Has Helios and Matheson Analytics (NASDAQ:HMNY) finally hit on a way to make money off its MoviePass service? The ticket subscription business endured a string of calamities in the third quarter, saying it suffered a "significant decline" in subscribers due to constantly changing the terms of its service, which caused losses to mushroom to $130 million from $43 million last year, and forced the parent company to write down the value of MoviePass by $39 million. But there was one bright spot.
The number of movies people saw on average each month plunged from 2.23 in March to just 0.77 in September. Since MoviePass pays theaters full price for each ticket -- meaning it loses money every time someone sees more than one -- the fact that members are seeing less than one movie on average suggests it might be making money on the service!
Of course, that's no way to run a business, and Helios and Matheson's ever-changing ticket subscription offers are running the business into the ground. Even as it faces a criminal inquiry by New York's attorney general into the adequacy of its public disclosures surrounding the risks inherent in its subscription plans, the data analytics firm is also engaging in a dubious effort to re-enroll subscribers who previously cancelled their subscriptions, all the while laying the groundwork to spin off the service as a separately traded business.
Losses as far as the eye can see
There's little wonder why Helios and Matheson's third-quarter earnings report was disastrous.
MoviePass segment revenues rose 9.8% sequentially to $80.5 million from the second quarter, which helped segment losses narrow to $28.5 million from $104.7 million at the end of June. However, Helios and Matheson still saw total net losses balloon, tripling from $43.5 million last year over $137 million this year.
So, don't be fooled by the company's reported loss of $0.20 per share compared to the $5.79 per-share loss posted a year ago. Last year, the company had just 7.5 million shares outstanding, while at the end of the third quarter of 2018, there were 642.7 million shares outstanding. Had the share count not changed, Helios and Matheson would have reported more than $17 per share in losses!
Worse, Helios and Matheson warns there could be further dilution coming because the conversion of its convertible note debt could add additional shares into the market. It's going to have to raise even more cash by whatever means necessary, because if it doesn't, "there is substantial doubt about the Company's ability to continue as a going concern through November 15, 2019."
An unsustainable model
The movie ticket subscription business is a tough one to make profitable, as even theater operator AMC Entertainment (NYSE:AMC) is finding out. It just announced it would be raising subscription prices in select markets for its Stubs A-List service because it is too popular. The more subscribers use their subscriptions, the more money the business loses, which should be clear to anyone with a grasp of basic mathematics.
The subscription services are playing the law of averages. Rival ticket subscription service Sinemia says the "modern moviegoer" sees on average three movies a month, while the Motion Picture Association of America says most moviegoers see four to six movies a year. Whichever number is correct, a subscription business could make money if its members stay within the averages.
This means MoviePass might have a chance! Having degraded the value of its service so much, even some people who have paid for their subscriptions (or were resubscribed and charged without their knowledge) no longer want to use it, so those subscription fees are just gravy.
In reality, though, all of this will come unwound. We'll likely see those subscription revenues plunge in the very near future as subscribers fall off the rolls. Although Helios and Matheson didn't say how many subscribers it actually has, suffering substantial member losses means the money it was bringing in is going to evaporate, too. And if MoviePass is ever spun off, don't make the mistake of buying a ticket for what's certain to be a surefire money loser.