Cineverse Corp (CNVS) 2008 Q1 法說會逐字稿

Good day and welcome to this Access Integrated Technologies first-quarter fiscal year 2008 earnings 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 and 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 a representation as to future results. You are encouraged to read the Company's Securities and Exchange Commission filings.

At this time, I would like to the presentation over to your host for today's call, Mr. Bud Mayo, Chairman and Chief Executive Officer.

Thank you, operator. Good morning, everyone, and thanks for joining us today for AccessIT's first-quarter fiscal 2008 investor conference call. With me on today's call are Brian Pflug, SVP of Accounting and Finance, and [Andy] Patel, our VP and Treasurer.

On our 2007 year-end call just seven weeks ago, I spoke about AccessIT's attempt to focus on results and internal growth for fiscal 2008. I am pleased to say that the first-quarter results show exactly that. In addition to the financial highlights, which I will share with you first, we have seen progress in signing outstanding regional exhibitors to our digital cinema plan. In the number of deliveries and continued growth in the number of installations, albeit slower -- at a slower rate for the quarter due to busy exhibitor schedules, in press coverage, and in speaking opportunities for AccessIT leadership, all of which I will discuss in greater detail later.

Moving right to our financial highlights, we have seen a threefold increase in year-over-year quarterly revenue. The internal growth drivers for this upward trend are our deployment division's virtual print fees, our transports division's delivery fees, and our software division's Theatre Command Centre license fees. Additionally the acquisition of our advertising and creative services division on August 1 of 2006 and our alternative content distribution division, The Bigger Picture, on February 1, 2007, have both contributed to revenue growth year over year.

A significant change since the March '07 quarter is our reduced loss from operations, which decreased from 41% of revenue to 7% of revenue in this quarter. This comes as a result of moderating SG&A, which was 45% of revenues in Q1 '07; 38% in Q4 '07; and lower to 31% in Q1 2008.

As we have been saying, the foundations for growth have been laid and we expect SG&A to grow at a much slower pace than in the past and to reduce as a percentage of revenue. To be more specific, while we continue to see growth in certain SG&A expense categories such as professional fees in connection with our being a public company, and Sarbanes Oxley compliance, our headcount has largely stabilized and we do not expect meaningful future significant SG&A increases for personnel.

Adjusted EBITDA margins, which I have previously noted is a key metric for going forward for the Company, improved from negative 4% in the prior year's first quarter and from 19% in our recently completed fourth quarter to 34% in this quarter.

At this point I would like to mention just a few of the more notable events in the quarter. First, our deployment program continues to dominate the digital cinema industry. To date, we have installed over 2900 systems in 31 states and we continue to move forward toward our goal of 4000 systems by the end of October.

Quality exhibitors of varying sizes continue to sign on to our plan. In Q1 we welcomed Marquee Cinemas and Neighborhood Cinema Group and more recently, Showplace Cinemas and MJR Theatres, all customers of our advertising and creative services division, as well as our Bigger Picture division. This brings our total number of signed screens to about 3600, with more than enough in the short-term pipeline to reach the 4000 screen goal.

On the delivery and, we recently saw the 200th movie title delivered to Christie/AIX deployed systems. And the number of screenings on AccessIT screens is now approaching 3 million.

In May, we welcomed to Bill McGlamery, as our new head of advertising and creative services division. Bill is an advertising industry veteran whose experience included founding Cinema Screen Media, which he grew into one of the largest and most successful privately owned cinema advertising companies in the United States. Prior to Cinema Screen Media, Bill spent many years in the broadcast media industry managing general business operations and sales staff of a number of successful radio stations. We feel his experience and work ethic will serve that division well as it enters the digital cinema age.

In our software division, we're seeing increased activity in licensing customers to our software solutions. In May we announced a new and very large customer in Kerasotes ShowPlace for our exhibitor management system. EMS was originally developed to support analog systems, but can now support digital cinema systems as well. We anticipate the upgrades to it and the move to digital to breathe new life into its sales.

Our leadership has been recognized in several ways. In May we were honored at the Geneva Convention, a regional trade show, by being named the vendor of the year. This award came as a direct result of our commitment to movie exhibition and our ongoing deployment, noted as the only one actually in progress.

On September 5, we will be accepting the Bravo Award during the Venice Film International Festival. Each year it is given at the SMPTE D Cinema International Forearm, a part of that festival, to a company deemed a pioneer for its innovation in the digital cinema supply chain.

In July, we learned that we had made the Deloitte & Touche's fast 50 list for companies based in New Jersey for the fourth straight year. We will find out later this month what our ranking it is. Also in July we learned that we have been ranked 60th in the country on Entrepreneur Magazine's hot 500 list. The combination of all these awards represents recognition for the Company both inside and outside the digital cinema industry.

Finally our alternative content division, The Bigger Picture, announced the first new programming channel since becoming part of AccessIT. Concerts reported at the South by Southwest Music Festival in March will be among the division's offerings and we expect supplemented by additional major artist concerts over the next 12 months. We hope to be making some announcements shortly regarding new and expanded offerings.

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

Thanks, Bud. I will begin by reviewing our results of operations. As you can see from the numbers, we have continued our rapid growth, generating revenues in the first quarter ended June 30, 2007 of $18.1 million, which is an increase of $12.6 million or 225% from the comparable prior year quarter. Included in the prior year quarter is approximately $700,000 of revenues related to components of our data center segment, which we no longer operate.

As Bud mentioned during the last earnings call, we are now managing our businesses such that we now have three reportable segments including Media Services and Content and Entertainment. Media Services includes Christie/AIX, our software division, and our transport division. Content and entertainment, with its focus being more on the exhibition market, includes advertising and creative services, The Bigger Picture, and the Pavilion Theater.

The increase in our reported revenues in the Media Services segment were driven by all facets of that business, virtual print piece, movie deliveries, and software fees. In the Content and Entertainment segment, the increase was due to the acquisitions of the advertising business and The Bigger Picture, as both were acquired after June 30, 2006.

Our direct operating costs increased by 81% for the quarter over the prior year predominantly in the Content and Entertainment segment following our two acquisitions. And in the Media Services segment, due to increased payroll costs supporting our deployment of digital systems. Direct operating costs decreased to 12% over last quarter primarily due to the exclusion of the data centers, which were disposed of effective May 1, 2007.

Our selling, general, and administrative expenses have also increased year over year, primarily due to the acquisitions, the increased headcount, and the Media Services segment. Our total Company headcount has more than doubled from 145 to 350 employees in the year-over-year period. We continue to see the SG&A expenses stabilize and be outpaced by revenue growth.

SG&A expenses decreased 16% over the prior quarter as our fourth quarter reflected certain year-end accruals. As a result, our adjusted EBITDA improved to a positive $6.1 million for this quarter compared to adjusted EBITDA of a -$218,000 in the prior year and a positive $3.4 million in our fourth quarter.

Our net loss was $6.8 million for this quarter versus $2.6 million in the prior year although the current quarter's loss includes $8.5 million of non-cash charges, more than our reported net loss. The June 2007 quarterly loss includes $4.7 million of interest primarily associated with the GE credit facility and $1.1 million of non-cash 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 significantly higher depreciation expense, which increased from the prior year due to our expanded asset base related to 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 the purchase accounting and the two recent acquisitions.

Turning to the balance sheet, at the end of the fourth quarter, we had cash of $28 million and our asset base continues to grow from the continual addition of equipment for our digital cinema rollout. Our receivables have grown dramatically year over year due to the USM acquisition and virtual print fees due from distributors in the normal course of business in the Christie/AIX division.

We had negative working capital defined as current assets less current liabilities of $1.3 million due to the senior Notes now being classified as a current liability as of this quarter, as they are due in April of 2008. We are currently in discussions to refinance certain debt obligations including the $22 million of senior notes.

With that, I would like to turn the call back to Bud.

Thank you, Brian. We are continuing to innovate at AccessIT and are pleased that the business units and products we need to accomplish our goals are already in place. I would like now to discuss a few items we have not yet covered that I am sure you'll be interested in hearing.

First, I mentioned in our last call that we intend to initiate Phase II digital cinema deployment next year. We are still in discussions with major studios with regard to this plan and remain optimistic that if completed it will be accretive to our shareholders in and of itself while it provides a larger platform for each of our other four divisions to do business.

Secondly as he may recall, I elected to issue some guidance on the last quarterly call as follows. Our revenue range for fiscal year-end 2008 is anticipated to be $82 million to $90 million and adjusted EBITDA is anticipated to be between $30 million and $36 million. I will now update that guidance to revenue range of $83 million to $90 million and adjusted EBITDA to between $32 million and $37 million.

Finally I want to update you on a few financial conferences I will be attending in the near future and hope to see some of you there. On September 5th and 6th, I will be presenting at the Roth Capital Conference at the Weston Hotel in New York City. And on September 20, I will be presenting at the Maxim Group Growth Conference, also in New York City. That is at the Grand Hyatt.

If you're interested in further information about any of these events, you can find it at our website under the events section or you can call our offices and ask for investor relations.

Now I would like to open the call to questions.

(OPERATOR INSTRUCTIONS) Jeff Van Rhee, Craig-Hallum.

Nice job. A couple of questions. First just a few housekeeping items. In terms of the credit facility, how much of the credit facility remains to be used?

Well, we have used about $170 million, so there is about $44 million left to be drawn down.

Okay, and then while we are on that, just in terms of credit markets, obviously a lot of headlines lately about the conditions in the capital markets and you mentioned the $22 million that is now classified as current and you are out considering financing alternatives. Then you also touched on the next tranche of rollouts, if you will. Can you just -- I know you have been in dialogue -- give us your color as best you can of how those capital markets look and what they mean to you right now?

Well the debt markets, as everyone knows, have gone upside-down recently, but fortunately we are not actively seeking to do any refinancing of the GE debt and really have an interest only facility through August of '08. So we have got plenty of time. That being said, we are looking into ways of monetizing some of the excess cash flows in that division and freeing up some capital that could be upstreamed to AccessIT and has a reason for optimism that we ought to be able to do that sometime in the early part of '08. We'll have to obviously look at the markets then, but we are not actively in the refinancing business right now.

With regard to the $22 million notes, there we are looking and a month ago we thought that was the heads up thing to do to start refinancing notes that are not due until '08. We like to look at the credit markets. Strangely enough, despite the fact that the markets are really not as robust as they were, we're seeing a lot of interest in refinancing those senior notes and pushing them out several years into more permanent capital. We are reasonably optimistic about getting something done in the very near future.

The early indications on those notes relative to current rates, are we looking something approximating where you are now, an improvement, or potentially get worse?

Well, it depends on what you would call worse. I think that first of all those were one-year notes were a six-month extension. We're now looking for more permanent capital that would push it out and be intermediate term notes and more permanent. So obviously there is going to be a slight rate differential associated with that. We are obviously not at a point where we can talk about specific pricing, but it would not surprise me to see us pay a little bit more for the increased term.

Okay and then just in terms of the data center operations, I know it had been categorized discontinued and it has changed a few times. You had essentially last quarter found a structured system whereby you would at a ratable basis be taken off the hook for remaining obligations. Did you say this quarter it is discontinued? It is not in ongoing operations in terms of what you just reported?

Yes, it is really not anywhere, Jeff. It is -- we accrued for expected losses back in March towards that, so if there is anything in the P&L this year, it will be negligible.

Okay, just wanted to make nothing had changed there. Okay, then just in terms of -- you touched on each of the -- this will be the last question. In terms of each of the other business segments that you touched on, you commented to growth on a year-over-year basis. Could you just comment sequentially if all segments saw growth or where the majority of the growth is coming from on a sequential basis? Certainly it looks like VPF's would have been up on a bigger screen count, but can you just talk to each of the segments and how they performed sequentially?

Both segments did see growth sequentially. There was nobody that has taken a major hit sequentially, certainly. We will have some information on our segment break down in the 10-Q which is going to be filed today. It is a pretty detailed footnote in there which gives year-over-your growth. But sequentially, yes, there is nothing of note going the other way, certainly.

Okay, I'll leave it there. Thanks.

[Chet Suteria], Thomas Weisel.

While I'm filling in for (inaudible), I just wanted to touch back on your refinancing of $22 million. Is it fair to assume that you won't be going for equity raise at all? Is it still going to be debt? Or equity offering is still on the table?

No, there is no equity offering on the table. We have obviously there is a lot of interest in our equity and a lot of interest in even a convert. We're not interested in doing either one of those. We are really after refinancing of the senior notes as debt. We want to push them back. We do not want to just kick them down the road a block or two. We want them to be more permanent and they will be hopefully structured with a minimal amount of equity attached to them. That is our intention.

All right, so again, I would just to get confirm (inaudible) that this current debt market is not a big concern for you. You will be able to issue debt whenever you would like?

Well, it is always a concern. I'm not going to sit here and suggest that what's going on around us and affecting so many companies could not potentially affect us. We like to think of ourselves as a special situation with a lot of support from the financial community. We are seeing that in our discussions and we have cause for optimism that we will conclude a favorable transaction for the Company in the very near future.

All right, and just to give us more color on the USM business, have you signed more screens for the advertising or any progress towards national advertising or any hiring plans to get into the national advertising market?

Well, all of the above I would say positive the answers are yes. We have added screens since we acquired USM. We continue to look to add screens. We are also very focused on operating expenses and getting more revenues per screen and one segment of that in the future and as we progress during this fiscal year will be the addition of national advertising. And we are working with a number of national advertising companies to rationalize a plan for the future that we think will have a significant impact in future years.

One of the things that I should point out is that as we convert these hundreds of screens to the Big D systems into our deployment plan, we will remove the LTD projectors and all of the costs and expenses related to operating them. So part of our plan is to do that and over the next couple of years to replace all 3800 screens with Big D systems and to add screens in the process.

So far we have been attacking this from a standpoint of our existing customers and converting them to the Big D systems which offer benefits both for the customer and AccessIT. We have not really aggressively moved in the other direction, where we have used our deployment plans and a one-stop shop to actually add screens to our advertising program. That plan is just beginning and will be a major part of Phase 2.

Okay, fair enough. And any progress with DCIP? I know last quarter you had mentioned something referring to that, so any color on that would help as well.

Well, the only thing I can say there is that we continue our dialogue with DCIP and to each of the consortium members, AMC, Regal, and Cinemark. We have made some of our technology available to them for testing and evaluation, and we are as hopeful as anyone that we will get to do some business with them. We're very interested in helping them to advance their programs both individually and collectively to really meet their goal of starting their deployments in the early part of '08. We think that is important for the industry and we think that anything that benefits digital cinema will benefit AccessIT.

All right. Great. Thanks a lot. That's it for me.

(OPERATOR INSTRUCTIONS) George Grose, American Capital Partners.

Bud, can you give us a sense as to what the size of your pipeline is right now, or how large that is for exhibitors?

We classify our pipeline into different categories. We have our kind of hot list. That is about 800 screens right now. We have a total pipeline where we have varying levels of discussion that are about 6000 screens. And if we were to include -- there is some overlap of the cooperative buying group for NATO which is about 4000 screens. That would increase substantially to close to 10,000 screens.

Okay, and in your total of 6000 screens, what is the time frame on that?

Well, obviously we only have a few hundred screens left to do literally in Phase 1. Until we announce Phase 2, that whole list is merely a prospect list. We have not finalized all the terms. I can tell you that in Phase 2 the exhibitor contributions will be much greater.

Those of you who follow Carmike note that their comments from both their CEO and COO were very clear about the indications. Certainly we are aware of that, that the studios are socializing a very strong preference and if not insistence on higher exhibitor contributions in Phase 2 and beyond. And we will address that on behalf of those exhibition and the studios and try to come up with a plan that we think is implementable. We hope to be able to make some announcements in connection with Phase 2 in the very near future.

I guess in your total of 6000 screens, what is kind of the largest -- largest screen count you have in there for a single customer?

Well, there aren't a whole lot of screen counts in the remaining circuits. The highest one would be around 1000 screens and it would drop off rapidly. As you all know, consolidation in this industry has taken place in the top four or five theater chains really comprise a very large proportion of the total screens.

That being said, there are 38,000 screens in the U.S. and Canada, which is the addressable market domestically for us in Phase 2. We are moving the 4000 screens that we intend to complete and the 13,000 to 14,000 that DCIP with hopefully our support will move on. That leaves quite a number of screens left to be addressed and we will be addressing them.

I guess as you see -- I mean like once you kind of get done with the UniqueScreen Media, those screens, you'll be moving up the food chain in terms of the size of the exhibitors. Is there -- are you running into situations where some of the larger exhibitors, they might want to deal with a couple of suppliers?

Well, as you know, our solution is vendor neutral and although we -- Christie is our partner in Phase 1 and there is a great deal of mind share that has taken place over the last two years and a great deal of trust at every level of both companies. We're pretty much joined at the hip. Phase 2 will still give opportunities to those who can compete effectively and provide the same level of support and product availability that Christie has shown they can do. And so if an exhibitor has a strong preference as to hardware vendors, our system can easily accommodate that.

Okay, I guess in your installations, I think last quarter, last call you mentioned you had satellite delivery in 252 locations across 31 states. Can you update us where you are now?

Well, I think I told you we were at somewhere around 160 the last time. We're north of 180 installed out of a total of about 260 some odd sites today. By the time we're through with Phase 1, we're now finishing up and adding some of the smaller sites as we complete Phase 1. We will probably have about 400 sites in total and each one of them within a matter of six months following the installation of the systems themselves should have satellite dishes.

Keep in mind that the satellite dish piece of this is our option. We have the right to put the dish on the roof. We don't have the obligation to. We will make those decisions as we go because it does involve a CapEx expenditure and we will kind of see where the funding -- whether it comes from vendors or otherwise unfavorable terms is available to us. It is part of the network that adds value to AccessIT, possibly the most enduring value longer-term.

But again, we're doing a pretty good job of delivering hard drives on an interim basis. We are exceptionally good at doing that. We found ways to make that a profitable part of our business on the delivery side. Whether we -- in terms of delivery of movies and other features and other content, whether we like it or not, we do not have the right to put a satellite dish yet on several hundred systems that are out there that have been deployed all over the country, not by AccessIT but kind of on a one-off basis to accommodate 3-D showings over the past two years -- and we deliver hard drives to them.

So we are going to be doing that anyway at least for the immediate future and we will revisit as those theaters add more screens and we can justify the installation of the satellite dish, we will address that as a separate matter.

Our ultimate goal is clearly to have a satellite network throughout the country in all 50 states in every top [DMA] and on every theater roof in the nation. And ultimately to extend that network worldwide.

Okay, Bud, my last question here on your guidance, has any of your assumptions changed from when -- at the time you gave it, the guidance last quarter? I mean, it seems like the summer blockbuster season is stretching into August now and you might have higher turnover now.

Well, the good news is that we have had a great turnover. It's actually exceeded our expectations. For that reason, despite the fact that we had 300 fewer screens than we'd hoped to have by the end of June, we were able to offset the fact that we did not and we are not able to generate attendant revenue on a per screen basis. The fact that the utilization of those screens that were deployed were higher on a per screen basis helped to make up for that and produced a very good quarter.

It could have been a better quarter, but despite that, the fact that we have signed additional exhibitors and continue to do so, I felt comfortable raising the EBITDA target, the higher end of the range by a million dollars and the revenue range a minimum by a couple million as well. So I think that actually by $1 million.

So what we're talking about is revisiting this as we sign more exhibitors to our plan, and what I am looking at is are only those screens that were contracted. And looking ultimately at the results that they will produce over the course of the year.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Paul Sonz, Sonz Partners.

Recently Carmike Theaters had a conference call in which they delineated the benefits of their conversion to digital in some detail. I have wondered if you could comment on some of the advantages they indicated, specifically on the -- their ability with the tentpole shows to not turn anyone away but to engage them in more screens very quickly. It also seemed like they were indicating that they increased revenues on their concessions by being better able to schedule their showings.

Well, thank you for pointing that out, Paul. We actually thought that those comments -- I even referred to them earlier in mine, we should share that with some folks who are interested in getting some articles of interest and we will be doing that.

Absolutely, the flexibility that digital cinema allows is tremendous. With a mouse click, an additional screen can be added on a Saturday night. I talked about this at investor conferences over the past few years. Digital cinema is about what you do with technology and this is one of those things. This is that ability to at a moment's notice open another screen with a mouse click, take advantage of what is going on, optimize scheduling, space out your showtimes, and bring some science to this process with the use of a computer. That is really what we are allowing people to do.

And we are hearing this. Carmike is the only public company that reports this kind of information and they have also mentioned specifically that Carmike is -- has some advantages in that they have incurred the costs and some of the business interruptions. It's minimal on a per screen basis but collectively they have done almost 2000 screens. This is behind them and they are poised as well as any circuit in the country, as are all of our exhibitor partners, Rave Theaters, down to Galaxy, down the Cinetopia, an 8-plex outside of Portland, Oregon.

These folks are enjoying the flexibility for scheduling that digital cinema allows and are just beginning to see more alternative content that will produce accretive revenues for them. This is something that Bigger Picture is driving and we're hoping to see other studio-related content coming out, whether it is through The Bigger Picture or otherwise. It benefits our exhibitor partners. We get paid alternative content fees. This is all good for the industry. It fills seats that are empty.

So Carmike is certainly poised to really take advantage of this as well as any public company that I know on the exhibition side. There is no doubt that others will follow. We hope Regal and Cinemark and AMC will all be among them, but everyone is starting to get it.

In terms of the -- it would seem to me that such a large company coming out publicly so strongly for the technology would sort of lead to at least an increase in interest in going digital. But I had a question. If people decided now and in greater numbers that they wanted to go digital and go digital sooner rather than later, what is the actual capacity of the industry to deliver?

Well, Christie has told us that they could do something like 600 or 700 a month once they ramped up. They could do 500 now with a single line and they are getting ready to ramp that up to significantly higher. Barco and [MEC] certainly have enormous capacity but it is fully underutilized and Sony has talked about entering the fray at some point they may and there may be others. Certainly we are hearing from time to time about others.

But among the top three, the DLP projectors, which are the only currently tried and proved, proven projector systems, there is probably capacity that would approach I would say about 2000 a month. I think a more gating issue is the installation rate and the preparation by exhibitors and spacing this out so it is not chaos. We got very good at it with Christie after a few months of raggedy stats back in 2005, and I think that with AccessIT's help, we could get others there if necessary.

Again, we and Christie are already talking about preparing for not only a number of initiatives here, but also outside of the United States and working together to accomplish that.

All right, thank you very much.

(OPERATOR INSTRUCTIONS) With no further questions in the queue, I would like to turn the conference back over for any additional or closing remarks.

There are none, operator. Thank you all for attending this conference.

Thank you and once again, ladies and gentlemen, that will conclude today's conference. We do thank you for your participation and you may disconnect at any time.