Cineverse Corp (CNVS) 2007 Q4 法說會逐字稿

Good day and welcome to the Access Integrated Technologies fourth-quarter fiscal 2007 and year-end results conference call. Today's call is being recorded. Listeners are cautioned some of the material discussed today may include forward-looking statements regarding AccessIT's business and expected financial results. Words like anticipate, believe, estimate or expect are generally forward-looking statements. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they are based on information currently available in certain functions. 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 to the future results. You're encouraged to read the Company's Securities and Exchange Commission filings.

At this time I would like to turn the presentation over to your host for today's call, Mr. Bud Mayo, Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us today for Access IT's fourth-quarter and fiscal year-end 2007 investor conference call. With me on today's call our Brian Pflug, our SVP of Accounting and Finance, and Ravi Patel, our VP and Treasurer.

Let me start by saying that fiscal 2007 was a year of transition for Access IT. Looking back at the many achievements of the past year, we are most pleased with the progress from our position as a development company to a results-driven operating company. We continue to prove our business plan works and that AccessIT, after years of investment, has become the world leader in digital cinema solutions.

The questions from the industry no longer include the word "if" when speaking of digital cinema. Instead, they focus on when and how AccessIT might assist them. This not only shows the industry has reached its tipping point, but also that AccessIT has been acknowledged as the leader in getting the industry to where it is today. With more than 2650 systems installed, we are the only company that is executing on plans to deploy fully networked systems and at the same time proving the virtual print fee model we helped to create in 2005.

AccessIT's software is being used every day in theaters throughout the country to run digital features, and we are the only company integrating both preshow and movies on DCI-compliant digital cinema systems, simplifying workflows and programming for our exhibitor, hardware and distributor partners like.

Before I speak about these and other key business developments, let me first discuss AccessIT's financial results for the quarter and for the year. 2007 marks a significant turning point in AccessIT's progress. We elected to make several strategic acquisitions, but as I mentioned on our third-quarter call, we feel with the acquisition of The Bigger Picture, we have completed the business plan for the Company. Although we will work to maintain our leadership position as the digital solutions provider in the industry, we have no further plans to expand by acquisition. As a result of this, in the coming quarters we expect to see quarter-over-quarter same-store results, demonstrating our internal growth.

The highlights for the year end and the fourth quarter are as follows -- we again saw large gains in revenues, specifically 181% growth for the full year and a 285% growth for the fourth quarter when compared with the year-ago periods. These increases are largely driven by the purchase of our advertising and creative services division, formerly UniqueScreen Media, on August 1 and The Bigger Picture on February 1. But also, as expected, significant internal growth came from increases in our deployment division's virtual print fees, delivery fees in our satellite division and from Theatre Command Center licensing fees in our software division.

We expect continuing progress in revenue and adjusted EBITDA margins going forward, and we are pleased to announce that we have begun that trend with the fourth quarter and the 2007 fiscal year-end results. For example, the fourth-quarter adjusted EBITDA margin was 20% of revenues versus the third quarter of 13%. Although the loss from operations increased both year over year and in the quarter, it should be noted that noncash charges comprised almost 100% of these losses.

At this point, I would like to highlight just a few of the more notable events for the quarter and the year. First, acquisitions -- AccessIT has now assembled all of the parts necessary to execute on its business plan. The year's acquisitions of PLX Systems, UniqueScreen Media and The Bigger Picture complete the vision we have for the digital future, a vision that began in 2002. Let me elaborate.

In June, we purchased PLX Systems, which is now part of our software division. Their primary product is called Rights Transaction System, or RTS, which enables content owners to manage their rights on all forms of content. We anticipate that this will greatly assist The Bigger Picture and at other content owners and studios in the tracking and management of royalties and ancillary revenue streams.

In August we completed the acquisition of UniqueScreen Media, one of the leading in-theater screen advertising companies in the country. We now call it our Advertising and Creative Services division. This was an important acquisition for us, not only in that it immediately increased our revenues and bottom line, but it also moved us further into providing integrated solutions for theater owners and provided us with a ready group of about 3600 screens to target for conversion to our digital cinema systems.

Since May, we have been providing advertising solutions that can be played out using the same digital cinema projection systems we've deployed for this division's customers. This AccessIT technology brings value to our exhibitor partners by enabling them to run all forms of content on a single digital cinema-quality platform that thereby eliminate the extra costs and headaches of running a separate preshow system, a true milestone in the world of cinema advertising.

In February, we completed the acquisition of The Bigger Picture, a leading distributor of nontraditional or alternative content. In my view, this new division represents a large part of the future of AccessIT on many levels. Most of what AccessIT does, as you all know, is to provide technology solutions to the motion picture industry. But digital cinema is not only about technology; it is about what you can do with the technology. The management team of The Bigger Picture understands this premise and is working hard every day to expand their offering of alternative content channels from the current five to their goal of 50 within five years.

On previous calls, I have talked about how digital cinema technology can enable cinema owners to increase the utilization rate of their seats from the current 10% to 15%. We feel The Bigger Picture and the choices of content offered by this division and others are the answer for theater owners. And we expect the alternative content marketplace to grow over the next five to seven years to potentially (technical difficulty) millions of dollars per year of accretive box office revenues. We intend to own a significant share of that market.

Second, we have reached a number of milestones this year. In September, we announced that Christie/AIX had completed 1000 screen installations. By February, we doubled this number, proudly announcing 2000 installs. AccessIT is the first company to accomplish these milestones anywhere in the world. No other company has reached even 10% of our total deployed systems, and to our knowledge, none of these systems are fully networked. They're all one-off installations.

Another industry milestone we have reached is that as of today, more than 2 million shows, 5 shows a day, seven days a week have been played out on our digital cinema systems utilizing our proprietary library management server and Theatre Command Center software. This is especially significant in that some digital cinema naysayers, without any facts, have suggested that the technology is not yet reliable. We know it is and we prove it every day, with a less than 0.1% failure rate.

Third, the vast majority of the members of the motion picture and financial communities recognize our leadership and offer tremendous support and appreciation for what we are doing. Almost all of the major titles being released today are available in the digital format, a key difference from last year, with at least 150 scheduled already for this year.

Not only are all of the major studios signed on to our Christie/AIX deployment plan, but independent studios have been signing on as well, all paying virtual print fees. Alternative content program is also starting to gain momentum, and we expect it to grow significantly in fiscal 2008, resulting in accretive alternative content fees for our deployment division as well as growth opportunities in each of our other business units.

The increases in available digital programming are encouraging more exhibitors to engage with us on deployment. We have identified significant interest in digital conversion from exhibitors and studios, and as a result, we're strongly considering a larger Phase II plan, which I will discuss in more depth later.

I want to point out that our Christie/AIX deployment is not the only division that is bringing new customers and revenues to AccessIT. We have four other operating profit centers, all of which can benefit and grow not only from those systems we deploy, but from any digital systems installed by anyone -- first, our Digital Media Services division, a division which delivers movies and all forms of content primarily by satellite -- this is a division that is still ramping up as the universe of digital cinema-equipped locations grows; Software, a division which licenses and maintains not only the industry-standard TDS software, but all of the software used by every other division of AccessIT; three, Advertising and Creative Services, a division which provides on-screen advertising to theaters in 42 states; and The Bigger Picture, potentially our most important division of the future.

At this point, I would like to turn the call over to Brian, who will comment on our latest financial results. After Brian's presentation, I will discuss a few more of the recent developments in my concluding remarks and then open the call to questions. Brian?

Thanks, Bud. I will begin by reviewing our results of operations. As you can see from the numbers, we continue to have significant revenue growth, generating revenues in the fourth quarter ended March 31, 2007, of $17.3 million, which is an increase of $12.8 million or 285% from the comparable prior-year quarter and an increase of 22% from our third quarter ending December 31, 2006.

On a year-over-year basis, our revenues nearly tripled to $47.1 million from $16.8 million. Included in the fourth-quarter and full-year numbers are $1.3 million and $4 million of revenues, respectively, related to components of our Data Centers segment, which we do not expect to continue in the future. Our reported revenues are coming primarily from our Media Services segment. As mentioned by Bud, the increase was largely driven by the August acquisition of UniqueScreen Media, the continued ramp-up in our virtual print fee revenues, exhibitor license fees earned through our Theatre Command Center software, and distribution fees earned following the February acquisition of The Bigger Picture.

Please note that our quarter-over-quarter comparisons we are making include the results of our Data Centers segment. In our 10-Q that we filed for the December 31 period, we reported the Data Centers segment as discontinued and reflected those results in a separate line. However, for the fourth quarter and year end, we're showing those results as being once again included with our normal operating results. This is because we licensed our data center operations to our third party, a company called FiberMedia, and the structure of that transaction did not qualify us for the discontinued operations accounting treatment. In addition, the Company decided not to sell the other component of the Data Center segment, AccessIT Managed Services, due to its importance as the Company's in-house IT functions including acting as an ASP for certain external customer applications in our Software division.

In the FiberMedia transaction, we have licensed our datacenter facilities to them. However, we remain on the leases, and FiberMedia will reimburse our costs, including rent, at an escalating percentage starting at approximately 60% in May and increasing to 100% next May and thereafter through the remaining term of each lease.

As of March 31, 2007, we took a one-time charge of $2.6 million to write off all of our data center assets and to accrue for the losses we anticipate over the next year until FiberMedia is assuming all of the data center costs. Any upside potential, such as from customer referrals, will be recorded in the applicable future periods.

Our direct operating costs increased by 149% for the quarter over the prior year, primarily attributable to the DCS or USM acquisition during the year. Direct operating costs grew by just 6% over the prior quarter, reflecting the improving operating margins as expense growth stabilizes.

Our SG&A expenses have also increased, again primarily due to the USM and Bigger Picture acquisitions and increased Company-wide staffing costs. And as a result, our total Company headcount has more than doubled, from 140 to 348 employees, in the year-over-year period. We're now starting to see SG&A expenses stabilize and be outpaced by revenue growth. In addition, our fourth-quarter SG&A was higher than normal due to certain year-end accruals.

As a result, our adjusted EBITDA improved to a positive $3.4 million for the latest quarter, which represents an EBITDA margin of 20%. This compares to adjusted EBITDA of negative $1.3 million in the prior year and a positive $1.8 million in our third quarter. Included in our adjusted EBITDA for the current quarter is a loss of nearly $400,000 from the data center operations which we no longer intend to continue. Adjusted EBITDA for the full year is $6 million, which includes a loss of $1.2 million from the data centers.

Our net loss was $11 million for the quarter versus $3.1 million of a loss in the prior year. I would like to note that the fourth-quarter charges include $11.4 million of noncash charges, slightly higher than our reported net loss. The March 2007 quarterly loss includes the $2.6 million data center write-off; $3 million of interest, primarily associated with the GE credit facility; and $900,000 of noncash interest paid in the form of shares on the $22 million of senior notes issued last October.

Our net loss for the quarter also includes a significantly higher depreciation expense, which increased from the prior year due to an expanded asset base to support our digital cinema rollout and the acquired assets of USM, as well as significantly higher amortization expense on intangible assets, which increased from the prior year due to purchase accounting in the USM and Bigger Picture acquisitions. We also made certain one-time additions to depreciation and amortization in the fourth quarter when we finalized the purchase accounting for USM and for PLX Systems.

Turning to the balance sheet, at the end of the fourth quarter, we had cash of $29.4 million, positive working capital, and our asset base continues to grow, bolstered by the continual addition of equipment for our digital cinema rollout. Our receivables have grown dramatically due to the USM acquisition and virtual print fees due from distributors in the normal course of business in the Christie/AIX division.

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

Thank you, Brian. I want to say again how pleased we are with the AccessIT team's progress in fiscal 2007. We finally made the transition from a development company investing heavily in our future and intent on getting it right to a results-oriented company with an eye on improving operating margins and adjusted EBITDA without limiting our continued rapid growth.

We're now providing guidance for fiscal 2008 as follows -- revenue range, $82 million to $90 million and adjusted EBITDA of between $30 million and $36 million.

I mentioned earlier that we're considering a Phase II deployment plan. We have been in negotiations with our studio partners and will continue those discussions until we feel we have developed a solid, accretive agreement for AccessIT. We would like Phase II to begin at the end of this calendar year, to take three years to complete, and to include an additional 10,000 screens.

We anticipate that the financing for Phase II will be done using a structured finance vehicle which will require little or no equity from AccessIT. In Phase I, we are proving that the BPS model work and that the technology we have installed, with a major commitment from our hardware partner, Christie Digital Systems, is highly reliable, flexible and easy to use. Our intentions are for Phase II to leverage this success with studios, exhibitors, hardware vendors, as well as the banking community.

Some other matters worth mentioning -- in recent weeks, we have completed three successful tests of live event presentations delivered by our Satellite division, with plans for a series of live events by January of 2008 in a variety of categories.

Also, on June 14, our Bigger Picture division completed the soft launch of the first of its South by Southwest concerts in four major cities. This is a new channel for the division, which will officially launch in the fall. We anticipate providing between eight and 12 South by Southwest programs over a 12-month period.

So as you can see, fiscal 2008 is beginning to shape up well for the Company. We are pleased with our accomplishments to date, but we will not sit on our laurels. The rollout is shaping up as expected, with systems so far in 252 locations and 31 states. Virtual print fees are ramping as expected and the business model is working. Our technology is setting standards and meeting expectations in theaters every day, and we're breaking new ground with innovative solutions for theater owners and our studio partners every day.

Let me close by saying AccessIT is executing on its plan and is a powerful force in the digital cinema marketplace everywhere in the world.

At this point, I would be happy to turn the call over to questions.

(OPERATOR INSTRUCTIONS). Richard Ingrassia, Roth Capital Partners.

Bud, a little bit more detail on your strategic emphasis, if that is all right -- it sounds that it is two-pronged, and one, to make the most of the potential revenue streams on the 4000 in Phase I, but it doesn't sound like you have given up on expanding your reach significantly beyond the 4000, even with the intentions of National CineMedia and DCIP in the market. Can you just maybe say more about the latter?

Well, what DCIP is doing, and it really has nothing to do directly with NCM, just happens to be the same group of exhibitors who formed DCIP expressly to do what we are doing for themselves and potentially others. We are talking with the DCI folks and each of the individual exhibitors and offering our technology to them, along with others, to potentially assist them in every way to make the transition to digital cinema, both individually and collectively.

That is about 13,000 or 14,000 streams out of 38,000 in the U.S. and Canada and over 105,000 worldwide. So we've got a lot of work to do, and anticipating a 10,000-screen deployment. We do not anticipate any portion of that, nor is any part of the guidance I have given including any business that we might do with any member or all of the members of the DCIP.

So 10,000 is still the goal ultimately?

Over a three-year period, that is our goal to add. That would bring us to 14,000 in total. This is a new plan, and it is in addition to the 4000 screens.

How much does existing IT infrastructure at your potential theater customers, if you will, create a barrier to either the sales process or to implementation?

Well, I think there is none in terms of the IT barrier because we provide a total solution, and that is one of the strengths that we bring to the table. We are a technology company. We develop technology. We implement technology. We project manage technology. And we can adjust to the needs of an exhibitor on the fly.

So that is not really a barrier. The barrier is really a sense of inertia, of fear of change that is understandable. And we spend a lot of time with exhibitors showing them that that change is nothing to fear -- that this is a simple, easy, flexible solution. And we use our own theater manager very often at the Pavilion Theater, which is our showcase theater and lab, to demonstrate that.

We find that the peer-to-peer kind of discussions can be very meaningful. In fact, as we talk to exhibitors -- we just had a meeting last week and I invited them to send their operators to our theater and just spend as much time as they wanted walking around, running the theater, using the software, using the system and saying how easy it is and how much easier it is than what they're doing now with splicing tape and platters and clamps. This is a whole new world, and as a result, people are moving, as they should, carefully into this whole new world.

And we understand that. We are very appreciative of their concerns and address them one by one. That does make the sales cycle longer, and we understand that too. That has been part of our overall planning, and that is why Phase II will be a three-year plan instead of two, as Phase I is.

Just one more question for Bud and then maybe one for Brian -- are there any studios now not under a multiyear VPF contract, Bud?

No. All the seven major studios are signed on to the plan. We're now turning our attention to the smaller independents and getting them signed on to long-term plan. Many of them are already in the plan, but are doing it -- are paying virtual print fees as they go. And we are addressing long-term agreements with them as well.

That would be Weinstein, Lionsgate, etc.?

And New Line are the larger ones, and then there are about two or three dozen of the smaller independents that we are addressing as well.

And then, Brian, where do you expect cash balances to be at the end of June?

That is not something I can really talk about, Rich. We have given some high-level guidance for the year, but we're not giving detailed cash flow guidance like that at this time.

Jeff Van Rhee, Craig-Hallum.

A couple of questions. First of all, Bud, in terms of the debt, can you just talk to access to lower-cost capital? When do you refinance? What are your options? What is the timeline there?

And then also, Brian, can you just touch base on the data center business, and what are you assuming in terms of an EBITDA drag for 2008 in that guidance, and maybe a sense of when that breaks even on an EBITDA or net income line?

I'm sorry, for the data center piece?

Right.

We've basically accrued for the loss that we would have otherwise expected to incur in the data center business. So really what you should be seeing, if we've done that accrual accurately, is that the data center piece will not affect us this coming year.

It was written down, but on a cash basis it will still be consuming cash until what point?

Until our next fiscal year.

So throughout the fiscal year, maybe 12 months out, we should get cash flow breakeven on that business?

Correct.

And as a component of the $2.6 million, it is under $0.5 million, just to give you a sense of all of the costs that we are anticipating during that period.

You mean under $0.5 million of cash burn for the year?

That is correct.

Okay. And then the debt?

The refinancing of the debt -- we are actively pursuing that as we speak. The debt markets are very attractive right now. Having proven the model, we can certainly do what we have been saying is our plan. We have a high degree of confidence that by the end of the year we will be in a position to refinance this debt and pull out some possibly major portion of the equity that we have invested in Christie/AIX. So that is looking good. The debt rates are clearly more attractive, and we have reason for optimism as we look into the latter part of the year.

I think we need to finish the deployment, which will be completed by the end of October, and then we will be doing work right after the summer on preparing to go before the credit agencies. And any refinancing we do will be very credit-driven in terms of pricing and in terms of size. But we have reason for optimism, based on our advisors and the conversations we have been having, that we will be successful in completing a financing after the first of the year.

And then two last questions and I will let somebody else jump on -- The Bigger Picture came into the mix here. Can you give us a sense of how big Bigger Picture was this quarter?

And then secondly, can you just talked briefly to the preshow business? You had commented on that, I think as -- when you put them in order, one of your -- or the number one key driver in terms of the growth. Has anything change materially, either number of screens live, your revenue per screen per year -- any kind of update on the preshow business?

The preshow business of UniqueScreen Media has increased year over year. And we are -- a component of the guidance we have given includes a small amount of growth in that division. We intend to augment that growth by adding a national layer of advertising to each of the screens. And our overall plan for that business, as I think you know, is within the next two years is to convert all of those screens to the Big D platform, and that assumes that we will have a Phase II, which again is an assumption that is merely an assumption, because we can't accommodate all of them in Phase I. We only have a few hundred screens left to deploy.

But making that assumption, we will be eliminating all of the depreciation for that division, all of the maintenance CapEx related to the LCD projecters and in some cases even slide projectors that exist on those screens. So the game plan is to get rid of all of those, get everything converted to a single platform, save the operating expenses, increase national advertising and move the needle with regard to the amount of advertising that we do on a per-screen basis, and of course, to add screens.

The universe of available screens, when you look at the marketplace where UniqueScreen Media or AccessIT's Advertising and Creative Services division, as we now call it, we are a distant third. National CineMedia is at the top and really very closely, possibly even led by Screenvision, another giant in the industry. And then comes our division, with a total of about 3800 screens that we service from an advertising viewpoint.

Our goal is to take a look at those screens, and if you do the math, you know there is another 5000 screens out there or so in the U.S. and Canada alone and that there is an opportunity to add some of those screens to our list. So we see growth there, but the major growth anticipated, giving effect to the guidance that you have seen, is going to come from our virtual print fees. It is going to be internal growth. And it is going to come from reasonable growth in each of the other divisions, with probably the greatest year-over-year growth in our Digital Managed Services division, our Satellite division, because that growth is tied directly to the universe of digital systems out there, again, whether we deploy them or not.

And then Bigger Picture's contribution?

I am not going to give that kind of guidance. What we will do and we're talking to our auditors about doing, starting in the June quarter, is to provide segmentation as follows -- managed services in the digital cinema world, because that is the business we will be in exclusively, will include Christie/AIX, our Software division and our Satellite division, our DMS division. Then we will have another segment called Content and Entertainment. And in there will be The Bigger Picture and our Advertising division, and our movie theater -- we will put that in there because that fits the entertainment complex. So we will segment then and report.

And as we complete financings in the future and complete Phase II, we will begin to try to give a little more transparency as to the revenue growth in some of the segments and even within the segments where we are seeing that growth. But primarily for competitive reasons and just good solid business reasons, we're not ready to break out those numbers.

Maybe I can ask it differently and maybe broader -- you had given some initial guidance for Bigger Picture, and as you look at what you've learned now that you have owned it, you're off and running, to some degree, in line, modestly exceeded, meaningfully exceeded or underperformed expectations?

Well, so far, they have outperformed expectations. But again, the guidance that I gave informally was more of a place-stopper of about $5 million for the year, but not really formal guidance. And I am happy to give that guidance now that we are on the call and this information that will be webcast. But we would certainly put a place-stopper in for that division of $5 million and about $1 million of net income.

(OPERATOR INSTRUCTIONS). George Grose, American Capital Partners.

Bud, if I read your press release, it seems like the biggest contributor to the year-over-year increase in revenues was from UniqueScreen Media.

Well, if you look at the historical numbers for UniqueScreen Media, you would estimate that about $10 million of the growth year over year came from them, and that is probably a good estimate. Again, we haven't broken out division by division, but everybody knows that it did about $18 million in 2005. And we have indicated that there has been growth year over year. So it is reasonable to assume that in the two quarters that we have owned them, the two and a half quarters that we have owned them, that there has been a significant contribution to the year-over-year growth.

And what is, because I think you didn't have any digital screens that were converted at UniqueScreen Media in Q4, so what is driving the strength there?

I am not sure that that is correct, George. We did have a meaningful number of screens signed and we continue to approach signings with more of UniqueScreen Media's customers. In fact, almost all of the customers we've signed since we acquired them through our deployment plan have come from their customer base.

But I mean in terms of being installed.

To being -- well, we haven't identified installations specifically. But we have installed quite a number of screens already for those customers -- Celebration, [Lowes, neighborhood theaters], to name a few. Whether they were installed in the March quarter or not I couldn't say for sure without looking up that schedule. But what is the question?

I guess is the growth in UniqueScreen Media, is that coming from the core business or from the fact that they are in digital format now?

No, it is coming from the core business. We separate -- when we talk about our divisions, we talked about separate products. The benefit for additional deployments and additional streams comes primarily to Christie/AIX and then trickles down to the other divisions, because when we install a screen anywhere in the United States, it creates an opportunity for the other divisions, specifically the delivery division -- our satellite delivery gets to install a dish and deliver more movies. So it generates additional revenue every time an additional screen is deployed. It has nothing to do with the virtual print fee -- this is purely incremental revenue.

The same thing holds true for our Software division. Because an installation takes place, we get license fees for our Theatre Command Center software. What happens now is that The Bigger Picture also gets to distribute to more screens and to generate distribution revenues as a result of that deployment.

As I pointed out in my comments, all four of these divisions can benefit independently of those screens that we deploy. For example, when we deliver a movie out of our satellite and delivery division, even though we deliver those via hard drive, we deliver to all of the screens that have been deployed by anybody. And there are a few hundred other screens out there, all one-off installations, that we haven't deployed. And we would expect that there will be more.

We are not going to deploy 100% of the screens in the U.S. and Canada, nor do we have any intentions of doing so. And we're not going to deploy all of the screens throughout Europe and Asia and South America and Mexico. We intend to get market share. We intend to prove our technology works to everyone outside of the United States. Certainly we have been acknowledged as the world leader in doing so. But again, it is important for everyone to understand the distinctions on how we run our business.

Christie/AIX is a profit center and a cash flow-generating profit center at that. It is an important division. It grows in direct relationship to the number of screens that we deploy times the number of movies that play on those screens per year, which we have indicated we expect to reach 15 times a year by the end of this year -- that is our goal -- and to keep ramping.

Incrementally, there are alternative content fees that are paid to Christie/AIX which represent 15% of the box office from the exhibitors for content they play. That is accretive revenue over and above the 15 turns a year. We expect that 15 to migrate to 17 per year over a period of time and possibly even beyond that as the independent distributors sign on and as a whole new breed of distributors come on with other forms of content. And we would hope and have encouraged the studios with their affiliates to bring out some of their alternative content as well.

The Bigger Picture division will be one of the players in this space. And as I have said, we see this growing into the billions of dollars of box office revenue over a five- to seven-year period. And we want to get market share for that.

The UniqueScreen Media division is an advertising division, period. It makes its money by selling advertisements on screens with whom it is contracted to provide those. And this is a very rapidly growing segment of the advertising business. Many of you are already familiar with National CineMedia, which has been very successful at providing on-screen advertising. This is a small model of that business and a smaller version of their business. And it has its own internal growth capabilities -- as advertising rates and as the number of ads per screen increase, also the number of screens can increase.

But again, the strategic value beyond the profit center directly for that division is received by the various divisions that feed off those screens. Have I made that clear?

Yes, sure. I guess maybe last question here -- UniqueScreen Media, I mean, they had I think 3500 screens or so that you could look to convert. Can you tell us where you are now with respect to converting their screens? How many have you done and how many--?

I can tell you we have signed about 500 or 600 of those screens already and are in the process of -- we expect to sign all the balance of the approximately 550 screens we have left to sign in Phase I. We expect most if not all of those screens to come from UniqueScreen Media's customers. And certainly in our pipeline that would be a reason for optimism.

[Mark Balzer], Blue Fin.

Bud, I was wondering if you could comment on the way movies have been released over the summer, maybe compared to last year, when tentpole comes out -- are they coming on four screens this year compared to three or two last year, or has that not changed all that much?

Well, what has changed is first of all, last year we were still signing studios to the plan. And last year those studios that had signed committed only 75% of their titles to be released in digital. As of November 1, all of the studios have committed to 90% this current year of their releases. And while the number of prints per site has not increased measurably over last year, what we are seeing are a lot more titles. And that is very meaningful to the VPF ramp-up. So we are seeing tentpole movies generating in some cases four and five prints for site at an average that is significantly higher than, for example, in the March quarter, which is the quietest quarter of all in terms of tentpole movies. Typically there are none.

And for that reason, when we book a print, even though there are plenty of titles, in fact, there may even be more titles in the March quarter, typically they are not booked, they are not tentpole movies and therefore they are not booked on multiple screens. In every other quarter, the June, September and December quarter, you have quite a number of tentpole titles, and certainly the June quarter is shaping up to be no exception. And July and August look like that will continue the trend. And typically, in the November/December period we see tremendous numbers of blockbuster movies.

So things are going well, and we're very pleased with the results, certainly for the current quarter and very pleased with the March quarter results, considering that it is the lowest-grossing quarter for the industry.

And this might just be the usual course of business, but there has been headlines recently about Hostel 2 and SiCKO prints being stolen. I assume that is from DVD precopies. But have you seen recent increase in calls from the studios to get this out on digital quicker because you only have a day or two days to make your money before it ends up on YouTube?

I can't say that we have. Last year, the industry reported a $6.1 billion loss from piracy. So you can be sure that it has everyone's attention, including ours. We provide, as you know, forensic watermark detection services out of our Satellite division. And we can tell exactly when and where in a timestamp that a recording of a pirated DVD or a file has taken place and can provide that information in the digital world. But again, most of this is being done by camcording right off the screen. So if it is not a digital print, there is no way for us to do this forensic watermark detection.

And certainly, it is an initiative. Personally, I believe that the real answer to piracy is to get a simultaneous release worldwide of a movie in every language, and that can only be accomplished by satellite and in the digital world. And someday, that will happen. I think we are probably five to seven years away from traditional, typical worldwide simultaneous release.

By doing that, what you are doing is showing it in movie theaters and eliminating the pent-up demand that exists on the part of moviegoers, who can read all about a movie, can even see a trailer in their own language -- what they can't do is see the movie. And that demand can only be met with these pirated files. If you show it in movies, where people, I believe, prefer to see it, you remove much of that demand. That, through a combination of enforcing laws and changing practices in movie theaters, the MPAA is very serious about it. I think the industry can tackle this. Clearly, they are committed to doing so.

Great. And then can you comment on are you still -- I think the number of committed screens is 3400 or 3500. Is it right in that range still?

It is 3450 or so today. And we're hoping to add to that in the next few weeks and continue through October to do so. And we remain intending to complete the 4000 screens by the end of October.

Great. And do you have any way to comment on how many of those 3450 are scheduled for an installation as opposed to pending installation time?

I believe they are all scheduled for installation. There has been a reduction in the rate of installation, as happened last year at this time, June and July. The exhibitors are basically saying get out of our buildings, leave us alone, for the most part. So we really are slowing down the process out of respect for their wishes. We will pick things up dramatically in late July and August, September and October, obviously, and are going to be moving quickly to meet the 4000 number. But you will see in June and probably July pretty relatively small numbers in terms of installations, but that doesn't mean they are not scheduled, and no one should read anything into those numbers specifically.

Lee O'Dwyer, Sonz Partners.

I was wondering, can you give us an idea of the number of titles that The Bigger Picture has been able to deploy, and then also what percentage of maybe the screens they are being shown on?

I can tell you that we have currently around 30 programs scheduled for the current fiscal year already, of which many have already been shown. When Bigger Picture distributes a piece of content, they tend to play on digital screens all over the country, no matter whose they are, and in fact, in some cases have even, with Fox Faith in particular, were able to distribute at the request of Fox some analog prints of those same movies, because they sought to have a very wide distribution that could not be met with digital alone.

But, for example, the Kidtoon series with Care Bears coming up soon, that will be distributed very widely to virtually every digital screen they can find. And percentage-wise, I would say probably 50% of the equivalent total of the sites that we deployed, at least 50% and really aiming higher. And the Fox Faith product, for example, the last title went out to almost -- I guess a little over 800 screens, which included -- only about a third of them were digital. The rest of them were analog. With Care Bears, they will all be digital and it will probably be 250 to 300 sites.

Great. Are you willing to give us any guidance as to the kind of churn you're seeing with movies now that so much of the distribution is digital?

By that, you mean utilization rates per screen?

Like how many titles per screen per year.

Well, that is the number I am not going to give at this point. We know what it is. We keep very detailed records, and that is what we intend to use to refinance this pool and at very favorable terms, we hope, and to present to the credit agencies. But until we have done that we're not going to provide transparency, specifically -- again, primarily for competitive reasons.

I will say that VPF levels have climbed dramatically quarter over quarter, as expected, and have outstripped the rate of installations, giving rise to what we would expect in terms of having all the studios signed and having them committed to release a percentage of their movies. So we are seeing the ramp-up headed in supporting our position of 15 per year. And that is about as much as I want to say about that subject.

And then of the screens that are currently deployed digitally, can you tell us what percentage of those are being serviced by the satellite delivery as opposed to hard drive? I am trying to understand where we might expect to see some margin improvement, because the costs associated with satellite delivery are obviously less.

That is correct. And we have about 160 out of about 252 sites that are deployed with satellite dishes. And we are planning to complete the rest of those. By the end of the deployment plan, we will probably have about 400 to 450 sites in the plan. And we expect to have satellite dishes on them certainly by the end of this fiscal year. It does affect margins, because it is more cost-efficient to deliver by satellite, as I am sure everyone knows. But we continue to deliver hard drive to all the sites that are not satellite-equipped, as well as to those sites that AccessIT has not deployed, since we don't have dishes and have no rights to put a dish on those sites as of yet. And we couldn't justify it anyway with just one screen in a multiplex. So we deliver a hard drive.

And I might say that we do have a very efficient hard drive replication system that our own technology people have developed that is about eight times faster than any commercially available replication systems that we have been able to find. In fact, we're planning to file a patent on that system. Have we filed it? We have filed for patent protection on that system.

That being said, we don't think that hard drive delivery is a good, viable long-term solution for the industry, and most of the studios, from our discussions with them on the technology and operations level, agree with that statement.

And then I had just one quick question regarding trailers -- revenue from trailers, does that occur on a per print basis or on a per shown basis?

We try to attach the trailers to the same file that we deliver when we deliver a movie, but we do charge extra for each one of those trailers. And that drives up the total revenue per delivery, which obviously is very attractive to us, and in particular, when we do it by hard drive, because there we're looking for as much margin as we can get. And there isn't the kind of margin that we would like in that business.

As I have said in my comments, that division is still ramping up and has still yet to turn the corner. I will say that we are now making money on a per delivery basis, based on direct costs. But we've got to do a lot more deliveries to a lot more sites to cover the nut in that division. And we expect that to occur sometime later this year.

[Ted Bate, 150] LLC.

I have two quick questions, the first being, I guess you guys mentioned the rate of installation per month should slow down in June and July. Should we see a similar rate that we saw in April and May? And then secondly, if so, what do you guys think you can install per month, August, September and then October?

Well, Christie, who does the installations, has told us that they will meet whatever numbers we have to meet. We have installed as many as almost 400 in a month, and there is reason to believe we can sustain that rate. But to answer the first question, we do not expect the same rate of installations to occur in June and July as in April and May. It will be, we believe, less than that.

And then just lastly, did you guys issue any stock to pay interest in the quarter at all?

Yes.

Do you have a rough number you can give me?

For the entire year, it was about $900,000 in total stock value, which translates into I'm not sure how many shares, but probably something in the order of 150,000 to 200,000 shares, nothing truly dilutive.

Wonderful. Thank you very much.

(OPERATOR INSTRUCTIONS). Shawn Boyd, Westcliff Capital Management.

Just a couple this morning. On your guidance of $82 to $90 million revenue, I am assuming that is based upon screens that we have today, screens that we will be adding between now and getting to that 4000 target at the end of October, and then would there be anything additional from Phase II in that, or is that guidance just based on a 4000-screen number?

The guidance is based only on achieving the installations that we have signed to date, period.

So that is back to the 3450 number.

Right. I am loath to give guidance -- in fact, it is even a smaller number than that. But I am loath to give guidance at all, and I am certainly not going to give it based on something that isn't in hand and that we have a high degree of confidence in reaching. So it is, conservatively it's based on the 3450 screens being reached and no more.

I will attempt at the end of each quarter to update the annual forecast and give some guidance on each call as we see more visibility, obviously in the hopes of being able to give more credibility to the higher end of that range and possibly even beyond. But basically, that is where we are today.

Great. So you are only starting with installations already committed at this point?

That is correct. And no Phase II involvement at all.

Understood. And just on Phase II, I want to clarify -- that is 10,000 screens over three years, and that would start when?

We are targeting January of 2008, so our fourth quarter of this fiscal year. But again, we have included none of that and no revenues from that plan, because it is not in place. And it has been our practice to try to limit what we talk about and what we publicly announce to those things that are firm and in place. And if we are successful in putting Phase II together, my guess is that we will have a series of announcements relating to studio signings, as we did in Phase I. But we hope to compress the period of time during which those findings are announced, because we want to get everybody on board.

We have the good fortune of having excellent studio relations and also the template for the agreement. So we are way ahead of the curve that we were when we started, where we started from scratch and had to introduce a whole new plan, a whole new idea, a whole new agreement to each of the studios. And we are past that now and we're looking forward to accelerating the process if we can.

So the signings, we would probably start to see those just in like the fourth calendar quarter of this year?

Well, hopefully sooner. But again, they will be when they are. We don't -- studios kind of move at their own pace. It is clear they are very interested in advancing the idea of Phase II, very interested, encouraging. But timing is always a difficult thing to pinpoint.

The breakdown -- I just wanted to make one comment in terms of a breakdown that you cited for the June quarter and going forward. That is a great step in the right direction. It will be very helpful. As a shareholder, we appreciate that.

Thank you. Do you need some further clarification?

At this point, I think we are okay. I just want to make sure what you are looking at is Managed Services and Content and Entertainment?

That is right. The two groups will be segmented, just like we used to do Data Centers and Media Services, we are going to break Media Services into two segments with more visibility as to the growth quarter over quarter and year over year going forward.

Obviously, anything that you can speak to in further breakdowns within each of those will be helpful.

As time goes by, we may be more willing to do that. And I understand, absolutely. And we understand how the lack of transparency can be misinterpreted, and certainly it is of concern to us. But we have got to run the business in a way that gives us the maximum competitive advantage as a leader in this business, as the first mover -- we need to maintain that position and guard our data jealously. And I hope you understand that.

Okay. Just one comment on that point -- I missed it earlier, on USM, how much of the dollar growth year over year was from UniqueScreen Media?

I don't have the exact number. Brian may be able to give it to you. But it is north of $10 million as a contribution. You had two full quarters, the December and March quarters. And then you had a portion of the second quarter, of the September quarter. So collectively, those would have added up to well north of $11 million.

So that is for the fiscal year?

That is for the entire year. We are going to make life a little easier for you, too. As I've said, we're not going to make any more acquisitions. So starting with the June quarter, it is going to be a lot easier for you to track what is going on. I recognize with all these moving parts that it is difficult for an analyst to really sit down and really figure out what is happening. We are hoping that starting with the June quarter that that's going to be a lot easier for you, that combined with the segmentation.

Very good. That is exactly right. And the last question for you is on the data center. I just don't -- if you could kind of walk me through what occurred there. And I understand it was put in discontinued operations with the thought that we were exiting the business. I'm just curious as to -- I don't fully understand the deal that you have got now.

We tried to sell the data centers. That is what we had put in place, a plan to sell the data center business. And what we ended up doing is instead of selling it, we ended up -- because it is essentially addition by subtraction here -- we had some obligations, which there are three primary locations. One lease ends next year. The next one ends in 2010, and then there is another one, the third one lasts until 2015. We have commitments on those leases which we intend to meet.

We were not able to find someone who could get us off those leases in putting a deal together. Ideally that would have been the best thing for us to do. Since we didn't do that and instead made an agreement in which we from day one gave up 60% of our costs and reduced our losses on a monthly basis and then put a deal together that gradually [pushed] those losses to zero over the period of the fiscal year, but yet remained on the leases, because we remained on the leases, our auditors, our outside auditors, said, you cannot treat that as a discontinued operation since you are still on those leases. And we were not able to get the accounting treatment of a discontinued operation.

So what we chose to do was to simply take all those assets and write them off at the end of this year. So $2.6 million of writeoff in this year comprises all of the assets that are associated with that and all the depreciation that would go on and be a drain on our bottom line in the coming fiscal years.

We also estimated the costs pretty precisely of what those continuing losses will add up to in the course of the year, with each month being less than the preceding month, and included those as part of the loss on disposition in purchase, I guess, in those accounting. And in doing that, we will not burden the coming fiscal year with any of those expenses and any of the depreciation or amortization associated with the data center business. So effectively, we are out of the business.

So at this stage, when you talk about $3.4 million in adjusted EBITDA for the quarter, if we were to say ex-data center, we should be thinking about $3.8 million?

That is, I believe, correct. Yes, $3.8 million is what it would be. And for the year, it would have been $7.2 million, I believe, without the data centers.

Brian Laden, Bonanza Capital.

Just looking out 12, 18 months, do you see consolidation among digital cinema providers or do you think we're going to end up with the five or six guys we've got now?

Digital cinema providers -- I'm not sure -- could you define that term?

Well, like the National CineMedias of the world.

Well, National CineMedia is not a digital cinema provider. DCIP is a company that was formed by Regal, AMC and Cinemark and run by a fellow named Travis Reid, who is an industry veteran, has been charged with the job of putting together a financing plan and to assist and guide with regard to technology choices, which will be made individually, or possibly collectively, by each of those exhibitor chains.

We are addressing their needs as a technology company, not as a deployment entity, but as a technology company, to assist them if they choose to use our systems in their deployment plan. So that is DCIP.

We don't know of any other company that is committed to the same type of deployment plan or has any level of success so far in doing that. There are some other companies that certainly have talked about doing that and may be able to emerge with a plan for a fully networked solution that meets all of the DCI specs, but we haven't seen any yet. We have seen some testing going on by one or two others. And in Europe, we have seen one or two players out there as well. But really, there is nothing significant going on other than what AccessIT is doing. And we really see it more like AccessIT, DCIP and maybe one other significant player on the deployment side.

On the delivery side, we really see the marketplace emerging that will be somewhere between $150 and $200 million a year of recurring delivery business. And we would expect -- I mean, obviously, we are targeting to win 50% of that market. And we have no illusions about winning 100%. We see that in that division as a $40 to $60 million minimum business and certainly we are targeting $100 million a year of recurring revenue for delivery.

There are bound to be one or two other players in that space. And those may be totally different players than the ones that have anything to do with deployments. In fact, every indication is they will be -- they will be different people, different companies.

On the alternative content distribution business, the one that we think is going to be the biggest in terms of its size, from a marketplace viewpoint, Bigger Picture will have lots of competition. They will be working with studios in some cases to bring out some of their alternative content. But National CineMedia we expect to be a force in this business in distributing alternative content. They have done a great job of proving the concept with some of their LCD projectors, and in particular with the opera, which has been a very successful event for them.

We really enjoy the fact that we have seen this kind of success with a very diverse group of content, and frankly, no matter who is distributing it, we think it is good for the industry, good for digital cinema. We have seen 3D versions of movies and soon of concerts and other types of events coming out -- again, very good for digital cinema. And the translation is that anything that is good for digital cinema is good for AccessIT.

Do you see the larger CDNs getting in on the delivery side?

The larger--?

The -- [like the Lions] of the world -- the content delivery networks?

No, I do not.

Adam Mizel, Aquifer Capital.

A couple of questions related to the guidance and then one more general. On the guidance side, you have said that you have included only 3450 screens in the guidance versus your expectation of having 4000 installations by October 31, '07.

Correct.

At what point do you believe you have the clarity on that 4000 number and its timing to be able to reflect that in your guidance? And should we read into its lack of inclusion any lack of confidence in that number?

You should not read lack of confidence, but you should read into conservatism in doing something that I have never done before, and that is give any level of guidance, in any company that I have been associated with. So we are trying to be conservative. Obviously, we would like to outperform those numbers or hit the higher end of the range. But I think the safer way to approach this from everybody's viewpoint -- I mean, after all, we are, in those numbers, practically doubling our revenues and multiplying EBITDA levels by six or seven times. So I think that is a pretty good year, year over year, in terms of progress of the Company, and hopefully that we will be able to satisfy our stockholder needs, who have been very patient about waiting for progress.

To answer the question whether we can -- when we see more visibility and when we will update that, I think we will update it probably in our September quarter. We will have more visibility as to the number of total installations that we are comfortable doing, and can then revisit the annual numbers. But we may have some visibility before that. The June quarter conference call will take place in August. Maybe we will have some more visibility there. We can update that number or at least narrow the range a little bit for you. And we will try to do that.

Related to that, I would say background of your thinking on guidance -- how did you approach the other divisions in your business, whether it is USM, The Bigger Picture, Software and the digital satellite distribution -- with the same kind of, for lack of a better -- bird-in-hand philosophy in the guidance, or is there additional expectations of certain things in your plans in this year that has been reflected in those numbers?

Now it begins. (multiple speakers) No, that's okay, I'm just -- all right. Each division has a budget for the current year, and in that budget there are contracted revenues and there are anticipated additional revenues, without exception. However, the primary driver for the guidance is coming out of our Christie/AIX division. And obviously, its installations -- maybe it isn't that obvious, but I have tried to make the point that as it installs more systems, the other divisions get to feed off those divisions with incremental revenues to each one of those divisions. So a very key component of what we're doing on the one hand is to continue to install systems which benefit the other divisions. But as I pointed out, those other divisions' growth can be fed by the installation by others of digital systems.

And then dropping down to the last division, The Bigger Picture, when The Bigger Picture releases a program, everybody gets paid. Our Christie/AIX division gets paid an alternative content fee. Our Satellite division delivers it, either by hard drive or by satellite, and it gets paid. Our Software division runs the back office and manages the delivery using its industry-standard software. It also gets a license fee. In our Advertising division, increasingly that division will be providing in-theater, on-screen promotions for the upcoming programs, as well as the current programs for Bigger Picture. And finally, The Bigger Picture gets distribution fees for doing its job, just the way any distributor of content would.

One other question on a slightly different tack. As we look at Phase II, and you have given a little bit of context there, is the timing and the substance of your discussions with the studios -- how is that driven in terms of your own discussions and parallel to DCIP's discussions? Effectively, who is either setting the timing, the terms, because I have a sense that there is going to be some consistency there -- a little bit more of contextually what is going on in that process and how we should look at that and think about it as we watch over the next number of months?

I am loath to give a lot of details. Obviously, there is a lot of sensitivity on the part of the studios about our talking about this much at all. I hope you will appreciate that. Although we are an important leader in digital cinema, we are a pipsqueak compared to the studios and what they want to do. They will need to drive this. And I can tell you that some studios are more aggressive about driving it, want to be out there, right out front, as they were with Phase I. And others are not as anxious to do this, or at least apparently, from a negotiating viewpoint, don't appear to be quite as anxious as others to do this.

What is going to drive this is really a continuing discussion of how the plan looks. There are lots of different concepts that have been introduced in Phase II by the studios. Our goal is to make Phase II look as much like Phase I as possible, so we can leverage off the financial model in financing it, because as I have said, we fully expect and are committed to a debt-only model for Phase II. We don't expect AccessIT to have to put an appreciable amount of equity in Phase II at all. And any that we do put in, which would be a nominal amount, would be done ratably over the three-year period. In order to accomplish that, Phase II has to look like Phase I.

If we can make it look like Phase I, even if there are adjustments in the VPF levels, because we know there will be adjustments in the CapEx and the systems costs that are coming down -- as long as the VPF levels do not drop below the level of the CapEx net to us after exhibitor contributions, which is another issue, that the studios are beginning to socialize -- larger exhibitor contributions -- we need to work our way through this. And we need to be responsible in how we do it. We have to fight the battle on behalf of the exhibitors, in one way, because after all, they are the ones who have to sign on to this. So we have to be mindful of their needs and give the feedback that only we have in dealing with so many in the marketplace, back to the studios, who want to see this happen on the one hand and on the other hand want to optimize their position.

And we are kind of the middleman in this, who want to do it, don't have to do it, but have to represent all constituents. We have to represent the exhibitors, the studios, of course, because they are paying us, and we have to also look at the hardware vendors' viewpoint and look at their position here and what they can do in terms of pricing to bring the costs down for everyone.

(OPERATOR INSTRUCTIONS). We have no further questions at this time. I would like to turn the call back over to senior management for any additional or closing comments.

I just want to thank you. This is a very lengthy call, hopefully elucidating and helpful to all of you. And thank you for your questions. I look forward to meeting you at the various investor conferences over the next quarter or so. Thank you all.

Thank you for listening to today's conference call. Thank you for your participation. You may now disconnect.