National Cinemedia Inc (NCMI) 2009 Q3 法說會逐字稿

Greetings and welcome to the National CineMedia Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Oddo, Vice President of Finance for National CineMedia Incorporated. Thank you. Mr. Oddo, you may begin.

Good afternoon. I'd 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 the statements of historical facts 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.

Now I'll turn the call over to Kurt Hall, CEO of National CineMedia.

Thanks, David. Good afternoon, everyone. Welcome and thanks for joining us for our third quarter 2009 earnings call. Today I will provide an overview of our third quarter operating results and an update on the marketplace. Gary Ferrera, our CFO, will then provide a bit more detail on our financial performance for the quarter and will provide specific financial guidance for the remainder of 2009. Then, as always, we'll open the call for questions.

While our Q3 revenue and adjusted OIBDA declined versus Q3 2008, we exceeded the top end of our adjusted OIBDA guidance range. Given that we continued to out perform the broader advertising marketplace, our lower current quarter revenue and adjusted OIBDA performance versus 2008 highlights the strength of our national advertising business during the second half of 2008.

That 2008 second half performance has created difficult comps for us for the current quarter and for Q4. To put things in perspective, the broader market struggled at the end of 2008, our 2008 third and fourth quarter grew by 10% and 19% respectively over 2007 while adjusted OIBDA grew by 10% and 20% respectively.

While our lower current quarter revenue and adjusted OIBDA related to declines in both our national and local advertising revenue, the decline in our national advertising revenue related primarily to the timing of the spending of our content partners and one large client and lower beverage revenue associated with lower theater attendance and a reduction in time required by our founding members to advertise Coke in our FirstLook preshow. In fact, our Q3 national revenue, excluding beverage revenue and the effects of the shift in spending of our content partners and the one large client, actually exceeded Q3 2008 by 2.5% as we had slight increases in both the number of national contracts book and revenue per contract. We also increased the number of categories sold during the quarter versus 2008, a promising sign in this difficult marketplace and clear evidence that our focus on expanding our national client base is paying off. The impact of this shift in client spending is further illustrated by the fact that excluding beverage revenue, our year to date national advertising revenue grew nearly 9%.

Our local ad business continued to trail 2008 despite an increase in network screens available for sale by our local sales force. While our local business continues to outperform most other local advertising mediums due to our mainly positive selling attributes, we're clearly not immune to the negative effects of tight credit on local businesses and the high unemployment rates across many of the states in which our network has a strong presence.

Having said this, quarterly revenue declines on a percentage basis appear to be stabilizing while we are hopeful that our local sales will begin to show some improvements in Q4, you should note that Q4 2008 contained an extra week, adding approximately $1.8 million of local revenue to last year's longer fiscal Q4.

In addition, due to a dramatic decrease in spending by auto dealers and certain other significant clients of newspapers, radio stations, and TV affiliates, we have begun to see more pricing pressure in the local market as supply demand dynamics favor the local advertising clients. So while things have stabilized somewhat, it could still be a few quarters before our local business begins to reestablish a meaningful same screen growth trend.

Our ability to continue to expand our client base and shift market share from existing national and local media platforms reflects some great work by our sales teams in a very difficult market environment. And some recent improvements to our digital theater network. Expansion in strengthening of our digital theater network remains a top priority in our effort to compete more effectively in the national advertising marketplace. While our reach and geographic coverage is improving, we continue to be at a competitive disadvantage in several client categories that require additional overall reach and more ubiquitous market coverage.

While we have established new relationships with several clients and categories this quarter including clients in the casual dining, military, technology, retail, and apparel categories, we continue to be significantly unrepresented from a spending standpoint in several other categories including retailers, consumer products companies, and QSRs or any business that has a national franchisee network that contributes to a coop media buying group.

Our network reach and geographic coverage continues to benefit from the construction and M&A activities of our founding member circuits. Last year's addition of the AMC Lowes circuit and the acquisition of several of the higher quality Muvico theaters by Cinemark earlier this year have helped expand our overall reach and strengthen our coverage in the larger CMAs. To accelerate the growth of our digital network, we have recently begun to more aggressively pursue network affiliate relationships with smaller regional circuits to fill in our coverage in larger markets and expand our reach and coverage in both smaller markets and larger market suburbs.

Network affiliate agreements have recently been signed with Starplex Cinemas, Showbiz Cinemas, Picture Show Theaters, Galaxy Theaters, Storyteller Theaters, and Cobb Theaters, adding a few new screens to our network in 2009 and several additional screens in 2010. These new circuits will add approximately 580 screens to our network in total, demonstrating our ability to expand our affiliate network and bring the benefit of our larger scale to regional theater circuits.

We're also hopeful that our network growth will continue to benefit from M&A activity. In addition to the 400 Consolidated screen acquired by Regal in 2008 and will join our network in 2011, we continue to monitor the National Amusement and Screenvision sales processes. It now appears that only an upper Midwest portion of the National Amusement circuit is even being considered for sale while the Screenvision sales process appears to be winding to a conclusion.

Today, we have not been included in the sales process even though we continue to believe that a transaction that NCM would provide attractive expense synergies and a national advertising network that is more competitive in the national advertising marketplace.

While we continue to be interested in pursuing a transaction with Screenvision, as we've been left out of the sales process, we have successfully shifted our attention to expanding our network through establishing direct relationships with other theater circuits.

While we are pleased with the expansion of our client base and related increase in inventory sell through, in the current quarter it did not offset the impact of the 7.1% CPM decline versus Q3 of '08. As we had warned on our last call, Q3 CPMs were negatively impacted by a less favorable client mix and an unfavorable supply demand dynamic in the TV marketplace that pressured pricing across all sight, sound, and motion advertising. We expect this weaker client mix and a soft October to result in lower Q4 CPMs versus Q4 2008, particularly given that Q4 CPMs last year were up over 12% versus 2007.

Having said this, over the last week we have started to see a tightening of the Q4 TV scatter market and firming of CPMs. While we will benefit from some of this late breaking scatter money, with November already very well sold and virtually no inventory left in December, we expect that there may be some late breaking December scatter money that we may not be able to clear.

Our meetings and entertainment programming division continue to performance very well overall with Q3 and nine month revenue up 1.4% and 7.1% respectively. Our Fathom Entertainment business experienced another solid quarter of growth, with several successfully events including the live Mayweather-Marquez fight and a DVD release event featuring The Wizard of Oz 70th anniversary edition. These strong entertainment events results offset some softness in our meeting business as corporate clients delayed or cut back their spending on corporate communications and marketing events. While the soft economy is expected to continue to impact the corporate event division, our fourth quarter should benefit from a solid entertainment programming event pipeline including the beginning of the new Metropolitan Opera season.

Looking ahead, despite a weaker than expected October, we mentioned sales activity has been very strong over the last couple of weeks for the upcoming holiday period. In fact, we have recently shifted most of our attention to 2010 as only small remnant inventory remains for November and December of 2009. This type of late sales activity is typical of the late breaking scatter markets that we have been experiencing over the last several quarters.

Clients continue to assess the effects of the economy on their businesses and are delaying making commitments until the last minute. While we have begun to see some activity for 2010, the dollar value of 2010 upfront commitments is lower than 2009 commitment levels at this same time in 2008. We currently have approximately $102 million in total 2010 scatter and content partner and other long-term commitments versus $126 million of similar advertising commitment for 2009 at the same time last year and only $70 million at the same time for 2008.

While we continue to monitor these longer-term commitment levels, given the late breaking nature of the current scatter market, the level of these long-term commitments is not a very reliable barometer of future business activity, much like the dynamic that goes on in the year to year ebb and flows of the TV scatter market, I am hopeful that turning away money in December will create and incentive for media buyers to begin blocking up 2010 inventory.

Overall I am very pleased with the progress that we are making to expand our business. While we are still experiencing some quarter to quarter volatility due to the timing of client spending and a growing but relatively small client base, our year to date and revenue growth relative to declines in the overall advertising marketplace provide strong evidence of the strength of our underlying business. While our long-term prospects remain very positive, as I mentioned previously, we face very difficult Q4 2008 comps that include an extra week in 2008 and we face an improving but still challenging business environment.

As such, while we are still bullish about our long-term prospects, with limited overall visibility to the late breaking scatter market, we will remain somewhat cautious about the next few quarters until we see more tangible evidence that the economy and the ad market are actually recovering.

Now I'd like to turn over the presentation to Gary to give you some more details concerning our Q3 revenue financial performance and other financial guidance for the remainder of the year.

Thanks, Kurt. I will now spend some time reviewing our third quarter and year to date financial performance in a bit more detail as well as provide guidance for the remainder of 2009 and briefly discuss the restatements to our financial that may be filed either later today or tomorrow.

As Kurt mentioned, our third quarter results turned out slightly better than expected. While our revenue results came in slightly lower than the midpoint of our guidance range due to lower than expected local advertising and Fathom corporate event revenue. We exceed our adjusted OIBITDA or guidance range by $800,000 primarily due to our continued effort in controlling expenses. For the third quarter, our total revenue declined 11.1% from Q3 2008 to $95.7 million from $107.7 million. Total advertising revenue decreased 12% to $88.3 million from $100.3 million while meetings and events revenue increased 1.4% to $7.4 million from $7.3 million.

The Q3 2009 advertising revenue mix shifted slightly to national and local due to decline in our beverage revenue versus 2008 and was approximately 71% national, 19% local, and 10% beverage versus 70%, 18%, and 12% respectively in Q3 2008. Q3 national ad revenue excluding beverage declined 11.5%. Utilization increased to 96.5% compared to 92.9% in Q3 2008, benefiting from a 5.9% decrease in our Q3 impression base. This slight decrease in impressions sold was compounded by 7.1% decrease in CPM. Attendance decreased due to a weaker July box office and a calendar shift around the Fourth of July weekend.

Beverage revenue declined 26.2% in Q3 2009 versus Q3 2008. As discussed on previous calls, the time required for beverage advertising by two of our founding members in 2009 was reduced from 90 to 60 seconds and the lower Q3 attendance also contributed to the decline. This reduction was partially offset by the 8% contractual beverage CPM increase in 2009.

While the economy continued to struggle versus the first nine months of 2008, the quarterly declines in our local business have appeared to stabilize as our Q3 2009 local revenue decreased only 7.4% versus Q3 2008. The 8.4% increase in total average screens available for sale by our local sales force helped to partially offset an approximate 15% decline in same screen sales during the third quarter. As you may recall, the Q1 and Q2 quarterly revenue decline in our local business were 19% and 6% respectively. During these same periods, our same screen sales declined approximately 29% and 16% respectively.

Total Q3 advertising revenue per attendee, excluding beverage, increased 2.4% to $0.51 and the lower revenue was more than offset by the lower Q3 attendance. National advertising revenue per attendee, excluding beverage, increased 0.9% to $0.40 per attendee in Q3. While Q3 local ad revenue per attendee increased by 5.3% to $0.11 per attendee.

We entered the third quarter with approximately $1.1 million of make goods. At the end of the quarter we had approximately $400,000 of make goods as a very strong box office in the last few weeks of September helped reduce our Q3 make good liability. Our meeting and events revenue increased 1.4% to $7.4 million from $7.3 million in Q3 2008. The Q3 variance was driven primarily by a 36.6% increase in event site count as our network expanded and Fathom Entertainment programming sources continued to expand with new types of content. This strength was offset partially by continued weakness in our Fathom corporate event business which is more reliant on corporate discretionary spending for communications and marketing events. Total Q3 adjusted OIBITDA decreased 16.5% to $51.8 million from $62 million in the third quarter of 2008. While adjusted OIBITDA margin was 54.1%, down from 57.6% during Q3 2008. The margin decrease was primarily due to the lower high margin beverage and national ad revenues. Adjusted OIBITDA, including Regal Consolidated integration payments for the third quarter decreased to $52.7 million compared to $63.5 million in 2008.

For the nine months ended October 1, 2009, total revenue was $262.1 million compared to $207.1 million in the first nine months 2008, an increase of 1.9%. Our year to date national advertising revenue excluding beverage grew 8.8% and our combined Fathom business grew 7.1% while our year to date beverage revenue and local advertising revenue declined 17.2% and 10% respectively. Adjusted OIBITDA was $124 million in the first three quarters of 2009 compared to $125.5 million in ten comparable period in 2008, a decrease of 1.2% primarily due to the $5.6 million decrease and 100% margin beverage revenue. Adjusted OIBITDA, including the AMC Lowes and Regal Consolidated theater payments was $126.1 million for the three quarters of 2009 versus $131.5 million in 2008, a decrease of 4.1% from the prior year.

You should note that the Regal Consolidated integration payment is not included in our operating results as those payments are recorded directly to our balance sheet. The Regal Consolidated integration amount was $900,000 for the third quarter of 2009 and $2 million for the year to date period in 2009 including the final payments specifically related to the AMC Lowes theaters in Q1, total integration amounts for the first three quarters of 2009 totaled $2.1 million.

Net interest expense increased $4.1 million to $17 million in Q3 2009 from $12.9 million in Q3 2008. This increase was primarily due to a net pretax non cash accounting impact of $4.3 million related to the interest rate swap with Lehman. This was partially offset by lower market rates on the unhedged portion of our term loan and revolver borrowings. Looking briefly at diluted earnings per share for the third quarter, we reported GAAP EPS of $0.16 versus $0.26 for Q3 2008.

At October 1, 2009 we had 16,805 total screens in our network including 2,329 network affiliate screens representing a 2.3% decrease in total screens at the end of the third quarter versus the end of Q3 2008 but a 2.1% increase in digital screens. The slight decrease in total screen count at the end of Q3 2009 compared to Q3 2008 was primarily driven by the reduction of approximately 670 non digital Marcus screens from our network and offset by the addition of approximately 180 Cobb screens, 150 AMC Lowes Stars screens and 82 Muvico screens acquired by Cinemark. You should note that the Marcus screens were not part of our digital network and were not available for sale by our local sales force as the local sales had been handled by Screenvision. Also, approximately 400 Consolidated theater screens acquired by Regal during Q2 2008 will not be included in our screen count and attendance until 2011. Approximately 14% of our network is composed of affiliate screens and approximately 92% of our total screens are connected to our digital network versus approximately 88% at the end of Q3 2008. These digital screens generate approximately 93% of our third quarter attendance.

We added fewer network affiliates in 2009 versus 2008. As such our capital expenditures were $1.2 million for the third quarter compared to $4.6 million in Q3 2008 with a total of $5.7 million in the first three quarters of 2009 versus $13.6 million for the nine months period in 2008. We continue to estimate that 2009 CapEx will be in the range of $8 million to $10 million, assuming that we do not digitize any network affiliates during the remainder of the year. This compares to $16.7 million of total CapEx in 2008.

Regarding our balance sheet, all of our debt is held at the operating partnership NCM LLC. Our total debt outstanding as of October 1, 2009 was $804 million comprised of the $725 million term loan, a $74 million balance on our NCM LLC revolver versus a $64 million revolver balance at the end of Q3 2008 and a $5 million non interest bearing note payable to Credit Suisse associated with the IdeaCast restructuring. The revolver balance net of NCM LLC cash and cash equivalents of $45 million was approximately $29 million at the end of Q3 2009 versus $41 million at the end of Q3 2008.

In addition to the $45 million cash balance at NCM LLC, there was a $42 million cash balance at NCM Inc. at the end of Q3 2009 versus $22 million at the end of Q3 2008. A portion of this cash is reserved for income tax payments and tax receivable agreement payments to the founder members; however, excluding the tax associated reserves, at our current rate, we have enough cash to pay approximately four quarters of dividends even if no additional cash were distributed up to NCM Inc. from NCM LLC.

The average interest rate on our $725 million term loan was 5.9% for Q3 2009 versus 6.3% for Q3 2008. Approximately $550 million of our $725 million term loan due in February 2015 is fixed under interest rate swap agreements at 6.7%. The remainder is floating rate debt at 2.1% as of October 1, 2009. The average interest rate on our revolver borrowing was 2.1% in Q3 2009 versus 4.9% in Q3 2008. Our pro forma net senior secured leverage at NCM LLC as of October 1, 2009 is approximately four times trailing four quarter adjusted OIBITDA including the AMC Lowes and Regal Consolidated payments which is down from approximately 4.1 times as of Q3 2008.

We also announced our regular quarterly dividend of $0.16 per share. This dividend represents an annual yield of approximately 4% based on recent trading levels. The dividend will be paid on December 3, 2009 to shareholders of record on November 19, 2009.

Looking ahead for the remainder of the year, marketers and media buyers continue to take longer to commit advertising dollars. Though October, a historically under utilized flight was weaker than expected. We are currently seeing a lot of late breaking sales activity for November and December. These months are historically two of our highest utilization flights and only remnant inventory remains. CPMs continue to be pressured due to the weak overall market environment and changing client mix as we bring on new advertisers. Additionally, while our local advertising business has shown improvement from the significant lows we experienced in Q1 2009, it is not fully back to the level we had anticipated during our budgeting and reforecast process.

Therefore we now expect total revenue for the full year 2009 to be in the range of $363 million to $368 million and adjusted OIBITDA to be in the range of $177 million to $182 million excluding potential make goods. We will be providing Q1 and full year 2010 guidance when we release our 2009 results.

Before we close, I'd like to briefly discuss some of the SEC filing made earlier this afternoon. We filed an amendment to our fiscal year 2008 annual report on form 10K to restate our minority interest expense and the related effect on net income, EPS, retained earnings, and additional capital. It was recently determined that in 1995 accounting interpretation related to real estate investment trust transactions also applied to our accounting as we had a deficit minority interest. Due to non cash charges in the fourth quarter of 2008 which related to our interest rate swap with Lehman and impaired investment, the available cash distributions to the founder member partners were greater than their proportionate share of NCM LLC income and under this accounting interpretation, the excess had to be charge as an expense on our consolidated income statement rather than directly to equity.

It is important to note that our revenue adjusted OIBITDA, the actual available cash distribution, and the statement of cash flows were not effected by this change. Ironically, this accounting interpretation was actually nullified at the beginning of 2009. So, beginning with Q1 2009, we returned to recording all cash distribution in excess of our founding members' pro rata share of earnings as a distribution in equity. Additionally, we filed amendments to our 10Qs for both Q1 and Q2 of '09 primarily to reflect an adjustment to the beginning retained earnings balance due to the 2008 restatement.

I will now pass the call back to Kurt for some closing remarks.

Thanks, Gary. Before I open the lines to questions, I wanted to make a few comments regarding the S3 registration statement that was filed a few minutes ago. This registration statement is meant to cover the conversion of NCM LLC units should any of our founding member theater circuits decide to convert those LLC units to our public and common stock and sell those shares. This registration process was only being completed to comply with a registration right that was granted to the three founding member circuits as part of the IPO transaction. While the founding member circuits have not indicated any intent to sell, we would be supportive of them selling some of their shares received after the IPO. It would provide more public trading float that may attract additional investors and would shift some additional economic value associated with NCM to the public market.

That, I guess, completes our prepared comments. Now we'll open the line for any questions that people have.

(Operator Instructions) Your first question comes from the line of Alexia Quadraniwith JPMorgan-Chase & Company. Please proceed with your question.

Thank you. A couple questions. The first question is can you go through some of your major verticals and tell us how they trended in the quarter? And then secondly you referred to a couple times a less favorable client mix, one of the reasons for the weakness. If you could give us more color, what you mean by that, please?

I'll handle the second one first. The less favorable client mix, as we've talked about our content partners allocate their spending throughout the year, so as we've talked about this year there was more content partner spending in the first half of the year than there was last year. That obviously creates a situation where there's not as much partner spending money in the second half of the year. That's part of the difference. Also with the military spending that has been shifted around, there's been some issues. Last year we had some military spending in the third quarter. This year it happened in the first quarter. So, we've had some things happen that have changed the mix a little bit of clients.

The vertical trends, I mentioned in my script some of the categories that we've seen some good positive movement on. I can reiterate that if you'd like. But we've done, I think, some really good business in the retail area that we hadn't done before. We're starting to do more business in the technology area. We actually helped Microsoft launch Bing in the second quarter or third quarter rather. We're doing a little bit of business with some of the brands in the CPG category which has been good. And the sit down dining, we did a little bit of business which was the first time we had ever done that. We also saw a little money come back from some of the US car manufacturers. The car business has been incredibly strong for us this year. It may be one of our largest growth categories, mostly on the back of the Asian car categories. But we did see some money come back from some of the US car companies in the third quarter which was good.

I guess my question was more on your core verticals. The military you addressed about bit, but the foreign auto, entertainment, areas like that, how that trended?

Entertainment continues to trend up. Asian auto continues to trend up as I just mentioned. The military, we're continuing to see money in. We thought they were going to move away a little more than they have in 2009. We're actually going to have some business with them in the fourth quarter that we hadn't expected which has led to some of the tightness in our inventory in December primarily. We're already committing for 2009. Or 2010 rather. So, we've got some -- the endemics, as I'll call them, isn't our real issue as we continue to talk about expanding some of these other categories.

And then just on the weakness at the beginning of the fourth quarter, the October weakness. Is that just sort of related to the economy do you think? Or is there something? Maybe a share shift to other media or something else that's in play?

I think it was mostly the economy. I think clearly a lot of people have held their money back as long as they possibly can. We're starting to see the holiday spending coming now. And as I mentioned, it's really pretty tight out there. I don't know. You've probably heard from some of the broadcasters already. Their inventory is getting real tight. I don't know whether that's increased demand or lower rating points or a combination of both but there does seem to be a lot of activity right now and we're just seeing a lot more money than we've seen over the last few months.

October's typically a little bit of a missed month. It's not a month that we would consistently have strong in every year similar to November-December, June and July. It's more of a shoulder month.

Last year and we talked about this on our last call, last year the military spent money in September, October, November, and December last year. This year they're only spending in the end of November and December. That shift alone obviously hurt our October. The good news is they have shifted some money into 2010 which is great.

Thank you.

You bet.

Our next question comes from the line of Ben Mogil with Thomas Weisel Partners. Please proceed with your question.

Good afternoon. Thanks for taking the call. So, I want to make sure I understood this. 500 new screens you're getting on the affiliate basis. Did those all come on stream on Jan 1 or some are actually coming on the fourth quarter?

The majority of them will come in on Jan 1. I think 180 of them or so will come in in the fourth quarter of 2009 and actually have come in throughout 2009 related to the Cobb circuit. The rest will all start January 1.

Some will be digitized over -- it takes a little while.

Yes. They won't all be immediately digitized, but most of them are planned to be digitized throughout the year.

Okay. In terms of -- I want to make sure I heard the commitments right. This time, right now you've got $102 million of commitments for 2010. This time last year you had $126 million for '09? Is that correct?

Correct.

Okay. And then in terms of the guidance you've obviously sort of tightened up the guidance. If you look at the midpoint it's kind of unchanged. We've heard obviously from some of your local TV and radio competitors. They've either opted guidance or sort of taken the lower end up if you will. Not that you're responsible for obviously what your competitors are doing. But is that from your perspective more a function of them really having even less visibility earlier on in the year and not so much a function of them sort of gaining incremental share at your expense?

I don't think it's them gaining share at our expense. That's for sure. I think they're coming from a different place as well. If you think about the auto dealers that completely stopped spending, if they're spending any money right now that's benefiting these guys, the newspaper and radios and spot television. I just think we're coming from a different place. If you look at our revenue growth numbers or decline numbers, however you want to look at it, we're considerably different than they are. We're mid single digits. They're coming from down 25% or 30%. So, I think that's the primary issue.

That's very fair to say. For them three points up is a huge change.

Plus, Ben, we will most likely have to turn away business. We are going to be very -- with what's left of the year on the national side.

The local side's actually even breaking a little later than in the past. We've started to see some money come back on a regional basis. We just got some car money in for instance. That was a coop buy for a bunch of markets. It's -- money is seeming to loosen up, but again we're trying to remain cautious.

Flipping over to Screenvision, I think you've said in the past that your experience during the auction process was that they were exceptionally rational. There was no crazy pricing to boost up some utilization rates in the short-term. What's your thought -- I'm not asking you who actually ends up buying it, but in terms of the type of buyer, it's strategic, it's a financial buyer, it's a VC. Which kind of buyer from your perspective is the best for you, not only in terms of rationality in the marketplace but the one that's going to help grow the overall share of cinema not just for you but for both of you?

I don't want to split hairs with you but I think the way we characterized Screenvision was that during this process they hadn't really changed much which really means they were selling at CGMs that we thought were somewhat lower than us. So, my comment the last call was they really hadn't changed much. As far as what we've seen for the interested buyers, it appears to be private equity with other media related entities in their portfolio. I don't know whether there's some sort of consolidation or synergy play there for them, but the two or so players that are left seem to be of that ilk. As far as I'm concerned, the rationale buyer is the good buyer from our standpoint.

Is the fact that they're not strategic, although they've bought some similar strategic assets a positive from your perspective in that you're not going up -- I'm going to use just to make up something. CBS as an example where their reach in the local market would be obviously significantly very great and be more competitive for you?

I would hope that they're going to have some of that if they're being bought by a private equity firm. So, there is going to be some financial pressure on them that wasn't there before that should lead to, I would hope, more rational pricing. We'll just have to wait and see. The deal's not done yet. We're continuing to monitor it.

Okay. Great. Thank you very much, guys.

Our next question comes from James Marsh with Piper Jaffray. Please proceed with your question.

Good afternoon, gentlemen. Two quick ones here. Gary, I just wanted to follow up on your comment earlier that total screens were down 2.3%. If you could just take me through that math again. It just wasn't clear to me. Secondly, one of you guys could follow-up on the growth of the Fathom business going forward and how the movement on DCIP might impact that growth rate?

Yes. Gary is accumulating the numbers to answer your first question so I'll answer the Fathom question. For us it's just a combination of two things -- creating a bigger network. We're up to over 500 live locations now where we can distribute live programming, over 600 screens because some locations have the ability to do it on two screens. So, that's part of the strategy is just to increase the distribution. That's pretty straight forward. The other part of the strategy is just more and more content. Obviously we've been highly successful with the Metropolitan Opera.

But that's not all. We did our first Saturday Night fight and that did really well. We do a lot of niche programming of various sorts. We just did a thing with Lance Armstrong, this Race to the Sky which is a mountain bike race here that's done in Leadville, Colorado. That went tremendously well. In fact, we're doing an encore later this month. The combination of more distribution and more content is going to continue to drive the revenue. Clearly, the DCIP deployment and the ability to start showing this alternative content on digital cinema quality projectors, I'm hopeful will attract more content. There will be more costs associated with the business end because there will be an alternative content BPF or whatever you want to call it which will be much lower than the film BPF but will add some fixed costs to showing alternative content in the theaters.

So, I'm hopeful that the increase in the quality will promote more content, will bring more people into the theaters, and obviously offset the higher fixed costs and the business model will be more attractive and there will be growth for us going forward. But this business I think has got quite a bit of upside just from what we're seeing in some of the stuff we're putting on the screens and the consumer response.

Excellent. Thanks.

And James, on the screens, because Marcus is no longer there, the screens are down, and that's down 2.3% but again that was a non digital circuit and all we did was national advertising on those. So, it wasn't -- we weren't generating a lot of revenue per screen on there. (inaudible)

The net loss was not as much, obviously.

2.3% is the total loss. There were 670 Marcus screens. But then we added the Cobb screens and some Muvico screens when Cinemark bought Muvico assets and some AMC Lowes Stars screens to offset part of that.

And so those 580 screens that you mentioned in whatever smaller regional circuit - ?

Most of those will come on next year.

Were they aligned with Screenvision before? Were they independent? Where did they come from?

There was both. It sort of depends. A lot of them were unique screen media or local people in the case of Cobb. In some cases they were sold nationally by Screenvision. We don't know how much. But that was the arrangement.

Thank you.

Thank you. Our next question comes from the line of James Dix with Wedbush Securities. Please proceed.

Hi, guys. A couple questions. Kurt, I think you said you only have remnant inventory remaining at this point. If you could just give a little color as to what you mean by remnant as opposed to other kinds of inventory. Have you sold more inventory at this point for the fourth quarter than you normally would? If so, why? You also mentioned that some of the networks are indicating scatter pricing is very strong in the fourth quarter. Are you seeing -- is the relationship between your pricing and the scatter pricing that the networks see staying consistent over time or is it changing? I'm just trying to get a sense as to how much read through we should be getting from what's going on in the dynamics of those markets for your business?

Clearly this DPM sort of go in tandem if you will. There's clearly a gap between broadcast or cable and us, us being higher, obviously. And we sort of go with the ebbs and flows of that. So, throughout most of this year and really until the last week or so, there was a lot of downward pressure on pricing just because the networks took a roll back in their upfront deals. So, every media buyer that came to us basically said, "Look, all the networks have taken roll backs. You've got to take a roll back as well." It just depended on the deal whether the roll backs were sort of the mid or low single digits, the way it was with the networks or it was higher. It was kind of all over the board. Sometimes it was lower, sometimes it was higher.

So, I would say it's not direct but there's clearly an influence on our marketplace that the television marketplace has on us. We're seeing that right now in the activity we've seen over the last week or so where there's clearly not been as much pressure by the media buyers because they're really needed the rating points. My sense is they have gone in some cases to broadcast and have not been able to get their stuff placed and now they're coming to us in some cases. In some cases they're just strict theater buys. What was the other part, the first part of your question?

Just on remnant inventory. You indicate there's really only remnants remaining local?

A non-remnant unit for us would be a 30 second unit across all four rating groups across our whole network nationally. A remnant can be one of two things. It can be the whole national network for a single rating like say G or PG. Or it can be regionally remnant if you will. Generally we try to sell everything we sell across our whole network so you don't generally get too much regional remnants. Generally what we're talking about in remnants here are certain parts of the overall platform based on the way we sell by rating. So, there may be a little bit of G rated. And we also divided up our network in sort of identical halves if you will, sometimes even in quarters. And split it up that way so you'll have a half net in G rated only. That would be a remnant.

It could also be timing. It could be somebody bought three weeks of the flight. So, you have one week left.

That's a good point. We have --

Or there was a run over into the next month or something.

We try not to break up flights and people will pay us a premium to do it. But that can happen as well.

The other part of the question was have you sold more of your inventory now than at this time last year. I'm just trying to get a sense as to how that dynamic is -- is that part of the reason why you're tightening your guidance range? You've sold more inventory than at this time last year? I just want to understand that.

I think we just have better visibility today about the fourth quarter than we did when we gave your guidance the last time. I think it's as simple as that. I haven't actually gone back and calculated how much more inventory we have or haven't sold because we're selling a different impression base in December this year than we were last year. Because one of the things that happened for instance last year in November we didn't have Lowes sort of clean. We had it clean all of sudden to December. So, the number of impression we had last year versus this year is a little sloppy. It's a little hard to answer your question specifically. Obviously I'm pretty happy where we're sold in December.

Okay. Sound good. Thank you.

You bet.

Thank you. Our next question comes from the line of Eric Handler with MKM Partners. Please proceed with your question.

Hi. Thanks. For taking my question. Two comments. First of all, I joined late so forgive me if you already touched upon this issue. When I think about pricing for the fourth quarter, maybe you can give some commentary around what you're seeing in terms of new advisors that might get a discounted rate versus returning advisors or full rate card buyers versus discounted rate card buyers. And of course then your content partners versus non content partners. And then secondly, wondering if you could give some commentary around the request for proposals for 2010 at this point right now versus where you were last year at this point.

Okay. I'll answer the last question first. We actually didn't talk about and won't talk about sort of the request for proposals as we talk. We did say that we've seen activity pick up pretty significantly over the last couple of weeks. We did give a dollar value, Eric, of how much we had booked for next year for our content partners, our scatter, and any other sort of long-term commitments we have. The numbers are this year we've got $102 million booked for next year. Last year at this time we had $126 million. Then the year before for 2008 we had $70 million. So, those were the numbers we gave.

That's booked and pending. So, not necessarily always a contract but pretty close to a contract and it's a matter of getting the thumbs up. It'll be done.

Then in terms of the fourth quarter as we think about pricing?

I'm not going to go into specific pricing of specific categories or content partners. What I can tell you is that it's been really soft as you see from our numbers in Q3. And really soft, really up until about the last week or so. And as we've been indicating every quarter for the last year, the scatter market continues to break later and later and later. We are seeing pricing firm up right now. There's a lot of talk in the broadcast world about pricing being even double digits about what they did in the upfront. That would seem to indicate that the television networks did the right thing by holding back inventory from the up front process. So, all of that I think has a positive impact on us. I'm also hopeful that if we are going to turn away some money in December which may be the case, that gets people going and trying to get booked for next year so they don't get blocked out.

Thank you.

Thank you. Our next question comes from the line of Scott Barry with Credit Suisse. Please proceed with your question.

Hey, Kurt. It's a bit of a shift with you guys targeting greater secondary and tertiary markets. Is that a direct client push back? Or is that just maybe a function of the fact that Screenvision may trade away from you guys?

I don't think it's disconnected from Screenvision trading away from us but I think it has more to do with us getting more into the CPG categories and the QSRs and people that need more ubiquitous coverage. What we're finding more and more is that we're at a reach disadvantage and a sort of geographic coverage disadvantage over television. If we're going to be successful in getting some of this money that's booked every single day of the year and advertisers that advertise every single day of the year, we've got to fill in our network. This is especially true in the retail environment where people have got individual locations scattered around the country. They can't buy mediums that don't advertise where all their stores are. I think it's mostly driven by that. But honestly I don't know whether Screenvision will go our way or not. We'll just keep watching the process. But in our business, the most important thing is distribution and what we always try to do is sort of match the progress of our revenue build or our ability to build budgets underneath our impressions and to build the impressions. I never want to be into that situation and I'm a little there right now in December in particular where if I had more impressions, I could sell them. There's money out there. So, we do have a lot of months where the exact opposite is true. If we can enter into agreements with circuits that don't have a lot of fixed costs associated with them, that will help us manage through this process of meeting demand in 4, 5, 6 months a year where we have more demand than we have supply right now and the opposite in those other months.

Just related, is there anything you can do, any initiatives that you can put in place to address some of those seasonally weaker periods. Or is that fill just a function of just further broadening the client base and filling in?

I really think it's the client base. September's a great month where there's an example. That used to be one of our weaker months. The last two years its been one of our stronger months on the utilization basis because we really developed a strong back to school business with the retailers. So what we need to do is really figure out what retailers buy when and go after the business. We are doing some things. We're looking at our audience and the way we sell a little bit differently to try to maybe give some more targeting to some of our clients that they don't currently have. Maybe that will attract more money. But we're working on a lot of ideas to try to fill in those weak months because that's where the opportunities are.

Thank you very much.

Our next question comes from the line of Rich Greenfield with Pali Capital Incorporated. Please proceed with your question.

Hi. A couple questions. One, historically you've talked to notably over 100% sell out particularly in the fourth quarter. Just listening to you talking about how you've got more demand than you have inventory, I'm just curious what is your ability to add some inventory at the end of the quarter to kind of juice the overall sell out? The second thing is just in terms of affiliates, obviously a couple of nice deals in the quarter making up for what happened with Marcus. I'm just curious when you look out over the quarter to the next 12 to 18 months, leaving -- assuming you don't get Screenvision and you've kind of said you've moved on. How many more affiliates -- how much low hanging fruit do you think there still is affiliate wise to capture given how you're doing? Thanks.

I think there's a lot of affiliates out there. I know that the Screenvision contracts, there's a number of them that are relatively short. Those are obviously on our target list. There are discussions that are ongoing. And I haven't completely given up on Screenvision. We'll see where the process goes. But I think there are opportunities out there, Rich. Of course we've also got Consolidated by definition joining us in '11. So, we'll have those screens come on board then by contract. So, all of that I think is very positive from the standpoint of the growth of our distribution.

With respect to your comment on the amount of inventory, as you know, we actually have up to 14 30 second units that we sell. We actually calculate our utilizations on 11 because that's what we release to the sales force. I think probably November and December are probably the first two months where we sold that extra unit. We got back that extra Coke unit, we got back. We sold that, I think, pretty good in December for sure and little bit in November. So, that's given us a benefit in expanding the inventory. But we've really tried to make sure that we don't get too carried away in our efforts to expand the revenue. We've got to always balance the show that we're putting up there, the effect on the theater patron and balance that with a demand in the marketplace.

So, you wouldn't consider adding yet one more spot and going to 16 or moving up a little bit further even for a part of the quarter to make up for what happened in October.

We resist that. I'm not going to say we've never done it for short periods of time. But we really resist it as much as we possibly can.

If you had more long form in there you'd be more apt to do it but you'd really have to have some long form.

If we've got a bunch of 60 second or 90 second or even in the case of the Army National Guard the last couple of years, they've put in two minute and even three minutes the year before. If you've got long form that looks like content, you can get away with a little bit more.

let me ask the question in another way then. Is it possible at this point in the cycle that that could still happen for the fourth quarter?

It could still happen.

In discreet segments, yes.

What we end up doing, of course is just taking local inventory out of sale. We're not actually extending the show per say.

Understood. But it's replacing -- it's growing overall dollars.

Of course. And we have the ability in the sort of middle of our show where we delegated some inventory to what we call regional. If that regional money is not there and we can sell it nationally, we're going to do it. So, it's important to note that the overall show itself isn't getting longer. It's just an allocation of inventory between local and national.

Perfect. Thanks so much.

Our next question comes from the line of Torin Eastburn: with CJS Securities. Please proceed with your question.

You mentioned in your press release that the decrease in third quarter revenues was primarily due to timing. Is that just the military spending or was it something else?

Content partner spending as well. Because if you look at last year's third quarter versus this year's third quarter, there was a lot more content spending last year than there was last year and most of that difference was pushed into the first half of the year. That's one of the things that we talked about why the first half was pretty strong this year is that we had more content partners spending money in this year's first half than last year's. If you looked at the breakout, this year is kind of 50-50. Last year was sort of 65-35. 65 being the second half of the year last year. And so it's those type of shifts that create this impact. If you look at our year to dates you can kind of see it because our year to dates have sort of stabilized.

Okay. I'm sorry if I missed this. What was the utilization for the quarter?

Just a second. 97 -- the quarter? 96.5.

Thank you.

Thank you. Our next question comes from Barton Crockett with Lazard Capital Markets. Please proceed with your question.

Great. Can you guys hear me okay?

I can. There's a little background noise. But we can hear you okay.

Okay. Sorry about that. Is there a scenario, if someone else bought Screenvision, let's say private equity, you guys could turn around and try to buy Screenvision from that other party? Or is that basically off the table in terms of your stance right now?

I'm open to any kind of transaction that's accretive for us.

Okay. On the fourth quarter of last year you guys talked about how much the extra week added to local. Any sense of how much it added to national in terms of revenues and attendance?

We haven't actually done it that way. The effect it probably had was it drove down our make good liability last year. At the end of last year, our make good liability was very low. So, without that extra week there is a little more risk that make good could be a little higher this year because of that. That's where it will effect national. Now, having said that, there's an awful lot of big films that are opening mid to late December including Avatar. You just don't know. That's the tricky thing about make goods. You really don't know where you're going to come out until you see what the attendance is, basically the last two weeks of the quarter.

Okay. Alright. And then the final thing is what struck me as a somewhat odd situation of maxed out utilization but declining CPMs. Normally I would expect that if you're selling out you'd be able to drive up CPMs. Were you surprised by the late breaking business? Is that why you weren't able to maximize the rate?

Remember, Barton, you're selling Q4 especially probably more than any other quarter, quite a ways in advance because November and December are highly utilized months. But you still had quite a bit left to sell. So, I'd say the stuff that was booked earlier was probably at a lower CPM. The stuff that's booked later, you're taking a risk if you wait too long to finish up booking.

Also, utilization is just a function mathematically of how many impressions you have to sell. So our utilization in the third quarter was driven up a little bit by the fact that our number of impressions were down. As you've probably heard from some of the other circuits, Regal in particular, their third quarter attendance was skewed a little bit by the timing of Fourth of July, for instance. So, third quarter attendance overall was down, obviously you had some tough comps with back end last summer, I guess Harry Potter would've been the comparative comp on a film by film basis. So clearly this year was a weaker film quarter because of the calendar and because of the film schedule. So, it's hard to just say your utilizations were way up. Why weren't your pricing. Like I said, the utilization was up a little bit more just because the attendance was down.

That's helpful. Thanks a lot.

Thank you. There are no further questions at this time. I would now like to turn the floor back over the management for closing comments.

Okay. Thank you very much. There have been a lot of documents filed by us, SEC documents over the last few hours. Once everyone gets a chance to review them, we will be here to provide any answers to any questions you may have and thanks again for all your support and we'll talk to you next quarter. Thanks.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.