Cineverse Corp (CNVS) 2011 Q1 法說會逐字稿

Good day, everyone and welcome to this Cinedigm Digital Cinema Corp. first-quarter 2011 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 promise or representation as to the 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. Adam Mizel, Interim Co-Chief Executive Officer.

Thank you. Good morning, everyone and thank you for joining us today for Cinedigm's first-quarter 2011 investor conference call. With me is Gary Loffredo who is serving along with me as Interim Co-CEO and as our General Counsel.

Before we review the solid first-quarter results, I will highlight the Cinedigm strategy. We are the architect, builder, financier and an industry leader in driving the conversion of movie theaters from film to digital cinema technology. Building upon our digital cinema infrastructure, we are developing a leading owner, marketer and distributor of alternative content in independent film whose variety of offerings are helping to change theaters into network entertainment centers. We will capitalize on the opportunities created by this once-in-a-generation transformation of the movie exhibition industry from film to digital to create various assets that produce long-term cash flows and ultimately equity value.

The May to August period is typically a slow time in our industry to generate new transactions as our studio and exhibition partners focus on the critical summer movie slate. Nevertheless, since June, we have made significant business development strides. First, Gary will begin with a discussion of our digital cinema deployment and our asset sales. Then I will discuss our content, delivery and other units before providing a financial review of the quarter. Gary will conclude by reviewing recent organizational changes and we will then open the call for your questions.

Thank you, Adam. I will begin with a progress report on the deployment of digital cinema systems. During the first quarter, we installed [308] digital cinema systems and signed another 117, bringing our total Phase 2 signed and financed digital cinema systems to 1693 as of June 30 and 1717 as of today. Approximately 150 of our budgeted first-quarter installations were rescheduled into our Q2 by our exhibitor partners. Adam will describe later the impact of the timing on our results.

As of today, the total number of installed Phase 2 systems has increased to 741 as we are rapidly installing that backlog. In addition, we have added 46 screens to Master License Agreements since July 1 and are in detailed contractual negotiations with several exhibitors we expect to sign as the busy summer season ends.

Each 1000 screens we deploy should add $2 million to $2.5 million of EBITDA between service fees, software licenses and maintenance and delivery fees. These deployments will drive significant growth in our cash flows over the next 12 to 24 months.

Our current active pipeline continues to expand and now sits at an additional 3500 screens, which would bring us to more than 8000 screens between Phase 1 and Phase 2. Our goal remains for the combination of Phase 1 and Phase 2 to reach approximately 14,000 screens by the fall of 2012.

We are also continuing to finalize various financing proposals to support these deployments. The most critical remains our commitment letters with GE Capital and Societe Generale for $100 million of senior financing for up to 2100 Phase 2 screens. We are currently in detailed discussions with mezzanine lenders to complete this capital structure. Due to supply constraints with all of the major digital projector system vendors, which are expected to abate by the end of this calendar year, we have timed this facility to coincide more closely with our ability to install systems in order to minimize the fees and carrying costs of an undrawn loan facility.

Adam and I, with the support of Ralph Willis of EFA Partners who we retained in June, simultaneously with Bud Mayo's retirement, continue to drive this toward closure. We also continue to work with exhibitor buyers to support their financing efforts through their own balance sheets.

Now let me update you on our stated goal to sell our non-core assets. On Wednesday, we announced the sale of our technology infrastructure and services outsourcing units to an entity formed by a member of that unit's management team. We received upfront cash proceeds and retained accounts receivables totaling approximately $440,000, as well as service credits against our ongoing technology services totaling $1.150 million over the next three years. We believe this is a win-win as the management team members of this unit are now entrepreneurs and owners with the capital to invest in growing their business.

Cinedigm will receive a consistent, high-quality, technology support service for our business, cash up front, as well as improved future margins and will remove the responsibility for a non-core business unit from our management focus.

In addition, for similar reasons, we continue to discuss the sale of the Pavilion movie theater with prospective buyers and hope to close on a sale of this business as expeditiously as possible. Now, let me turn the call back to Adam.

Thanks, Gary. First, let's move to Cinedigm Entertainment Group, which we refer to as CEG. As you know, CEG is the content ownership, marketing and distribution arm of Cinedigm. It distributes feature movies and alternative content programming targeted to a specific audience. This division had a quite active and productive first quarter and early second quarter as demonstrated in July 2010 when we brought the FIFA World Cup final to theaters live in 3D. The final game of the tournament played on select screens across the country and sold out in most locations.

This followed a very successful live 3D presentation of the NCAA College basketball men's Final Four in April sponsored by LG Electronics and CBS Sports. Both of these events demonstrate the power of live 3D sports on the big screen and are changing consumer awareness of the theater as a venue for more than movies. We expect to announce several additional events for the fall and winter once we finalize contracts.

We also debuted Phish 3D, a recorded 3D concert, which was the most successful CEG distribution to date. This event sneak-previewed in nine cities and quickly sold out almost everywhere. It was then booked at more than 200 theaters for its one-week run and held over for a second week in more than a third of the theaters. The event produced a valuable waterfall of revenues totaling over $311,000 to Cinedigm as our deployments earned VPF, our delivery unit earned its delivery fees, USM provided ad screens and CEG earned its distribution fee.

CEG also launched its Million Dollar Movie program, which provides independent movie producers distribution to a target of 200 digital cinemas in a revenue-sharing model that aligns the financial incentives of the content owner and the distributor. To support this effort and to build awareness within the independent film community, CEG was a panel participant at the Tribeca Film Festival and the Producers Guild conference and just yesterday, we announced CEG will be the official digital cinema adviser to the Telluride Film Festival for the next three years, as well as a sponsor at this year's Telluride Film Festival.

These affiliations are broadening our awareness within the independent film community and have already produced several potential movies we expect to distribute late in our fiscal year. These successes have created continued demand by exhibitors and sponsors for more events and we look forward to reporting on new and exciting opportunities in the weeks and months ahead.

Our Digital Media Services unit, or DMS, which delivers movies, trailers and other content to theaters across the country every week for a variety of content owners from the largest Hollywood movie studios to the smallest independent movie distributors had a solid quarter as well. For example, we partnered with SENSIO Technologies to support the production of 25 of this year's FIFA World Cup matches for live 3D broadcast globally. DMS was retained as the global coordinator and architect of a satellite distribution for these matches in 475 cinemas across 33 countries worldwide.

We also announced plans to more than double our network of satellite-enabled theater locations across the United States by deploying an additional 300 locations over the next 12 months. This will increase Cinedigm's satellite-enabled theater network to more than 575 locations. Satellite-enabled theaters represent the best of breed in modern cinema. In addition to their ability to receive the latest theatrical content by satellite, which limits the carbon footprint of Hollywood distribution, among other benefits, they also can receive and present live events. The first 35 new dishes are in the deployment process at this time.

And with that, I will now provide details on our first-quarter performance. We produced solid financial results for the quarter. You will recall that, as of March 31, our operating results excluded our Pavilion theater, which we classified as held for sale. In the first quarter, we finalized definitive plans to sell our managed services and Ezzi Net divisions as Gary previously discussed and in fact closed on that sale this week. So we have, therefore, also classified those units as held for sale in the most recent quarter. These units constituted our former Other segment, which you will no longer see in our financial statement, further simplifying our structure.

Our consolidated revenues for the first quarter ended June 30, 2010 were $19.4 million, which is an increase of $3.1 million, or 19.4% from last year's first quarter. Even excluding Phase 1 and Phase 2 deployment revenues, service and content division revenues for the quarter increased by $3.2 million, or 59.3% year-over-year.

First, our asset-heavy Phase 1 and Phase 2 deployment segments, which include the VPF revenues, expenses, EBITDA, digital cinema assets and nonrecourse debt associated with the deployments, performed well in the quarter, especially our Phase 1 unit, which saw several wide summer releases, including the acceleration into June from July (sic) of the release of Twilight - Eclipse. As result, Phase 1 VPF revenues increased approximately $900,000 year on year to $11.5 million. We expect a partial reversal of this timing impact in Q2 with our current forecast estimating a modest year-on-year reduction of Phase 1 VPF. Phase 2 deployment revenues were $601,000 in the quarter versus $243,000 last year due to our continued ramp-up in installations. We had 635 screens installed at June 2010 versus 139 at June 2009.

Our Services segment, which provides a variety of services to our Phase 1 and Phase 2 deployments, as well as to third-party customers through our Digital Cinema Services unit, DMS, and our Software division, these businesses produced a total of $4.2 million of revenues in the quarter, including service fees earned from our own deployment subsidiaries and almost doubling from last year and are poised for further growth in terms of both revenue and adjusted EBITDA as our Phase 2 deployments accelerate in the balance of the fiscal year.

As we mentioned earlier, total revenues in the quarter were reduced by the shifting of approximately 150 Phase 2 system installations into Q2. This reduced our Service segment revenues by approximately $500,000 in the quarter, as both Digital Cinema Services revenues and software license revenues were delayed. These revenues produced 90% plus adjusted EBITDA margins.

Our final segment, Content and Entertainment, includes our preshow advertising business, UniqueScreen Media, and our alternative content and independent film distribution arm, CEG. This segment produced $4.4 million of revenues in the first quarter, up from $3.3 million last year. Both USM and CEG grew their revenues meaningfully since last year due to improvements in the advertising climate and gains we made from our national ad partnership with Screenvision.

CEG, which is, of course, title-driven, had successful runs of the Phish 3D concert movie, the live 3D NCAA Final Four, as well as its regular Kidtoons programming as we already discussed. We expect to gain additional traction in both of these businesses going forward as compared to prior periods.

Our overall adjusted EBITDA was $10.5 million for the quarter, a 16.6% increase over last quarter's adjusted EBITDA of $9 million. The strong quarterly EBITDA performance is consistent with our revenue gains due to the positive operating leverage embedded in the growth of our service fees and our continued focus on cost control.

It should be noted that our direct operating expenses increased year-over-year driven by variable costs that are tied to revenue growth. SG&A also increased year over year, but primarily due to contractually obligated and nonrecurring expense accruals of $912,000 related to Bud Mayo's retirement, $200,000 related to a new policy of accruing for certain year-end audit costs quarterly that we previously recognized only at year-end.

The nonrecurring severance cost accrual has been added back to adjusted EBITDA for the quarter. We also expect to incur certain other transition expenses over the remainder of the fiscal year, approximately $450,000 in total, for search fees, consulting fees and other expenses related to the shift in management. Excluding these charges, our SG&A levels have dropped versus prior periods as the cost-cutting efforts we have discussed take hold. Aside from our transition costs, our expense base has stabilized at lower levels and future increases, when they occur, will generally be tied to greater top-line growth rates.

Adjusted EBITDA in the first quarter, excluding the EBITDA earned in our Phase 1 and Phase 2 deployment subsidiaries, which is pledged to service the nonrecourse debt of those subsidiaries and excluding the nonrecurring CEO transition costs, was negative $469,000. This represents a modest improvement compared to negative $491,000 in the fiscal fourth quarter. However, Cinedigm would have been cash flow positive with breakeven EBITDA in this quarter if not for the installation delay by our exhibitor partners of approximately 150 budgeted Phase 2 systems to the second fiscal quarter. This delay shifted approximately $460,000 of adjusted EBITDA into Q2 from Q1.

As of today, 114 of these delayed systems have been installed and it is fully anticipated that the balance of the deferred installations, along with most of the installations budgeted for the second quarter, will be successfully deployed. Cinedigm continues to benefit from positive operating and leverage inherent in the expansion of digital cinema and expects this cash flow metric to continue to improve with additional Phase 2 deployments in the balance of our fiscal year.

Our interest expense totaled $6.8 million in the quarter, a decrease versus $7.3 million last year. The interest expense on our Sageview debt was $3 million; although only $1.4 million was paid in cash and that was funded from our interest reserve account with the remainder accrued as an increase to the debt balance. This interest reduction was also partially driven by lower costs on the Phase 1 credit facility as a result of the refinancing that occurred in May.

There was a loss on the extinguishment of the note payable of $4.4 million in the quarter, which was resulted from the retirement of the GE Credit facility related to the unamortized debt issuance cost of $3.3 million plus the funded prepayment penalty of $1.1 million.

Our balance sheet reflects total cash and investments of $24.3 million versus $24.2 million at March 31, of which $16 million is set aside as either restricted cash or investment securities, to pay interest on the Sageview notes, as debt service reserve funds for the Phase 1 facility and for future purchase of satellite dish equipment. Our receivables portfolio continues to be in good shape with the majority representing studio-contracted payments and adequate reserves on the remaining customer base.

Finally, a few words on the quarter ending September 30. We expect the improvements in our operations and cash flows that were evident in the most recent two quarters to continue. Service fees earned from our deployments and exhibitor buyers will grow with our refinancing complete, with the positive trend in the number of summer movie releases and the widening booking patterns and with our expected installation of additional screens from our backlog. As we have discussed, these deployments generate positive operating leverage with additional software license and maintenance fees and delivery fees.

Finally, this quarter, our preshow advertising unit is experiencing improved local and national ad rates and a seasonally expected slow summer event release schedule will impact CEG results, but given our pipeline, we expect our events to accelerate in our fiscal third and fourth quarters.

A reminder that in November 2010, our contracted Phase 1 VPF rates with the six major studios will have their final stepdown of 7%.

Finally, as industrywide digital cinema deployments expand, we expect to benefit accordingly and we look forward to a year of continued improvements in our financial results. Now, I will turn the call back to Gary.

Thanks, Adam. As you know, Bud Mayo, our Co-founder, recently retired as Chief Executive Officer and President of the Company. Bud has been an inspiration to all of us and the current stature and future prospects for Cinedigm are in no small measure a consequence of his dedication, innovative thinking and unwavering commitment.

Recently, we simplified our organizational structure with each of our five business units reporting directly to Adam and me as Interim Co-CEOs. We are seeking to better integrate each of the units and foster greater collaboration within Cinedigm as we meet the opportunities and challenges of the next 24 months.

This is a critical time for Cinedigm. Digital conversion is accelerating towards a tipping point and this is our moment to solidify our leadership position in the industry. As part of this process, we have made several organizational changes, which we believe will better align our team to meet these challenges. We are refocusing these resources to add key talent to our team while maintaining or possibly reducing our cost base.

To this end, subsequent to the completion of this quarter, we announced that Peter C. Brown, Former Chairman and CEO of AMC Entertainment, has been nominated to stand for election as a member of the Company's Board of Directors. We are excited by Peter's interest in joining our Board as his reputation and relationships within the movie and entertainment industry are exceptional. Peter has a strong belief in the content opportunities created by digital cinema and his input will accelerate our already strong momentum as a company.

In addition, Bill McGlamery, who was President of USM, our preshow advertising subsidiary, retired and was replaced by John Brownson, the CFO of the unit and an industry veteran. John is concentrating USM on both customer growth and improving the effectiveness of its sales force.

We are also refocusing our technology resources towards the growth of our digital content delivery capabilities and our software-based data, analytical and operational engines. Expect to hear of several innovative new products and services from us in the next few months.

Thank you all for your continued interest in Cinedigm. We are very excited about the future and our prospects for future growth and success are better than perhaps any time in our history. And now we will be pleased to answer your questions.

(Operator Instructions). Kris Tuttle, Research 2.0.

Hi, guys. Just had a couple quick questions. One of them is can you talk about, in general, why an exhibitor would -- what would drive them to delay their installations? And secondly, if there are any observations on either competition or market dynamics that you have seen during the quarter, that would also be helpful.

Okay, I will answer the first part of that and Adam can answer the second. This is Gary. There is several reasons why an exhibitor may choose to delay installations. There is a lot of organizational and planning that has to go into actually taking out the 35mm systems and putting in the digital systems. So that takes some planning and as we started with some of these exhibitors, they were ramping up their process of doing the conversions. So some of them just slipped a couple of weeks to a month as they got better at that process.

And in particular, that happens in the summertime because there are so many movie releases and there are so many people in the theaters, they don't want to lose revenue by for a day or two not having a screen up. So that is a lot of the reason where things didn't get done that we thought were going to get done in June and they are now getting done in late July and August when you get still busy, but less busy.

The second half of your question just on industry dynamics, as we have discussed in the past, there are really -- in this country, there are three entities that are converting cinema from film to digital. There is a group called DCIP, which is focused on AMC, Regal and Cinemark. Those big three chains created their own and off-balance sheet financing entity and servicing entity. So they are rapidly deploying in those three chains.

Cinedigm is effectively doing almost everything other than that. The only other player out there is Sony who will provide VPFs and financings for some exhibitors as part of selling Sony equipment and only Sony equipment. So we have a very robust pipeline and I think you'll hear a lot of new exhibitors over the next months from us as we kind of get through this summer lull.

(Operator Instructions). I am showing no further questions at this time, sir.

Okay, well, thanks, everyone, for taking the time this morning and we look forward to speaking with you over the coming months. In the fall, we will be at three different conferences. We will send out a press release, but we will be speaking at the Imperial conference on September 15, at Houlihan Lokey's conference in October and then Merriman's conference in November. So hopefully we will see some of you there and we will talk soon. Thank you.

Thank you. Ladies and gentlemen, thank you for your anticipation in today's conference. This concludes the program. You may all now disconnect. Thank you and have a nice day.