Cineverse Corp (CNVS) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q3 2006 Access Integrated Technologies Inc. Conference Call. My name is Kelly and I'll be your coordinator for today.

[OPERATOR INSTRUCTIONS]

Listeners are cautioned, some of the materials discussed today may include forward-looking statements regarding AccessIT business and expected financial results. Words like "anticipate," "believe," "estimate," or "expect" are generally forward-looking statements. Although the company believes that the expectations are reflected in these forward-looking statements are reasonable, they are based on information currently available and certain assumptions. There can be no assurances that they will prove correct. You should not rely on anything in these forward-looking statements as a promise or representation as the future results. You are encouraged to read the company's Securities and Exchange [Income] Filing.

I would now like to turn the call over to Mr. Bud Mayo, Chairman and CEO. Please proceed sir.

Thank you operator, and good afternoon everyone from Los Angeles. Thanks for joining us on today's AccessIT's Third Quarter Fiscal Year Call. With me on the call today in Morristown, New Jersey as always Brian Pflug, our SVP of Accounting and Finance, and Jeff Butkovsky, our CTO.

As most of you already know, having heard me on previous conference calls discussing the many important developments regularly occurring at the company, we often spoke about investing in the company's future, in terms of both technology and people, to ensure that everything would be well positioned as a company to fully capitalize on Hollywood's forthcoming transition to digital cinema.

Well, as we exited the third fiscal quarter and entered calendar 2006, I believe it is clear that our efforts have been highly productive, and our time well spent. The third quarter marked an important transition point for AccessIT. One that I believe firmly moves the company into a new phase. One focused on the execution, the full commercial rollout of digital cinema systems nationwide, with the support of the major studios and multiple exhibitors, including Carmike, Emagine, Ultrastar, aggregating almost 2,500 of the 4,000 screens in our plan.

These events, and other key initiatives all over the world, are setting the stage for what, no doubt, will be an exciting next two years for AccessIT. And before I speak about this, let me first turn your attention briefly to the financial results reported this morning. In the quarter, many of the trends established earlier in the year have continued, most notably, strong revenue growth supported by relatively high levels of investment spending. As expected, the majority of this growth was generated in our media services operations, the result of increasing software contract revenues, and of course the operations of our own Pavilion Digital Showcase Theatre, which reflected strong year-end holiday business.

As a result, revenue in the third quarter of fiscal 2006 was up 61% to $4,411,000 from $2,739,000 in the year ago period. SG&A in the quarter was up 66% over Q3 2005. This is evidence of our continued focus on making significant investment into the business in advance of revenue generated through the wide-scale delivery of digital content, and to the Christie/AIX Deployment Plan revenues.

What is important to note here, is a gradually slowing SG&A growth rate. This comes despite the fact our head count has increased to 74 full-time people from 61 recorded at the end of September quarter, in addition to our roughly 50 part-timers at the theatre. As we move forward with our deployment, we'll witness significant revenue growth leveraging this investment, which will rapidly outgrow a more stable and normalized expense base.

Looking to the balance sheet, it now reflects the positive impact of our recent debt and related warrants conversion, with higher cash and current assets, reduced debt and lower liabilities versus the year-ago period. Brian will talk more about these items in a few minutes. So, let me recap some of the events of the quarter that support our indisputable leading position in the transition to digital cinema.

First, studio commitments. Throughout the third quarter, the company successfully obtained the support of the majority of the Hollywood studios. Building upon our first such landmark agreement with Disney, commitments were subsequently secured with 20th Century Fox, Universal, Sony Pictures, and DreamWorks. These studios represent the majority of releases in 2005. This support combined with support expected to be obtained from the remaining studios shortly, represents a key element of our rollout plan, ensuring exhibitors that a steady flow of content will be made available to gradually allow for the full utilization of the newly installed digital projection systems.

Furthermore, because the studios have committed to pay virtual print fees to us, these systems are being deployed at almost no cost to the exhibition community. It is the receipt of these VPFs and steadily growing base of available screens to deliver content to that will generate increasing revenue, cash flow, and earnings over the next 12 to 24 months. Exhibitor rollout. While others are still formulating their strategies and funding plans, and in some cases just beginning to get their first look at digital cinema equipment, AccessIT and it's hardware partner Christie Digital Systems are now putting our collected know how and years of field experience into full operational deployments.

Through our Christie/AIX unit, we've already completed the turnkey installation of a fully networked, 153 systems, outfitting both Emagine and Ultrastar circuits and have begun scheduling the first few 100 installs with Carmike, the nation's third largest exhibitor. These systems are fully functional, and represent the most advanced systems of their types in the world, featuring a network of linked projectors and media players in each multiplex connected by a central library server, which is run by AccessIT's Theatre Command Center Software and our two-way satellite distribution system.

In fact, initial deliveries of movies and other content have already commenced to these systems, and AccessIT has recorded its first virtual print fees and transport revenue from these systems in January. Although these early revenues will be extremely modest, they are nonetheless important, and a milestone since they will grow significantly as the number of installed systems and the ramped up studio releases in the months ahead.

We remain committed to our original goal of deploying the first 2,500 systems by April of 2000, and the full 4,000 contemplated under the plan by the end of October 2007. We also look forward to ultimately increasing the number of systems well beyond the 4,000 screens to a new goal of 10,000 systems within four to five years. Technology advancement and integration.

AccessIT is the first and foremost a technology solutions provider, incorporating internally developed technology, such as our industry standard Theatrical Distribution System, or TDS, and our Theatre Command Center, or TCC, with a best of breed technology sourced from leading hardware providers from around the world in an effort to deliver to our customers, the studios, and exhibitors complete, fully integrated solutions tailored to meet their unique needs.

To that end, we are constantly looking at new technologies and services, which will benefit our customers through increased flexibility and efficiency. In the days and months ahead, we'll be expanding both the technology deployed in our rollout, as well as the possible launch of new services ranging from security and anti-piracy, to the incorporation of 3D capabilities. This approach, and our ability to seamlessly interoperate with all providers further differentiates us from other providers who are interested in playing in the market, further strengthening our first mover advantage.

And finally, market development and expansion. Building upon our credibility in the U.S., during the past year, AccessIT formally launched its Asian business development program lead by David Gajda, the company's Senior Vice President of International and the founder of Hollywood Software, I might add. Russell Wintner, President and CEO of our Media Services Division, and Chuck Goldwater, President and COO of Christie/AIX. During recent trips to China and Singapore, meetings were held with major regional exhibitors, content owners, and local investors. One of these trips culminated in a presentation at Asia's largest exhibitor trade show, CineAsia, by Davie Gajda.

Throughout Asia, as has been the case throughout Europe, South America, and Mexico, exhibitors are quickly embracing digital cinema. As the leader in providing innovative technology solutions for both studios and distributors in the U.S. for digital cinema, AccessIT is uniquely positioned to capitalize on the global adoption of digital cinema through our proven content distribution and management capabilities. Not only with solutions for international distribution, such as our International Theatrical Distribution System, but very substantial and unique real-world experience with exhibitors who are now transitioning to digital cinema.

We look forward to reporting our progress in this large and exciting new market as we move forward. 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 will make some concluding remarks and then open the call to questions. Brian?

Thanks, Bud. I'll begin by reviewing our results of operations for the quarter. Our revenues for our third quarter ended December 31, 2005 were 4.4 million, which is an increase of 61% over our 2004 third quarter. And on the year-to-date basis, the revenue growth was greater, at 72%. We experienced year-over-year revenue increases across most of our operating units. Our media services segment's revenue grew by 112% versus the prior year's third quarter, driven largely by box office and concession sales of the Pavilion Theater, which was acquired in February 2005, and increased revenue within our software business.

Our data center's services segment revenues grew by 15%, which was due to continued strong growth in our managed services business. In our legacy data center business, as customer contracts expire, we will be de-emphasize the [pure] data center rental business in favor of higher end managed services and web hosting. Our costs of revenues reflects our direct operating expenses and consists mostly of personnel and facility related costs, and increased by 91% for the quarter over the prior year predominately in the media services segment, most of which was attributable to film rent, concession expenses, payroll, and other operating costs of the Pavilion Theater.

We also experienced additional costs from the operations of our AccessIT Satellite and Services division, which was acquired in November 2004 and only had operations for half of the three-month period ended December 31, 2004. We continued to add resources to our infrastructure this year as we augment our ability to service the digital cinema rollout and other increased activity.

Our quarterly gross profit margin fell to 29% from 40% in the prior year's quarter due to these factors, as well as lower margins from the Pavilion Theater and added costs associated with the startup of the digital movie delivery business.

As Bud mentioned, our selling, general, and administrative expenses have also increased due to increased headcount and office expenses, which include the acquisitions of the Pavilion Theater and AccessIT Satellite, and the creation of Christie/AIX to support the digital cinema business. Our total company headcount has more than doubled, going from 58 to 128 in the year-over-year period, including the part-time employees at the Pavilion.

We also incurred higher professional fees as a result of increased compliance costs and due to the overall growth of the company and entering into new business transactions, advertising and marketing expenses related to our media services business. We anticipate that the rate of increase in these costs will be much less dramatic than it has been in the past. As a result, both our EBIDA and adjusted EBIDA for the quarter were a negative 818,000 versus a negative 249,000 in the prior year.

Our net loss was 2 million for the quarter, compared to a loss of 1.3 million in the prior year. Our net loss for the quarter also includes significantly higher depreciation and amortization expense, which increased from the prior year attributable to the depreciation and amortization for the assets of the Pavilion and various other asset additions. Part of this depreciation relates to assets that will support the anticipated revenues from our software delivery and licensing business. Also, please note that about two-thirds of our third quarter net loss comes from non-cash charges such as depreciation and amortization, debt conversion costs, and non-cash expense.

Turning to the balance sheet, we had over 10 million of cash as of December 31, and an improved working capital position due to a greatly reduced debt load following the two conversions of debt into equity that occurred over the last few months, and our other recent fund raising activities. Lastly, to mention something that occurred after the close of the quarter, we have raised an additional 16 million in January with our first [take] down from our shelf registration, primarily to fund future digital cinema related assets.

With that, I will turn the call back to Bud.

Thanks Brian. As is our custom, and before I take questions, I'll make some concluding remarks. As you can see, AccessIT has reached an historical inflection point, and has taken the motion picture industry with it. We've begun to embark on the execution phase of our business plan. And although we are carefully moving ahead with our deployments, the key driver of revenue cash flow and earnings for the company over the next decade or so, we continue to be focused on our core objectives.

These include delivering products and services designed to meet both the current and future needs of our clients. This includes comprehensive end-to-end solutions which will make managing their businesses easier, more efficient, and profitable. It will provide them with the tools necessary to address the changing nature of their businesses and capitalize on the rapidly growing opportunities created by digital technology. Prudent investments, both in terms of technology, business synergy, and people.

Our business, as indeed all technology based businesses requires a focused and disciplined approach to investment. This includes how we raise capital, and how we spend our resources. In the capital markets, AccessIT's effective shelf registration has been utilized to provide more of the initial equity to directly fund our accelerating rollout plan. The shelf also provides the company with flexibilities, cost effectively [tap] the markets on as needed basis. We're working today to finalize a more than $200 million line of credit with a major lender, permitting us to choose to borrow or use equity for years to come.

In terms of operating expenses, although we've reached a point where expense growth is beginning to stabilize, laying the foundation for rapid revenue and earnings growth will continue to make the investments in products, services, and personnel that are needed to maintain our current leadership position in the digital cinema service marketplace. We'll remain prudent in how we invest, seeking ROI and genuine synergy to support our focus on digital cinema.

And let me conclude by saying, as I have in the past, that we at AccessIT know that we're fortunate to be on the ground floor of a very significant and inevitable technological revolution that is changing the global movie industry. Others are slowly waking up to that reality, but having been there first, and now moving ahead rapidly to not only maintain but solidify our lead, we have no doubt about the bright future for our company. We look forward to updating everyone on the many groundbreaking initiatives underway at AccessIT, and to sharing with you the many exciting opportunities that lie ahead.

And with that, operator, at this time I'd like to turn the call open to questions.

Thank you very much, sir.

[OPERATOR INSTRUCTIONS]

Your first question comes from Rich Ingrassia of Roth Capital Partners. Please proceed.

Thanks. Good afternoon, everybody.

Good afternoon.

Bud, do you have a number in mind for deployments or targets for the end of the March quarter?

We have a number in mind and that is a minimum of 250 for the quarter. The caution I would give you, Rich, is that right now the dating event for us is the availability on a timely basis of media players. There is only one media player manufacturer. They are just getting ramped up and have promised to make up any shortfalls from that 250 that occur in this quarter in the next quarter.

We have been right on top of that. In addition, there'll be at least two other media player manufacturers coming into play by the end of June. We're testing both of them now, so we're feeling that that particular event or constraint, if you will, will go away. It's difficult for me to give you exact guidance. My sense of it right now is that we probably won't hit 250 in this quarter.

Fair enough. Then, competitively on the Dolby call recently, they really just rehashed the Chicken Little story. On the Thomson call, there really was no mention of Technicolor, their efforts on digital cinema. We know Barco, Kodak is out there, maybe NEC, can you maybe summarize the competitive landscape of who might be trying to get in, and who --?

The competitive landscape has several levels. On the deployment side, we haven't heard anything from Technicolor. They're the only one's who've announced that they're going to do one. There's one announcement that has some detail in it, and that is that they've worked out something to do about 120 screens with a circuit called Century Theaters in California. We have no idea of how they're doing this, whose equipment they're going to use, and when it's going to occur.

From the deployment landscape, I'd say we're at least a year, possibly two years ahead of anybody else. It's hard to read that. And that's not to say that a company like Technicolor couldn't eventually catch up. We're certainly sure they have the resources and if they put them to work. But it is a process. We've been working on this for three years and have joined technologies with Christie that's been working on it for five years. But catching up is not going to be that simple.

On the transport side, and the software side, no one else to date has put together an electronic solution for delivering movies. We continue to deliver movies. No one has our TDS system, and I doubt that anyone will, a major differentiator for us because it does provide the studios and distributors and new content players a way of getting into the business right away. That's what we do and it's a virtual monopoly for AccessIT.

On the exhibitor side, we have our theater command center, which we license as a component to the exhibitors of our deployment plan. So, each time that we install a screen, we record $800 worth of license fee revenue. That is a discount from the list price. It's a 20% discount for those exhibitor partners that join our plan. It is the only vendor agnostic software available that labels all of the hardware vendors, and we'd expect several to appear by the end of the year, media player manufacturers, server manufacturers, to plug-and-play. And the software theater command center is, I think you know, makes them all look alike.

So, what we have here is a fully networked, complete solution that makes the job of running a movie theater a very simple one. And again, no one has that. So, we think that eventually certainly the transport side will emerge. Somebody's going to compete with us on the electronic delivery side, perhaps Technicolor, perhaps Deluxe. Or, they may partner with us.

We certainly are interested in doing that, being their courier for the digital era just the way they use Airborne and DHL or a trucking company. We are certainly prepared to use our transport system to complement their digital mastering and digital intermediary business. It would make a lot of sense for both companies to do that. So, that's the landscape.

As far as the hardware manufacturers, we haven't heard anything from NEC at this point. I'm sure they're busy trying to get some traction. And Barco, which is much stronger in Europe and Asia, may get an order from somebody. Were committed to Christie, as far as the projector is concerned. We'll be working with Dolby and others, as far as the media player's concerned. We're very interested in dealing with multiple providers. It provides flexibility and also gives them a showcase for their products to differentiate themselves, both to the marketplace and to us, as ultimately their customer here.

There isn't any clear competitive landscape right now. We're hearing a lot of things, and we're certainly paying attention, but our job is very simple for this year. We have no lack of ambivalence about this. We've got to sign 4,000 screens. We're well on our way to doing that, and then blow through that and try to reach our goal of doing 10,000 screens. We'd like to do that during the course of this fiscal year. We want to sign the rest of the studios. There are only a few. We want to get them all on board. They've all told us they want to be on board, and we believe them, and we're working through individual contracts with all the rest of them.

We want to get an international initiative off the ground this year. That's a goal. It's not going to be easy, but if we do the payoff is substantial because we don't have to invest capital. We can leverage our technology. We can get license fees and multiple revenue streams and trade off and leverage the technology and the expertise we've developed by what we've done here.

Those are our goals. We are going to obviously continually look at opportunities for acquisitions, for advanced product development, for services, and you can expect some announcements in the not too distant future with respect to each of those kinds of activities. We're building the company and we're managing a business that is brand new. We're blazing a new trail, making history if you will, and we've got a management team that's light on its feet, knows how to react if we can't get something done one way --.

For example, if we do fall short of the screens that we deploy in this quarter, and we probably will, what we're trying to do to offset that, so it has no revenue impact, not that the revenue is going to be enormous anyway in this quarter, it isn't, but so it has minimal impact, we want to try to install the reduced number of screens in the same number of buildings so that we have the broadest appeal, the broadest opportunity, and frankly the opportunity to increase utilitizations for those screens we do do. That's called managing the business, as far as we're concerned, and we look at this constantly. We look at and understand each location, working with the exhibitor partner and find ways to make this the most efficient.

I can tell you right now, Christie has gotten very very good at these installations, and it's clear that the systems we put in place on both sides, both Christie and AccessIT, have learned greatly from the installations we have put in. And what we've learned, we've put into effect, and it's working.

Okay Bud. Thanks for all the detail. I'll give it up now.

And your next question comes from Jeff Van Rhee of Craig-Hallum.

Hey Bud. Congrats on a pretty busy quarter. A couple of questions here. First, can you just give us an update on the theater discussions? You've gotten Emagine, Ultrastar, and then Carmike signed, and you've got a little room here to round out the 4,000 screens. Can you update us on the progress with additional theaters? And then a second question, to what degree if you can give us a little more color on this 10,000-screen goal over several years. What makes you think that's realistic? What kind of reasonable timeline do you think there is for expanded domestic rollouts?

Well based on the conversations we're having with exhibitors, what's very clear is that we can blow through the 4,000 screens. Obviously, once we've done that, we've got to go back to the studios and get them to support the overage, which we think will be substantial. Getting to 10,000 screens by the end of this next fiscal year, and I'm talking about March 31 of '07, at one point, I'd say a year ago, it would have seem to be a very daunting task. The way conversations are going now, and the size of some of these larger regional exhibitors, I would say there's cause for optimism. It's certainly one of our goals.

We'd like to hit that number, or failing to hit the entire number, it'll still be progress because we're already thinking about the third and fourth year. And based on the efficiencies we're achieving and how much better we are collectively providing these installations, we think we can finish up this first two-year deployment at the rate of north of 700, possibly even higher per quarter installations. That means in the next two years, we should be able to do 6,000 screens instead of just four.

So, without getting too far ahead of ourselves, the conversations are going extremely well. We expect to have some announcements with other exhibitors in the very near future. We expect to be filling in the blanks for any questions that may remain on the part of both the investment community and the motion picture industry having anything to do with the full execution of our plan.

Okay. Two additional questions and I'll let somebody else jump on. Could you give us to the degree that you're able to be specific, sort of a framework of the commitments from the studio side in terms of digital content? What's a reasonable pace to expect, a ballpark percentage of their content to be coming to market -- digital. And then secondly, would you update us on the spend on systems in the quarter and additional orders for future periods?

Let me start by telling you that with the meeting with the studios, that's one of the reasons that I'm out here in LA, to get some commitments on release patterns. We're trying to assemble for our exhibitor partners a pretty good release schedule for them on digital movies. It's clear that the June quarter, it's going to pick up quite a bit. Right now, the Disney Company is the only one so far this year who've released any movies. In fact, they've indicated they are and have been releasing all of their movies, even though their commitment in the first year is only 75%.

The indication from the other studios are that they're going to follow suit once they get rolling. It takes a while. Even though we've delivered a bunch of movies over the last two years, now that we're in the DCI mode, the DCI compliant mode. JPEG2000 is the file format. Security standards are tighter. Everything is different. The studios now need to do things a little differently and they need to get ready to do it. The studios now are following. Those that have signed, and we've got commitments from them to start releasing movies a little later this quarter, and then really pick it up in the June quarter and beyond.

This is when the summer movies are going to start to appear, and then, of course, the September quarter should be very busy. It's all good. It's pretty tough to give any guidance on exactly how that's going to play out, but again, our job is to get as many screens out there on as many sites to get the maximum utilization, to get the broadest exposure for digital cinema, enable 3D showings to occur routinely, increasingly over the next few quarters there will be some more 3D movies, enable our systems to have choices with regard to 3D technologies, and just keep going.

With regard to how we're buying the systems, we've of course paid for the entire first 150 systems. As you know, we've placed an order for 200. So, there's another 50 due in this quarter, and we've placed another order for another 250 at this time. So, capital spending will absorb a good part of the cash that was on hand at the end of the quarter. Of course, having been replaced now by the most recent raise. So we're sitting in a liquid position and want to stay that way, but at the same time we need to keep the [inaudible] order positions going.

There is some lead-time for Christie and some of its suppliers. So, we don't want to do anything to interrupt that flow, and I'm confident that we and Christie are on exactly the same page. Now that we have signed Carmike, we have visibility on exactly how we can plan the entire installations and we're out there, or I should say Christie's people are out there doing surveys now of eventually the entire Carmike circuit. So, we can plan on DMA at a DMA at a time to do this rollout.

And the last look at that, you mentioned you've gotten very close on the debt facility, any ballpark of when we would hear some sort of formal announcement?

I think we and the lender want to have something done by ShowWest, which is March 13th. We're both committed to try to get it done by then. We may be able to make an announcement before that, but I would say that that's our target, to have something in place and completed by then.

It sounds great. Thanks.

Your next question comes from the line of Mark Harding of Maxim Group.

Just a follow up on your outlook for the March quarter and media constraints. Can you give us a little bit of color on the backlog?

The backlog of media players?

Yes.

A little disappointing in terms of being the meat. We've got the projectors. We've got the [LMS'] as we call them, the library server -- the network kits. All that will be done for at least 250 screens in this quarter, but if we don't have a media player to stick in front of it is another component of the system, then that's the constraint. You're never happy about any even minor setback. Frankly, the revenue impact is meaningless, but that's fixed. It's been fixed. We've been to the factory. We've met with their people. They've ramped it up.

They promised us they'll make it up if there is a shortfall by the end of this quarter, and there probably will be, based on what I'm hearing. Whatever we don't do in this quarter, we'll try to make it up in the next two quarters. But we're on track. I have no real concerns because it was always skewed toward the end of the year and into next year in terms of really picking it up. It makes sense to manage this process and not be too much a rush. It isn't about how much we're going to get or not get in the way of [VPF] in the next few quarters.

It's about where are we competitive, and what it means to the company ultimately, which, of course, you and a handful of other people understand very well. But the end game is we get 4,000 screens installed and we drive revenue from a variety of sources [to] those screens. And the aggregate revenue opportunity as we see it in our goal, certainly by the fourth year and beyond is still $20,000 a screen.

And if we accomplish all of those things, we've built ourselves a very solid base from which we are going to do many, many more things, I can assure you. But a good solid profitable base for the company. That's what we've sought from the outset, leading the charge, and I don't have any doubt that we're on plan to do so. Whether we do 50 or 75 fewer media players in a particular quarter is not what this is about.

I was just trying to get a sense of, as well as the exhibitor backlog, and --

The exhibitor backlog is looking fantastic. I can't be more pleased at the level of momentum that Chuck and his team have put together in meeting with these exhibitors. You know we have 2,500 already signed out of the 4,000. But just based on the conversations we're having, we could easily within the next few months be at 4,000. I'm not going to predict anything at this point, but certainly it's looking very good, and the list is very long. So, the backlog is looking very strong. I will announce the signings as they still are [meaningful] as we do them, but we're talking pretty big chunks going forward. In fact, in one or two cases, one of these exhibitors could get us to 4,000 screens.

So that 10,000, is that an official expansion on the rollout plan, or --?

No it's not, if I gave that impression, Mark I apologize.

I just wanted to clarify.

It is a goal. To be clear, to go past 4,000 screens we would have to go back to the studios who supported the first 4,000 and novate the agreement, or extend it, to cover another number. We're confident that the enthusiasm they have for our plan, and their support for it based on continuing dialog, is still very strong, and I have every reason [of] optimism that we'll be able to do that.

As far as the VPF, you did mention that since the end of the quarter, you have collected some VPF. I was wondering if you could give us a [percent] of how many movies and how many theaters were involved in that?

There were three movies, all from Disney, that we have charged VPF for. Nothing significant. I think the average booking was probably 10 screens for each one of them. So, it's hardly a major number.

But it's a start.

But it's a start. And it's certainly a milestone. It's the first time anybody has billed virtual print fees ever, and certainly we're very pleased with that. I'll be pleased when those numbers start reaching six digits routinely and beyond. In the meantime, it's a step.

Absolutely. Thank you, very much.

Thank you.

Your next question comes from the line of Sean Boyd of Westcliff Capital Management.

Hi Bud. How are you?

Hi Sean. How are you?

Good. Just a couple of questions. The 250 looks, lets [get beyond] that, but I just wanted to make sure your minimum goal is adding 250, or [a] cumulative number of 250?

My goal was adding 250 for the quarter. We'll certainly double the number of screens that we have currently by the end of the quarter. I have little doubt of that. But the question is can we hit the 250. We know we can if we can get the media players. That is the constraint. If we don't, hopefully we'll make them up in the subsequent quarter. We know we're teeing up to ramp up the rate of installations in the June quarter and beyond.

On this money that you raised, you've got about 15 million in debt. [As] you lever that up quarter one under your new financing agreement, can you just give us a feel for how far into that year this gets you? In rough calculations, I'm getting --

Without getting too specific, we would expect to leverage the 30 million of equity that we've so far committed to Christie/AIX by roughly at least twice that number. So, we're looking at the ability to take us out well into the year, if you do the math. Another, certainly 1,000 systems, quite readily could be funded with that line of credit. Whether we choose to use it or not immediately is another issue for us, and we're not committed to any single course of action.

We want to fund this in the most intelligent way possible, and give our equity partners the chance to participate with us as we do that. But, having the choice and having that facility in place, first of all takes the bulk of the financing out of play. If there's any question in anybody's mind, and hopefully there hasn't been, but we want to put that to rest. And then make some choices with regard to how we use the balance of our shelf. If we do, there are some mezzanine players who've expressed some interest in getting involved in this, and we'll certainly look at that as an alternative to equity.

We've certainly been offered many tens of millions of dollars in some form of convert or preferred. We'll look at all of those things and depend on some good judgment and a lot of good advice from our advisors as to how best approach that and make it the least diluted it can be. But having the debt facility, of course, gives us an important choice. Maybe it's a combination of the two. Maybe we want to stay under leveraged for a while, and maybe do a combination of maybe a little less equity and more debt, gradually.

Ultimately, we're going to use the whole -- more than $200 million facility, clearly. It's designed to essentially be a warehouse facility that will convert to a term loan if we want it to be. But as you all know, or at least most of you know, our goal is to do an ABS transaction, which will take out that debt and hopefully recycle some of the equity that we've invested and allow us to use that same equity to help fund the equity portion of the next deployment plan and not have to go back into the equity markets. That's when it really starts to get interesting. That is the game plan.

From what you're seeing right now in terms of the terms on this line of credit, would it allow up to 100% debt financing on these screens?

100% of those screens --

If you chose not to use any of the equity money that you've raised, could you simply take -- your screens are 67,000 or 68,000 a pop, could you simply do those screens entirely debt financed under this $200 million line?

No. There has to be an equity component.

There has to be some equity component.

But we've already provided that, so that essentially if we're borrowing, let's say twice our equity, it would mean if we've invested 30 million, obviously you can do the math, it would give us $60 million of availability immediately. And we need to choose whether to use all or some of it, and how to best move forward, knowing that at the end of the day we'll probably have some more equity or mezzanine debt in place in order to fund the entire plan, because the entire plan is in a well-north of $200 million.

Understood. And switching gears here, Bud can you just speak to the capacity at Christie's once again? You're very clear about your plans for 4,000 screens. What does that do? Remind me what the 4,000 is relative to Christie's total capacity and a percentage utilization or what that [takes] into?

I have received commitments from both Christie and its parent company's CEO that they will do whatever it takes, in terms of stepping up production capacity, which has plenty of ability to grow, so that they can meet the demand and meet the timetable we've established. The thing that we concentrated on in the past quarter is the rate of installation, which has really grown to the point where, I believe this is a correct number, we've been told that they can now, or very shortly, will be able to with resources in place do 18 installations a day.

Our goal, ultimately, is to be able to do 750 units a quarter. Obviously, if you do the math, they can install much more than that. It would be a great issue to have to figure out how to match production capacity with installation ability, and to match those two to really [graft] this thing up and perhaps in four or five years be at a point where more than half the screens in the United States are converted to digital. Hopefully, that answered your question. We don't have any issues with them. I think, right now, we're looking at about 150 a month. The ability to produce about 150 a month by Christie. They believe that they can double that quite readily and add another line to get that up to 750, 800, even 1,000 a quarter.

And just the last question. In terms of modeling, as this ramp progresses, can you give us a feel for the gross margin side? You've tried to focus people on EBIDA, and I totally understand that, but just the company now is at a 30% gross margin level. How does that ramp --?

Understand the gross margin of the company today doesn't include any significant revenues. In this last quarter you didn't see a nickel's worth of VPF revenue. You didn't see any significant transport revenue, because there simply weren't that many screens to deliver to. That's all going to change, and as that does, the expense base is not going to go up. We do have some very small variable costs, essentially satellite time.

So, at the EBIDA level, the $818,000 negative number, we're going to blow that pretty quickly once we start delivering and playing movies on these screens. Whether we deliver one movie or not, we're going to blow through that 818,000 loss in a quarter of EBIDA. It is not, and this is the point at which it starts to get very interesting, in this quarter we'll start recognizing VPF revenue. And, we will also recognize license fee revenue, which is all margin at this point, because we're already amortizing our software products.

We're already depreciating and amortizing the entire infrastructure from which we deliver movies. We are paying 24/7 for a payroll staff. We're paying rent facilities, power, and everything related to maintaining that facility. What we're not doing is generating very much revenue. So, incrementally, the revenue we drive through that facility comes right down to our bottom line.

To say that the margin is 100% or even 85% you have to consider that it's incremental, that the movies that we've delivered are not going to cost us any more to deliver because if we delivered to 100 screens or 1,000 screens, than if we delivered to seven or eight, or 10, or 12. Those are the movies we've been delivering, but not only that, we're going to have a lot more movies. And we're going to have a lot more screens to deliver to them. That drives revenue. And as we continue with this deployment plan, we'll be recognizing license fee revenue. In addition, everything we're doing here, we're now initiating serious discussions outside of the United States in other markets.

The opportunities there over the next couple of years are actually, in many ways, even larger than what we're doing here. We're not taking our eye off the ball here, but we don't need to. We've got plenty of partners and we've got plenty of resources to pursue those. As we look at this, we're looking at high margin incremental business. At this level, the Christie/AIX level, we've already got pretty much the full staff that we need to do that, the software that will manage the monitoring of VPS, pulling information out of the log files in the central server, automating the entire process of billing and tracking.

We have a super staff led by Chuck Goldwater, they're already on the payroll. We're not going to be adding senior staff to our business. We will be adding some support people from time to time throughout this to make it work and make things run smoothly. So, [what] we're really looking forward to is ramping up the VPS. What is hard to really predict is exactly the rate of which there is. I would encourage at least for the next few quarters, not to be thinking in those terms, in specific metrics, but rather that we're continuing to be on plan and continue to roll out toward our goal and getting closer to full utilization of all 4,000 screens.

There, it's a lot easier to see visibility when we have the steady state continuous flow of content to all of these screens. It's not hard to get to that $15,000 to $20,000 per screen revenue of high margin business. But in the meantime, it's going to be very interesting too. We're not going to be standing still. You'll see steady progress throughout this year, and even greater progress next year until we're completed with this goal, and you'll hear, hopefully, many exciting announcements showing continued growth and expansion of everything else we're doing.

Well it's been exciting so far. Thank you, Bud.

Thank you, Sean.

Your next question comes from Dennis McAlpine of McAlpine Associates.

Thank you, and good afternoon. Could you expand on what your initial comment was on adding 3D? Whether you have a particular process in mind, and where that's going? And then, second, in its conference call Regal talked about still wanting to wait to see what happens to 4K. Can you talk about where you see 4K at this point, and when this will ultimately be resolved? That either 4K is better or not, and what that means?

With regard to 3D, all of our systems are 3D ready, which means they will enable any of the two technologies we currently know about, specifically [RealD] and [In3] to play on these systems. And we will continue our dialog with both companies and any other company that comes down the pike, to be sure that they can provide their services to exhibitors. It is an exhibitor choice. We're not going to choose a vendor, but we will enable that vendor to be able to work with our systems and we leave it to the exhibitor to choose which combination.

It could be that actually one doesn't [pursue] the other. A multiplex can contain some RealD systems, and if an exhibitor wants to, he can also have some that are in 3, and choose and experiment with that and decide to [deploy]. Our job is to try to save our exhibitor partner some money and to make it simpler for them to choose. And if they ask us to help them deal through it and enable them to test something, we will certainly help them do that.

We're very excited about 3D, in the early stages of digital cinema as a way to differentiate it and to call attention to it more widely by the customers who come. We know that Chicken Little, which had to be the seminal event in digital cinema according to the media, based on the coverage it got alone, was a very exciting thing for the industry. While we know there are many more movies that are going to come out in 3D this year, and I think that number will increase over time because customers like it, and exhibitors like it because they get to charge a premium. They get more seats filled. People go out of their way to see the 3D version, and it's a very easy and relatively inexpensive thing to do.

With regard to 4K, we're very excited about the prospects and potential of 4K, but I think it's going to take a while. In the meantime we've got work to do. We're only doing 4,000 screens out of potentially 105,000 screens worldwide. So, we're not committing ourselves to any one technology. The way we're going about doing what we're doing when Sony is ready, we are certainly ready for them, and we'll do what we can to cooperate with them and support some kind of deployment plan. And there's no doubt in my mind that when they are ready, we'll be sitting down and trying to figure something out.

Thank you.

And your next question comes from [Ted Bade] of [Canel Capital].

Hi. I just have two quick questions. One, you guys revised your installments targets for June quarter?

We're not giving any specific guidance on quarters. I think that's a slippery slope for us at this stage. We know where we want to be. We're pushing ahead. The June quarter, I think it's safe to say, that we'll do more in the June quarter and subsequent quarters than we've done to date [over] the December quarter. Remember, we started from a standing stop in November, that those first 150 systems. In this quarter, our goal was to ramp that up.

As I've indicated earlier, I think that's not likely that we'll get the full installations in. We'll get most of them. It won't be a very difficult thing to add those media players. In the June quarter, we definitely want to step it up, even from the 250 goal that we had. But, I'd rather not be that specific at this time. I'm hoping as the year goes forward that we'll be able to provide some more guidance, but I think we need to focus more on the bigger picture and all the many things we have to get in place rather than on that particular kind of metric.

I guess that there's been a number floating around of 1,000. Should that just not be relied upon then going forward here?

To have 1,000 in by the end of June, it's going to be an almost impossible goal at this point. Just doing the numbers, quickly, there'll be a very significant number. We know that there's a lot of summer product coming out. We want to get as many screens up there. Certainly by the end of September that would be a number that would be at least what we'd be looking for, but I think we're going to be slipping a little bit with those kinds of expectations.

This total deferred revenue number for the quarter if possible?

Deferred revenue? Not a whole lot. [Inaudible] Do you see a deferred revenue line item in our --?

No. You used to break down, I was wondering if it was lumped into Other now? You definitely, last quarter, would have been --

In our [inaudible] business we used to have a deferred revenue. When we signed a client for a long time in our data centers, we smoothed it out over the term. That created a deferred revenue item. But we don't do that. That's not the nature of our business. You can see that our data center operations are diminishing. We're more in the managed services area in revenue recognition. It's much closer to one on one. I don't believe we have --. Brian are you able to comment on that?

While the data centers deferred revenue is actually quite small now. The software business will have deferred revenue depending upon the timing of their billings versus their recognition of revenue. I think when you asked the question, you were referring to the balance sheet --

Yes.

... where we condensed some of that for quarterly presentation. But, we would anticipate for the 10K for year-end we would have more line items specified and you will probably see the deferred revenue [there].

Thank you.

Okay.

This concludes our question and answer session. I'll now turn it back to the speakers for any closing remarks.

I just want to thank you all for joining the call. This is the busiest call we've had to date, and that's a good thing as far as I'm concerned. We enjoy sharing the story and the excitement surrounding our company, and I want to thank you again for joining us.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.