Cineverse Corp (CNVS) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to this Cinedigm Digital Cinema Corporation first-quarter fiscal year 2010 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 Cinedigm'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 premise or representation as of future results. You are encouraged to read the Company's Securities and Exchange Commission filings.

Now I would like to turn the presentation over to your host for today's call, Mr. Bud Mayo, Chief Executive Officer.

Thank you, Operator, and good morning, everyone. Thank you for joining us this morning for Cinedigm's first-quarter 2010 investor conference call.

With me today are Brian Pflug, our SVP of Accounting and Finance; Andy Patel, our VP and Treasurer; and treasurer, and Adam Mizel, who we announced last night is our new CFO and Chief Strategy Officer.

You may recall that we introduced Adam as a new Board member on our last call, and have since made the mutual decision that he should join us full-time.

For those who were not able to join us on the last call, Adam began his career in private equity at Morgan Stanley Capital Partners in 1991, and spent his career in private and public equity investing. He was most recently the managing principal of the general partner of Aquifer Opportunity Fund LP, and he has significant experience in working with small public companies to help maximize shareholder value through both strategic and financial efforts.

I've gotten to know Adam during this time and I know he will be a great help to our Company. We welcome him on board.

On the call today, Adam and I will first discuss our announcement last night of a $75 million recap of Cinedigm by the private equity firm Sageview Capital LP. After this, Adam will provide a report of the topline financial results for the quarter. Then I will review a few of the successful events we've participated in since the start of the year, and I will provide an update on our business.

Brian Pflug will then review the financial results in further detail. Finally, I will conclude with our outlook for the rest of fiscal 2010 before opening up the call for questions.

Last night, in a separate press release, we announced that Sageview Capital LP closed on a $75 million investment in Cinedigm to refinance our existing $55 million senior notes and prepay $5 million of Phase 1 debt, as well as to provide the Company with approximately $23 million of capital to its balance sheet.

Sageview manages $1 billion fund, which takes a private-equity approach to investing in public companies. The firm was founded in 2005 by Ned Gilhuly, who has joined our Board, and Scott Stuart. Ned and Scott were senior partners at KKR and were members of its global investment committee.

As we discussed on our last call, refinancing our existing senior notes due in February 2011 has been a high priority for the Company. We retained Imperial Capital to assist us in this process and identified Sageview as our preferred partner.

Sageview brings Cinedigm a global perspective, an analytical financial discipline, and a unique value-added network of relationships to support our growth. Sageview completed an extensive diligence process in advance of its investment. They'll be a terrific partner in enhancing our leading position in providing the services, expertise, and content necessary to transform the exhibition industry from film to digital technology.

Today, we truly have a new Cinedigm. We are a well-capitalized Company with the growth funds necessary to support our business plan, a long-term private-equity partner, and an expanded management team ready to take on the myriad opportunities ahead of us.

I will now ask Adam, who worked closely with me on the Sageview transaction, to provide greater details. Adam?

Thank you, Bud. First, let me say how excited I am to join Cinedigm as the CFO and Chief Strategy Officer.

I have worked closely with Bud and the entire Cinedigm management team and the team at Sageview over the past few months to make this transaction a reality. As Bud stated, today is a turning point for Cinedigm.

When I first spoke with you on our last call, I outlined a series of steps the Company is focused on to address its balance sheet. The Sageview investment is the first and most critical step in that process. The capital infusion will significantly strengthen the Company's balance sheet, extend debt maturities, provide capital for the Company's continued growth, and introduce a key long-term investor to our shareholder base.

Under the terms of the transaction, the Company issued to Sageview new senior notes in the principal amount of $75 million with a rate of interest of 8% per annum, to be paid in kind in additional senior notes, and 7% per annum to be paid in cash. The new senior notes have a five-year term with a scheduled maturity date of August 11, 2014, and up to one-year extension under certain conditions.

In addition, the Company issued to Sageview a seven-year warrant to purchase up to 16 million Class A shares of Cinedigm with a strike price of $1.37 per share, a 38.4% premium to yesterday's closing price and representing 35.3% of the fully-diluted shares outstanding pro forma for the closing of this transaction.

The Company also appointed Ned Gilhuly, a managing partner of Sageview, to its Board immediately, and subject to shareholder approval, will add a second designee of Sageview following its upcoming shareholder meeting.

The Company used proceeds of the transactions to, one, redeem its existing $55 million 10% senior notes, due February 2011, at a total purchase price of $42.5 million, reflecting a price of 77.3% of the principal amount of such notes; pre-pay $5 million in aggregate principal amount under the Company's existing Phase 1 senior credit facility; fund a cash reserve of approximately $11.3 million, which shall be used to pay quarterly cash interest on the notes for two years; pay transaction expenses; and provide growth capital to the Company of approximately $11.7 million.

This is a new Cinedigm. Our partnership with Sageview will allow us, the Company, to restart its growth engine. We would like to thank all of our existing lenders for supporting this transaction. Removing the uncertainty in our capital structure is necessary to support the aggressive rollout of Phase 2 screens.

Now that this transaction is complete, we expect to accelerate a number of other Phase 2 financing initiatives we have been working on. Shareholders will be receiving proxy materials from us shortly, outlining in greater detail this transaction and several provisions that require shareholder approval, including the appointment of two Sageview-nominated directors and weighted-average anti-dilution protection for their warrants.

We have our annual meeting scheduled for September 10, so Bud and I will be available to answer any questions you may have in advance of that.

Finally, one of my new responsibilities will be to lead Cinedigm's investor relations efforts. I have met or spoken with a number of our shareholders and analysts over the past month, and look forward to continuing and expanding that dialogue. I will be accessible, and my new Cinedigm contact information is included in our earnings release.

Since we may have a number of new listeners on this call, let you take a few minutes to highlight the Cinedigm strategy. We are the leader in driving the conversion of movie theaters from film to digital technology.

Cinedigm is an integrator that has secured 10-year contracts with Hollywood movie studios to pay us virtual print fees, or VPFs, every time a movie first plays on a digital screen for an exhibitor in which we have installed digital equipment tied to [ushed's] contracts that run through 2020.

Based on these contracts, Cinedigm has secured over $285 million of debt and equity financing to purchase the equipment for our 3,724 Phase 1 screens on a non-recourse basis to Cinedigm, and we own the residual cash flows and the equipment. This is a critical point to recall, and supports our confidence, and Sageview's, in the value underlying its new $75 million investment.

Cinedigm is currently in the early stages of deploying an additional 10,000 Phase 2 screens under a similar model with studios and exhibitors. However in Phase 2, Cinedigm operates in a cost-recoupment model, in which we act solely as a servicer and we are paid only service fees.

Given this structure, we are pursuing financing alternatives to limit the need for us to consolidate on our balance sheet any additional nonrecourse debt.

Around this deployment entity, the other parts of Cinedigm provide a number of critical services. We receive license and maintenance fees for the software necessary for the operation of the deployments. We operate the industry's only combined satellite and hard drive digital movie delivery network, on behalf of our movie studio partners. We provide preshow in-theater advertising services, and we distribute alternative content, such as CineLive 3-D and 2-D sports and concerts, thematic programming, as well as distribute independent films.

In summary, we are helping to transform movie theaters into digital and network entertainment centers.

Now to our quarter. Revenues for the quarter were up 4% versus the March quarter, to $18.7 million, but down 9% year over year, primarily due to the challenging advertising climate and a contracted 16% reduction in virtual print fee rates starting last November of 2008. This rate reduction was partially offset by a 5% increase in screen turnover in the fiscal quarter, versus last year.

The Company has been aggressively managing its existing Phase 1 asset base to improve results. As we mentioned last call, the stepdown in contracted VPFs charged to the major studios has stabilized, with just one additional stepdown of a more modest 7% reduction scheduled in the third quarter of fiscal 2012. After which, the VPF rate will remain flat until the systems we installed in 2005 through 2007 begin to roll off from the major studios' 10-year VPF schedules.

Given our long-term Phase 1 studio contracts, this business remains predictable and is performing according to our expectations. Adjusted EBITDA increased 29% sequentially to $9.4 million, as we entered the seasonally stronger summer months and due to continued careful expense management. EBITDA was down 8% for the quarter year over year, due to this same VPF rate reduction factors as the revenue reduction.

Let me turn the call back to Bud.

Thanks, Adam. Since the beginning of the fiscal year, Cinedigm has continued to increase consumer awareness with its participation in groundbreaking events.

On June 19, we bought the first-ever live virtual movie premiere to theaters. The evening began with the movie The Narrows, which was followed by a live question-and-answer session between the Hollywood movie cast and 20 theater audiences nationwide.

The cast members, including Kevin Zegers, Vincent D'Onofrio, and Sophia Bush, located in New York City, appeared live on screen to answer over 100 audience questions submitted by text message and The Narrows Facebook page. Audience and cast members noted afterward that it was unique and exciting part of the entire event, and we at Cinedigm feel we've established a new template for value-added programming and services.

Actually, we intend to further market this service to both content owners and studios.

On July 7, Cinedigm brought Michael Jackson's memorial service to 47 multiplexes across the country. We are grateful to the Jackson family and to AEG Live for allowing us to do so. We did this at no fee to Cinedigm and at a very modest cost, as we felt offering an in-theater community experience to Michael Jackson fans would be invaluable.

This was truly a groundbreaking event in digital cinema. And were it not for the exceptional team at Cinedigm and the network we have created over the past several years, it could not have happened. In 36 hours, we secured broadcast rights, booked theaters, communicated bookings to fans, and successfully transmitted via satellite the live feed from the Staples Center to 47 multiplexes nationwide.

This event became the catalyst for the launch of our social media campaign, which reached hundreds of millions of people. A Cinedigm Twitter stream and Facebook page each were started, and as a result, most theaters were well attended and some were filled to overcapacity. I'm very proud of the many Cinedigm employees who worked around the clock to make this happen, and hope that those of you who tweet and use Facebook will begin to follow us using those mediums.

I will now move on with an update of our business, beginning with the media services segment. As Adam mentioned, as part of the Sageview transaction we agreed on an amendment with our existing Phase 1 lenders, without cost to Cinedigm, to prepay $5 million of our Phase 1 facility, and credit this prepayment ratably over the next eight quarters as a reduction in mandatory amortization. This will provide us with additional cushion to remain in compliance with all of our covenants in that credit facility.

Also, in July we announced a Phase 2 agreement with one of our partners, Imagine Cinemas, a Michigan-based cinema chain that was among the first to sign on our Phase 2 -- Phase 1 deployment plan. Imagine will participate in Phase 2 through a self-financing option we've created, whereby they provide the necessary equipment financing and Cinedigm gets a fee for managing the deployment process, tracks, collects, and disburses the virtual print fees from the studios.

This first-of-a-kind arrangement is an excellent template for theater exhibition companies to move forward with Cinedigm, even in the challenging credit market environment. We expect numerous additional screen deployments to follow this or similar models, and to date we've converted over 4,000 screens from film to digital, including 160 screens so far in Phase 2.

We remain the only experienced provider of end-to-end technology solutions for theater owners, with almost 14 million shows to date on our screens and a 99.9% reliability.

Our entertainment group has a number of events coming up this fall. In September, we have an expanded network of participating theaters around the nation. The Kidtoons feature is Thomas and Friends, Hero of the Rails, featuring Thomas the Tank Engine.

Some of you may recall that the last time Kidtoons featured Thomas was the highest grossing month in Kidtoons' history. Kidtoons also has two single-night events in September, Barbie and the Three Musketeers, and Bionicle: The Legend Reborn.

For older audiences, like me, the entertainment group will distribute a second independent movie, a lovely movie called Opa!, starring Matthew Modine, heading to the screens on October 16.

CEG, also in partnership with AEG, recorded live 3-D events -- the Mile High, All Points West, and Lollapalooza music festivals this summer, and expects to be releasing them in the best-of-format in theaters this fall, followed by a series of 3-D one-week concert bookings with headliners, including people like Jay Z and many others, subject to reaching final agreement with some of these artists.

At this point, I would like to turn the call over to Brian, who will walk you through the financial results in greater detail. Brian?

Thanks, Bud. I will begin by reviewing our quarterly operating results as usual.

Our consolidated revenues for the first quarter ended June 30, 2009, were $18.7 million, which represents an increase of $800,000 worth, or 4%, from our fiscal fourth quarter, and a decrease of $1.9 million, or 9%, in the prior year's first quarter.

Media services segment revenue was $13.6 million, which is $1.1 million lower than the prior year, due to the contracted 16% reduction in major studio VPF rates, offset by a 5% increase in quarterly screen turnover, modest Phase 2 deployment revenues, and upfront fees from our TCC software, which were not generated last year.

However, segment revenues were up by $1.2 million from the fourth quarter, due to increased content delivery and VPF volume. We will anniversary the VPF rate reduction in November 2009.

Our content and entertainment segments' revenues decreased $0.8 million versus last year, due to our elimination of various underperforming customer contracts, continuing economic factors impacting the advertising industry as a whole, and the expected lack of significant alternative content in theaters during the seasonally busy summer movie release schedule.

We expect alternative content revenue to increase in the remainder of the fiscal year, as our distribution calendar is strongest in Q3 and Q4.

Our media services segment EBITDA decreased from $11.8 million last year to $10.8 million this year, a nine point eight -- a 9% decrease. Given the high margin nature of VPF revenue, almost all the revenue lost from the rate reduction noted before is felt on the EBITDA line.

However, segment EBITDA was up from the prior quarter by $1.6 million, due to the revenue increase noted and lower expenses incurred quarter over quarter.

The content and entertainment segments' EBITDA loss was limited to $128,000 for the quarter, versus $28,000 last year and $186,000 last quarter. It should be noted that consolidated adjusted EBITDA has routinely exceeded all of our interest expense, cash and non-cash, for the last two years.

Our direct operating costs continue to be carefully managed and were down nearly 6% from last year, and are just below 30% of revenues. Our resulting gross margins continued to be over 70% for both this year's and last year's first quarter.

Our overall SG&A expenses have declined significantly versus last year, dropping nearly 20%, and stands at 21% of revenue this year from 24% last year. The decrease was primarily related to reduced staffing levels across the Company and decreased professional fees, travel, and other expenses.

Following the completion of our Phase 1 deployment, overall headcount reductions have stabilized. Our total Company headcount was 243 as of June 2009, versus 270 as of June 2008. We intend to carefully control our overall expenses going forward.

Our interest expense was $0.4 million higher this year than last year, due to the higher interest rate on the non-recourse Phase 1 GE credit facility related to the fourth amendment, and in part due to the interest rate swap under which we have locked in a higher-than-market LIBOR rate on 90% of our Phase 1 debt until next August.

We recorded non-cash income of $0.7 million, compared to $2.3 million last year. This reflects the change in fair -- in the fair value of the swap contract, which is a function of the outlook for the LIBOR rates over the duration of the contract, and the fact that, as the remaining term diminishes, accumulative value of the swap must return to zero.

Since we intend to hold the swap until maturity in August 2010, we don't expect to realize any cash losses on the contract.

Our net loss was $7 million for the first quarter, versus $4.3 million in the prior year. Excluding the mark-to-market accounting on the swap contract, our net loss would've increased by $1.2 million, due to our reduced revenues, increased interest, but offset by reduced operating expenses.

The current quarter's loss includes $9.6 million of non-cash charges, including $800,000 of non-cash interest expense, which is included on the interest expense line in the P&L.

The balance sheet reflects total cash of just over $19 million and working capital reflects a deficit of $4.6 million. As expected, we incurred $5.6 million of CapEx this quarter, primarily for Phase 2 systems, although funded with a combination of debt and exhibitor-provided funding.

The Sageview transaction will add approximately $23 million of cash to our balance sheet, or pro forma cash of $42 million total, of which $11.3 million will be restricted cash utilized to pay the quarterly cash interest expense for the next two years on the new Sageview notes.

We expect to accelerate Phase 2 deployments going forward as a result of the Sageview transaction, and intend to focus efforts on structures that do not require consolidation of the non-recourse Phase 2 debt in our financials.

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

Thanks, Brian. This has been a long call and we appreciate your attention.

As you've just heard, this has been a very busy time for the new Cinedigm. We've secured a long-term capital partner who has joined our Board. We have strengthened our balance sheet and removed near-term liquidity pressures. We have added a new CFO and Chief Strategy Officer; launched an exhibitor self-financing model for Phase 2; distributed our first independent film, including the groundbreaking live Q&A session; and with just 36 hours' notice, brought Michael Jackson's memorial service live via satellite to audiences in theaters around the country.

And we're just getting started. With the support of our new partners at Sageview, we're ready to resume our growth and continue to lead the digital conversion of the movie exhibition industry. Thank you, and now I will open up the call for questions. Operator?

(Operator Instructions) Jeff Van Rhee, Craig-Hallam Capital Group.

A couple of questions. First of all, can you just help me as it relates to the capital structure changes? A few questions there. First of all, what is the all-in interest and principal payment expected for the next couple fiscal years?

On the Sageview notes, Jeff?

No, all in. So not just Sageview, but GE -- the full debt load. What is your principal and interest for each of the next fiscal years?

Let me try to piece it for you, because I haven't thought about it in that context.

On the Sageview note, we have a 7% cash payout for the next two years, which we've funded as part of this transaction. So, effectively, that note has no cash impact at all on the Company.

Separate those out. Forget that you've got it on the balance sheet because we will see that on the balance sheet. I'm just curious what the total cash outflow, albeit that some of it is already reserved.

Sure. On the Sageview note, 7% cash interest, which over two years is $11.3 million, of which we've funded the $11.3 million on our balance sheet. Okay? On that piece.

On the GE Phase 1 nonrecourse facility, we have a -- about $1.92 million per-month principal amortization mandatory. We've prepaid $5 million of that, effectively, which will be ratably applied over the next eight quarters. We did that purposefully because, in our fixed-charge coverage ratio, that reduces the mandatory fixed-charge amount and gives significant margin for error in any of those covenants, and gives us confidence that we don't have any problems going forward.

The actual GE interest expense is about -- I'm sorry? I mean, we have an interest rate about 9.6% on a declining balance. So I would just -- Jeff, off the top of my head, I couldn't tell you what that total number is. But the total EBITDA, as you know, in the Phase 1 subsidiary is in the mid-40s, well in excess of the principal and interest requirements of that facility.

So the Company has no cash outflows to support debt, beyond what it's had historically, beyond what it's earnings base, which is highly predictable, supports, and we've raised excess capital as part of this investment transaction to give us the capital to build our business -- deploy satellite dishes, whatever that may mean, as we build our business and as we roll out a lot of Phase 2 screens.

I will come back to that offline. I just want to make sure I've got a precise number there, but the diluted -- what is the all-in share count right now? Fully diluted, all-in, and I mean including options. What's the outstanding beyond the visual?

Again, Jeff, basically on the treasury method, which is how we are going to be reporting our 10-Q, it's approximately 28 million shares of Class A and Class B shares on the treasury method of any options or warrants.

And we're issuing to Sageview warrants for 16 million shares at $1.37 a share. There will be approximately -- now those will not be reflected in our fully-diluted count until they are in the money, but there will be approximately 45 million shares post the closing of this transaction, which is where we get the calculation of a 35.3% ownership.

Yes, okay. Then you said specifically the excess cash is going to give you -- obviously, it gives you, at the expense of dilution to equity holders, gives you some flexibility to pursue the growth plans, and you specifically pointed to Phase 2, accelerated Phase 2 efforts.

Can you just give us kind of a quick snapshot of where you intend to focus your efforts there? What are the key things that are really going to drive returns to the holders?

Sure. Basically, as you think about our business model, and I think as you know, there is significant operating leverage in what we do, whether it's deploying these screens, delivering movies to these screens.

As you know, in our delivery business, we are hired by the studios to deliver movies to all of the digital screens that exist. And so, we do the same work as we deploy more Phase 2 screens and as the industry continues to deploy more digital screens, we will see our revenues and our earnings in that business move up materially, naturally just sending the same work to more places.

Similarly, when we deploy our own Phase 2 systems, we collect a license fee and an ongoing maintenance fee for the software that operates those systems. And so, as those deployments accelerate, that revenue will immediately and over the long run in that business unit increases materially.

Third, we deliver -- we're in the alternate-content business, which is we are originating and distributing that content. Again, the more screens that exist for us to distribute it to, the more revenue potential we have in that business unit.

So, there is meaningful operating leverage in everything we do. By clearing up our balance sheet and liquidity issues, many of the growth and financing conversations we have around Phase 2 become much easier. Because, as you can imagine, all of the debt for Phase 1 and Phase 2 is nonrecourse to the Company. We are the servicer and we are the one who makes that business operate. Our lenders want to be sure that we are a stable Company. And we'll tell everyone we are (multiple speakers)

Let me ask it differently. Can you drive -- the problem has been critical mass, right? You need more screens out in the industry to get delivery revenues. You need more DMAs to drive alternative-content growth of any meaningful magnitude.

The debt markets don't seem to have opened up enough to get DCIP on the field in volume. We'll see if you guys can do it in big volume, but what is it going to take to really get those businesses growing? Can you do that in this environment? Or are we essentially looking at very modest improvements in delivery revenues in VPFS and in alternative content until debt markets open up? I mean, is it ultimately that simple?

Jeff, I think your presumption the debt markets are not opened up is incorrect.

Well, is DCIP rolling out?

They are doing what they are doing it. I don't know what you are doing. I think that everybody has a set of terms and a set of assumptions upon which they will finance their growth.

So your suggestion (multiple speakers)

Jeff, I can tell you that we are confident that we have numerous ways to access capital to deploy Phase 2 screens. The necessary first step was the transaction with Sageview we announced last night.

Okay, so go down that road, then. What are we talking about? Maybe I'm missing it. Are we at an inflection point in installations? Do you think we will put in another 1,000 screens in the forward year, 2,000 screens, 500 screens? I mean, what kind of ramp, outside of DCIP getting on the field, are we looking at?

Jeff, the constraint -- we have no constraint on us in terms of the ability to install screens. As we've talked about in the past, it's capital.

And what I can tell you is we are very confident that we have access to capital to do that. When we have specific things that we will be able to announce, we will announce them. You know, I can't get ahead of myself in that way, but this transaction with Sageview was the necessary first step. It was a condition of us unlocking our financial markets.

All right. I guess I will leave that there. Is there anything else you can help us on the fiscal year? You had previously thought double-digit growth on revenues and EBITDA. Any updates there in terms of guidance?

We continue to stand by that guidance.

(Operator Instructions). We have no further questions at this time. I would like to turn it back over to our presenters for any additional or closing remarks.

We have no closing remarks, but -- other than to say thank you all for your patience over the past several months. We've completed a milestone in our history and are very excited about the future. Thank you very much, and have a great day.

That does conclude today's call. Thank you for your participation.