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….

 

MoviePass Just Had Its IPO Moment!

Big News! Helios & Matheson is doing another public offering – utilizing their shelf registration.  I view this as  long term positive very bullish.  It looks like Ted Farnsworth is likely seeking to finalize HMNY’s ownership position and fully takeover the company.

Once completed HMNY can officially become MoviePass!  With a stock ticker of MVP (or some equivalent).  This will be positive for the company.   Aligning the name of the company with its primary branded service is a positive for retail investors, and will go a long way to sort out the confusing ownership position Helios and Matheson has had on MoviePass.

Also very important and BULLISH!  – many large money managers and hedge funds have very strict policies banning any investment in passthrough companies.  Once this proxy situation is finally settled, it will allow bigger institutional buyers to more fully participate in MoviePass as an investment.

Think of this as MoviePass’s IPO Moment!

 

 

HMNY10K – A Few New Items – Overall Story Remains Unchanged

Helios & Matheson released their 10K this week  revealing a few interesting new developments on MoviePass.

Of primary importance, the company revealed that it now owns 91.8% of MoviePass.  Up from the previous 82% holding from the company.

The increased position taken by Helios (HMNY) removes a great deal of uncertainty related to the passthrough structure and proxy battle that has been a concern for investors.

Separately, Ted Farnsworth was quoted in a new cover story for  Variety where he took an IPO of MoviePass off the table.  In the article it says,

“Farnsworth rules out spinning off MoviePass from Helios and orchestrating an initial public offering. “We’re so busy doing what we’re doing that we don’t have time to do that,” he says. However, he is considering rebranding Helios’ public listing to reflect its ownership of MoviePass because he believes the subscription service is a better known brand.”

I see this as a bullish development as it clears up confusion on corporate structure going forward.  It also demonstrates that MoviePass will soon be the leading brand for the company, and it won’t be long before they rebrand the Company name, Helios & Matheson, to MoviePass, and they will likely change the stock ticker of HMNY to better represent that new brand. Maybe it will be MVP or something like that.    As silly as it may seem, a stock ticker that represents the company brand helps a stock by attracting more retail investors.  So it is a good plan for the company to move forward with a new branding.

Finally, it was also revealed today that Helios does not face any near term liquidity meltdown that many have feared given the massive spending taking place to build the MoviePass subscriber base.  In the Variety story Farnsworth has this to say about running out of money.

“Since day one, people have been saying we’ll run out of money,” says Farnsworth. “I assure you that capital is not an issue. I’m sitting on hundreds of millions of dollars of dry powder, and I’ve got bankers and debt-financing companies calling me all the time. They know they’re looking at an Uber or an Airbnb. This is a unicorn company.”

There was also a bit of a dust up surrounding Farnsworth claiming the company had secured a $375 Million line of credit to float the company’s cash needs.  It turned out that the company did not have a line of credit secured, rather it was a reference to a shelf offering that company had already executed, but has not yet sold into the market.

I continue to remain bullish on the MoviePass opportunity.  While the business model is not easily understood using simply math and accounting methods.  A longer term view that considers the disruptive nature of the company as they take advantage of more nuanced behavioral economics concepts continue to make this company look like they indeed do have a shot of becoming the next tech unicorn.