Cineverse Corp (CNVS) 2012 Q4 法說會逐字稿

Good afternoon, everyone, and welcome to Cinedigm's full year and fourth quarter 2012 earnings conference call. With us today are the Company's Chairman and Chief Executive Officer, Chris McGurk; and Chief Operating Officer and CFO, Adam Mizel. Before I hand the call over to Management, please note that on this call certain information presented contains forward-looking statements. These statements are based on Management's current expectations, and are subject to risks, uncertainties, and assumptions. Potential risks and uncertainties that could cause the Company's business and financial results to differ materially from these forward-looking statements are described in the Company's periodic reports filed with the SEC from time to time. All information discussed in this call is as of today, June 14, 2012, and Cinedigm does not intend, and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented in this call represents non-GAAP financial measures. The Company's earnings release, which was issued this afternoon and is available on the Company's website, presents reconciliations to the appropriate GAAP measures, and an explanation of why the Company believes such non-GAAP financial measures are useful to investors. Now, I would like to turn the conference over to Chris McGurk, Chairman and Chief Executive Officer of Cinedigm. Sir?

Thank you, and thanks, everyone, for joining us for Cinedigm's full year and fourth quarter fiscal 2012 conference call. I couldn't be more pleased with the operational, strategic, and financial accomplishments we achieved in fiscal 2012. This year marked a strategic repositioning of the Company, where we focused on our core digital cinema servicing software and content distribution units, sold two non-core divisions, and embarked on a comprehensive review of home entertainment distribution companies, which resulted in our acquisition of New Video, the world's largest digital aggregator of independent content in April, subsequent to fiscal year end. Just as importantly, we accomplished these strategic initiatives while delivering record fiscal year revenue and EBITDA growth. This performance exceeded our internal budgeted expectations for the full year. Fiscal 2012 was a year of transformation, and fiscal 2013 will be a year of investment and growth. As we will discuss on this call, we are moving aggressively to build upon our leading market position, and we will continue to make the investments necessary to drive strong shareholder returns in fiscal 2013 and beyond.

Later in the call, Adam will discuss the fourth quarter and full year results, walk you through the economic model behind our content distribution release strategy, and discuss annual guidance for fiscal 2013. But first, I will briefly review our fiscal year 2012 results. Revenues for fiscal 2012 were $76.6 million, a 31% increase over the prior-year time period. Consolidated adjusted EBITDA from continuing operations for fiscal 2012 was $58 million, an increase of 26.7% year over year. Adjusted EBITDA, excluding deployment subsidiaries, was $5.7 million, an increase of 534% from the previous year. In fact, over the last 30 months, non-deployment EBITDA has seen a positive swing of almost $14 million. Clearly, by all accounts, fiscal 2012 was an important year for Cinedigm, as we transformed our operations, set records for all of our key financial performance measures, and exceeded our budget for the full year.

Since I joined the Company in January 2011, Cinedigm has undergone a significant transition. We have turned a complicated Company that was spreading its resources across to five businesses into a focused organization that is now the leader in each of its three businesses. We are number one in exhibitor deployments and deployment servicing. We are number one in software for exhibitors and distributors. And with the acquisition of New Video, we are now the number one digital distributor and aggregator of independent content in the world. Our customers and the investment community now have a much better understanding of Cinedigm's businesses and where we are headed. We will continue to lead the expansion of the global Digital Cinema platform, provide our customers with innovative transactional data and analytical software tools, as well as distribute high quality independent film and programmatic alternative content across all screens and platforms. We also continue to make selective changes to our Management team, including new talent in key positions, like our recent hiring of a Head of Global Software Sales, as we continue to raise the performance bar for the Company.

Now, let's discuss our three core divisions in more depth, starting with our digital deployment and servicing business. This past fiscal year was a record across the board, as we signed license agreements for 2,811 screens, and installed 3,419 screens during the fiscal year. As a result, we ended fiscal 2012 with 10,466 total screens under agreement, and 9,342 total screens installed across 206 exhibitors. These numbers have further grown as we head towards the studio-imposed deadline to complete installations that access the VPF program. Earlier today, we announced the signing of Hollywood Theaters, bringing our total signed license agreements to 10,877 screens.

On the software front, fiscal 2012 was also a time of significant growth and accomplishment. Revenues in the software group grew 110% year over year, as we added numerous new software customers with a number of key players, both domestically and internationally, including Warner Brothers, Open Road, AMC, Bharti-Airtel, and Technicolor. We also continued our international expansion into Europe, with a transaction with DCL in Ireland, and in partnership with our Digital Cinema servicing group, we moved into Australia, New Zealand, and Brazil. Next week, I head to CineEurope in Barcelona with our new Head of Global Software Sales to continue our aggressive international push. We have a robust sales pipeline, and expect to announce several new customers in the months ahead.

Now, I will turn to our content distribution business. In the last year, Cinedigm has released 12 independent films, 12 family offerings via our Kidtoons program, and several special event releases, including Life in a Day, a Ridley Scott production with National Geographic, Google, and Youtube; a one night special event of the documentary No Room for Rock Stars, a weekend screening event for the newest Pokemon movie, and groundbreaking live 3-D events with both the Foo Fighters and the UFC. Most significantly, in April, we announced the acquisition of New Video, the largest aggregator of independent digital content in the world, and a leading distributor to the home and mobile platforms. Cinedigm's acquisition of New Video creates a new, full service, end-to-end digital studio, enabling the Company to acquire and distribute independent films and specialty content both theatrically and via all key digital, mobile, and home media platforms. With this accretive New Video acquisition, we have clearly jump-started our plans in this high growth area of content acquisition and distribution, positioning us squarely in the middle of the multi-billion dollar independent film and alternative content markets. This acquisition builds upon the strategic partnership formed this January between Cinedigm and New Video, which allowed us a great opportunity to date before marriage. So through this joint venture, we already acquired two award winning films at Sundance and South By Southwest; The Invisible War and Citadel, which are planned for release in June and October, respectively.

And in April, we announced the acquisition of two more projects, the highly regarded independent film, In Our Nature, as well as 22 Bullets, a Luc Besson, Jean Reno thriller. And we have several more film and library properties in our acquisition pipeline. The success of these joint efforts and our integration process to date have clearly reinforced our belief that New Video was the right acquisition for us at the right time and at the right price. Now, with New Video as part of our Company, we anticipate ultimately distributing one to two independent film releases per month, as well as rolling out multiple alternative content in-theater channels over the next 18 months that will bring regular recurring programs to theaters to fill seats during underutilized days of the week. Our objective is to fill theater seats by precisely aligning targeted content with avid audiences who want to enjoy programming in a communal setting, and then leverage the awareness and publicity that only a theatrical release can bring to distribute that content on the consumer's preferred home and-or mobile viewing device, be it an iPad, a mobile phone, or a TV.

The New Video acquisition gives us that complete distribution capability, and the full ability to monetize content by generating fees and profits across the entire distribution value chain. Overall, we believe that our leadership position in each of our digital businesses will enable us to generate $40 million to $50 million in non-deployment EBITDA, versus $5.7 million in fiscal 2012, over the next three to five years. In fiscal 2013, we expect to deliver solid revenue and EBITDA growth, but have made the conscious decision to invest a portion of our growth in the building of our content library and content distribution rights, as well as in our software business. This foundation building will set us up for an even stronger fiscal 2014 and beyond, as we fully monetize these investments. To support our growth plans and working capital requirements in the content distribution and software businesses, we raised $10.2 million in equity capital in April simultaneous with the New Video acquisition. We are now well capitalized to execute on our plans, and do not foresee any need for additional capital to support our existing business. And with that, I will turn the call over to Adam Mizel, our Chief Operating Officer and CFO, to further discuss our financials for the quarter and year.

Thank you, Chris. As Chris mentioned earlier, we experienced a record fiscal 2012. As we have discussed previously, we completed the sale of Unique Screen Media -- our pre-show advertising subsidiary -- in Q2, and the DMS asset sale in Q3, so our current and historical results have been restated in accordance with GAAP for simplicity and consistency to reflect the movement of the historical results of USM and DMS to discontinued operations. Fiscal 2012 was marked by significant growth, with total revenues increasing 31% to $76.6 million, and non-deployment revenues growing 119% to $18.6 million. Similarly, EBITDA improved significantly, with total EBITDA increasing 26.7% to $58 million, and non-deployment EBITDA increasing 534% to $5.7 million. Importantly, we exceeded our internal budgeted financial performance expectations for the full-year.

Q4 2012 was a solid quarter, as we continued to experience growth across our core units, including 597 screens installations. Total revenues grew 15.2% to $17.7 million, and the non-deployment revenues declined at 1.6% to $3.5 million. Total EBITDA also improved 9.7% to $13.2 million, while non-deployment EBITDA declined to $215,000 from $1.2 million previously. Is decline was primarily due to unexpected delays in software revenue recognition and deployments with three customers; a major studio, a major exhibitor, and one of our international exhibitor customers. Each customer, for various reasons, pushed product acceptance and deployment into our first and second quarters of fiscal 2013. This timing delay represented approximately $1.4 million of license fee revenues moved out of the fourth quarter.

In addition, as Chris mentioned earlier, we have a robust software sales pipeline, driven by our new Global Head of Sales, who began in April. We expect several new signings in the months ahead. The fourth quarter 2012 net income was also impacted by the final restructuring charge of $0.4 million related to the 2011 restructuring plan announced in Q3, and M&A costs of $0.6 million from the New Video acquisition. An additional $1.1 million of New Video acquisition costs were recognized in April with the closing of the transaction, and those will impact the first quarter 2013. Now, let's discuss each of our segments in greater detail.

First, we will discuss our asset-heavy Phase I and Phase II deployment segments, which include the VPF revenues, expenses, EBITDA, Digital Cinema assets, and non-recourse debt associated with the corresponding deployments. Phase I VPF revenues increased $1.3 million in the quarter to $10.7 million and $1.1 million for the fiscal year to $44.6 million, respectively. We continue to see increases in screen terms, with additional titles, often smaller releases by our newer distributors, as well as wider release patterns by the major studios on intent poll movies. We continue to earn our recurring Phase I service fees of 5% of the total VPF revenues, and expect the units performance to remain consistent with recent results.

Phase II deployment revenues were $3.5 million for the fourth quarter and $13.3 million for the fiscal year, representing increases of 43.1% and 106%, respectively. This revenue growth was driven by our continued ramp-up in Cinedigm finance installations, in which we consolidate the full VPF revenues, assets, and non-recourse debt of those installations. We had 1,815 Cinedigm finance screens active at March 2012 in Phase II, versus 759 at March 2011. 973 of these screens were financed non-recourse KBC and consolidated in our financial statements, and 89 were financed through our up to $100.5 million, non-recourse CDF 2 facility. This facility is not consolidated into our financials, and we account for the results similar to our exhibitor-buyer customers, into which we adjust the asset servicer and receiving recurring service fees. The total number of deployed Phase II screens installed was 5,609 at March 31, and we expect to install an additional 600 to 630 screens by the end of this June. All of these screens generate recurring revenues for our digital cinema services unit in both up-front license fees and recurring maintenance fees for our software division.

Our services segment, which includes the previously mentioned digital cinema services unit and our software unit, supports our Phase I and Phase II deployments, our exhibitor-buyer customers, and other third parties. We experienced growth of 13.9% of revenues in the quarter, including inter-Company fees from our deployment subsidiaries, to $4.4 million of revenues, and 87.3% growth in revenues through the fiscal year to $21.9 million. Our digital cinema servicing unit has seen fiscal year revenues jump 76% to $13.2 million from $7.5 million, in parallel to the rapid ramp-up in digital cinema installations, as we installed 3,419 systems this current fiscal year. Our software unit revenue grew 110% in fiscal 2012 to almost $9 million, from $4.3 million last year, and has contributed EBITDA in fiscal 2012 of over $3.3 million, even as we invest in new product growth. The software unit continues to experience strong growth from our accelerating Phase II deployments, which generate license and recurring maintenance fees for our Theatre 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 EMS software products to exhibitors, and have built a substantial pipeline that we expect to come to fruition in these areas.

This was the final quarter for CEG, our content distribution unit as a theatrical-only distribution entity, as our New Video acquisition will transform this unit going forward. This segment produced $144,000 of revenue during the quarter, compared to $453,000 last year, as all of our efforts were focused on acquiring New Video this quarter. CEG produced $1.6 million of revenues for the year, versus $1.1 million last year. In total, and similar to last year, the unit lost in excess of $2.5 million of EBITDA for the full fiscal year, as the unit lacked the scale and the ancillary revenue distribution capabilities to earn strong results. New Video addresses this issue, as it earned well $12.7 million of revenues, $2.7 million of pro forma adjusted EBITDA in calendar year 2011. We expect improvements in CEG results going forward as a result of the New Video acquisition, although our strong top line and cash earnings growth in this unit will not immediately all become GAAP earnings, due to the J Curve in GAAP expense recognition.

Let's turn to the slides that are posted on our website to illustrate the economics of our movie releasing business in more detail. First, Cinedigm's independent film strategy is to acquire the long-term distribution rights, typically 7 to 15 years, in all mediums -- theatrical, digital, video-on-demand, DVD, Blu-ray, premium television, et cetera -- to finish films for a modest up-front advancory guarantee, typically from $0 to $500,000, and then to launch an appropriately sized theatrical release with an up-front marketing investment of $200,000 to $500,000, typically. The example we will review later on slide 4 assumes an average total up-front cash investment of approximately $500,000 per title in advance guarantee to the producer and-or theatrical marketing spend. We use this theatrical release to enhance the marketing awareness and the ultimate value of the movie in all channels. Well placed reviews, social media campaigns, and theatrical trailering and one-sheet placement all build audience awareness and comfort in the quality of the movie, translating into buttered digital, VOD, and DVD revenues.

We will be acquiring and releasing a diverse slate of 20 to 25 movies per year following this model, and we utilize a disciplined acquisition approach to limit our up-front investment to levels we believe have a very low risk to our principal. As a reminder, we are not producing or developing content. Instead, we are acquiring finished movies, and any modest up-front investment is really last-dollar-in, first-dollar-out capital from all revenues. These two factors greatly improve our risk-reward profile. We recover our capital first, and we also earn a distribution fee, typically 25% to 35% of all revenues, plus a share of up to 20% of all back end profits after our fees and expenses. With this high-volume low risk approach, we quickly build a diversified movie portfolio, and increase the probability of a breakout hit, which we do not count on in our analysis of the business.

Let's move to slide 2 to discuss our process for acquiring indie films. First, we perform a qualitative analysis, in which we assess key factors like quality -- for instance, story line, editing, production quality -- and what we call marketable elements, including the talent, such as cast and director, the genre, the topic, the audience demographic, to name just a few. This helps to define our revenue potential and ensure marketability. We also follow a rigorous and disciplined quantitative analysis, in which we prepare low, medium, and high case ultimate P&Ls using compatible title performance information from our own database, as well is internal and external data resources to ensure we capture all the relevant data. Like Billy Beane of the Oakland A's, it's a Moneyball approach to our acquisitions. Based on this profitability analysis, we then structure our acquisitions to align incentives and limit our downside. Finally, all titles are reviewed by our Green Light Committee, which includes the CEG Co-Presidents, Steve Savage and Susan Margolin, plus Chris and me.

Now, let's go to slide 3 to discuss risk management. The purchase of New Video, in combination with Cinedigm's theatrical releasing capability, our deep industry relationships, and our strong capital base has created the first end-to-end digital studio. We now have the key assets in place to limit our implementation risk. With our acquisition of New Video, we gained the established, experienced, and proven home entertainment infrastructure of the leading independent digital aggregator. By adding the proven Cinedigm theatrical releasing expertise to this infrastructure, a combination which is greatly valued by talent, we can attract a higher caliber of movie, and significantly increase its value in the ancillary markets. This is critical, given the large, expanding, and still under-served supply of independent films seeking distribution. There are over 700 to 800 titles produced annually, and only 140 to 150 theatrical releases per year.

The financial crisis and the shifting of the major studios to global franchise releases have dramatically reduced the number of players focused on the indie film market. Fortunately, New Video and Cinedigm have numerous pre-existing relationships built on our strong track record with content owners to acquire the cream of this crop. We are filling a vacuum with encouragement and support from all of our partners and customers. New Video has a long standing distribution partnerships with the leading digital aggregators and big-box retailers, and an enormous credibility with the important constituent, as it has pivoted into digital five years ago. This beach front real estate that Cinedigm could not have re-created easily on its own is a critical factor for success.

The New Video acquisition provides additional key sales advantages to us, as well, including; first, given their relationships, we will immediately access more and better shelf space with our retailers at very competitive terms; second, better title placement in digital and VOD stores and resulting marketing support from the stores will lead to higher typical revenues; third, as we just reviewed, our detailed database of actual revenue performance of New Video titles, when supplemented with third-party data, has already allowed us to evaluate expected title performance and make the best possible acquisition and marketing spending decisions -- the Moneyball model we discussed; and finally, our experienced Executive team and staff are poised to execute on the vision. The unique combination of capabilities, existing distribution partnerships, and track record is a key competitive advantage that we believe accelerates our growth at a much lower level of risk than other alternatives.

Next, as slide 4 illustrates, the front loading of marketing cost results in losses being incurred when a title is first released. We refer to this as the J curve. We must record marketing costs in the period incurred, while distribution revenues are recorded in the period the title becomes available; for instance, when the theatrical release date, the video street date, the TV airing data, et cetera. Marketing costs predate the release of a title by anywhere from three to six months in the theatrical and home entertainment windows, and release windows are staggered over time in advance of the recognition of revenue. Our plans to combine traditional theatrical releasing with appropriate day-and-date theatrical and VOD digital releases will, over time, help mitigate this accounting impact. As the below example illustrates, we recognize almost $300,000 of GAAP losses over the first six months of release ahead of revenue recognition on a $500,000 up-front movie investment. That is the J Curve. Ultimately, we expect in a base case to earn $370,000 of distribution fees, plus a return of our $500,000 of capital investment in this example, a simple ROI of 70% in 18 to 24 months.

So let's move to slide 5. As multiple titles are released over time, and we reach our goal of 20 to 25 releases per year, initial losses on newly released titles will be more than offset by recurring revenue of previously released titles. Our capital should be recycled over a six to nine month period, and our profitability builds significantly. With our initial 8 to 10 film releases in fiscal '13, plus digital library acquisitions this year, we are on the wrong side of the J Curve. By next year, with our goal of 18 to 24 releases in fiscal '14, the J Curve will be significantly absorbed and less impactful. We will benefit from the embedded value of the 8 to 10 releases this year, and the similar number of releases in the first half of fiscal '14, with only the latter 2014 releases negatively impacting the GAAP results.

Finally, to help clearly lay out our plans and the GAAP impact of our growth strategy, we will provide annual guidance for fiscal 2013. Quarterly results are not a reliable and predictable metric for Cinedigm, as we build our software and content release-driven businesses. Each quarter can be significantly impacted, like this recent quarter, by software deployment timing and revenue recognition outside of our control, and by the timing of content acquisitions and release dates, as we discussed previously in our review of a movie release example. The seasonality of our business has increased with our New Video acquisition, with the heavy movie release calendar in our fiscal Q3, and the significant holiday purchases of digital and physical DVD home entertainment products. This will skew our EBITDA performance to that quarter.

In total, we expect to produce consolidated GAAP revenues, including our deployment units, of $91 million to $97 million, and consolidated adjusted EBITDA of $57 million to $59 million in fiscal 2013. We expect fiscal 2013 to produce adjusted EBITDA from non-deployment operations of $11.2 million to $12.7 million prior to the $4.5 million to $5 million of GAAP expense impact from our 8 to 10 movie acquisitions and additional library acquisitions, the investment Chris referred to earlier in the call. Net of the GAAP expense impact, we expect to produce reported adjusted EBITDA from non-deployment operations for fiscal 2013 of $6.7 million to $7.7 million. We expect our portfolio of movie distribution rights to produce a strong and accretive ROI, as we previously discussed, going forward. And with that, I will turn the call back over to Chris.

Thanks, Adam. We believe the future for Cinedigm is very exciting. We have already begun to take key steps to bolster our presence in the content distribution space, expand our stable, predictable digital servicing business, and ultimately, generate strong multiple revenue streams to further deleverage our balance sheet, and generate significant profits. Further, in addition to strengthening our business domestically, we will also continue to develop Cinedigm's presence internationally. We've already made strides in Canada, as well as Australia, New Zealand, Brazil, and the UK, and will continue to further expand our presence globally, where there currently exists and even greater base of theatres that have yet to be digitally converted, and can benefit from the services of all of our divisions.

Both domestically and abroad, we believe strongly in the long term potential of our existing businesses, and as we have stressed on these calls before, we opportunistically remain focused on selective, accretive acquisitions that can accelerate our growth plans, or expand our product offerings in the software and content arenas. As a reminder, Management and the Board currently own about 40% of Cinedigm's outstanding equity securities, including options and warrants, so you can be certain that we are all fully aligned with our shareholders interest in each step of this opportunistic assessment process. We thank you for your time and attention today, and look forward to sharing our continued progress on next quarter's call. With that, I will open this up to questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Eric Wold from B. Riley.

Thank you. Good afternoon. A couple questions, one on guidance. I'm glad you guys are starting to give guidance, here. I just want to make sure I understand the two line items, the adjusted EBITDA, and the adjusted EBITDA from non-deployment operations. It looks like the EBITDA, adjusted EBITDA guidance is fairly flat to what was reported last year, where you have a significant ramp in the non-deployment EBITDA. What is going on in your assumptions there with the deployment EBITDA this year versus last year?

Sure, Eric. Basically, in an effort to budget conservatively, as we always do, we assumed in our budget for deployment EBITDA modestly lower screen turns then we are experiencing this year, and we have one, with the recent merger of two studios, that changes the contractual VPF rate of one of the studios. But basically, we were budgeting conservatively in terms of screen turns for the deployment subs. So in essence, what you see is the growth in the non-deployment EBITDA more or less probably offsets the conservative budgeting on the funded EBITDA. Right? That's how you get --

Okay. And besides the contract change, the two studios merging, is there anything you're seeing in the screen turns that would make you think that that is not a conservatism, that is the trend that is happening this year, or is that just taking a conservative stance on initial guidance?

We're seeing nothing in our current performance in screen turns that would make us think that -- the only thing that's really unknown, and part of the conservatism, to be fair is we don't really know whether Lionsgate and Summit will delay any of their releases when they combine their slates. I think that's one of the reasons we wanted to be a little conservative, because they could decide to move one or two releases out of the fiscal year if they spread things out. We haven't heard or seen that, but I think that's probably the biggest reason for us to be a little conservative.

Okay, fair enough. And then on the -- you spend a lot of time on the independent film side. On the alternative content site, what are your plans on that in terms of launching channels? And is that something that is included in the guidance for this fiscal year? Or is that more of a next year contribution?

It is included in our guidance for this year. I think our plan is to try to launch two channels by the end of the fiscal year. It's unlikely we would want to do before the holidays, and so it would have -- again, it would be part of that GAAP investment cost, because it won't produce a lot of offsetting revenues to it in this fiscal year. That's fundamentally what you're seeing in our guidance, is that we are expecting most of our releasing to be done late in the fiscal year, so that you will see the expenses with very little of the revenue this fiscal year. That's fundamentally what we are walking through with people. If we acquire a movie or a piece of alternative content today, it would be hard to imagine it being released in shorter than four to six months from the date of acquisition, when you figure out ramping up your marketing spend and your marketing planning, and getting your booking. And among others, one of the biggest bottlenecks to timing is there's generally at least a four month lead time to really book a release on the digital and VOD platforms.

So even if we could acquire something and get it theatrically sooner, we have to leave enough time to make sure we get the right placement on whether it's iTunes or Time Warner cable, because you certainly don't want to get that wrong. And that's generally -- managing through the cable and the digital infrastructures, and their timing and their processes, it's at least a four month advance. So all of that leaves much of our releasing in the business to be at the very tail end of our fiscal year, and that you have the GAAP accounting, which means we will see expenses but not revenues.

Eric, this is Chris. Just to your point on alternative content. We see multiple alternative content channels in our future. Adam talked about the timing of that. And I think one of the exciting things of the New Video acquisition is, based on their library and their pretty vast customer base. They handle independent content for about 500 different customers, and all of their relationships in the market, particularly a lot of these digital retailers, we probably come up with another 20 ideas for channels, just out of the New Video integration process, and looking at their customer base. And we are currently evaluating about 30 to 40 different ideas, which we are narrowing down to 1 to 5 of the highest potential channels that we want to put at the front of the queue for the launch. But it's exciting that we have that breadth of ideas backed up by an awful lot of content and relationships, and New Video brought a lot of that to the table.

Perfect, thank you both.

Sure.

Our next question comes from the line of [Ron Patz], a Private Investor.

Good afternoon.

Hi, Ron.

I have a couple of questions. You described a particular example with regard to a release. What would a real success -- not a grand slam home run -- what might a real success look like in terms of return?

Sure. I think what we laid out in the example is what would expect a single to be. And that's what we manage our business against. A real success from that, it really depends on the genre and type of title, but I think we could certainly hope to see revenues in total from all media to be 2x to 3x what we laid out in the example, and then clearly we capture 30% of all of those as a distribution fee, and depending on the back end, another 10% to 20% of that. So in a $0.5 million investment, I would say good success could easily, then, instead of being almost $400,000 in fees, could be more like $1.5 million in fees. It's not you get a Paranormal Activity, you get a Saw or Hostile franchise in the horror space, or you get a breakout of an indie film like you can see, and like many have seen, and go on through the long list, where you have massive results. We don't predict that. We don't project that. We are not planning on it. That is a wild card that is unknown. But I think a success in the range of what we're doing can easily be 2x, 3x, 4x what we map out as our typical expected case.

The beauty of the strategy, too, is it's a high-volume, low-risk strategy, low up-front investment strategy, which enables us to go to bat many times, 20 to 25 times a year on the indie film side. And that's the kind of portfolio strategy that really gives you the opportunity to hit those doubles and triples once in a while. And then it lets you go to bat enough that once a while you're going to get the home run. And if it's half or a third of what Paranormal Activity or Saw did, you're talking about tens of millions of in profits on the up-up upside from that single picture.

Have you ever been involved in one of those?

Yes, actually, I have. In a couple of different instances. One example is a little picture that we did at MGM called Barbershop, where the up-front investment -- I won't give specific information -- was very low. And our expectations were that maybe it would do $10 million to $20 million at the box office, and ultimately it did over $100 million worldwide, with very low participations that we had to pay out, and it was probably the highest ROI film that we had at MGM while I was there. Another little movie like Bowling for Columbine was another example of that, which, quote only did $22 million or $23 million at the box office, but it broke out. It was a very low up-front investment, and it was very profitable to the Company. Part of our strategy there was the same thing, go to bat an awful lot with these lower-budget films and acquisitions, don't count on the movies to break out on the upside, but invariably, if you go to bat enough, one or two do.

Given the theatre occupancy that you have described, Monday through Thursday, or the lack of occupancy, do you get the enthusiastic cooperation of the exhibitors?

Absolutely. Demand is not an issue here. The heads of two of the top five theatre chains in America just last month said to me, we need more independent content and alternative content like we need air, so come on, where is it? The demand is there, and they are very cooperative with our ideas for alternative content. And actually, our creative ideas for releasing independent content, because they need to reduce their dependency on the six major studios who currently are supplying them with 95% of their product, and they are looking for creative ways to enhance and grow revenue streams in-theatre.

To a point that Adam was speaking to or explaining with regard to the J Curve. As you go, or as you progress through a period of time, should the recurring revenue that you are generating from software and theatre service fees, should that not be attenuating some of this -- it would attenuate some of this J Curve effect, right?

Sure. Our other businesses will clearly contribute and continue to drive growth. I think that's part of what you even see this year before the J Curve impact, which is driving almost, in our guidance, almost a doubling of EBITDA before we have the investment effectively in the accounting, or impact of that investment. That is because of those other businesses, and the fee generating part of our content distribution business here at New Video. As we do our digital and other home entertainment distributions on a fee-for-service basis, and that is growing significantly, that is driving growth too. But as we are in the steepest part of the ramp-up of the releasing business, the accounting impact the way we've laid out, that's why we felt it was really helpful to give everyone guidance, so we weren't talking around in circles and smoke signals to try to figure that out. I think over the next couple, few years, as we said, we see a lot of growth coming from all of those businesses, and really the next 12 months is where there is the most accounting impact that masks that without us breaking it out the way we have.

You will provide some adjusted numbers as you go forward?

Yes, we'll keep doing our best to make this as clear as possible for people, as we have today. We dumped a lot of information today. I hope people found it helpful, and we are certainly going to be able to, both on this call and afterwards, answer questions as needed. But we are trying to make it very clear what we're doing, and why we are excited about what we're doing.

What will make it clearer is your delivery of good results as you go forward.

Correct.

Always true.

Good luck doing that.

Thank you, Ron.

Thank you, sir. Our next question is from Chris Tuttle from SoundView.

Hi, guys. Thanks for taking my question. I've got, actually, just a couple. First of all, could you talk a little bit about the software business? Operationally, there are few things that slipped. I'm wondering if any of those, since we're creeping up on mid-June, here, have actually closed, and if you could just talk about your outlook for falling into Q1 or Q2.

Yes, basically, the installations of some software in one of our international customers that was supposed to begin in March began at the beginning of June. So that is starting to happen. We've delivered two other software products. We're waiting for product acceptance, and that hopefully happens in June. But it will either happen in June or July. You can't control acceptance of revenue recognition. But they're all at the place where they will get done, or end in the income statement very soon.

Okay. And then I had one fundamental question on the New Video, on the content business. There is an existing, let's call it a tail of there's all the current content that they have, that generated the revenue last year. That content continues to generate revenue as it is used and deployed further at the various outlets, from Netflix to Amazon, et cetera. Is my understanding correct there?

Yes, the library --

Yes, so you're working that existing library, if you didn't do anything new, if you didn't actually go off and get any additional content and all that, what ballpark would that generate on a run rate basis?

I think, as you might recall, when we announced the acquisition of New Video, we talked about how its trailing EBITDA was about $2.7 million, and we estimated that this calendar year, 2012, because we hadn't converted them to fiscal year, would be about $4 million, a little over $4 million of EBITDA. That was them doing nothing but continuing to manage their business the way -- they weren't growing with new acquisitions of distribution rights. They were not in the releasing business model, with more of the capital up front. Part of why they wanted to do a transaction with us is that the way to really jump start the growth and build the value both of the existing library, because of new releases, and the future value was that new release piece. And so that was part of the combination, and effectively, the way GAAP works is we are investing all of that earnings and then some a little bit, because of the nature of what we're doing in buying and building release rights.

But remember, the reason why New Video was so excited about doing the deal with us was the pipeline of new product that we were going to give them, which really enabled and took their distribution business to an entirely higher level. Because having that steady supply of new product gives them more leverage with each one of the digital retailers that they're dealing with, and also gives them the ability, then, to cut better deals, to bring in more library product under their banner, because they are generating higher results. And that, in and of itself, over time is going to lift the base to an even higher level.

Right, I understand what you're saying. Okay. And one other question on the software part of the business. Are there new releases or new products that are basically in the pipeline that you could talk a little bit about, in terms of new modules, or features, or things that you think are potentially pivotal to customers in the software business in the fiscal '13 year?

Yes, as we've talked a little bit about -- I ought to be sort of general, because I don't want to, from a competitive reason, be that clear of what we're rolling out and when. But given the huge data flows that come out of all of the digital cinema projectors, it changes the ability for us to effectively analyze, produce reports and information, that guide revenue and transaction processing decisions for both studios and exhibitors. And so over the balance of the fiscal year, and in sort of the second half of the year, we will be rolling out some of the first of those products and services. And we are starting to have conversations with studios. What's helpful, in particular, is that that translates, even now, into some of our discussions about selling and licensing the existing studio distribution servicing and exhibitor distribution servicing products, because they see the product road map and the vision, and see how that makes sense, and they can leverage all that, and using our existing software only enhances and makes that easier to do. So we get a benefit, we think, in the sale of our existing products, even in advance of rolling out the next set of stuff.

Right. The road map helps drive current sales.

Yes.

And based on what you said, is it fair to say that there will be meaningful releases in, let's say Q2, Q3, versus Q4? Is that reasonable?

I think that the next set of those products, probably more Q3, Q4 than Q2, Q3.

Okay. That's exactly what I was interested in. I think that's good for now, I will yield the floor, and if I have any others I will come back.

Sure, thank you.

Thank you. Our next question is from the line of Russ Silvestri from SKIRITAI Capital.

Hello, Adam. Hi, Chris. Quick question on the three films, the independent films that you have upcoming. How many screens do you expect to show those on? And a follow-up after that.

The first one coming out is called The Invisible War, which is a documentary that won the Audience Award at the Sundance Film Festival, and is getting, right now, great reviews and great buzz. We plan on starting that film out in just a few markets. It's a typical release for a documentary, where you take it out in major markets, and then expand it based on how it does at the box office. The current plan is to get it to about the top 12 markets, and then see where we are at. And then after that, we have a movie called Citadel that we talked about, that is going to go out in October. We are currently in the process of determining our release plan on that title. But you can probably count on it getting to at least the top 10 to 20 major markets domestically, and probably 100 to 200 screens.

Those are the levels that we're talking about. The key is with these titles, screen count isn't as important as getting a quality release on a national footprint in each one of the major markets to generate reviews, publicity, and buzz that you can capitalize on later in the ancillary markets. And if you can do that in a quicker way by compressing windows or going day and date, all the better. So that's the level on those two releases. We've got two other movies. 22 Bullets, which is an action thriller produced by Luc Besson and starring Jean Reno, and we're determining the release pattern on that. It will probably be a five-market release. And then In Our Nature, which is another indie film, will follow a pattern probably similar to Citadel.

My follow-up question is on each of those four films, how many films do you think you would have reviewed or passed on to get to those four films?

An awful lot. Dozens. We are looking at everything that's available in the market right now. And we've got a very, very robust pipeline, but as Adam described, as he went through his section of the remarks, we've got a very disciplined process. And that's going to lead to a lot of films that fall by the wayside that either don't meet our creative standards or our financial standards. We fully intend to stick to the discipline of our plan. The good news is that there is just a robust amount of independent films and other types of content that are available in the marketplace, and the response to our all-digital, end-to-end solution and adding New Video to the mix has been very, very positive. There are just two elements that we need to add to the equation that I think will up our game even further. We're looking to add a Head of Acquisitions, and we've got some very, very strong candidates, and we've felt very, very positive about the caliber of the candidates who have come our way, and also, a Head of Theatrical Marketing, and we're very hopeful that we will be making announcements on both of those positions in the next 30 to 60 days.

Just one last thing, why don't you have an ethnic bias, in terms of delivering films to various ethnicities, whether they are Hispanic, or Filipino, or things along those lines? I was curious why you aren't putting more focus there.

We do. We do have that bias. Because again, what we're looking for are movies that we can release in a very targeted way, and the audience -- who we know exactly what that audience is, and how to get to that audience. For instance, the Jean Reno movie is a French language movie. And that's going to really help us in terms of targeting our marketing for that movie, both theatrically, and in the ancillary markets. But an ethnic strategy, a genre strategy, is very much a part of what we are going to do going forward.

Okay, thank you.

Thanks Russ.

Thank you.

Our next question is from the line of [Cosell Goga], another Private Investor.

Hi, thanks for to my question. I had a couple questions regarding first the guidance. If you back out 2012, the deployment EBITDA works roughly to $52 million, and going forward, you have about $4 million or so from New Video. And your overall guidance says you're going to do roughly around $12 million in non-deployment EBITDA. I'm just trying to understand. So that means you are assuming that your deployment EBITDA drops to about $46 million or so next year? Is that correct?

No. Because there's a lot -- it's not as -- unfortunately is not as simple as that math, because a chunk of the -- when you're talking about non-deployment EBITDA, which we guided to the $12.7 million before our investments, the $6.7 million to $7.7 million net of the investment in movies. That includes inter-Company -- appropriately, by the way, includes inter-Company service fees. Because if you think about our non-deployment revenues, that includes, one of our customers is our deployment businesses that pay us service fees like the third parties. So you have inter-Companies that cancel out, and so our deployment revenues are expected to be more -- as we said, we've kind of budgeted them going down, our EBITDA, at going down a couple million dollars year on year, as my answer to Eric Wold's question, but not to the degree you described.

So I guess I'm trying to understand, if I were to look at the line item for SG&A in terms of what it was this year, you anticipate, given that revenues are going to be up roughly about $20 million, you anticipate a roughly $15 million to $18 million increase in SG&A for indirect operating costs, roughly?

I'm trying to think of how you're thinking about it. Fundamentally, we are expecting a lot of -- the margin in our growth is being eaten up by that $4.5 million to $5 million of investment in the acquisition of distribution rights and the marketing costs that go with it. So you basically get a skew -- and that will end up in direct operating costs, not SG&A, because you get it skewed for the timing of that. We certainly will also -- and we have not embedded that at all in that $4.5 million to $5 million -- but clearly we have some people and resources that are dedicated to the acquisition and the marketing of those movies that are not getting a return in the short run from a GAAP basis. So there is more SG&A that is effectively being put against a lot bigger volume, with the return on that coming in the ensuing 12 months, when you get the ultimate revenues of those releases.

I understand. That clears up -- I just wondered where, if you have a $20 million increase in revenue, why EBITDA would be roughly flat year over year. And I guess that basically the investment up front to acquire a lot of the releases is eating up the majority it, along with a few million dollars in the deployment business. Is that pretty accurate, you would say?

Yes. That's right.

Yes.

And second of all, I had a question regarding the debt that is basically on the books for $87 million, that ticked up to $87 million. As I look back, if I recall correctly, there is a pre-payment penalty regarding that debt. Starting in August, you can prepay that. You have talked in the past about perhaps exploring ways to refinance that debt? That debt seems just extremely high, both in the cost of even cash, or the PIC function, it seems a lot of that debt is consuming quite a bit of shareholder value. I know you talked about, in the last conference call, that you expect of a lot of the residual cash flow from the Phase I to pay off that debt. But have you guys look at any which way to try to refinance that before you go there? I think there could be can significant savings in the next few years from perhaps cutting the cost of that one way or another, and paying be pre-payment penalty.

We agree that we spend -- we certainly focus on how we maximize our capital structure to the right cost, and that is high on the priority list. Right now we need the Europeans to get themselves stabilized. But we definitely are focused on that as an opportunity.

We always said we needed to get through our year of transformation, and get our operating structure down, and our strategy down, which we have done, and then we would focus on our balance sheet, and we are doing that.

Okay, that's good. Just wondering whether you guys are looking to it, and it sounds like you are. And I know what's going on in Europe is not going to go away tomorrow, one way or another. Just wondering what's going on out there, if there is anything to do, one way or another, in terms of you guys do have a steady stream of highly rated cash flows that are coming in. Is there are way to securitize that, or anything like that going forward? I'm not sure if anything like that is possible, but just trying to think out loud, I guess.

No, you are raising very good issues that we are addressing and exploring.

Okay, great. Thanks for taking my call. I appreciate it.

Thank you.

The next question is a follow-up from the line of Kris Tuttle from SoundView.

Hi, guys. a couple other things. First of all, very simply, I'm embarrassed that I can't find these slides anywhere, Adam, that you are referring to. If you want me to shoot me an e-mail afterwards, that would be great, but I don't see them on the website anywhere. Second question is just on R&D. It's obviously extremely small this quarter. Almost wondering should that be a separate line item, or was this quarter an anomaly? How should we be thinking about that line?

I think at the moment, as we are developing certain new software products, until you have a product, most of what you spend is actually -- you have to expense it versus capitalize it. Some of that may be in R&D, some of that may be in SG&A, because you get into time allocations. And so I don't think -- I think about it in total. So I would have to go back and look as to how I think about R&D versus just total expense. That's probably the best answer I can give you right now, Kris, without looking more in depth later.

Okay. And that my last question is a little bit different. Broadly speaking, the industry has been focused on this kind of second screen interactivity space, most of the discussions are more around, frankly, digital TV, and stuff like that. But I know we've talked about interactivity around content in the cinemas, and what I can see, it's been somewhat controversial, with the CEO of Regal Cinema getting into some hot water, talking about texting in cinemas, and whether or not that's ever going to happen or should be allowed, or how to get to interactivity. Have you picked up or had any insight into this whole realm of having people in the cinema doing interactive things related to the content on the screen in their community, and the internet? Is any of that resonating or changing in your world?

Let me try a couple things, and then, Chris, jump in. I think, interestingly, we've had a lot of conversations on second screen, as we have spent time with our digital aggregator partners -- the Xboxes, and iTunes, and Amazons, and Googles, and others of the world -- as they think about that related to their offerings online, and through the television, et cetera. So it's certainly a real time, and that leads instantly to talk about theatres. So I think there's a lot of thought about it on the technology side of it, the downstream distribution side. I think within exhibition, I think exhibition is trying to understand and wrestle with how the world changes, and I think there are different chains that are probably a little bit more trying experimenting, and there's others that are going to be slower. I think that's hard for us to wade into the middle of that. I think one of our roles can be, with some of the more forward-looking guys, is to try different things. And I think with the partners we already have here at Cinedigm and New Video, we will probably try some of those. But I think it's part of an evolution, and that people are going to test and figure out.

Yes, I was also curious from -- Chris, you are a real Hollywood guy, and I looked at this stuff and thought, maybe it's really this crazy idea to think that people are going to have digital devices and illuminated screens in a film environment, where you are really trying to tell a story and have an experience for the most part. Maybe our thoughts around on that being realistic are just maybe a little bit too technologically oriented, and not thinking enough about film entertainment and the theatre experience.

I don't know whether that's a compliment or not that you're calling me a Hollywood guy, but I will take it as a compliment.

I mean it as a compliment.

Everybody is interested in the upside of this second screen, and we are evaluating it along with everybody else. We think we are a perfect Company, right in the middle between content providers and exhibitors, to be a Company that can help, in a careful way, prove the concept one way or the other, and do it in concert with one or two of the alternate content channels that we are launching. But again, what everybody needs to focus on, again, is what maximizes the audience experience in-theatre for the particular type of content that you are showing up on the big screen. And there are going to be ways to use interactivity to do that. But we've just got to be very careful about who we partner with, and how we explore it, and what content we are doing with it. I don't know if that answers your question, but we are kind of in the middle of it, and I think, as I said before, we are a perfect Company for exhibitors and content providers to test the concept with.

Okay, great, I just wanted to bounce that off you. Thanks very much.

Thank you. Our final question today is a follow-up from the line of Ron Patz.

You Hollywood guys or guy, you have been there for a while now, and talked about $40 million to $50 million of EBITDA as a goal out there three to five years from now. So you've got some experience in what you have seen coming to this Company in making the New Video acquisition, and selling out the content opportunity. So without being specific, do you have a better feeling about achieving your goals than you did a while back? Contextually, what is your feeling now?

I'm feeling very positive. As we mentioned in my remarks, in this process, this year-long process that we went through before we acquired New Video, we looked at every single home entertainment distributor that was available and not owned by a major studio in North America. And it gave us a unique opportunity to see what was working in the marketplace, who was doing the right things, and who, what we thought, were doing the wrong things. And based on that process, we are 120% comfortable that we acquired the right Company, with the right forward-looking strategy that's perfectly complementary to what we're doing. And I'm very confident that we can achieve our goal on the content distribution side now, which is probably $20 million-plus of that $40 million to $50 million, as we've said before, in three to five years. I feel very good that we acquired the right company. We've got the right strategy. We've got the right final pieces in terms of personnel identified in the marketplace to get us going quickly. I feel very confident, Ron.

Just one more thing on that. So qualitatively, would you comment about the software opportunity, and what you see today versus what you thought a year ago?

I think that there are enormous opportunities in that space, as well. I think we've finally got the pieces in place internally to go and take advantage of the market opportunity. I think bringing on board a dedicated Head of Sales for the first time in the Company's history, who wakes up in the morning and goes to sleep at night generating new business is huge for us, and I'm going to be spending, as I said, all next week with him in Barcelona pursuing international software opportunities. I am equally confident that we are going to be able to generate that $20 million-plus in software contribution to EBITDA in that same time frame.

Thank you for your time.

Thank you, Ron.

Thank you, sir. That concludes our question-and-answer session for today. I would like to turn the conference back to Management for any concluding remarks.

This is Chris. I just want to thank everybody. This was a long call, and we went through an awful lot of material. So I want to thank you all for your patience and your continued support. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.