What I Learned About and From Mark Gomes

One of the great things I have found since starting this blog is that it is a great way to meet new people.   Most of the people I have met are quite interesting, have successful backgrounds, and have a high level of expertise in their respective areas.   Aside from the occasional troll, the vast majority of people that I have communicated with have been great, well-meaning people who simply want to exchange ideas and thoughts about MoviePass, retirement, investing or other topics that I touch on here and there.   Mark Gomes is one of the people I met through this blog.  Mark and I started exchanging thoughts and ideas around MoviePass several months ago.   And as some of the people who follow us know Mark and I did a debate online where we shared our respective opinions on MoviePass and HMNY.

Before doing the debate with Mark, we spoke at length about Mark’s background, about life, about our investing ideas and strategies.   We found that we shared more things in common than we differed.   I always find it interesting that more often than not, if you really try to understand a person and understand their personal journey, you will find that you can find many common threads that bind you.   I found that to be quite true with Mark, as we shared a story of early retirement, the desire to give back something to the world, we both feel very fortunate and blessed with where we are in life, and like any lifetime spent working, we had our share bumps bruises and battles along the way.

One bump that Mark has on his record is a dust-up with the SEC.   Specifically, Mark was served a cease and desist order based on what the SEC saw as a series of pump and dump trades.  Mark settled with the SEC, as part of the settlement he was barred from working in the financial industry for 5 years. (at least essentially barred – you can read the specifics in the filing).  I talked to Mark about this entire episode at length.   I wanted to make sure I was doing my DD before agreeing to do anything publicly together, so I wanted to get the full story from him about what had happened between him and the SEC.

Like any story, there are two sides to the Mark Gomes and SEC story.  Personally, I am not picking sides here, but I do believe that Mark’s side of the story stands up pretty well.   Let me explain a bit of Mark’s history and I will get into why I believe Mark deserves the benefit of the doubt, and further why I believe Mark is a very good analyst.

Mark’s history started out as a grunt at International Data Corporation (IDC) – Funny enough, Mark and I had similar grunt jobs, being essentially fax boys back in the old days when fax machines were considered expensive and essential equipment to running a business.  Mark was savvy and smart enough to start helping out doing research, learning what needed to be done, and eventually climbed his way up to being a very respected senior researcher for IDC and later AMR research.  His career working for those two respected companies lasted for 10 years, from 1994 to 2004. 

Mark then decided to break out on his own.  He has an entrepreneurial spirit, and he could see an opportunity to take his craft and make money providing research to various hedge funds utilizing his knowledge and contacts in the industry.   Mark started a company called Pipeline Data LLC and ran that from 2004 to 2009.  Mark then semi-retired, did some volunteer work.    He also kept busy doing some blogging on Seeking Alpha.

Then according to Mark’s story, he had a close friend who was diagnosed with breast cancer in 2013.    Apparently, this friend did not have a lot of money, and Mark wanted to help her out.   Mark told me he would have gladly just written a check to his friend, but the couple he was trying to help had a lot of pride and did not wish to take any handout.   So Mark offered to do a partnership with his sick friend’s husband to create a new research firm.  Mark was going to do the research work and lead the analysts, and the friend was going to do the website and do promotion of selling the premium research.   Essentially the premium research was early access to Mark and other analysts calls on certain stocks.  The company was named PPT research.

Again, according to Mark, he discovered in 2014 that his partner (the sick friend’s husband) had done some nefarious selloff of the company’s assets without his knowledge or permission, he also found out that his partner had made some errors in clarity on disclosure that Mark felt was going to be bad for the company.   Mark, of course, felt burned by all of this and took steps to back away from the company and start shutting it down.

In 2015 the SEC started an investigation of PPT Research.   They alleged that PTT Research’s disclosures did not properly inform investors of their trading practices/intentions. They also alleged that PPT’s newsletter service was in actuality acting as an unregistered investment advisor (all investment advisors must be registered by law).  That investigation was ultimately narrowed down to determine whether Mark himself was releasing stock reports with the sole intent of scalping – pumping a stock’s price up to profit by immediately selling the shares at a higher price.

As part of the investigation, the SEC requested every article Mark had written and compared them to the nearly 5,000 trades he had made.  He was also hauled in for an 8-hour deposition at the SEC Miami office.  In total the SEC looked at approximately 400 different stocks were involved.   Mark’s attorney warned him that the SEC could seek millions in disgorgements and penalties, along with possible imprisonment in the event that Mark gave any false testimony or information during the investigation.  So Mark was motivated to prove his case! 

Through a long process with the SEC, they narrowed down from the original list of near 400 stocks, down to 4 stocks that were still considered to be in question.   Mark’s lawyer argued that 99% of the trades in question were found to have no wrongdoing.   And that the remaining 4 stock trades in question could likely be explained by coincidence alone.   Mark shared with me that he could have mounted a very good defense for the remaining 4 stocks, and he felt he had documentation and a good case.  Mark explained the few trades in question to me, and I must say, he has the details, timestamps, and good reasoning for why he made the trades when he did, and how those actions did coincide with his research in a way that most traders would accept as ethical.  (Note – I am NOT a trader, I am a long-term buy and hold guy, I don’t trade daily news events, and I only buy a stock if I feel like I can stick with it for many years – so I can’t really speak for how heavy traders would feel about Mark’s work with 100% confidence and conviction)

Mark consulted with his lawyer and ultimately decided that it was a better decision for him to put the matter behind him, settle and pay the approximately $275,00 fine to the SEC.

The logic was that it could have cost him several times that amount to fight the battle in court.   And when fighting a branch of the US Government, you are battling an entity that has essentially unlimited resources to throw at you.

The SEC is like any government agency, they have a certain number of cases they have to get through, and they basically throw the book at you, and hope to settle.  They want their money, and they want to make it appear as if they are getting results.  So you are best to stay out of their crosshairs.   Mark learned a lesson on all of this.   And you will see how very careful Mark is on his disclosure statements if you look at his site or any of his material or research.

So like many stories – it helps to hear both sides.  With context, it seems obvious that it would not be at all wise to write off Mark as simply a pump and dump artist with a bad SEC record.   Mark does detailed research, he believes in his methodologies, and he has been schooled and trained by some of the best in the business.  I am confident that Mark is right on his trades more often than he is wrong.  Beyond that, Mark is a decent guy, and impressive in other areas of his life.  He is a world-class accomplished track and field athlete.  He made a dream comeback to win the 400 MeterTrack & Field Championship Masters event while shedding 50lbs in preparation for it.   And he holds the World Record in the event.

I have had the privilege to work with a lot of really smart and amazing people throughout my career.   And IMO Mark stacks right up well with these A Type personalities.   He is very intense, highly driven, and one of those people who you don’t just “turn off”.  They are always doing something, they don’t like to be bored, and their minds are always going.  That may have got Mark into some trouble – that intensity can do that to a person, when you are a fully charged one-man wrecking machine, you have to make sure those powers are used for good and not evil.  I think Mark took one on the chin with the SEC, and I have seen that kind of thing before.   It is not making an excuse for him, and I am sure Mark learned his lessons

I learned a few things from Mark and was reminded of a few things I already knew.  In my passion for Moviepass and the opportunity for HMNY, it would have been better for me to have slowed down and head some warning on the fears of dilution that Mark was banging his fist about.  I knew that the company was going to raise money through secondary offerings, but what I did not know was how wildly negative that market was going to react to those events.  I don’t blame Mark in any way for pointing out the risk of the ATM and the dilution.  And, I don’t believe either Mark or I have the power to materially move HMNY stock over the long term, or the short term.   What I do know, is Mark’s experience and his research told him that the dilution would spook Wall St.   He was right about that.    Mark has called the stock moves & trades of HMNY almost to a tee.   So much so, he is probably on the SEC’s short list of who to go harass over the unfortunate and huge declines that stock has suffered.   I don’t believe Mark has any insider knowledge at all, he was just calling things as he saw them, based on his experience, and his knowledge of Wall St.

I could have found a better entry point to this stock had I been more open to Mark’s viewpoints.

I remain a committed bull on MoviePass and HMNY.   But I sure as hell would rather have started my investment at $0.18!  At this point, I think Mark is wrong on his call to further short the stock.   I think the stock is basically priced to go out of business, and I don’t think that is going to happen.   This stock has been on death watch for a couple months now, but really shows no sign true sign of rolling over completely.

I am glad for having met Mark, and I hope we can continue to talk about stocks, stress test each other’s ideas, and keep doing what we both like to do.

I hope by reading this, you learn a bit more about Mark, and when you see people (trolls) bashing him, you think twice before dismissing his POV.

My hope is that Mark switches over to the bull side of HMNY soon, and we can ride this together to great gains!

MoviePass – Why The Earnings Don’t Really Matter -Yet

 

I spent a good deal of time combing through the earnings numbers last night and then again this morning.   Overall, the loss on GP was bigger than I expected or modeled.   I won’t bother repeating all the numbers here.  Gomes does a fine enough job covering the short view of how the financials sucked.  So if your glass is half empty read his post.    And BTW I am not saying he is wrong on the analysis of the quarter.   What I am saying is that it actually doesn’t matter all that much yet.    HMNY is making the transition to Unicorn status, and that is what matters now.

HMNY stock action is starting to act like a unicorn.  Investors, both retail and institutional are starting to accept that it is going to take a lot of money to build this business to scale.   For unicorns, the name of the game is rapid growth, at almost any cost + the belief that at scale a wonderful business will be born.  MoviePass made solid progress on both of those fronts.  Not as good as I had hoped, but solid progress has been made in the QTR.

On subscriber growth, honestly, I was a little disappointed with the 2.7 Million number.   I really wanted to see 3 Million here as the surprise number.   But, 2.7 Million is not a BAD number, and it does put the company on a solid pace to hit or beat 5 Million subs by the end of the year.   We still have the two most busy moviegoing seasons ahead of us!  We all get impatient I know, but 5 million subs in the period of about 14 months is a crazy good number.   That is unicorn growth.

On the front of creating a wonderful longterm business at scale, I like what I see.   The advertising business is just scaling up now, and it was frankly too early to have a lot of traction early in this QTR on ad revenue.   That said we did see some real revenue here at just of a million bucks, and we have 3 real paying customers, who must have spent a decent chunk of change to get that number over a million.  The completion of MovieFone acquistion happened in the QTR, and don’t forget that this gave MoviePass access to Oath’s huge salesforce.  Also of note, MovieFone announced the decommissioning of their standalone app to be integrated into MoviePass just this week.   So there is a lot of good progress in building up an advertising business to take advantage of MoviePass as it continues to grow and scale up nicely.

The news was less good on Utilization rate, and hence this made the financials look worse.   The explanation for this is the immaturity of the customer base, and the new safeguards and limitations were not yet in place.

The maturity of the user base is key to utilization, if you have had MoviePass for more than 5 months you know exactly what I mean.  At first, you ride that new bike like the shiny awesome new toy it is.  You make love to it like it was your hot new GF or BF.   But like all new things, after a while, it becomes an old thing, and you calm down and ride it less.   We are creatures of habit, we go back to our old habits, it happens, I have reams of data to prove it.   Buy if you want a great read on how strong our habits are read this book.  It will blow your mind!

So, unfortunately, with strong new subscriber growth, we will experience higher utilization rates for some amount of time until the userbase is significantly larger than new net additions each quarter.   If you take the 350,000 net new ads monthly the company is now claiming, once we get past 5 Million subs, that math for more mature vs. immature subs starts getting a lot better.   There are a lot of businesses that work this way.  This is not something to get overly alarmed about.   Have you ever heard of giving away the razor to sell the blades?   That is what is happening here.

Longs should be relieved that all the jacking around of the offering did not cause any type of serious momentum bust.   The iHeart Radio promotion was in my mind a clear dud.  It didn’t do much, and Farnsworth has now publicly thrown the thing under the bus – stating “somebody talked me into it, I will never do it again”.   Chalk that one up to having a bit of a moron leading this thing, and startups doing nutty stuff from time to time.

The great news is that the “one movie once” limit, and the ticket stub submission procedure, did not cause a total subscriber rebellion.   Anytime you can make changes that have a 35% reduction of COGs from your customers, and they still love you, it means your value proposition is very strong.   Add to that, customers say they will willingly pay more, things are looking good on being able to get a revenue model on subs to break even sometime down the road.

Honestly, there has been some pretty stupid shit that has happened with this company and stock over the last QTR, and even with that, the momentum case is better than the short case, particularly at this Market Cap level.   This company needs PR help BADLY!   From the horribly timed 8K, to the late a feeble defense of its stock price from Farnsworth, to the completely insane way they released the QTRLY ER last night and followed up with the PR this morning.   It is just a total shit show on PR.   I mean it is amateur hour at its worst.   In some ways, the company has been successful in spite of itself, and that is because the overall idea is so compelling, and this space was so totally ripe for total disruption.    I continue to believe that Farnsworth is a bozo, but MoviePass needed somebody with brass balls and a bit crazy to make the moves it has.  He is a useful idiot in the MoviePass crusade.   Farnsworth is our very own  Erlich Bachman!   If you don’t know Bachman, you should not even think about investing in HMNY!  It’s not for you!

And so it is, the financials look ugly, the company continues to grow multi 1000’s percentages, the shorts will howl that the company is doomed!  The longs will see the beautiful unicorn.   The stock will start to rise, the shorts will get squeezed, the Wall St. number crunchers and bean counters will pout that everything they learned in MBA school was wrong.   And a unicron will become real!

 

What the heck is going on here! Is MoviePass really going BK?

The past couple weeks have been admittedly rough for HMNY investors.   I have continued to stay long, but I have not been enjoying the ride much.  My time horizon is multiple years, and I still believe longterm MoviePass has a very good chance of not only surviving but thriving.  Today was particularly ugly with the 8K filing that set off alarm bells for longs and gave shorts another day in the sun to predict near-term doom for MoviePass.   AMC’s CEO Adam Aron bashing the company and spreading more FUD, also did not help matters much either.   The mainstream press seized on  the 8K filing, and went for blood with scary headlines predicting near-term bankruptcy.

Spoiler – I do not think MoviePass is headed for Bankruptcy.   I still believe the MoviePass model can and will work.    I have said it before, MoviePass really should not be a public company yet.  And in many respects, they really still are not fully a public company.  But by Proxy – via HMNY they are close enough.  At least for retail investors who have wanted to get a piece of the action on MoviePass’s business.

I am pretty sure there are a whole lot of HMNY investors who are kicking themselves right now.  Wishing they had stayed away from this stock, and who could blame them given the rapid descent of the stock price.   So far, the bears have been right, and shorts have made good money betting against MoviePass.

I still believe we are in very early innings for MoviePass.   And while I think it is problematic for the company that shares have dropped to this low level, I don’t think it is a catastrophic situation.   The short attack on the company has undoubtedly been successful, and it has put the company in a more difficult position for raising funds.   There is no way to escape it, this makes things harder for MoviePass.  Selling shares on the cheap is a rough way to raise money, and convincing lenders to fund further sub growth will be difficult and expensive given the scary headlines.    I expect to see this narrative linger for at least a few months.  Maybe until the end of the year.  Yes, it will come with dilution, and it could also come with share price staying under pressure.

I don’t see bankruptcy as a likely outcome here.  The primary reason is that the company has no debt.   So really only HMNY management can decide if they want to try and take BK route if things get that bad, but by doing so, they gain very little.   Hell, at this point, even the whining about Farnsworth’s market cap incentives seems wildly misplaced.   At the current market cap of about $78 Million – Farnsworth will get exactly ZERO from his market cap bonus structure.  At this point, I would love to see nothing less than a 100% payout to Farnsworth if he can hit these goals!

I continue to believe that Farnsworth and Lowe have a LOT of levers they can pull to further reduce the cash bleed, while still maintaining reasonable subscriber growth.    Do remember that the MoviePass terms of service give the company a lot of options for changing the service in any number of ways.   Removing the ability to see a movie more than once, and forcing photos of ticket stubs were successful in bringing ticket COGs down by 35% – I believe the company can go even further to reduce COGs.

A few ideas for further reducing COGs

  • Have one day a week where only partner theaters are available for MP subscribers.   This would give a great bonus to those who are playing nice with MP, and it will sting the chains who don’t play nice.  It would also reduce consumption 4 days a month.   I think they could do this without infuriating the subscriber base.  MoviePass just needs to be open and honest with subscribers, and communicate with them upfront prior to making a move like this.  People LOVE their MP, and if well guided, they will help do their part to keep the company in business.
  • Block opening weekends for more big blockbuster films.   I know many will howl at this, but I contend that a very large number of MP customers will not care if they have to wait 2-3 days to see the big BB film.  By doing this, it will reduce some consumption, and will also offer more value to chains, helping them fill more seats that would otherwise go unfilled as perishable inventory.
  • Cut off some AMC theaters where there are obvious good alternatives – if a deal can be struck with competitors Regal etc.   AMC is trying to kill MoviePass with a smear campaign, and playing hardball here will be understandable by most MP customers.  Again, MP needs to step up the PR machine here and get the customer on their side.   They are just not doing enough to make their loyal customers part of the solution.
  • Encourage Customers to be part of the solution to reduce costs!   Ask loyal customers to frequent matinees when convenient, use MP like you would use your own money.   Honestly – I think a lot of customers would be happy to help if it means the company stays viable.

There are other much more draconian ideas we could all think of to reduce costs, but obviously, the company does not want to take any measure that will kill its ability to scale.   That said – if the decision is BK or more draconian cost reductions, particularly to slow down the heavy users – MOST will accept the draconian measures over BK.  And remember, 88% of the subs are not a problem, we are only trying to slow down the hogs!

  • Simply start kicking out the heavy users.  If they are month to month users, don’t renew them.  Offer the heavy user a $29.99 plan.   I think about 1/2 would take it.
  • Start restricting the movies that heavy users can see.  Limit their options and limit the theaters they can go to.    Yes that sounds harsh, but to avoid BK, MP may need to start getting harsh with the hogs!

The point is – there are a LOT of levers, and a lot of options for MP to stay in business and provide an excellent value to the vast majority (88%) of their customers who do not drain the bank every month.   Making the talk of any near-term BK very unlikely.

Things are not quite a pretty as they were a couple months ago.  The share price has fallen far below where I thought it would fall.   But I think the story still works, I think the business model can still work with some tweaks.   I have not given up.

Finally – if you believed that MoviePass would work from my previous models.  Which of course I do believe, than you should now love the stock even more after MoviePass has successfully implemented the cost reductions they now have in place.

From the  NY POST article today:

Farnsworth, however, disputed AMC’s figures, saying MoviePass members had actually visited the chain an average of 1.8 times in April.

He added that MoviePass has slashed that number to 1.13 since it began cracking down on users who have been sharing their memberships and watching the same movie more than once.

“Anything below 1.5 for us is great, because you can make it up with other revenues” from marketing deals and other corporate tie-ins, Farnsworth told The Post.

I understand a lot of people are scared, and they don’t trust Farnsworth anymore, and I can’t totally blame investors for that.   However, if pressed, I find only a very few things where Farnsworth has not been totally clear, and I have not seen flat out lies.  Missing projections does not equal a lie – BTW.   That is why they call it an earnings miss.  Not an earning LIE.  They are guesses at the future.   Is Farnsworth a bad guesser?  Maybe!  Has he been wrong with other businesses in the past, yes.   Does he deserve the benefit of the doubt when he speaks about MoviePass now, only you can decide.  But if you truly don’t trust the CEO and think he is a liar, I would avoid the stock anyway.

So I have an updated model on the model page with 1.13 Utilizatoin rate.  And that looks very promisting indeed.   It all depends on who and what you want to believe.  That hasn’t changed!

 

 

 

Why I see MoviePass utilization rate staying in the 1.2 to 1.5 range

I have now received a LOT of feedback on my MoviePass revenue model published on Seeking Alpha today.  By far the biggest area of feedback has been from people who disagree (sometimes violently and rudely) with the  utilization factor I used in the model.  This is the number of times per month on average MoviePass users will see a movie.  I used 1.4 in my model.  Many people emailed me and said I was crazy, the usage will be way higher the say! Lots of people gave me anecdotal evidence about how they use MoviePass all the time and so all of their friends!    It will be at least 4 a month!  Your model is junk!  2 is the lowest it will ever go!  booo !  Hiss!!    models like Mark Gomes ramp it to over 4.   and shorts have loved that logic!

Why do people care so much?  Investors know, the Utilzation rate has a massive impact on the model and on MoviePass’ fortunes, so I wanted to revisit my assumption here and more fully explore the topic.  As if I am way off, my model will be wrong, and it would not be good for the company or my long position in HMNY.

First, it is worth noting the company has claimed it sees utilization rate settling at 1.2 average over time.  

Many have pointed out that the company had mentioned a number over 2 in SEC reports, I have not been able to find those numbers as of yet. But if somebody has a link to send me, please do!  

In the most extensive interview done yet on the MoviePass business model Mitch Lowe and recode’s Peter Kafka –  Mitch explained the usage numbers this way.

Here’s the trick: 89 percent of American moviegoers only go to four or five movies a year. When they join MoviePass, they double their consumption and go to about 10 a year. That’s a little bit less than one a month. They balance out the 11 percent of the population that go 18 times before joining MoviePass and then after go three times a month. It works out. Over time, it actually works out to be about one movie per month per subscriber. Now, some people do go to 10, 15. We even have one guy who on this 40th birthday challenged himself to go to 40 movies in 40 days. We do have people with a fair amount of time on their hands.”

So if we use these numbers form the CEO! – It would put the Utilization factor at 1!

As you all know, I am believer and a bull on MoviePass.  But even I have a hard time accepting a usage factor of 1.  It just seems too low to me. That is a gut feeling.

Another interesting source for utilization rate was posted here on reddit.

This model does an extrapolation of total movie tickets sold and the % of tickets sold by MoviePass over a 4 month period and does a calculation from there to come up with an average number of tickets per subscriber.  This model lands at around 1.3 to 1.5 Movies per month. The author comes up with a final analysis stating.

“With a TLDR: Moviepass bought at most 14,499,069 tickets from movies released between Novemember 1st – March 24th which is an average of 1.53 movies per subscriber.

A better estimate using 6% of the box office for the missing data is 12,384,621 tickets sold for an average of 1.3 tickets/month per subscriber. Most likely the average subscriber goes to 1.3-1.53 movies per month”

In my model I factored in that MoviePass has capped users with the most recent promo with iHeartRadio at 4 movies a month.  That keeps the heavy users from skewing (& screwing) up the average. MoviePass has also made some significant moves to reduce fraud and started to get more aggressive enforcing its terms of service.  In some cases discontinuing Heavy Users subscriptions.

So the hard facts we have from the Company CEO, and from other detailed models do show that my estimated 1.4 Utilization Rate is actually pretty reasonable after all.  It is higher than what the Company publicly states, and within the high range of the most detailed model I could find.

Then there is a more subjective view I think is important to consider.  

Most people simply do not have the time to see more than 16 to 17 movies a year. Which is what a 1.4 utilization rate would bring.  In reality most don’t have the time to see more than 1 movie a month.

Let’s look at some data to backup that claim.   

The Average feature film is around 90 Minutes long.  That does not include previews, ads etc. that accompany most viewings, that easily ads 15 minutes to the experience.  If you add in the commute time to the theater, I estimate 15 minutes each way for 30 minutes total commuting time you get to a total time commitment of at least 2 hours, likely more, but I will use that number to be conservative.

A 1.4 Utilization Factor or about 16 movies a year x 2 Hours equals 32 hours a year committed to movie going.  Almost an entire work week spent at the movies? I just don’t think most people have that kind of time to spare.   

We have all read the research and seen the many articles on how busy Americans are.  The work week continues to get longer, people don’t take their allotted vacation days, we live in what is now called the “busy culture”.  Not to mention there is incredible competition for our free time and lots of attractive media options when you want that media escape.   

Going to the movies typically means finding somebody else to go with you – although more people are starting to go it alone with MP.  It also means finding a show and a time that works for you, it could mean getting a babysitter, and it may mean you have to leave your warm dry house and go through inclement weather just to see a show.  There are a LOT of good reasons that people think they will go do something, and finally reality sets in and they make other plans, admit it, it happens to you all the time!

Finally, If you are reading this article – know that you are NOT normal!  You likely care about movies more than most people. That is likely why you found out about MoviePass in the first place.  You are also a subset of the population who actually cares about individual stocks. You live in a small cohort world, you are not the “average” consumer.  So if your gut – subjectively is telling you people will see a lot more than 16 movies a year. You are probably wrong, and you just don’t know it. The data doesn’t back it, nor does a longer examination of the subjective thinking on the topic.  

So with that – thank you again to all who sent feedback – some of it angry 🙂 on how stupid my model is because my Utilization rate is a fantasy!   Maybe that fantasy is actually your own….