National Cinemedia Inc (NCMI) 2010 Q1 法說會逐字稿

Greetings, and welcome to the National CineMedia, Incorporated First Quarter 2010 Earnings Conference Call. (Operator Instructions.) 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 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 and Exchange Act of 1934 as amended. All statements other than statements of historical facts communicated during this conference call may constitute forward-looking. 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. Welcome and thanks for joining us on such a chaotic day in the marketplace. Today, I will provide a brief review of our Q1 results and an update on the marketplace. Gary Ferrera, our CFO, will then provide a more detailed discussion of our financial performance for the quarter and will provide specific guidance for Q2 2010 and update our outlook for the full year. And then, as always, we'll open the lines for questions.

I was very pleased with the Q1 results compared to a relatively strong performance last year as we grew 2010 revenue 15.1% and adjusted OIBDA 20.8% over Q1 2009. These favorable results reflect a recovering advertising marketplace in another strong quarter for our Fathom consumer business. We also increased our operating margins during the quarter by nearly two percentage points due to increases in our high margin advertising revenue and continued margin improvement in our Fathom business. It is also important to note that these Q1 results are coming off a relatively strong Q1 2009 for our national ads business as most networks experienced significant Q1 2009 national ad revenue declines versus 2008. Our Q1 2009 national revenue increased 32.4% versus 2008. We are also pleased to announce a 12.5% increase in our quarterly dividend to $0.18 per share from $0.16. This increase reflects both the continued growth of our business and our commitment to return a substantial portion of our free cash flow to shareholders. Our national advertising revenue excluding beverage grew 8.5% off a relatively strong 2009 primarily driven by record Q1 inventory utilization of 78.1% versus 67.4% in Q1 2009. The most encouraging part of this inventory sell through increase was the fact that we were able to increase CPMs 1.7% while Q1 saleable advertising impressions increased 2.4% over Q1 2009 due to the continued expansion of our network and a strong box office that was fueled by several successful 3D films.

Our Q1 national advertising revenue also benefited from the expansion of our client base and higher spending by one of our larger existing clients, partially offset a shift in spending by our content partners to later in 2010. The number of national advertising contracts, excluding content partners and our cell phone PSA during Q1 increased by 18% as we continued to successful add new clients and categories while our Q1 average national contract value was approximately the same year over year. So far, 10 national clients have made 2010 commitments that had never bought with us. There were also five clients added during the first quarter that had not spent since 2006. The first time clients included businesses in the personal care, domestic auto, beer, and governmental categories.

While our future visibility has improved, there is still a fair amount of last minute buying as clients continue to monitor the strength of the economic recovery and look for the last minute alternatives for broadcast overflow caused by rating shortfalls in the tight TV scatter market. In fact, the tight TV scatter market has positively impacted our CPMs. As we have mentioned on prior calls, our CPMs continue to be impacted by the supply/demand dynamics of the national TV marketplace and available TV ratings. While we expect the strong pricing environment to continue for the next few quarters, the continued expansion of our client and category base will likely dampen our CPM growth in low demand months as we sell that time to clients that are more CPM sensitive.

We have also recently closed several low priced airplane deals that will allow us to place the inventory wherever we want, thus allowing us to record revenue related to inventory that would have otherwise gone unsold. As a result, we anticipate some quarter to quarter CPM fluctuations as we place increasing focus on expanding our client and category base and growing utilization levels in low demand months, while continuing to maintain premium CPM levels in high demand months.

We continue to work hard on increasing our impression base through the addition of new network affiliate theater circuits. In addition to the 70 net founding member screens added in 2009 and 332 net affiliates screens added to our network during Q1 2010, we have recently announced affiliate agreements with Metropolitan Theaters and a new Rave Cinemas entity that acquired a portion of the National Cinema circuit in 2009. Metropolitan Theaters will add approximately 77 screens with 3 million attendees beginning in Q2 2010 and the Rave Theaters will add approximately 475 screens and over 18 million annual attendees beginning in June 2011 when the existing contract with ScreenVision expires. We will also benefit from the addition in 2011 of approximately 400 Regal consolidated screens with approximately 15 million annual attendees currently being sold by ScreenVision.

These network additions will continue to expand our reach and will improve our geographic coverage and competitiveness in the national advertising marketplace. In fact, based on unduplicated impressions, our network would be ranked among the top TV--top 10 TV networks in the U.S. While this is great progress, there are still several clients in categories that do not buy us as our market coverage is still not as ubiquitous as TV and other national media networks. As such, we continue to have conversations with several regional theater operators, and we expect to continue to add new affiliate screens in the future. While it will not impact our network size materially, we have--we are expecting the completion of the AMC acquisition of the Kerasotes circuit over the next few months. This AMC acquisition will significantly extend the contract life associated with these theaters, enhancing our operating margins and reducing our leverage as we convert the current rev share agreement to the longer term, higher margin, founding member theater access fee structure.

One of the strongest signs of the recovery advertising marketplace was the Q1 growth of our local advertising revenue that increased nearly 36% over a relatively weak Q1 2009. These strong results were driven primarily by a significant improvement in regional sales but at a much higher individual contract value and thus a few new deals can have a significant impact on our overall local sales levels. The regional categories that contributed most to the quarterly revenue increase were regional auto, telecom, cable, MSOs and government. Our smaller local clients also began to increase their spending although somewhat more cautiously as fear has started to give way to hope that the economic recovery will continue to accelerate.

Fathom had another strong quarter as combined Q1 revenue increased over 25%. This was driven primarily by nearly 37% revenue growth in our consumer events division as it benefited from our expanded live broadcast capabilities and an increase in the number of higher quality events, including strong New York Metropolitan Opera titles. With the expansion of our network and improving programming, we appear to be approach a tipping point where consumer awareness is reaching critical mass providing content owners with a national distribution alternative and a powerful new marketing channel. We are also beginning to see increased interest from theater owners as they begin to understand the value of being part of a larger national network.

Looking ahead, we expect the interest in our network by a broader media marketplace to continue to grow as advertisers and content owners look for new more effective media platforms. Our RFP activity levels remain very high as media buyers look for ways to replace declining broadcast ratings and increase the effectiveness of their marketing plans. We also expect to benefit from the continued growth of our Fathom business and online mobile initiative as we bundle event sponsorships, online mobile, and our in theater inventory to create a unique integrated entertainment focused advertising product. The recent completion of the DCIP financing and the acceleration of the digital cinema deployment will also begin to have a more meaningful impact on our business. In fact, we ran our first 3D advertisement in Q2 creating a unique product that could help to expand our client base and increase our future CPMs. Given all these factors I am very optimistic about our future as we continue to improve our competitiveness in the national and local media marketplace.

Now, I'd like to turn over the call to Gary to give you some more details concerning our Q1 financial performance and provide guidance for Q2 and the year.

Thank you, Kurt. I'll now spend some time reviewing our first quarter financial performance in a bit more detail as well as discuss our guidance for Q2 and full year 2010. For the first quarter, our total revenue increased 15.1% to 84.6 million, driven by a 12.8% increase in total advertising revenue, including beverage, to 67.8 million, and a 25.4% increase in Fathom events revenue to 16.8 million. Total Q1 adjusted OIBDA increased 20.8% to 32.5 million from 26.9 million in the first quarter of 2009. Strong operating leverage in our advertising business helped drive our adjusted OIBDA margin to 38.4% up from 36.6% during Q1 2009. Adjusted OIBDA, including the Regal consolidated integration payment for the first quarter, was 32.9 million versus 27.3 million in 2009. You should note that the effect of integration payments are not included in our operating results as those net payments are recorded directly to our balance sheet.

Looking briefly at diluted earnings per share, for the first quarter, we reported GAAP EPS of $0.03 which approximates the $0.03 earned in Q1 2009. You should note that net income and EPS in both Q1 2010 and 2009 are impacted by the non-cash change in fair value of the interest rate swap recorded through interest expense. Excluding the impact of this item, our Q1 2010 EPS would have been $0.04 doubling our EPS of $0.02 in Q1 2009.

Our advertising mix for Q1 2010 was as follows - 68% national, 18% local, and 14% beverage, versus Q1 2009, which was 71%, 15%, and 14%, respectively. Q1 national ad revenue excluding beverage grew 8.5%, driven by an increase in utilization to 78.1% compared to 67.4% in Q1 2009, across a 2.4% increase in our Q1 impression base and a CPM increase of 1.7%. The strong results in our CPM and utilization based on screen revenue were partially offset by lower lobby revenue resulting primarily from a decreased quarterly allocation of must spend content partner dollars. In addition, we did not sell a branded content onscreen segment in Q1 2010 as we had done in Q1 2009 as the client chose to purchase regular onscreen inventory instead.

Our Q1 beverage revenue increased 9.3%, driven by the six points--the 6% contractual CPM increase in 2010 and a 3.1% increase in founding member attendance. Our local advertising growth rates continued to improve in Q1 2010 from sequentially declining levels of negative growth during the first three quarters of 2009 followed by strong positive growth in the fourth quarter of 2009. Q1 2010 local revenue increased 35.6% over Q1 2009 with same screen sales increasing 29.1%. You should note that Q1 2009 represented a very weak quarter for our local business and we do not expect this high growth rate to continue for the remainder of the year as quarterly comps become increasingly more difficult and smaller local businesses remain cautious.

Total Q1 advertising revenue per attendee increased 10.5% to $0.42 with our national advertising revenue per attendee, excluding beverage, increasing 6.1% to $0.29 per attendee and our local ad revenue per attendee increasing 32.5% to $0.08, both on a 2.3% increase in Q1 theater attendance. We entered the first quarter of 2010 with approximately 300,000 of make-goods and as the end--as of the end of the first quarter we had approximately 600,000 of make-goods. Make-good balances remained low as a strong box office near the end of each of the prior two quarters resulted in nearly all campaigns being fully delivered. By comparison, we entered the first quarter of 2009 with approximately 1.3 million in make-goods, and at the end of Q1 2009 we had approximately 2.5 million of make-goods.

Our combined Fathom events businesses had another solid quarter. This was driven by a 36.8% increase in Fathom consumer revenue as the division has remained strong with increased attendance on stronger Metropolitan Opera titles and two successful live, original programming events. This was offset partially by a 2.6% decrease in Fathom business revenue as the division, which focuses on corporate meetings and events and marketing events, continues to be impacted by the fact that corporations still have not returned to their pre-recession spending levels.

As of April 1, 2010, we had 17,076 total screens in our network, including 2,732 network affiliate screens, representing a 1.6% increase in total screens at the end of the first quarter versus the end of Q1 2009. Approximately 16% of our network is comprised of affiliate screens versus 14% at the end of Q1 2009 and approximately 91% of our total screens are connected to our digital network. Although that percentage is expected to increase as certain of the new affiliate screens are converted to digital screens in the near future. These digital screens now generate approximately 93% of our attendance.

Our capital expenditures were 2.1 million for the first quarter compared to 2.5 million in Q1 2009. We now estimate that 2010 CapEx will be in the range of nine to 11 million primarily due to digitizing a portion of our recently signed network affiliates. This estimate assumes that no additional network affiliate agreements are signed during 2010. Regarding our balance sheet, our total debt outstanding as of April 1, 2010 was 809 million, comprised of our $725 million term loan, an $80 million balance on our revolver, versus the 74 million revolver balance at the end of Q1 2009 and a 4 million balance remaining on the non-interest-bearing note payable to Credit Suisse associated with Reach Media Group consolidation. The revolver balance, net of NCM LLC cash and cash equivalents was down to approximately 46 million at the end of Q1 2010 versus 51 million at the end of Q1 2009.

In addition to the 34 million cash balance at NCM LLC, there was a $48 million cash balance at NCM, Inc. at the end of Q1 2010, approximately the same as at the end of Q1 2009. The NCM, Inc. Q1 2010 cash balance was adversely impacted by--versus 2009 due to the timing of the initial annual tax receivable agreement payment to our founding members of approximately 14 million in March 2010 versus approximately 13 million in April 2009. A portion of the 48 million NCM, Inc. cash balance is reserved for income tax payments and tax receivable agreement payments to the founding members. However, excluding these tax associated reserves at our new $0.18 per quarter dividend rate, at the end of Q1 2010, we had enough cash to pay approximately five 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 5.6% for Q1 2010, versus 6.1% for Q1 2009. Approximately 550 million of our $725 million term loan due in February 2015 is fixed under interest rate swap agreements at 6.7% and the remainder is floating rate debt at 2% as of April 1, 2010. The average interest rate on our revolver borrowings was 2% in Q1 2010 versus 2.3% in Q1 2009.

I would like to take a moment to provide a final update on our relationship with Lehman. As discussed on our previous call, we assigned the interest rate swap with Lehman to Barclays in February under the same terms and notional amount and also paid back all back payments to Lehman we had held until resolution of the situation. These payments totaled 7 million plus an immaterial amount to default interest.

Regarding our revolver, the unfunded Lehman commitment of 6 million was assigned to Barclays in February and we transferred the admin agent role from Lehman to Barclays at the end of March, as well as executed an amendment that allows us to pay down and borrow on 66 million of the revolver. The remaining 14 million revolver balance continues to be held by Lehman and has effectively been converted into a term loan that will be excluded from any pro rata share of revolver payments and will become due when the revolver term ends in February 2013. Our pro forma net leverage in NCM, LLC as of April 1, 2010 is approximately four times trailing four quarter adjusted OIBDA, including the consolidated integration payments. You should note that we are well below our financial covenant of 6.75 times as of April 1, 2010. This covenant reduces to a floor of 6.5 times beginning in 2011 through the maturity of the term loan in 2015. While we do not anticipate paying down our term debt, our leverage should decline over time as OIBDA grows.

I'd now like to provide an update on our current content partner revenue allocations for 2010. We are currently projecting a 2010 allocation of approximately 45% in the first half of the year, and 55% in the second half of the year, a slight shift from the allocations provided during our outlook call back in early February. The allocations at that time were approximately one third in the first half of the year, and two thirds in the second half of the year. You should note that a shift in must-spend commitments between quarters is possible as film and DVD release dates or TV program schedules shift throughout the year.

Turning to our Q2 guidance and annual outlook, for the second quarter we expect total revenue to be in the range of 97 to 100 million, and adjusted OIBDA to be in the range of 48 to 50 million, excluding the impact of make-goods. With respect to our annual outlook, we are increasing our previous guidance for 2010, and are now expecting total revenue to be in the range of 402 to 412 million, and adjusted OIBDA to be in the range of 198 to 205 million, excluding the impact of make-goods. The increased annual guidance is primarily due to our stronger than expected Q1 results and a higher rate of booked and pending activity versus this time last year. Our national advertising revenue, including content partner beverage, cell phone PSA, and booked and pending scatter contracts is now approximately 80% of our total 2010 national advertising revenue target, whereas last year we were at approximately 71% of the actual 2009 national advertising revenue. While this higher booking rate may simply be due to timing, it is encouraging, given the late-breaking scatter environment experience over the last several quarters.

That concludes our prepared remarks, and we'll now open up the lines for any questions you might have.

Thank you, ladies and gentlemen. We will now be conducting a question and answer session. (Operator Instructions.) Our first question comes from Alexia Quadrani with J.P. Morgan. Please proceed with your question.

Thank you. Just a couple of questions. First, any comments on how April trended versus the first quarter? And the second question is that your CPMs crept up in the first quarter. Was that really just due to strong demand, or is there any change to your previous sort of guidance which suggested some near term pressure to CPMs as you diversify the client base?

Alexia, hi, this is Kurt. I think that the CPMs clearly have firmed up considerably since late last year. And as I said in my comments, I think most of that is related to the tight TV scatter market. As you know, a lot of the money that we get is budgeted as TV money and then eventually gets allocated to us. So I just think that this is a pure reflection of what's going on in the broader marketplace. Occasionally we will have a mix of clients that will affect it. We had a few clients in the first quarter that had some pretty high CPMs, so that obviously helped, but I think at the end of the day, you've got to kind of go from what we said, that--and we're going to continue to push CPM pretty hard during some of the more--the higher demand months. And there's going to be probably a bit lower CPMs in those lower demand months, especially related to these airplane deals.

We haven't really commented historically on individual months, so you've got to kind of go with our second quarter guidance on your April question.

Okay, just a thought then on the Fathom business. You tend to see such very good growth in that segment. Could you give a sense of where you think the opportunity is in that business longer term and how big it could be?

Well, I'm not going to talk about the future in terms of how big we think it could be. I think it's going to be a continuing growing part of our business. I think there's clearly upside there. We haven't done a very good job yet creating sponsorships around our Fathom events. I think there's an opportunity there. And clearly, as our network gets bigger and bigger, and as the digital cinema capabilities come into our network, both from a higher quality 2D and 3D capabilities, I definitely think there is some upside. The relative importance to our business, of course, you'd have to answer the question, well, how much does the advertising business grow? Because the advertising business, obviously, has much much higher margins than the Fathom business, so while I think the revenue growth of the Fathom business will clearly continue to outpace advertising, because of the margin, the advertising will continue to be the most important part of our business.

Thank you.

Yes.

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

Thanks. Good afternoon, guys. A couple questions. Kurt, I know you've been looking to expand the number of airplane deals that you have for a while. Sounds like you've made some progress there. Just wondering what in particular drove it and if you can give anymore color on the relative size of those deals in terms of the amount of inventory that you might be able to place through them. And then, second, any update on your overall concentration of categories, like how much revenue you're getting from your very largest categories? Is that starting to drop a little bit as you're getting new advertisers to come online? And then, finally, any update on the status of ScreenVision or does that seem to have kind of gone to the back burner for the moment?

All right. Let me--the airplane deals, obviously not going to disclose the size of the deals, but it's a few million dollars, so it's going to be significant in those months where we weren't selling at high levels of our--the sellthroughs are reasonably low. So I'm very excited about those. As you know, the CPMs on airplane deals are considerably lower than the sort of average, if you will. But for us, it's a heck of a lot better than letting the inventory burn. So I think the reason that we've had the success we've had, I think, too, it's some really good selling by Cliff and his group for sure. But I think also some of the clients that are doing these deals aren't traditional cinema clients and we've just been able to get them comfortable with the cinema medium. So I think it's a combination of I think great selling and just getting people more comfortable with the medium.

Your second one, update the customer categories. I'd say we're getting growth across the board. I mean, we've had some of our traditional categories, like the car companies, obviously they've picked up, especially the U.S. car companies are starting to show life again. So that's become a big category. Military continues to spend. That's been one of our historically strong categories. So I think our growth--you're seeing a contribution to our growth both from traditional categories and as I mentioned in my comments, the addition of several new clients. So I think that's really what's pushing the growth that's in both categories or both areas.

ScreenVision, I guess it's pretty common knowledge that their process has been terminated. I really don't know any specific color on that, so I can't really comment. I just know that they had--have stopped the process of trying to sell themselves.

Okay. Thanks very much.

Thank you. Our next question comes from the line of James Marsh with Piper Jaffray. Please proceed with your question.

Great, thank you. Two quick ones here. One, just to follow up on the Rave screens that you were talking about adding into your account shortly. Does that include all the screens that they're going to be managing for National Amusements as well, or is it just the screens that Rave owns? I'm not sure exactly how that works.

Well, they actually will have two corporate entities that the Rave management will be managing. And while there's a few theaters that have moved from one entity to the other, in basic terms, the Rave theaters that existed before the National Amusements acquisition will continue to be serviced by ScreenVision and the theaters that they acquired into a separate entity financed by a different set of investors will be the ones that will come onto our network mid next year.

Okay. That's more clear. And then, I just had a question on Fathom in general and wanted just to talk a little bit about how the economics work there. And maybe you could talk a little bit about the recent boxing and UFC deals and how those economics look broadly without getting into too many specifics. And just how that model has evolved over the last say year or so. I mean, are there any trends there?

Well, the model continues to be a straight revenue share. We've resisted and will continue to resist the temptation to go down the path that television has gone down of paying upfront licensing fees and all of that. We think that's a very bad direction to go in, so we've continued to be able to strike deals with these larger franchises like the ones that you mentioned - UFC and the boxing and so on, on a rev share bias, so that everybody is aligned equally and everybody is pushing in the same direction. So I actually like the model. I think it's the right model. It's been the model that's been in the theater business for years and years and years and it's worked and I think it will work in the alternative content as well.

Are there any particular segments that you're working on within Fathom that don't like the rev share?

Oh, none of them like that. Everybody would like to have a bunch of money paid upfront on--.

--That really don't like it.

--Yes, a guaranteed basis. And of course everybody asks, but I think the model is evolving into one that's a revenue share base.

All right. Thanks, Kurt.

Yes.

Thank you. Our next question comes from the line of Barton Crockett with Lazard Capital Partners. Please proceed with your question.

Okay, great. Thanks for taking the questions. It's Lazard Capital Markets. I guess a couple of questions. One is getting back to ScreenVision. The sale process has stopped, but there does seem to have been a change in management there. And I'm just wondering if you could tell us about how competitive you're seeing ScreenVision now for advertising deals and also for affiliate deals. I mean, do they--is there any change? Are they less competitive as they go through their process here or more competitive as they try to keep it together or is there no change?

I would say at the level of advertising sales I wouldn't say there's been much change. The same person that ran their sales group before is still there, [Mike Chico]. So I don't think there's been really much change in the marketplace. I think on the front of theatrical you've probably read we signed up Rave and shortly after that they signed up [Harkins] for a little bit longer term. It was somebody they already have and I think they just extend the term a few years. So I don't know what to read into that. We're--as I said in my comments, there's still a number of circuits that we've having positive conversations with and we're going to continue to expand our network. The main reason is because I think it makes us more competitive in the TV marketplace, and that's the primary place that a lot of the growth has come from. And we still have a lot of clients, QSRs, some of the retailers and so on that don't buy cinema as much as I think they will in the future because the net--there isn't a big enough efficient network out there and it's quite honestly a little too hard right now for them to buy both networks.

Okay. And then, I wanted to ask a question about 3D. I mean, you sold your first 3D ad. You know, you have someone like Cinemark this morning talking about a goal to get at last 30% of their screens and potentially up to 50% 3D, 30% by the end of this year, more after that potentially, with an idea that maybe that's a comparable amount of box office we'd get in 3D. You've in the past been relatively cautious about the 3D add opportunity. Is your view of that changing? I mean, is there a day you think in the not too distant future where it might be a meaningful part of your mix?

Well, I don't think our view has ever changed. I think what has changed is the technology is now getting deployed into the theaters that can deliver a platform--an efficient platform for our advertising clients. Our cautiousness was really based on making sure that we could provide a quality product to the advertising marketplace and a product with enough reach and number of screens, impressions, and so on, that made a difference for our advertising clients. So I think with the DCIP financing getting completed and the rollouts all in full swing, as I'm sure Regal and Cinemark has talked--have talked about, we are obviously now gearing up. I mean, we've been preparing for it for two years. We just didn't want to get too far ahead of ourselves with the marketplace and wanted to make sure that the product that we were going to offer was a quality one.

Okay. And then, the final question here, your guidance would seem to suggest an assumption that revenue growth slows in the second quarter both at the low end and I think at the high end versus the rate in the first quarter, yet the comp doesn't seem any more difficult. In other words, revenues were up less in the second quarter year over year than they were in the first quarter. What's decelerating in your business to prompt that guidance or is it just a measure of conservatism?

Well, I think that clearly there's a tougher comp in Q4. Our Q4 numbers last year as you recall, we did a lot of catching up in two months, November and December. So our cautiousness clearly mostly is in fourth quarter. Third quarter comps aren't quite as bad and so you call it conservatism, you call it whatever you want. We've made a practice of making sure that when we put numbers on the Street we're darn sure we can meet them. And I think so far we've been able to prove that we can do that and in most cases exceed them.

And my question was really about the second quarter guidance. I mean, is there something decelerating there or is that more just conservatism?

No, I think the growth that we're putting out there on the Street for second quarter is pretty good. And I don't--.

--It's just a little bit slower than the first quarter.

Yes.

Well, I mean, the first quarter was a very, very good quarter, so there's no doubt--I mean, we did mention how high utilization was compared to any quarter in the past. So the quarter over quarter growth was very, very good.

Yes. The other thing you have to understand is that there's a lot more opportunity for growth in the first quarter than there is in any other quarter. And we've got a lot more open inventory, a lot more pricing flexibility and so on in the first quarter than we do in every other quarter just because we have more inventory available and because our utilizations in the past have been lower in the first quarter. So second quarter last year, June was a very strong month, May not so much, and I guess April not so much. So look, I think we can continue to grow our business as our guidance would indicate.

Okay, great. Thank you.

Okay, thank you.

Thank you. Our next question comes from the line of Anthony DiClemente with Barclays. Please proceed with your question.

Hi. Thank you for having me on the call. I have a question for you, Kurt. And you made a comment in part of your opening remarks where you talked--you said something about reach and that in certain cases that you still get a little bit of pushback from prospective ad buyers--sorry for paraphrasing what you said--in terms of cinema advertising (inaudible) reach. So just at this point in the life cycle of the business I was just wondering if you could just elaborate just a little bit more on how those conversations are going with prospective ad buyers and what are the hurdles, has it reached a hurdle, why is it still a hurdle, and what you see as the path towards closing the pricing gap that you have.

Sure. Well, the reach issue for us is really more about probably what I'd call C&D county smaller markets. We have incredibly good coverage in the top 10, top 25, even top 50. There is one market in the top 50 we're not in. It happens to be Memphis. But generally, the pushback we get are from the QSRs, some retailers, some CPG companies, because we don't cover all of those smaller markets where they may have stores. And so, that's when I say reach, we're just not--and I used the word "ubiquitous." We're just not as complete coverage as television is. Television and I guess now the internet are the two mediums that you can say are perfectly ubiquitous. And so, that's the--that's really what we're talking about from the standpoint of reach.

Now, the way to obviously conquer that, if you will, is what we're doing. It's creating relationships with a lot of the smaller theater operators. You'll note that a lot of the announcements that we've made have been really focused on some of the C&D counties. The announcement we made about Rave, you will note that they bought a bunch of theaters in Cincinnati. That was one of the larger markets we didn't have as good of coverage as we would've liked. It happens that P&G is located in Cincinnati. That's kind of a strategic deal for us. So it's those sort of things that we're really looking at to try to fill in our coverage to make sure that we get closer and closer to the ubiquitous coverage that TV can make.

The other thing you might note, and in fact there was an ad in Ad Age this week, is that we are starting to position ourselves more as a reach medium as we've gotten bigger and bigger. And the ad is kind of a clever ad, I thought anyway, that said that we were the number seven network in the country based on unduplicated impressions. In fact, on the weekend, we were the number one network based on that unduplicated impression measure. So we are very much starting to approach the media world as a more of a reach medium and we're getting there. We're not perfect yet and that's where we're trying to get to.

Do you think the ad agency folks are starting to recognize that a little bit more on behalf of their clients and how are those relationships evolving?

Yes, they clearly are, and we're obviously doing our darnedest to make sure they notice it--.

--Right--.

--And understand it. And I think the growth that you're seeing in some of our categories that I mentioned on the call is a reflection of that.

Great, thank you very much.

Yes.

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

Hi. Good morning--or good afternoon. Thanks for taking the call. So a quick question for you. Can you talk a little bit about the airlines side? Should we be looking at this more as just a way to smooth out inventory, sort of the way you sort of balance out inventory management in sort of traditionally slower quarters? Is that the way we should be looking at it?

Yes.

Okay.

It's a technique that the TV guys have used for years. They have another category called direct response that they also are able to use. Unfortunately, because of the nature of those direct response ads, they just don't play very well in cinema, and so direct response is not a category that we compete in virtually at all. So we have chosen to do these sort of airplane deals with these clients as a replacement for that.

Okay. And then, in terms of--I mean, and then there's just so much inventory availability for you on airlines that if there's (inaudible) it doesn't really come into play here, if you will?

Well, yes. It's not on airlines. The reason--and maybe you misunderstood. These are called airplane deals because we can "land" the inventory anywhere we want. So they basically--.

--They used to be called helicopter deals to be more clear.

Yes, just helicopter deals would be better wouldn't it.

Okay.

But we have the complete flexibility to put the inventory wherever we want and in exchange for that it's obviously done at a lower CPM.

Sure. But at least it clears through inventory effectively the make-goods.

Correct.

Okay. When looking at the (inaudible) increase the dividend, can you talk about why you chose a dividend increase as opposed to a share buyback? Was it issues or concerns about liquidity? Was it sort of the founding members not really wanting to sell stock back but wanting more cash upfront? Can you talk about sort of the capital allocation decision, if you will?

Yes. First of all, the decision on dividend has nothing to do with the founding members, because the cash that's being used to pay the dividends has already been distributed out of the LLC that we are partners with the founding members. So it has no relationship whatsoever to the cash or anything that the founding members get. As you know, the public entity that is receiving these dividends is 100% owned by the public. So this is really about living up to our commitment to distribute a significant portion of the cash that we generate up to the public company. And we took a little breather over the last 16, 18 months. I think given the economic things that were going on, I think that was prudent. We've obviously, as Gary indicated in his comments, built up a fairly significant cushion, if you will, and we felt this was the right time to start increasing that dividend again, and as we've said in the past, we'll continue to monitor those dividends. And we are very committed to living up to that commitment when we went public to distribute a substantial portion of our free cash flow.

Okay, that's great. Thank you.

Thank you. (Operator Instructions.) Our next question comes from the line of Torin Eastburn with CJS Securities. Please proceed with your question.

Hi. Good evening. Just two quick ones. The first one is about the lobby and entertainment network revenue. Does that tend to be fixed or tied to attendance?

It's not fixed, clearly, because we sell it just like we do onscreen. We sell as much of it as we can.

And the part that's on the [LIN] is based on eyeball in the same way that it would be onscreen. It would be the other stuff like box office handouts and things like that that wouldn't necessarily relate to the eyeballs.

Yes. Said another way we sell it on a CPM basis just like we do onscreen. Obviously, the CPMs are quite a bit lower than the onscreen. But it is sold in a similar manner.

Okay. When you give CPMs does that include the lobby revenue?

No, that's just our onscreen CPMs.

Okay. And the other question, your share based compensation ticked up this quarter. What does your full year guidance assume?

This full year guidance doesn't assume anything on that because we exclude all of that share based compensation from the calculation of adjusted EBITDA or OIBDA. And so, I think if you go to our press release you can see the adjustments in there that we've made from the GAAP financials to OIBDA. That's one of the add backs. So it doesn't actually have any effect on our guidance in effect, because we eliminate it.

Well, except that it's baked into SG&A, right?

Yes, but we add it back when we calculate adjusted OIBDA and the guidance is based on adjusted OIBDA.

Okay, thank you.

Thank you. Our next question comes from the line of Richard Greenfield with BTIG, LLC. Please proceed with your question.

Hi. Just a couple of quick questions. One, you talked about 3D earlier. I was just curious. Now you're actually starting to take--or sell 3D ads. What type of a premium are you getting and how should we think about the relative value of 3D to non-3D? Is there any type of factor we should be thinking about just given how many 3D movies are going to come out and how I think advertisers are going to want this. And then, you had some content that I thought was relatively differentiated with Kraft recently that's been running. And it seemed to be a very high stylized creative ad. And I was just curious whether--what type of attention has this sparked among other advertisers, both in the category and just more broadly? Because it seemed like more than just your traditional advertisement that you can run on the big screen and I was just curious what reaction has been. Thanks.

Yes. On the 3D, Rich, I'm obviously not going to give you any numbers. But the premium is meaningful and obviously there's a lot more work involved by everybody on our side and on the production side. So it is a more expensive medium. There is no question about that. So--and it is something we'll continue to look to. We have a few clients looking at it. I would say there's a lot of interest around it, but at this point it's been tough for people to pull the trigger because of the incremental production cost, it's a new medium that people aren't used to yet, and so on and so on and so on. So I suspect we'll go through some of the same growing pains we went through with high def when high def came into the marketplace. As soon as the creative agencies get a little more comfortable with it, costs will continue to come down of creating it, and you'll continue to see this as a bigger and bigger part of our pre-show. We've actually designed--I don't know how much you looked at this, but we designed a 3D pod--we call it First Look 3D--that is the last two or three minutes currently of the advertising pre-show. And we've created this so it can continue to expand back. We still end the show at the advertised show time, but the 3D pod can continue to expand back as there's demand for 3D ads.

And your second question on the Kraft thing, yes, this was I think a bit of a groundbreaking deal. We've been trying for years and years to get brands, non-entertainment company brands, to start thinking about longer form content. And this is the first time that we've really gotten a brand. In this case it's obviously Kraft.

Outside the military.

Yes, outside the military. That's correct. Thanks, Gary. Ex-military guy, you had to add that.

Yes, had to add that.

Anyway, outside of the military it's the first non-entertainment brand that has really gone forward with this. And we're obviously very hopeful this creates some movement amongst other brands because we do have content segments that we control that we can sell to non-entertainment companies and that's in effect what happened here. And also, just selling our normal inventory in longer form we think creates a much better presentation for clients. And it also gives us a little more flexibility to expand the pre-show like we did in the fourth quarter.

Thanks.

Yes.

Thank you. I would now like to turn the floor back over the management for closing comments.

Great. We don't really have much to close on other than thank you very much for all your support and thanks for getting on today. I know it was a pretty hectic day in the marketplace. And we will be available for the next few hours, if anybody has any additional questions or follow ups. So thanks, again. We'll talk to you soon.

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