Cineverse Corp (CNVS) 2008 Q2 法說會逐字稿

Good day, everyone and welcome to this Access Integrated Technologies second quarter fiscal year conference call. Today's call is being recorded. Listeners are cautioned that some of the material discussed today may include forward-looking statements regarding Access IT'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 representation as to the future results. You are 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, and hello, everyone, and thank you for joining us today for AccessIT's second quarter fiscal 2008 investor conference call. I'm speaking to you from our Hollywood office and along with Chuck Goldwater, the President of our Media Services Group, who's with me today, and also with me on the call from Marstown, New Jersey, is Brian Pflug, our SVP of Accounting and Finance, and also Andy Battelle, our V.P. and Treasurer. This call marks a turning point in AccessIT's history. I'm now able to talk about the completion of our first deployment plan rather than its progress. As many of you know, October 31 marked the end of our Christie/AIX deployment, which we've been describing as AccessIT Digital Cinema Phase I.

The 3,743 systems represent 94% of our target of 4,000 screens, and 150% of our original commitment in June of 2005 when we first announced the plan. It's not only placed AccessIT on the map as a global leader of digital cinema solutions, but also has allowed us to create a network of digitally equipped screens and satellite dishes that our company can leverage to increase revenues in all four of our other divisions for years to come. The end of Phase I is a new beginning for AccessIT. Before I discuss the future, however, let me comment on the recent past and a discussion of our most recent quarterly financial highlights.

Consolidated revenues for the second quarter of fiscal 2008 were $19.5 million, almost doubling last year's second quarter. For the six months ended September 30, revenues rose 142% from the comparable year-ago period to $37.6 million. Adjusted EBITDA for the second increased to $6.9 million, a more than nine-fold increase from the $752,000 in the prior year, and to $13 million for the six months ended September 30, a 17-fold increase from last year's comparable period. Noteworthy in the past quarter is the growth of our satellite network to more than 170 sites in 40 states, and we are now in the process of completing at least another 104 during the next few months and plan to reach all serviceable Phase I sites by summer of '08.

Based on our last few quarter's results on utilization of installed screens, together with studio agreements to increase their percentage of digital titles starting this month, we appear to be on track to achieving our goal of a run rate of 15 turns per year, per screen. We're also encouraged by the growing number of independent distributors, including the independent divisions of major studios who have begun digital releases. We've also begun to see an increase in alternative content programs on our deployed screens. A few significant newly formed distributors will open their doors in calendar 2008, licensing our industry standard theatrical distribution system software, and we expect utilizing our transport services. They will, of course, pay virtual print fees for digital titles that play on our screens and are expected to eventually sign long-term agreements for Phase I and Phase II deployment plans. I mention these because the gradual entry of independent distributors into the digital area provides AccessIT with multiple growth opportunities.

Now I would like to mention some of the more notable events of the past quarter. During the quarter, AccessIT was honored in a number of ways. First, as a growing company by both Entrepreneur Magazine, we were ranked number 60 in America's top 500 list, and by Deloitte and Touche, who ranked us 16 out of the 50 fastest growing companies in the state of New Jersey. Additionally, the Society of Motion Picture and Television Engineers, also known as SMPTE, Recognized AccessIT with the Bravo award at the Venice film festival by providing the underlying platform enabling 3D in cinemas. The entire team at AccessIT is appreciative of these important forms of recognition.

More significant to our future business success was our recent announcement of the new exclusive proprietary product we branded SynAlive. SynAlive enables our satellite-ready digital theaters to offer live 2D and 3D events to their patrons, widening the range of content and bringing additional revenues to both our media services and content and entertainment segments. We hope to have significant announcements regarding the use of this unique technology early in our next fiscal year. We certainly can't have a discussion of the recent months without a note on the completion of Phase I deployment plan. Throughout the summer, we signed several more regional theater chains. Importantly, of the last nine chains we signed, eight were customers of our advertising and creative Services division, representing more than 800 screens of the total. We believe this is an example of how our plan of integration is working.

Customers of one division become customers of another division and so on, creating more revenue opportunities for AccessIT as a whole. During last month, we completed a record number of installations, thanks to the managed services team at Christie, to conclude Phase I at 3,743 screens and 3,071 sites spread over 40 states. This number represents more than 80% of the total number of digital screens in the United States. AccessIT is proud of the groundbreaking work its management team and employees have done to bring digital cinema to so many theaters and to kick start the digital cinema era. We look forward to continuing that work through 2020 and beyond.

To that end, we are proceeding with our Phase II deployment plans. As announced earlier this week, we have reached substantial agreement with several of the major movie distributors and are actively negotiating with the others. To further our progress, we've been working with advisers towards refinancing Phase I at lower interest rates and by utilizing our equity investment and excess cash flows from Phase I to provide financing for Phase II. We'll work to begin installations before our current fiscal year end. On the exhibitor side, more than 200 screens for two regional circuits are keyed up for Phase II already. They would have been part of Phase I had we simply not run out of time. With an active pipeline of exhibitors carried forward from Phase I, our management and business development teams are already in negotiations with many more. We hope to have specific announcements shortly.

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

Thanks, Bud. I'll begin by reviewing our quarterly operating results. Our consolidated revenues for the second quarter ended September 30, 2007, were $19.5 million, which is an increase of $9.5 million or 95% from the comparable prior-year quarter. Included in the prior-year quarter is approximately $600,000 of revenues related to components of our former data center segment, which we no longer operate. Our second quarter consolidated revenue increased $1.3 million or 7% over the first quarter. Breaking this down, our Media Services segment revenues showed year-over-year growth for the quarter of 165% to $11.9 million. The quarter-over-quarter revenue increase of 8.5%, while less dramatic due to the inclusion of our acquired entities in both periods, were derived from increases in virtual print fees, transport fees, and software license fees.

The weighted average increase in screen installed was modest during the quarter, skewed mostly to September, resulting in a lower quarterly growth rate than we expect in our next two quarters. We are pleased to see a 26% growth in delivery revenues during the last quarter versus the previous quarter, even though our digital screen count increased an average of 15.6% in the same period. The Media Services segment year-to-date adjusted EBITDA grew from $2.6 million to $15.3 million, a 497% year-over-year growth rate. Our content and entertainment segment showed a year-over-year quarterly increase from $4.6 million in revenues to $7.2 million. Quarter over quarter revenues increased 6% to year-to-date revenues of $14 million.

Our cost containment initiatives produced a reduction of SG&A and an adjusted EBITDA swing for the segment of $230,000 quarter over quarter, from a negative$100,000 to a positive $130,000. Our direct operating costs increased by 34% 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. Our second quarter operating expenses increased approximately $775,000 over the first quarter, and as a percentage of revenues, only increased by approximately 2 percentage points. The increase was primarily due to the increased cost of sales associated with the sale of certain hardware within our Media Services segment, increased film costs at our movie theater due to summer blockbusters, and increased theater payments within our advertising businesses.

Our selling, general and administrative expenses have also increased for the quarter over the prior year, primarily due to the acquisitions and the increased head count in the Media Services segment. Our second quarter's SG&A decreased from our first quarter by approximately $80,000, and as a percentage of revenues, actually decreased by three percentage points. Our total company head count is now stabilized at just over 300 employees in the year-over-year period. We continue to see SG&A expenses stabilize and be outpaced by revenue growth. As a result, our adjusted EBITDA improved to a positive $6.9 million for this quarter, compared to adjusted EBITDA positive of $752,000 in the prior year, versus a positive $6.1 million in our first quarter. It should also be noted that EBITDA has exceeded interest expense for the last two quarters, a trend we expect to continue.

Our net loss was $9.3 million for this quarter versus $6.1 million in the prior year. Although the current quarter's loss includes $10.4 million of non-cash charges, more than our reported net loss. The September 2007 quarterly loss includes $6 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 both our newly issued notes and the $22 million of notes we refinanced. Our net loss for the quarter also includes significantly higher depreciation expense, which increased from the prior year due to our Phase I deployment related assets and the acquired assets of our advertising business, as well as higher amortization expense on intangible assets, which increased from the prior year due to the purchase accounting in the last two acquisitions. Lastly, there was $1.1 million of non-cash, nonrecurring debt refinancing charges incurred in connection with the refinancing of the $22 million of notes.

Turning to the balance sheet, at the end of the second quarter, we had cash of $52.4 million, positive working capital, and our asset base has continued to grow through the completion of our Phase I deployment plan. Our receivables have grown dramatically year over year due to the acquisitions in 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 to Bud.

Thanks, Brian. In conclusion I want to note that with the increase of our digital screens in September and October, more than 700 during that period, the increase in distributor commitments to release digital movies and the ramping up of other business units in both segments, we believe, our best financial performance is still ahead of us, even before we begin Phase II deployment. We also expect to see our Bigger Picture division, which has experienced operating losses in our first two quarters, making real contributions in the fourth quarter and beyond, with Bigger Picture's robust lineup of alternately content finally picking in with the Bon Jovi convert from AG Live, which went to 106 screens in 34 states this past Tuesday night. We expect a growing and continuous flow of exciting alternative content to find its way to digital screens across the country.

Noteworthy in this distribution is that of the 106 screens this concert played on, about 70% were AccessIT-deployed screens and the rest were part of the relatively small universe of digital screens deployed by all others. We believe this is an example of how AccessIT can grow its business as the universe of digital screens grow, whether or not AccessIT has deployed those screens. Finally, of our continuing progress on Q1 '09 start for Phase II, because of that, and a projected 6 to 7-fold expansion of the digital Cinema universe of U.S. exhibitors as a whole over the next three years or so, we continue to have great cause for optimism for the future of AccessIT as a beneficiary of that expansion.

Finally, we reiterate our revenue guidance from 83 to $90 million this year; adjusted EBITDA between 32 and $37 million; with the expectation -- I'm sorry, 33 to $37 million, with the expectation of being closer to the lower end of the range, based primarily on the timing of second quarter installations, and the somewhat slower than expected ramping of the bigger picture division. Operator, I would like to open the call to questions now.

Thank you, sir. (OPERATOR INSTRUCTIONS) We'll go first to Rich Ingrassia with Roth Capital Partners.

Good morning, everybody.

Good morning, Rich.

Bud, or maybe Brian, can you say a little bit more about gross margin in the quarter? Maybe it would help to -- I think mostly the assumption on the Bigger Picture and unique screen media contribution has been in the 50% gross margin with delivery service significantly higher than that. Can you give us a reality check given the result here?

Let me start. Brian can chime in anytime, but first of all, as Brian described in his comments, we had -- we own a movie theater, as you know, that is a significant theater, it's a nine-plex outside of Manhattan. This summer, as you all know, there were a series of blockbusters. Film rent during that period is much higher. So we experienced an operating increase in film rent quarter over quarter because of that event of almost $400,000 more in film rent and an increase in revenue, but a disproportionately high operating cost related to that revenue. During the summer, they're also staffing up for these blockbusters, costs generally do go up, and margins during that period, even those revenues do climb a bit, do go up as a percentage of those revenues. So that's an impact. We're talking about a 2% gross margin change, that's not a trend.

Certainly, the Bigger Picture, which did very little business in the second quarter, would have had a relatively high margin of cost to revenues in that quarter, certainly a little bit disappointing in that small part of our business for that quarter. As Brian indicated, there are also some hardware sales in our software division, which are done at a relatively small margin. Again, as these revenue levels, we're talking about a few hundred thousand dollars that would affect margin. We don't see this as a trend at all. In fact, with all the installations that were done in September and October, which did not hit our P&L in any significant way, will do so, we expect, in the December and March quarters, and so you'll see, we would expect bounce in the margin. We also expect the Bigger Picture, which has finally gotten started with the leases, to make some more significant contribution, in particular in the fourth quarter.

Okay. Thanks for the detail. Did I hear you say that the 250 screens or so that are left in the 4,000 to Phase I will now just move to Phase II, or what's the chance that the studios stiff you on payment to those screens, just because they didn't go in by the contracted date?

Well, we didn't take that risk. That's exactly what happened. We could have -- we felt we could have signed these last couple of hundred quite readily and decided that we couldn't take that risk. So we have simply shifted those screens and a bunch of others to a concentration of discussions regarding the Phase II agreement, which we believe is nearing completion and launch. So it's not meaningful to us. Certainly, it would have been a nice thing to have those in Phase I and we certainly would have liked it, but from the standpoint of AccessIT as a whole, this shift is not meaningful and will allow us to kick start Phase II right off the bat. I think that's always a good idea as well.

Just two more questions, if you don't mind. What's the chance that NEC or some other manufacturers that projection system provider in Phase II, or will it likely be mostly Christie again?

Clearly, Phase II is a vendor-neutral program. We're going to give everyone an opportunity to use their resources and to provide whatever we're needing in Phase II in the way of hardware and even financing to the extent that mezzanine debt will be a component of the financing of Phase II. We will be looking to hardware vendors to provide that as contributed equity. Everybody will get to play.

Obviously, we have a longstanding relationship with Christie and we've been working together, hand-in-hand, for two and a half years now in putting the plan together and executing on it. So clearly they had a leg up and we'll certainly start with them and we'll entertain as we clarify our specific requirements, vendor-by vendor, and include as many as it will make sense to do. And obviously, exhibitors will have some of their own preferences. We'll be able to at least address some of those preferences as we move forward.

This is a three-year plan that involves two and a half times the number of targeted screens, it may even grow from there. Certainly, it does not include any international. And in many respects, this is the template for international, because the agreement we're negotiating here is intended to be used wherever possible as the template for international deployments that we would team up with others for.

Okay. Thanks. Finally, on the debt or the refi, based on your initial discussions with lenders, what would you expect to be the range of rates that you'll have in consideration on the refi?

We certainly know with our expectations are, but certainly from past experience, I am hesitant to create expectations. We do know, based on every discussion we've had with any potential participant in this that we can target a significantly lower rate. Certainly, 200 to 250 basis points below what we are currently paying. Again, I have to qualify that by saying, we all know what's going on in the debt market, we're looking at the debt markets today, and with that expectation, assuming they don't get worse and hopefully they get a bit better by the time we enter the market in the first quarter, which is that -- which is our target and remains our target, we certainly are not going to refinance anything unless we can significantly improve both the interest rates and the amortization table and improve overall net cash flows and free cash flows. And those are our goals and we have reason for optimism based on the conversations we've been having with our advisers and even some direct lenders.

Okay. Thanks, Bud.

Thank you.

We'll go next to George Grose with American Capital Partners.

Is that me?

Yes, sir, please go ahead.

Okay, sorry, I missed that part. Bud, I guess, after stripping out the non-cash charges, it seems like you were profitable on a cash basis; is that correct?

Well, that's the conclusion we're trying to bring to the table is that if you look at the asset base and look at all the amortization and depreciation and non-cash items, that trend is one that we have seen. If you'll recall last quarter, there was a smaller delta between those two numbers and it has improved quarter over quarter. We think that's significant as a measure among many for looking at the progress of AccessIT.

So as you ramp, then the delta should get bigger?

Well, I'm not going to forecast that, but that certainly is -- and I'm not giving specific guidance on that, but certainly that would be a logical conclusion, yes.

Okay. Then maybe about your pipeline of exhibitors that you have to be included in Phase II.

Well, not specifically I haven't, but there are about 6,000 screens in that pipeline level over from Phase I that we have had various levels of conversations with it. It usually starts at with a full presentation either at a facility here in Hollywood or even many Brooklyn at our theater and it's followed by a term sheet and a walk-through of all of the key terms of what we call the master license agreement and then we sit down and start getting serious about legal terms and provisions and walk-through with counsel on both sides and reach a conclusion. So in this 6,000 screens, there are some whom gone through this, even have term sheets, and have come close to signing and have even decided to wait a while or for whatever reason we weren't able to accommodate them in Phase I. We've always been confident that we can kick off Phase II and we've always been committed to doing that. And I think the industry -- certainly, the industry understands our commitment to it and our ability to execute on our promises to the industry.

If you go back to June of 2005 when we released our first information about our plans for Phase I, it was 2500 screens, we hadn't identified a single distributor, we hadn't identified a single exhibitor at that time, we didn't have our financing in place - we've done all of those things. And when we announced a few days ago our plans to do Phase II I would hope our credibility to introduce Phase I from a standing start, I think given our experience we have and our reputation worldwide as the leader in digital cinema that that announcement would have a level of credibility that the first one didn't have. And we certainly feel that our ability to implement on that plan is far, far greater today. The proven BPF model, the proven technology, the experience that we've had that can't be matched anywhere in the world is something we bring to the table and we're very confident we can at this point move forward on Phase II.

If I recall about your prepared remarks in Phase II, you have some studios that have signed it and some that have not?

None have signed definitive agreements yet. We are at various levels of negotiations, contract stages with most, one or two really still in the provision discussion stage. But a sense from all of them that we're moving forward on this. Some have red line copies, more in the more intermediate discussion stage, but all committed to digital cinema without question and all committed to supporting a plan of the type that we've put forth, and to continue the momentum of converting the industry to digital cinema.

Bud, in the past, you talked about being able to accomplish a Phase II that is not dilutive to shareholders. Is that -- would you say that still holds true?

Absolutely, our commitment to do that. We are not going to start Phase II if it involves any equity dilution on the part of the AccessIT. The entire model is built around leveraging the equity we've already put into Phase I and the existing and future and excess cash flows from the deployment of Phase I and contributions in the form of mezzanine debt from vendors and possible third parties and exhibitor contributions. The combination of all of those should not require any additional AccessIT sale of equity and we are committed to that proposition, even if it means slowing down the process of Phase II. We're simply not going to do it.

And I guess maybe last question here, when you talk about refinding the Phase I, is there any talk about equity there too? ?

There's no need for any equity, there's no equity component in the refinancing of Phase I or Phase II for AccessIT.

Okay. Thanks.

We'll go next to Adam Pennacchio with Craig-Hallum.

A couple of quick questions for you. First, you were touching on the gross margins and the margin drivers in general. Did I hear you right, film rent expense was up $400K sequentially?

Yes, I believe that's true. Brian?

Yes.

Okay --

-- that alone would affect the overall margins at this level, significantly.

Sure. And next quarter in terms of Pavilion gross cost contribution, what should we expect there in terms of their gross margin impact potential on the overall business next quarter?

In the December quarter?

Yes.

We don't expect that -- we don't expect it to get worse and should improve somewhat quarter over quarter.

Okay. Delivery business, you commented, is growing faster than the actual growth in installed screen counts. In terms of gross margins on that business, can you give us a sense of where those are going in the meantime?

I really -- we have not -- we have not drilled down to that level.

But, directionally, would you expect based on just sort of the broad overview of the business that they've stayed the same or improved?

They improved. And they continue to improve. This is a scalable model. To the extent that we do hard drive deliveries to everyone who has a digital screen, when we deliver a movie, that's more linear, the cost of linear, but there is margin. The more interesting model is clearly the satellite delivery model, where you have a much -- where the costs, once you've hit break even, the incremental margin is much higher.

Okay. And virtual print fees, exceptionally high margin, there's some cost of delivery, but very little gross cost associated with these revenues, nothing changed there either?

That's correct, but the incremental quarter over quarter BPFs weren't as high as they might be based solely on the installations. That will change, we expect, in the next two quarters.

Okay. Brian, on the balance sheet, it looks like deferred revenues up $2.3 million sequentially, what's the color there?

That is -- we have deferred revenue from two business units. It's the advertising business and also the Bigger Picture. And we had some billings that went out related to the Bigger Picture for some upcoming releases that were not actually recognized as revenues.

Is that a seasonal thing or just something unusual right here?

Yes, something that affected us this quarter. I don't know that it's seasonal.

Okay. So you would expect what out of that line then next quarter?

I really can't comment on flowing that out for you time-wise, there, Jeff.

Okay. Media Services, I'm sorry, I think you gave it for the quarter, but what was the EBITDA for the quarter?

Media Services EBITDA for the quarter, let me go back to my script here.

That's all right, if you don't have it, can I get it offline.

It was $15.3 million year-to-date and -- I don't have that number offhand, for the quarter, Jeff.

Okay. All right. Then I guess just last housekeeping item, the cash balance at the end of this Phase I deployment, almost to the 4,000 screens here, you've got the cash as of the end of the quarter, were there any outstanding material payments related to equipment that still needs to to be paid, or was that ending cash balance roughly where we wrapped up Phase I?

Jeff, I'm going to ask you to repeat that.

So Phase I, I know the payments for systems don't always match exactly when the system gets installed. There's some prepays that are sort of staggered. The question was, for Phase I, does the end of the quarter balance sheet reflect payment for all of the systems involved in Phase I?

No, it does not. There's ongoing amounts owed since the installations were not all completed as of 9/30. So there will be some amounts paid out --

Can you give us a ballpark of the necessary cash spend that will be on top of where you ended the quarter, roughly, how much more CapEx beyond end of quarter will need to be paid?

That's about $20 million.

Okay. Okay.

Net of deposits and cash flows and that are generated during that period and the remaining draw on the GE facility.

I'm sorry, I -- that's a $20 million in cash needs to be paid for the systems yet after the end of the quarter?

That's correct.

Okay. That's all I needed.

That's net of -- but some component of that will be cash generated internally at the subsidiary level. So it's not necessarily all coming right off the balance sheet. We'll see.

Sure, okay. I understand.

We have more than adequate resources to meet the requirements to complete all of the CapEx by the end of the December quarter.

Obviously. Okay, great.

We'll go next to Bud Zaino with Royce and Associates.

Two conceptual questions, with stock at $3.5, what is it that the Street doesn't understand about the cash flow characteristics of your business?

I think everything. I think --

Well, look at the debt on the balance sheet. Given the installed base of equipment, how long would it take to amortize that existing debt? Forget about what's going to happen in Phase II?

Well, there are two kinds of debt in our company. One is the debt funded by the deployment plan and the BPF schedules. Currently, that's on a seven-year amortization schedule that begins August of '08 and a refi, we would expect to extend that materially and to bring the interest rate down, creating a net cash flow that would be a bigger delta than it is today. The addition of other independent distributors and the studio's own commitments under contracts with us to actually increase the percentage of the total titles that they release in digital and the trend that I mentioned earlier for even the independent divisions of these major studios who have committed to start releasing all of their movies in digital too will increase that cash flow.

So that's one component. Then we have our $55 million senior note deal and certainly that carries with it a cash coupon of 10%. The other portion of the kicker shares, which we've already paid for this coming year will be priced based on a collar that will be a range. Brian, do you have what that range is just to repeat? I believe we filed that, but is that a six to ten collar on the stock component?

The kicker shares on the $55 million of notes, Bud?

Yes.

The amount of shares we will be issuing is going to be based upon the volume weighted average price of the stock going forward. I don't know if I'm answering your question. That's the interest payment if we choose to make the payment. I'm talking about the kicker shares. There's a range where we get the benefit up to $10 and we issue shares at not less than a price of -- and I don't have it in front of me because I'm on the west coast, but Gary or Brian --

Yeah, it's within that range, Bud.

It's $6 to $10, I would rather to be more specific, and I apologize from here that I don't have it. Brian, would you get that information before the end of this call so we don't have it sitting there. It's somewhere between $5 and $6, as I believe the low end of the price range, but we'll get that. In any event, to go on with that question, the valuation of our company is something that I think we need to do a better job of --

Well, what would be the risks to the cash flow? I guess that would be the principal question.

The risks are the same as they would be for any company and that is if you're not generating cash internally and making accretive movements quarter over quarter, year over year, you're going to eat into your cash reserves until they go away and you can never depend on the ability to do favorable financing.

But the cash flow from the existing base creates a cash flow, correct?

That's correct.

So what are the risks to that?

I think the misunderstanding here is to ignore what's going on in the rest of the company and reduce us to a deployment company, which is not what we are. We are a deployment company, yes, that's one of five divisions of the company, but our satellite network has enormous value. And if it were a separate company, it would be rated and valued very differently. As far as we can see, the implicit value that is being placed on the four other divisions of the company are satellite network, our software -- industry-leading software company, our content and entertainment segment, advertising, which did $14 million in revenue in the first six months of this year, they're getting a negative value as far as we can see as we value the discounted cash flows for the subsidiary.

I'm not going to comment on the overall risks. I think we've set those forth in our filings. They're very detailed, they're the same as they would be for everyone. The only thing I would remind everyone of, is that we've only crossed over into positive EBITDA in the December quarter, I mean, last year. We've just moved from being a development company for four of five years into a company that is targeting ever-improving results and bottom line results, and in doing so, we've been growing at rapid paces, absorbing pieces of the final business plan, which is now complete in these five divisions, and absorbed all of that. It's been not only a challenge of integration, which we've met, but an accounting and just keeping up with all of that. We've passed that, we've met the challenge, and we see the future as very positive and improving, both from a revenue EBITDA and any other important metric and cash flow.

Thank you very much.

The $6 to $10 range you just quoted on the kicker shares is correct.

Okay. So basically, what we're looking at is a 10% cash coupon on our notes. We have the option of using stock, but obviously at these levels, we're not about to do that. So what's left is a quarterly payment starting sometime in the third quarter of '08, where we would have to make a delivery of some additional shares. If the stock is trading at $4, we would deliver those shares valued at $6, if the stock is trading at $14, we can only hope for that, we would deliver them at $10. So the benefit would go there on the upside to the note holders and on the downside we have protection as a company. I don't know if I've made that clear.

We'll take our next question from Mark Balser with Blue Fin Investment Management.

Hi, Bud. Thanks for your time. Just in terms of how many the weighted average screens in the quarter, is it fair to say it was probably in the 27, 2800 range, somewhere that that ballpark?

Actually, I did an analysis. It was slightly higher than that.

Okay.

Something like 2900, I think, was the number.

Okay. But then as you layer on and just trying to think of a run rate EBITDA for the business, adding almost 1,000 additional screens, are you kind of well over $10 million, kind of in the $10 million to $11 million EBITDA.

I think that based on the guidance, even the lower end of the guidance that I've given, obviously we would expect to see numbers like that in the next couple of quarters in order to catch up. Because we've got $13 million so far and we're talking about trying to hit a $33 million number, so we're going to have to crank it up, obviously, in the next two quarters and we fully intend to.

Sure. So you have a couple of months there where you're not installing new systems and you can kind of get a clean view. What are the levers that you have to expand EBITDA beyond that, be it -- is it screen turns or Bigger Picture, what kind of magnitudes?

Once we have completed the installation, which we've now done, so a couple of months in this quarter we'll get the full benefit, but in the fourth quarter, of course, for the entire quarter, we'll have all of those screens hopefully more, because of Phase II, but let's just stick with same-store revenues and bottom line. We see growth in our -- related to the growth of the digital screens that are going in as we speak for 3-D presentations of the upcoming Beowulf movie next week from Paramount, there are a lot of additional screens going in. Those screens present opportunity for our our transport division to deliver to them as we do now to book a digital product. That's one area we can see some growth. We've experienced it quarter over quarter and we hope that trend will continue. That's a marketplace in delivery that we think eventually we'll approach $200 million a year. And we need to get market share.

We have no illusions about winning 100% of the that market, but we certainly expect to win market share and see a significant increase in that division's performance. That division, where we've made a huge investment over the years, has just begun to approach break-even, as a separate profit center. Our software division can grow, license fees, it's been doing a great job as the industry standard, theater command center software, it's got the industry standard distribution software. We continue to sign new distributors, we continue to license the product and have proposals outstanding all over the world for that product. So we see some growth in software and margin to go with it.

Bigger Picture is just getting going. The Bon Jovi convert was the first significant name brand piece that we've done since we've owned Bigger Picture and we've got a lineup that will follow and we'll be making announcements of not only what's going to go on in this quarter, there are a few more events planned, but there are a lot more in the fourth quarter and beyond. We're very intent on doing channels there and building a continuous flow in each of these categories, not just doing oneoffs. We think that's not the way to do it. Continuity is, and so we've -- it's required a little patience on our part to really line up things the right way and put the right amount of time and energy and marketing behind it, but we think as we move forward, that will be another accretive part of our business.

Sure. And then SG&A was pretty flat sequentially, where do you see that going?

I see it staying pretty much at that level. We're not making anymore acquisitions, so same-store comparisons. There'll be a bump in the fourth quarter as there always is for a lot of audit fees that are in our Sarbanes-Oxley compliance fees and some year end bonuses for our key people, but other than that, it's stabilized and we expect it to stay that way.

Great. And then in terms of the financing for Phase II, what kind of lead time do you have in terms of signing financing and then starting deployments?

As I've indicated, our plan is to start deployments in Phase II as early in the March quarter as we possibly can. We've got some intervening holidays to deal with where just meeting people is going to be an issue, but we certainly are targeting sometime in January to resume installations, if at all positive. We've had meetings with hardware vendors about this, and exhibitors. January, February, March is an excellent time for deployments because it's relatively quiet. There aren't the big movies in that quarter. So we certainly want to take advantage of that and get rolling. We would like to have a momentum and we think we do. We've seen signs of it and we've seen a lot of increased interest in digital cinema, driven in part by the 3D presentations by all of the studios and increasing that type of product. But also one of the drivers is ultimately alternative content. We need to push that, because that's a value proposition for exhibitors and a reason to make the conversion sooner rather than later.

My last question and I'll let you go. I think you were running a chain at the time during the last writer strike. What impact did that have in terms of the number of showings per screen? And then what have you heard from studios in terms of perhaps looking for alternative content to keep the screens full if the strike persists for any long period of time.

I don't have any special insights into what the studios are thinking about this, but certainly when I was in that business, we saw steady flow of product, uninterrupted. The movies for the most part didn't play quite as long. That's not a bad thing for us. We're not -- we certainly would like to see this whole thing resolved as soon as possible, but from a standpoint of its direct impact on AccessIT, we don't expect it to be in any way, certainly not over the next year or two, a negative.

Great. Thanks, Bud. Thanks, Brian.

Thank you.

We'll go next to Shawn Boyd with Westcliff Capital Management.

Hi, Bud. How are you?

Hi, Shawn, how are you?

Just one question today. On the utilization, you spoke earlier about this, but in terms of what appears to be a quarter to quarter drop, is that related to -- can you just go back to your comments on that earlier and see if that timing related on the installs or what's driving that?

The quarter over quarter drop in what -- you mean on gross margin?

No, no, no. On revenue per screen basis. So you mentioned we're going this 15 turns target.

Yes.

And I'm wondering where -- how far out that is, but more importantly just quarter to quarter, it looks to me like the revenues on a per-screen basis have dropped slightly.

Well, you're looking at a consolidated number. Are you looking at the content and entertainment segment or the Media Services segment? Media Services is where you want to look.

Okay.

That's up quarter over quarter. And they's consistent with the BPF schedule. But that's arithmetic. But that's why I suggested guidance in the lower end of the range, because you can't get that quarter back. We didn't install that many systems, and it wasn't because of us, it was because of exhibitor requirements and preferences during a very, very busy quarter. So we had to make it up. And thanks to Christie's managed services team, we've done that and -- but it skews towards this quarter and beyond, because 700 screens went in and almost none of them had any material impact on the September quarter.

Okay. Where are we on -- in terms of targeting 15 plays per screen per year, what's that metric right now in the September quarter?

I'm not giving the specific information, but we are well on our way to hitting the 15 milestone by the end of this year based on reasonable assumptions and the increase of studio releases and the percentage of those releases as of November 1 of this year.

Got it.

So we're going to see some impact from that going forward. That 10% increase will combine with a number of other distributors coming online that weren't in the plan give us -- get us to the 15 or very close to it.

Okay. Okay. And one other question as I'm sitting here. You may have mentioned this earlier, but when we think about the adjusted EBITDA at $7 million in the September quarter and we look at that just on a per-screen basis, if you were to not go any further with another screen, where does that number settle out at? What's the cash flow per screen screen?

First of all --

I'm just trying to get a base before we model in Phase II, that's all.

I agree. We certainly have done that. The issue here is that you're looking at a consolidated statement that includes four other divisions. And we haven't broken out the Christie/AIX separately. We come as close as we care to today in our Media Services segment by segmenting and you'll see in the Q a more detailed breakdown of both segments, content and entertainment and Media Services. And you'll see the growth built into that. But I'm not -- and I don't mean to avoid your question, but clearly our expectations for the next two quarters are significantly higher than what they were in the second quarter or the first quarter. We intend to see sequential growth with EBITDA.

I'm hesitant to give you an absolute number on a quarterly basis, because I haven't given guidance on quarters, but we certainly do expect the third quarter to be significantly better than the $7 million that we just did, the $6.9 million. And we are hopeful that the fourth quarter will be even better than that. Again, we're driven by a whole bunch of variables that we don't have total control over and we're figuring a little bit of this out too, but I think that at this point, what we see is a very strong third and fourth quarter.

So your current guidance for adjusted EBITDA for the full year, full fiscal year at 33 to $37 million --

The lower end of that range.

Understood, lower end of that range. Does that include any Phase II screens?

No.

That's strictly on what's installed through Phase I?

It's strictly what's installed through Phase I and the growth to some degree of some of our other divisions through the next few quarters.

Got it. That's it for me. Thanks.

Gentleman, due to time constraints, we have time for one final question and we'll go to Steve Balog with Cedar Creek Management.

Thanks very much. I want to come back to the issue that Bud Zaino was putting his finger on, the perception. Maybe coming at it from a different angle. If somebody got the elevator speech on this company and took a look at it, they would probably real quick say, oh my gosh, this is a highly leveraged little company. $270 million debt, and $83 million in equity, just past. Because guys that buy little stock like this are looking for things with a whole bunch of cash, not a lot of debt, generally. So the question I think he was asking and I'm trying to get around to is the debt service from these VPNs that are servicing that, the fees in that basis, what are the risks to those VPNs, recession, low box offices, chapter 11 of theater groups?

That's the kind of thing that rumbles through people's minds and a decent explanation of that that's not as -- that level of debt for a small company is not as troublesome as one might expect of looking at it for 2 minutes. I think that's part of the issue about why the stock is where it is and they can't see this. So you say, well, your response before was they're missing the value of the other divisions and if you do discounted cash flows on all those, honestly, we don't have information to do those BCFs on five different divisions, and probably at this size of company, not a lot of investors would be willing to do that. There's a lot of rambling here, but the issue of the security or the stability of the VPNs, I think, is a big issue

Okay, first of all, the BPF schedule is solid and it's paid by studios that are major credits and they've committed to do so for ten years from the completion of the deployment plan. So through 2017, we're going to be collecting virtual print fees from these studios and many other independent distributors and alternative content fees in that subsidiary. Any reasonable discounting of future cash flows will produce, in my view, and again this is my opinion and I'm another number cruncher, if you will, exceeds the market cap today. So that's implicitly what the market's telling us, is that the other four divisions are satellite network has no value, in fact, has a negative value. Again, it's not making money, so you can't -- you could make the point that it's a bunch of great assets that have a great future. I think if separate company, it would be a very exciting company to invest in by itself.

Our software company is certainly profitable and it is a business that is the world-class standard for the things that it does and has -- from theater management to distribution management. To not value that very important part of our company, which is at the core of everything that we do makes no sense to me. We have an advertising business, which is the third largest in the country, by far. I mean, it's a distant third. I don't mean to overemphasize that, but it has value, and it makes money and it has no debt. The debt is up at the $55 million, we clean that up, and it's now debt free and cash flowing. We have a Bigger Picture division, which granted, hasn't done much yet, but it has value and has enormous future value because when it distributes a concert or sporting event or any event, it creates a waterfall of revenue for every other division of our company. It generates alternative content fees for our employment sub, it generates transport fees for our satellite business, it generates software fees because we manage the entire distribution process.

This is totally misunderstood and I don't believe that you could use -- you need to do the work and I think you made a good point, that maybe it's too much work for a lot of people for a tiny company like this. I don't necessarily disagree with that. I don't -- I think it is an awful lot of work to take the components and try to value them and then add them all up. Clearly, what's happening here is the misunderstanding, looking at our bottom line, which hasn't really given effect to the full installations of all of our screens nor to the installation of the industries moving forward itself, with or without us doing Phase II and the benefits that we get from that expansion. That's the point I'd try to make and perhaps I haven't done the job of communicating that as well as perhaps we should. But what I'd like to do is to get people focusing on what else we do and how we benefit from the growth of digital cinema in any form, anywhere in the world.

Where the potential for the things we have done and accomplished is enormous and not just limited to collecting virtual print fees. But to that point, the virtual print fees that will continue for another ten years will be more than enough to service the debt and throw off excess cash flows. They've been doing that for the last few quarters, we've got invested capital there that's already embedded in all of this, so an investor today is looking at a company that if we did stop at the 37, 43 is pretty quantifiable.

It seems to be can be valued and in fairness to the analysts who've been looking at this, we had a lot of moving parts over the last year or so. We've made a lot of acquisitions trying to figure out where they fit and what they're worth hasn't been easy, but that's done. We're out of the acquisition business and we're now finished with our business plan and hopefully can produce the kind of results quarter over quarter that will get and pique the interests of more and more in the investment community.

Well, that's true. The good news is it doesn't matter if the stock's at $3.50 or -- because you're not -- you don't need to stock for anything. You're not raising more money or you're not buying anything, so the truth will out at the end of the day.

Well, we certainly hope so and that's absolutely true. It's not keeping us from doing any of the things that we need to do to move the chains forward.

Thanks.

Thank you.

And that is all the time we have for questions today. At this time, I would like to turn the call back to Mr. Mayo for any additional or closing comments.

The only thing I have to say, gentleman and ladies, is thank you for your time. We will -- and our best performance is in front of us. Thank you. Have a good day.

That does conclude today's conference call. We thank you for your participation. You may disconnect at this time.