the initial investment amount, that’s when they will have to contribute some cash. Their ability to leverage their brand into Ventures so soon is a testament to management. You should do some research on downstream revenue based on opening weekend box office. Further, have you seen the testing they’ve been doing blocking specific movies? It didn’t even occur to me – but now it does – that they could eventually list ONLY movies that are giving them a cut – just like they plan to eventually do with theaters. Even blockbusters would have to pay them once they have sufficient leverage.

        $6 is not out of the question and based on above – I think we do see evidence that management knows how to leverage the brand, can think out of the box, and has been extremely fast to sign up these partnerships.

        However, even $6 in ancillary revenue doesn’t get you to the promised land. At the end of the day, avg # of movies seen per month has a far greater impact on the bottom line.

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        1. Over the past few weeks, I have to say that we have come closer to one another on the facts and are therefore getting closer to the point where it’s simply a matter of believing or not believing that they will pull it off.

          If that is indeed the case, I can do nothing but wish you luck. You have something to gain, so I hope you’re right. 👊🏼

          Liked by 1 person

      2. Glad we are mostly agreeing on the facts now. So in the end, it does bring the thesis down to belief in management, brand, industry, and moat.

        I will say, I gave management a pass early on because I thought Mitch Lowe would be given instant credibility due to his background at Redbox and Netflix and would result in good valuations on the raises. This didn’t play out (yet) but I believe it is mostly due to the proxy nature of the investment. The proxy issue will be solved soon and perhaps wall street will be willing to fund Mitch directly without ridiculous terms. But I do have other concerns cropping up with management. Management may be up to the task. They may not be. I have data on both sides of this argument but I strongly believe this is where the debate needs to be had – going back to why I think crunching the #s at this early stage is a fool’s errand. Bottom line, so far wall street has not rewarded HMNY and it’s only because of proxy or management issues. If they 100% believed in management and if there was no proxy, then this would be funded at much better terms.

        I’m expecting better stock performance once the proxy issue is solved. The extent to which the improvement will be, will be directly correlated to how competent Wall Street believes Mitch and the rest of the management team are.

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        1. That’s a possibility, but I haven’t polled my institutional contacts to find out for sure.

          That dynamic didn’t hold back best-of-breed companies in the past (a pre-IPO VMware comes to mind), But every situation is individual, so I’ll ask around.

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        2. By the way, I 100% disagree regarding crunching the numbers being a fools errand. Not an opinion — it’s a fact.

          I’ve worked with institutions for 25 years. Numbers always get crunched early and often. Progress must be hypothesized and tracked. What you might misunderstand is the weight that goes into those numbers. They aren’t everything, but they are important (and compulsory to run through).

          Actually had this conversation with an ex-Goldman investment banker just the other night. He shook his head at how nonchalant retail investors are about things like that.

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    3. I gave consideration to what you said about the $6 per customer per month goal. From what I gather, the $6 includes the 20% ticket kickbacks. Re-watch the interview and LMK if you still disagree. Unless I interpreted it incorrectly, Lowe’s $6 figure includes his entire vision of what they can reasonably do to earn material revenue.

      FYI, Canaccord’s all-in 2022 operating profit projection is $7.475 per month per customer ($5.10 of which is ancillary), but includes $1 of concession revenue, which has, to this point, largely attained in accounts (like SMG) where the customer receives preferential placement in the app. They can only do that with one account in any given area. It also includes $0.80 of advertising, which I’ve shown to be about 90% unattainable in prior posts. Adjusting for those issues (just adjusting…not eliminating them completely) would bring Canaccord in line with my figures (which goes along with Lowe’s comments).

      Of course, we have to remember that these are GOAL numbers. This includes the assumption that they can get a 20% cut from 45% of all tickets purchased. I view that as aggressive because Lowe claims to only be asking more 20% of the extra revenue they help theaters generate. This makes sense because I don’t see the major theaters giving MoviePass 20% on every Star Wars, Black Panther, etc. ticket they purchase under any circumstances.

      The interviewer said it herself. MoviePass is particularly well-suited for smaller films and smaller theaters. IMHO that is where they will eventual find profitability. However,1) that profitability won’t justify the current valuation and 2) is predicated on them surviving their pursuit of the holy grail.

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  4. Obviously there over a dozen points that can be discussed, but I don’t want to write that much and I KNOW you don’t want me to, however, there is 1 easy point I will address, you stated:

    “This begs the question – why isn’t utilization pulling back as expected?
    This is not a February issue, nor is this year’s slate a 2018 issue”

    maybe it’s a weather issue? I’m in Las Vegas so I’m a bit blind on the subject, but if it’s 0* and folks are getting cabin fever couldn’t they be going to a movie to get out and not freeze? Would that generate higher than usual ticket sales? OK, I’ll check back, going to lay by the pool and read

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    1. Quite possible, but my seasonality adjustment should account for that in large part. The question is, could the weather have had so much of an impact so as to throw the expected number is off by so much? It’s worth discussing. Again, I’m not trying to be right… I’m seeking the truth.

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      1. As to your not wanting to be right etc…. I have never questioned your intent, either here or on SA. You put more time and effort into GIVING your knowledge away that you’ve earned the right to be right, or argumentative, and I agree, the purpose for back and forth dialogue is to make points others may not see, correct points some post that are incorrect, and eventually hash out enough accurate info that if someone has an interest in buying or selling a stock they have well over the minimum to make an informed decision. While I may at times disagree with your thesis I respect other opinions and either agree or agree to disagree. Take good care

        Liked by 1 person

  5. Do you notice that anything you write about MoviePass gets much more active participation in the comments section? Of course you do. My point… I think you are stuck with this story to the end whether you want to be or not! LOL.

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    1. Nah…

      But I see myself following this story For sometime. It might be the most interesting stock I’ve ever covered. I’ve been doing this for 30 years, so that’s saying something

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  6. Mark re: “I’ll find the segment of Mitch’s last interview that made me realize that they may be INTENTIONALLY funding the company on the backs of retail investors.”

    How is this different than any company that raises money on wall street? Infact the ONLY reason to be publicly traded is to INTENTIONALLY fund the company on the backs of investors.That is the entire purpose of wall street so not sure why you are spinning this into an issue of mal-intent.

    Do you have evidence that Mitch KNOWS the business model will NEVER work and he is simply pumping the stock to get rich on the backs of retail investors specifically? No I don’t think you do. Mitch believes in the business model as do I. I think your comment is borderline slander without evidence.

    However, what I can agree with is that wall street has not bought into the business model yet so it’s retail investors who are supporting the stock price. High retail demand is in fact important so the company can raise funds at better valuations until they can prove to wall street that the core business model will work. Nothing unethical about this.

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    1. One, you’re taking my words to strongly. There’s no mal intent nor any slander. If anybody else believes that my words are poorly / maliciously chosen, please chime in. I’m open minded.

      You’re so off base on this, I can’t even argue with you on this issue. I read your comment to one of my institutional contacts and he literally laughed into the phone.

      Keep supporting the stock until Wall Street (the professionals) by until business model. If that time comes, I’ll be there to buy the stock at the bottom and thank you for supporting the company all the way down to that level.

      No Ben, that’s not how it works, but you are correct on one point – if Management can get investors to buy into the vision, their cost of capital ends up being lower. As long as they don’t tell lies, it’s all good… and for the record, I do not believe they are telling any lies. I just don’t currently believe that their story will materialize to a fraction of the extent they are conveying. But that’s just my opinion at this stage. There’s no evidence to indicate that they will or will not succeed, nor to what extent. That’s the bulls biggest argument at this point in my opinion.

      Liked by 1 person

      1. I’m not sure what you guys are laughing about. I’m just agreeing with your statement that RETAIL demand is important at this stage in the company’s lifecycle. It’s another way of saying what you said “INTENTIONALLY funding the company on the backs of retail investors”.

        Because the business model is not proven yet, retail demand is higher than institutional demand. There is nothing laughable about this. It is pure fact. Many retail investors do not have the knowledge or time to get in on the bottom like you may be able to Mark. They won’t know precisely when Wall Street buys into the model. They are willing to hold long-term for a chance this will be the next NFLX. This is just pure fact. If you are laughing, you are misconstruing my comment.

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        1. Maybe we misconstrued, but retail investors shouldn’t be supporting the stock if they are going to dilute you and force the stock down. That’s not how it works.

          A higher valuation is afforded to a company with a good long-term business plan (regardless of the short term lifting needed). This is why companies like Amazon seemed expensive all the way up. Institutions (as a whole) knew what they were doing and believed in its efficacy, enabling rounds of funding under attractive terms.

          This is why institutions haven’t come out in support of MoviePass as of yet… and if institutions don’t support the company, retail investors probably shouldn’t either.

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        2. Brad said it well… “Which is why Ted and company should take care of retail investors on equity raises (i.e. let them in on it).”

          Everyone is getting a good deal except the retail investors.

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        3. In case my point wasn’t clear, when investors (usually VCs) invest in a company that will likely require more funding, they do so at a valuation that enables subsequent rounds to be done at higher valuations, thus rewarding early investors. Otherwise, what’s the point of being early? Nobility is usually not a profitable investment strategy.

          When a subsequent round of funding is done at a lower valuation, it’s called a “down round” and has many negative consequences beyond the immediate-term dilution.

          https://www.investopedia.com/terms/d/downround.asp

          http://www.businessinsider.com/what-down-rounds-do-to-startups-2013-2

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      2. Which is why Ted and company should take care of retail investors on equity raises (i.e. let them in on it). Do I sound like a broken record on that yet?

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      1. I tend to agree, but allow a benefit of doubt that someone can overcome confirmation bias with clear and open minded thought.

        But this business model bears ZERO resemblance to NFLX. NFLX buys a license to show a movie an unlimited number of times. MoviePass has to pay for every viewing. BIG difference.

        One had to wonder if Mitch himself is confirmation biased, fueled by an inner sense of loss in having sold his NFLX shares about 15 years too early. That’s not meant to sound snide. I’m being serious.

        That’s another thing. I think Mitch is a great operator (Redbox showed that), but he’s never proven himself to be extraordinary visionary. The actual Redbox box was already invented and simply needed to be sold into what was largely an existing customer base from the original Coinstar box. Add that to his early exit from NFLX and I don’t see where he can be credited with being accurately visionary. His MoviePass plan is imaginative, but I don’t see it as visionary.

        Of course, I could be the one missing out of the vision in this case. I’m known for my vision when picking stocks (LIOX, FB, HIMX, PXLW, QADA, etc… all visionary picks), but not all hit. I miss a lot but more than make up for it with the home runs.

        So, I guess we’ll just have to see.

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  7. Hi Mark,

    Thanks for this new piece. I hope you didn’t mean me as one of those who insulted you. Again, this is precisely done, however I still think there are fundamentally wrong parts in terms of this product’s future, or at least how I imagine it being successful, because we are really just trying to guess here.

    So I believe the #1 point and direction they should follow (and this is what is really the best interest of theaters) is to help theaters fill up their empty seats, leaving the peak-times for the pay-as-you-go full-price moviegoers. We already have seen some of their actions moving into this direction with routing users to (or away from) particular titles in the last couple of weeks.

    A few words about the theaters’ own subscription service: It ain’t gonna work. People (especially in the US) want the biggest, the best, the unlimited from everything, and they want it cheap. On the other hand, because of my visioned model below, theaters don’t want to limit the users to themselves either. They want a balanced and constant, near 100% utilization. They can’t reach that by only themselves, since once their showtimes getting full, they can’t fulfill the demand and disappoint their users. They also really don’t want to deal with huge customer service (on top of what they already need to do for their brick-and-mortar business). And, since it’s not their primary business, they simply can’t beat a specialist 3rd-party. All they need is good deals, stable contracts and trustful relationship with MP.

    But, back to the main topic: I think, there is one thing that we shouldn’t be counting with at all (and I’m afraid the majority of your calculations are based on that): TICKET PRICE. Why? Because there is literally no price for a seat that remains empty through the showtime (like a dusty DVD sitting on the shelf of the store, to pair with my metaphors from my last comments). The actual price can be anything between the $0 and the full price. I don’t believe that 20-25% discount would be a good and final deal, maybe just a start, to get the foot in the door and only for the GA (full) tickets.

    How I see this to continue AND succeed is really just the matter of time when the big chains start to make their deal with MP. From this moment, MP will be the best partner of the theaters, dynamically routing the traffic to their showtimes, to give help them reach nearly 100% utilization. This is where the real creativity / magic can come into this story..

    I see the base fare remains around the same, or slightly higher, but still around the $10, since it is clear that this is the magic price point that attracts both avid-/casual users. But, what I also see coming is that they will start routing users to off-peak as soon as they got the deals with the theaters (from twitter posts, you can see they are already doing that with contracted small chains). This means that the main goal should be to fill afternoon / weekdays showtimes, rather than the premier-week / weekend evenings. They could still offer that, by limiting the number of seats for MP users, like to around 5-10% of the room capacity. I believe this is one of the trade-offs that everyone expects and I’m pretty sure they have this strategy in their mind as well.

    So, in general I think this should turn into a real subscription-like service, where you still get an awesome deal, but with some limitations like having to go off-peak / >= 2nd week movies or be lucky / race for the limited number of peak showtimes. Then, I can see add-ons. Have you checked out Amazon Prime Videos nowadays? There is a bunch of older / amazon-made movies / series you can watch with Prime. Then you can pay-as-you-go for the premium content.

    As an MP user myself, I am totally OK with the model I just described, going on weekdays or if – once in a while – it really is one of those handful number of movies that I am keen to watch the 1st week and on a weekend.. Then I’m just happy to pay $2-3 on top of my base monthly sub fee.

    I suspect that you know how the tickets are being priced and how much is the revenue the theaters can get from a $10-14 movie ticket.. And that there is no direct answer to this question, as it depends.. On the first week, movie theaters are usually paying between 75-100% of the ticket price to the studios.. (with biggest titles it’s close to 100%). After the 2nd week, this drops to 25-50% and from the 3rd-4th week they almost keep the whole price. Therefore, I dare to say that if MP manages to get these deals with them – given that it’s proven how much MP users are spending on concessions – they can get these very off-peak showtimes “for free” (or for a small fee which will wiped out by the 10-20% concession commission MP should get and the commissions MP will pay to the theaters from third-party integrations!). There are numerous variations how this can play out very well..

    But let me stop here, because this is beyond the details we will ever know about these deals between MP and theaters. What we will see is that they will be doing great, let’s say in 1/2 – 1 year from now and – along with theaters! – will be making big profits. This is my vision about this service.. I still wanna collect all these in an article myself, but having a day job and some pet projects limit my capabilities. But if you feel that you now see a more positive future, just mention me and feel free to give HMNY another shot 🙂

    So, as with everything, I believe the law of supplydemand will play out very well. The key point now is to build the subscriber base and get the theaters join the game, since this is really something, that I suspect even they don’t know can turn their business into an ATM. So as MP’s.

    Cheers,
    Szabi

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    1. Good post with some great thoughts. The one thing I would caution investors to remember is that the theater owners aren’t looking for a partnership with a company that stands to gain power over them. If the big three theater operators owned a combined 60% of movie pass things might be different.

      However, The reality is that there is a contentious relationship between the two sides. I get the sense that the theaters would rather figure it out for themselves then allow an outsider to come in and gain an advantageous position over them. Thus, it is in the big three’s best interest to not negotiate with them until/unless it becomes absolutely necessary.

      p.s. Some people make insulting comments, but I take no offense.

      The past decade has led millions of individual investors to think that they know what it takes to be a professional investor. The reality is that it takes a solid 10+ years of education, mentoring, and work experience, just like any other lucrative profession.

      But the irony is that I used to be one of them. It wasn’t until I learned what I didn’t know that I realized what I didn’t know.

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      1. Mitch talked about concessions twice in that interview. First, he said $11 million dollars was spent by 1 million MP subscribers at AMC specifically last month. He also said later that the average customer spends $5 on concessions before they subscribe and $10 after. This has not been talked about much because nobody can verify it and probably many do not believe it, but if Mitch is even close to being right, this will have an impact on MP being able to negotiate. Q4 concession revenues last week were nothing to write home about and if what Mitch said is true then they may be worse than we think without any impact from MP.

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        1. Exactly! And yet, the theaters saw concessions do well at newly-renovated theaters and a similar impact in Europe as in the U.S. — I simply don’t see the 120% uplift they’ve been claiming. Personally, I think the effect (whether 120% or otherwise) is as transitory as their utilization is supposed to be.

          Anecdotally, that’s what I’ve seen — an initial concessions uplift, followed by a slowdown back toward normal levels with each passing movie. For me personally, I initially splurged, but reigned myself in for the sake of staying more loyal to my healthy diet.

          My sense is that MoviePass is trying to get a cut of the whole pie, as opposed to just the part they increase. I’d want to know each individual customers’ prior usage and compensate MoviePass on the individuals increase of each individual customer. Not practically possible. Only total sales can be calculated, not how many sales would have occurred anyway. The uplift is a leap of faith.

          If I AMC, I would think about running a cohort analysis, establishing an estimated uplift and paying on that. If utilization really does track materially lower over time, their cut on any given customer would decrease over time and maybe drop to zero if they return to the estimated baseline utilization (the zero-uplift level).

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      2. If MP cuts off 100 more AMC locations, I guess they will find out how much it hits their concession revenue.

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        1. I don’t think they really care. MoviePass is undeniably good for AMC’s bottom line, but I don’t think management likes the strategic trade-off. They’s be getting money in exchange for affording MoviePass the opportunity to become more influential (read: a threat) in their industry.

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  8. WOW excellent analysis. I never accepted the “gym membership” model with declining use over time. I believe that if good movies come up at anytime during the subscription period, it will drive use. I’d somehow give a discount/reduction for all the “kiddie movies” being released during 2018 as the typical MP subscriber is an adult and less likely to view these movies.

    Great work on one of the most interesting business models I’ve ever studied.

    Like

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