Cineverse Corp (CNVS) 2012 Q1 法說會逐字稿

Good day everyone, and welcome to Cinedigm Digital Cinema Corp's first quarter 2012 earnings conference call. This call is being recorded. Visitors 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 a 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 of today's call, Chris McGurk, Chief Executive Officer and Chairman of the Board of Directors; Adam Mizel, CFO and Chief Strategy Officer; Gary Loffredo, Senior Vice President of Business Affairs and General Counsel. Gentlemen, please begin.

Thank you, operator, and good afternoon everyone. This is Chris. Thank you for joining us today for Cinedigm's first quarter fiscal 2012 conference call.

As we reported earlier today, we are pleased with our start to the year, with our first fiscal quarter showing solid operational and financial progress. We significantly grew revenues and adjusted EBITDA, continued to rapidly expand our visitor platform, made great progress in digital system deployment, and solidly advance all of our many strategic initiatives.

Adam will review our financial and segment performance in detail shortly. However, before he does so, I would like to take a few moments to share some of our key thoughts and strategies going forward. With the VPS agreement installation deadline with the studios approaching in the fall of 2012, we expect near term deployments to continue at a rapid rate. As a reminder, if an exhibitor misses this deadline, they will not benefit from the subsidies provided by the studio-paid VPS. Exhibitors are now clearly aware of this financial incentive, as well as the operational and programmatic upsides of going digital now. And so this looming deadline has helped to significantly accelerate our digital screen deployment program during the last year.

Following our multi-exhibitor record signing of 1,402 screens in the first quarter of this calendar year, in the last four months alone, we signed over 1,700 more screens, lead by Marcus Theatres and Malco Theatres, two of the largest remaining exhibitors to make a decision on digital conversion. We now have 138 exhibitor partners, who have signed MLA's and/or deployed digitally with us, representing over 9,400 screens. Clearly, the exhibition community fully realizes that the time to go digital is now, and that Cinedigm is the trusted partner to make it all happen.

Now while we continue to achieve this impressive growth leading to enhanced revenues and profits from our Phase One and Phase Two deployment programs, we also strongly believe we can further accelerate growth and create significant shareholder value by streamlining the Company's focus, directing our resources and efforts towards those businesses where we can take best advantage of the rapidly expanding digital cinema platform. So, while we will certainly continue to strongly support our deployment program, we will also focus our energies on building our high-potential, software and content distribution businesses.

As we have stressed before on these calls, both software and content distribution are high growth, high multiple businesses where we can be the clear market leader. Let's talk about software first. As more and more screens are transformed to digital, software will be needed to power the more than 100,000 screens worldwide, support studio digital distribution, as well as gather and analyze playback and booking data. As the market leader, Cinedigm is uniquely positioned to take advantage of this growing opportunity, both by expanding our customer base around the entire worldwide digital platform, and by developing new management and analytical tools to help our customers operate their businesses more effectively.

We also are in a strong position to develop precision marketing and audience analytics software tools for our studio and exhibitor customers. All in all, the global growth potential of Cinedigm's software business is enormous.

To take full advantage of this upside potential, we are devoting considerable time and resources to the software business and have already generated outstanding results. For example, in March, we signed an overall agreement with AMC, the second largest domestic theater chain, to use our exhibitor management software solution as the backbone of their North American distribution organization. Then in June we signed a deal with Warner Brothers, the largest worldwide film studio, to license our theatrical distribution system as Warner's domestic accounting and release management software solution, including release planning, booking, print management, revenue accruals and more.

And just this week we announced that the newly-formed and cutting edge AMC Regal distribution company, Open Road Films, has also chosen our theatrical distribution software. These deals underscore that software and business analytics have never been more important to the entertainment business and Cinedigm is solidly positioned as the industry leader in this area. We remain highly focused on leveraging this position to help exhibitors and distributors get even smarter and more efficient. We occupy a strong and unique position that should enable us to continue as the most influential innovator in creating digital cinema software applications and management efficiencies for exhibitors and distributors around the world and we are equally optimistic about the prospects for our other key growth business, content marketing and distribution.

First, let me remind you about a statistic I shared on our last call. Only about 5% of seats are occupied in theaters Monday through Thursday. And only about 15% to 20% on an annualized basis. That means on average, theaters are empty upwards of 80% of the available times and yet the domestic box office is still more than a $10 billion business annually.

As you can imagine, just a small incremental increase in capacity utilization through indy film and other alternative programming has the potential to create a huge new business, and that doesn't even take into account the ancillary revenues from that content such as VOD and DVD sales which should be even greater than that of theatrical sales. With that in mind, we have intensified our focus on the content marketing and distribution business in the last few months.

Currently we are aggressively working with exhibitors, producers and sponsors to create a full slate of alternative content and independent film programming that will drive incremental attendance, particularly during off peak times. We are focused on recurring programmatic content that satisfies the demand of avid audiences, leverages the many distinct attributes of digital cinema, from both an enhanced viewing and targeted distribution standpoint, and importantly creates downstream profits that we can share with our exhibitor partners.

In the month of July, we distributed the groundbreaking documentary Life in a Day, in conjunction with National Geographic Entertainment and YouTube, and also the Sarah Palin documentary, the Undefeated. June saw the release of John Carpenter's indy film psychological thriller, the Ward, and we recently announced a partnership with Arc entertainment to bring eight additional titles to theaters before the end of the year via our digital distribution platform.

We believe we have developed the right plan to rapidly build a leadership position in this high potential, high growth content marketing and distribution business. Expect more announcements in this area over the balance of the year as we roll out plans which may include selective M&A opportunities.

A few words now about our philosophy on the M&A and divestiture area. As we recalibrate our focus toward the high growth, high multiple software and content distribution businesses we believe that selective acquisitions in those areas, that are accretive and can accelerate our growth plans and expand our product offerings, could be important shareholder value drivers for the Company. As such, we have strengthened our focus and resources in this area and are now evaluating high potential acquisition opportunities that may meet our financial and strategic criteria.

Our recent $6.9 million private placement provides us with additional flexibility in capitalizing on such opportunities. By the same token, we are taking steps to rationalize our non core businesses that we believe do not have the same high growth potential as software and content distribution.

A very recent example of this is the binding letter of intent we signed with Technicolor to tell the assets of our feature film and trailer delivery business. Although still subject to diligence and definitive documentation, we believe this transaction simplifies our story, focuses our resources and allows us to exit a capital and management intensive business. As a key part of the deal, Cinedigm will license to Technicolor our current delivery software and technology solutions and forge a strategic software design partnership with them. In addition, Technicolor will become Cinedigm's preferred partner for content delivery going forward. We are very excited to have become partners with Technicolor, no longer competitors, so we can grow our businesses together, hopefully leveraging their broad and deep global footprint with our software and content capabilities.

Clearly, this deal with Technicolor underscores Cinedigm's strategic investment as well as our M&A and divestiture philosophy. We are selling the assets of a non core business where we are currently not the market leader and face large capital and management requirements. In exchange, we have forged new partnership arrangements that augment and enhance our key focus area of growth and potential value creation, our software and content and marketing distribution businesses. Expect us to continue this approach toward enhancing shareholder value as we move forward.

Now, I would like to turn the call over to Adam, who will more fully review our first quarter operational and financial results and then I will come back with a few concluding remarks. Adam?

Thank you, Chris. Our consolidated revenues from continuing operations for the first quarter ended June 30, 2011, were $23.5 million, an increase of 21.4% from last year's first quarter and a 14.3% increase from our fiscal fourth quarter ending March 31. This growth was driven by both the expanding Phase Two deployments, increasing virtual print revenues and the related increase in our service, software and delivery fees.

First we will discuss our asset heavy Phase One and Phase Two deployment segments, which include the VPF revenues, expenses, EBITDA, digital cinema assets and non recourse debt associated with the deployments. Phase one VPF revenues increased modestly in the quarter by 1% to $11.6 million. We continue to earn our Phase One service fees of 5% of the total VPF revenues, and expect the unit's performance to remain consistent with recent results.

Phase Two deployment revenues were $3 million in the quarter, an increase from $601,000 last year due to our continued ramp up in installations. At June, 2011, we have 874 active Cinedigm financed screens compared to just 237 at the end of the prior year period. And a total of 2,829 installed Phase Two screens at June 30.

1,955 of the Phase Two systems are from our exhibitor buyer program and we do not recognize the VPF revenues generated from these systems in our consolidated revenues since we passed these dollars through to our exhibitor partners net of fees we earned for our services. However, as I just noted they do generate revenues for our digital cinema services unit as well as up front license fees and ongoing maintenance fees for our software division. As such they are an extremely important part of our strategy.

Also, VPFs generated from the Phase Two asset base, other than the service fees we earned, are all pledged to support the underlying non recourse debt and therefore do not revert to Cinedigm upon debt repayment, as this is a cost recoupment model, and Cinedigm has made no equity investment inin contrast to Phase One.

As of today, Cinedigm has signed a total of 9,409 screens with a 2,625 screen backlog to be installed. As a reminder each 1,000 screens deployed will add $2 million to $2.5 million of non deployment EBITDA in the first 12 months through service fees and software license and maintenance fees.

As we announced yesterday, a portion of the screens in backlog will be financed by our non recourse Phase Two financing facility of up to $130 million, syndicated with bookrunners Société Générale Securities America and Natixis Corporate and Investment Bank Americas, together with junior lease capital provided by CHG Meridian US Finance Limited. We expect to continue to add exhibitors to this facility in the months ahead as it satisfies an industry need for a simple turnkey solution for the many interested exhibitors seeking the significant advantages of the studio VPF model.

Our services segment which includes our previously mentioned digital cinema unit, software and digital delivery unit supports deployments exhibited by our customers as well as other third parties. These businesses produced a total of $5.5 million of revenues in the quarter including inter company service fees earned from our deployment subsidiaries. This is a 93% increase from last year and the unit is poised for further growth in terms of both revenue and adjusted EBITDA as our Phase Two deployments grow and as we continue our growth in the software business.

Our DMS unit which delivers movies, trailers and other content on behalf of studios to theaters saw revenues increase to $2.3 million this quarter from $1.8 million in the prior year. Adjusted EBITDA in the segment however was negative this quarter due to increased staffing and shipping costs from Fed Ex and UPS required to handle the additional volume. As discussed previously, these scaling and margin challenges contributed to our decision to join forces with Technicolor.

Our software unit revenue grew 207% in the quarter, contributed EBITDA of over $600,000 in the quarter, despite ongoing growth investments that we have made and customer driven implementation delays which shifted EBITDA to later in this fiscal year. The unit continues to experience strong growth from the Phase Two deployments which generate license and recurring maintenance fees for our theater command center product, software that allows a theater to operate like an iPod On top of this, we are expanding our licensing of both our enterprise and EMF software products to exhibitors both within and outside our deployment as evidenced by the recently announced EMF license with AFC and expanding our TDS customer base as evidenced by the recently announced Warner Brothers and Open Road Films transactions.

Our content and entertainment segment includes our pre show advertising business, Unique Screen Media , and our alternative content and independent film distribution arm. This segment produced $3.4 million of revenues in the quarter compared to $4.4 million last year. The 13% year-over-year decrease reflects a 5% reduction in local ad sale revenues and a 44% decrease in national advertising revenues generated by the partnership with Screenvision.

While the local advertising sales environment continues to be challenging due to macro economic factors, the nationalized decline was predominantly the result of a shift by Screenvision in timing for national ad revenue accruals to our fiscal second half results. In addition to the projects Chris mentioned earlier, we have a number of exciting releases and programmatic channel launches in our pipeline for content that we hope to announce shortly. We expect growth in our content and entertainment segment to accelerate over the remainder of the fiscal year.

Our overall adjusted EBITDA was $13.2 million for the quarter, a 24.9% increase over last year's quarterly adjusted EBITDA of $10.5 million. The strong quarterly adjusted EBITDA performance outpaces our revenue gains due to the positive operating leverage embedded in the growth of our service and software fees and our continued focus on cost controls.

Our SG&A costs have decreased year-over-year. This is primarily due to non recurring expenses related to our CEO transition process in the prior year and other recently completed restructuring steps. Partially offset by increased travel costs and additional staffing tied to new revenues. We will continue to manage SG&A closely and tie increases to margin enhancing new business.

Adjusted EBITDA in the quarter excluding the Phase One and Phase Two deployment subsidiaries increased to $324,000 from an adjusted EBITDA loss of $470,000 last year. An improvement of almost $800,000. As I mentioned earlier the combination of contracted software revenue recognition delays due to customer requirements and the negative adjusted EBITDA from our delivery unit impacted this quarter. As our deployments continue to grow and as we complete various ongoing software installations and add new software service and content distribution events we expect adjusted EBITDA to continue to improve in the quarters ahead.

Our interest expense totaled $7.4 million in the quarter an increase versus $6.8 million last year. The interest expense on our stage two debt was $3.2 million with $1.5 million paid in cash and funded from our interest reserve account and the remainder accrued as an increase to the debt balance.

The interest reserve account will fund our interest expense into September of this year at which point we expect to meet our ongoing obligations from cash flow from operations.

Phase One interest expense continues to decline as the strong free cash flow from this deployment is rapidly repaying the debt balance of our non recourse phase one credit facility and will ultimately upon retirement of the non recourse facility then repay a portion of our corporate debt as well.

Offsetting this decline is the growth in interest expense related to the non recourse phase two debt balance tied to new installations. Of course, interest on all of our non recourse deployment related debt is fully funded by VPFs coming in and we incur no debt or interest at all on the exhibitor buyer systems deployed.

Turning to our balance sheet metrics we ended the quarter with total cash and investments of $22.2 million versus $23 million at March 31, of which $10.7 million isset aside as either restricted cash or investment securities to pay interest on the staging notes as debt service reserve funds for the phase one facility and for future purchase of satellite dish equipment.

Our receivables portfolio is growing as our business expands and continues to be ingood shape with the majority representing studio contracted payments and adequate reserves.

This cash balance increased by approximately $6.7 million in early June -- early July, with the successful closing of our pipe transaction.

Finally, a few words on the current quarter ending September 30. We expect the improvements in our operations and cash flows that were evidenced in the most recent fiscal quarters to accelerate. We expect a solid quarter with installations consistent or potentially exceeding our fiscal Q1 total of 634 systems, depending on final deployment timing decisions by several exhibitors.

In addition, we expect a continued expansion of software results as we install various new customers. Our recently announced content releases are targeted for late summer and fall after the busy summer blockbuster season and should improve content distribution unit results. Finally, service fees earned from our deployments and exhibitor buyers will grow with our expanding Phase Two installations and pipeline. As we have discussed, these deployments generate positive operating leverage with additional software license and maintenance fees.

Now, I will turn the balance of the call back to Chris.

Thanks, Adam. So Cinedigm's operational and financial performance continues to be both positive and accelerating in momentum. We are achieving outstanding financial progress and our strategic initiatives are taking hold and moving the Company in the right direction. Perhaps most important we clearly know what we need to do to grow shareholder value and our entire management team is dedicated to optimizing our strong potential. I'm confident that fiscal year 2012 will be very exciting and successful for us.

As always we thank you for your support and confidence and now we can answer any questions you might have.

Thank you. (Operator Instructions). We have a question from Eric Wold of Merriman Capital. Your line is open.

Thank you. Good afternoon. Quick question on kind of the backlog. You installed 630 or so systems in the quarter. You ended with a backlog of 2,600 and then kind of guided to equal to above for this quarter. So should we think about that backlog as being pretty evenly weighted over multiple quarters? And then, someone signing today for a deployment agreement, what are the major factors of when those will be installed? Is it really still up to the theater as to when they want it installed based on the disruption to their auditoriums or is there just kind of a backlog in capacity initially to get these things installed?

Hi, Eric, it's Adam. The driver of timing is really , as you asked it, the theater level, at the exhibitor level. They are going to determine when they want to make those installations based on their operational capacity to manage them, they are managing their own cash flows around the timing of their exhibitor contributions. So it's really a theater level decision, A. B, there is certainly a seasonality impact to it. We actually were surprised at the level of installations this summer because normally they would slow down in the summer. I think part of that was driven by exhibitors trying to continue to get more 3D screens given the number of 3D releases. I would expect that overall there is always a slow down in installations kind of Thanksgiving to new year time period in the holidays but other than that it is really going to be driven by exhibitors. And the third piece that drives the timing as we alluded is by the end of 2012, effectively if a system is not installed, an exhibitor will not have the ability to have support from the Virtual Print Fees. And so overall as you look at that backlog it really needs to get installed over the next 12 to 15 months or there will be no Virtual Print Fees. That is what is driving the acceleration in signups and that will then drive to a relatively quick deployment installation by the exhibitors so that they can benefit from the virtual print piece.

Now, I know we saw Fox kind of being a little more vigilant about the digital requirement in Hong Kong market near the first of next year. I guess how much of a sense do you get from the studios they are going to be vigilant about the September, 2012, deadline in terms of being installed versus having a signed VPF agreement that maybe you need to slip a couple of months to actually get them installed.

This is Chris. All the feedback that we have got from the studios is they going to hold the line on that date. And so we have to take what they say at face value and assume there really isn't any flexibility there and exhibition is reacting accordingly. As you can see, given the momentum and the signings or the MLAs that we have had over the last six months. So again, we are going to take them at face value and believe that there really isn't any flexibility to that deadline.

Okay. And then last question. On the software side, I know you have had good success so far, great success with AMC, Warner and then Open Road yesterday. Talk about with the exhibitors and studios that you are speaking with, what is the main decision factor between going with the Cinedigm software package versus going with something else and what would that something else be?

On the studio side, domestically, which is the market we are most present in, really the choice has always been using the Cinedigm TDS product or in house solution. So currently I think there is no other, to our knowledge, all whether major, mini major, or small independent distributors, use our software other than three of the large studios who have in-house products. Warner Brothers had previously had an i-house software product for managing their distribution and they were looking at the upgrade and reinvestment cycle and concluded that it did not make economic sense for them and turned to us to license our product. We are in the middle of the implementation with them. One of several things, as we were talking about delays, it's just there's is a lot of work being done in the professional services side that we are doing to get them installed which we hope to get done by the end of the year. That on the domestic side for studios is really the choice.

We are expanding internationally where there will be some other competition and then we will be competing with one or two others who have international products, small companies that we think we have a very attractive offering for a studio and in particular those that are already our customers because it's easier -- there is a lot of logic in having a single global system provider and that has been the next leg of our expansion that we are starting to roll out and market to studios going forward.

On the exhibitor side -- actually on the products we are talking about similarly, generally it is effectively in-house or no solution versus using our solution. And the digital conversion that is going on creates a dynamic in which there is need for more automation. In a manual world of film on projectors it was not much harder to sometimes manage things manually in particular if you were a smaller chain. As you get digital projectors which are then connected through our own internal exhibition network to other parts of your point of sales system and other tools, you step back and see greater efficiencies and synergies as you then automate the distribution process and plumbing. And so, we walk in with our solution into that environment to say whether what you put together in house doesn't scale as easily to the new digital world and the investment you'd make to do that probably is more than working with us as a software partner or you haven't made that investment and it is now time because there are real synergies and efficiencies for doing so.

Perfect. Thank you, guys.

Thanks, Eric.

Thanks, Eric.

Thank you. Our next question is from Allen Portelli. Your line is open.

Hi, can everyone hear me?

We can hear you, Allen.

Okay. Adam knows me. Chris, I'm glad you are onboard.

Thank you.

Without a doubt, everyone on this call, including management's, number one goal is to increase shareholder value.

Absolutely, correct.

And in today's environment investors are looking for less risky investments and want to invest in companies that have positive GAAP earnings, after tax earnings, not EBITDA, and lower debt. So my question is, with all of these initiatives you guys have going, when are you planning to start showing positive after tax earnings and what plans do you have in the future that is going to reduce the significant debt on your balance sheet because both of those factors will have a significant impact on increasing shareholder value? Do you have -- how long were you going to still have after tax losses? Through 2013? Through two thousand whatever?I know these are projections but I know you do them.

Allen, it's Adam. We obviously can't give that kind of forward-looking projection or guidance and we are not going to do that. I think that you are absolutely right that one of the complexities of this business is the optics that are caused by our non recourse debt and the associated interest expense and depreciation, which why we highlight and focus on EBITDA which tries to at least move aside from the GAAP related confusion from the consolidation of all the non recourse elements. Over the next 24 months to 36 months with nothing else -- if we did nothing else, and as you can get a sense, Chris and I are not doing nothing else every day here, that debt pays down significantly from the free cash flows of the Phase One deployment, in the low to mid $30 million every year. And that is what one sees in our Phase One debt balance which will start to just shift the income statement and balance sheet naturally. As we build our software business and our content business, which are both high margin businesses, we expect that to further accelerate everything we are working on. So that is part of the goal in building the business as we are, I think it will shift the perception and the reality of the balance sheet and the income statement but that doesn't happen overnight and that is part of what we are hard at work in doing.

Okay. The feature and trailer delivery business, was that an unprofitable business? And when you sell it or whatever you are doing with Technicolor, is that going to produce cash that could be used to pay down debt?

It is -- as I mentioned in my comments that the last quarter that business was an EBITDA loss for us and so yes, we believe it will be accretive. We sold -- and the asset sale transaction and software partnership we have created with Technicolor, it will produce for us some value, but not significant value, as you wouldn't expect for that business to do but it is certainly an accretive financial transaction and will add for us more resources to focus on our software and content businesses where we think we can grow significant value.

It was unprofitable in the last quarter. The other point that I made in my remarks was, as a non core business, it was also a business that took up a large amount of management time and it was very capital intensive, buying hard drives, and those were additional reasons beyond the financial performance parameter that we really felt this was the right deal. In addition we got deals back as I said that augmented and enhanced both our software business, and we did a strategic design partnership with Technicolor in our content business. We think it was a win-win for us not just in terms of the sale side but also the deals that we were able to cut that are going to provide go-forward profits for us.

I think it was you, Chris, that said when you did this deal Technicolor became a partner rather than a competitor.

That is absolutely right and that is very important because as you know they are the leading company in that business. They have got a worldwide global footprint and we think as their partner it will really help us advance the ball in terms of our strategies in both the software side and content side around the globe.

What you guys are trying to do is get more content and distribute it digitally and get people, get more customers in these movie theaters on Monday through Thursday and maybe even a little more on Saturdays and Sundays?

Absolutely right. I mean again, capacity utilization in theaters is extraordinarily low on an annual basis and particularly Monday through Thursday. The digital platform enables us basically to provide other forms of content at potentially higher price points during those days that we know consumers want to see and we think we have come up with a plan to dramatically accelerate our efforts and take advantage of those market dynamics in that segment. And we have had a very strong track record in that space to date but I think you are going to see over the next few months announcements in that space that really help articulate our specific plans to the investment community, to the entertainment community and you are going to see us rapidly roll out our plans in that area.

(Inaudible - multiple speakers) that because --

And we are uniquely well positioned given our relationship between the studios and exhibition and our relationships with content providers to be the leading company in that arena. And we think the opportunity on a global basis for that type of alternative content is in the billions of dollars on an annual basis.

Okay. One last question. On the $6.9 million equity financing where you brought in shareholders at $1.60 a share, is that, correct? Did I read that correctly?

Yes.

I didn't view that positively and the reason I didn't view it positively is I thought we were diluting existing shareholders because, at least in my heart, I hope Cinedigm is worth a lot more than $1.60 a share. Where was my thinking wrong and why did you do it?

As we have talked about, and Chris talked about in his comments, we believe that in building both our content business and our software business, there are a number of M&A opportunities out in the marketplace today that can accelerate our growth and accelerate value creation so effectively we felt that we could raise capital that we could deploy very accretively to the Company's benefit in building those businesses and I think that over the next number of months that is a lot of where we will spend time and focus and I think you will judge ultimately whether we made a wise decision as all of that becomes more clear.

Okay. Just one other thing, Adam. Wouldn't it have been cheaper to borrow the money or couldn't you borrow?

I think that -- think of where you started. You felt that this Company already had a lot of debt. A, and B, that mentally we are looking at building businesses and building businesses is generally an equity component. We may deploy that equity and we may look at acquisitions that have a component where we borrow additional funds with a specific acquisition but we didn't think it would be prudent to borrow money to sit on our balance sheet in hopes of finding the right acquisition and basically pay that negative spread without adding earnings for the specific acquisition.

Okay. That's a good answer. All right. Thank you and I wasn't trying to trip you up. I hope in my heart that you guys are successful as all hell.

Thank you. And we appreciate all those questions.

Thanks, Allen.

Our next question is from Kris Tuttle of Research 2.0. Your line is open.

All right. Thank you. Just a couple of questions. On the software side of the business, which is expanding pretty rapidly, the deals that you guys have announced, can you give us a little feel for what the composition of those deals is? Is there an up front payment and then an ongoing revenue stream that you get from that and kind of how does that break down for us to get a feel for what the revenue flows look like?

They are all different, unfortunately. There is not a simple generalization.

Okay.

Currently the software business that we are in as constructed today is an enterprise software business. A license and maintenance fee business with professional services. All of the things that we have announced generally involve all three of those revenue components. License fees, maintenance fees and professional services. We are, as we talked about in various conversations, the beauty of this business opportunity from our perspective is we are really surrounding the theatrical distribution business on both the studio and exhibition side with that enterprise software which leaves us very well positioned to then build in the next generation of products and services transactional-based software products and services, exchanges and transaction engines as well as data and analytic engines, because out of the digital systems that are deployed our software is capturing, gathering all of the log file data, what goes on with every projector and creating analytical tools on top of that to provide access to that data to our customers on all sides is a big opportunity.

That is kind of where we see over the next 24 to 36 months that this is evolving which is to be a blend of an enterprise managed license and management software business and a recurring revenue softwares and service transaction business. Those are the conversations that we have in our own development activities. That is part of the strategic design partnership we are creating with Technicolor. We are having similar strategic design partner conversations with one or two large studios and one or two large exhibitors to also participate in that endeavor and they are very excited about it. I think that is where you see it moving going forward.

Okay. Okay. Next question is on the -- you talked about the advertising, the local and international advertising being down a little bit. And some of that was due to a shift and some of it was due you to more of a weakness in the market. Based on what you see, I mean your expectation going forward, do you think that that business is going to start to grow or at least be flat in the next few quarters? I don't know what the compares are like year-over-year for that particular segment.

I think that we expect that business over the next couple, few quarters to grow in profitability over the previous year. Whether revenues grow significantly or not, because we have done a number of steps as we have talked in previous calls in terms of shedding unprofitable contracts and unprofitable relationships with various exhibitors. We are adding some modest number of new screens and so I think we see that business being a growing profitable business. At the top line, hard to tell because that is driven by macro economics right now and one thing the last week has shown everybody that is a very uncertain question.

Right.

As you can imagine, in some ways the local advertising market freezes the most quickly in the environments like we are seeing, when you see political infighting, when you see stock markets moving all over the place, so we certainly live through that but I think we have done a number of things to make sure that the business' profitability improves even in that kind of environment.

Okay. And what is the -- what is your estimate on the timing of the closing of the Technicolor transaction?

Should be sometime in September.

September, okay.

I think we announced hopefully early to mid September.

Early September.

Okay. And the last question I will throw out there is based on -- and you guys have some of the experiences with the new content in this past quarter. The YouTube movie. Do you have any take aways there in terms of either did people show up? I mean how did the exhibitors feel about it? There was any notable kind of datapoints that you got back that either encourages you or changes some o f your thinking around that area?

No, I think encouragement is the word. On most everything we have done and we have done 250 events over the last five years with very precise marketing and not really expensive marketing behind it. People show up and we fill up the theaters. Whether it's an independent film, whether it's a music concert or whether it's a sporting event. The challenge in the business going forward is to sort of take that experience and really turn it into an overall business where there is enough money to go around where not only do we end up generating a very nice return on our investment but also the exhibitors and the content providers do the same and we think the key to doing that is to approach the business in three different ways that no one has approached it before.

One is having more programmatic recurring content, almost viewing our network as a big TV set and we are programming it like we are programming television channels, so you would have different types of product recurring and being presented on different nights of the week and that way, against an avid audience, you sort of set up a destination night or afternoon where they always know they can go and they are going to get the type of product that they want to see in a communal environment. We think that is really, really important. That has been a key part of success behind the Metropolitan Opera and also our Kidtoons, which has been successful.

And the second thing that is really, really important is we are looking at content that either has or we can build a robust ancillary market around because right now much of the content that has been presented in theaters as alternative content has been basically just one off events. Again, concerts or sporting events that only have a life in theatrical and then don't have a life downstream in DVD and VOD and foreign sales, et cetera. And we think having content that has that after life is extremely, extremely important to creating a business that makes sense again for all the constituents. In the film business they make more than 100% of the profits and more than twice of the revenues in the downstream markets, not theatrical. We don't have to have that same kind of formula, but there does need to be an ancillary market for this product in order to make it a viable business and we are very focused on trying to isolate categories of content that we know either have or we can build an ancillary business. Independent film obviously is one of them.

Right.

And then the third thing that we think is really, really important to making the whole concept work is to make sure that our exhibitor partners in our network share in the downstream profits in those ancillary markets from any content that debuts on their screens. We think that is very, very important because it aligns incentives for exhibition and for us the distributor and also for the content provider and will get them to do the right thing in theater for that content which will help enhance those ancillary values. Those three factors that I just mentioned are all kind of our key learning from the last six months and from looking at the events that we have done and others have done and those three attributes are really going to be the lynchpin of the plan that you are going to see we are going to begin to roll out very, very soon and a plan as I said that might include selective M&A opportunities that we are looking at now.

Okay. All right. Well, thanks a lot. Looking forward to the next quarter.

Thank you.

All right, bye bye.

Thank you. The next question is from David Bench of Trinad Capital. Your line is open.

Hi, guys. Can you go over for one minute your capacity? I know that Eric talked about it for a little bit but the capacity for PhaseTwo development, what you see there in terms of your ability to deliver over the coming quarters. And the second question is regarding the software, how many screens are you currently touching with some piece of your software and where do you see that going in 2012?

David, it's Adam. I think the first question, you are asking the capacity for installations in the Phase Two backlog of 2,625 screens?

Correct.

I would say that there really -- there is no realistic monthly limitation on that meaning that all of the vendors, the providers of the projectors and servers have no capacity constraints on what they are manufacturing and there are still more than enough service organizations that have been trained partially by us in that installation process that they can all do that. So what really drives the number of installations we do in any month or quarter are the timing decisions made by an exhibitor of when they want those installations done. We generally have visibility, several -- two, three months in advance that can shift for lots of reasons but I think as you think about that what we need to install of our backlog and the additional exhibitors we expect to keep announcing signings over the months ahead is the kind of end of 2012 deadline approaches, there will be no sort of constraint other than what the exhibitor wants the timing to be.

Great. Okay. Because I -- based on the numbers you are putting out there and assuming the pipeline grows you are never going to have a -- until the end of 2012, you are not going to have a quarter that is smaller than the number of installs this quarter.

I wouldn't say never because I mean we could have a quarter where the exhibitors just decide not to do anything for some reason or another en masse and we have double the next quarter. I mean that is what I'm saying there is no -- I would think that we -- that it should be relatively stable to up from where we are, or within reason. But I don't control that timing and when we look out over the next few months we see what exhibitors are planning but could there be a big slowdown because it is a busy holiday season and you don't see a lot of installations in November and December and then it ramps up huge in January and February, it could. Those are things that we don't control but there is no reason to --

You are correct, we have a huge backlog and we are very bullish on the outlook for installations over the next couple of quarters.

Great. And then on the exhibitor side, on the software side, can you go through that?

Sure, basically every screen that we are servicing is installed with our TCC or iPod-like software. So of the -- we've got over 6,000 screens installed on our way to -- of the 9,400 effective that we have signed and are in the process of installing they will all have our TCC software. And as we've said, we expect to end up with signing up certainly another 1,000, 2,000, 3,000 screens before the end of the period of the VPF agreements all with our TCC software. We license that software internationally. It is on 100 or 200 screens in Ireland. We are close with an interesting transaction in Australia. We'll have pilots going on in all the Latin American countries so we will ultimately see more screens around the world using that TCC software.

The other extreme you can say, AMC licensed that EMS product to help manage their box office. A different product but on the metric you are talking about that is four or five thousand screens whatever AMC's total is now that is now a software customer. We will keep doing that as move different products around our customer base and around the world.

Part of the opportunity is to sell in that enterprise -- that EMS product to AMC licensed and something that we call our enterprise product which is sort of like iTunes on top the iPod that allows an exhibitor to program and manage their entire circuit from a central location and gather more data themselves about how their circuit is being managed, to better manage themselves. Those are the cross sale opportunities into that customer base that we were just outlining. And that is part of why we see a lot of opportunity in software because we are getting a lot of questions and demand for more and more of the technology as an exhibitor becomes digital and then they start thinking about new ways to get greater efficiency, lower their own expenses and be more efficient in managing their circuit. So that is kind of the opportunity that we are mining, and are adding sales resources within our organization -- adding and/or redeploying sales resources within our organization to go after that.

How far off are you from the analytical tools that you mentioned on the call, almost being a mini Nielsen type of thing or Rentrack.

That is our product development road map over the next 24 months. So it is hard for me to have a specific answer because there are pieces that we are constructing, pieces of them that we have it is then productizing and getting enough flow in as the digital conversion gets completed. There are a lot of moving pieces. But I think when we look at the growth opportunity over software we think step one over the next 12 to 24 months is cross selling our existing products and services into our customer base and selling them internationally to the digital conversions that are anywhere from one to three years behind what is going on in North America. Step two, over the next 24 to 36 months is that next generation of products and services that we are building and rolling out and it is not a black hole where three years from now you have them, it's different things you roll out over the next couple few years to build that compete suite.

Yes, and what is going to help us develop that whole next generation of tools are these strategic design partnerships that we talked about. We just are in the process of signing one with Technicolor as I mentioned. We hope to do one with a major studio and one with a major exhibitor as well and utilize their resources and their footprint to help develop that whole new set of tools which will be Phase Two of our growth in the software business.

Excellent. So you taking an expert from each of the silos and you are working with them.

Correct.

Great. Thanks a lot.

Thanks, David.

Thank you, David.

Thank you. There are no further questions in the queue. I would like to turn the conference over to management for any closing remarks.

I think I did the closing remarks. We thank you all for your interest, support and your questions and we will talk to you all soon. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. And have a wonderful day.