National Cinemedia Inc (NCMI) 2010 Q2 法說會逐字稿

Greetings, and welcome to the National CineMedia, Incorporated second quarter 2010 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. Thank you, 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 and 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 second quarter 2010 earnings conference call. Today, I will provide an overview of our Q2 results and an update on the marketplace. Gary Ferrara, our CFO, will then provide a more detailed discussion of our financial performance for the quarter and will provide financial guidance for Q3 and updated outlook for 2010. And then, as always, we'll open the lines for questions.

Our Q2 2010 revenue and adjusted OIBDA growth from 6.7% and 10.2% respectively over Q2 2009 reflect the continued recovery of the advertising marketplace and robust TV scatter market, offset slightly by a decrease in Fathom revenue. While these results were at the top end of our guidance range and resulted in an increase in operating margins, they were dampened somewhat by lower than projected late May and early June attendance related to a few PG-13 films. This lower PG-13 attendance combined with a record June inventory utilization of 107% resulted in an increase in the quarter-end make-good liability balance and a decrease in Q2 revenue of approximately $4 million.

It should also be noted that our current quarter grew off a very strong Q2 2009. The Q2 2009 revenue and OIBDA increased 7.2% and 5.8% versus 2008 respectively, while many other media companies posted declines in Q2 2009 versus 2008.

While I'm pleased with the overall results, I was most encouraged by the continued broadening of our client base as our efforts to expand our network and years of strategic selling by our sales team appears to be paying off. During Q2, we added 18 new clients that advertised in the second quarter, primarily in the import auto, retail, insurance, packaged goods, financial, print media, toy, beer, electronics, video game, and casino categories. For the six months of 2010, we have added 32 new national clients that had never bought from us and two additional clients that had not spent since 2006, all of which will run ads during us--on us during 2010.

While we have made great progress to broaden our client base, there are a significant number of brands that still do not buy our network. While cable and broadcast television networks carry thousands of national advertisers, our national client base currently only represents a little over 100 advertisers, some of which advertise multiple brands. This provides our national sales team with a lot of fertile ground, especially as our network grows and we are better able to compete with other national networks for the spending of clients that require more ubiquitous national coverage.

Our Q2 national CPMs were positively impacted by a very tight TV scatter market, as media buyers looked for alternatives for broadcast overflow caused by improving market demand and rating shortfalls. As we have mentioned on prior calls, our CPMs are impacted by the supply/demand dynamics of the national TV marketplace. While I expect the strong price environment to continue for the next few quarters, the ongoing diversification of our advertising client and category base will continue to dampen our CPM growth somewhat in low demand months as we will sell time to clients that are more CPM sensitive.

We will also continue to create lower priced so called airplane deals that allow us to land the inventory wherever we want and record revenue related to inventory that would have otherwise gone unsold. Having said this, with our inventory utilization levels approaching sellout in certain months, we plan to continue to maintain premium CPM levels during several high demand months.

We also expect there to be increasing positive impact on our CPMs as we expand the number of 3D ads distributed across our network. We began distributing 3D ads in April with the production of a 3D pod at the end of our FirstLook pre-show that seamlessly transitions from 2D to 3D and then to trailers and the feature film. Since our launch of 3D advertising, we have experienced increasing demand and have so far distributed two 3D ads, have two more booked for later this year and are in advanced discussions with several clients about future 3D campaigns.

With our utilization rates increasing, our primary strategic focus continues to be on increasing our advertising impression base through the addition of new network affiliate theater circuits. So far during 2010, we have announced affiliate agreements with Rave, Great Escape and Metropolitan Theaters and have ongoing discussions with several additional circuits.

Since the end of Q2 2009, we have added eight network affiliate circuits with 1,260 screens and approximately 45 million annual attendees that have already joined or will join our network through mid-2011. We will also continue to benefit from the M&A activities of our founding member circuits.

In addition to the acquisition of select high-quality Muvico theaters in early 2009 by Cinemark, next year we will benefit from the addition of 400 Regal Consolidated screens with approximately 15 million annual attendees. While the recent acquisition of the Kerasotes theaters by AMC did not expand our network, it did increase our OIBDA and OIBDA margins and significantly extended the length of our contract with respect to those acquired theaters.

One of the strongest signs of the recovering advertise marketplace is the continuing growth of our local advertising revenue. While the Q2 year-over-year growth was not as high as it was in Q1, due primarily to more difficult 2009 comps, we continue to see increasing client demands both from smaller local clients and our larger regional clients that buy theaters across entire DMAs or across multiple DMAs.

This increased demand resulted in a 10% increase in the number of local contracts in Q2 versus 2009 and an increase in average contract values. The Q2 film mix also--was also favorable for our smaller local clients as several local karate schools ran advertising during the run of The Karate Kid film, and several clients focused on teen and female audiences by placing their ads during the Twilight films.

Our Fathom business revenue declined in Q2 as certain new sports programming underperformed our expectations, and certain events were either postponed until 2011 or cancelled. Some of this Q2 decline was also related to the timing of events as overall Fathom revenue for the six months grew 12.7%, with the Fathom consumer entertainment division revenue for the first half of 2010 increasing in excess of 20% over the first half of 2009.

Our events pipeline for the remainder of this year are very promising, including several new types of content and the start of the 2010/2011 Met season. We continue to test several new types of programming, particularly in the sports category. By creating a series of events, we believe that programming franchises can be created within our network, much the way we have developed the Met Opera series.

Like all new programming, it takes time to build an audience, especially when there are not significant mass-media marketing budgets to support the programming, thus consumer awareness must be built through grassroots campaigns and more frequent events that are intended to drive favorable word of mouth. With the addition of more and more events, we are hopeful that we will begin to reach a consumer awareness tipping point that changes consumer habits and drives theater event attendance and future revenue.

With the expansion of our live broadcast capabilities and higher quality technology, we continue to believe that our theater network will become an increasingly important national distribution alternative and a powerful new marketing channel for entertainment programming producers and corporations.

For example, last month with the help of RealD and some of their new 3D broadcast technology, we distributed our first ever live 3D event. While the World Cup soccer semi-finals third place match and final were all--only broadcasted to 15 theaters within our network, the theater event provided a very high-quality consumer experience and consumer demand, especially for the finals, was strong.

Looking ahead, our advertising RFP activity levels remain very high, and our future visibility is improving. In particular, our Q3 visibility is much better than at the same time last year as reflected in the strong year-over-year growth projected in our Q3 and annual guidance.

While Q4 visibility is better at this time than last year, the Q4 TV scatter market is breaking slowly as clients continue to monitor the strength of the economic recovery and evaluate the impact of their significant commitments during the recent upfronts on their Q4 spending.

While we are planning for somewhat lower overall Q4 scatter spending than in 2009 due to the higher upfront TV commitments, we expect that the expansion of our client base and continued growth and improvements in the quality of our network will allow us to continue to increase our market share of the scatter spending. The crowding-out effect of political spending may also send some clients our way.

We will also start to benefit from our clients' focus on integrated marketing campaigns and our unique ability to integrate lobby promotions, online and mobile inventory and Fathom sponsorships with our onscreen advertising, which will improve with the deployment of the digital cinema systems. In fact, we are finalizing amendment of the ESA with our founding member circuits to allow us to connect our advertising in Fathom networks to their new higher quality digital cinema equipment. With all three founding members installing 4K projectors, we anticipate that this agreement will create benefits for our advertising business, including the ability to display 3D ads and allow our Fathom business to improve the quality of its events, including 3D live broadcasts, such as the recent World Cup.

We have also entered into a long-term agreement with DCIP with respect to the payment of a standard virtual print fee associated with Fathom events. While these new agreements will increase our theater access fees and Fathom event expenses slightly, over time we are hopeful that these costs will be more than offset by the positive impact of the improved quality of our onscreen presentations, including the ability to project 3D images.

Now, I'll turn over the call to Gary to give you some more details concerning our Q2 financial performance and provide guidance for Q3 and the year.

Thank you, Kurt. I will now spend some time reviewing our second quarter financial performance in a bit more detail as well as discuss our guidance for Q3 and full-year 2010.

For the second quarter, our total revenue increased 6.7% to $99.1 million driven by a 7.9% increase in total advertising revenue, including beverage, to $90.1 million, while Fathom events revenue decreased 5.3% to $8.9 million. Total Q2 adjusted OIBDA increased 10.2% to $49.9 million from $45.3 million in the second quarter of 2009. An increase in the mix of our national advertising revenue as a percentage of total revenue and a strong operating leverage in that business helped drive our Q2 adjusted OIBDA margin to 50.4%, up from 48.8% in 2009. Adjusted OIBDA, including the Regal Consolidated integration payment for the second quarter, was $50.8 million versus $46.1 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 second quarter, we reported GAAP EPS of $0.11, a decrease from the $0.17 earned in Q2 2009. You should note that net income and EPS in both Q2 2010 and 2009 are impacted by the non-cash change in fair value of the interest rate swap, which was formerly with Lehman, and is recorded through interest expense. Excluding the impact of this item, our Q2 2010 EPS would have been $0.14, as it was in Q2 2009.

Our advertising revenue mix for Q2 2010 was as follows, 71% national, 18% local and 11% beverage versus Q2 2009 which was 70%, 18% and 12% respectively. Total advertising represented 91% of our total Q2 revenue versus 90% in 2009.

Q2 national ad revenue, excluding beverage, grew 9.9% from $58.3 million to $64.1 million driven by an increase in utilization to 92.5%, compared to 81.3% in Q2 2009 across an 8.3% decrease in our Q2 impression base. This higher utilization and strong TV scatter market contributed to a CPM increase of 6.7%.

We entered the second quarter of 2010 with approximately $600,000 in make-goods, and as of the end of the quarter, we had approximately $4.6 million in make-goods. Approximately $2.6 million of this balance is expected to be made good in Q3, and the remaining $2 million balance is expected to be made good in Q4. As mentioned, make-good balances increased due to the underperformance of a few PG-13 films in May and June, which resulted in several campaigns being under delivered. By comparison, we entered the second quarter of 2009 with approximately $2.5 million in make-goods, and at the end of Q2 2009 we had a make-good balance of approximately $1.1 million.

Our Q2 beverage revenue decreased 2.3% driven by a 7.9% decrease in founding member attendance, partially offset by the 6% contractual CPM increase in 2010 and the shift in Kerasotes screens acquired by AMC through the founding member structure.

Our local advertising business continued to improve in Q2 2010 as local revenue increased 7.2% over Q2 2009, with average same-screen sales increasing approximately 4.3%. Total Q2 advertising revenue per attendee increased 19.6% to $0.55 with our national advertising revenue per attendee increasing 19.5% to $0.39 per attendee and our local ad revenue per attendee increasing 25% to $0.10 per attendee, reflecting the higher revenue and the 8.4% decrease in Q2 theater attendance.

Our combined Fathom events businesses had a relatively soft quarter. This was driven by a 10% decrease in Fathom consumer revenue as the revenue per event for certain new types of programming declined during the second quarter, partially offset by increased Metropolitan Opera attendance and the number of Q2 events--or the number of events in Q2 2010, including boxing and the UFC.

You should note that for the first half of 2010, total Fathom consumer revenue increased 20.7%. Our Fathom business division which focuses on corporate meetings and marketing events approximated Q2 2009 revenue as it continues to be impacted by the fact that corporations still have not returned to their pre-recession spending levels for these types of events. For the first half of 2010, total Fathom business division revenue decreased 1.2%.

For the first half of 2010, total revenue was $183.7 million, compared to $166.4 million in the first half of 2009, an increase of 10.4%. This included advertising revenue of $157.9 million, compared to $143.6 million in the first half of 2009, an increase of 10%. Adjusted OIBDA was $82.4 million in the first half of 2010, compared to $72.2 million in the comparable period in 2009, an increase of 14.1%. Adjusted OIBDA, including Regal Consolidated integration payments, was $83.7 million for the first half versus--of 2010 $73.4 million--I'm sorry, versus $73.4 million in 2009.

As of July 1st, 2010, we had 17,091 total screens in our network, representing a 1.5% increase in total screens at the end of the second quarter versus the end of Q2 2009. Approximately 92% of the total screens were connected to our digital network, with these screens generating approximately 93% of our attendance.

We had 1,861 network affiliate screens comprising 11% of our network versus 14% at the end of Q2 2009. This decrease was primarily due to the conversion of 925 Kerasotes affiliate screens to founding member screens as a result of the AMC acquisition of Kerasotes toward the end of the quarter. We estimate that the conversion of Kerasotes from an affiliate model to a founding member model added an approximate $600,000 positive impact to our Q2 OIBDA results. We estimate the total OIBDA impact for 2010, including Q2, will be approximately $3.4 million. These estimates are now included in our updated 2010 guidance.

Additionally, we estimate that a full-year annual impact will be to increase beverage revenue by $2 million, decrease affiliate fees by $6.1 million and increase theater access fees by $3.1 million for a full-year annual positive OIBDA impact of approximately $5 million.

Our capital expenditures were $2.2 million for the second quarter, compared to $2 million in Q2 2009. We now estimate that 2010 CapEx will be in the range of $10 million to $12 million, which now includes the impact of digitizing the recently signed Great Escape theater circuit currently scheduled for later in the year. This estimate assumes that no additional network affiliate agreements are signed and digitized during 2010.

Regarding our balance sheet, our total debt outstanding as of July 1st, 2010 was $780 million, comprised of our $725 million term loan, a $52 million balance on our revolver versus a $74 million revolver balance at the end of Q2 2009, and a $3 million balance remaining on the non-interest bearing note payable to Credit Suisse associated with our investment in Reach Media Group. The revolver balance, net of NCM LLC cash and cash equivalents, was down to approximately $42 million at the end of Q2 2010 versus $47 million at the end of Q2 2009.

In addition to the $10 million cash balance at NCM LLC, there was a $46 million cash balance at NCM, Inc. at the end of Q2 2010, up from $34 million at the end of Q2 2009. A portion of the $46 million NCM, Inc. cash balance is reserved for income tax payments and tax receivable agreement payments for the founding members. Excluding these tax associated reserves, at our current dividend rate at the end of Q2 2010, we had 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 5.7% for Q2 2010 versus 5.9% for Q2 2009. Approximately $550 million of our $725 million term loan due in February 2015 is fixed under an interest rate swap agreement at 6.7%, and the remainder is floating rate debt at 2.3% as of July 1st, 2010. The average interest rate on our revolver borrowing was 2.6% in Q2 2010 versus 2.2% in Q2 2009.

Our pro forma net leverage in NCM LLC as of July 1st, 2010 is approximately 3.9 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. 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 future leverage should decline over time as OIBDA grows.

We also announced our regular quarterly dividend of $0.18 per share. This dividend represents an annual yield of approximately 4% based on recent trading levels. The dividend will be paid on September 2, 2010 to shareholders of record on August 19th, 2010.

Now, I'll take a few minutes to discuss our Q3 guidance and annual outlook. For the third quarter, we expect total revenue to be in the range of $118 million to $121 million or 23% to 26% above Q3 2009 and adjusted OIBDA to be in the range of $68 million to $70 million or 31% to 35% above Q3 2009, excluding the impact of make-goods. This guidance reflects robust scatter market demand during the quarter and higher allocations of our annual content partner spend versus Q3 2009.

With respect to our annual outlook, we are increasing our previous guidance from 2010 and are now expecting total revenue to be in the range of $415 million to $425 million or 9% to 12% above 2009 and adjusted OIBDA to be in the range of $210 million to $218 million or 11% to 15% above 2009, excluding the impact of make-goods. This annual growth is coming off of a relatively strong comp when we're compared to many other media companies that saw significant declines in their financial performance in 2009 versus 2008.

The increased annual guidance is primarily due to our stronger than expected first half results and strong Q3 guidance, as well as the positive impact from the AMC Kerasotes transaction.

Our national advertising revenue, including content partner, beverage, cell phone PSA, and booked and pending scatter contracts is now approximately 88% of the total 2010 in national advertising revenue included in the upper end of our updated guidance, whereas last year we were at approximately 82% of our actual 2009 national advertising revenue.

As this annual guidance implies relatively flat year-over-year performance in Q4, I'd like to remind everyone that we were very well sold in Q4 2009 with inventory utilization for the quarter of 104%, resulting in a more difficult comp for Q4 2010. Additionally, we expect to have a lower Q4 allocation of our annual content partner spend versus Q4 2009, and we expect a softer Q4 scatter market due to a significant increase in TV upfronts.

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

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

Our first question is from Alexia Quadrani with JPMorgan. Please go ahead with your question.

Thank you. I have a few questions. I guess the first one, just to clarify on your comments on the guidance where you say excluding make-goods, is that excluding incremental make-goods you're not aware of or does it include the make-goods you know about going into the quarter?

Excluding incremental.

And if you could just clarify, really, how that--I mean, I assume you guys have a certain budget in--what you think the box office or attendance is going to be as you progress through the quarter that you're selling against and your sales guys are selling against. Could you give us a sense in the third quarter of how you are tracking, I guess, versus your own expectations--how the box office, I should say, is tracking versus your own expectations?

Sure. July looks pretty good. The July box office, as you know, has performed very, very well, and so we're in quite good shape at the end of July.

And with regards--I don't know how far out you go, but I think you sold so much your fourth quarter already. I mean, I'm just trying to get a sense of--and we all have our own projections for the box office, and I know it's very difficult to project, and I'm trying to get a sense of how conservative you may be going into the fourth quarter given the comparisons in terms of what you're selling against.

Yes, I think our guidance and the conservatism you're sensing in our fourth quarter guidance really isn't affected by the box office. It's more, really, our--what we did last year, where we were versus last year at this time, and how well we were sold last year.

The other unknown, as Gary mentioned and I alluded to, is the fact that so much upfront money was committed to, and what impact is that going to have on the scatter market. I happen to continue to believe we'll get an increasing share of the scatter market, so I'm pretty confident we'll be fine. But, that's really all that's led to our conservatism.

And then, in the second quarter, does the mix of the type of film really influence your advertising dollars significantly, meaning the fact that it's skewed a bit more towards the kid-oriented, family-oriented film in the second quarter versus the third quarter seems a bit more diversified. Does that impact your advertising?

Yes. As we alluded to, the thing that really hit our make-goods or increased our make-goods in Q2 was the PG-13. There were several films that were PG-13 films that just didn't perform in the second quarter. There were several films, PG films, that performed very well. So, the mix does impact us. PG-13 is our biggest category, and it's the biggest amount of attendants. So, when that doesn't perform then it is an issue.

And on the--there's been some recent press on Screenvision and their changing their format of their preshow. Do you--I guess, do you have any commentary on how that might affect you competitively, if at all?

I don't know, we made the--the changes, we made eight years ago.

All right, and just one last one. Can you give us any sense, I guess, of the--I don't know how much you can say about this because it's also--it's early days, but any sense on the incremental revenue or possibility on your 3D ads versus the more traditional 2D?

Yes, I'll say the same thing I did before because I don't want to get into much detail. Clearly we're getting a meaningful premium.

Okay, thank you.

Your next question is from Eric Handler with MKM Partners. Please go ahead with your question.

Hi. Thanks for taking my question. Just a little more color on the third quarter guidance. Aside from your content partners, what verticals are you seeing strength? Also, in terms of the make-goods, are you able to use, let's say, the shoulder period times, the less-busy times, for those make-goods, let's say, in August and September versus July, which I assume is quite strong for you guys? Also, are those make-goods helping keep CPMs on the positive track for the third quarter as well?

Yes, I would say September and October are generally the shoulder periods, although September sell-through has been very strong recently as we've developed a back-to-school business with a number of retailers. So, the answer is we can use those make-goods. We'll probably spread, as Gary had indicated, the delivery of those make-goods throughout both Q3 and Q4--.

--And it's usually done--it's obvious that we got to keep in mind the client and when they need to run, so it--.

--Yes, I think that the big categories we're seeing in the third quarter are financial, insurance, electronics, retail, CPG, auto, some of the normal ones that we've had good success with in the past, just everybody is spending, which is, obviously, a good sign.

Okay, thank you.

Your next question is from Barton Crockett with Lazard Capital Markets. Please go ahead with your question.

Okay, great. Thanks for taking my question. I just wanted to make sure I am straight on the Kerasotes impact. You ran through a lot of the numbers. I couldn't quite keep up with all of the income statement impacts. But also, on the minority interest line, what's happening there?

So, do you want me to run through all the numbers again, or?

Yes, just to make sure I've got them straight, but also the offset, it's a, let's say, EBITDA, but there's an offset of additional minority interest.

Yes, I mean--well, with the minority interest line, the way it works is at the --whenever there's an adjustment made, and it's an adjustment for the quarter, you don't do a partial quarter. So, the adjustment on the minority interest line would be for the total quarter. The actual effect was just in June, so that'll wash out over the next couple of quarters.

As far as the thing that I walked through is, basically, for the rest--let me do it on a full-year basis, so it doesn't get confusing. On a full-year basis, we would expect the beverage revenue to go up by $2 million, and then the affiliate fees would go down by about $6.1 million. And then, the increase in the theater access fee that we'd be paying out would go up by about $3.1 million for a net effect of $5 million on the bottom line.

That's for a full year, and for--.

--Yes, for the rest of the year--or for the year, it's $3.4 million of which $600,000 we already had in this quarter.

Okay, that's on the adjusted OIBDA line.

Yes.

Okay. All right. And then, I was wondering if you could provide us a bit of an update on the incremental affiliate deals, the strength you've had there recently, a couple of big deals coming up next January, is there anything meaningful that we could think about between this--the balance of this year before the big deals come up potentially next year?

Well, as I indicated, we've had good success bringing Rave on the other ones that I mentioned, Metropolitan and so on. There's two or three other regional circuits we are talking to right now. And the bigger ones that I think you're alluding to, the Carmike and National Amusements, will be coming up next year.

Okay. All right, I'll leave it there. Thank you.

Thanks.

Your next question is from Torin Eastburn with CJS Securities. Please go ahead with your question.

Good afternoon. Could you add any detail on how CPMs or utilization are trending into Q3?

Sure. The pricing environment continues to be pretty robust, and a lot of that, as I mentioned in my comments, is driven by the fact that the TV scatter market has been so robust and inventory generally has been pretty tight in the TV marketplace. So, all of that bodes very, very well for us.

And that will be offset a little bit by the fact that we're going to be getting into CPG and QSRs and other categories that generally have lower CPMs or have less tolerance to higher CPMs, however you want to look at it. And we'll continue to do the airplane deals.

The real wildcard, I think, for us the rest of the year is what impact the 3D is going to have on our overall CPMs. As we've mentioned, there are meaningful CPM increases associated with 3D. And we have one more deal that we've already booked that's going to run in the third quarter, one more in the fourth, and then there's several we're talking about. There are also--I don't know, six, seven, eight, something like that--films, 3D films, that are going to break between, I guess, Thanksgiving and the end of the year. So, that'll be, I think, one of the wildcards affecting our pricing.

But, I think you can pretty much expect a pretty good environment for the rest of the year.

Okay. Thank you.

Your next question is from James Dix with Wedbush. Please go ahead with your question.

Good afternoon, guys. Just a couple questions. First, is there any impact in your change in full-year guidance from new affiliations or is this all just a change based on a reassessment of organic growth?

And then, secondly, I was just looking at your fourth quarter and how you're seeing the scatter market break. I mean, how is your assessment of that, what's happening in the fourth quarter or might happen, changed over the past couple of months? Just any color you can get as to how much you think macro concerns are playing into that or how it's--how that pricing environment or how it potentially is going to shape up differs from what you thought three months ago?

Yes, I think, clearly, our clients are, I think, getting more and more hopeful, it appears, especially--and the local clients are probably a better read. As we've all read about, there's a lot more, I think, issues affecting smaller businesses than larger businesses, generally. So, the large business spending is pretty robust, as we've reflected. And obviously, with the upfronts being up in total spend of about--total dollars of about 20% and CPMs being up mid to high-single digits, that's all pretty good news for client spending generally.

And I think we're seeing some of that in the results of some of the companies that are reporting their second quarter. Generally, I think the earning season has been pretty positive. A few exceptions, but in most cases it's been pretty good.

So, all of that, I think, is being reflected in our business as well. And I don't--we, obviously, have expressed a little bit of caution, if you will, associated with fourth quarter. But, like I said, most of that is just because we had such a strong fourth quarter last year, especially December and late November, and the tough comps.

Obviously, we'll be updating this again sometime first part of November when we release third quarter. And I wouldn't read too much into it, but we're just being a little cautious. We've been cautious and conservative in the past, and we'll continue to be that way.

Okay.

And, James, on the first question, there isn't a major impact of those ones that we've announced coming on in this year because we have to get digitized and things like that. So, there isn't anything in those numbers.

Okay. All right, great. Thanks very much.

Your next question is from Mike Hickey with Janco Partners. Please go ahead with your question.

Hi, Kurt, Gary and David. Congratulations on your quarter.

Thank you.

I was curious if you have been able to crunch any data in terms of the overall effectiveness of 3D ads versus traditional 2D?

Yes, we have a little research back from the first one that we ran, which happened to be for Samsung, and the research is incredibly strong. The recall--pretty much every data point you look at were very, very strong. Given that it was the only--it was the first 3D ad, there was a ton of PR around it, and it was the only 3D ad running at the time, all those things bode pretty well.

Okay. And then, I'm guessing you're hesitant to give too much clarity on potential CPM increase with 3D ads, maybe just to keep expectations in check. But, this is like--maybe we should be thinking late 2011 where 3D ads can give enough utilization to be meaningful to CPM increase as an aggregate?

Yes, look, obviously the more the better, and we've already said that there's a meaningful CPM increase. There are some increased costs associated with the distribution of 3D. There's some expenses associated with glasses and things like that. So, the costs are a little bit higher, but clearly there's an incremental bump to OIBDA associated with it.

Okay. And definitely it's still early days, but for the 3D ads, are these coming from existing--your existing client base or are you attracting new clients?

Both.

Okay. And for the placement--I should know this, but is that showing in the beverage segment that's been--.

--No. Here's what we're actually doing. I mentioned it in my comments. We basically took the last three or so minutes of our pre-show, the FirstLook pre-show, which happens to be the last three or four minutes before show time, and we basically stopped the 2D presentation which is being done on LCD--generally, LCD projectors, at that point in time and transitioned from those--that infrastructure to the digital cinema infrastructure. And at that point, there was messaging about telling people to put their glasses on and so on. And then, we played the rest of the FirstLook pre-show, which we're calling, as you would expect, FirstLook 3D, which includes the ads that we've sold, the beverage advertisement from Coke, PSA telling people to turn off their cell phones and don't text and all that, and all that sort of programming is all done in 3D. So, we're producing, effectively, the last three or so minutes of our complete show in 3D. And then, that just transitions right into the 3D trailers, and then the feature film, so people don't have to put on and take off their glasses multiple times.

Okay. That's very helpful. Thanks, guys.

You bet.

(Operator Instructions)

Your next question is from Marla Backer with Hudson Square. Please go ahead with your question.

Thank you. You guys are doing a very good job at growing the advertising base, growing the pool of advertisers. And at some point, I'm optimistic that you may run out of inventory on the pre-show. So, in terms of incremental alternative advertising venues--you've talked about the lobby, you've talked about the website--where do you think your biggest opportunities are, and what's the strategy for leveraging those?

Well, first of all, Marla, we've got a ways to go. And even though we're reporting pretty high utilizations, I'd like to remind everybody that those utilizations are calculated based on 11 30-second units when in fact we'll sell up to 14. So, when we report the utilizations of 90% like we just did for the recent quarter, we could theoretically sell to 127%. Not likely we'd ever get there because you're always going to have remnants and so on, but I think, clearly, there's a lot of upside over the next few years in just selling more of our inventory, and obviously upside in maybe getting the CPM higher, possibly, with the help of 3D.

The other thing that's very much a part of our focus, which I mentioned, is increasing the number of impressions through new agreements with network affiliates. So, we're adding a lot of impressions over the next few quarters. And as I think we've mentioned, there's almost 50 million new attendees. When you convert that into impressions, you just multiply that number by, I guess, 14 would be the total, you end up with a fairly large number of impressions, advertising impressions, that we're adding.

So, if we keep going at the pace we've been adding impressions through network affiliates, I think we've got a lot of upside in that as well. And as I mentioned, that is one of our primary focus areas.

The goal, obviously, is to continue to grow our impression base at the same rate that we're growing budgets and that we're growing our client base, so that you never have this imbalance between the number of impressions you have to sell and the amount of demand that's out there. And I think keeping those two things in relative balance is the best way to keep your CPMs higher.

But--no, no, no, I--what you're saying makes a lot of sense, and I didn't think you were going to run out of inventory this year or next year or in the immediate future, but clearly you have talked about focusing greater efforts on the lobby utilization, and are those strategies--.

--No question. And in fact, there's a lot of technologies that we're looking at right now, both visual and wireless engagement-type technologies, that we're looking at for the lobby areas that I think are going to be very, very additive to the future, not only individually, but as part of these integrated offerings that we talked about.

I think if there are two buzz words that are going on in the media business right now, it's integrated and engagement. And I think we have an asset base that I think meets those two desires, if you will, of clients and of the advertising agencies pretty well.

Okay, thank you. And then, I have one question on--a housekeeping question on the airplane deals. What's the time frame during which you have to air those?

It varies on every one of them. Some are several months in duration, some are annual. So, it just is deal by deal. Some have different rules about how much can play in any--of the total deal, can play in any flight. Some have rules about how long in front you have to tell them. Some of them are as short as Monday through Friday. So, every one is different.

Okay, thank you.

You're welcome.

Your next question is from Ben Mogil of Stifel Nicolaus. Please go ahead with your question.

Hi. Good afternoon. Thanks for taking my call. I just wanted to ask you quickly, going back to the comments you had about 3D. Obviously, technology is going to be--a big group is going to be interested in using that as an advertising medium. Can you talk about some of the other categories that are in discussions with 3D--obviously, you don't just name advertisers specifically--and which ones actually surprised you that were so interested in the medium?

Well, I think it's across almost all of them, to be perfectly honest. I mean, the retailers seem to be very interested. We've had interest from the car manufacturers, the technology guys--we've already run Samsung. We're actually running a Lexus ad, I think, right now. The video game guys seem to be pretty interested in it. So, I don't think there's anything--any surprises in there necessarily. I think, clearly, what everybody is looking for is a way to differentiate their brand, differentiate themselves from other clients and their competitors that are out there.

Okay, great. Thank you.

There are no further questions in queue. I would like to turn the call back to management for closing remarks.

Great. Not much more to say. Thanks so much for everyone's support. And if there are any follow up questions, we're going to be available for a bit to take those. So, whoever needs to call us, you know where to call. So, thanks again for all your support, and we'll be talking to you soon. See you.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.