HMNY: Major Forecast Update

Long-time readers should note some significant changes in how I communicate in the public domain. The primary purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

Accordingly, this document should not be construed as an endorsement or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.

 

I’ve updated my MoviePass model to adjust for the latest figures presented by management. Key points:

* MoviePass had 2.7 million subscribers as of May 16. That’s a big shortfall from my 2.9 million estimate. As a result, I had to significantly lower my year-end subscriber estimate from 5.67 million to 3.85 million.

* Operating expenses are much higher than I expected. I’ve adjusted the numbers up to account for this.

* Ancillary (non-subscriber) revenue is growing much slower than I expected. As I’ve presented before, I expected advertising revenue to be low (among other reasons, because people don’t spend much time in the app!).

However, I expected to see more kickbacks from theaters. It could just be that their “relationships” are really much less meaningful than they’ve portrayed (shocking). That’s no surprise though. I had been wondering why theaters would be willing to give more MoviePass a cut on anything more than the extra visits MoviePass catalyzes.

Well, it seems that maybe they are. I’ve adjusted the numbers down.

 

Am I the only one who finds it funny that nearly all of my numbers proved to be too bullishPerhaps now the bulls can see that I haven’t been a “bashing bear”.

Either way, it’s all good. I’m used to being maligned. Long-time readers know that I’m merely an analyst who models what I see…

…more like a “numbers monkey” than a bashing bear!

 

* MoviePass also released a chart showing the change in utilization catalyzed by their initiatives to cut down on abuse. I’ve also updated the model to account for this.

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The drop-off is nice (and overdue), but take note of the fact that utilization doesn’t drop off from cohort to cohort. This highlights the problem I first raised as the stock hit its peak — people aren’t slowing their initial usage much!

Worse (for those seeking to gain trust in management), the data was massaged to optimize the appearance. They did this by using May utilization numbers from May 1 through May 10. Check the calendar and you’ll see that May 1 was a Tuesday and May 10 was a Thursday.

In other words, the 10-day period only included one Friday and one Saturday. Imagine if our work week worked like that!

If you go to boxofficemojo.com, you can see the impact for yourself. Not only did their method avoid a full weekend, it also failed to recognize that the first week of May was a big letdown week for theaters, because “everyone” had gone to see Avengers: Infinity War on Friday, Saturday, and/or Sunday.

The result was a box office that averaged just $27.7 million per day during the first 10 days of May, versus $42.2 million in the three days that followed.

Using that math, MoviePass utilization has actually INCREASED in May!!

 

image3  image2

But using that math would be as unfair as the math they used. To be fair, complete weeks should be used, in which case, the number is only $29.6 million. So, the chart they provided was misleading by a factor of 7%. In other words, the data is still positive, but not as positive as they’d lead us to believe.

By the way, June will have five Fridays and five Saturdays. Just sayin’.

 

These are two of many reasons why I originally dropped it from my list and portfolio back in October. It’s also the reason why the company has been forced to dilute shareholders so much.

So, while this drop-off is nice, I don’t know what else they can do to get the utilization number down to the sub-1 levels needed to spur profitability (aside from retrenching, as I suggested in my last post).

That being said, the impact on the company’s cash burn is BIG (in a good way).

My prior model had them burning $470 million between May 1 and year-end. My updated model has now has them burning “just” $170 million between May 1 and year-end.

In other words, once its current ATM is complete, I believe they may “only” need to raise another $20 million to get them through the year.

But that’s not cause for celebration.

I believe that the $150 million ATM in still underway and will be utilized gradually as that need the money. I estimate that they only need 50% of it to get through July and don’t expect that they’d raise more than that until necessary (since the stock is down around 70-cents).

So, the good news is that the cash burn has been cut by more than 60%, but the bad news is that the stock is likely to be consistently pressured by the rest of the ATM… until they need to initiate another financing.

When it’s all said and done, I think the total shares outstanding will be somewhere around 300 million at year end and their revenue run rate somewhere around $360 million.

At current levels, that would value the company at around 0.5 times revenue. However, I would continue to caution against putting a revenue “multiple” on this business. I currently anticipate an additional $215 million in losses for 2019.

This is validated by CEO Farnsworth’s claim that they have enough cash for 17-months. This is thanks to the company’s $300 million “equity line of credit”, which:

  1. Requires them to sell more shares, creating more exponential dilution, which I anticipate will continue to pressure the stock.
  2. Implies that they will burn $300 million between now and mid-October 2019 (17-months). Based on my latest 2018 forecast, they will burn $160 million of that between mid-May and year-end.The remaining $140 million will be burned by mid-October 2019. Apples-to-apples, that’s essentially flat with Jan to mid-Oct 2018 (adjusting for the new anti-abuse measures). So, assuming a near-flat cash burn in Oct/Nov/Dec 2019 vs. Oct/Nov/Dec 2018 ($80 million), I derive my total 2019 cash burn forecast of $215 million. As usual, my analysis is all based on management’s own commentary, so it’s likely as bullish as it can be.

 

Speaking of management’s commentary, Mitch Lowe blew a hole in another one of Ted Farnsworth’s claims by sharing that 80% of MoviePass customers go to less than 4 movies per month. That means that 20% go to more than 4 movies per month. This counters Mr. Farnsworth’s recent claim that 88% of their customers are profitable.

So much for that. The wonders never cease.

 

Conclusions: The reduced cash burn is a step in the right direction, but that’s meaningless if you’re hiking from NYC to LA with a dwindling amount of cash.

To make a long story short (no pun intended), the massive amounts of dilution will continue. This will put a cap HMNY’s potential upside while continuing to present substantial downside risk.

Most of all, management’s comments regarding 2019 call into question my decision to turn neutral on the stock last week. After processing Mr. Farnsworth’s $300 million / 17-month comment, I am reinstating my short call effective immediately.

I would have done so last week, but I decided to wait for the game-changing acquisition Mr. Farnsworth promised to announce by Saturday… which, of course, didn’t happen.

No matter. I wasn’t holding my breath.

In fact,  when someone asked, “what do you think Ted is buying?”

I said, “More time.”

 

p.s. This weekend, I saw Deadpool 2, the latest in this year’s long line of summer blockbusters. It was EXCELLENT (which is bad news for HMNY).

This week, Solo (the latest Star Wars movie) comes out.

FYI, Donald Glover — via his alter-ego “Childish Gambino” — is suddenly on fire with his Billboard-topping hit “This Is America” (along with its white-hot and highly-controversial video). This could add fuel to Solo’s fire.

It all goes to explain why I’ve been receiving an influx of communications from investors who have switched from HMNY to SMSI. I first opined that doing so would be a profitable move when they were sitting near the same levels (actually, HMNY was higher). Since then, HMNY has fallen about 60% and SMSI has risen about 20%.

I continue to have the opinion that swapping one for the other holds more promise to make HMNY shareholders whole (though becoming “whole” is becoming more improbable with each passing month).

Stay tuned…

 

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Disclosures / Disclaimers: I have no position in HMNY. However, this is not a solicitation to buy, sell, or otherwise transact any 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 primary 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.

80 thoughts on “HMNY: Major Forecast Update

  1. (1) I find it suspicious that they are making a comparison between avengers opening weekend and the following weekend and claiming that this is somehow due to their abuse prevention.

    (2) Technologically they are not preventing anyone from seeing the same movie twice. You can just check-in to a similar showtime for a different movie and voila.

    Liked by 2 people

    1. No… mainly because the dilution has started to have an exponential impact on the share count and therefore valuation… but also partial because I generally don’t do price targets, especially short-term ones.

      Suffice it to say that $200M per year of burn is going to weigh heavily if utilization doesn’t magically drop off a cliff.

      Like

  2. First, I think your updated model finally looks reasonable to me. Second, I do not think there are many people left that think you are just a bashing bear on this now that Ted has so thoroughly added supporting evidence that he can’t be trusted.

    Liked by 1 person

  3. By the way, good catch on the May 1st to May 10th graph being another misleading output from these guys. I do not doubt at all that was the intent. While I never gave that much weight because it was only 10 days, I missed what you caught about only 1 weekend! Shocking……. 🙂

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  4. What are the rules of an ATM? I thought they had to disclose as they sold but I’m guessing now they only have to disclose after completion?
    I don’t know yet, but if American Animals gets decent distribution, I may take a few shares for a bounce.
    Don’t want to be holing when they announce how many shares they sold though.

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  5. Waiting for the sequel “Mitch and Ted’s Excellent Adventure part 2” in this sequel Mitch and Ted get caught by the Care Bears with lots of money while their friends (investors) have less, this causes the SEC to see how this could possibly happen when Mitch & Ted kept saying publically that their company was going to make all their friends money all while M&T were leading their friends (much fewer by now) to the poor house.

    Liked by 1 person

  6. Mark how right you have been. Hope you made money on Hmny at some point either up or down. Hard to see how they come out of this. Is it normal for a stock and company to fool so many and cause such major financial losses? Seems odd that millions of subs may be out of luck in the next year or two. Can you give any similar company examples I can realsearch? Thanks.

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    1. Thanks LB!

      Since retiring from track and focusing on stocks again (no distractions) I’ve been doing better than ever. Appreciate the sentiments 🙌🏼😊

      As for your question, no… I’ve never in 25+ years seen anything like this.

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  7. Mark,

    I respect your research and input, and was wondering what your thoughts were on a RM or IPO.

    Still long on this stock despite all the proof it’s bad. I believe in the MP dream of bringing people back to the theaters, and so i’m here for the long hall.

    Thank you

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    1. Honestly, I don’t see much way out for them. I understand people who like the long-term vision and I like it too. The problem is, they need critical mass for it to work.

      In order to get critical mass, they need to have about 5 to 10% of Americans signed up… and just look at the carnage caused by the the cash needed to sign and support 1%.

      The cash burn required to get them to3% will probably drive the stock down another 50% or more. Just being honest. I still have no position here.

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      1. They should just increase the price to what Mitch originally wanted ~ $15.95, would go a long way even if they lose a few subs in the process

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        1. I’m sure they’ve run the models. That would just scare off the casual users and kill their hopes of gaining critical mass. Sub growth has slowed as it is.

          They’re DONE. Honestly no hope to be what they hoped. 0%.

          Meanwhile, investors are STILL waiting for me to be wrong about the set up… but this is one of the easiest companies I’ve ever covered. 🤷🏻‍♂️

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          1. They could just as easily bring back tiered planning, as it doesn’t have to be all or nothing at the higher price. Point is they still have some levers to pull before going to ZERO

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      2. Unless i’m misunderstanding what your saying, 5-10% of the US population would be between 16M and 32M. I thought 5M was when they MIGHT be able to be profitable? It seems to me even with the slowed rates of sub growth they could still potentially live long enough to make some deals. Of course as you’ve outlined the stock would be further diluted and by that time shareholders wouldn’t see the rocket they’ve hoped for ( which is where i was thinking an IPO would help). Thanks

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          1. I read it in it’s entirety, and i understand how much of a long shot it is. Still long and hopeful though. Thanks

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          2. I always teach that hope is not an investment strategy, so I wouldn’t be hopeful with too much $$.

            The company has a path to profitability, but it’ll only come after the realization that the current strategy is dead.

            With the blockbusters coming fast and furiously, the stock could be down in the $0.30s by July.

            At THAT point it MIGHT be interesting for a bounce, but it’s not a good investment until this year of blockbusters is over and they give clarity on them cutting the cash burn.

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  8. Ha, blockbusters coming “fast and Furiously”. I see what you did there. I’m only hopeful because I’ve been in since 8.50. That and i’m not playing with any money that’s too big or wasn’t extra anyways. We’ll see though.

    Liked by 1 person

        1. I think they should pay him in HMNY shares based on the share value the day that agreement was reached! I am beginning to wonder if for Ted this was a scam from the start.

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          1. I actually give him credit for a lot of those negotiations. Take what you can get. It’s up to us to judge the Board of Directors judgment and oversight. I just don’t condone the misrepresentations he’s been making in the public.

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          2. Yes, but has he been pursuing success in good faith? I wonder. Why would you not stay with the IPO plan and instead flush this down the toilet? There has to be a reason. Not saying they would have succeeded with IPO, but they could not be worse off than they are now.

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          3. That’s part of the misrepresentations. He can talk about all the things that he wants to do and nobody should believe him. It’s the SEC compliance stuff that we need to pay attention to. And even that’s dicey.

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          1. I might have believed that if I understood better why you thought that. I definitely believe it now as Ted has made it obvious. The day he said line of credit is the day I sold what I still owned and turned my attention elsewhere.

            Liked by 1 person

          2. Oh and I am still awaiting a response from management on some very serious questions I asked of them around that comment. Lots of correspondence with their investor relations girl but to date management will not provide her the answers to my questions. I have followed up no less than a dozen times. I would say more but you would have to delete my comments if I shared how I feel about that.

            Liked by 1 person

      1. Selling your soul to the devil is basically Wallstreet summed up :). He would probably sell his mother if it paid enough. Wallstreet/investment bankers suffer many ethical issues. Always have and probably always will. Some call it smart business, some call it bad ethics.

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    1. Thanks for the data point. Next step is to learn how to analyze them 😉

      Check it out…

      Still, respondents to marketing campaigns are typically in the 2% range (for MoviePass, that’s about 50,000 people). So, if they get $300 per taker from laurel, that’s $15 million worth of annual MoviePasses (which will likely yield $20-40 million in ticket expenses, of which $15 million — the subscription cost — will be covered by Laurel Road).

      So, they’re basically helping Laurel Park in exchange for increasing their cash burn 😂 …but to be fair, it does help in their pursuit of building critical mass with minimal marketing expense.

      My problem is still the utilization (which hasn’t ORGANICALLY dropped in a meaningful way yet). That makes it more difficult for them to cover their CAC. I’ll bet that their LTV is still a negative number, so they’ll need to do a LOT of marketing campaigns (one successful one, roughly every 3 weeks) to make up the difference.

      ——————
      Bottom Line: I think this is a smart idea. Forget getting money from the big studios and theaters, along with “night at the movies”.

      Instead, focus on the small studios/theaters (who will actually pay) and leverage the installed base for marketing.

      They probably got the idea when they realized how much money they hard to give Costco 😂

      But at least they got it. Credit where credit is due.

      Like

    1. That’s nada. 5M shares. It’s $2.5 million.
      That’s 1/50th of 1% of Citadel’s CEO’s net worth. 🤷🏻‍♂️

      I keep saying it. You can’t just look at data points, you have to analyze them. Unless you are a great trader, that’s where the money gets made.

      Like

  9. What do you think about the deal announced this morning? Looks like Ted actually came thru with something that he promised. How are they going to pay for this studio? No details given. The PR said Helios has the “OPTION” to acquire. That tells me it’s anything other than a done deal.

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    1. I read it that they bought a 51% stake in the company with the option to own the entire/100% of the company in the future

      Like

  10. Definitely sounds interesting.
    Helios also announced today that it has formed MoviePass Films LLC (“MoviePass Films”) with Emmett Furla Oasis Films (“EFO Films”). Helios owns 51% and EFO Films owns 49% of MoviePass Films. MoviePass Films will focus on studio-driven content and new film production for theatrical release and other distribution channels. Hollywood veterans Randall Emmett and George Furla will serve as Co-CEO’s of MoviePass Films; MoviePass Films’ Chairman of the Board will be Ted Farnsworth. Mitch Lowe will hold a Board seat as well, and Farnsworth and Lowe will work together day-to-day to execute the strategy between MoviePass and MoviePass Films. Terms of the deal were not disclosed, however both parties agreed on a payment in the form cash and stock.

    Helios plans to capitalize on the unique capabilities of its subsidiary, MoviePass Inc. (“MoviePass”), to market future MoviePass Films productions to millions of MoviePass subscribers and moviegoers everywhere. MoviePass Films will pay MoviePass for any marketing services provided to market MoviePass Films productions. MoviePass Films will own and control all revenue streams from theatrical release, domestic and foreign distribution rights, streaming, retail, DVD sales, transactional sales, etc.

    “To have such a well-known, quality production company join forces with the Helios/MoviePass group of companies is truly remarkable,” said Mitch Lowe, MoviePass’ CEO. “Since we began disrupting the movie industry with our unprecedented low-cost movie theater subscription service, MoviePass™, we have envisioned owning and developing our own studio content and using the power of our several million subscribers to bolster the success of the box office for our films. I believe MoviePass Films will accelerate those efforts and demonstrate the power of MoviePass to drive movie theater attendance and downstream sales, for the benefit of moviegoers, movie theaters, studios and the film entertainment ecosystem as a whole,” concluded Mr. Lowe.

    Helios believes its acquisition of the current production slate of EFO Films and the leadership of MoviePass Films by veteran producers Randall Emmett and George Furla will accelerate Helios’ plan to produce its own movies for theatrical release, create new revenue opportunities for MoviePass’ marketing services, fill theater seats throughout the United States for MoviePass Films productions to the benefit of exhibitors, and enable MoviePass Films to participate in box office and downstream revenues from its proprietary content.

    “To do a deal with Helios and MoviePass is epic for us,” said Randall Emmett of EFO Films. The MoviePass™ subscription service has totally disrupted the movie industry, for the better. When we worked with MoviePass Ventures on the movie Gotti, starring John Travolta, which premiered at Cannes and is set for release this coming June 15 – I immediately saw how revolutionary the MoviePass™ service is. I have never seen any player in our industry move so quickly and gain such a large following in such a short period of time. What impresses me the most is that MoviePass can guarantee box office attendance, which is a game changer. I don’t believe anybody else can do that,” concluded Mr. Emmett.

    “Ever since we co-acquired our first film with MoviePass Ventures, American Animals, which is set for release June 1, we’ve been looking for an opportunity to acquire and produce studio content on a larger scale and prove the power of the MoviePass™ service in the process. We believe we’ve found that opportunity with Emmett Furla Oasis Films. Along with MoviePass Films, MoviePass Ventures, our studio driven production company and our independent film investment division, will play an integral role in our business strategy,” said Ted Farnsworth, Chairman and CEO of Helios. “We believe the track record of Randall Emmett and George Furla over the last twenty years speaks for itself. For MoviePass to have the opportunity to jump in the middle of new high-caliber productions that are already underway, becoming a part of that, is more exciting for Helios and MoviePass than I ever could have imagined,” concluded Mr. Farnsworth.

    Like

    1. Tertiary announcement with a tertiary player.

      Terms not discussed, but wouldn’t be surprised if they suckered EFO with shares of HMNY stock.

      It COULD work out if MP can drive people to MP Films’ movies without increasing their utilization rate. THAT is def worth monitoring.

      Like

  11. No idea how much money MP will make from American Animals BUT it was a good movie and they hosted a live Q&A with the writer and some of the actors. Quality debut!

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      1. While I did not spend the time trying to find out how many screens it is showing on, I did look through every Studio Movie Grill location online and guess how many screens they are showing American Animals on today (Saturday)? Yep. Zero. I hate to be so critical, but they still don’t have the original MP business running right so why would anyone think they would run Ventures any better? But now they are looking to acquire EFO films. How do you think that will go? I know my answer. Great ideas, but when you start lying to cover up the fact that you can’t execute……….. Need I say more? https://www.studiomoviegrill.com/Movie/Now-Showing

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        1. Ahh, ok. Well that makes me feel a little better. I really did expect to see some success with this film just because they have enough subscribers that should go see it because MP asked them to go see it.

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          1. I don’t like the rolling schedule. It basically guarantees that the movie won’t have any chance of making it to the weekly box office charts, limiting its PR leverage. 😭

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        2. Great legwork! Now we’re getting to the bottom of this… but I wonder why they didn’t tell people about this more publicly and in advance 🤔🤷🏻‍♂️

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  12. American Animals grossed ~35k per theater in its initial 4 theater limited release. Which apparently was in the top 1 – 3 position per theater. Looks like they will roll out to a minimum of 600 theaters over the next several weeks. (My thoughts now – “if” demand holds up, we may see the release roll out to additional theaters). Article: https://www.google.com/amp/s/deadline.com/2018/06/moviepass-american-animals-the-orchard-box-office-partnership-release-1202402545/amp/

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    1. It will be interesting to see if the strong per theater sales were a result of demand or limited supply of theaters.
      If you can only see the movie and a few theaters, those of the ones you go to, so I would like to see how the movie did relative to its peers in each CITY, not on a per-theater basis.

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      1. Yep. And no matter how you slice it it’s still more cash out than in at least for a while. Not exactly what they need right now but Ted still has 40c shares to sell until he doesn’t.

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        1. The financing isn’t a problem as long as there are people willing to hold the stock. They can always reverse split and keep going. The problem I have is that their studio advantage is in their advertising ability to market to movie pass subscribers… but that’s only good if the subscribers go to one of their movies instead of another one, as opposed to in addition to.

          Like

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