Expectations were low going into AMC Entertainment's (NYSE:AMC) fourth-quarter earnings report. The company had been under a cloud of skepticism amid tepid box-office results to start 2019, along with nervousness surrounding its new subscription service, AMC Stubs A-List.
However, some of that skepticism may have vanished after the report, which sent shares skyrocketing as much as 17.6% on Friday.
In the quarter, AMC met its revenue guidance and trounced expectations for profitability, posting earnings per share of $0.43, well ahead of estimates for just $0.17. One particular bright spot for AMC was the U.S. market, where the company's full-year attendance growth of 6.1% bested the overall domestic market's 5.8% growth.
So what's causing these eye-popping profits and U.S. market share gains? It appears to be AMC Stubs A-List.
After A-List's rollout last June, the market soured on AMC. After all, movie subscription service MoviePass is barely clinging to life. Could a subscription service really work without cannibalizing existing full-priced patrons?
As this earnings report showed, AMC appears to have cracked the movie subscription code.
Higher food and beverage sales
In the movie business, theaters typically make about a 50% gross margin on ticket sales, give or take. That's good, but the real money is made on those egregiously priced buckets of popcorn. Last quarter, AMC earned a whopping 85.9% gross margin on food and beverage sales in the United States.
While AMC may be taking a hit on its admissions profit per A-List subscriber, higher frequency means more sales of high-margin food and beverages. CEO Adam Aron said A-Listers are spending 2.5 times more on food and beverages per month than before they joined A-List.
A-Listers bring friends... at full price
Aron was also excited about A-List's "bring-along rate." While movie lovers may be getting a great deal on their A-list subscription, many don't like going to the movies alone.
On the conference call with analysts, Aron said A-list subscribers doubled their "bring-along revenue" of friends and family, who, unlike A-Listers, pay full-price. It's not clear how one measures this item, but given that A-Listers are now seeing several movies per month, as opposed to just six movies per year before joining, it's likely that many more incremental full-priced friends are coming along. That helps mitigate the lower admissions margins from core A-Listers.
A-List signups continue ahead of expectations
Management also revealed that the number of A-List members surpassed 700,000 shortly before earnings, after crossing the 600,000 mark near the end of December and the 500,000 mark around the time of the November earnings call. At this rate, it's possible that A-List could have 1 million subscribers by its one-year anniversary in June: double management's initial expectations for the service's first year.
In addition, Aron said that usage trends remain similar to what management described in November: heavy upon initial sign-up, at 3.3 average visits by the end of the first month, but falling below 3 visits per month in short order. Average usage across the whole footprint, which includes many high-frequency new subscribers, was already at a manageable 2.8 visits per month in February.
It all adds up
As A-List initially ramped up, management expected it to cost the company $10 million to $15 million in adjusted EBITDA in 2018. However, the hit came in toward the lower end of that range at just $11.6 million, despite AMC signing up more subscribers than expected, which theoretically should have caused a larger hit to earnings in the short run. While management had previously expected A-List to break even in 2019 before adding incremental EBITDA in 2020, management now expects A-List to add to AMC's adjusted EBITDA in 2019, ahead of schedule.
Aron said he would "not be surprised" if A-List wound up generating $3 in incremental EBITDA per subscriber per month when mature. At the current 700,000 member count, that equates to an extra $2.1 million per month, or $25.2 million per year, already above the high end of management's initial hopes of $15 million to $25 million. If membership reaches 1 million, that's an extra $36 million in annual EBITDA. At 2 million subs, it's an extra $72 million.
Considering AMC's full-year 2018 adjusted EBITDA was $929.2 million, that would be a meaningful boost to profits. In short, shareholders should be excited, not fearful, about AMC Stubs A-List. It could bring a happy ending to 2019.