Cineverse Corp (CNVS) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q1 2006 Access Integrated Technologies, Incorporated Earnings Conference Call. My name is Michelle and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). Before we begin, the Company has asked me to read the following statement.

Listeners are cautioned that certain oral statements made on this call by officials of Access IT 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 the future events or conditions which include words such as "expect," "anticipate", "intend," "plans", "could", "might", "believe", "seeks", "estimates", or similar expressions. In addition, any statements concerning future financial performance including future revenue, earnings or growth rates, ongoing business strategies or prospects and possible future actions which may be provided by Access IT'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 Access IT, its technology, economic and market factors in the industries in which Access IT does business other things. These statements are not guarantees of future performance and Access IT has no specific intentions to update these statements.

I would now like to turn the presentation to your host for today's call, Mr. Bud Mayo, Chairman and CEO of Access Integrated Technologies. Please proceed sir.

Thank you operator and good afternoon everyone. Thank you for joining us today for Access IT's First Quarter Fiscal 2006 Investor Conference Call. With me on the call today is Brian Pflug our Senior V.P. of Accounting and Finance and Jeff Butkovsky our CTO.

The momentum created at the end of fiscal 2005 carried into the first quarter of fiscal 2006 with two major developments. First in April we announced the appointment of Dave Gajda the co-founder and former president of our Hollywood Software unit to the position of Corporate Senior Vice President of International formally kicking off our international expansion efforts.

Secondly in June together with Christie Digital Systems we announced our ground breaking 2,500 screen Christie AIX Digital cinema rollout plan. We believe that this plan the largest digital cinema venture yet undertaken will serve as an industry template -- one that provides a viable and economically sound financing model that is scalable enough to potentially cover all 36,000 screens in North America and Canada.

To implement and possibly expand this plan, just last week we hired Chuck Goldwater former chief executive officer of Digital Cinema Initiatives as President and COO of the Christie AIX unit. While we will discuss each of these in more depth later let us first discuss Access IT's financial results for the quarter. After these discussions we'll turn the call over to you for your questions.

As you're aware over the past few years Access IT has been in an investment mode focused on supporting both its growth and on research and developments to ensure that we continue to provide the key enabling technology that will enable the studios and exhibitors alike to embrace digital cinema.

As we've said previously this focus will continue throughout this fiscal year 2006. These investments continue to play a vital role in our growth as evidenced by an 80% increase in revenues for quarter one as compared to those in quarter one of fiscal 2005. The bulk of this increase occurred in media services, the result of increasing content delivery, CDS software contract revenues and of course the additions of the Pavilion Digital Showcase Theater and FiberSat Global Services which has become our satellite delivery operations unit.

Supporting our 80% increase in revenues was only a 55% increase in SG&A over Q1 2005, partially as a result of the addition of FiberSat Global Services, but primarily resulting from an increased head count and other corporate development -- and software development activity.

Some of the notable milestones achieved in the quarter include, as I alluded to, earlier in April Dave Gajda was names our SVP of International. We expect that the window between the motion picture and the United States transitioning to Digital Cinema and the international marketplace following suit will be a short one.

International markets with over 75,000 screens represent a vast opportunity for Access IT one that far exceeds the large potential we are serving domestically. To ensure that we can capitalize on this opportunity we look to Dave, the co-founder of Hollywood Software, to build upon the success enjoyed domestically with TDS and the strong relationships established within the motion picture industry both with distribution and exhibition to lead our company into the international motion picture marketplace.

His first step in this role was to attend the premier European Motion Picture Industry Trade Show, Cinema Expo, in Amsterdam at the end of June. While there Dave presented and was part of a panel discussion on the positive effect the shift to digital will have on the market for European movies.

Decreases in delivery, mastering and marketing costs will likely erode today's barriers for distributing Spanish, French and Portuguese movies to locations around the world where these countries - languages -- are commonly spoken significantly increasing potential ticket sales for each given film.

In May Access IT hosted a Digital Cinema premier at our Pavilion Digital Showcase Theater. The night included a tour of the theater and digital projection booths and demos of Access IT software culminating in a midnight showing of Star Wars Episode Three in 2K DLP.

The evening not only allowed us to share the incredible picture quality of 2K but to officially demonstrate our Digital Cinema end-to-end solution in a fully functional and real world setting for paying customers.

Finally on June 21st, Access IT announced the formation of Christie AIX its ground breaking agreement with Christie Digital Systems to rollout digital projectors and related equipment to 2,500 screens in the U.S. between October of 2005 and September of 2007. To date we've achieved several important milestones relating to this agreement.

First Access IT has raised more than $18 million in equity financing thereby providing the capital to fund at least the initial 200 systems.

Second multiple key studios have indicated their intent to participate in the Christie AIX rollout in the form of non-binding term sheets. And third Access IT has appointed Chuck Goldwater former CEO of Digital Cinema Initiatives, the organization created by the major studios in Hollywood to set standards for Digital Cinema, as president and COO of Christie AIX.

There's clearly no more qualified and well connected industry figure to lead our Christie AIX unit. For over three decades he's demonstrated his ability to understand the special needs of exhibitors and distributors alike and we are pleased to have Chuck join our team.

At this point, I'd like to turn the call over to Brian who will comment on our latest financial results in greater detail. And after Brian's presentation I'll make some concluding remarks and then open the call to questions. Brian.

Thanks Bud. I'll begin by reviewing our results of operations. Our revenues for our first quarter ended June 30th, 2005 were approximately $4 million which is an increase of 80% from the prior year's quarter. Our media services segments revenue grew over 300% versus the prior year's first quarter due to contributions from our acquisition of FiberSat in November '04 and the Pavilion Theater in February '05 and increased revenue on our software development and our content delivery businesses.

Our data center services segment revenues were slightly lower than the prior year due to the bankruptcy of one data center customer last year. This was offset by customer growth in the data center and in the managed services business.

Our cost of revenues reflects our direct operating expenses and increased by 142% for the quarter over the prior year due primarily to expenses associated with our increased revenues. Our quarterly gross profit margin fell to 31% from 49% in the prior year's quarter primarily due to costs associated with the startup of the digital movie delivery business, the aforementioned bankruptcy of the data center customer, costs related to certain software development contracts and lower margin contributions from our recent acquisitions.

As Bud mentioned our selling, general and administrative expenses have also increased due to our standard media services and managed services businesses. And as a result our total company head count has increased from 44 to 62 full-time 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 related to our media services business. It should be noted that these costs have increased less proportionately than revenues have.

In the current year's quarter we have also recorded research and development expenses of $133,000 which result from our investment in new software products in our media services business. As a result both our EBITDA and our adjusted EBITDA for the quarter were a negative $524,000 versus a negative $64,000 and $60,000, respectively, in the prior year.

Our net loss was $2.5 million for the quarter compared to a loss of $1 million in the prior year. In addition to the previously mentioned components, the March 2005 quarter reflects higher cash and non-cash interest expense due to our new convertible notes payable, interest on capital lease obligations and accretion on our warrants.

Our net loss for the quarter also includes significantly higher depreciation and amortization expense which increased from the prior year due to an expanded asset base in our media services business. I would also like to note that nearly two-thirds of our first quarter loss comes from non-cash charges such as depreciation and amortization and non-cash interest expense.

Turning briefly to the balance sheet. While the investments we are making have reduced cash as of June 30th with the $18.1 million financing we completed in July 2005 we continue to have adequate cash on hand and a positive and substantially improved working capital position. With that I'd like to turn the call back to Bud.

Thank you Brian. Before I take questions I want to assure all of you that we've been very busy finalizing a series of contracts with multiple studios and with the large exhibitor originally indicated in our initial rollout release as well as beginning discretions with other exhibitors.

As I've said before we're confident in our ability and we remain confident in our ability to convert these term sheets into formal contracts and we'll certainly be making announcements as soon as they are completed. Until such time however we cannot provide any specifics other than what we have said publicly.

That being said I think we can all agree that we're on the verge of having Digital Cinema arrive. DCI has finalized its specifications for technical compliance and security thereby eliminating much of the industries concerns with these standards all parties including studios, exhibitors and vendors can now base all of their future decisions on the same universal standards.

We continue to receive overwhelming interest in our rollout plan far exceeding the 2,500 screens. We will be addressing this demand with the intention of possibly expanding the plan in the near future. As this additional interest is converted into fully binding agreements we'll update everyone.

Before concluding, I wanted to mention two brief traditional items. On September 7th we will again be presenting at the Roth Capital Investor Conference in Manhattan. Additionally, Access IT's Annual Meeting will be held at 2:00 p.m. on September 15th, at the American Stock Exchange. If you would like to attend, please contact Suzanne Moore at our corporate offices so that we can arrange your name to be included on the list of attendees at the security desk. We look forward to seeing you all there.

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

(OPERATOR INSTRUCTIONS). And your first question comes from Jeff Van Rhee of Craig Hallum. Please proceed.

Thanks. Hey guys. I got bounced off part of the call there so forgive me if you've already touched on this but the rollout plan I think you had previously expected to maybe start rolling out some screens somewhere around the start of October. Can you update that?

That is still in our intention Jeff to begin the rollout in October.

Okay and can you give us some benchmarks on this move to international? I mean how should we expect this to play out? Is it going to be a progression very much like what you've done domestically we're going to see some sort of arrangement and rollout plan to X-number of screens to certain Theaters in a certain amount of time or what are the benchmarks? What should we watch for internationally?

Well the way we're going to approach the international market is very much the way we approached the domestic markets. The Christie AIX rollout plan is really the sum total of those efforts and really the culmination in some ways of doing something that others have not done and that may or may not be a part of the plan internationally.

As you already know we've created an international version of our industry standard TDS software which studios and distributors use to run the back office part of their business. With that international version we are beginning where we have begun in the domestic department working with distributors who need to manage the process of distributing for movies and other content internationally. With our satellite delivery system we will connect the dots for them and provide services which will allow those foreign distributors to get their products to other countries including the U.S. and Canada but we're talking about 28 territories throughout the world covered by TDS.

Finally, the theater owners who will be utilizing Digital Cinema will need a central server management software package and we have the only vendor agnostic version of that and that's the theater command center software. We'll be marketing that as well. If the results of these activities produces the opportunity as it has in the United States for us to team with a viable vendor to do a similar rollout plan in Europe or Asia then we'll certainly be opportunistic about pursuing that. But again, our business is delivering product and licensing software and providing managed services first and then it can be followed by the real opportunity that we see in producing a rollout plan template.

Our intention is to do as much as we can here in terms of rolling out screens and try to meet the demand but also to support other plans as they emerge until all 105,000 screens worldwide are covered and converted to Digital Cinema.

And last question I guess. It seems and maybe my memory is failing me but it seems that maybe in the last call you had discussed a potential move to Nasdaq. Maybe just refresh me there.

Well we haven't made any formal moves there but we are certainly considering it seriously and that's really all I can say at this point. I think the advice we are getting by an increasing number of people is that it would be a good idea for us to consider that. I believe we will be turning our attention to that later this year.

Okay. I'll let somebody else jump in.

And your next question comes from the line of Rich Ingrassia of Roth Capital Partners. Please proceed.

Thanks. Afternoon everybody. Bud or Brian, I don't know if you can do this for me online here, but can you maybe give us a sense for how media services revenues breakdown between FiberSat, Pavilion and Hollywood Software?

We are not providing consolidating information at this time.

Okay, fair enough. And then maybe spend a little bit of time describing what the nature of any resistance you might be seeing from the studios is? I mean since you've taken most of the risk - most of the piracy risk out of the platform and are offering what appears to be a cost neutral proposition, I'm wondering if you get push back solely because there are competing - existing relationships between certain studios and their current distributors or if there's some other factors involved?

Well first of all we're not evidencing any push back of any consequence. Certainly the studios are being very heads up in negotiating every single clause and you can be sure that there'll be a most-favored nation pricing clause for their virtual print keys but we're seeing nothing but enthusiasm for this plan. And again this is 2,500 screens possibly growing but certainly only a very small -- effectively a national test bed is what we're really after for the entire industry. It is not necessarily our intention to keep going but we will if the studios want us to and the industry supports us to keep going. But to characterize it as push back I would say we've not seen any.

Okay. Then our expectations should be in fairly short order here, all seven major studios and probably some independents should be on term sheets on this rollout?

I would say that our expectation to launch this plan is to have three major studios as least signed before we launch. We are confident that we will get more than that. There are essentially, now that Sony and MGM have merged, six major studios we are hopeful of getting all six and have reasonable expectation of getting all six as well as several major distributors of independent film and eventually all of them because frankly all of the independents are customers of ours now. We're actually running the applications - the TDS application for most of the in our own data centers. So we will approach them in due time. We're starting with the largest and getting those on board first. You can expect some announcements hopefully within the next 30 days of the signings. We are certainly optimistic but until we do we're not making any hard predictions and we're certainly not by any means.

Okay thanks Bud.

Thank you.

Your next question comes from the line of Walter Winnitzki of First Albany Capital. Please proceed.

Brian a couple of financial questions if I could. Three of them. If you can provide CapEx maybe you can talk about what the organic growth is and media services when you back in the acquisitions in the prior year. And finally the flow through of this bankruptcy, maybe a little more color as to how it impacted sales and I think you mentioned gross margins. And then just a follow-up for Buddy after this.

CapEx is something that when we file our 10-Q you'll be able to see in our statement of cash flows and in the MBNA. I'm not really at liberty to go into all those details right now on the call. Can you repeat your other question please?

Yes. The second was the organic growth in media services adjusting for the acquisitions in the prior year -- just what it was.

As Bud said, we're not giving details on a consolidating basis of the individual divisions that make up our segments. Perhaps when you see our 10-Q you'll be able to derive more information out of that.

The growth in -- obviously this time last year, in this quarter last year, our delivery units did no business. So obviously, the growth there was very high quarter-over-quarter. We weren't delivering movies until July of last year. So that's where a significant amount of growth and -- obviously, that's where the high margin expectations are to turn around the gross profit.

The Pavilion Theater did contribute. That obviously is not organic, although we expect organic growth within the Pavilion because we've added some things and adjusted pricing and added a ninth screen just in the last few weeks. FiberSat wasn't there last quarter, it is now fully integrated as the operations unit for our delivery system. So there's business there that was not organic. That's really where the growth has come.

So it's been small amount of growth. Then, of course, in our software development unit, Hollywood Software, we did see growth as well through additional license fees and some ASP fees regarding the TDS and TDS International businesses.

Any bankruptcy issues?

That was a customer that we had disclosed called NorVergence, that was in our of our data centers and went bankrupt last summer. That was a major part of our data center revenues for the one location that they were in.

All right. You said there was some cost in gross margins associated with that, too?

Yes, well just be loss of revenue --

Oh, the lack of revenue --

-- dropping to the bottom line, yeah.

Okay. All right. Then the final question that I, again, was as well -- off and on, and I think you confirmed, it's still on plan for 2,500 screens and the 200 this year?

We are still intending to deploy 200 screens by the end of this year and to get all 2,500 done, in any event, even if we fall a little short of that number, by December. But we're going to move heaven and earth to get as close to the 200. We're relying on Christie's production capabilities and ramping up to do that. But we fully expect to have somewhere between 150 and 200 by the end -- by Christmas, in time for Christmas product and then keep going and accelerate that.

It's important to point out here that rushing is a mistake. We have to do this and do it right. We're leading the way here for an entire industry and everything we do we have to be extremely careful and very circumspect in every respect in how we deal with every detail. So rushing to have another 50 or 100 or even 150 more screens in any given time frame is not what we're going to be doing.

The impact on this fiscal year for those virtual parentheses (ph) and for the attendant delivery business that we hope to get is not what it's about. It's about doing it right and really picking up the hockey stick opportunity in our fiscal 2007 and for ten years beyond that. So -- and hope to expand this plan and the ability to deliver to more screens in an increasing population of digital screens, not only in the United States, but all over the world is what our plan is all about.

Okay. Thanks.

Your next question comes from the line of Jonathan Ziegler of J.M. Dutton.

Please proceed.

Good morning. A good quarter and I just was hoping maybe I could trouble you for some updates as well. Bud, did you say that you added a ninth screen at Pavilion last week?

We did, just about two weeks ago.

Okay. What's the potential capacity there? How many can you go to?

We can add another -- a 10th screen, there's room for a 10th. We'll look at that as the opportunity grows, but right now it's not on the drawing board. It was part of the deal that we made in buying it where the seller actually paid for the ninth screen. So that was part of the package, he had already begun plans for doing so.

We're really not in the business of building movie theaters, we're in the business of using that as a lab, as well as an operating unit that can contribute cash flow to the company and provide our vendor partners, such as Christie, Do Re Mi, Dolby and others to test their equipment and use it. We have made offers to just about every vendor to participate with us, interacting with our vendor agnostics central server software.

But the ninth screen is going to be a money maker. I mean, basically, in the motion picture business, if you're averaging $300,000 a year per screen in revenue and you add another screen -- there is a point of diminishing returns, but it's not a reach to assume that you're going to sustain pretty much the same level of revenue per screen and then bring -- the incremental margin on that screen historically would essentially accrete to the bottom line of that theater, at least substantially. There might be a little increase in personnel costs, but essentially you're really looking at very few variables. And whatever incremental revenue and gross profit after film rent and candy cost will generally find its way pretty much to the bottom line. So we'd look at it as a marginal gross profit as something like 50% of the incremental revenues, which is a conservative number, I think.

Great. Do you think there is a need at this point to do a pavilion-style operation in the European Union somewhere to get things jump started over there?

Well, if you consider California the European Union, the answer is yes. We haven't started thinking that far, but certainly once we are entrenched in Europe and Asia, it would be a very good idea to at least partner with an exhibitor there, if not actually own a theater ourselves. And again, the criteria for acquiring a theater is it's got to be a money maker. We're not just going to own a lab and pay a lot of money for it. At this point we're past that point, we're looking for any additions -- capital additions that we make, we want to see a contribution to the whole, in addition to the strategic value that it could provide.

Thank you. Can you, for the quarter, update us on the number of digital releases that were made during the quarter, as well as the number of screens at quarter end that are digitally empowered or capable?

Well, I can give you some information. With regard to the number of movies in the quarter we did -- in that quarter that ended on June 30th, there were three movies that we delivered and there have been five year-to-date, including Sky High, which we delivered recently.

We delivered 16 movies in total since last mid-July to a total of about 280-some odd screens and have delivered well over 100 other forms of content, including a concert to a bunch of screens. We have serviced virtually every major distributor and many independents in delivering that content. That's a test stat. We've delivered it -- I'd say the average delivery we've done has been somewhere around 20, 22 -- well, obviously, you can divide of the 16 into 282 and come up with the average. So it's obviously less than 20 per delivery. Some has been as high as 28 and some have been as low as I think 4 or 5.

What it's all about is proof of concept at this point. What we're waiting for -- which is what everybody's waiting for -- and that is a meaningful deployment of digital screens. As I've said before, we've decided, with the help our studio partners and a great partner in Christie Digital Cinemas to take the bull by the horns and do this and get things started. So we not only can create that template that we've talked about for the industry, that's scalable, but also create opportunity for other revenue streams for Access IT, which has always been the business plan.

Exactly. Now, do I read into what you're saying there are probably about 280 screens symmetrically now that are digital capable?

No, that was the aggregate number of screens that we've delivered all of those movies to, those 16 movies to. The total number of enabled screens right now is somewhere around 120 that are digital cinema quality. But there I'd have to asterisk that by saying that of those 120, less than 20 are 2K DLP and meet the current DCI standards. The others are 1.3K DLP systems that have been in for a while, including those that we acquired when we acquired Boeing Digital Cinemas division. They provided a meaningful test stat and they put a great image up on the screen, but they are right now grandfathered into the digital cinema world, but eventually will be replaced by only 2K or better systems.

Let me ask you, because you are such a driving force in this business, are you more positive on your outlook for eventual market share coming out the gate at the other end -- I mean, to have a real dominant market share or do you see anybody else coming in because you're successful?

We certainly expect to get significant market share as the first mover, and as the only company currently with an electronic delivery system that can use either terrestrial or satellite to get a movie virtually anywhere in the world. We have the only software that is used -- provided by a third-party vendor for the industry on the front-end management side. We have the only vendor agnostic software for theater exhibitors to use to run the multiplex and to provide all the functionality and interoperability that everybody wants and enables the ease of use.

But again, that being said, it would be foolhardy for us to assume that we're going to own that market entirely, in particular, the delivery piece. We may be the only vendor agnostic software provider for exhibitors in the central server; we may be the only vendor providing distributors and content owners with their back office software as a third-party provider. But it would be -- our planning assumption is that somewhere along the line somebody is going to compete with us for delivery business. I'd be foolish to assume anything else.

We are doing our best to create as many barriers to entry as we can and to make ease of use for our customers who use TDS and TDS International now, to use our system, because if there is a seamless hand-off to our delivery system uniquely. But nobody's going to be a gatekeeper, nobody's going to own a business. Anybody who knows the motion picture industry knows that nobody gets to win it all. The industry wants competition and if one doesn't exist, they'll try to create one or encourage one. So we're prepared for that and we'll do our best to maintain large market share.

We continue to be very optimistic and continue to enhance the products and services we have, which is why our emphasis has not been on what our bottom line looks like today, but in continuing to invest in personnel, software development, R&D. Much of the development is being expensed, taking a more conservative view. We're not capitalizing most of it. We've added tremendous resources -- we've added key people like Chuck Goldwater to our team. We do this fearlessly knowing that we need the strength that the collective management team brings to bear here and the relationships and credibility that we've all developed over many years of dealing in this industry.

Two final questions. When will your Q be available? And --

When will it be filed?

Yes.

By Monday.

Okay. Great. And then finally, you said something in your prepared remarks about the data services that you had increase in number of customers. Can you give us some guidance on that? I know it's not the thrust of your business, but just as a background of --

Well, we have made some steps in replacing the lost NorVergence business. NorVergence was paying us, as I recall, about $70,000 a month. And that's a significant drop-off.

We've replaced a good part of that and so you can see some of the comparative quarter-over-quarter that if you take out $70,000 and add back whatever the difference is, you will see the shortfall. We continue to get traction in that business and have continued to add customers in this quarter and intend to continue to add them. We're adding quality customers, including members of the motion picture industry in our managed services piece.

We hope to be making some announcements in connection with that, too. But the integration of some of the more traditional archiving and managed services and network management business that our managed services division provides is now being presented to an increasing number of movie distributors. As we do that, we're beginning to get some traction in that area, that, along with law firms and financial institutions.

Okay. Do you have a number on what the customer count is now?

The total customer count for our data center business? It's well over 100.

Okay. Great. Thanks very much. I'll pass the baton to someone else.

Well, thank you.

(Operator instructions.) And the next question comes from Peter Spearasis (ph) of Gorilla Capital. Please proceed.

Peter Sires (ph). Hi, Bud.

Hi, Peter.

You were nice enough to invite us to the Star Wars, which was spectacular, but you should also mention that before we were allowed to see the movie, we all had to attend Digital Cinema University and pass a test to qualify to see the movie. I just want -- with that -- all kidding aside, it was a great experience and I wanted to thank you for it.

The question I have is -- and I don't know whether we're mixing domestic or international or what kind of question, but if -- living in the city of New York there are all sorts of neighborhoods with people of all sorts of different nationalities. Is there a business where, in a particular theater, you could show, on Tuesday nights the same movie in Chinese or on Wednesday nights you could show a Korean movie or something like that? Because it seems to me that if -- is there a way of accomplishing that of showing international movies or international versions of domestic movies in different -- on a particular date and time?

Yeah, absolutely. Actually, that's precisely one of the advantages from the movie exhibitors' point of view of choice, the ability to do a Spanish language version of a Hollywood hit in his theater by designating Thursday nights or Tuesday nights, 4:30 or some -- presumably a time when he's not doing a lot of business.

Because that's the kind of thing, he can't afford -- you can't afford to be sending prints to one theater for Tuesday night and another theater for Thursday night, but you can deliver digital, right?

You can deliver digital with multiple sound tracks, absolutely.

So let me in some sense, if I have -- let's take Star Wars as an example, you could deliver Star Wars with three different -- let's just say you were in New York City, you could deliver Star Wars with English, Spanish, Chinese sound tracks or whatever and I could say that on Tuesday afternoons I'm going to show Spanish and Wednesday afternoons Chinese?

Yes, absolutely.

And it would take much bandwith --

And on and on and on.

-- to get the extra sound tracks in? I mean the extra -- yes.

It can be attached to the file and be an option on the play list, it's a version that goes from the Theater Command Center to the media player for that screen for that show is all part of the scheduling capabilities of the Theater Command Center software and enables the theater owner to make those choices, in advance. That could be done either at the theater level or at the home office or both, and the so-called play list of what's going to appear on what screen and at what time is set with keystrokes, and the digital file can take on a variety of formations that is a function of how the file is created by the studio and at the post-production house.

But I would say -- I'd go one step further, that not only will we see major Hollywood movies in this type of version, but we will also begin to see foreign movies from foreign distributors finding their way into the appropriate language speaking markets in the United States.

No, but -- so let me just sort of back up, because -- I don't mean to take time, but this sounds important to me. Is that reasonable? Because this is something that's besides just a look and feel, this is a significant differential between digital and film.

It is absolutely one of the differentials.

So if I have a multiplex in Tuscon and I figure I've got 50-50 split between Hispanic and Anglo viewers and I'm going to show some new movie on - some hot new movie on three screens. Can I decide that, at a particular evening, I'm getting more Hispanic guys. I'm going to put two screens in Spanish? It's just really clicking a button, right?

It is the click of a button and an agreement with the distributor. I don't want ...

No, I understand that.

The technology will not preclude the business rules between the distributor and for the content owner and the exhibitor, but the answer ...

But if you're Disney or you're Fox, do you care if it's in Spanish or in English?

Well, I'm not sure, but I - what I care about, if I'm Disney or Fox is maximizing the box office revenue --

Okay, that - okay, now let's go to the last point you made, which is about international. So, now let's say - let's take a simple one. Let's say that you get a foreign film. Well, Sky High was a foreign film, right?

No, it wasn't.

That wasn't a foreign film. Let's say that somebody - a distributor comes and they've got a Spanish film. How does that work? It's not being distributed in the United States, but there are 20 markets that they think there's a business for it.

Well, let's assume that we're - this is originating in Spain.

Yes.

Or Portugal.

Yes.

And what we would do is provide the services to arrange to enable them to do business in the United States or in other Spanish-speaking countries, like South America.

Right.

So, what they would do is, using the TDS software, have all of the functionality that they need to provide that and manage that process to all the settlement accounting, et cetera - each of those territories. The software would hand off to a delivery system that would be - it would be - where the content would be ingested somewhere locally and utilizing a satellite delivery system that would either be augmented there or connected directed to our satellite system here in the United States and then sent from there to the theaters that have booked it. Again, we're not in the business of booking.

No, no. I understand that. But what I'm saying - if I'm like one of your old Clearview Cinemas. Let's, again, I'm somebody in Manhattan. I could decide, like, Clearview - whether it was Clearview on 23rd Street - I could decide that every Tuesday afternoon I'm going to show a movie in Hindi and every Wednesday afternoon in Chinese and every Thursday afternoon in Korean and then I could just book it through you.

Okay.

Does that - is that - am I understanding that correctly?

That is correct. The software can be done - our software enables them to do all the booking, to do all the management, the accounting, et cetera. And the delivery can certainly be done by us as well.

And that let's the movie theaters offer something they don't have before and it lets the movie producers in foreign countries distribute where they couldn't afford to send the print.

Exactly. And that's the guidance goal is to enable the countries outside of the United States. But again, Peter, I have to emphasize that activity outside of the United States is very early stage. We're just getting going. Relationships are being developed. We're trading off the credibility and experience we have here in the United States. But certainly, the earlier part of your question is absolutely yes because the Hollywood studios can control that easily. And in terms of getting the foreign product here, it's going to take a little while, but that's certainly something we're targeting and we want to be an early mover there as well.

But as I look five years or six years down the road, that's what the business will look like.

I think so.

Great. Thank you, Bud.

Thank you, Peter.

And your next question comes from the line Paul Johnson of Nicusa Capital. Please proceed.

Thank you. I just - Bud, I wanted to follow up because I just wanted to make sure I understand. You said some things here I think are very important on the conference call. It seems to be that the real long-term business model is the satellite distribution of film. That's what AIX really is about pioneering and wants to be in that business - dominate that business. That being the biggest source of cash flow over the next five or six years.

Well, I would say that, until the formation of Christie/AIX, that would have been and still may be the biggest revenue generator of relatively high margin incremental business for Access IT. And that is still our goal. Because we've set up Christie/AIX, a very significant generator, potentially, of virtual print fees at a substantially higher level than the delivery fees that we were receiving for the same movies, we like both. We like the fact that we can have some influence on the process that we can kick start something the industry needs kick starting for and enable ourselves to take advantage of that as a beneficiary of any rollout.

As you - those of you who have following the company for awhile realize that we've been waiting for two years now for a rollout to occur, initiated by others and attempted to support other rollout plans. And frankly, would continue to try to support other rollout plans, recognizing that, as you said, our business plan is to deliver more movies to more screens. And as we do that, our revenues will grow and our incremental margins will grow because we're already depreciating the infrastructure we already have and are paying for most of that infrastructure today. And what we need are more revenues and, just as movie theater adding screens will see large incremental margin business coming to the bottom line, we anticipate the same thing happening with our delivery business.

But if you - if several other plans came along very quickly in the industry and you no longer needed to jumpstart it, you would - would you be happy to let them go forward and you guys would then just be in the delivery business?

Yes.

All right. So, if the industry all of a sudden got very aggressive, the 200 screens - the 2,500 screens - if you felt that the industry was going to surpass those at a much faster pace, you would be happy to let them go do that. Then you would go back to the - I don't want to say original strategy, but the core strategy of going after the delivery platform.

Yes, we would.

Okay. So, your jumpstarting the 200 and 2,500 is sort of contingent somewhat on the industry continuing to sit on their hands.

Oh, okay. We've been effectively asked by the industry through this process to start things out.

I totally understand.

Nobody's promised us all 36,000 screens. If that's the job we have to do, we're prepared to pursue it and do our best to meet the demand. But again, our business plan is to deliver to those theaters and you've all - many of you have heard this before, but the analogy I like to draw is FedEx just needs somebody to sign for the package. We need a digital installation because that's the - that's really what we are. We're a FedEx. We're a courier for this product and these packages. And that's all we ever wanted to be. We created the software on both ends to facilitate that, but those are, more or less, the razors, the blades in this analogy are the delivery, the recurring delivery revenues that we can generate, not just for movies, but all forms of content.

And we continue to pursue that business. We think by doing the Christie/AIX, we've helped ourselves in both ways and hopefully we've helped the industry get started with this rollout, which everybody seems to want, but nobody's been able to find the answers to getting started. We think we've - we know we have the answers. Once we complete the agreements that we hope to complete within the next 30 days, we will be off and running and hopefully begin to share some of that information, selectively, in ways that will be helpful to everyone, down to the small mom and pop exhibitor as well as the large chains.

The question, I guess, then is focusing back on satellite because I know the AIX/Christie gets a lot of attention as it should, but - and it's the newest thing, so it needs the most explaining. But if we could go back to the distribution - satellite distribution for a moment - and you gave some very impressive statistics. I think it was 280 screens, 16 releases. That works out to 17-and-a-half, 18 screens per release. Is it fair to assume that all of those are out of the Boeing relationship or are some those screens new screens you've picked up recently?

Some of those are new. There are about, I think, eight or nine new screens since May, since Star Wars --

Okay. How many have --

... have been added to the Boeing system. So, I think we're up to something like 35, 36 screens that we directly service and have satellite dish capabilities.

How many - of the eight incremental, how many are Pavilion and how many are non-Pavilion?

Five are the Pavilion.

So, we have five new Pavilion. We have the Boeing installation, we have the five new Pavilion and then we have three new independents?

We have two new independents with a total of - how many?

Five.

Five more?

Five screens.

Five more screens. So, there are - Jeff is getting the --

Five.

Okay. So, it's five in the Pavilion and five to six outside of the Pavilion in three locations.

And those are - those three new locations --

Are all 2K projectors.

2K projectors -- the DCI projectors of which you now own the satellite dish on top of those theaters?

We either own the satellite dish or about to put one in.

How would you have distributed digitally if they didn't have a satellite dish?

We would have delivered a hard drive.

Of the 280 screens - maybe, Jeff, this is a better question for you - order of magnitude, how many of those were satellite and how many of those were hard drive?

The majority of them - pretty much all of them are satellite deliveries with maybe the four or five sites that aren't equipped with satellites right now.

And those --

And included in those are the new ones.

Yes, the new ones. Some of the newer ones that went out did not get satellite dishes yet.

Okay.

They weren't - I mean, we had to scramble just to service them.

Right. Exactly.

And they haven't booked any particular (ph) movies since then, as far as we know or ...

It's pretty much been Star Wars.

So, we're preparing to put satellite dishes on the roofs of those theaters as well.

Jeff, one final follow-up, just so I make sure I have the map. And I apologize because I just get confused by the numbers. Five new screens were Pavilion. Does Pavilion have a satellite dish?

Yes.

Oh, yes. Sure.

And all the Boeing, by definition, have satellite.

Yes.

Yes, except for --

One.

-- one.

Oh, all right. So, that - maybe that will make the accounting work. And then you've added three new sites that don't have dishes yet, but are about to get dishes.

Correct.

So the four that don't are one traditional Boeing account that doesn't have a dish and the three new you've added that don't have dishes, but are about to have dishes.

Correct. We're really not interested in doing hard drive delivery. We think that's --

I assumed that was the case.

-- not a solution.

I assumed that was the case. That's why I was surprised when you said that some of them were.

Well, we do what we have to. When we're hired to deliver a movie, we deliver it in the best and most efficient way possible. And our job is to get it there and get it there on time. And we will scramble to help somebody out if they need our help and that's what we've done in the case of those new theaters that came on line.

Dumb question and I think I promise this will be the last one. If somebody - if you're delivering on a hard drive, how do you physically do that? You have a center where you copy this onto the hard drive?

Yes. We have the ability to replicate hard drives by the hundreds, if we need to. We can - and we can expand that capability. It's not a solution. All it is - is delivering a smaller package, which is a very delicate package overnight using FedEx or Airborne or somebody like that. Very much in a very archaic kind of way for doing deliveries. We don't like it. Things get lost. Things get misplaced. Tracking is difficult. Anybody whose ever lost a package by any of the common carriers knows what I'm talking about. It's not a way to deliver movies. And n a test bed environment, as a backup, fine. But - and we'll do what we have to do.

But our solution as a satellite or terrestrial solution - terrestrial being direct fiber into the theater and once we have enough business capability for those theaters that cannot deal with the dish and - there will be a few - we'll deploy as we do now all over the country. From one of our data centers, we'll go directly with a fiber - dedicated fiber directly into that theater and that will be the means. Our software solution that manages the delivery process doesn't care. To us, satellite is a pipe. Whether it's fiber or satellite, it doesn't matter. The software will get it there and manage that process from end to end.

And presumably the software would not care if it arrived on a hard drive either.

Well, that - the delivery software wouldn't care because it wouldn't be involved. I mean that - it does track it from the standpoint of - and once it gets to the other end and is ingested, it can know - and QC it. But it does care because it's a whole different process. And we lose control over it, to a degree, as soon as we hand it to FedEx or Airborne or anybody else. We don't lose control when we do it.

No, I understand. When you - when you guys have talked about - maybe this isn't your term and I don't mean to imply it was your term. But the land grabs for the satellite dish on the top of theaters, you've given a very - you've been very helpful on the digital cinema rollout - 200 and 2,500. Is there any kind of number we should be tracking on the number of satellite dishes, fourth quarter, first quarter, all of '06?

Well, if you assume that the average theater has 12 screens - at least those that we're going to be addressing - between eight and 12 screens - you can use any average you like. The average in the United States, I think, is up to about eight or slightly higher than that. So, if you just take any of those numbers and divide it by 2,500 - into 2,500 - you'll get the number of buildings. And you've got to assume that most of those buildings will have a satellite dish connected to the central server.

I should make it clear that the central server that we will be installing as part of the rollout can be used in another way. And once the central server is there, within certain parameters, a hard drive ingest is possible. We have not linked the installation in our rollout plan to our delivery services. We have not created that gatekeeper mentality that we know the industry abhors. And instead, we've provided those services, we certainly had to demonstrate that we could do this in order to get studios comfortable in signing onto the plan because, as I've mentioned before, studios wanted to know that they had, essentially, a cost neutral model that included the delivery service, on the one hand, and the virtual print fee they would pay to Christie/AIX on the other. And the combination of those two needed to be, essentially, cost neutral for them to com on board. And having demonstrated that, things moved a lot faster.

But in this model, you have Christie/AIX working on digital cinema and all the pieces they would need inside the theater and the first screen, to deliver a DCI compliant movie and then have another piece that's going to come from Access IT that would be a satellite dish and some receiving software on the movie. Who's paying for that? Would that be the theaters will pay for that or you'll pay for that?

No, we will own that type.

You'll own the satellite dish and you'll own the receiving device.

That's correct. And that will be - we'll do that on screens whether we - in theaters, whether we fund the rollout or somebody else does, we certainly will want to put a dish on the roof.

I assume you have an aggressive sales force out, selling that solution as we speak?

We have a senior management team that is presenting that solution routinely to exhibitors. And I mean, there aren't a whole lot of them. And obviously, it doesn't do us any good to put a satellite dish on the roof until there's a digital installation there. So, we're not - they happen together.

But that's what I meant - you really have the combined as they put in the DCI compliant --

Sure.

-- projection. That's when --

Yes. And that's part of what Chuck Goldwater will be doing, for example, for us is interfacing with senior management at the exhibition side. I will certainly be participating, Russ Wintner will, on the studio side. It will be a combination of our senior managers and the senior management of Christie on both ends. Christie's senior team is also with us as we go forward. But we anticipate there will be other vendors joining the party along the way and we are certainly open to those discussions as well.

So, finally, I think - as we model the satellite services, we should think with those as - in conjunction with our thoughts on the rollout of digital cinema screens. Maybe even a slight delay, but - or a lag. But the whole idea is that people will start putting in digital cinema and you'll start bringing in satellite dishes and services right behind that.

That's correct. And when it comes to modeling, I think the modeling will occur when you start counting the number of satellite dishes that we have up there and then trying to figure out how many movies we'll be delivering and the combination of the utilization at the theater level for Christie/AIX and the number of satellite dishes as a total, which could exceed the number that Christie/AIX does. And then, the number of movies and what percentage of the market we begin to capture. All of those numbers will become a lot clearer.

Will you feel comfortable, quarterly, giving us an update on how many satellite dishes are installed?

In the future - yes. Once we start doing it? Yes, I think that's a metric we can provide guidance on. Sure.

Excellent. Thank you very much.

Thank you.

And your final question comes from the line of Jeff Bennery (ph) of Craig-Hallum. Please proceed.

Hey, guys. I know things are dragging here, so I'll try to keep these short and to the point. Cash from operations this quarter and expected cash usage next quarter?

I would direct you the 10-Q for cash flow from ops for this coming quarter, for this quarter just ended in June. And we're not giving cash flow guidance at this time.

But you can't recap the prior quarter's cash flow?

That was not in our earnings release. So, no.

All right.

That will be in our 10-Q, which will be out in a couple of days.

Cost structure - should we expect any material changes? I mean, is this the baseline cost structure and, even as we see the screen counts ramp, there will, I understand, be some very marginal incremental expenses but - is this a reasonable baseline to be thinking of going forward?

What you see in the current quarter?

Yes.

You will see slight increases in SG&A. But again, not in anywhere near directly in proportion to revenue increases. The margin, obviously, depending on the mix of increased, but organic growth from satellite deliveries will certainly be very incremental and produce a good solid result to the - both the EBITDA and bottom line of the company. Depreciation for the infrastructure related to deliveries and all of that part of the business is obviously not going to grow significantly. It's already in place for maybe some additions, but small. The major CapEx will be, of course, the Christie/AIX subsidiary level, which will be consolidated. So, you will start to see some pretty big numbers on CapEx there, but directly related to that, you will also see revenue streams from the VBS.

Okay. Great. Thanks.

Thank you, Jeff.

And I'll now turn the call back over to Mr. Mayo for closing remarks.

Well, thank you all. Some very good questions and hopefully informative to all of you. I thank you all for your time and for your continued support. We appreciate it and as always, if any of you have any questions, please contact Suzanne Moore and we'll try to set up an opportunity to answer some of your questions as they arise. Have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.