Cineverse Corp (CNVS) 2011 Q2 法說會逐字稿

Good day everyone and welcome to Cinedigm Digital Cinema Corp second quarter 2011 earnings conference call. Today's call is being recorded. Participants 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 would 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 Security and Exchange Commission filings.

Now I would like to turn the presentation over to your host for today's call, s Mr. Adam Mizel and Mr. Gary Loffredo Co-Chief Executive Officers.

Thank you operator. Good morning, everyone and thank you for joining us today for Cinedigm's second quarter and first half fiscal year 2011 investor conference call. With me today is Gary Loffredo who is serving along with me as Interim Co-CEO as well as our General Counsel. We also have with us Brian Pflug our SVP Accounting and Finance. As we described in our earnings release, this quarter marked a critical turning point for Cinedigm.

We shrunk our adjusted EBITDA loss from our non-deployment subsidiaries to negative $178,000 from negative $489,000 in the first quarter and negative $648,000 last year. And more importantly September was the first EBITDA positive month in our history excluding the deployment subsidiaries. This achievement is due to our accelerating Phase II deployments and their resulting service fees and positive operating leverage at all of our units. A renewed momentum which is translating into improved results in each of our units as well as our prudent financial management over the past year. We have reduced non-core staffing levelings and G&A costs by an annualized amount in excess of $2.5 million since the beginning of 2010.

We expect these positive EBITDA months to continue this fiscal year as our contracted Phase II deployments expand and more of our new business pipeline converts to contract. We will discuss the financial results in greater detail later in the call. I'd like to take a few minutes to review Cinedigm's strategy. We are a digital cinema services and content marketing and distribution Company, driving the conversion of the exhibition industry from film to digital technology. The Company provides a digital cinema platform that combines technology solutions, financial advice and guidance, software services, electronic content delivery services to content distributors and movie exhibitors. Cinedigm has secured 10 year plus contracts with Hollywood movie studios, to pass virtual print fees or VPF each time a movie first plays on a digital screen for an exhibitor which we have installed digital equipment.

The digital equipment we provide exhibitors is tied to uses contracts that run through 2022. Based on these contracts, Cinedigm currently has over 160 million in nonrecourse financing that we have used to purchase the equipment for our 3,723 Phase I screens and furthermore, we own the residual cash flow and equipment in Phase I. Cinedigm is currently deploying an additional up to 10,000 Phase II screens under a similar structure with studios and exhibitors However in Phase II, Cinedigm operates a cost recoupment model in which we act solely as a servicer and we are paid only service fees. Around this deployment and services capability, Cinedigm's digital cinema platform provides a number of critical services.

We receive license and maintenance fees for the software necessary for the operation of the deployment and we operate a combined satellite, hard drive and broadband digital movie trailer delivery network on behalf of our movie studio partners. Cinedigm leverages this digital cinema platform with applications to capitalize on new business opportunities created by the transformation of movie theaters into network entertainment centers. The three main applications provided by Cinedigm currently include one our digital entertainment marketing and distribution business focus on alternative content and independent film. It's, our operational and analytical software application and our preshow advertising and theatrical marketing business.

We believe we offer the broadest platform and application package in the industry which we offer to our customers as a integrated, connected and optimized total solution as well as a la cart to meet more specific individual customer needs. With that synopsis, Gary and I will provide an overview of our strong progress and second quarter and first half of the fiscal year. As we have noted, there are some seasonality to business development activities particularly during the May through August period which is typically a slow time in our industry as our studio and exhibition partners focus on the critical summer movie slate.

Therefore we are pleased with our progress during the quarter and first half as evidenced by the strong improvement in virtually all financial metrics as well as the operational gains achieved which set the stage for a very exciting and rewarding time in the current quarter and beyond. First Gary will begin with a discussion of our digital cinema deployment and our asset sale. Then I will discuss our software, content delivery and other units before providing a financial review of the quarter. We will then open the call for your questions.

Thank you, Adam . I will begin with a progress report on the deployment of digital systems. During the second quarter we installed 442 digital cinema systems and signed another 688 screens including 170 screens with Cobb Theaters and 250 screens with Dickinson Theaters. With the additional signing since the end of the second quarter our Phase II signed and finance systems currently stand at 2,383. As of today the total number of installed Phase II systems has increased to 1,351 as we are rapidly installing that backlog. As was the case in the first quarter we experienced continued modest delays in installation during second quarter as well, given industry supply bottlenecks and the summer movie season.

However, we experienced a sharp increase in the pace of installation in the final month of the quarter which is continued to date and is expected to accelerate through the balance of the fiscal year. Indeed as a consequence to our strong contracted and projected pipeline we believe second half installations will increase at least 100% over that achieved in the first half of the year and will contribute to continued strong financial performance. As you know, each of these screens generate immediate and long term cash flow from service fees as well as additional revenue opportunities for software, content delivery and distribution.

As consistently stated each incremental 1,000 screens we deploy adds $2 million to $2.5 million of EBITDA between service fees, software license and maintenance fees and delivery fees. We are pleased that our recent accelerated deployment program and the resulting improved EBITDA results validate these projections. 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 4,000 plus screens which will bring us to more than 10,000 screens between Phase I and Phase II.

Our goal remains for the combination of Phase I and Phase II to reach approximately 12,000 to 14,000 screens by the end of 2012. This morning we announced that our Phase II subsidiary has received commitment letters from Societe Generale and Natixis fund for a none recourse senior credit facility totaling $75 million with an option to expand to $88 million through syndication and from Macquarie Equipment Finance for up to $23 million of junior capital. This facility will finance the deployment of up to 1800 to 2100 screens. We have secured all necessary levels of the capital structure to make this financing successful and expect it to close by year end with deployments commencing in the first calendar quarter.

Given the growing momentum of digital cinema this year, our exhibitor partners are rapidly changing over to digital and requiring innovative financing solutions. These commitments will allow Cinedigm to further accelerate Phase II deployment and enable exhibitors to capitalize on the advantages of digital cinema such as 3D movie releases and exciting alternative content offerings. As previously announced we also completed the sale of our technology outsourcing unit in August to its management team. We remain an important customer of this business but were able to exit a non-core business unit that was requiring both management time and capital resources to grow.

We received cash proceeds of $250,000 and service credits in excess of $1 million over the next three years. This transaction reflects our commitment to focus our resources on our core digital cinema platform and applications. In addition we are currently focused on the sale of our Pavilion Movie Theater in Brooklyn for similar reasons. Now let me turn the call back to Adam.

Thank you, Gary. First let me discuss the progress on our digital cinema platform development and rollout. 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 studios to the smallest independent movie distributors showed strong progress in the quarter and first half as well, as evidenced by the 39% revenue increase in the second quarter alone.

This unit is benefiting from the operating leverage we have described in the past as the industry's conversion to digital accelerates. We estimate there are now over 13,500 digital screens in North America and as a result, we today deliver our average feature to 650 to 700 digital sites as compared to less than 400 sites at the beginning of our fiscal year. We expect this growth to continue as our own and other digital installations accelerate. In addition CMS expanded its role as a technological innovator.

To date, we have received enthusiastic interest from both distributors and exhibitors and hope to deploy our technology in theaters across North America over the next six months. We will report back to you on our progress. Our Company is also making great strides in the integration of software solutions designed to streamline and automate circuit wide digital cinema operations. In June we announced the release of theater command center enterprise to provide real time consolidated digital theater information as well as the centralized certain scheduling and content management tasks allowing exhibitor to save significant time and money through this automation.

Our customer pipeline has expanded significantly in the past several months with several major new software pilots underway. We are in several conversations with large exhibitors to utilize the enterprise product and maximize the benefit of exhibition from visual cinema and are testing our TCC digital cinema operating system at several large international circuits. In addition, we have began a scoping project with a major studio to expand the use of our industry leading theatrical distribution software. As we described earlier software analytic products are key applications we market to leverage our digital cinema platform.

Next let's move on to the Cinema 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 moves and niche alternative content programming targeted to specific audiences including CineLive, live 2D and 3D events. This division had an expected slower quarter during the summer movie season. Despite the crowded multiplexes CEG as previously reported in July, 2010, brought the FIFA World Cup final to theaters live in 3D and we continued our successful monthly Kidtoon series. CEG's finalizing contract for several key events in our fiscal fourth quarter including an expanded and sponsored Kidtoon program, a 3D movie release, several programmatic content series. We report final details as these contracts are signed.

Finally our UniqueScreen Media division which provides advertising, entertainment to the digital movie market, registered positive growth in the second quarter reflecting the rebound in both local and national advertising market. USM has also seen results improve as it has restructured its sales force to emphasize a more balance mix of long and short term advertising contracts and increases in the field sales force to an excess of 50 employees. USM has recently renewed several exhibitor contracts and like many of our other units, USM has an expanded new business pipeline that we expect to see turn into new screen advertising customers in the months ahead. This is a change in direction from our recent focus on cutting unprofitable legacy customers and it's further evidence of our reinvigorated growth prospects.

With that I will review our second quarter results. Our revenues from continuing operations for the second quarter ended September 30, 2010, were $18.9 million which is an increase of $1.4 million or 7.8% from last year's second quarter. Excluding the Phase I and Phase II deployment revenues our revenues for the quarter increased by $2.9 million or 72.3% year-over-year due predominately to incremental service fees generated by our Phase II deployment, growth in Phase I service fees retained and the positive operating leverage generated by deployments in the revenues of other units.

First our asset heavy Phase I and Phase II deployment segments which include the VPF revenues expenses, EBITDA, digital cinema assets and nonrecourse debt associated with those deployments. As discussed in our previous quarter large movie release shifted into Q1 from Q2 and as a result Phase I VPF revenues decreased modestly by $400,000 year on year to $11 million. The actual year-to-date Phase I VPF revenues remains at expected level. Phase II deployment revenues were $1.1 million versus $451,000 last year due to our continued ramp-up in installation.

We added 1,050 screens installed as of September 30, 2010, versus 160 a year ago in September, 2009. Our services segment provides a variety of services to our Phase I and Phase II deployment as well as third party customers to our exhibitor buyer program. These businesses produced a total of $4.2 million of revenues in the quarter including service fees earned from our deployment subsidiaries, 134% increase from last year and are poised for further growth in terms of both revenue and adjusted EBITDA as our Phase II deployments accelerate in the balance of the fiscal year.. We experienced a delay in the instillation of approximately 75 Phase II digital cinema systems deployments due to vendor equipment and supply constraints in the quarter. And, we expect those installations to occur in the fiscal third and fourth quarters.

Overall, year to date, we remain 277 installed screens behind planned due to the previously described factors. We expect most of these to be installed prior to the end of the fiscal year. Our final segment, content and entertainment includes our preshow advertising business in UniqueScreen Media and our alternative content in independent film distribution arm CEG. This segment produced $3.9 million of revenues in both this quarter and last year quarter.

USMs in theater local advertising revenues increased 19% and national advertising revenues generated by the partnership with Screen Vision increased 4% offset by reduced intercompany barter revenues as we had less content event in the fiscal second quarter. CEG which is, of course, title driven had the release of the FIFA World Cup and it's regular kids' programming as we already described. We expect to gain additional traction in both of these businesses going forward as compared to prior period.

Our overall adjusted EBITDA was $10.4 million for the quarter including our deployment subsidiaries, 10.4% increase over last year's quarterly adjusted EBITDA at $9.4 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 quarterly direct operating expenses increased slightly year over year. This is only attributable to our variable costs that are tied to revenues. SG&A also increased year-over-year primarily due to non-recurring expenses related to our former CEO's retirement, increased travel costs, and a new policy of accruing for certain year end audit costs quarterly that we previously recognized only at year end. The nonrecurrent transition cost has been added back to adjusted EBITDA for the quarter.

We are also now including stock-based compensation expense in our SG&A and direct operating expense line items rather than presenting this separately in the P&L. Excluding these charges our SG&A levels have dropped versus prior periods due to the cost cutting efforts we have discussed. In total we have reduced personnel and SG&A related cost by almost $2.5 million on an annualized basis since the beginning of 2010. We have and will prudently reinvest a portion of these -- that savings tied to new revenue growth initiatives. Aside from our transition cost, our expense base is stabilized at lower levels and future increases when they occur will generally be tied to greater top-line growth rate. Adjusted EBITDA in the quarter excluding our Phase I and Phase II deployment subsidiaries which is pledged to service the non-recourse debt of the subsidiaries and excluding the non-recurring CEO transition cost were negative $178,000. This represents a solid improvement compared to negative $489,000 in the first fiscal quarter and negative $648,000 last year.

In addition, as I mentioned earlier, September was the first EBITDA positive month Cinedigm experienced in its history and the quarter would have seen approximate break-even EBITDA if not for the installation delayed by exhibitor partners of approximately 75 budgeted based to installation which were moved to the third and fourth quarters. As we deploy these delayed systems as well as our current contractual backlog and we also expect to add additional exhibitor customers, Cinedigm will continue to benefit from its positive operating leverage inherent in the expanse of digital cinema and expected positive monthly EBITDA results to continue.

Our interest expense totaled $6.6 million in the quarter a decrease versus $8.5 million last year. The interest expense on our Sageview debt was $3 million only $1.4 million were paid in cash and that was funded from our interest reserve account. The remainder accrued as an increase to the debt balance. This interest reduction was primarily driven by lower cost in the Phase I credit facility as a result of our refinancing that owe occurred in May. The balance sheet reflects total cash in investments to $26.5 million versus $24.3 million at June 30 which $15.1 million is set aside as either restricted cash or investment securities to pay interest on the Sageview notes as debt service reserve fund for the Phase I facility for future purchases 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 current quarter, ending December 31st. We expect the improvements in our operations and cash flows that were evidenced in the most recent two quarters to continue. Service fees earned from our deployments and exhibitor buyers will grow with our refinancing complete and our new Phase II financing commitment letters, with the expected strong holiday movie season upon us and the widening booking patterns in with our deployment of our contractual backlog of Phase II screens.

As we have discussed these deployment generate positive operating leverage with additional software license and maintenance fees and delivery fees. A final reminder that this month, in November, our contracted Phase I, VPS rates with the six major studios will have their final step down of 7%. Finally as industry wide digital cinema deployment expand we expect the benefit accordingly and look forward to a year of continued improvement in our financial results.

As always we appreciate your continued interest in Cinedigm. We have devoted a tremendous amount of time and resources over the past two years to enable Cinedigm to take optimal advantage of the expected acceleration of the digital cinema industry. We are quite optimistic that the fruits of our labor will be increasingly evident in getting in this, the second half of fiscal 2011. We are more confident in our business strategies than every before in our 10 plus year history. While challenges confront us every day, we are moving forward in a constructive and exciting manner. Thanks for your time and attention and now we will be pleased to answer you questions. Operator?

Thank you.

(Operator Instructions)

One moment for our first question. Our first question comes from Lee Giordano of Imperial Capital.

Hi, good morning, everyone.

Good morning, Lee.

My question is on the vendor equipment and supply constraints that you mentioned. Just, can you go into a little more detail about what the bottleneck is there and when you think that might be alleviated? Thanks.

Sure. The supply constraints will be alleviated, really, by the end of this calendar year. The bottlenecks have been three things, all of which have addressed. Two of the three major vendors have added new manufacturing facilities in China. They've wrapped-up their own production capacity and those opened in the summer time.

The other constraints were a limited supply of DLP chips from Texas Instruments, and a limited supply of lenses, I think, from Minolta. Both of which have sort-of cleared up, and so, a lot of the capacity has been spoken for through year-end, but all of the vendors are very confident that they have plenty of capacity, really, starting in January.

Great. And, Adam, could you just comment on the big picture; what you're seeing out there as far as the momentum in the 3D movie industry, and as far as the exhibitors and, I guess, just the overall feel for digital? Seems like things are on-track. I just want to get your overall big-picture take.

Yes, that's exactly right, they are on-track. 3D continues to be a driver of demand for the conversions, as exhibitors need more screens to play 3D, generally over the last year you've seen exhibitors who have installed one, two, maybe three digital systems to play 3D movies in their multiplexes, so call it, on average, maybe 20% of the screens; that's not enough. Most of these exhibitors need 40% to 50% of their screens to be digital 3D, which necessitates a full multiplex conversion.

That's whats happening; I mean, six months ago there were probably 6,500 digital screens in the United States, and today there's almost 14,000. That reflects that trend; it reflects the financing with DCIP secured in the conversion of those theaters that we've installed, as Gary said, 1,300 screens, really, since -- in the last six months. And so, all that continues.

There's significant activity and demand in our pipeline, as exhibitors confront that reality and are making the decisions of how they want to best both finance this and get it installed, and so all of that continues and is part of why we're seeing our deployment pick-up.

Great, and my last question is on SG&A. Just want to get your feel for -- is there any more room to cut SG&A, and how we should be looking at the back half of the year? Thanks.

I think we have, over the first half of the year, made ourselves lean and efficient and really tried to focus our SG&A, or all of the dollars we spend, to where we get the maximum return. We are building a business; we're growing a company. And so, what we've tried to do is make sure we're as efficient in doing that, and where we invest our dollars, we see a return on those dollars.

I don't envision any additional significant cutting in our expense base but rather, more importantly, I think there'll be some growth there, but tied to new contracts and new revenues where we're effectively expanding margin, and so, that's how we're looking at it going forward.

Great, thanks a lot.

You got it.

Thank you.

(Operator Instructions)

Our next question comes from Eric Wold of Merriman Capital.

Hello, good morning.

Good morning, Eric, and welcome. Thanks for joining the family.

No problem. So, I guess, two questions on the active pipeline of the 4,000 screens, can you talk about how many of those could fall into the exhibitor buyer group, and what you're seeing around the financing environment for those exhibitors?

Sure. Our active pipeline of 4,000 is probably split equally between exhibitor-buyer and Cinedigm finance. Some of these exhibitors are exploring both options to see what works best for them. We have developed a number of lenders that are active in lending directly to exhibitors, so there are a number of choices for exhibitors. And, if an exhibitor has a balance sheet and wants to pursue the exhibitor-buyer structure, there are lenders out there that would finance them.

Okay. And then, on that pipeline and kind-of what you've experienced over the past 12 months, or if you want to go recently, how has the sales cycle changed at all on something that enters the active pipeline to becoming closed or not closed?

We're seeing an increased momentum and an increased desire on exhibitors to make a decision on how they want to proceed and get started with their deployment. We've noticed over the past six months that that momentum has picked-up.

And Eric, a couple of things that -- the period in which those exhibitors can join our program and have their screens deployed by contract ends September 30, 2012, so a little less than two years. So, as that deadline approaches, the sale cycle, by definition, shortens. You layer that, again, with the momentum we described earlier, and you see more than doubling of digital screens in the last six to eight months; reflects more pressure on exhibitors to make decisions.

Then, layering again on that, a little bit of the seasonality effect which is, generally, exhibitors want to get the -- get focused on digital and installation in advance of the major movie seasons. We're about to approach the next one, the holiday season, in another week or two through New Years. The multiplexes are filled with big releases from the studios; lots of 3D releases, so there's always a push. Once that ends and you get into January, the really big push begins ahead of the summer 2011 movie season, which now begins earlier and earlier in May, so

that altogether does, I think, shorten the sale cycle. So, I think we are seeing that, and we're -- they're just getting more educated. Part of our sales cycle is we spent a lot of time with these exhibitors at the various industry trade shows, and then, one-on-one, specifically, with them. That investment of time and energy over the last year or two starts to culminate where things happen much more quickly, and so, I think we believe we're entering that window where decisions will get made more quickly and more easily by the exhibitors.

Perfect. And then, last question, maybe kind-of a larger picture, I guess. If, really, the studios are mandating to go digital, and we all know the advantage of going digital, and the exhibitors are considering making that decision to upgrade or not, what would cause an exhibitor to, one, not upgrade if they can make that choice, or two, not go with Cinedigm, either through your finance or the exhibitor-buyer program? What would be their -- if they still want to upgrade, but not use that, what would be their other option? And then, the second part of that was, do they really have a choice not to upgrade at all?

Well, certainly, they have the choice whether to install digital systems or not. We're increasingly finding exhibitors making the decision that they want to install digital systems. As far as our competitors, where else they can go -- they can install a digital system themselves and not participate in a VPF program, and under that scenario, the exhibitor would bare the total cost of the system and implementation.

There are other implementation entities out there; Sony has san implementation entity that is competing with us to deploy digital systems, and some studios have offered a direct exhibitor-buyer program; not all studios, and the amount that the studios would pay, as we understand it, is much less than we're receiving.

And, as of -- the competitive alternatives are limited as we've discussed in the past and, as Gary said, if you would -- Sony offers a deployment package for Sony equipment only. That has its own set of issues, and many exhibitors prefer other vendors' equipment. We're vendor-neutral with the three other major vendors that exist; Christie, Barco, and NEC, and, I think, that's something that most exhibitors prefer. And so, I think, really, the decision process for them more than anything has been, when do I do this, how do I finance it, and let me make sure I understand what this is.

I mean, if you think about it, simplistically and metaphorically, for most Americans, the most complicated financial transaction they perform is their own mortgage. For many, many people listening to this call, and for those of us who live in a finance world, that's not -- that's an easier transaction than a lot of what we go through, and so, a lot of what we're talking about is intuitively-obvious. What we're proposing and working exhibitors through, who fall much more into the category of not having to deal with complex balance sheet structures, is an asset-backed securitization.

With very complicated contracts that drive revenues and payments and terms, and we have to educate them on that, and that's the process we go through and, as I was saying earlier, it just builds-up time and momentum, so you can see that we are not -- it's not a regular process where every week or month we can tell you we expect to be signing-up exhibitors, but you can see it's a little lumpy and unpredictable, but we're signing-up more and more of them. And, as Gary said earlier, our pipeline is larger -- our pipeline of people in detailed conversations has expanded by one-third to 40% in the last couple of months since [ShowEast], and since we've been able to talk about both Cinedigm financing, which we announced this morning, as well as on the exhibitor-buyer structures. And, that starts moving things along, and so, I think we'll see a lot happen.

Perfect, thank you, guys.

Thank you.

(Operator Instructions)

I'm showing no further questions at this time, sir.

Okay, well, thanks everyone for joining. As we announced previously, I will be speaking at the Merriman Conference on Tuesday in New York City, so anyone would like do hear more, we'll be making an investor presentation and having one-on-one meetings. I will be, I think December 2, speaking at the LD Micro Conference in Los Angeles, either the 2nd or the 3rd. Anyway, I look forward to seeing some of you there, and we'll talk to you next quarter.

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