National Cinemedia Inc (NCMI) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the National CineMedia Inc. first quarter 2007 earnings conference call. Today's call is being recorded. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

Now at this time for opening remarks and introductions, I would like to turn the call over to Ms. Nikki Saks. Please go ahead.

Thank you. Good afternoon. I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. All statements, other than statements of historical fact communicated during this conference call may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the Company's expectations are disclosed in the risk factors contained in the Company's filings with the SEC. All forward-looking statements are expressly qualified in their entirety by such factors.

On our call today is Kurt Hall, Chairman and Chief Executive Officer of National CineMedia, and Gary Ferrera, Chief Financial Officer of National Cinemedia. I would now like to turn the call over to Kurt.

Thanks, Nikki. Good afternoon, everyone. Welcome, and thanks for joining us for our Q1 conference call. Today I'll be providing you with an overview of our -- National Cinemedia's Q1 2007 operating results, and an overview of the progress we are making against some key revenue growth strategies and business development initiatives. Due to the mid quarter completion of our IPO, the first quarter historical financial results are pretty difficult, as you know, and do not fully reflect a full picture of our revenue, EBITDA and earnings. And as such, our call today will be a little bit longer than usual, because we wanted to try to walk everybody through some of the historicals to the pro formas. Gary will get into a more detailed discussion of the historical and pro formas than I will, and after our prepared remarks, we'll have plenty of time for questions.

As we had indicated in our last call, Q1 2007 was a very strong quarter, with total Q1 pro forma revenue and pro forma adjusted EBITDA increasing approximately 51% and 106% respectively over the comparable Q1 2006 pro forma results. You should note that this revenue growth exceeded our previous guidance, due to primarily a stronger than expected March national advertising scatter market, stronger March meetings and events revenue, and higher ticket sales in our FAB and Digital Programming division, primarily related to the Met Opera event. Our quarter over quarter revenue growth was primarily driven by organic growth related to significant increases in national advertising inventory utilization, the addition of the Cinemark screens to our network, and over 120% increase in pro forma CineMeeting and events revenue. In addition, our national advertising CPMs increased 6.8% over the first quarter of 2006. Despite this Q1 CPM increase, we are expecting some scatter market CPM volatility over the next few quarters. As there are only a few number of national contracts per quarter, a single contract can impact the CPM growth quarter to quarter. What's really important to remember is that we are focused on increasing CPMs over the long-term.

As expected, our EBITDA margins continue to expand with our revenue growth. Our overall pro forma Q1 adjusted EBITDA margins increased by nearly 11 percentage points to 41.4%. However, they were somewhat diluted by the growth in our lower margin Meeting and Events business. As we had mentioned during our IP road show, one of our key areas of focus is to increase our national inventory utilization during the low-demand months, including those in Q1. I was very happy with our Q1 progress, as we successfully expanded our client base in several categories, including technology, food, personal care and finance. The movie studio category also continued to expand. We also benefited from higher than expected theater attendance, as we were able to make good a significant amount of deferred revenue that existed at year-end 2006.

With the Century deployment completed at the end of February and the pending addition of Goodrich Quality theaters in the third quarter, we continue to make great progress expanding our network reach and concentration in the top 10 and top 25 markets. This will continue to be an important factor in our effort to increase our market share of overall media expenditures, and increase our CPMs. As of the end of April, we had approximately 14,000 total network screens, of which approximately 12,200 screens were part of our Digital Content network. Loews, of course, will be an important addition to our network in June 2008, as it will increase our market share of attendance in the top 10 markets to approximately 72%, and top 25 markets to 69%. We also expect to benefit from the expansion of the founding member circuits through new theater construction, and acquisitions of regional circuits as they come to the market.

In addition to the growth of our founding member circuits, we have also begun to more aggressively pursue new network affiliates in an effort to further strengthen our network and value proposition to our advertisers, relative to our competitors. As we announced in March, we have signed an agreement to add 269 screens operated by Goodrich later this year, and are pursuing potential opportunities with several other regional theater circuits that we have been told are coming out of contract with Screenvision. Our relationship with network affiliates is very much a strategic partnership with both benefit-- with benefits for both sides. We are able to build a stronger, more efficient and effective network at attractive returns on invested capital, while providing the network affiliate with financial upside associated with higher CPMs, and access to alternative programming, and most importantly, we provide a higher quality preshow for the movie patron.

Moving to the remainder of the year, we continue to be optimistic about the year as a whole. With 90 seconds of first look inventory already contracted by our founding members to fulfill their beverage agreement, and commitments from our content and other strategic partners as part of multiyear agreements and other clients who have contracted to units in advance. We have commitments of approximately 75% to 80% of our national advertising target for Q2 through Q4 2007. Certain of these contracts do have options to cancel and/or change the placement up to 90 to 120 days in advance, prior to the play date, and are subject to fulfilling impression guarantees. Also consistent with TV advertising contracts, our national advertising contract values do not increase, should we over-deliver the contracted number of impressions. You should remember, while a strong film release schedule can incrementally affect our local advertising revenue, in general, national advertisers plan media spending around their product launches or other marketing priorities, not around film release schedules. Should the Q2 slate fulfill current -- film slate fulfill current expectations, we could over-deliver certain of our national contracts, especially in May.

While we will continue to compete for certain contracts in the TV scatter market with Screenvision, given the high level of existing advertising commitments already on our books, we have much more flexibility to pass on deals with unacceptably low CPM, especially in the high-demand summer and holiday months. In fact, we have already passed on certain Q2 and Q3 contracts with unacceptable CPMs. With our digital distribution capabilities continuing to expand, and concentrations in the larger DMAs increasing, especially in 2008, we are being patient with CPMs, as we do not want to undermine our rate card, just when our network is becoming more valuable to advertisers. In fact, more and more clients are beginning to establish an advertising relationship with us in order to set a CPM baseline as they look ahead to 2008 and 2009, when our coverage of the larger markets will increase, and inventory utilizations are expected to tighten.

On the local side, our advertising business is off to a very good Q2 start. The reason for the higher local demand is pretty simple; patrons are generally in their seat earlier for a blockbuster film, and thus the local ads that are further from show time are seen by a larger number of people. As local advertising is sold on screen per week basis, the more people that see the ad, the better the value for the client. As mentioned, our Q1 2007 results were also positively impacted by better than expected growth in our Meetings and Events business. While we had growth across all categories, the big surprise of the quarter was the attendance for the New York Metropolitan Opera event. These events are a great example of how non-traditional content can be successfully distributed in theaters. In addition to being profitable for us, these events also attract a whole new clientele and provide an increase in concession sales for the theater operator. They have also created significant local and national PR for the opera franchise. You should note that due to high seat utilization, we have begun to more aggressively -- we have begun to more aggressively, with our founding members and network affiliates, to expand our cinema broadcast network to meet this demand.

Last weekend, we had our final live event of this year's season that was distributed to over 113 locations versus the 56 locations for the first event at the beginning of Q1, and attendance was approximately 150,000 for the whole series. We've just completed a marketing event for the rerelease of Dirty Dancing, as well. This was the 25th anniversary of the film, and the marketing event was to commemorate tha event. Attendance for the two-night event, which was last night and the night before, was over 80,000, well exceeding our expectations. Given the success of the Metropolitan Opera event, we are currently negotiating a contract with the Met for the 2008 season that is expected to include eight live performances. All theaters that are part of our advertising network that have made the nominal investment in our live broadcast and encryption technology will be included. While the Meeting and Events business is currently only a small part of our overall revenue, it is providing incremental EBITDA growth with very low capital expenditure requirement, and is becoming an important consideration when circuits join our network as a network affiliate.

We have also been working on our initiative to expand our advertising reach beyond cinemas. While we do not yet have any specific deal to announce, we have studied several of the new emerging out of home digital networks, including ones in convenience stores that sell gas, health clubs, quick serve restaurants, department stores and office buildings. Our main focus has been on those networks that have a favorable relationship between deployment costs and CPMs, and in environments that produce targeted high-quality advertising impression. We are also focused on businesses where we can not only invest at an attractive early-stage valuation, but are also where we can provide synergy benefits associated with our sales, marketing, technology and other infrastructure. While we are moving very carefully, we have narrowed our focus to a couple of categories in early-stage businesses that could act as an incubator for us. From our standpoint, this business development initiative is purely an upside option that could accelerate our revenue and EBITDA growth, as media buyers begin to reallocate more and more of their budgets from traditional media platforms to these new digital media platforms. In addition, these new networks can be bundled with our theater platform, creating a unique and new, more valuable media offering. With that, I'll turn the presentation over to Gary to provide you with a more detailed discussion about our Q1 financial performance.

Thank you, Kurt. I'll now spend some time reviewing our first quarter financial performance in bit more detail. As Kurt mentioned, it's important to note that our historical results do not fully reflect our performance, due to the effect of our IPO and bank financing, which closed mid quarter on February 13th, 2007. Therefore, we have provided both historical and pro forma information in the press release, and I will discuss both during this call, but will focus the majority of my comments on the pro forma results. The historical results are divided into two periods, the pre-IPO period from December 29th, 2006, through February 12th, 2007, and the post-IPO period from February 13th, 2007, through March 29th, 2007. For the first quarter of 2007, total revenue was $23.6 million in the pre-IPO period, and $32.4 million in the post-IPO period, compared to $27.4 million in the entire first quarter of 2006. During the quarter, we incurred a net loss in the pre-IPO period of $4.2 million, but were profitable in the post-IPO, with net income of $1 million, compared to a net loss of $9.4 million in the first quarter of 2006.

The improvement in our historical operating results over Q1 2006 was due primarily to revenue growth and lower payments to the founding member exhibitors. These benefits were partially offset by higher advertising, operating, and selling and marketing costs associated with the higher revenue. A planned increase in administrative cost due to the Company's IPO, non-cash stock option expense, interest expense related to our new debt facility, and our tax sharing agreement and deferred tax expense. We also began to record minority interest expense. I will talk in more detail about these later.

In order to facilitate comparison between periods, we provided you with pro forma financial results. The remainder of my discussion will focus on our pro forma results, but assume that the IPO transaction, the amended and restated ESA and LLC operating agreement, and the $805 million senior secured credit facility were effective as of December 30th, 2005. In addition, the effect of the Loews integration agreement is not included in our operating results, as those net payments are recorded directly to our equity account. On a pro forma basis the amount is approximately $1.3 million for the first quarter of 2007, and is expected to be $11 million to $12 million for the year. During 2006 and 2007, up until the effective date of the new ESA, NCM paid 68% of advertising revenue related to its advertising contracts to the founding members as a circuit share payment, and retained a 32% fee for the management and collection of legacy advertising contracts retained by the founding members. Under the amended 30-year ESAs, all legacy contracts were contributed to National CineMedia. Therefore, after the IPO, advertising revenue related to all advertising contracts was recorded by NCM, and rather than a circuit share payment, we began to pay a theater access fee to the founding members of $0.07 per founding member patron and $800 per digital screen. On a pro forma basis, the Q1 theater access fee represented 19.6% of advertising revenue. This percentage will decline over time given the semi-fixed components of the calculation, and the fact that Q1 is usually our lowest revenue quarter.

For the full first quarter ended March 29th, 2007, total pro forma revenue grew 51.1% to $62.1 million. This increase was due to a strong ad scatter market, combined with growth in our network, as well as a strong growth in our meetings and events business. Pro forma advertising revenue increased 45.7% over 2006 to $55.8 million. Excluding the beverage contracts revenue, pro forma advertising revenue increased over 60% from Q1 2006 to Q1 2007. Pro forma advertising revenue per founding member attendee grew over 34% from $0.32 to $0.43 per founding member attendee. Pro forma advertising revenue for the 2007 quarter was made up of approximately 62% national advertising revenue, 18% local advertising revenue, and 20% beverage agreement revenue. While significantly increasing utilization to 66.2% for Q1 2007 from 46.7% in Q1 2006, we also increased our CPM 6.8% from the first quarter of 2006. Our Q1 CPM was strong, but you should note that CPM growth can very quarter to quarter, due to our efforts to promote adoption of the cinema advertising medium, the allocation of content partner commitments throughout the year, and downward pricing pressure with regard to certain advertising contracts where we compete head to head with Screenvision.

As Kurt mentioned, some of the year-over-year revenue growth was due to the addition of CineMark screens to our network. In assessing the effect of these circuit additions, you should note that there is a lag between the time we add impressions to our network and begin recording revenue. In the case of CineMark, while they joined NCM as a founding member in July 2005, due to an existing contract with Screenvision, NCM was not able to begin selling ads until January 1st, 2006. And due to a Screenvision run-out period, we did not have exclusive access to the CineMark inventory until April 2006. Thus, we did not begin realizing significant revenues from the CineMark screens until early Q2 2006. With respect to Century, while CineMark acquired the Century circuit in October 2006, we did not start selling those screens until November 2006, and had not completed our digital network deployment until the end of February 2007. As such, we did not begin realizing any meaningful revenue from additional Century impression until the end of Q1 2007.

Meetings and Events revenue grew 121.4% to $6.2 million, due in significant part to the success of the New York Metropolitan Opera event. During the current quarter, we held CineMeetings events in approximately 1,700 locations, an increase of 18.4% over Q1 2006, with average meeting revenue per location of approximately $1,900, an increase of approximately 35% over Q1 2006. We also distributed Fathom digital events to approximately 1,200 screens, an increase of approximately 112% over Q1 2006. Total attendance to date for only the Met events is approximately 150,000 across an average of 135 screens per presentation, with average ticket prices approaching $17. Pro forma adjusted EBITDA excluding the Loews payment increased 105.6% to $25.7 million from $12.5 million in the first quarter of 2006. Adjusted EBITDA margin was 41.4%, up from 30.5% during the same period in 2006, reflecting the operating leverage of our business. Our EBITDA margin improvement was held back slightly by the increase in our lower margin Meetings and Events business. The Meetings and Events business began generating positive EBITDA in 2006, and after allocation of incremental corporate overhead, the current EBITDA margin of this business is approximately 10%, with incremental event level EBITDA margins north of 30% , depending on the event. As we scale this business, current EBITDA margins should continue to increase.

Turning briefly to our expense line item. On a pro forma basis, advertising operating cost as a percentage of advertising revenues of 3.8%, were in line with the first quarter of 2006 due to an increase in network affiliate expenses, and offset by increases in other costs, while Meetings and Events cost increased as a percentage of Meetings and Events revenues to 51.6% from 32.1%. This increase was primarily driven by the higher content cost associated with the Metropolitan Opera event, which made up a significant portion of the Q1 Fathom revenue. Network costs as a percentage of total revenues declined from 7.5% in Q1 2006 to 5.8% in 2007. Pro forma theater access fees declined to 19.6% from 21 -- I'm sorry, from 27% of total revenues, due to the semi-fixed nature of these costs, and the fact that the pro forma expense included CineMark screens and attendance in Q1 of 2006, but were not generating meaningful revenue at that point. Selling and marketing costs also declined as a percentage of total revenues, from 20.9% to 16.4%, due to the fixed nature of much of these costs. Administrative expenses increased slightly from 8.5% to 9% of total revenue, primarily due to the increased costs associated with being a public Company. As of March 29th, 2007, we had 13,995 total screens in our network, of which 87.3% were connected to our digital network. Our screen count includes 927 network affiliate screens, and does not yet include the approximately 265 Goodrich screens, which will be added to our network during the third quarter of 2007, or the Loews screens that will be added in June of 2008.

With more focus being placed on adding network affiliates to our network, I wanted to briefly discuss the financial aspects of those arrangements in a little more detail. Due to a significant number of operating synergies, our network affiliate EBITDA margins are approximately 45%. While this is lower than those of our founding member screens, they provide incremental EBITDA with an attractive return on investment. Each deal is negotiated and structured differently depending on the size of the circuit, the markets covered, and the capital investments made by us and/or the affiliate. The total required in-theater investment per screen to connect to our advertising network is approximately $10,000 per screen. Please note that while we have included pro forma net income results, the assumptions we have made in the pre-IPO period are just that, assumptions. Particularly with regards to outstanding revolver balances and related interest expense. And these do create a fair amount of sensitivity to the bottom line.

Given the significance of our minority interest expense associated with our founding members ownership interest after the IPO, I also want to provide a little more detail to assist you with your financial modeling. For the post-IPO period during the 2007 first quarter, the minority interest expense was $2.2 million. This amount represents pre-tax income of NCM LLC net of an assumed rate of 40% for taxes, times the 55.2% ownership interest in NCM LLC of our founding members. It is important to note that the NCM LLC pre-tax income differs from the consolidated by the amount of interest related to the tax-receivable agreement, which is approximately $2.8 million for the quarter and $11.3 million expected for the year.

Moving on to our balance sheet. Our total net debt outstanding as of March 29th, 2007, was $763.4 million. Our net interest rate on our $725 million term loan after the affect of the recently completed interest rate hedge, was slightly less than 7% for the Q1 period after the IPO, while the revolver borrowings carry a bit of a higher interest rate at LIBOR plus 175 basis points. There will be approximately $1.9 million per year included in our interest expense related to the amortization of debt issuance fees and expenses, and approximately $11.3 million of amortization related to the tax-sharing agreement I just discussed.

Our pro forma leverage as of March 29th, 2007 is approximately 4.7 times trailing four quarters adjusted EBITDA, or pro forma adjusted EBITDA. You should note that this does not reflect the fact we have decreased our funded revolver from $51 million at quarter end to $26 million as of yesterday. While we do not anticipate paying down on term debt, we will delever over time to EBITDA growth, and do not envision dropping to a leverage ratio of less than three times before reevaluating our capital structure. As previously discussed, our overall financial strategy is to maximize EBITDA and free cash flow growth, and return cash to shareholders over time. We continue to expect that after the completion of the second quarter of 2007, we will begin declaring a reoccuring quarterly dividend, which we anticipate will be initially in the range of $0.10 to $0.12 per share. While we intend to distribute to shareholders a substantial portion of the distributions received from NCM LLC over time, our initial dividend payout ratio is being set to provide some flexibility for management and our Board of Directors to evaluate investment opportunities that could provide incremental growth, which may include, but are not limited to the expansion of our advertising reach across network affiliate circuits, and other out of home digital advertising platforms.

In our year-end 2006 earnings release, we provided pro forma quarterly revenue and EBITDA to illustrate the quarterly EBITDA margin pattern last year. Other than Q1, due to the significant utilization increase, 2006 results provide a reasonable quarterly EBITDA margin guide. Our EBITDA margins are also affected by our revenue mix. As a rule of thumb, at our current level of sales, our organic incremental national and local advertising revenue are added at an EBITDA margin of 90%-plus and 65%-plus respectively, while incremental Meetings and Events revenue yields an EBITDA margin of 30% to 40%.

Due to the delay related to our IPO quiet period, we provided specific Q1 revenue guidance in our last call. However, we do not plan to provide any specific quarterly or annual revenue EBITDA or net income guidance in the future. With our local business being bought approximately 30 to 45 days in advance, and with a later and later developing TV scatter market, it is difficult for us to give specific revenue and EBITDA quarterly guidance a month or so into the quarter. More importantly, we have very limited -- very little visibility into future theater attendance. An unexpected decrease in theater attendance at the end of any quarter could result in a deferral of revenue to be made good in a future quarter, or less likely, refund of a portion of that contract. With that, I'll pass the call back over to Kurt for some closing remarks.

Thank, Gary. I'm obviously very happy with the progress we are making against our internal targets across all of our businesses. While we experienced good CPM growth this quarter, I would expect there to continue to be volatility in CPM growth over the near term, as we expand our network impressions base, and bring on new clients and categories. I'm confident over that over the long-term, CPM growth will begin to accelerate as we step up our effort to expand our network by adding key regional circuits, add loews to our network in 2008, and build our utilizations closer to sell-out level. That concludes our prepared remarks, and now we'll take any questions you may have.

(OPERATOR INSTRUCTIONS) Eric Handler, Lehman Brothers.

Can you just touch a little bit about the scatter -- the volatility you suggested for CPMs in upcoming quarters? And specifically the competitive environment with Screenvision? It just seems with -- it's really a duopoly type of market with you guys, and it seems like there's a lot advertising that you guys can divide. Where are you seeing the competition really playing with the pricing?

I think, Eric, the volatility really goes to the fact that in any month, there are very few contracts -- national contracts. We only have 11 slots, right? 11, 30-second slots. So while there can be more than 11, because we may divide up the contract -- or, the network in various ways, any one or two contracts that either have high CPMs or low CPMs can affect obviously, the CPM. And I really don't want people to get overly focused on this quarter to quarter CPM, because last quarter, our CPMs were down 2.8%. This quarter, they are up 6.8%. It doesn't take very many contracts to make those CPMs go up or down. So that's the key point. I think relative to the competitive pressure in the marketplace, there are a few contracts that we have passed on, just because the CPMs got too low. And we will continue to do that if that happens. And we obviously, I think are doing a pretty good job of proving to people that our network is more valuable and that they should be establishing relationships with us.

Then, would you say that when you see low market CPM contracts, are the CPMs low -- is that a function of competitive pressures? Or is it just a function of advertisers wanting to just pay a lower amount?

It's a little bit of both. To your latter point, it's a good one. There are a lot of categories that are just used to buying at lower CPMs, and they do that across all mediums, whether it's television or otherwise. And so those categories, as we start to introduce those into the theater platform, are going to demand lower CPMs. In some cases, we may actually do that as an introductory type of situation. In other cases, we may pass. Again, it really depends. The other thing that is important is that if it's done with an agency that happens to be an agency that we don't deal with a lot. Or the clients -- there are no other clients represented by that agency, we might also take a lower CPM. The real danger in taking a low CPM with an agency that represents a lot of clients, is that they will start wanting to then apply that lower CPM to all of the rest of their clients, which is obviously a very dangerous thing to do.

Got you. Okay. Thank you.

Eileen Furukawa, Citigroup.

You have talked a lot about your strategy being increasing local utilization, and local is the area you can really benefit from a strong film slate, more so than national. So can you just remind us what our average local utilization is -- was by segment in Q1? And where do you think that can get to in the summer? When you have all these blockbusters, where do you think it gets to longer term?

We haven't actually put those numbers out as of yet. We are working on systems internally to better track by segment. We don't actually sell local in the same way we sell national. And local doesn't have a standard sort of CPM, if you will, because we sell it on a per screen per week basis. We also sell 15 seconds as well as 30, so there's no sort of standard length, if you will. So we're in the process of trying to standardize all of that. And we'll hopefully be able to start nailing that down. During the road show, we did tell people that we thought our average sort of utilizations in the local business were 30% to 40%. And so we thought there was a lot of upside. And I think as we alluded to in our script, we're having a very good second quarter on the local side.

And where do you think that they -- starting at the 30% to 40% base in the summer or beyond, where do you think it goes to 50%, 60%? Or what kind of magnitude increase are you talking about?

I don't think it's going to be a lot different than what you see in some of the other primarily local mediums, say radio, or some of these others that are driven primarily by local advertising. If we could get it to 50%, I think that would be good. I think clearly we're going to be a lot higher in what we call segment three. Because we sell segment three, which starts, give or take, 12 to 14 minutes from advertised show time. That's mostly regional and local, at this point. And then we sell segment four, which starts to get closer to 20 minutes out. I would expect segment three to be much, much higher than segment four, just because it's closer to advertised show time.

Okay. Thanks a lot.

Barton Crockett, JPMorgan.

Let me see, the -- that was one of the questions I had, was on the local sell-out rate and the lift from the second quarter. So I'll turn to the next one. On the Loews payment, Gary, I think you said that about $1.3 million is what came in. And I assumed that was an actual number. I was wondering if you could give us what the pro forma number would have been had the IPO been in effect for the entire quarter? So that would be one question. And then the second question is, in terms of the discussion of "volatility in CPMs," that's a kind of generic term. In other words, it could accelerate from here, it could decelerate from here. Are you trying to tell us anything beyond that? In other words, should we figure that in the second quarter, the CPM is more likely to decelerate in year to year growth, or accelerate, or is it really kind of neutral in terms of the direction of the volatility? So that would be kind of a second question.

Gary?

Yes, I'll handle both of them if you want. I think volatility is meant to be neutral. It could happen in either direction depending on what quarter it is. I think what people need to look towards is more of a long-term growth in CPM. And as Kurt mentioned, with 11 units, it could fluctuate quite a bit. As people noticed last quarterly call, they were down 2-something%, now they are up 6.8%. It could go in either direction in Q2. Going back to the Loews payment, the $1.3 million actually is a pro forma amount. I think when people -- I mean, obviously, the documents are public documents, so people could read it. But just to give a little background on how the Loews payment works, it's heavily dependent on on-screen EBITDA that was generated. And as you can see, we are a very leveragable business. So the first quarter on-screen EBITDA is obviously lower than in other quarters. So if you do the math, and you are all looking at sort of what you are looking at for EBITDA, this quarter compared to the total year, you should be somewhat similar for what the Loews payment is for the total year, and maybe a little bit more leveraged towards later in the year. So that-- hopefully, you can all do that math, and it makes sense that it's $1.3 million instead of evenly broken out between each quarter. Which I know I think some of the analysts have projected.

It's one of the reasons you gave the whole number for the year, too.

Right. Exactly.

Okay. Great. And then just one final question, here, getting away from the numbers. This past quarter, we had the Meet the Robinsons movie out on the -- a lot of the 3D projectors and generating a little bit of extra attendance at those screens. Can you just give us a sense of what your outlook is for 3D, in terms of when you think that might get to be meaningfully deployed? And what impact, if any, you think it might have on on-screen advertising?

I think clearly from the theatrical standpoint, it's going to be sort of held hostage, if you will, by the whole digital cinema deployment. Clearly there have been some test locations, quite a few of them now, that have been rolled out primarily financed by either manufacturers or by Real D themselves, to try to sort to prime the pump of this whole 3D effort. To my knowledge, no theater circuit has actually paid for any of the 2K equipment that's required to actually do the 3D. So whatever your assumption, Barton, is on when digital cinema, 2D 2K technology, is going to be rolled out into the market, that will then get -- that will tell you when you think the 3D will get rolled into the market. Because you need the first thing to happen before 3D is possible, at least digital 3D. So from a timing standpoint, that's my answer to that. I think from the -- just how significant this could be to our business, clearly on the digital programming side, I think it's going to have a more immediate effect. We are talking with both Real D and with Dolby, who is just introducing in the next few months their 3D, digital 3D solution, about how we might start doing prerecorded and maybe even live 3D events, which I think could be pretty compelling if we could actually get to make them work. The technology isn't there yet, obviously. But I do think it could be a boost to our digital programming business, our Fathom business.

I think from a advertising side, there could be some upside for that potentially. Although I think we're a long ways off. Because you think about the number of people that you've got to get producing 3D all at the same time, to be able to create one solid 3D show. You are talking about an awful lot of advertisers, an awful lot of agencies, and an awful lot of production that would all have to start producing in 3D. I don't think you're going to get a situation where people take advertisements and convert them to 3D, the way they have with film. Because advertisements just happen so quickly after the advertising -- after the production, I just don't think you are going to see that happening. It would be much cheaper to just produce it, to begin with, in 3D. So I think there could be some marginal upside there. And we've had a few discussions with a few clients about it, the fact that it would be cool. It's just hard to switch back and forth within one preshow between 3D and 2D, because you are asking people to put their glasses on, and then take their glasses off, and so on and so forth. Plus, you've got to switch back and forth between technology solutions. So I think it's going to be a while on the advertising side.

Okay. That's great. Thank you very much.

Scott Barry, Credit Suisse.

Just two questions. One -- and I am mindful that the inventory has changed pretty dramatically year-over-year. But Kurt, maybe you could just give us a sense for that 75% to 80% of your national ad target that's contracted, how would that compare with where we were a year ago today?

We are a bit ahead, where -- same place we were a year ago.

Okay. Great. And then secondly, last year the first quarter revenues looked to be about 15% of the full year. Gary, is it reasonable to think that that would be -- because of the first quarter strength, would be a little bit higher than that this year?

No, I wouldn't say that as an example. I would say, we put out some guidance in our IPO prospective where things fell out, and I don't think we would change that dramatically. Obviously it was -- we had a strong-- very strong quarter.

Yes, I think, Scott one of the things we tried to do in the script in Gary's section, is we tried to tell everybody the margins that were in the four quarters that we gave-- the pro forma four quarters that we gave in the last press release, were pretty reasonable for the next three quarters. I think that was sort of our way of letting you guys do some modeling. I think for us to tell you what percentage we think first quarter is, aren't we just telling you then what the year is?

Sure. Understood. Thanks, guys.

[Hunter DuBose], Morgan Stanley.

Couple of questions for you, the first of which is you mentioned that you are currently in discussions with, or about to approach certain regional circuits that you believe their contracts are coming up for expiration with Screenvision to add to your own network. Can you talk about the level of competitive intensity around those negotiations? And in particular, I believe that you previously guided toward revenue sharing economics of between 30% and 50% for the affiliates. How are the economics trending with these newer contracts, and are there other key terms as well that we should be aware of? And the second question is, what kind of guidance can you give us for digital screen percentages for the remainder of the year? And in particular, how does that break out between members and affiliates?

Okay. I think the answer to the first question is, obviously, it is a pretty tough competition between us and Screenvision. We are only really focused right now on some key regional circuits, which are a bit larger -- concentrated, maybe, in some of the larger markets. So those are the ones that we are focused on right now, as we've indicated in the past. I think the economics that Gary laid out for you in the script, I think were pretty good ones. I think the $10,000 per screen investment for the digital equipment, and in the neighborhood of a 45% EBITDA margin after all is said and done, there aren't a lot of incremental costs that we have, other than the network affiliate payments we have to make. There are a few incremental costs, there are not a lot. There's a lot of synergies, as you'd expect by adding these people to our network. So we just have to stay tuned. Obviously, from our standpoint, I think just strengthening our network is a good thing, especially if it's relative to Screenvision.

And, sorry, just to clarify, does the the 45% margin reflect the marginal economics, or the average economics including the existing contracts?

That's just the marginal for each individual network affiliate.

Okay.

James Dix, Deutsche Bank.

Couple of questions. First, in connection with the TV network upfront, do you typically make any types of special presentations or approaches to advertisers to try to get to them when they are making those budget allocations? And if so, have they been a decent read in the past on share shifts for the coming year? And I guess secondly, the box office has been strong, expectations are strong. Have you -- I know you don't necessarily go necessarily with what the circuits give you in terms of expectations, because you have a different model and you have to worry about make goods. But have you changed your attendance expectations for the year since the IPO? And if so, directionally, what way and what magnitude?

We haven't changed anything necessarily for the year. I think clearly, as we started to get closer and closer to May, sort of the beginning of this year, we actually budgeted sort of October, November, we budgeted a reasonably big May to begin with. And then I think as the hype started, and everybody's expectations started to grow, we-- on some of the later contracts that we entered into, we upped the numbers a little bit. So we tried to be as reflective as we could of the current information. We do rely reasonably heavily on the budgets and other things we get from the circuits on a monthly basis, in trying to tell our sales force what to go out and sell. The problem, of course, is that any contract that we sold, say, last October or November for the month of May, we're locked into in attendance. And that -- you can't go back to the agency and say, would you like to give us more money for the month of May. They would laugh at us. They obviously like the fact that we're over-delivering attendance, because all that really does is decrease the CPM. So I think that's the answer. There was another part of your question, I know I haven't been responsive to. What was -- ?

Just in connection with the TV upfronts, do you go out to agencies, advertisers kind of at this time of year, and make any type of special presentations? And does that give you any sense as to how the share shifts are going to go?

There is no, what would be called upfront in the traditional sense for cinema. What we have tried to do though, with the deals we've made with the circuits on the beverage agreement, we've got long-term deals with our content partners, we've got some other multiyear deals out there with Cingular, now AT&T and others. So we have tried to create a bit of an upfront for ourselves by all of these long-term commitments that we get from people. Now it is a good thing for Cliff and our other sales and marketing people, because they end up scheduling an awful lot of dinners and meetings, because there's just so many clients and so many media people in town for the upfronts. So that is a good thing for us. And Cliff usually attends some of the upfront presentations, just to get a sense of where everybody is going.

Okay. Sounds good. Thanks very much.

Mike Hickey, Janco Partners.

Just another one on the volatility of your CPM. If I heard you right, you said 75% to 80% of your national advertising has already been filled, which is above last year. And you said that you could pass on any deals that had lower CPMs. So it seems like that volatility would be biased upwards. In particular in Q4, I think your CPM comped -- or was down 2.8%, so it looks like you have an easy comp. Any more color on that or -- ?

Was that a question or were you making a statement? I'll just say, okay, if that was the statement. I think, clearly, as I indicated, one or two contracts that we decide to take at a lower CPM for one reason or another, as I discussed, could bring our CPMs down a little bit. And I caution people to get too tied into this quarterly CPM up and down. What you really need to look at is at the end of the year, what is going on. And then as I also indicated, and we indicated this on the road show, we're pretty bullish about what is going to happen in '08, when Loews comes on board and we get a higher percentage of attendance in some of these top 10, top 25 markets.

Okay. And then the lack of guidance, is that something that you guys had intended to do? Or -- I mean, obviously there's uncertainty in any business model. But it seems like a lot of your contracts are already pre-sold. Is that-- do you expect to give guidance next year? Or is that at some point in time? Or if you could identify just the main points again as to why you're not giving guidance.

I think the main points are that we don't sell a lot of our inventory until near the end of the quarter. So here we sit with two months, basically, left in the quarter, and there's still inventory that we're selling. And I really don't want to get ahead of myself on where we think that inventory is going to go. Because the scatter market can turn on a dime. It can either crank up really quickly, and we've seen late developing scatter markets recently, which is obviously a good thing. The other thing, as I mentioned, is that if the last two weeks of any given quarter happen to be down weeks for the theater business and attendance is down, that may necessitate us to take a make good -- or to record a make good liability, and move that revenue into the following quarter, which obviously, goes right to our bottom line. It's dollar for dollar basically right to EBITDA. So those are the sort of reasons that we have chosen not to give it. Philosophically, I just think we all felt, including the audit committee and the Board, that it was just better not to give guidance. And instead, what we have tried to do is give analysts enough building blocks to get their models dialed in, so they really don't need guidance. They've really got everything they need to be able to calculate what they think our earnings and our EBITDA and revenue are going to be.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) [Mike Hazenour], Highland Capital.

Quick question. CineMark, looking at their screen portfolio, it looks like they have close to 20% international. Listening to some comments they made during their road show, they said that the in-theater advertising was relatively nonexistent. Can you give some comments on potential strategy partnering with them in their international market? And maybe some comments on expansion globally elsewhere?

Yes, I think depending on what market you are talking about, there is actually a fairly good advertising business in certain markets. It's obviously not delivered digitally, the way we do it. It actually benefits from a number of things that we don't, like a lot more alcohol advertising, even in some countries, they advertise cigarettes. I don't know if CineMark actually does or not, but I know some theaters do. So the businesses outside the United States, or in some countries are actually quite good. We have not -- while there have been some general discussions about using the "NCM model" or the technology in those other countries, there has been talk about that. But it's not something that we have been directly involved in. In fact, if you go to our agreements, the definition of a territory that we have rights in, is really limited to the United States. So we really haven't spent a whole lot of time looking at outside the United States. And the reason is pretty simple. Media does not cross border. There are separate budgets, separate sales forces, all of that happens country by country by country. So it's very difficult -- it would be very difficult to scale our sales our infrastructure, and even some of our technology infrastructure, because it is satellite-based, outside of our existing footprint.

Fair enough. Thanks.

And there appear to be no further questions at this time. I would like to turn things back to our speakers for any additional or closing comments.

That's all we had. And obviously, to the extent anybody has any follow-on questions, let us know, and if we can answer them, we will. And I really appreciate everybody's support and attention today, and please let us know. Thanks a lot.

Again, that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.