MoviePass – Why The Earnings Don’t Really Matter -Yet
May 16, 2018
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!