Cineverse Corp (CNVS) 2013 Q3 法說會逐字稿

Good afternoon, everyone. And welcome to Cinedigm's third-quarter 2013 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 on this call is as of today, February 13, 2013. And Cinedigm does not intend, and undertakes no duty to update further events or circumstances.

In addition, certain of the financial information presented in this call represent 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 measure, and an explanation of why the Company believes such non-GAAP financial measures are useful to investors.

And now, I'd like to turn the call over to Chris McGurk, Chairman and Chief Executive Officer of Cinedigm. Chris?

Thank you, operator. And thanks, everyone, for joining us for Cinedigm's third-quarter fiscal 2013 conference call. I am going to first give a brief overview of our current achievements. And then I'll spend the majority of my time today sharing a broad perspective on the industry, and why we believe we are so well-positioned to succeed. After I finish, Adam will review are financial highlights and our guidance for the remainder of the year. Then we will answer any questions you might have. So, let's begin.

After pioneering the digital cinema rollout, and divesting non-core businesses, Cinedigm is now number one in each of its businesses. Built off our strong digital cinema deployment foundation. We are the number one servicer of digital cinema exhibitors, the number one provider of software to exhibitors and movie studios, and the number one digital aggregator and distributor of independent film and alternative content.

Now, I would like to highlight some of our recent achievements in each of these businesses. And let me start with digital cinema deployment. This past quarter we saw the final surge of exhibitors making the move to digital prior to the studio-imposed deployment deadline. Consequently, we installed 835 screens in the quarter. Bringing our total domestic deployment to 11,697 screens across 269 exhibitors. And giving us an unmatched digital theater footprint in North America. We are pleased that our domestic screen signing program is now complete. And we far surpassed our stated goal to deploy more than 10,000 screens.

Additionally, we have developed a program in partnership with the studios and the National Association of Theater Owners to support the drive-in movie theater community, as it also moves from film to digital. We expect that program will result in 100 to 300 additional digital screens by the summer. We're also commencing our international servicing activities with a planned, up to 290 screen installation by Caribbean theaters this quarter, and next. As well as initial installations with our partner, ICAA in Australia and New Zealand. We also expect installations to begin in early fiscal '14 in Brazil, with our local partner, Beyond All. And we're in a number of conversations to further expand into other countries in Latin America and Asia.

Now, to review the highlights from our software business. As we announced earlier this year, Dan Sherlock joined us in January as the new President of the Software Group. Dan is an entertainment software veteran, with previous executive experience as President at baseline.com, and General Manager of movies.com while it was owned by Disney. Through these and other experiences, Dan has deep industry relationships, and a very strong track record of success. We are pleased Dan is now onboard to lead our growth efforts in this business.

On the exhibitor software front, during our last call we announced our expanded software relationships with both Carmike Cinemas and Goodrich Theaters. This quarter we are pleased to add Southern to our roster, for our exhibitor management system and our TCC Enterprise system. On the distributor front, we added LD Entertainment as a licensee for our TDS product. And in January, we added distributor RCR for that product, as well. Internationally, we are seeing equally positive results as we begin software installations in Ireland and the UK. And our software group also expanded its global footprint this quarter with Caribbean Theaters, and a variety of exhibitors in Australia, and New Zealand. With these new customers and a very active sales pipeline, we continue to add to our over 70% share of all studios using our distribution product, and our footprint of over 16,000 exhibitor screens using our theater software solutions.

Now, I'll turn to our content distribution business. As we underscore regularly, Cinedigm is the largest end-to-end distributor of independent digital content across all platforms in the world. And has rapidly become a key player in the multi-billion dollar independent film and alternative content distribution business. During the quarter, our Entertainment group acquired the distribution rights for three films. Subsequent to quarter end, we acquired The English Teacher, starring Julianne Moore and Greg Kinnear, and the Sundance documentary, Narco Cultura. Year-to-date we've acquired 13 films and have released 3 theatrically. And we are very pleased that The Invisible War, our first release as a complete studio, was recently nominated for an Academy Award for best documentary. A tremendous endorsement for this powerful film. And also our release and marketing strategy.

In other theatrical news, we released Citadel and In Our Nature in the third quarter. And both of these titles will be released into the home entertainment markets in the fiscal fourth quarter. We expect to be profitable on these titles, as we benefit from our focused and disciplined acquisition strategy. During the current fiscal quarter, we will release the highly acclaimed documentary, Don't Stop Believing, about the band Journey, as well as the horror film, Come Out and Play. And we planned for a heavy release slate in our first fiscal quarter with three major releases, in April and May.

On the digital distribution front, we saw impressive progress in performance. During the quarter, Cinedigm distributed 2,830 hours of film and TV content to more than 22 digital partners. Cinedigm's content available on digital platforms totaled over 2,130 films and 365 seasons of TV, comprising over 5,732 episodes. We acquired 714 hours of new movies and TV series, including the classic anime franchise, Digimon, 22 new festival films via our Sundance partnership, and the highly rated series Coast Guard Alaska and Coast Guard Florida. With this recently acquired content, the Company's industry-leading library now totals over 19,000 movies and television episodes.

Subsequent to quarter end, we announced a partnership with Rapid Eye Film and Voltage Pictures. In this three-year, five-picture output deal, Marco Weber's new genre label, Rapid Eye Film, will develop, fully finance and produce these films with Cinedigm presiding a US theatrical release and subsequent rollout across on-demand, digital, TV and DVD. All of these deals should keep us on track to produce a strong and positive remainder of this year, as well as provide a stable foundation for growth in fiscal 2014 and beyond.

And I want to point out that, as the leading digital distributor for independent content, we are in a strong position to stay ahead of the curve on new distribution opportunities. Our relationships and track record with the established key distribution platforms creates a unique barrier to entry for us. From the 269 separate digital theatrical exhibitors to in-home digital retailers, including iTunes, Netflix, Amazon, Microsoft and Hulu, to mobile phone applications, to cable and satellite operators. As well as the new emerging platforms we're not able to discuss at this point due to the NDAs. All of these close partners reinforce our leadership status, and foster strong upside potential as we rapidly grow this business.

Now, as I mentioned at the onset of the call, I'd like to spend some time looking at Cinedigm's broader opportunity. In essence, a game-changing digital revolution is sweeping the entire entertainment business. Not just in cinemas but in homes and on mobile devices. And Cinedigm is uniquely well-positioned to capitalize on it. We're in a time that, in important ways, is reminiscent of the two previous extraordinary transformations in the independent content business. The first was during the late '60s and early '70s, when movies like Easy Rider and Five Easy Pieces were being made. Thanks to more portable equipment that allowed films to be shot inexpensively on location, technology was a key enabler of that shift.

And a similar production shift is happening now. Once again due to technology. Red cameras, computer-based editing programs, and other digital technology improvements enable content producers to produce better content, with bigger stars, and in 3D and high-def for much less money than ever before. And all of this content needs innovative digital distribution partners to monetize it in theaters and on all home and mobile platforms.

The second golden era of independent content occurred in the late '80s and '90s. This, too, was enabled by technology. But, in this case, growth wasn't driven by the technology of production, but rather the technology of distribution. On the television front, instead of just three broadcast networks, there were suddenly hundreds of cable channels offering both free and paid services. Additionally, home viewing technology entered the market in a big way. First with VHS and then DVD and Blu-ray. And all of this drove huge demand for high-quality, independent content. And dramatically increased the revenues available to support this content.

This same type of distribution transformation is happening now. And this time on an even bigger scale. We are all aware that theaters have gone digital, creating opportunities for more targeted movie releases and programmatic options. But now, more and more digital retailers and platforms are also emerging in the home and mobile arenas. Creating an arms race for more new content and libraries to fill their pipelines. They want it all -- independent film, TV shows, web-based shows, and more. And just as there are more ways to distribute content, there are more and more rapidly evolving devices to view it on. Hard as it is to believe, the iPhone is just five years old, and the first iPad came out only three years ago. As a result, the market is dramatically expanding. And independent content is more valuable as consumers increase their entertainment spending to watch more content, when they want, where they want it, and how they want it.

So, what does all that mean to the industry in general and Cinedigm's business in particular? First, more quality independent movie and television content with star talent is available at a lower cost than ever before. Second, multiple low-cost digital distribution platforms are in an arms race for a high volume of quality content. And third, aggregators and programmers are in high demand to thoughtfully guide and monetize this pool of content on all existing and emerging platforms.

And Cinedigm's plan to capitalize on this digital revolution is very focused and clear. We will continue the high-volume, high-variety release strategy for independent content that we've already begun. We will continue to grow our 19,000 title library by acquiring distribution rights to high-quality movie and television product demanded by our rapidly expanding digital and VAD partners. We will continue to extend Cinedigm's leadership position and relationships with core theatrical and digital platforms. We will continue to identify and partner with innovative first movers in the digital content revolution, including exhibitors, producers, financiers and new digital platforms. And finally, we will leverage our successful distribution strategies by growing with our customers internationally.

Now, I will turn the call over to Adam Mizel, our Chief Operating Officer and CFO, to discuss our financial results for the quarter.

Thank you, Chris. I will begin with a review of our financial results for the third fiscal quarter which ended on December 31, 2012. And then will discuss our outlook for the balance of fiscal 2013. Please note that all comparisons referenced in my prepared remarks reflect quarterly year-over-year comparisons unless I clarify otherwise.

Revenues for the third quarter of fiscal 2013 were $23.2 million, a 17% increase from $19.8 million in the third quarter a year ago. The increase in revenues is primarily the result of solid performance in Cinedigm's Entertainment Group, including results from the New Video acquisition which closed in April 2012. As well as continued steady results from the Company's recurring revenue digital cinema servicing and software platforms. Digital deployment revenues will continue to remain steady, as we are no longer increasing the deployment footprint. And the resulting consolidation of VPF revenues will track the historical levels going forward.

Non-deployment revenues were up 53% to $9.6 million, including the New Video acquisition. Our content unit revenues alone increased 3% year on year pro forma for New Video results in both periods, as rapid digital revenue growth of over 54% offset a planned reduction in revenues attributed to customers pursuing solely DVD distribution. In the third quarter of fiscal 2013, adjusted EBITDA from continuing operations totaled $14.5 million, an increase from $14.3 million in the year-ago period, as a number of consolidated Cinedigm non-recourse finance screens did not increase significantly year over year. However, excluding Cinedigm's VPF business units, adjusted non-deployment EBITDA was $2.2 million, a strong increase of 58% from the year-ago period. And an increase of 81% from the previous quarter.

This quarter saw in excess of $1 million in software revenues and EBITDA pushed into Q4, as our customers did not complete installations in time for us to achieve revenue recognition. In addition, non-deployment EBITDA in the quarter included $0.4 million of J curve film distribution costs incurred as CEG ramps up its film releasing business, building toward a goal of 20-plus releases per year. These third-quarter distribution costs were incurred in advance of any home entertainment revenues for those film releases, which will be realized in subsequent quarters. As Chris mentioned earlier, we expect these releases to be ultimately profitable.

Consolidated net loss decreased to $1.8 million, or $0.03 per share for the quarter, compared to a consolidated net loss of $10.6 million, or $0.28 per share in the comparable prior year period which included a number of one-time charges related to our asset sales in that quarter and a decrease from a net loss of $2.6 million, or $0.06 per share, in the preceding quarter. As Chris mentioned earlier, we have nearly 12,000 screens installed, and all these screens generate recurring and stable servicing revenues for our digital cinema services unit. As well as upfront license fees and recurring maintenance fees for our software division. And will support solid results the remainder of this fiscal year and beyond.

We continue to aggressively strengthen our balance sheet, as we paid down nearly $38 million of non-recourse debt in the first nine months of fiscal 2013. Total non-recourse debt is now down to $137.3 million from $171 million at the beginning of the fiscal year. And going forward, we expect to continue this significant deleveraging of our balance sheet from our stable deployment cash flows. As we have discussed on previous calls, we also continue to evaluate opportunities to improve our balance sheet and reduce our cost of capital. To that end, Moody's will be issuing shortly a preliminary new rating report, reaffirming our existing debt rating of Ba1, with the potential of an upgrade to an investment grade rating of Baa3 as part of an amendment expansion in size and maturity extension transaction we are exploring for our non-recourse loan facility. Any transaction will be dependent upon market conditions at the time. As we actively consider various financing alternatives, we will, of course, announce a transaction if and when we complete a refinancing of both our non-recourse debt and our recourse mezzanine note.

Year-to-date, Cinedigm has produced total consolidated GAAP revenues of $66.7 million, consolidated EBITDA of $42.1 million, as well as non-deployment EBITDA of $4.3 million. We are reaffirming our annual guidance. In total, we continue to expect consolidated GAAP revenues, including our deployment unit, of $91 million to $97 million, and consolidated adjusted EBITDA of $57 million to $59 million for the fiscal year 2013. We expect to produce a reported adjusted EBITDA from non-deployment operations for fiscal 2013 of $6.7 million to $7.7 million.

As a reminder, quarterly results are not a predictable metric alone for Cinedigm, as we build our software- and content release-driven businesses. Each quarter can be significantly impacted by factors such as software deployment timing and revenue recognition outside our control, by the timing of our content acquisitions, and the corresponding release dates, and by changing movie release dates by the major studios, and the resulting impact on VPF revenues.

Now I'll turn the call back over to Chris.

Thank you, Adam. In summary, we're excited about both the near- and long-term prospects for this business. Perhaps most significant, it was less than two years ago that we laid out a new strategy to transform Cinedigm to take full advantage of the digital distribution revolution that's changing the entire entertainment business. Today, we're doing exactly what we said we were going to do. And are fully executing against that strategic plan in all areas. We have a clear road map for where we are headed. And the entire management team is focused on producing results.

Thank you for your time and attention today. I look forward to sharing our continued progress on next quarter's call. And with that, I'll open this call up to questions.

(Operator Instructions)

Eric Wold, B Riley.

A couple of questions. One, you mentioned that some of the digital deployments were delayed, the revenue recognition delayed in this quarter due to timing. Can you give us a sense of how many deployments have been completed so far this quarter? And if you're done through this quarter, or you're still getting things done now?

Eric, it's Adam. I didn't say that about deployment. I said software revenue recognition for several of our installations and licenses. We completed all of our -- we had a very small number of deployments in January on the basic phase two deployment. We will be doing some drive-ins, some this quarter and then into the summertime as part of the drive-in program. Obviously we also then have, as we described, the Caribbean installations and other international installations.

So, the big issue, as we've seen previously this year, we can't control the installation timing and the acceptance testing that our customers do. And a couple of things we thought would happen will happen. And two of them already happened this quarter, and a couple more, I expect, before the end of the quarter.

Okay. Sorry if I misunderstood. Help me understand that if you -- last quarter's call you had 12,252 screens under digital deployment agreements. And you've done 11,697. What is the delta there, and when do those -- are those lost?

In the 12,252 was the Caribbean screens that will be installed, those 290. Although that's part of our international program. About 300 screens that were signed up for conversion were not able to get their own financing -- exhibitor-buyers. And so they will not get installed. They're not converting, effectively. So, that's how you reconcile those numbers.

Okay. And then, what is the opportunity with the drive-in theater market? I know there's not a ton of screens out there, but are the economics similar to the previous VPF deals?

We think we'll end up installing somewhere between 100 and 300 screens. They are a shorter duration of VPFs than the traditional or the original phase two screens. But from our perspective, as a servicer and a provider of software, they're the same economics to us. They will not likely -- they won't be nine or ten years, they'll be, I forget if it's seven years or six years, or something to that effect.

Okay. And then lastly, moving on to the, more importantly, the indie film side. I know you've had some good success with a number of films that have been released so far. Maybe grade the films that have been out there since last summer, maybe grade how you've monetized those films through all the channels versus your original expectations. And if you believe you're still on track to reach overall profitability in that division maybe around the middle of this year.

Yes, I think we've been very pleased with the films that we've released so far, and the acquisitions that we've made. The acquisitions that we've done. And I think we mentioned I think we've got 13 films we've either released or we have in inventory right now. We've been acquiring in the range that we had targeted when we entered the business last year. We've released just a few films to date, maybe on the smaller end of the spectrum of acquisitions. The first being The Invisible War. As I mentioned, we're very pleased with that one, as the first one out of the chute that we got an Academy Award nomination for best documentary.

But that, we never thought it was going to be a world-beater theatrically. We took it out on a very limited basis. Did less than $100,000 at the box office. But we screened the hell out of it, I think in 400 different locations because of the subject matter. It's about sexual assault in the military. And just got a huge amount of publicity around it.

And then we subsequently took the movie to iTunes and to DVD. We bought the movie basically -- we don't want to get too specific in terms of disclosure because we're subject to confidentiality arrangements with our participants -- but for basically just the marketing commitment, and for an upfront commitment of probably only around $200,000 or $300,000. We've taken in, on iTunes and the digital platforms, and then DVD, more than twice that to date. And we think that we've got an opportunity to generate significantly more revenues on top of that.

So, we're already profitable. It will become much more profitable as we go forward. And if it wins the Academy Award, we're not counting on that but we've been nominated, it will be significantly more profitable.

The other two movies that we released, Citadel, and In Our Nature, are just about to go into the home entertainment market. They're both going to be in the black. And then going forward, we're going to step up with some films that are probably more commercially viable in our first three or four releases, that we have high hopes for that we can generate revenues in the millions, if not multiple millions of dollars on.

That's the Journey documentary that I mentioned, Don't Stop Believing, that comes on March 8, a movie that we acquired at the Toronto Film Festival called Arthur Newman starring Colin Firth and Emily Blunt that I mentioned on our last call, that should be coming out in the spring, a movie called Violet & Daisy that was directed and written by Geoff Fletcher, who wrote Precious, and stars James Gandolfini, and a movie that we just picked up and announced yesterday called The English Teacher #feature with Greg Kinnear and Julianne Moore. Those are movies that we think are going to have a much higher revenue profile than the first three movies that we released. But net-net we feel we're completely on track in the Film business. And the market realities are matching up very closely to the original plan that we set for that business a year ago.

Perfect. And then just a final question, Adam. I know you mentioned Moody's and taking a look at some of the possible restructuring. I know there's a lot of options probably out there. But how would you characterize an optimal scenario in terms of how the debt would look afterwards? And does that involve any of that coming off the balance sheet? Or is it still beyond the balance sheet? And how would that change possible rates or interest?

Sure. We're working on having as much of the debt that we have non-recourse as possible. We can't, given the nature of GAAP accounting, get it off our balance sheet but can certainly make it non-recourse. We certainly expect to be able to meaningfully lower our weighted average cost of capital on our debt facilities. And we're working hard on that. I think the first step in the process we go through with Moody's is we rate and expand the size of the senior facility to go with the junior piece and revamping all of it.

Perfect. Thank you.

Joel Achramowicz, Merriman Capital.

I was interested, Adam, can you perhaps quantify what Eric was talking about, maybe some of the push out of some of the fourth quarter? Can you quantify that, the amount of revenue that might have been booked if they hadn't been pushed out?

As I said in my comments, over $1 million of software revenues that we had expected to recognize in the third quarter pushed into what I think will be the fourth quarter. A couple of those customers have already accepted and gone through either central acceptance, so we will recognize revenue, a couple more of it we hope and expect to be installed by the end of the quarter. But we can't control the pace at which an exhibitor or studio does their testing, their installation and their user acceptance. So that's what we're -- we've delivered everything, it's really out of our hands, in many instances.

I understand. As far as the guidance goes now, $91 million to $97 million, do feel comfortable at this point with the mid point of that range? There's obviously been a little bit of slippage via the consensus here. But at the same time, too, it's still been a solid quarter sequentially and year over year. But do you have a feeling for that, that the mid point is definitely doable of that range?

I think that -- if I break this, there's three pieces. We've given revenue, consolidated revenue, consolidated EBITDA and non- deployment EBITDA. And I think both on the consolidated revenue and the consolidated EBITDA, the low to mid-point of the range is certainly doable. As we discussed last call, there's $2 million of virtual print fee revenues in EBITDA that, given the events in the summer between the Batman release and the Aurora shooting, and the movies that were moved around, and the studios being very careful what they did in July and August, that, you don't make up.

That's one-time things in our VPF business that is not impactful and driver of the long-term value. So, in both of those areas, you can't make up what you can't make up. The calendar is the calendar. In our Non-deployment business, we're making progress with our timing and software. So I certainly think that the middle of our range on our non-deployment EBITDA, if we didn't think that was the case, we would have done something differently.

Great. Were there any signings at all, additional signings for digital screens? Or is that pretty much done?

When we announce, when we sign up a large number of drive-in screens, we'll do some press release on the total number of screens that sign up for drive-ins. We're not going to announce one screen here and there, obviously. We already do a lot of press releases. We don't want to drive everyone that crazy.

And as we do more things on the international side, we'll clearly announce things that we do there. But you won't see the kind of consistent releasing of this exhibitor or that exhibitor because that part of our Business is now at a close. And we will service those screens, very predictable, very steady cash flows going forward.

The new properties that you've put together, you've increased three new important content properties, how have the releases gone with those particular properties? Have you released any of them into the distribution?

I am not sure which ones you're referring to.

Just the new properties that you just talked about adding to the portfolio this quarter.

No, we haven't released them yet. The ones we added were The English Teacher, which -- that's the Julianne Moore, Greg Kinnear movie, which we're trying to settle on the release date now. It will either be this spring or will be in the fall. The movie that we acquired at Sundance is the acclaimed documentary called Narco Cultura. And we're working on setting the release date for that soon.

And, by the way, we've really established ourselves as a go-to company in the documentary business. New Video already had a significant number of docs in their library when we acquired them. And I think now we have the rights to over 900 docs in total. And a vast experience in working with documentary film makers and maximizing the value of those documentaries. And we just got nominated for the best documentary with The Invisible War.

When you add all those things up, we've been noticed in the committee by documentary filmmakers, and we've become sort of a go-to stop. That was one of the reasons why we bought Narco Cultura, how we acquired the Journey doc, Don't Stop Believing. We bought another documentary called Call Me Kuchu, which is going to be released later this year. And that's a whole area of business where we separate ourselves from the rest of the indie herd out there. But I think as I mentioned, three important movies to watch in our release slate going forward, because we think they have a higher revenue profile than the first three releases are, Don't Stop Believing; the Journey doc, which comes out in March; Arthur Newman, which is Colin Firth, Emily Blunt movies, which is going to come out later in the spring; and then this picture The English Teacher with Julianne Moore.

Chris, my final question. Each quarter we expect to hopefully get more feel for the presence and the image of the content group that you're developing with New Media. Do you continue to see progress in having access now to new and more extensive properties than you had before? And your image is much more ostensible in the market in the entertainment market there?

Absolutely. And again, after we bought New Video, and we went in the market, we were in the process of assembling our team as we went along. We hired a head of marketing, a head of acquisitions. And we recently hired a couple months ago a head of theatrical distribution.

Now, with that team in place, the successful release of The Invisible War that really got us noticed in the marketplace, we're getting access to a higher caliber of content and a higher caliber of movie. And I think that's reflected in the recent acquisitions that we've made -- Arthur Newman that I mentioned, The English Teacher, Don't Stop Believing. Having access to high-caliber projects is not our issue at all. Our issue is just being smart about picking them and keeping to the discipline of acquiring them at the right price. And then settling on the most flexible and profitable release plan for each piece of content.

The other way that we've tried to separate ourselves from the herd of independent film companies, and I think I mentioned this on our last call, is we don't have one model for releasing a film. What we plan on doing is putting forth the right releasing model that matches up most profitably with the dynamics of that movie. So for a movie like this Journey documentary, we think it deserves a theatrical release, but because of its rabid fan base with the band Journey and everything, we think that doing a day-and-date VOD release on the property is the right way to go. And we think that gives us the best chance to maximize revenues.

For a movie like Arthur Newman, which is a movie star indie movie, with Colin Firth and Emily Blunt, we think that's a movie that deserves a traditional theatrical release. And we think that theatrical release will really enhance its value in the ancillary markets. And we think this kind of flexible approach, where we don't try to acquire a movie and fit it in all of our cases into one releasing model, really gives us a competitive advantage in the marketplace, as we're out there talking to film makers and agents and producers.

And I think it's stood us in good stead so far.

Great. Thanks much, Chris.

[Chris Pedal], SoundView.

Very nice job with the press release and the content discussion. I think we've nailed that one. I wanted to ask you if you might elaborate a little bit on the software business. Obviously, you brought in a new senior executive, Dan Sherlock. So I'm curious to know what you have planned there in Q4 or the beginning of the next fiscal year, if there are things in the pipeline new release-wise that you could talk a little bit about. Just give us a sense of where you see that division of the Company unfolding in the next three to six months.

Sure. This is Adam. I think we're both excited about the prospects ahead of us. Dan has hit the ground running and doing a terrific job in focusing in on the opportunities that we have. I think that you'll continue to see a lot coming out of our pipeline. Remember, Larry McCourt started running the sales of that unit last April, May. And exhibitors and studios don't move super quickly. And you've seen more and more momentum over the last six months as we signed and announced new transactions. We certainly have a lot more coming. We have a couple of interesting value-added reseller and strategic partnerships that I think will drive some sales of our existing products.

We're also now talking with a number of studios on data and analytical products as they look at how they can better track both features and trailers in light of all the digital systems and digital information that's out there. So, we've been discussing how we develop some things for them that we can then monetize in the marketplace. So, I think all that is happening, and you'll see more and more announcements as we make progress on that front.

Okay. Yes, that whole data area, obviously there's monstrous opportunity there if we could figure out how to do all this stuff better.

Yes, totally agree. I think the caution that we have is, the nice part of our business model is, A, our existing products are selling more rapidly because they are there, and they are easier to understand demand. The data side and the analytical side, we need the studios and the exhibitors to partner with us on what they want to do. And those conversations and some of that development is happening, but they don't move as quickly as you would like or I would like, I assure you.

Okay. All right, got you. Thanks very much, guys.

[Ron Chez]

I have a couple of balance sheet questions, and a couple of operating questions, if you would. First of all, on current assets, liabilities, the significant increase in AR and AP -- would you comment on the nature of that? And DSOs?

Sure. As normal course in our content business, our fiscal third quarter, so the December quarter, and a little bit into the fiscal first quarter, we build up AR and AP because you're distributing and selling a lot of movies in both physical and ancillary markets around the holidays. So, effectively, we build working capital and we add cash for that in the October through February timetable because you have a relatively decent period of time between the revenues and when then you pay your participations to the content right holders in the spring and summer. So that's most of what you're seeing there.

With respect to the payables increase, that's principally money you have to pay to the owners of the content?

Right. So receivables go up because we're selling DVDs in Walmart or Target or wherever it is. Or we're selling rentals on iTunes. Or we have contracts signed with Netflix in which we book -- we don't book the revenues, we book a receivable. We book revenues when the product goes live on the service, whatever it may be. There's a lot of that activity in the third fiscal quarter and the early fourth fiscal quarter. That's the receivable. The payable is, we have to then give the content owner their share of that and we keep our fee out of that. So it's the timing of that going on.

And so you are not concerned about the DSOs? That's not a problem?

It's totally normal course. Totally normal course.

Okay. To the debt, and in this low interest rate environment, your qualitative comment about getting the -- you would care principally about the recourse debt and its refinancing, correct?

Yes.

And so in this low interest rate environment, what are the impediments? Are you making progress towards refinancing the debt?

We would only -- the only refinancing that we will be doing is one that involves our entire debt side of our balance sheet. And so I would rather generally not say anything until we have closed the transaction. But because we are working on both the senior and the mezzanine piece, Moody's has issued -- it's probably on their website now -- a release about the potential rating upgrade on our existing senior piece as we amend it and extend it and expend it. So increasing the senior facility, which, obviously, has a much lower cost. The use of those proceeds would be part of refinancing the recourse debt, which is higher cost.

And the range, what could you look for in terms of the range of basis points that you would save in getting this refinancing done, when and if it gets done?

Ron, I'm going to be coy because it's market condition. There's 100 other things. I think what you can read into the fact that we are even talking about it, is it's probably not that far away, if Moody's is issuing releases. And so, we're informing people that those things are out there because Moody's doesn't want to be the one issuing releases about a Public Company versus a Public Company talking about it.

But I think you can assume that we're actively in it. It can't be that far away. And what we hope to see accomplished, given there's information from a ratings agency. And in this environment, we'd expect to secure significant savings in our weighted average cost of capital, and that is where we sit today.

Okay. As to an operating question, I think that you said that you expect, for the 12 months, $6.7 million to $6.9 million non-deployment EBITDA.

$6.7 million to $7.7 million is the guidance we have out there.

Oh, $6.7 million to $7.7 million.

Yes.

Okay. So now you've talked about three to five years in terms of, what was it, $40 million to $50 million of EBITDA?

Yes.

What is the non-deployment revenue that's going to produce the $6.7 million to $7.7 million for this year, for this fiscal year?

Yes, probably in the mid to upper $30 millions.

So, what is it going to take? Is that relationship going to stay the same? I would assume that it is not. But what is it going to take in revenue to achieve the goal of $40 million to $50 million of EBITDA? And do you think -- is that still what you envision today?

Let me go at -- I'll answer it a slightly different way, but I think gets to the same place. We think that our content business should be a mid 20%s EBITDA margin business. And so we said we think that's a -- in giving our long-run goal $40 million to $50 million of EBITDA, we've generally said that we think the content business can be at least a $20 million EBITDA business. So call that $80 million in revenues at a 25% margin.

And we think that our Software business -- and those are higher-margin businesses -- they tend to be in the 40%, 50% EBITDA margin businesses. And so we think software can also get to a similar $15 million to $20 million revenue scale. And so that tells you, you are going to have a, call it, $40 million revenue business. And our Digital Cinema Servicing business, which we've said is going to be a $6 million to $10 million EBITDA business, it's already, to be honest, above the $6 milliion.

And that's a very high-margin business because it's servicing fees on a lot of screens. So that's a 70% or 80% margin type business. So, when you add all that up, that's going to get you to revenues in the $120 million to $140 million range, and $40 million to $50 million of EBITDA.

And do you believe, just to complete that, do you believe you're still, as you look out that far, do you believe you're on track to be able to do that? Are the ingredients there to be able to do that?

Sure. Remember, we've released three movies this year. Three small movies, as we build up the movie release slate and our experience set. So those movies have contributed very little to our financial performance, with a goal that we're going to be releasing 20 to 25 movies a year.

And we're not talking massive movies, but as we've talked about in the past, we think, talking about, given the very focused and risk-attuned model of releasing, those are movies we think that each year -- we look at movies today that we think are low single-digit millions of revenues, in which we're going to make a 25, let's call it a 25% margin on. If we do 20 or 25 of those, and we've effectively gotten well under $1 million of revenues from movies releases this year, that's a big driver of the scale in our Content business.

Similarly, as we said in our script, our digital aggregation revenues have been growing over 50% a year. That won't last forever because that's part of the shift from physical goods to digital goods. The best significant growth in our Business. And those two factors are driving the growth that we see today, and then we see coming in the future. That's the platform and the foundation that we're building out, as we speak.

That we talked about this year being a year of investment and growth, that's the investment piece of it. The growth will start coming over the ensuing 12, 18 months, as that slate rolls through. So, given that, sure, I don't think there's anything we've learned and seen in our Business that's different, that changes our expectations. We're along the path we're on. I wish it were quicker, but we're building a business, and we're building it hopefully with the foundations for long-term, solid performance.

Do you still regard the competition in the Software business as being inertia? Is there somebody who's come to challenge you with regard to software deployments?

There's no one domestically. The competition is inertia/in-house product. And Internationally, we certainly have a couple of competitors. And as we move more internationally, we bump heads with those people. But we make good progress and we're getting a number of International sales. So I think we still feel good about where we sit there.

And, as we've also said -- and we really didn't talk about in these comments, I think -- in both our Content business and our Software business, we will continue to grow, as we are organically. \We'll also continue to look very thoughtfully at accretive strategic acquisitions, because I think those will exist. We've done one good acquisition to date in the New Video acquisition. We have digested and integrated that well. We will look at things that make sense along the way. There's nothing that we are doing at the moment but we will always be looking.

And one more question about software. And that is, have you seen what you consider to be an appropriate increase in the pipeline?

Yes. I think our pipeline is in pretty good shape.

Should it not be by now significantly improved over where it was six or nine months ago? Or, is that --?

It definitely is significantly improved over where it was six, nine months ago, or had a sale started eight or nine months ago. So, yes, we've done a very good job, and we've got a very significant pipeline.

Okay, thank you.

[Rick Silvestri], [Skrocki].

A real quick question. Mr. Chas asked all the ones I wanted to ask. But what's the headcount today and what was it a year ago?

Oh, gosh, let me think. I don't have the exact headcount number in front of me. I would say it's approximately 150, 155 people today between all of our businesses. A year ago is a hard comparison because the content as we bought New Video, had about 80 people. So let's say a year ago it was then 70-ish, somewhere there. Where we have grown headcount has been predominantly, we've grown it in both software and content. But a lot of that has been tied to the new customers, new revenues we've added. So, when you see our Q, you'll see that corporate expenses and overhead and SG&A, if you back out, which we do in the Q, the impact of the new expenses from acquiring a new business, they're generally flat to down from a year ago in all other expenses.

And then my other question was, as you look at next year with the fewer deployments, should we see any margin -- should they improve sequentially? Is that how we should think about it? Is there going to be much seasonality to the margins?

I think the biggest impact on margins on a quarterly basis will be when we release movies and the P&A expenses associated with those releases, vis-a-vis the revenues kicking in. So, example being, as we said, we have several significant releases planned in the fiscal first quarter. We will then have a lot of expenses for those releases in that quarter, and we'll highlight that, as we do in the J curve. But we expect a lot of the revenues that come from that to come in the ensuing couple of quarters. So you're going to have margins that move around based upon that kind of timing that's driven by releases. And it's why, as we've said a lot, and you hear in my scripts, that quarter to quarter is not the easiest metric for the way our business operates and the growth curve that we're in.

Right. And you're even going to see that, even though once we get to critical mass in our indie releases, and we're at 20 to 25 releases a year, you're not going to see our release pattern being linear where we're picking up two titles per month. Because we're going to avoid the crowded major studio releasing periods of the summer and Christmas.

So, you're going to see, moving around in the release slate to find the right dates, which matches up with this more flexible approach to distribution that I talked about before. And then to find the best competitive environment to release the movie. So, our activities in that space are going to probably compound the volatility that Adam mentioned, even when we're at steady state.

I'll try to always call out, though, the timing-related issues so that you guys can understand it and adjust for it in your own thinking.

So, like this last quarter was $400,000.

Correct.

All right. And the last question I have, just in terms of the software sales, do you sell a perpetual license with maintenance? Or do you guys do some SaaS type of thing where it's monthly recurring revenue?

Both. And I think our customers are beginning to transition more and more to wanting a SaaS model. The studio and exhibition world tends to lag trends in other industries around software. But we're getting a lot of -- we're doing more and more SaaS sales because our customers -- we think it makes more sense for us, and our customers are now more receptive to it. So there's both of those going on.

So, if you're going the SaaS model, your revenues in software should actually shrink a little bit on an annual basis. Or just on a quarter-to-quarter basis, as you sign up more folks, wouldn't they?

Yes, it depends on the mix of licensing and SaaS customers. We have a lot of new customers and new growth going on. So I wouldn't jump to that conclusion, by any stretch. And I think --.

What's the mix today of license versus SaaS?

It is almost all -- 80%, 90% license business to date.

Okay. Are you going to make an active effort to convert these guys to SaaS?

No. I think where we're focused on SaaS products, for instance, is our new TTC enterprise product that sits on top of the basic exhibitor TTC software. That we're selling as a SaaS model. So that new sale is generally predominantly a SaaS model.

So right now, when we think about some of the new data stuff that Chris was asking about earlier, that will be in a SaaS or subscription model. With the studios, the smaller studios have always used our TDF software in an indie direct basis. But most have wanted to continue to license that. We're having one or two interesting conversations with some larger players, as they think about upgrading to a new software package, thinking that they might prefer to go at it from a SaaS basis and a license and maintenance basis. And so we may see that shift a little bit going forward, but that wouldn't impact the existing customer base.

Okay, thank you.

(Operator Instructions)

[Castle Golga], CG Capital.

I had a question regarding the possible debt refinancing. First, can you talk about what there is, what the penalty is for prepaying the mezzanine early? And, second of all, in terms of maturity, you said it would one debt facility. You said that would basically refinance all of your debt. What would be the maturity timeline? And would it be in an amortizing facility, like your current one? Or would it be basically one with a balloon at the end?

I'm not going to really answer the latter one. I don't really want to go into huge detail about things that are in process and not definitive. I don't think it's appropriate. But I would say that, obviously, we would expect, compared to where we sit today, to be increasing the Company's flexibility and extending its maturities. And to your first question on the existing mezzanine debt, the prepayment penalty is 3.75%.

Thank you very much. Appreciate it.

Thank you. I'm showing no further questions in the queue at this time. I'll hand the call back to management for closing remarks.

This is Chris again. And on behalf of Adam and myself, I just want to thank you all for your time and attention. And we look forward to talking to you on our next quarterly call. Thank you all very much.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect. And have a wonderful day.