Cineverse Corp (CNVS) 2008 Q4 法說會逐字稿

Good day everyone and welcome to this Access Integrated Technologies fourth quarter fiscal year 2008 earnings conference call.

Today's call is being recorded. Listeners are cautioned that some of the material discussed today may include forward-looking statements regarding act 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 representation as to future results. You are encouraged to read the Company's Securities and Exchange Commission filings.

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

Good morning everyone and thanks for joining us today for AccessIT's fourth quarter and fiscal year end 2008 investor conference call. With me on today's call are Brian Pflug, our SVP of Accounting and Finance, and [Andy Battelle], our VP and Treasurer.

Fiscal 2008 was a year of great progress and milestones for AccessIT. We completed the world's first and by far the largest studio-backed digital cinema deployment plan, and announced our second even larger plan. We signed our first international agreement to distribute our technology. We delivered our first live sports event by satellite, and we announced our first major alternative content programming channels, all of which I will discuss in more detail in a few minutes.

Also significant is that fiscal 2008 is the first year in which we grew the Company internally and not by acquisition.

What was not new for AccessIT this year was a continued acknowledgment in the industry and the banking community that we are the global leader in digital cinema. Our signing of four major studios to our phase two distribution plan was a validation of the tremendous job our personnel have done and intend to continue.

We received considerable press coverage at ShoWest, the major industry tradeshow in March. And requests for us to participate on digital cinema and alternative content focus panels have been plentiful throughout the world.

Now I would like to focus on the financial results for the fourth quarter and for the year, and then I will discuss some of the significant achievements this year, after which I will pass the call on to Brian Pflug to discuss the financial results in more depth.

As I suggested in our last conference call, meeting our previous guidance was going to be a difficult task. And we barely missed those numbers with $81 million in revenues versus a targeted $83 million, and adjusted EBITDA of a bit more than $30 million versus a targeted $32 million, primarily due to less than expected revenues in our Content and Entertainment segment for the fourth quarter, and some extraordinary Sarbanes-Oxley expenses also in the fourth quarter.

Although I will not provide guidance for fiscal 2009 on this call, I will point to the annualized fourth quarter results at $22 million and $9 million for revenues and adjusted EBITDA, respectively, as a good starting point before further internal growth, and before we begin phase two, or recognize any revenues from international initiatives.

Revenue, what has been growing consistently, continued to do so, showing a 72% growth for the full year and 26% for the fourth quarter when compared with the year ago periods. These increases are largely driven by virtual print fees and media delivery fess in our Satellite division, as well as a full year of operation of our advertising and creative services unit, UniqueScreen Media.

Gross margins also increased in the quarter from 60% in fiscal 2007 to 69% in 2008, and from 53% at fiscal 2007 to 67% for the full year 2008. Adjusted EBITDA grew 164% for the three months ended March 31, and 406% for the year as compared to the year ago periods. This was due to the above-mentioned revenue growth, while expenses have grown far less.

EBITDA margins increased for both year-over-year and the comparable quarter-over-quarter. In fiscal 2008 they were 37% versus 13% in 2007. And in the fourth quarter of fiscal 2008 they were 41% versus 20% in 2007.

Loss from operations was considerably reduced for both the year and the quarter as compared to the year ago periods, falling from 38% of revenues in fiscal 2007 to 7% in 2008, and from 40% of revenues in Q4 of 2007 to 11% in Q4 2008. This was due to increased revenues while our direct operating and estimate expenses grew at a much lower rate in the year-over-year period, and actually decreased by a combined 6% in the fourth quarter as compared to the year ago period. And most notably for the fifth consecutive quarter the non-cash components of our expenses have exceeded our losses.

At this point I would like to highlight just a few of the more notable events of the quarter and the year. First, our Media Services segment, which consists of our digital cinema plans, digital media delivery services, and software.

Obviously it was a big year for digital cinema installations. We completed our first digital cinema deployment last fall with more than 3,700 screens installed. I'm pleased to be able to remind you -- those of you who can have been following digital cinema, that this is the first and by far the largest deployment anywhere in the world, and the only one backed by all of the major studios.

Part of our success in that deployment is the result of leveraging our relationships with our advertising customers. More than 20% of the 3,700 plus screens were crossover customers from that business unit. In fact, 800 of the last 900 digital cinema conversions were advertising customers following our acquisition of UniqueScreen Media in July of 2006.

This not only helped us to accelerate our screen conversions, but also enabled preshow and feature content to play on the same projectors, many of which are now also equipped with 3-D technology, and are scheduled for our CineLive installations this year.

Perhaps most notably our Christie/AIX subsidiary's VPF revenues for the quarter exceeded last quarter's, which was more than $12 million. And adjusted EBITDA reached more than $11 million for that business unit in the quarter, and more than $39 million for the full year.

Clearly our phase one deployment plan has been a complete success. We see only upside from here, as more and more independent movies are released in digital every year, and alternative content programs gain traction.

Following on the heels of this success in December, we announced plans for our second or phase two deployment plan for an additional 10,000 screens in the U.S. and Canada. In March we were pleased to announce that four of the major studios have signed virtual print fee agreements for phase two, including Disney, Fox, Paramount and Universal. We are still in active discussions with two other major studios, as well as the major independents, including Lionsgate, who we recently signed to a long-term phase one VPF agreement.

In April our subsidiary, Christie/AIX, executed an interest rate swap to lock in rates at 7.3%, effective August 1, on $200 million of GE debt, a reduction of more than 2.5% versus last year, thereby saving our Company millions of dollars per year in interest expense.

On that note, we continue to work on refinancing phase one debt, while concurrently creating the template for phase two financing, and are gratified with the reception so far among our existing and perspective lenders throughout the world and their recognition of our leadership and success.

Let me emphasize that these phase one and phase two financings have no new AccessIT equity components. We look to provide you with more specifics with respect to our financing plans in the near future.

In our Digital Media Services division we had a very successful year, increasing our satellite network to 254 sites in 109 markets installed, with an increase of 133 at the start -- from the 133 at the start of the fiscal year. And deliveries went up 106%, partly due to more digital product and partly due to working with an expanding list of customers.

Efficiencies were also created by software improvements in that division, enabling the business unit to reduce its reliance on temporary employees, resulting in a reduction of direct costs.

In October our Satellite Delivery division announced the launch of a new product that will greatly leverage and increase the exposure of our satellite delivery services. CineLive, developed in conjunction with SENSIO Technologies and International Datacasting Corporation, for the exclusive use by AccessIT in the United States.

Added to our existing satellite network, CineLive enables live 2-D and 3-D events streaming into digital cinema equipped theaters. Throughout the year 3-D movies and concerts have proven themselves to be box office draws. We anticipate that live 3-D will be even more appealing to audiences and are appeared to invest in its future.

Last week we announced that we have begun outfitting 50 locations with CineLive equipment in major designated market areas around the country, and we plan to an additional 100 locations this year, including some of our new phase two partner sites. This entire deployment will be funded with an 8.25% term loan with no equity components. I will discuss this further in my remarks later.

Also in December we announced our first international distribution agreement with Doremi Labs, the supplier of all the media service we use in our phase one deployment plan.

Doremi is now our partner in bringing our Theatre Command Center and Library Management Server to theaters outside of the United States. This nonexclusive agreement is the first of its type that we have entered into, and will enable us to expand the reach of our technology without requiring international offices or personal. In fact, we are preparing documents for our first license for an international exhibitor as we speak.

In February AccessIT worked with Disney/ESPN to bring a live broadcast of a University of Texas and Texas A&M basketball game into 15 digital cinema equipped theaters in Texas. This was our first live event. And thanks to a great collaboration between our satellite team and Disney/ESPN, and it went off seamlessly. We learned a lot from the experience, which will assist us with all future live events, both 2-D and 3-D.

Our Content and Entertainment segment also made progress, despite a disappointing year. Most significant was The Bigger Picture's agreement with the San Francisco Opera to begin showing select operas in digital cinema equipped theaters around the country. The series began with four operas this spring, each of which played on more than 125 screens. The Bigger Picture has exclusive rights to distribute the operas internationally, and has already begun doing so in the UK and Australia. We anticipate additional opportunities abroad.

Although the box office from the opera series was less than originally expected, each performance exceeded the prior one by an average of 24%, and routinely outgrossed any feature playing on weekday evenings. This reaffirms our belief that audiences can be built using a programmatic approach to each genre of content, rather than using one-offs.

The Bigger Picture has also increased the number of concert events and kidtoon programs it has been distributing, preparing for what we expect will be a significantly improved fiscal 2009 performance.

Theaters in the AccessIT network are beginning to have a regular flow of Kidtoons content on weekends, and one night only concerts on Monday and Tuesday nights throughout the year. These have already included Bon Jovi, Beyonce, Tom Petty, Queen and Deep Purple, and most recently TobyMac. A John Mayer concert is coming up on June 30, all in collaboration with AEG Live.

We expect many more major artists and new channels to appear on digital screens throughout the balance of this year, accompanied by significant sponsorship revenues.

Although The Bigger Picture is distributing an increasing amount of alternative content, others are bringing events to the theater as well. Most significant this year was Disney's record-setting Hannah Montana concert. This played in 3-D on 387 AccessIT network screens, representing more than 55% of all the screens it played on in the U.S., which is about the same percentage of 3-D screens enabled by AccessIT in the U.S. That was shortly followed by National Geographic Cinemas' release of U2 in 3-D, which also played on 268 AccessIT venues.

As I have mentioned before, we have made significant changes in our management team at UniqueScreen Media, our advertising and creative services unit. In doing so we lost some focus and momentum in the third and fourth quarters. After an exhaustive review of each exhibitor contract and a revamping of sales territories and plans under the leadership if Unique's new President, Bill McGlamery, we appear to be getting back on course.

At this point I will turn the call over to Brian, who will comment on our latest financial results in more depth. 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.

I will begin by reviewing our quarterly operating results. Our consolidated revenues for the fourth quarter ended March 31, 2008 were $21.9 million, which is an increase of $4.5 million, or 26%, from the comparable prior year's quarter, and a slight increase over our fiscal third quarter's revenue.

Included in the 2007 fourth quarter is approximately $550,000 of revenues related to components of our former data center segment, which we no longer operate. We finished the year at $81 million of revenue, which is a $34 million increase over the prior year.

The year-to-date and quarterly revenue gains were evident in nearly all components of our Media Services segment, which saw a year-over-year quarterly growth of 92% to $15.6 million. Led, of course, by virtual print fees in the digital cinema business from our fully deployed phase one rollout.

The Media Services segment year-to-date adjusted EBITDA far outpaced the revenue gains, quadrupling from last year, from $9.5 million to $38.8 million, and year-over-year quarterly EBITA growth of over 200%. This performance is also due to the digital cinema business, which has high EBITDA margins, and ongoing cost containment in the other units as well.

Our Content and Entertainment segment also experienced a year-over-year revenue increase of approximately 28%, however, showed a year-over-year quarterly decrease from approximately $8 million in revenues to $6 million. However, the cost containment initiatives, as we have discussed previously, are minimizing the impact of the revenue decline.

On a consolidated basis our direct operating costs decreased by 3% for the quarter versus the prior year, or as a percentage of revenues, decreased to 31% from 40% in the prior year.

Our fourth quarter operating expenses remained in line with the third quarter as a percentage of revenues. We continue to see our direct operating expenses level off following periods of rapid growth for the Company.

Our overall selling, general and administrative expenses decreased by 8% for the quarter versus the prior year, or as a percentage of revenues, decreased to 28% from 38% in the prior year, primarily related to a consolidation of sales personnel within the advertising business, ongoing cost containment efforts elsewhere, and as we have said previously, our expense growth has leveled off.

This was partially offset by professional fees incurred for Sarbanes-Oxley compliance efforts in the current year. These costs exceeded $600,000 this year, but now that our year one compliance efforts are completed, ongoing cost will be much less.

Our fourth quarter's SG&A remained in line with our third quarter. And our total Company headcount is not just under 300 employees as of March 31, 2008. As a result, our adjusted EBITDA improved to $8.9 million for this quarter compared to adjusted EBITDA of $3.4 million in the prior year, and $8.4 million in our third quarter. Year-to-date adjusted EBITDA exceeds $30 million versus $6 million last year.

It should also be noted that adjusted EBITDA have exceeded all of our interest expense in the last four quarters, a trend we expect to continue.

Regarding interest, I should note that we're now presenting non-cash interest expense together with cash-based interest expense, However, we will be disposing the components in our 10-K filing shortly.

This quarter includes a non-recurring $1.6 million impairment charge, resulting from the write-off of certain customer contracts, which were characterized as an intangible asset in The Bigger Picture acquisition in 2007. The Bigger Picture is well on its way to generating new business relationships to offset the loss of these contracts.

Our net loss was $11.2 million for this quarter versus $11.1 million in the prior year's fourth quarter. Although the current quarter's loss includes $14.5 million of non-cash charges, which as in prior periods is more than our reported net loss.

The March 2008 quarterly loss includes $5.6 million of interest, primarily associated with the GE credit facility in our digital cinema unit, and $3.2 million of non-cash interest related to our other notes payable.

Our net loss for the quarter also reflects higher depreciation expense, which increased in the prior year due to our phase one deployment related assets, and for the full year due to the two businesses we acquired in fiscal 2007. As we move forward with our acquired assets and entities, expense comparisons will become much simpler.

Turning to the balance sheet. At the end of the fourth quarter we held cash of nearly $30 million, and working capital exceeding $10 million. Following the phase one completion, but pending any phase two activity, our asset base has substantially peaked, and receivables have declined for the first time, which leaves us to positive operating cash flow in the quarter.

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

Before I move on to questions, I want to spend some time regarding our CineLive deployment, which I am particularly enthusiastic about. As I mentioned earlier, in October we announced our exclusive CineLive product, a technology which will enable live 2-D and 3-D events to be streamed to U.S. theaters. Our planned investments in fiscal 2009 to provide this equipment to 150 locations in top DMAs is an effort to encourage more live 3-D programs developed by content owners and producers, many of whom we are in serious discussions with.

By expanding this network on which the 2-D and 3-D content can play, we hope to increase the available content, and thus give our new exhibitor partners still another reason to convert to digital cinema systems, and to reward those visionaries like Carmike and Rave, who already have.

In addition to our plan to refinance phase one, and to recycle some of the already invested equity back into phase two, we are also in active discussions with lenders with a strong interest to provide a warehouse facility for phase two. And we continue to anticipate the start of installations late in the September quarter.

Now I would like to open the call to questions.

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

Maybe a couple of questions. Firstly, the interest expense line you touched on at this quarter is a combination of non-cash and cash interest expenses. I guess two questions. One, what is the comparable number for Q3, just so I see the time series correctly?

Then secondly maybe, Bud can you -- or Brian -- can you just give us some sense then directionally June quarter versus March, because we won't have seen the benefit of the interest rate reduction, what we are to see in overall interest expense there?

Q3 we also gave combined this, so I think the presentation Q3 versus Q4 is comparable. In the cash flow statement of both the quarter and the 10-K, which we will file shortly, you will be able to see what that non-cash component is.

And then just directionally for the June quarter versus the March quarter?

Well, we would expect to see a reduction of interest expense now because we have entered into the interest rate swap, which we have disclosed. So now we are going to be moving down a couple of percentage points, at least as of August 1, actually.

All right, I am just talking kind of June quarter here.

Yes. The June quarter we would still expect to see it lower though just because the LIBOR rates are continuing to drop, since that GE debt was variable. I don't have a number to shout out to you, but you can expect to see it less.

It would be at about 7.8%. As we were speaking, Andy was able to give us that information. He has been the custodian of those re-ups each time. And so for the June quarter we would expect the average interest rate on the debt to be about 7.8%.

What was the weighted average for this quarter?

About 8.5.

That is helpful. Then, Bud, you touched on EBITDA for just Christie/AIX for the quarter, but it went by pretty quick. What was that number?

I would be happy to repeat that.

That was north of $11 million.

(multiple speakers) North of $11 million and up modestly from last quarter, is that -- did I hear that right?

We didn't give that information for the last quarter. (multiple speakers). I gave you revenues. I gave you VPF revenues in excess of $12 million last quarter. They are higher this quarter than last quarter. And we, for the first time ever, have given you an EBITDA number in that business unit that is more than $11 million.

That is very helpful. The content side of the business, certainly the virtual print fee structure is panning out seemingly as expected. The numbers seem to work pretty well there. The other side of the business -- you touched on it -- you had some managerial change over and some other issues that have set you back. But the feeling seems to be that you feel like you've got your momentum there.

Understanding you don't want to give specific guidance, but can you give us a broad -- whatever range that needs to be -- sense of when you think you can get those businesses to an EBITDA breakeven or near an EBITDA breakeven position?

I expect both of them to be at least EBITDA breakeven and positive -- actually positive this year. They are certainly budgeted to do so.

You mean for the year as a total, or they would go positive at some point, likely end of year?

During the course of the year. I mean, they are two separate business units -- profit centers. Advertising, we expect to crossover very quickly, and to build on that. The Bigger Picture we're looking third, fourth quarter crossover.

Keeping in mind that The Bigger Picture does incur expenses in their P&L that actually benefit other business units. But they use our delivery business. They use our software business. They pay alternative content fees. They pay virtual print fees occasion. And they are not -- we don't internally allow them to get a free ride. No one does. So when I say breakeven in that business unit, that means on a consolidated basis they are contributing to the overall consolidated bottom line.

All right, helpful. I guess last, and I will let somebody else jump on. The phase two, you commented late September quarter would be a reasonable time period to start the rollouts on phase two. You've got some -- studios certainly have signed on, and you have got others in the works. What chance have you had to date to get reaction from exhibitors on the terms of phase two? And when would be a reasonable period to start to think about when folks would come on and sign?

I guess the first part of that is more important -- their initial reaction to the terms of phase two.

I would like to believe that signings with exhibitors are imminent. We certainly are inundated with conversations and positive momentum with so many. Many of them left over from phase one, many new ones, many excited about the idea of live events. And our announcement for CineLive, very excited about the selection by AccessIT, which I failed to mention as a highlight of this year by the NATO CBG group as their integrator of choice over a whole field of other competitors.

So we're busy. There's an awful lot going on concurrently, as you might imagine. We're working on all the financing pieces. We're working on signing exhibitors. We're completing studio agreements. And bringing this altogether with a goal, again, to begin installations in September.

And I have to emphasize the word goal or target. I'm not at this point prepared to make commitments. But one thing is clear that when we do start phase two it will be additive. It will be incremental to the kinds of results we put up there in the fourth quarter. And it will be incremental to the organic growth that we expect to occur during the course of this year in all divisions.

So we're nothing but optimistic. We're confident that we can meet all of these challenges. There is no question that it is a difficult market to be doing anything in. But we're very confident and bolstered by the meetings that we have been having, by all the experiences that we bring to the table, and the acknowledgment of everyone that we speak to that we know what we're doing and can do more. And We fully intend to do so.

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

Like in terms of the timeframe, you talked about starting installations by the end of the September quarter under phase two. Is this kind of an optimistic scenario or is this kind of a worst-case scenario? And maybe if you could help fill in the blanks, like what are the events that need to occur for that to happen there?

It is neither optimistic nor pessimistic; it is what we intend to do. Obviously, there is always a level of optimism whenever you start by making forward-looking statements, and certainly this is one of them.

But all of the pieces are moving into place to enable us to do that. There would be no point in my even commenting on a specific target date if I didn't believe, based upon these meetings with lenders, with exhibitors, with the huge slate of 3-D digital movies that are scheduled for 2009, to prepare for these, we have to get started in the fourth quarter.

It is not going to happen overnight. And there's a great deal of planning and complexity in putting together these installations. The exhibitor needs to prepare his site. He needs to schedule deliveries and installations. We need to coordinate all of that with him.

It is not something you just decide to do today and begin tomorrow. It is a process. Each part of this is a complex process from the studio agreements to the lender agreements to the exhibitor agreements. And then the implementation, which we alone have proven we know how to do -- that follows.

And we're planning to do all of these things. All we're doing is more of what we have been doing for the last three years, and that is deploying digital systems with a 99.9% reliability.

I guess maybe I will try it in another way here. In terms of getting -- of hearing from -- like from the rating agencies, when do you expect to hear from them?

I can't comment on any aspect of private placement and refinancing of our debt at this time.

Not even like on the size of the --?

No, absolutely not.

Okay. In terms of your gross margin, in the steady-state where you don't have any ongoing installations, and you're doing all the satellite delivery that you can, and you have a lot of operating leverage on your model, where do you see your gross margins in a steady-state?

Well, I mean we are obviously past 60% and we're looking to increase those margins over time. But I think most businesses would be very happy on a consolidated basis with a 60% gross margin. We're not happy with it. We think there is room for improvement. There is some leverage in some business units, particularly software and satellite delivery as the business grows, as the universe of digital cinema grows, as phase two gets rolling, as international initiatives and licensing continues to occur, obviously there are substantial margins incrementally in those types of businesses.

In terms of The Bigger Picture's approach -- or advertising, we don't expect tremendous improvement in margins. We expect more dollars. We expect continuing growth, but not necessarily vast improvements in ongoing operating margins.

I guess if you are at 69% now in terms of your gross margins, and you're having the drag from The Bigger Picture and the UniqueScreen Media that are still not operating at levels where you want them to be, I would assume that -- I think you would have to be in the 70% range.

We are in the fourth quarter, as you know, and I'm talking about the full year. And last year we were at 60, the gross margin was almost 70% in the fourth quarter. I'm obviously trying to be conservative here because it is really a matter of the mix of content.

If I get my way, Bigger Picture gets to be a very big business. Maybe not this year, but we know that that will stress the gross margins because they simply can't produce those kind of margins. Advertising cannot produce those kind of margins. We would like to see significant growth in that division.

But certainly on the media services side, our core business segment, which includes the deployment plan of high margin VPF revenue, of ACF revenues, of software licensing fees, of satellite delivery fees, that group certainly we see substantial growth.

But again, if we have our way, we want to see a substantial gross in the Content and Entertainment segment too. And that, to the extent that it enters the mix, will certainly impact what the ultimate consolidated gross margins will look like.

Last question here. On your balance sheet, why did your property, plant and equipment go down by about $8 million on a sequential basis?

That would just be due to depreciation that we have. We're done with the phase one rollout, so we're not adding to the gross asset base anymore. But we are of course depreciating that asset base.

(OPERATOR INSTRUCTIONS). Madhu Kodali, Fertilemind Capital.

A question on the remaining two major studios. What is taking time there?

They all take a lot of time, and they require attention. The thing that we have got a great deal of experience with is the financing side of this. One major component of what is a very complex structure to begin with, is really the key provisions of the studio agreements. And we need to work through those with the studios, one by one. It is an arduous process. It is one that the studios are very supportive of, but need to be talked to.

These are major contracts, even at these major studios. We're talking about 10,000 screens. We're talking about a systems cost of north of $700 million in total, including the exhibitor contribution. We need to fight a number of battle here when we negotiate these, those that effect financing, those that effect exhibitor partners. Because we need ultimately an implementable plan. And it is really a matter of sitting down, working page by page, which we are doing. And we're optimistic about getting to the end zone with each one of these studios. We just continued to work through it.

We're not going to give in on key terms that obviously are not going to be in interest, or more importantly, the interest of getting the job done. We need something that can be financed favorably with interest. at a low rate, with minimal equity that can be recycled from our phase one plan. All of which we have been been talking about for the past two years.

This has been our goal from the outset. We're implementing on that plan and we need the studio agreements to fit in to that plan. It is in everyone's interest to do that.

As far as the terms are concerned between different studios, I guess you should have probably an universal set of terms, right, in terms of total cost or define your CLP and all that?

Absolutely. I mean, that also adds to the complexity of the negotiations. Once we have agreed to make a change that has any economic consequence, then we do need to go back and conform the other agreements. And that just lengthens the process.

This process is no longer than it was in phase one. In fact, it is a lot shorter. We got the template. We have already proven the technology, as I mentioned before, at 99.9% reliability. They know the platform works. They know that we know what we're doing. They know that we have an incredibly positive relationship with each of them on every level -- operations, senior management, in the field.

We have great partners in Christie and their service organization, Doremi, our own team throughout the Company supporting, handholding, servicing. And that makes a huge difference. I repeat that we're the only Company in the world who have all the studio signed to any deployment plan. And what we're doing is just moving forward with our same partners. And again remain optimistic that we will get all of them signed.

I will remind you that in phase one we started the deployment without having all of the studios signed. In fact, we only had three. We already have four, and we're confident we will get more. It doesn't necessarily provide a gating issue for us to actually start the deployment. And move on, as we did with phase one, in phase two.

What happens in a situation where you have only four signed up and you start rolling out phase two, what happens to the movies that are produced with the other studios, in terms of EPS?

What we did with phase one is we deployed initially about 50 or 60% of the screens in a building -- initially on the first pass. And then put in the LMS and all the cabling, so that going back and putting the rest of the screens in was a pretty simple matter. It is just hookups.

We may do that again. And that -- as soon as you do that, where you have an average of 10 screens in a building, if you only do five or six, there is plenty of product. One of the advantages that we have now is that virtually every movie is released in digital now. And even the independents are starting to come on stream, adding to the amount of product and choice. And then you add to that the alternative content events, there is plenty to fill the screen.

We have a nine-plex in Brooklyn that we own as our demo and lab. It is all-digital. There are no analog projectors there. And since May of last year we have only played digital movies, and have never had a problem finding bookings, and finding plenty of product. Our exhibitors in some cases have 16 and 18-plexes that they keep routinely filled with all-digital product. It is simply not a problem.

So we will have plenty of product. There will be no free riders. Anybody who plays on any of our screens, pays a virtual print fees, whether they sign an agreement or not. And everybody knows how the game is played. In fact, those who don't sign a long-term agreement actually pay a premium virtual print fee. And these are all parts of the metrics that go into building the model.

Studio agreements are certainly something we anticipate having, as we did in phase one. and we continue to work very hard with them in a very collaborative way, a mutually understanding way of what the goal is and what it takes to get there. We uniquely are in a position to explain that, and explain what we have run into, what the issues are. We are in the marketplace today. We have already done all of the components. We have completed them.

One more question about on the phase two capital equipment cost. I think one of the things you alluded in the past is that (inaudible) interesting exhibitors to fund probably up to 20% of the initial cost. How is the takeup on the exhibitors in terms of the reaction of pushbacks, if there is any?

Needless to say, there is a certain amount of pushback, but those are the facts of life. I mean, that is the deal. We certainly alerted many of our exhibitor partners in phase one as we prepared. And there are thousands of screens leftover from our phase one pipeline. We did alert them as we neared the end of phase one that phase two was clearly going to be somewhat less attractive, that would require bigger contributions on the part of exhibitors. And that certainly is the case.

A question for Brian. Brian, could you elaborate a little more on the non-cash interest expense? How does that come out, and how does it look going forward?

Sure. The non-cash interest expense relates to -- the non-GE debt that we have is payable in the form of stock -- that is interest. So every quarter, depending upon the volume weight of average price of our stock, we issue a certain number of shares to the holders under that -- under the $55 million of those notes.

So that is really where the non-cash (multiple speakers). That is at our option, I should add. We could pay that in cash as well, but we have chosen to pay that in the form of stock to date.

So it is still an expense, but it is non-cash because you are giving equity instead of cash?

Correct.

Going forward, again it remains an option, and you would probably be able to tell us what it would be, right? I guess the difference on you will do in terms of financing going forward?

Correct. Let me also add that that non-cash interest expense includes some amortization of amounts we had paid to those holders previously upfront.

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

Very quickly, just in terms of modeling the revenue side, the UniqueScreen Media, you commented about the write-off of some of the goodwill because of some contracts you have chosen to exit. What does that mean revenue-wise sequentially from UniqueScreen?

That was at The Bigger Picture where that write-off occurred.

So that isn't -- I thought you had discussed the vetting of contracts at UniqueScreen, and trying to slim the roster down to more profitable accounts. I heard that wrong?

No, that's correct, but that's not -- that didn't require an impairment charge. It is just optimizing the business, improving margins. We are also looking to insert a national layer. And we feel we're making good progress toward being able to provide that national layer for them as well.

There are lots of things that are going on in those divisions to improve their operating margins and their operating results. We look to these noncore businesses to be contributors in a variety of ways, not just strategically, but from a cash flow viewpoint. So a lot of attention is being paid to those business units.

I guess I was just thinking in terms of setting realistic expectations out there for next quarter, when I put out a model, if that is a material reduction in revenues, because you have eliminated some contracts that weren't profitable it would be useful to know it. Is that a meaningful number? Can you give us a sense of the revenue impact of contracts you have chosen to exit?

At this point I really can't. Our budgeted results for the year show an an improvement in the bottom line, and some reduction in revenues. If you're looking at the revenue side, I'm not prepared to give specific guidance -- I'm sorry -- at this point.

We are obviously looking to get -- to retain as much of it as possible. When I say we go through a contract, it doesn't need we're going to cancel the contract. What we need to do is renegotiate it in a way that improves what we get. And if we get the advertising -- the national advertising, we see a revenue bump from that element.

So I'm not necessarily looking for business to be down, I'm looking for it to be better in that business unit. So we have got work to do. And I apologize for being fuzzy about that. But this is a noncore business that has a lot of elements here. We are also keying up many of those customers, and part of the consideration in looking at them is their involvement in phase two in how we approach them. There are some significant multiscreen circuits in that mix that we want to address in phase two. So we're looking at the whole of this as we approach this business.

Jake Schmidt, Henry Holdings.

This is more of a comment, rather than a question. At Henry Holdings we have a subsidiary, The Film Fund. So we actually finance and produce independent features. We have had the pleasure of dealing with AccessIT on one of our independent features just recently. And it went extremely well. I just wanted to compliment you on your rollout and what you're doing.

Comcast distributes our DVDs, and we intend to do more business with AccessIT in the near future. So I just wanted to comment and let you guys know that I thought you're doing a fantastic job.

Thank you very much. It is always great to hear that.

Madhu Kodali, Fertilemind Capital.

Bud, one more question the equipment initial outlay of $60,000, or if it is going to be lower than this in phase two. What percentage of that is provided by AccessIT in terms of software and services?

During the deployment phase a number of things converge. First of all, we're very proactive in providing services to the exhibitors to be sure that their personnel are properly trained by our choice of vendor. We conduct seminars for those vendors, and for some of the exhibitors themselves, senior management. We have a whole school that we create for them of what digital cinema is, how to use it, etc., at a high level and then we go down to the operating level where we handhold on a 24/7 basis, proactively, calling theater personnel to walk them through those initial weeks in which they are nervous. In which this is something new.

As simple as the system is it is new. And we had made it even simpler with software revisions from time to time. And we continue to do that. That is something that goes on during the deployment period. And that is an investment that AccessIT makes in the deployment plan.

When we -- in terms of capital investment, we will make no further equity capital investment, other than to recycle equity that is already in a very successful phase one plan. The plan has always been to refinance that, to free up equity, to move it back into the phase two financing vehicle. And in doing so, combined with the exhibitor contributions, provide all the equity that is necessary -- the contributed equity that is necessary to raise favorable (technical difficulty) financing to complete the purchase of these systems, as we have in phase one.

phase one, it was an entirely different credit profile when we started. We haven't proven ourselves. The technology hadn't been proven. Now we are almost 8 million shows later. We're at 99% reliability. The technology has just been installed over and over again. We have worked through all of the issues and problems. We understand that they are. We understand what the exhibitors' concerns are. Where the failures do occur when they have occurred, we address them in advance and anticipate them. And continue to work toward doing that.

I hope that answers your question.

So in the starting phase you don't really generate additional revenue through AccessIT services. It is an investment and the revenue you get is only primarily through VPF and monthly software maintenance, is that right?

And licenses fees for (multiple speakers).

Right.

There are some front-end licenses fee that are part of the system that do end up coming directly or indirectly to AccessIT.

Mr. Mayo, we have no further questions at this time. I will turn the call back over to you for any additional or closing remarks.

Thank you all. Good questions, and hopefully we have given you good answers. In closing, I would like to say that we have our work cut out for us in fiscal 2009, as we have in each of the previous years. But I am confident that we'll continue to be successful, both in our industry leadership and in the continued growth and operating results of the Company. The new year brings new challenges, but also many new opportunities. We intend to meet the challenges and continue to exploit the opportunities.

One final note, there is a lot of focus on being more kind to our planet, reducing waste and limiting the use of toxic chemicals. Digital cinema, when delivered by satellite especially, is green. One of our goals in the coming year is to get this message across to all those making choices about upgrading equipment and striking film prints. Each of us does our part, and AccessIT is proud to be providing services that will bring about positive change for our environment as well.

Thank you all, and have a great day.

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