Helios and Matheson Analytics, Inc. (HMNY)

 

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Helios and Matheson Analytics, Inc. (HMNY)

 

      Website: https://www.hmny.com

   

This is a little different than our normal report. We started working with this company when they had their Red Zone app. Mark Gomes wrote a great article with an inerview for his Seeking Alpha page. Rather than try to outdo mark, we decided to reprint his article here. You can follow Mark on Seeking Alpha at https://seekingalpha.com/author/mark-gomes/articles#regular_articles

MoviePass And Helios: Executive Interview

Summary

Mitch Lowe has already served as an early executive at two modern era disruptors - Netflix and Redbox. With MoviePass, Lowe is seeking a movie-industry trifecta.

Taking a page from the Netflix and Redbox playbook, Lowe introduced a revolutionary pricing model for MoviePass. The service went viral, attracting 400,000 paying members in less than a month.

Publicly-held Helios & Matheson reached an agreement to acquire a 51% stake in MoviePass just days before the latter went viral. Shares of Helios have started to follow suit.

I sat down with Helios CEO Ted Farnsworth to gain an understanding of how MoviePass intends to expand and eventually achieve profitability.

The Internet era has been defined by the encroachment of visionary entrepreneurs bent on disrupting the status quo. Armed with billions in venture funding, their enterprises flourished, leaving many of the last generation’s leaders hobbled in their wake.

Last week, I heard about the latest visionaries looking to shake up a long-stagnant industry - Mitch Lowe and Ted Farnsworth.

Mitch Lowe has already overseen the emergence of two modern era disruptors. His first home run came as a co-founding executive at Netflix (NASDAQ: NFLX) where he handled business development and strategic alliances. Then, in 2009, Lowe took the helm at Redbox, which pioneered the widely-criticized concept of offering $1 movie rentals.

The critics were wrong.

Not only was the idea of $1 rentals a sustainable business model. It was also highly profitable. As Redbox’s industry power grew, revenue and profitability followed. By the time Apollo Global Management took Redbox and parent Outerwall private (for a hefty $1.6B), the company was generating $1.5B in sales and $325 in cash flow.

Thus, it should come as no surprise that Mitch Lowe is now the CEO at MoviePass, which is looking to disrupt yet another segment of the old-school movie industry - cinemas.

MoviePass enables customer to go to the movies as often as they like for a monthly subscription fee.

You would think that MoviePass is backed by a Silicon Valley Venture Capital firm. After all, with the near-endless supply of easy money flowing through Silicon Valley, the general public rarely gets the opportunity to take a chance on promising disruptors anymore.

But this time is different.

You see, MoviePass wasn’t started from scratch. When Lowe joined the company (in June of last year), it had already been around for four years. It had just 16,000 subscribers to show for it. Lowe believed that the company had merit. He wasn’t the only one. Chris Kelly, co-owner of the Sacramento Kings and among the first employees at Facebook (NASDAQ:FB), already has $10 million invested in MoviePass.

Despite this, as Lowe pitched investors, he was greeted with skepticism, due to the company’s lackluster history.

Enter Ted Farnsworth.

An expert on marketing and data analytics, Farnsworth poured through MoviePass' financials. When he was done, he realized that MoviePass' model was all wrong. Like Redbox, Farnsworth felt that MoviePass needed to offer a price that consumers couldn’t refuse.

Farnsworth understood what Lowe already knew… and a bond was instantly formed. The Silicon Valley elite wouldn’t be getting their hands on MoviePass. Instead, Farnsworth’s Helios and Matheson (NASDAQ:HMNY) entered into an agreement to acquire a 51% stake in privately-held MoviePass.

Concurrent with the acquisition, Lowe (who remains in close contact with Netflix CEO Reed Hastings) took a page from his experiences at Netflix and Redbox and dropped the price of a MoviePass subscription to an unprecedented $9.95 a month.

 

The new pricing made national news and MoviePass went viral.

As reported by Seeking Alpha last Thursday, 400,000 paying subscribers signed up in just four weeks. The market potential is significantly larger. There are 250 million movie goers in the U.S. and Canada. About 27 million of them are classified as frequent movie goers. So, the penetration rate is in the low single digits, no matter how you look at it.

As a result, MoviePass is looking like a Robin Hood among Internet disruptors. Usually, mom and pop investors have to wait until a disruptor goes public to participate.

In this case, investors can experience the reward (and risk) of venture investing via HMNY’s 51% stake in MoviePass. In comparison to unicorn IPOs, HMNY valuation appears quite compelling. Two weeks ago, MoviePass disclosed that it expects its customer base to reach 2.1 million subscribers within 12 months.

That translates into $250 million in revenue, up from the company's current $50 million run rate (which is up from $5 million last month). This puts MoviePass on a faster grow track than Netflix in its early days:

It sounds incredible. But frankly, the feat was tougher for Netflix to pull off. Back in 1999-2001, the Internet was still in its formative stages. Nowadays, virtually everyone in American has multiple Internet-connected devices. Accordingly, bigger overnight successes are possible (though they may remain as elusive as ever).

Based on Thursday’s closing price, HMNY’s stake in MoviePass is currently valued at approximately 0.5x next year’s $250M run rate. Whether that’s cheap or egregious requires additional analysis. This article is solely meant to provide background information and an executive interview.

As word has spread, shares of HMNY have begun to rise. However, though Lowe has already contributed to two movie-industry unicorns, some investors are expressing just as much skepticism about this one.

Most notably, everyone is asking the million (or billion) dollar question…

Can it be profitable at $9.95 per month?

To be honest, my knee-jerk reaction was, “No way.”

However, my 20+ years of Tech investing have taught me not to underestimate a successful executive without hearing him out. So, I contacted Helios & Matheson and arranged for an interview with Ted Farnsworth.

Here’s how our conversation went…

Mark Gomes: Last month you made a deal to acquire 51% of MoviePass for $27 million. Can you review the upcoming payments required for this acquisition?

Ted Farnsworth: Sure. The next payment is for $5 million. That’s due in the December time frame, about 30 days after we do the audit and complete the deal. Ideally, we’ll get it done sooner. We want to keep the momentum rolling. Then, the third $5 million doesn't come until we're ready to go public with MoviePass early next year.

Mark Gomes: How is the $9.95 pricing going to work within your business model?

Ted Farnsworth: MoviePass has been around for five years, so we have a wealth of historical data. At $39, the average customer would go to four movies a month. At $29, the average dropped to three movies a month. When MoviePass went to $19, the average customer went to two movies a month. So we think we can be profitable on the subscriptions at $9.95 and then make the real money from the additional revenue sources. The size of our customer base will give us a lot of leverage.

History tells us that the average customer won’t abuse the service. Mitch talks about this all the time. $9.95 is like a buffet. The first time you go, you load your plate. The next time, you take a little bit less. By the third visit, you eat the same amount that you’d eat at home.

Based on our historical numbers, MoviePass will be similar. People will use it three times in the first month. The second month, they'll use it twice. Then, in the third month, they'll use it once or less. After that, they'll only use it once in a while.

Mark Gomes: So, you think you can break even on the subscriptions alone?

Ted Farnsworth: I’m confident that we will. We already see it in our first 30 days at $9.95. Usage was even lower than we anticipated.

Mark Gomes: What’s the issue with AMC (NYSE: AMC)?

Ted Farnsworth: AMC is upset because they were coming out with a subscription service in the fall for $29, but only for AMC theaters.

Mark Gomes: I hear that they’re thinking about blocking MoviePass from working at their theaters. If you guys are successful, that’s not going to work.

Ted Farnsworth: Right, but the actual MoviePass is a MasterCard debit card. They can’t block us. They'd have to stop taking all Master Cards. That's why they're upset. The day we announced $9.95, AMC, Cinemark (NYSE:CNK), and Regal (NYSE: RGC) were all down that day. CNBC Closing Bell attributed it to us.

But I think we’re going to bring a lot of business to the cinema operators. But we actually want people to go. We fill empty seats and more than double their concession revenues. Once the operators see how much revenue we’re bringing to the table, it will only mean good things for us.

They’re only doing us a favor by talking about it. We’re getting lots of free press and the David versus Goliath just helps the story to become more viral.

Mark Gomes: How are you managing the viral explosion in demand?

Ted Farnsworth: We’re managing through the growing pains. We didn't have enough Master Cards, but we will be caught up before the end of September. After that, new customers will get their cards in five days. We'll be able to ship 100,000-150,000 cards a week.

Mark Gomes: How did Helios end up with the opportunity to buy 51% of MoviePass?

Ted Farnsworth: Their banker approached me. They’ve been out raising money with MoviePass for a while. In its first five years, the company developed some great assets, but didn’t much customer traction. Investors were like, "They went through $20 million and it hasn't worked in five years… why is it going to work now?"

Mark Gomes: How did Mitch Lowe’s arrival change things?

Ted Farnsworth: Mitch took over last year and put some of his own money in it. It takes time to make the kind of changes MoviePass needed, but he’s really started to revamp it. With his operational expertise and my marketing experience, we’re starting to make things happen.

Mark Gomes: As the 51% owner, what kind of influence will Helios exert?

Ted Farnsworth: Mitch is a great operator. He was on the original team at Netflix and then ran Redbox. He took Redbox from six kiosks to $1.5 billion in revenue and $325M in free cash flow. When they introduced $1 a day rentals, analysts, investors, and competitors like Blockbuster said it was unsustainable.

So, obviously he’s going to run the show at MoviePass. We just took the chance on them and will bring our technology capabilities to the table. We’ll each have board seats.

Mark Gomes: Tell me about your customer acquisition costs.

Ted Farnsworth: When they started Movie Pass, they were paying about $50 to acquire each paying customer. I felt that I could get that under $10. Then, I did some testing and knew I could get probably even get it under $5. But right now, our acquisition cost is close to zero. We have no advertising, no social media advertising, nothing.

Mark Gomes: It's viral.

Ted Farnsworth: It's strictly PR. Purely viral. Purely organic. Every day thousands of users are signing up and paying on day one. It took off because of the price points and we got free press because of the story (Mitch's background at Netflix and Redbox). It’s a great story - like Netflix for the theater.

Mark Gomes: How about customer turnover?

Ted Farnsworth: Mitch thinks it'll be around 3% or 4% at the most. We have lots of historical data on that.

Mark Gomes: Tell me more about the data MoviePass has collected over the past five years.

Ted Farnsworth: As the CEO of a data analytics company, I can tell you that the data is incredible. MoviePass is able to influence which movies their customers go to see. They can also influence where they go to see it... and when. It's brilliant.

Mark Gomes: So, you’re able to influence which movies people attend and optimize the filling of cinema seats?

Ted Farnsworth: Exactly. So we've been approached by many of the major studios in L.A. We’ll be out there for a series of meetings in early October.

Mark Gomes: What else can you see with the data?

Ted Farnsworth: We can see how much impact we have on ticket sales. When researching the investment, I saw that MoviePass can increase a theater’s attendance by several hundred percent or more. When I saw that, I knew I wanted a stake in the company. In Texas, their influence pushed Studio Movie Grill from being the area’s #10 cinema to #1 in just one month… and that was before we went viral.

With the data, we can also see whether they drive past other theaters to go to the ones we recommend, among other things. Between this, our customer base, and our patented buying system, we have a great barrier to entry. Soon we’ll be able to see how much they spend on concessions.

FYI, Studio Movie Grill is “partnered with EFA Partners and Goldman Sachs who recently helped increase the company’s debt facility to $85 million.” At the end of 2016, Studio Movie Grill took an equity stake in MoviePass. My sources suggest that Goldman is now deeply involved with MoviePass. If Goldman banks/endorses their IPO, the valuation implication for HMNY will surely be meaningful.

Mark Gomes: So this is how you’ll be able to be profitable at $9.95? You’ll get money from the cinemas and studios?

Ted Farnsworth: We’ll generate revenue from many sources. Tickets, concessions, advertisements… We already have deals in place. We can also sell soundtracks, posters, and other movie-related products, right from their phones. As soon as they're walking out of the theater, we’ll contact them. We tested it and 5-8% of people buy product from us.

Mark Gomes: What can you tell me about the float and how that’s expected to change?

Ted Farnsworth: I can’t tell you much about that, but we're all on a two-year lockup.

Mark Gomes: What’s the rough number fully-diluted shares we can expect Helios to have after the MoviePass deal is done?

Ted Farnsworth: With the MoviePass deal and everything else, we’re going to have about 13 million shares outstanding.

Mark Gomes: So, if MoviePass is worth $260 million, that’s $10 per share for Helios.

Ted Farnsworth: Right. Of course, we did a fairness opinion for MoviePass before we did the deal. With about 16,000 users, the fair value range was between $40 and $60 million. Anyway, so that's how we came up with the $50 million valuation. That was with 16,000 users.

Mark Gomes: And now you have 25x that amount.

Ted Farnsworth: Right. And the MoviePass financials will show up in Helios’ financials because we’ll have 51%

Mark Gomes: With 400,000+ subscribers, MoviePass has to be on a $50 million run rate. Your reported revenues are going to multiply.

Ted Farnsworth: Right, exactly.

Mark Gomes: You’re averaging 100,000 new customers per week. If this is really going viral, your subscribers per week could actually increase.

Ted Farnsworth: Sure. People are getting their cards and telling other people, but we’re guiding to 2.5 million subscribers in the first year.

Mark Gomes: Two times two is four, not two.

Ted Farnsworth: Exactly.

Mark Gomes: So why did it take until Friday for your stock to start running?

Ted Farnsworth: We’ve been on the Today Show, Good Morning America, Fox, and CNBC, but we never put Helios together with it. It was all just MoviePass. So we've started going back and telling the story of MoviePass and HMNY. I think you’ll start seeing more of this over the next couple of weeks.

Mark Gomes: How about Wall Street coverage? Also, do you plan on attending any investment conferences?

Ted Farnsworth: We’ll be at the BTIG Disruptors Conference on October 12th. Mitch is one of the guest speakers. And yes, a lot of analysts know Mitch from Netflix and Redbox.

Mark Gomes: You know, if you keep signing so many customers, you’re going to need a lot more capital.

Ted Farnsworth: Right. But that’s a good problem to have. We we’re talking to a lot of big Wall Street firms. Before people knew how fast MoviePass was growing, I think investors were pushing the stock down because they knew we needed to raise money to close the deal. I don’t see that as a problem now.

Mark Gomes: OK. Do you see any follow-on potential for the MoviePass cards? Because they’re debit cards, right?

Ted Farnsworth: Sure. We're looking to turn them into regular credits cards. We can get a major bank to sponsor the card, so there'll be no cost to us. Plus, they'll pay us a commission for acquisition. As it stands, it pay hundreds of dollars to acquire each customer.

Also, Movie Studio Grill has about 30 theaters. We have a program that MoviePass announced six or eight months ago called Open Tab. With Open Tab, customers order their concessions before they even get to the theater. When they get there it’s all there waiting for them.

Mark Gomes: Talk to me about your market potential. 250 million people in the U.S. and Canada have been to a movie in the past year. About 27 million of those are frequent movie goers.

Ted Farnsworth: Right. And about 60 million are “infrequent” movie goers. That will be our sweet spot. They go to the movies three to six times a year. Even if they double their consumption, we’ll be profitable without all of our other revenue sources.

Mark Gomes: How is your system handling the influx of new customers? Are there any scalability issues? Also, what are you seeing in terms of bugs?

Ted Farnsworth: When the demand spiked, we immediately hired Fueled, a company here in New York. They do work for Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Verizon (NYSE:VZ), Apple (NASDAQ:AAPL), and other big companies. They’re a high-end app company. They’re basically our SWAT team. They’re also working to integrate our new apps with better onboarding, etc.

Beyond that, Mitch is busy bringing on execs from his past companies to scale the business up. He’s an expert on growing disruptive companies, so this is old hat for him.

Mark Gomes: Is there any way the deal can fall through? For example, has shareholder approval been secured from MoviePass?

Ted Farnsworth: Yes. We already have that approved on both sides. We have to do the proxy, but we already have written consent from the majority of the shareholders. The attorneys already have it.

Mark Gomes: Great. Good luck and thanks for your time.

Ted Farnsworth: Anytime.

Disclosure: I am/we are long HMNY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Similarly, the disclosure above may state that I am long or short shares of the companies mentioned herein, but should not be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. My personal investment strategy is based on a variety of factors. Because of this, it is possible (or even likely) that I might be buying and/or selling the stocks mentioned herein today or at any other time, regardless of (and possibly contrary to) the content of this article or this website’s timing of its release. Any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.

Additional disclosure: HMNY is a member of the Seeking Alpha Corporate Visibility program. Learn more

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.


 

 


NASDAQ Symbol: HMNY

Current Price: $5.75

Shares Outstanding:
7,071,799 million

Market Cap: $40.7 million

52 Week Trading Range:

52-Week Low: $0.02

52-Week High: $0.50


Corporate Offices:

Empire State Building
350 5th Avenue, Suite 7520
New York, New York 10118

Phone: (212) 979-8228
Website:
https://www.hmny.com