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Reading The Latest MoviePass Tea Leaves

|About: Helios and Matheson Analytics, Inc. (HMNY)

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The following four points were highlighted in a comment from my most recent article on MoviePass (MoviePass Hits 1.5 Million Users... Is An ICO Next?). The points were extracted from CEO Mitch Lowe's most recent interview, which appeared on Kuow.org on Friday:

Point #1. “Our primary customers are the people, especially young people, who typically go to five films a year, and after they join MoviePass they go to about 12 films a year,” Lowe said.

Point #2. In the long-run, the company plans to partner with film studios to help market their films. Lowe said the big studios are “getting it” and see value in the vision.

Point #3. According to Lowe, MoviePass currently buys “1 in every 35 tickets every day in the United States.” But when the company promotes a film through the app, Lowe said that number rises to 1 in 10 tickets sold that day.

Point #4. Lowe said the company is still working on deals with the major studios.

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By analyzing these data points, we can derive the following conclusions regarding the current state of affairs at MoviePass (MP):

Regarding Point #1. This is a bearish second derivative move. MP had previously been saying that customers double their movie-going when they sign up for MoviePass. The specificity of Mr. Lowe's comment suggests that the number is closer to 2.4x than 2.0x.

That serves to validate my estimate that expenses were coming in 20% higher than originally expected. If the movie-going multiplier is actually 2.4x, the odds of MP breaking even on subscriptions will be much more challenging. In a business like this, it could prove insurmountable, barring a 20% price hike that doesn't scare customers away (and it surely will... the question is "how many"?).

Regarding Point #2. Mr. Lowe's recent rhetoric makes it appear that they WON'T be selling data (at least not to the extent that we've been led to expect, based on past interviews). Rather, it sounds like they'll be using the data to assist in recommending / marketing movies to subscribers. This is the second straight interview where his commentary points us in this direction.

If MP can't generate significant standalone revenue from the data, it will add pressure for them to make sure customers are going to movies the MP recommends INSTEAD OF movies the customers choose (where MP will pay 100% of the ticket price with little compensation, if any).

With MP customers already going to 12 movies/year, any success in spurring a 13th, 14th, etc visit will only add to the company's losses, unless the studios / theaters give them a 100% rebate on those tickets (which would go far beyond management's most optimistic range of outcomes).

To me, Point #2 is where the story has degraded most in recent months, relative to management's previous rhetoric.

Regarding Point #3. Though Point #2 has degraded most, Point #3 is the scariest. 1 in 35 tickets equates to 3% (1 divided by 35), but MP has only penetrated about 0.75% of moviegoers (1.5 million MP subscribers divided by 200 million moviegoer).

That suggests that the average MP customer is attending 4 times more movies than the average consumer (3% divided by 0.75%).

Many (if not most) investors been operating under the assumption that MP doubles (2x) a customer's visits, from roughly 5 to 10, as originally stated by management months ago. But now, Mr. Lowe is implying that the number is 2.4x. However, if they are buying 1 in 35 tickets (suggesting that the average MP customer is attending 4x more movies than the average consumer), it all triangulates to suggest that the average MP customer goes to 67% (4x divided by 2.4x) more movies than the average consumer.

If that's the case, the road to achieving profitability is going to be far more challenging than the original figures suggested (about 2x more challenging, to be precise).

Yes, they can raise the subscription fee (and Mr. Lowe says they will, eventually). However, that will have an impact on demand and renewal rates, at least partially offsetting the added revenue generated from the price hike.

...and this is without discussing the implications of Mr. Lowe's comment about representing 1 in 10 tickets when they promote a film through their app.

As I've already discussed, if those tickets represent additional visits (as opposed to a replacement for another movie the customer might have gone to see), the ticket will represent a loss for MP, regardless of virtually any viable combination of rebates.

Regarding Point #4. To say that "the company is still working on deals with the major studios" is the same as saying "we haven't signed any, yet". The "yet" is an important consideration, but this comment is still of concern.

If I'm a major studio, I'm happy to do business with MP. However, I don't want to be paying a rebate on tickets that I'm going to sell without their help. I'm only willing to pay them for selling a ticket that I wouldn't otherwise sell.

Further, a studio "only" gets about $5 from each ticket sold, so even if they give MP 100% of that $5, MP will still be losing $5 (by paying $10 for the ticket and only getting $5 back). The only way around this was discussed in point #3. They need to spur recommended visits while simultaneously discouraging incremental discretionary visits.

Bottom Line: In my humble opinion, almost all of the data points have been moving in the wrong direction since September. Pricing has been lowered, usage is coming in higher than expected, and partnerships are not coming as fast as originally suggested. This all validates why I removed HMNY from my Interest List in the midst of the speculative frenzy.

Netting it all out, I believe that MoviePass needs to sign a lot more deals with studios, theaters, and local businesses quickly, while simultaneously figuring out how to decrease their expenses (or significantly raise prices without losing a commensurate number of customers).

I'm not saying that it can't be done. I'm simply saying that the risks and cost expectations have increased dramatically as this story has unfolded.

As I've stated before, Helios (HMNY) remains on my Interest List, but only because it's hard not to be interested. Among my active interests, it is the only one in which I am not invested. Aehr Test (AEHR) and Smith Micro (SMSI) remain my largest holdings.

Disclosure: I am/we are long AEHR, SMSI.

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