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:

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.

 

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