Cineverse Corp (CNVS) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2005 Access Integrated Technologies Incorporated earnings conference call.

(OPERATOR INSTRUCTIONS)

Before we begin I would like to read the following statement. Listeners are cautioned that certain oral statements made on this call by officials of AccessIT are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, which include words such as expects, anticipates, intends, plans, could, might, believes, seeks, estimates or similar expressions. In addition, any statements concerning future financial performance, including future revenues, earnings or growth rates, ongoing business strategies or prospects and possible future actions which may be provided by AccessIT's management, are also forward-looking statements as defined by the Act.

Forward-looking statements are based on current expectations and projections about future events and are subject to various risks, uncertainties and assumptions about AccessIT, its technology, economic and market factors and the industries in which AccessIT does business, among other things. These statements are not guarantees of future performance and AccessIT has no specific intention to update these statements.

I would now like to turn the conference over to your host for today's presentation, Mr. Bud Mayo, president and chief executive officer. Please proceed, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us today on AccessIT's third quarter fiscal 2005 investor conference call. With me on the call today is Brian Pflug, our senior vice president of accounting and finance, and Jeff Butkovsky, our CTO.

I'll start today's call with a brief overview of AccessIT's financial results for the quarter. Following that review I'll comment on a few of the important milestones and other notable recent events which have taken place. Brian will then review in more detail our financial results and we'll open the call to questions.

First, about the quarter. We continued to experience rapid growth as evidenced by our increased revenue streams. Most notably during the quarter we've not only replaced but have exceeded the revenues lost in the second quarter as a result of one of the major data center customers going bankrupt. This increase in revenue was offset by a substantial increase in SG&A, primarily due to the addition of key personnel related to the ramp up of our media services units as we prepare for next year's growth objectives. But probably most importantly, our media services business accounted for most of that growth compared to last year's comparable period, 104% growth in the quarter and 292% for the 9 months, including a substantial traction in the satellite delivery of content to movie theaters.

As we've stressed in previous calls, we're spending this fiscal year investing in our preparation for the imminent conversion of the movie industry to digital cinema, including our purchase of FiberSat Global Services, which of course results in increased operational costs. These costs are the natural result of our expansion in growth. I've indicated previously and continue to state that while this is not the year we expect our bottom line to become positive, our strategic investments are beginning to pay off with not only increased revenues but, more importantly, increased revenues in our most important focus today, media services.

The comprehensive solution we are now able to provide to the motion picture industry is creating a sense of ease, creating ease of use for customers and barriers to entry that will challenge any would-be competitor.

Additionally, we are signing new customers, which is of utmost importance, in all areas of our business, some of which I will highlight for you now in my discussion of our third quarter achievements.

First, in November we completed the acquisition of FiberSat Global Services, a satellite uplink organization whose expensive satellite distribution and networking capabilities bring AccessIT further into the fold of providing digital content delivery to a wide variety of customers. In addition to offering us access to its new and existing customers, FiberSat will function as the network operations center for our delivery of digital movies and other content to movie theaters. Based in L.A., this new and important division will be a key to our ability to service the needs of our studio customers as the conversion to digital cinema intensifies.

Second, also in November our Hollywood Software division announced that its theater distribution software was selected by Magnolia Pictures. Magnolia represents the 24th independent film distributor to choose Hollywood Software's industry standard domestic TDS system, which addresses 36,000 streams in the U.S. and Canada to manage its domestic film distribution, including its back office operations. Those of you who listened to our second quarter teleconference and were generally familiar with TDS will recall that this product's offering has now been expanded into a stand-alone international product which supports 26 territories and more than twice the number of screens of the domestic market throughout the world.

With these products we will have the capability to plan, track, account for, analog our digital movie distribution to almost 100% of the world's theaters that play Hollywood movies. Importantly, both the international and domestic versions of TDS integrate with AccessIT's satellite delivery system and our exhibitor focus Theater Command Center, what we call TCC. TCC is our unique content library application software that centrally houses movie content in exhibitor locations and simplifies the task of building shows and schedules across different brands of digital cinema projectors and servers.

We intend to enter into license agreements with hardware manufacturers for this powerful vendor agnostic software in the next few months. These capabilities pave the way for the rapid utilization of digital distribution for studios, vendors and exhibitors alike as the rollout of digital cinema begins later this year.

AccessIT has initiated a greater focus on educating the film distribution and exhibition industries about the integrated nature and power of our products and services. Previously our products have been successfully marketed on an individual basis in response to a customer's specific need.

Now, with our recently introduced software enhance capabilities, such as those provided by FiberSat, we're now able to fully demonstrate and highlight the integration and interoperability that will further differentiate AccessIT and reaffirm our leadership as the software and service provider to the film distribution and exhibition industries. To kick off this initiative, we plan on creating a significant presence at ShowWest in March. ShowWest is the film industry's premier event and it is our goal to ensure that all who attend, in the thousands, are exposed to AccessIT and fully understand the powerful combination of products and services that we offer by introducing what we will call AccessIT's Digital Cinema University.

In addition to our marketing and integrative development efforts throughout the quarter, AccessIT continued to make significant progress in delivering digital movies via satellite. In the last quarter alone we have delivered 5 major feature movies as well as more than 34 other forms of content, such as trailers, bringing our totals to 9 movies and 55 other content. We anticipate an increase in the number of movies we deliver next year, as well as the number of screens we deliver them to.

Moving into a discussion of the data center services business, we've had several new developments worth noting. The first is the official launch of AccessIT Legal Solutions, a package of data management, security and connectivity services created specifically to support the needs of mid to large law firms and other legal service providers. This new suite of products is custom designed for law firms and other legal service providers. Excuse me, the new suite of products is custom designed for law firms seeking to increase their document storage capacity, ensure disaster recovery and increase the speed and reliability of Internet connectivity and email delivery. Response to this effort has been exceptional as we were pleased to announce that we've signed 2 prestigious law firms and expect more in the next few months.

Despite the loss of a large customer in our last quarter due to bankruptcy, as mentioned earlier, these exciting developments continue to contribute to the regular growth of the data center services side of our business, supporting our long term growth while enabling us to maintain our objective of independent divisional profitability.

As announced this morning, AccessIT was successful in completing a $7.6 million private placement of its 4-year convertible notes to new institutional shareholders to fund the Pavilion A-Plex (ph) Café acquisition and for working capital. As we have publicly said, we expect the Pavilion transaction to be significantly accretive to AccessIT's operating results. We anticipate the theater will generate revenues of up to $5 million a year with substantial incremental cash flow, this before we add a 9th screen and introduce the wonders of digital presentations to its audiences and importantly provide the real world demonstration site for the latest digital cinema technologies AccessIT and many of our industry partners have developed.

At this point, I'd like to turn the call over to Brian who will comment in greater detail on our latest financial results. After Brian's presentation, I'll make some concluding remarks and then open the call to questions. And by then I'll have a drink of water and may be able to not stumble over the rest of my presentation.

Brian?

Thanks, Bud. I'll begin by reviewing our results of operations.

Our revenues for our third quarter ended December 31st, 2004 were 2.7 million, which is an increase of 34% from the comparable prior year quarter and an increase of 25% from our second quarter 2004's revenue. This increase in revenues reflects our continued rapid growth via our media services segment, which most recently saw the acquisition of FiberSat in November 2004. This quarter also includes additional revenues from our digital delivery of movies within that same segment and a full quarter's results from Hollywood Software, which was acquired in November of 2003.

Our cost of revenues reflects our direct operating costs, an increase by 83% for the quarter over the prior year, due primarily to expenses associated with these increased revenues. Our quarterly gross profit margin fell to 40% from 56% in the prior year's quarter, mostly due to 3 things; startup expenses related to the digital movie delivery business, slightly higher costs in the data center services business coupled with the loss of a significant data center customer, and non-recurring revenue for 180,000 in the prior year resulting from the settlement of certain licensing issues for the Hollywood Software customer.

As Bud mentioned, our selling, general and administrative expenses have also increased due primarily to our expanded media services and managed services business and, as a result, our headcount has increased from 23 to 58 employees in the year-over-year period. We also had higher professional fees as a result of being a public company and higher advertising and marketing expenses.

In the current year's quarter we have also recorded research and development expenses of 122,000, which result from our investment in new software products within our media services business. Last year we had much R&D costs due to the mix of products in development.

Additionally, as mentioned earlier, in the second quarter of this year we recorded a provision for doubtful accounts related to the bankruptcy of one of our data center customers. We have recently received approval from the bankruptcy court for payment of all amounts due to us. As a result, both our EBITDA and adjusted EBITDA for the quarter were a negative 249,000 versus a positive 270,000 in the prior year's quarter.

Our net loss available to common stockholders improved to 1.3 million for the quarter from a loss of 1.7 million in the prior year. In addition to the previously mentioned components, the December 2004 quarter reflects lower cash and non-cash interest expense resulting from our March 2004 exchange of notes payable for common stock and lower rate convertible notes and our conversion of all of our preferred stock into common in November 2003, which resulted in non-cash accretion expense in the prior year.

Our net loss for the quarter also includes higher depreciation and amortization expense, which increased from the prior year due to the assets acquired to expand our media services business.

Turning briefly to the balance sheet, we continued to have adequate cash on hand and a positive working capital position, which was greatly improved following the completion of the aforementioned convertible note offering, which will be reflected in the year-end balance sheet.

And with that, I will turn the call back over to Bud.

Thank you, Brian. We're particularly pleased with the caliber of investors who've chosen to participate in the recent financing, by the way, and I'm unable to comment further upon who those folks are. But eventually it will be a public disclosure.

I'd like now to conclude today's call with a few encouraging pieces of news. We're looking forward to sharing information on AccessIT at our first West Coast Investor Conference, which will be held in February and sponsored by Roth Capital Partners. Based upon favorable results we received in the last Roth event held in New York, we're looking forward to participating. Shortly thereafter, as I alluded to earlier, we intend to make a splash at the annual major movie exhibitor tradeshow, ShowWest, and that'll take place in March.

Finally, although I've said this in the past, further indications that the digital shift is upon us can be seen in the recent press coverage of digital cinema appearing in a broad spectrum of publications, clearly evidence that the digital cinema movement is gaining momentum. There've been several articles written by the likes of Bloomberg, the Economist and even Vanity Fair on the subject. All confirm that the major digital shift is going to commence during the calendar year, an exciting prospect for moviegoers, the motion picture industry, and, of course, AccessIT.

We're excited for the future of AccessIT and the value that we intend to return to shareholders.

Operator, at this time I'd like to open the call to questions.

Thank you very much, sir.

(OPERATOR INSTRUCTIONS)

And your first question, ladies and gentlemen, comes from Bill Relyea of Wainwright. Please proceed.

Speaking about the financing of the digital projectors, as far back as November we had the investment bank circulating proposals. Could you just give us some background on why it's taking so long and is any of the financing possibly going to hit before the Star Wars release?

What has been reported in the press is what I'll comment on. On a call like this I'd be reluctant to discuss more detail. But generally speaking, we know that there's an RFP out there from 3 major studios -- they've been identified as Disney, Sony and Warner Bros. -- to put together a plan.

And we do know that that's in the works. The timing, depending on who you talk to, is sometime this year, as early as the summer, for launching that plan. We'd expect there'd be a lot of buzz at ShowWest about the financing plan. It is gaining momentum. I think the press in general is getting more information than they were before, but at this point, until the plan is crystallized, I don't imagine that anyone is going to go on the record as describing it in great detail.

But you're right about the delay and the only thing I can attribute it to is a combination of antitrust concerns on the part of the lawyers for the 7 studios that comprise DCI and the general difficulty in getting 3 major companies to agree on anything. So I think that while we're very enthusiastic about supporting this plan and have played an active role in providing some advice and guidance when asked and have been proactive in other ways, we're in the same position as everyone and it's probably the single most frustrating part of what we're doing.

But in the meantime, I want to assure everybody that we're not just sitting back waiting for this to happen. We are proactive about not only enhancing the products and services that we already have, but making moves of the type that we're doing with the Pavilion, entering into agreements with a variety of hardware and software vendors to enhance everything we're doing and to create that interoperability that the industry needs. And we're going to be ready with the very best that the industry will need to make this transition.

Again, it's very difficult to project exactly when the plan will be ready, but as soon as it is, there will be rapid traction beginning with the holiday product and then moving into next year. My sense of it is that 2006, calendar 2006 will be the breakout year in terms of the number of streams that will be deployed. We'll see some traction this year. We know that there's another initiative going on on the part of a vendor that could be visible in time for Star Wars.

We know that the makers of Star Wars and George Lucas himself is very anxious to see this movie out in digital and we will do everything we can to make sure that happens. Certainly at the Pavilion we intend to be showing the movie and we'll use our best efforts to make sure that we do show it in digital on at least 1 screen.

So there's a lot going on, Bill. I agree that we would have liked to have seen it earlier. But patience is something that we, in this case, have to choice but to exercise.

Good. As far as the 2 competing systems of projectors, the 2K and 4K from Sony and 2K from TI with the 3 makers, has that introduced an element of hesitation in the theater owners as far as you can tell?

There's no question that the introduction and relatively delayed production plans, which are expected to begin in March, on the part of Sony have definitely slowed down the process a bit. There are those in Hollywood who feel 4K is the superior solution and they want to make sure that anything they do gives the exhibitor choice. It'll be a market decision ultimately. And as far as AccessIT is concerned, we support both IT and its licensee's efforts as well as Sony and have cordial and continuing relationships with both manufacturers.

Okay. Oh, just 1 other thing. Is that Pavilion acquisition of yours, is that a possible lead-in to more theaters becoming part of AccessIT?

We would love to have another theater, at least 1 out on the West Coast right in the Hollywood area to be able to do the same thing we're planning to do in the Pavilion, which is to showcase everything we do and some of our vendor partners, do it a lot closer to the studio executives.

But as you well know, Bill, we are an opportunistic company and if we can find a transaction that we think is a good vertical for us and enables us to strategically improve our position in the marketplace and accrete cash flow and earnings and revenues, then we're going to look at that transaction. And if it's a movie theater or group of movie theaters, I would say we'd certainly look at them.

Thank you very much, sir. Your next question, ladies and gentlemen, comes from Walter Winitski (ph) of Mancusa Capital (ph). Please proceed.

Thanks. Actually I have 2 questions. Bud, first question, with the exception of what you just discussed about the possibility of maybe a West Coast theater, are pretty much all the pieces in place or is there another acquisition or so or small pieces before you've kind of got the whole product ready to go for the rollout?

Well, we are absolutely ready and have been delivering movies. And we've proven our concept 9 times, we can deliver in the same effort a movie anywhere on the globe. We've been delivering to an average of about 20 screens, all 9 movies. If it were 20,000, it wouldn't make it any difference; we can do it with the same system. If the screens are there, we can get the product there. So that the answer to the question is absolutely, we are ready.

So FiberSat was really the last big piece that you needed.

Well, it was. And in fact, we acquired FiberSat because we had deployed all of the Boeing digital cinema equipment there and then enhanced it with more than $1 million of additional equipment and software. So we were housed there and using their services on a timeshared basis and co-locating equipment there. It was always our intention to try to acquire them and we needed to put the right deal together to do that. So now we've enhanced that, we want total control over that division. We didn't want to be a customer of theirs, we wanted to operate and own the entire facility, which we now do.

second question. In the quarter, what was the cash flow, cash usage issue, and how should we look at that as we go through the calendar year here in preparation for the rollout next year?

Well, our biggest concern, of course, is always cash flow and everything we do is tied to gear to minimizing outlays. I can tell you that the Capex requirements, based on where we are today, are pretty much done with the exception of specific accretive acquisitions that we will entertain. With regard to operating cash flow, if you really look at the cash flow numbers and if you start backing out of EBITDA some of the non-recurring items, some of the amortization above the line, if you look at the adjusted EBITDA, you can see that we're not burning a whole lot. This year has not been a year that we've concentrated -- other than being prudent about any expenditures -- about maximizing the bottom line.

As we move into next year and as we add the Pavilion, which is a cash flow generator, and begin to tighten and increase revenues organically and tighten our belt when necessary without hurting ourselves and our ability to compete effectively and being shortsighted in doing so, we are optimistic about next year's cash position. We certainly expect improvement and we continue to try to build a company that will be self-sustaining under any circumstances.

We've all witnessed substantial growth year-over-year. We expect that trend to continue independently of what we view as the hockey stick opportunity for AccessIT related to the increased delivery of movies, not only in the United States, but eventually worldwide, and we're committed to that continued growth. You've probably seen the press release and we were honored to be named the third fastest growing technology company in the United States by the Deloitte Fast 50 analysis. And we're very intent on continuing that trend. And as we leave this year we're very confident that we'll be going into next year with a very, very substantial growth rate under our belt already.

Thank you very much, sir. At this time we have no further questions. I'd like to hand the call back over to Mr. Mayo for any closing remarks he may have.

Well, at this point I would like to thank you all for joining us and look forward to speaking to you individually in some cases. And have a good day.

Thank you very much, ladies and gentlemen for your participation in today's conference call.

This concludes the presentation and you may now disconnect.

Have a good day.