FuboTV ( FUBO -3.35% ), the sports-centric streaming service that saw its stock rocket higher in 2020, is nowhere close to turning a profit. The company generated revenue of $61.2 million and an operating loss, excluding one-time impairment charges, of $65.5 million in the third quarter.
FuboTV isn't profitable because the direct costs of delivering its service are higher than revenue. Subscriber related expenses, which include affiliate distribution rights and cloud computing charges, among other things, were slightly higher than revenue in the third quarter. Broadcasting and transmission costs added another $9.8 million to the toll.
What's worse, a big chunk of these expenses go up right along with the subscriber count. According to the company's S-1 filing with the SEC: "The cost of affiliate distribution rights is generally incurred on a per subscriber basis and are recognized when the related programming is distributed to subscribers." In other words, fuboTV is no Netflix. Operating leverage will be hard to come by with fuboTV's business model.
If the massive losses and abysmal economics weren't enough to turn you off from fuboTV stock, the company's choice of adjusted metrics should do the trick. FuboTV reported a "non-GAAP adjusted contribution margin" of 16.1% in the third quarter. Yes, fuboTV somehow managed to concoct a profitability metric that's positive. It took some doing, that's for sure.
What is adjusted contribution margin? FuboTV defines adjusted contribution as platform bookings minus variable cost of goods sold (COGS). Contribution margin, then, is this contribution divided by platform bookings.
Let's start with platform bookings. FuboTV takes the revenue they actually recognized during the quarter and adds the change in deferred revenue. When a company sells a subscription, revenue is recognized over the lifetime of the subscription. Initially, deferred revenue is increased on the balance sheet on the liability side to offset the increase in cash from the subscriber's payment. That deferred revenue is then recognized as revenue over time. The costs associated with delivering the service are also recognized over time.
So platform bookings represents revenue recognized in the current period plus some portion of revenue that will be recognized in future periods. What's variable COGS? FuboTV takes subscriber related expenses for the current period, adds some very minor costs related to payment processing, then subtracts some less minor costs, notably costs associated with minimum guarantees for its affiliate distribution deals. The net result is that variable COGS is less than the reported subscriber related expenses.
The problem with this metric should now be obvious. Platform bookings includes a portion of future revenue yet to be recognized, while variable COGS does not include the subscriber related expenses associated with that future revenue. In a sense, fuboTV is "pulling forward" revenue without doing the same on the expense side.
And because the change in deferred revenue is purely a function of subscriber growth, this contribution margin metric is higher when the company is adding a lot of subscribers. It doesn't matter if those subscribers are profitable or not.
Here's a simplified example. Imagine I start a company that offers a subscription service: Subscribers pay me $90 at the beginning of the month, and I send them $100 over the course of that month. Obviously, this business makes no sense. It's structurally unprofitable.
But I can still report a positive adjusted contribution margin! Imagine I have 1 million subscribers at the beginning of a quarter, and I add another 200,000 subscribers on the last day of that quarter. My platform bookings would be the revenue recognized from existing subscribers -- $90 million -- plus the change in deferred revenue from those new subscribers, or $18 million.
On the expense side, my variable COGS would be my subscriber related expenses for the quarter -- $100 million. FuboTV subtracts various other items, but I'll keep things simple here. My adjusted contribution is $8 million, and my adjusted contribution margin is a healthy 7.4%. These numbers would be higher if I had gained more subscribers, and lower if I had gained fewer subscribers.
It should now be pretty clear that fuboTV's adjusted contribution margin is a meaningless number. It's a function of how quickly the company is gaining subscribers, not a representation of profitability. The fact that the company reports such a misleading metric is a huge red flag. It's reason enough to stay far away from the stock.