National Cinemedia Inc (NCMI) 2010 Q3 法說會逐字稿

Greetings, and welcome to the National CineMedia Inc. third 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 Inc. Thank you. Mr. Oddo, you may now 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 2010 earnings conference call. Today, I will provide an overview of our Q3 results, the progress that we are making against our key business strategies, and a brief 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 the remainder of 2010. And then, as always, we'll open the lines for questions.

I'm obviously very pleased with our Q3 results. Our quarterly revenue and adjusted OIBDA of 125.7 million and 74.4 million respectively represent a quarterly record for us and puts us on track for growth for the year in excess of almost all other media categories. This growth over 2009 is even more significant when you consider that as the recession deepened, our business outpaced almost all other media companies in 2009.

With our current quarter revenue growth of 31.3% and adjusted OIBDA growth of 43.6% over 2009, and adjusted OIBDA margins of nearly 60%, this was clearly one of those quarters where everything went our way. While we were benefiting from the more stable ad market and the world economy, these results are also a reflection of the hard work of our team and the cumulative effect of high-quality strategic selling and tens of thousands of sales calls that we've made over the last few years.

With our Q3 national inventory utilization at near sellout levels of approximately 122%, there's clear evidence of the continued progress that we are making against our strategy to broaden our client base and capture market share from other media platforms. With this higher sell-through and a tight TV scatter market, we were also able to hold the line on pricing, as our national CPM increased 7.6% versus Q3 2009.

We also benefited from the continued expansion of our network and a strong quarter at the box office, as our network attendance increased slightly over Q3 2009. While there continues to be some concerns about film schedules and quarterly fluctuations in theater attendance, Q3 exceeded expectations and Q4 is expected to hold its own, as there are a number of (inaudible) films like "Harry Potter" and several 3D films that are highly anticipated.

As we have mentioned many times, while any underperformance at the box office at the end of a quarter can impact the level of our revenues slightly, it is primarily a timing issue for us, as the under-delivered contracts are typically made good in the next quarter or two.

The broadening of our client base and digital network continued to be our primary growth drivers. During Q3, we added 11 new clients that advertised in the quarter, primarily in the technology, apparel, restaurant, credit card, auto parts, retail, government and video game categories. Including contracts that have already run, or will run in Q4, we have added 39 new clients that have never bought from us and five additional clients that have not spent since 2006. While we have made great progress, there are still thousands of brands that have never bought our network, or buy it only when there is a special marketing priority or product launch.

One significant opportunity that will help drive our future national advertising revenue growth lies with brands that spend every day of the year. We have begun to gain some traction in these non-traditional cinema advertisers like CPG companies, QSRs, insurance and financial companies. Some of the more important factors that will influence the continued growth of these and other under-penetrated categories relate to our ability to drive better research that supports the positive attributes of our network and premium price relative to TV networks, and the development of flexible pricing and placement structures like the airplane deals that we have discussed in the past.

It is also important that we continue to expand and improve our digital network to provide better reach and more ubiquitous national coverage to clients that require greater scale and marketing coverage for all of their retail outlets.

The growth of our digital network over the last few years has clearly made us more competitive with national TV networks. In fact, based on a full month of unduplicated impressions among the highly desirable 18-to-34-year-old demo, we are now the seventh largest network in the US and the largest network on Friday and Saturday night when compared to national broadcasters and cable channels.

While we have made great progress expanding our network to 17 theater circuits that are now part of our network, along with our three founding member circuits, we are not done yet. And as next year, certain Rave theaters that were purchased from National Amusements and the Regal Consolidated Theater Circuit will join our network from Screenvision. While Screenvision has recently entered into long-term relationships with certain of their larger regional circuits in conjunction with their sales to private equity fund, Shamrock, there are many circuits with less than three years remaining on the contracts to Screenvision.

As reflected in the number of network affiliate circuits that we have added over the last few years, we have had great success selling the positive attributes of joining our network, including the incremental attendance and concession sales associated with our Fathom Network. We'll also continue to benefit from the ongoing M&A activities of our founding members circuit.

While the recent acquisition of the Kerasotes Theaters by MC did not expand our network, it immediately increased our OIBDA and OIBDA margins and even more importantly, it significantly extended the length of our contract with respect to those acquired theaters from less than two years to nearly 27 years.

We also expect the improving technical quality of our digital network to have an increasingly positive impact on our overall business. As recently announced, we have just begun to integration our digital network with the higher quality digital cinema equipment being deployed into the vast majority of our founding member and select member affiliate theaters. As this operation is completed over the next two to three years, we expect over 16,000 of our current network streams and approximately 90% of our current network attendance to display advertising on higher quality digital cinema projectors. We are currently advertising on 1900 digital cinema projector screens with new screens being added each week as the DCIP implementation rapidly progresses.

In addition to improving the visual quality of TV ads, this higher quality equipment will also allow us to present 3D ads across their advertising network and 3D live and prerecorded Fathom events. The ability to provide a unique marketing opportunity to clients is not only expected to provide meaningfully higher advertising CPMs on the 3D portion of those contracts. We are also hopeful that it will attract new advertising clients and Fathom content to our networks.

Since our launch of 3D advertising this past April, we have experienced increasing client demand and have so far distributed three 3D ads, have three more booked for the remainder of the year, and are in advance discussions with several clients about future 3D campaigns. It is important to note that two of these 3D clients were first-time clients.

In addition to the digital cinema integration, we've also developed and begun to deploy a patent-pending sound monitoring device to capture sound levels in the auditorium that are monitored electronically from our network operating center in Denver. This innovation provides sound level data that is measured at the point of consumer consumption, something no other national or TV network can provide to their advertisers.

One of the strongest signs of the recovering advertising marketplace is the continuing growth of our local advertising business, which posted robust 25% revenue growth in the current quarter over Q3 2009. We continue to see increasing demand across both smaller local clients and our larger regional clients as their number of contract increased by 8%, while both small single location businesses and larger regional clients that buy across entire DMAs or multiple DMAs are increasing their spending, a portion of the Q3 growth has come from these larger regional clients, resulting in an increase in the average contract value of 15%. We also believe that some of the crowding-out effect of the record political advertising spend helped our local business.

Our Fathom business revenue continued to increase in Q3 as we nearly doubled the number of Fathom consumer events held in the quarter versus 2009. While our event flow has been very strong, several events fell short of our expectations, resulting in a decrease in revenue per consumer event of 36% versus Q3 '09. This decrease reflected some experimentation with certain new sports programming that was presented as a simulcast with Cable Pay Per View. While this 2D sports programming under-performed, several other new events met or exceeded our expectations, including the final four matches of the Soccer World Cup that represented our first 3D live broadcast.

With the number of consumer events that we have distributed across our networks so far this year increasing over 30% versus 2009, we are starting to accumulate a meaningful level of data that will begin to tell us more about the potential of a given even and what we can do to improve event attendance for future events. While we will continue to experiment in the sports and other new categories, our focus will continue to be on regional and unique niche programming that is not overexposed on TV. And we will also begin to distribute unique 3D programming as the new digital cinema and (inaudible) equipment is deployed throughout our network.

Another key part of our strategy is to create event series that will benefit from the positive PR and other word of mouth that accompany a programming franchise that remains in the market over a long period of time like the Met Series. Unfortunately, the alternative content business will not yet support TV advertising and other mass-marketing tactics that are required to build awareness quickly for one-off events. We are hopeful as our network grows and the revenue associated with any given event expands, this critical mass will allow higher marketing budgets that will break through the market clutter.

Our events pipeline for the remainder of the year looks promising, with a good mix of several new events in established, successful franchises like Glenn Beck, Race Across the Sky, and of course, the 2010-2011 Met season which began in October and will include 12 live events and 12 encores through June 2011.

Overall I'm 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 our growing but relatively small advertising client base, our projected 2010 annual ad revenue growth relative to all other -- to other -- to the overall advertising marketplace continues to provide strong evidence of the strength of our networks and the growing acceptance by the broader media marketplace.

Our longer term prospects remain very, very positive, even though we have projected an approximately flat Q4 against very strong Q4 2009 results. While we are starting to see some movement, our Q4 guidance reflects a slow breaking Q4 scatter market, most likely due to the significant increase in TV upfront commitments made last summer.

We have also been notified by one of our larger Q4 2009 clients in the military category that they are not going to spend further in 2010 due to budget cuts in response to growing national deficits. However, they continue to evaluate their spending plan for 2011.

Our Q4 results will also be negatively impacted versus 2009 by lower content partner spending, as their annual commitments had been more heavily allocated to the first three quarters of the year.

Looking into next year, we are expecting continued improvement in the overall economy and the ad business. This improving economic outlook appears to be contributing to an increase in the number of clients that are increased -- interested in discussing 2011 commitments, including a number of airplane deals that will help us fill inventory that would otherwise go unsold.

With the success of our business this year and the positive momentum going into next year, today we announced 11% increase in our quarterly dividend to $0.20 per share. As you may recall in the past, we have reviewed our dividend policy once per year during our midyear board meeting. Due to the uncertainty in the marketplace this year, we chose to be more conservative until we had a clearer understanding of where the overall economy was going and how our year would end up.

The recent $0.02 per share increase to $0.20 per quarter now brings our dividend to a level that fulfills our commitment made when we went public to distribute a significant amount of our free cash flow. This recent increase is also reflective of the fact that we performed very well through the economic storm of 2009 and returned to healthy growth levels in 2010.

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

Thank you, 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 discuss our guidance for the remainder of 2010 and briefly discuss the change in tax status from previously paid dividends as outlined in our earnings release filed earlier today.

For the third quarter, our total revenue increased 31.3% to 125.7 million, driven by a 33.3% increase in total advertising revenue, including beverage to 117.7 million and an 8.1% increase in Fathom events revenue to 8 million. Total Q3 adjusted OIBDA increased 43.6% to 74.4 million from 51.8 million in the third quarter of 2009. An increase in the mix of our national advertising revenue as a percentage of total revenue and strong operating leverage in that business helped drive our Q3 adjusted OIBDA margin to 59.2%, up from 54.1% in 2009.

The margin increase was also driven by the Kerasote circuit shift from an affiliate deal to the more beneficial founding member economics and was slightly offset by higher Q3 2010 personnel expenses related to projected overachievement of 2010 targets. Adjusted OIBDA including the (inaudible) consolidated integration payment for the third quarter increased 43.8% to 75.8 million from 52.7 million in 2009. You should note that the effect of the 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 third quarter, we reported GAAP EPS of $0.24, a 50% increase from the $0.16 earned in Q3 2009. You should note that net income and EPS in both Q3 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 Q3 2010 EPS would have been $0.26, a 52.9% increase from the $0.17 that would have been earned in Q3 2009.

Our advertising revenue mix for Q3 2010 was as follows -- 74% national, 18% local, and 8% beverage versus Q3 2009 which was 71%, 19% and 10% respectively. Total advertising represented 94% of our total Q3 revenue versus 92% in Q3 2009. Q3 national ad revenue excluding beverage grew 38.4% from 62.5 million to 86.5 million driven by an increase in utilization to 121.8% compared to 96.5% in Q3 2009 across a 4% increase in our Q3 impression base. As Kurt mentioned, this high utilization and strong TV scatter market contributed to a CPM increase of 7.6%.

We entered the third quarter of 2010 with approximately 4.6 million of make goods and as of the end the quarter, we had approximately 4.2 million, the vast majority of which we expect to be made good during Q4. The make-good balance remained relatively high as a portion of our Q2 balance was scheduled to be made good during Q4 versus Q3 as discussed on our last earnings call.

Our Q3 beverage revenue increased 12.1% driven by the 6% contractual CPM increase in 2010 and a 5.8% increase in founding member attendance, primarily related to the shift in Kerasote screens acquired by AMC to the founding member structure.

Our local advertising business continued to improve in Q3 2010 as local revenue increased 25% over Q3 2009, with average same-screen sales increasing approximately 21%. Total Q3 advertising revenue per attendee increased 28.6% to $0.72, our highest ever quarterly revenue for attendee, with our national advertising revenue for attendee excluding beverage increasing 33% to $0.53 per attendee, and our local ad revenue per attendee increasing 18.2% to $0.13 per attendee, reflecting the higher revenue, and a 3.9% increase in Q3 theater attendance.

Our combined Fathom events revenue increased 8.1% and was driven by a 21.6% increase in Fathom consumer revenue, as we nearly doubled the number of events held during the quarter versus Q3 2009, partially offset by a lower average revenue per event. Our Fathom Business Division, which focuses on corporate meetings and marketing events, posted a revenue decline of 5.4% versus Q3 2009 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 nine months of 2010, total revenue was 309.4 million compared to 262.1 million in the first nine months of 2009, an increase of 18%. This included advertising revenue of 275.6 million compared to 231.8 million in the first nine months of 2009, an increase of 18.9%.

Adjusted OIBDA was 156.8 million in the first three quarters of 2010 compared to 124 million in the comparable period in 2009, an increase of 26.5%. Adjusted OIBDA including Regal Consolidated integration payments increased 26.5% to 159.5 million for the first three quarters of 2010 from 126.1 million in 2009.

As of September 30, 2010, we had 17,301 total screens in our network, representing a 3% increase in total screens at the end of the third quarter versus the end of Q3 2009. Approximately 91% of the total screens were connected to our digital network, with these screens generating approximately 93% of our attendance. We had 2,134 network affiliate screens comprising 12% of our network versus 14% at the end of Q3 2009. This decrease was primarily due to the conversion of over 900 Kerasotes affiliate screens, the founding member screens, as a result of the AMC acquisition of Kerasotes toward the end of the second quarter, partially offset by adding several regional affiliate circuits to our network since Q3 2009.

Our capital expenditures were 2.5 million for the third quarter compared to 1.2 million in Q3 2009 with the increase primarily due to digitizing a portion of a recently signed affiliate screen. We continue to estimate that 2010 cap ex will be in the range of 10 to 12 million.

Regarding our balance sheet, our total debt outstanding as of September 30, 2010, was 757 million comprised of our $725 million term loan, a $30 million balance on our revolver, versus a $74 million revolver balance at the end of Q3 2009, and a $2 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 NCMLs in cash and cash equivalents was approximately 19 million at the end of 3Q 2010 versus 29 million at the end of Q3 2009.

In addition to the 11 million cash balance at NCM LLC, there was a $50 million balance at NCM Inc. at the end of Q3 2010, up from 42 million at the end of Q3 2009. A portion of the 50 million NCM Inc. cash balance is reserved for income tax payments and tax receivable agreement payments to the founding members. Excluding these tax-associated reserves at our current dividend rate, which we have increased twice this year, and now stands at $0.20 per share, at the end of Q3 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 rates on our $725 million term loan was 5.7% for Q3 2007 -- 2010 versus 5.9% for Q3 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 2.1% as of September 30, 2010. The average interest rate on our revolver borrowings increased to 2.7% in Q3 2010 versus 2.1% in Q3 2009, reflecting a decrease in the use of LIBOR borrowings. Our average revolver balance decreased from year-end as we are now using the revolver as intended and it's resolving the Lehman issues of earlier this year.

Our pro forma net leverage in NCM LLC as of September 30, 2010, is approximately 3.4 times trailing four quarter adjusted OIBDA. Including the Regal Consolidated integration payments, and if you include the cash in NCM Inc., net leverage would be 3.1 times. You should note that at 3.4 times, 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 majority -- sorry -- the maturity of the term loan in 2015. While we do not anticipate paying down our term debt, our future leverage should continue to decline over time as OIBDA grows.

Looking ahead to the remainder of the year, we now expect total revenue for the full year to be in the range of 422 to 427 million or 10 to 12% above 2009 and adjusted OIBDA to be in the range of 215 to 220 million or 13 to 16% above 2009.

We will be providing Q1 and full-year 2011 guidance when we release our 2010 results in late February.

Before we open the line for questions, I'd like to briefly discuss the change in tax status for previously paid dividends as outlined in our earning release. We have determined that cash dividends paid at the NCM Inc. level have been in excess of tax base earnings and profits reported for each given year, and thus, a portion of the cash dividend payments made since going public will be treated as a non-dividend cash distribution.

Of the dividends paid in 2007, 2008 and 2009, 19.99%, 72.36% and 78.31% respectively ought to be treated as non-dividend cash distribution for federal income tax purposes. On November 8, 2010, corrected IRS Form 1099 Div will be mailed to registered stockholders who have received dividends for shares in certificate form. And for those stockholders who have received dividends for shares in Street name through a bank or broker with dividends deposited into a brokerage account, corrected IRS Forms 1090 Div should be issued from that institution.

A portion of the dividends paid to stockholders during 2010 are also expected to be treated in part as ordinary dividends and in part as non-dividend distributions. However, the Company cannot definitively determine the tax treatment of these distributions until the completion of its fiscal year end, December 30, 2010.

Going forward, stockholders will receive a Form 1099 Div in February of any given year that will contain the Company's best estimate of dividend treatment. The Company may issue corrected Form 1099 Div after completion of each fiscal year's US Federal Income Tax Return if the actual characterization of the distributions differ from the reported characterizations.

Each stockholder is urged to consult his or her own tax advisor to determine the basis in their NCMI stock and the appropriate individual tax treatment, including any state, local or foreign tax consideration. Please go that the Investor Relations link of the Company's website at NCM.com for additional information.

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

Thank you. We'll now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from Barton Crockett from Lazard Capital Markets.

Okay, great. Thank you for taking the question. I was wondering if you might be able to quantify a little bit more some of the SKUs to the growth rates in the fourth quarter versus earlier in the year? I think you pointed to three factors for the deceleration in the fourth quarter, the content partner allocation venture earlier in the year, the military ad spend. And I was wondering if you could give us some sense of just how much on a percentage basis those might be affecting growth.

Well, as we said last year, the military spend was a pretty big spend in fourth quarter. So the fact that we've been able to pretty much entirely replace that, I think, is a really good sign. It's obviously part of our strategy to broaden our client base because there are going to be times when certain clients aren't spending. So the more clients we have, the less that becomes a risk factor, if you will, or a factor in variations from quarter to quarter. So I think that's probably one of the most significant factors.

And as I mentioned, Barton, in my comments, this time of year is always a very difficult time of year for us to project fourth quarter because we're in a bit of a lull right now, and as I mentioned, we're starting to see some loosening up in the scatter market, but it's still a little sticky right now, so that leads to some cautiousness.

Okay.

And Barton, just to be clear, I mean, in Q4 last year, we had a very strong Q4.

Yes.

So we're going against the (inaudible). We were north of 100% utilization in Q4 last year.

Yes. And as you recall, it all really hit us in sort of the last two or three weeks in November into December. So obviously, we'd be hopeful that that would happen again, but it's not something we can absolutely count on.

Okay. And then if I could switch gears a little bit to the (inaudible) your competitor Screenvision, I was wondering if you give us a sense of, A, how you've seen their pricing competition recently, and any thoughts on whether there might be a change now with new ownership? And B, you've pointed out that there's some affiliate deals that are coming up for renewal, but their biggest affiliate, National Amusements, I think we're all assuming that that's kind of off the table, that they're likely to stay; otherwise (inaudible) wouldn't have gone in, but maybe you have some different ideas about that. I was wondering if you could update us.

Well, I'm not going to comment on pricing. It's probably not appropriate to do that. I would hope that with the new ownership and Travis at the helm, that the company is going to become stronger, a more rational player in the marketplace, and I think all boats could rise. I actually think it's a positive that this has happened. With stronger ownership and great leadership, I think that's a good thing. I don't know, as I said before, whether -- in my comments -- whether it's going to change the playing field all that much because all of our contracts are pretty much locked in.

As I mentioned, there's some more circuits coming onboard already next year that we've got under contract. We are working on other ones, so -- and we've also got the possibility of M&A activity by various of our owners or other people that we have relationships with. So again, I don't think it's going to change the playing field as much as people maybe have speculated more than it would have otherwise.

Okay. I'll leave it there. Thank you.

Yes, thanks.

Thank you. Your next question comes from Alexa Quadrani from JPMorgan Chase.

Thank you -- Alexa Quadrani. A few questions here.

You don't (inaudible).

Thanks. First on the fourth quarter guidance, the lower revenue from the content partners, I guess with your high demand and generally high utilization rates in the fourth quarter, couldn't that maybe be a good thing if it frees up some inventory that you can sell? I can understand that you might not have the visibility this early on, particularly in the fourth quarter, everything's so last minute, but net-net, could that be an opportunity?

Yes, of course, it could. The fact that we've burned off, if you will, so much of the annual commitment in the first third quarters does leave us some room to grow with other clients in the fourth quarter. So of course, that's a good thing.

And then on your -- then your great job you've done in terms of penetrating new verticals and adding some new clients to your business, I guess if you can give us a sense of how sizeable maybe the -- I'm assuming the biggest sort of new client, and correct me if I'm wrong, is the CPGs. When does that become sizeable enough that it compares with your sort of core, more traditional advertising verticals?

Look, the CPG category is such a humungous category to begin with. We're still -- even though we've grown with the CPG probably three-or-four-fold, as much as five-fold this year, it started out as a pretty small number and we're still significantly under-represented. So I would say there's still a lot of green pastures out there, if you will, in this category.

But I guess if you're going to look at, let's say, your top five major verticals that have been traditional advertisers in cinema, if you're looking at your smallest of those top five, when does the next vertical sort of begin to compare in size? That's what I'm trying to get at.

Well, I don't know who you're considering the top five. Clearly, the entertainment category continues to be strong. We've gotten the car category; especially with the US car manufacturers coming back into the market, it's been very, very strong this year across not only our network, I'm sure all the television networks as well. The telecommunications industry has started to be one of the bigger ones and so those have traditionally been the top three.

I think what's really happening, Alexa, is not necessarily somebody is moving up to the top of the list. We're just filling in with those clients that are -- did nothing with us before and now they're doing 2 or $3 million, maybe a flight or two a year, where they did nothing before and that's the way generally these relationships work. Somebody will come in and do maybe a half net one-flight deal, try it out. They're very comfortable with it, and then all of a sudden, they're doing something bigger in the following year where they maybe buy a full net or they buy multiple units.

We have started to break through in some interesting categories. The insurance category, we're starting to do quite a bit more business with them and that was not a category that we had really thought about as a traditional cinema category just because their demos are generally -- their focus is much older. We've also done a little bit more business recently with the electronics companies. So I would not say there's anybody that has all of a sudden gotten so big, it's sort of in that top three or four group. We just crated a much bigger group of clients down below that bigger group.

And you might have been taking a category that was 5%, to Kurt's point, up to 25 or 20% now, so it's a pretty dramatic increase, but it's still small -- not of the total, I mean, of the size of those verticals you discussed.

Okay. The last question (inaudible) in terms of the 4.2 million in make goods you mentioned for the fourth quarter, should we assume that there were really no make goods in Q4 '09?

Yes. The make-good balance at the end of Q4, as you know, a pretty big film schedule with Avatar and so on last year was I think our lowest ever.

It's ranged everywhere -- in Q4, it's ranged from a low of, say, 300,000 to a high of 4 million.

Yes.

But the 4 million, I think, was -- we were a smaller network then, but it was a pretty bad Q4 with National Treasure was your --

[The best ever].

-- number one (inaudible).

Yes, I think that was '07. Yes, last year was the lowest level, so clearly, we've got -- as we mentioned -- I think Gary mentioned in his comments, there's about $4 million at the end of Q3 that's rolling into Q4 and we're going to make that good in Q4. The $64 question about Q4 is how much of the Q4 contracts will be delivered in Q4? And that really comes down to the attendance in the last two or three weeks of the year, and as you well know, the last week of the year between Christmas and New Year's is generally one of the biggest weeks of the year. So it can generally come down to that week. Last year, we had very big business the last two or three weeks of the year after the opening of Avatar and a few other very successful films. So that's why you saw our make good be so low.

Okay. Thanks so much.

You bet.

Thank you. Our next question comes from James Marsh from Piper Jaffray.

Good afternoon, a couple of quick questions here. The first one, Kurt, you talked a little bit about the opportunity to use some of the DCIP screens and how they will allow you to do things you couldn't do before, and do them better. Could you talk a little bit about how the business model changes there? Obviously, you're not buying that equipment upfront; you're going to have some type of access (inaudible). Can you just kind of describe how those -- the business model changes take place and when you expect them to show up in the income statement?

And then just secondly on 3D pricing, could you give us a sense for the magnitude of the premium that you're charging for some of these 3D ads and are these new startup-from-scratch type 3D ads? Are they something that's post-production converted, do you know?

Well, some of the ads are made from scratch, 3D. We have had some that were television 2D ads that people later converted, one that I can think of with Lexus for sure, yes. So of the six, I think four have been conversions and two were sort of made from scratch 3D. So that answers that question. What was your first question? I'm sorry.

The first part related to the change in your business model related to DCIP.

Okay. Yes, as we've announced in various press releases, and it's been in some of our SEC filings, we amended our ESA with the circuits to effectively increase our theater access fee. That's where it'll show up on our P&L in the theater access fee line, and the biggest part of that increase really relates to the increase in the bulk costs because if you think about the 25 or 30 minutes or whatever we use of the total show, clearly, there's an incremental cost associated with running those more expensive projectors and the more expensive bulbs than the LTD projectors that we have currently.

And there's a pretty hard and fast calculation of what that is and that was really the biggest contributor, quite honestly, to the incremental operating costs that we're contributing against. And then so you'll see that come on as those projectors are hooked up to our network. As I mentioned in my comments, we're around 1900 or so of those projectors right now and as they come on, the incremental fees associated primarily with the bulk costs and other maintenance costs will be added.

Okay, great. Thanks very much.

Yes, the other thing you had asked, I think, is the premium on 3D. Were you going to let me off the hook there?

Aha.

Look, we've said this before, but the premium, depending on whether it's a full-owned 3D only which we tend not to want to do, or it's 3D as part of an overall network buy can vary from 50 to 100%, the premium.

Okay. Okay, excellent. Thanks a lot, Kurt.

Thank you. Your next question comes from Marla Backer from Hudson Square.

Thank you. I want to follow-up on the 3D ads topic. I recently heard [Cliff] talk about 3D ads and how the recall rates are substantially higher. How sustainable do you think that impact is as we see more and more ads starting to come on in 3D?

Now, clearly, Marla, there is a -- what I'll call clutter effect and the fact that so far, when we've had a 3D ad playing, I think the most we've ever had playing at the same time was two and we are going to try to limit it to two or three. Obviously, that will dictate demand, but as we're seeing the marketplace right now, having two or three 3D ads on screen at the same time in front of the same film probably is where we get to, and I think under those circumstances, we can continue to argue that there's very little clutter, if you will.

The ads, because of the way our 3D pod is set up right at the end of the first look, they're also the ads that are closer to the advertised show time. In fact, if you've seen it, basically what we've done is taken the last two or three minutes of our 2D show and actually introduced a 3D pod that runs and tells people to put their glasses on, runs through all the ads, including Coca Cola and the Sprint turn-off-your-cell-phone ad, and then right into the trailer. So people don't have to take off and put on their glasses. It's a nice, smooth transition that runs in the last two or three minutes right before show time.

So I think we're going to be able to sustain a meaningful premium. Obviously, time will tell and it's somewhat based on demand, but I think people right now are trying to figure out how to use the medium. I think the biggest gating factor in there being more 3D ads is for the media, the creative side of the media business, to get comfortable using the medium, how to script it into their ads and their messaging. And like everything else that's new, it usually takes a little bit longer for the marketplace to get comfortable with it, but we do see it coming. And we've also upgraded all of our capabilities within our shop so that we can produce in 3D. In fact, as I said, the first look preshow that we're producing the last two or three minutes for the 3D version is something we produce in-house.

Okay. Thank you. And then one other question and switching topics, is on Fathom and the alternative content. Given that there is an expanded scope now moving beyond the Metropolitan Opera, you have the (inaudible) games, are you seeing anything so far that you've decided just doesn't work in theaters?

I don't think we've concluded on anything yet. We still don't have enough data. We are -- it's looking like we have enough events this year to start getting at least a statistically significant enough data to start drawing some conclusions. There's some general comments that I would say is when you're competing directly with something that's on television -- in our case, it's been with Pay Per View. There's been a couple of different types of events. I think we've done probably four or five or six individual events that have been directly against television.

It's tough to compete and we're playing around with the pricing a little bit with our circuit partners, trying to figure out what the right model is because you're basically asking the consumer to leave his home, or to leave a bar or someplace else they may go view the fight or the UFC event or whatever, and go to the theater. I'm hopeful that actually 3D might be the answer to that, where maybe there's a world in the future where the 2D version of whatever content we're talking about shows on television and a 3D version shows in the cinema.

Um-hum.: That makes sense. Okay. Thank you.

Thank you. Your next question comes from Peter Stabler from Credit Suisse Group.

Thanks very much. Kurt, I wanted to revisit some comments you made about Q4 and the scatter and you said a lull and some kind of poor visibility, and I'm just trying to reconcile that with the TV market where I understand at this point, TV scatter for Q4 is kind of put to bed, or at least that's the impression I get talking to agencies. And does this mean that that's erroneous, that that's not true, or does this mean that cinema for some advertisers has become more of a pivot-type medium where because you're digitized, because you can enter and exit quickly, you guys have -- you guys are, I guess, more discretionary in some ways than scatter television, whether it's cable or broadcast?

Well, look, Peter, you know this very well that we're in the first quarter of the media year and we all know that the upfronts were incredibly strong.

Right.

So the reason the scatter looks tight in TV is because they sold most of it upfront and as you know, most of those contracts have very little optionality, if any. So I think what you're seeing in the TV market is they just had very little inventory to sell after the upfront activity. So that is not something that we necessarily benefit from. It's been our experience the last two or three years where this period from sort of October into the first few weeks of November, first week in November, there seems to be almost this breathing -- take a deep breath and let's get ready to get our clients ready for the buying season into Thanksgiving and Christmas.

And they're all sitting there kind of waiting to see what they're going to do and that's what we experienced the last couple of years, most significantly last year, and we were sitting in the middle of November last year quite a bit behind our budgets, and we made it all up in about a three or four-week period.

And one of the comments I made is we're starting to see actually in the last couple of days things come loose a little bit. So it's almost like the money is sort of there and everybody is just kind of waiting until the last minute, and I don't know what the dynamic there is. I know there's still television money moving, although to your point, there's not a lot of inventory left and I think the pricing has obviously been pretty firm, so that's good news.

So we're hopeful the same thing that happened last year is going to happen this year, that clients have to start spending Thanksgiving and the Christmas shopping period is coming, and they will start to get there. Clearly, there is a bit of a different buying cycle because of the upfront that the TV guys have.

Great. Thanks for the color there, Kurt. And one follow-on that's kind of related here -- to what extent are you seeing multiple quarter buys at this point? And are we going to get to a point in your high-demand quarters where the market is going to force advertisers to take a multi-quarter view if they want to get in in the high-demand weeks, that they're going to be in a position where they kind of have to commit to lower demand weeks to get there?

Yes, we're definitely seeing people make longer term commitments for the Christmas buying season and this is especially true with people like car companies who have product launches that they know about. They've got to get that inventory set many, many months in advance, and so some of the clients we're talking to for next year are clearly thinking about multi-unit or multi-month buys and locking it in.

Clearly, the more we can report the kind of utilization that we reported in the third quarter, and especially months like August that were incredibly heavily sold, the better off it is because we start saying, "No, I'm sorry, we don't have any inventory" to clients and that's the quickest way that's going to give them the cue that they better get on the stick if they want it for the next year. And that's all part of our strategy to build our utilization which has always been our primary focus.

Now, fortunately, this year the market has been reasonably tight on the TV side and there's been a lot of demand so our CPM has actually been maintained as well. I mean, that was the sort of perfect storm, if you will, in a good way for the third quarter that we had a very high utilization compounded by very high CPM growth of almost 8%, and on top of that, we had ratings or attendance growth.

All right. Thanks very much, Kurt.

You bet.

Thank you. Our next question comes from Torin Eastburn from CJS Securities.

Good evening. My first question is about the CPMs. How do you see them turning in Q4 comparing to Q3?

Yes, I mean, obviously, we don't make those sort of forward-looking statements because it's just not our policy. We've got a lot of business still coming in, as I mentioned before, which will obviously fluctuate the CPM. I think as I said many, many times now, what people should consider is sort of low to single-digit CPM growth and if we exceed that, which we've just done in the third quarter, that's obviously the result of some very favorable market dynamics.

Sure. Second question, how much do you think the elections helped your utilization this quarter?

I don't think they helped our utilization on the national side at all mainly because there wasn't any national campaign. So most of the buying that went on, as you know, was either regional, statewide or either -- and very local. We think, and I mentioned it in my comments, that it probably impacted positively our local business a little bit because as I noted, we had a pretty good bump of what I will call regional or larger -- what looked like national clients that bought regionally, and that increased our average contract value pretty significantly. And so my sense is that we did benefit a little from the crowding out.

There's been a lot of articles written recently about there was just so much political advertising, all sort of records set, with the amount of advertising. And that actually crowded out other advertisers, either because they actually couldn't get the inventory -- it wasn't available -- or they just didn't want to be beside so much negativity. I know I got sick of watching television and listening to radio after a while. I was so glad when Tuesday came.

Next question -- putting aside the slow Q4 and thinking about the longer term, your utilizations this year have been excellent and obviously, it shows that people are coming to accept your medium. How do you -- in your mind, what's the tradeoff going forward between driving up the CPM because people clearly want your inventory, but also trying to penetrate the markets that aren't big buyers of cinema yet?

Yes, look, it's a balancing act, clearly, and it's a different answer depending on the month. Clearly, there's four or five months in a year and those months are sort of June, July, August, November, December, that we've got a lot more pricing power, if you will, just because of the supply-demand economics of our business and the amount of business that we've built in those months. The other months of the year we have more flexibility and those are the months that we're focusing on for airplane deals and other things that we're doing with certain types of clients that just can't make the cinema CPM work for them.

And when somebody is focused primarily on an older demo, buying cinema is very difficult because we have a younger demo. So when you look at it on an effective basis, the CPM for the audience that they really want to buy, cinema becomes a very, very expensive medium. So it's those kind of clients, and we've mentioned them in the past, that we have tended to try to create some sort of structure to give us some flexibility on placement, give them some pricing flexibility. And so the answer to your question is not an answer that you can apply across the whole year.

Having said that, and this is again -- this has been our strategy from day one -- is we built a number of clients which builds utilization and let CPM take care of itself. We do not manage our business necessarily by CPM except there are deals that we will walk from. There are deals where you draw the line and there are situations where if you do a deal at a very cheap rate, and it's the same advertising agency or buying agency group that you've got a lot of other very high-priced deals at, there's a really big risk that they're going to start wanting that lower rate for those other clients that you've established at higher levels. And that's where you have to be very strategic and very careful about how and when you provide discounts to people to get them onboard.

So there have been situations that we've just walked on deals and we've talked about those in the past, so you do have to draw the line somewhere or you lose control of your rate card because those guys out there are pretty clever about this pricing stuff, and there aren't that many buying agencies. So the balance of power is clearly in their hands.

Sure. Last question, just a quick one for Gary. What was the share count at the end of the quarter?

The share count at the end of the quarter on a total basis is about 54.2 million when you include everything in for dividends and probably about 53.3 million would be what would be reported on the front of the financial (inaudible).

And that does not include all the convertible securities that the founding members own?

Right.

Okay, great. Thank you.

Thank you. Our next question comes from Jim Sticks (sic) from Wedbush Securities.

Hey, good afternoon, guys. I guess I wanted to follow up on one thing you were talking about, Kurt, in terms of the similarities, kind of the compare and contrast between the dynamics of this fourth quarter versus last fourth quarter. I mean, do you have any sense that -- it seemed like -- and correct me if I'm wrong -- that there was some dynamic last year that clients were looking around for rating points and TV wasn't quite delivering them, and that allowed you to get in on some buys and that really helped your demand. And obviously, the networks sold more on the upfront this year, but the ratings dynamics are a little different. So I wanted to get any sense from you as to whether that was shaping up to maybe help you.

Well, I don't think the rating issue is quite as serious. I think it seems to me like the networks did a little bit better job with their programming lineup this year, so there hasn't been as significant -- although there's been some ratings deterioration. So I don't think that's been as big an issue where money has cut loose because they couldn't handle it. I think the upfront dynamic, as you know, seems to go back and forth every year that people buy a lot in upfronts. The next year, they don't and they feel like they should have and then it alternates back. So we're in that cycle this year where everybody bought a lot in upfronts.

I think what we're seeing is that there's not a lot inventory out there and as people really start to put together their marketing plans for the Thanksgiving and Christmas period, that's where we start to see the money. That's why, as I said before, we see that lull and I'll call it a planning cycle that they go through in October and very early November, and then once they get that done, all of a sudden, the money starts cutting loose.

And like I said, it's actually starting a little bit the last couple of days and I'm hopeful that it will -- what happened last year. And I can't stress enough that we're comparing to a very, very strong fourth quarter last year. While October was a little weak, November and December were incredibly strong, especially December.

Right. Do you have any sense that institutionally, the friction in terms of moving money back and forth between TV and cinema is any better this year and the fact that (inaudible) potentially move money your way, or is the change there kind of over a longer period?

Well, no, I think -- look, I think there are more and more clients and agencies that are getting more comfortable with cinema and as I said in my opening comments, a lot of that is because of the thousands, literally thousands, of sales calls that we've made. We've got clients where we didn't land them until the 20th sales call, literally, and so we're starting --

Or years.

Yes, three or four years of calling on clients and they finally get there and some of it's changes in personnel, some of it's changes in their comfort level with the research and some of the other data that supports the value. I would say that people are getting a little bit better at production, so the barrier that used to exist that cinema was a little more intimidating to produce for than television -- and we've for the last year and a half have been sending our Chief Creative Officer on sales calls with new clients in particular, but even other clients that were trying to use cinema, but maybe didn't have a good idea or needed help.

And so we've, as a strategy matter, have really been out there trying to help our clients produce for cinema so that it didn't become a gating factor. We clearly, with lots of different types of clients, deal with the pricing issue. The whole airplane strategy has helped us alleviate some of that, but clearly, that's a gating factor for some clients still.

Okay. And then another issue -- just what do you think the outlook is now for picking up, expanding your network, not necessarily through any one big affiliate deal, but through just kind of the three and four-yard running-play-type of deal? What's the outlook for kind of the inorganic growth through your network over the next year?

Yes, clearly, it's part of our focus and our strategy and as we talked about many times, we've been focused on the smaller regional players. I don't know who it was on the phone a while ago speculating that National Amusements will also be part of Screenvision over the long-term. I don't think that's a bad assumption, quite honestly.

So what we're really focused on are the, I would say, 5 million attendee circuits and up, maybe to 10. I mean, as you well know, once you get below the top 10 circuits, it drops off pretty quickly and it's a very fragmented marketplace after that. And so there's still a lot of circuits that we are focused on and discussing with, and as I said before, we've already got the built-in benefit of Consolidated and Rave coming on next year and really what we've tried to do over the years is build up our impression base at the same time we're building up our revenue base.

And if you keep those things in line, you keep the proper kind of pressure on pricing because clearly, if there becomes an imbalance between your available impressions, and the amount of demand there is in the market, prices will usually go down. And that's not something that obviously is a good thing. So I think we've done a good job of building our distribution while we've built demand for the cinema product and if you keep those things going up at the same level, I think that we're in pretty good shape.

We have probably at least 35 million-plus going to come in next summer that we know of and we've already signed, and we're talking to multiple circuits every day.

Okay. I mean, do you have a general sense like every year --

No, it's --

-- it's kind of a minimum level?

It's almost like tuck-in acquisitions.

Yes, (inaudible) points, their sizes are all over the map and as they roll off, it's different.

Yes, and we can't control when they're available, quite honestly, and so we're going to just continue to add as much as distribution as we can. I am confident now in our sales force's ability to sell the inventory that we have available, that our job is now to get -- Gary and I spend probably most of our time right now on focusing on some of these issues, and also trying to create a more ubiquitous network.

As I've said in my comments today and in other calls, that's the one place that we don't compete very well against television is that we still lack ubiquitous coverage in a lot of markets, primarily smaller markets. And so to the extent that we can create better coverage, I think it gives us a better selling proposition to people like QSRs and other folks that have to cover markets nearly ubiquitously. And that's, I think, one of the keys to landing some of those client categories.

Okay. And then I had just one other question -- on the events part of Fathom, what's your sense on the trends there? Obviously, corporate events hurt a lot in the recession --

Yes.

-- down again a little bit in the quarter. Just trying to see what visibility you have and what's your outlook for maybe that business going positive?

Well, it's already positive. I mean, if you look at the businesses individually, the consumer business revenue for the nine months is up 20%. So --

Right, yes, I (inaudible), but I was focusing on the corporate part (inaudible).

Yes, the corporate part, I think until the economy recovers and companies start spending discretionary money on marketing and communication with employees and customers and so on, I think that business is going to be a slower growth business because that's what you're going after. And that's kind of the first marketing dollars to get cut are those kind of marketing dollars that are associated with the kind of events that we do in our Fathom Business Division. So I think that one pretty much is directly tied to the economy.

Okay. Thanks very much.

You bet.

Thank you. (Operator Instructions). Our Your next question comes from Mike Hickey from Janco Partners.

Hi, Kurt, Gary and David, great job on the quarter.

Thanks, Mike.

I'm not sure if there's much of an impact, but for your Q3 period (inaudible) at least quantify the 3D impact on your 8% CPM growth?

A little bit. I think we had one -- was it one or two ads running in the third quarter, so it's a tiny bit, but I don't think it was significant, Mike, quite honestly.

Okay. And then maybe more importantly for 2011, what sort of impacts we consider from 3D over, say, typical or base CPM growth rate.

Yes, I would hope that clearly, if we start doing a few more airplane deals, that's going to drag our CPMs down; just doing more business with the CPG companies generally is going to drag them down a little bit. I'm hoping that the 3D impact will offset that and when I look sort of our models going forward, I think those two or those three factors kind of offset each other.

Okay. And then lastly, for your book to business for 2011, can you give us any sort of perspective on the percentage that are 3D ads?

Well, I said in my comments we're working on two or three others that some of those will fall into 2011, but I would hope obviously we're going to do, I guess, some -- or five or six of them this year. I would hope we'd be able to increase over that next year.

Okay. Thanks, guys.

Thank you (Operator Instructions). Our next question comes from Steven Slifer from Wall Capital Management.

Hello, there. A couple of -- you were (inaudible) the numbers earlier, then I tried to get a breakdown (inaudible) number ones. What's your total cash been on dividends and how it is expected to be over the next year at the higher rate?

10 --

10.8 million?

Yes.

That's the annual spend (inaudible) is 10.8, okay. And what's your revolver --

Quarter, that's per quarter.

That's per quarter?

Yes.

Okay. And what's your current revolver balance?

As of the end of the year, it was --

Quarter.

I'm sorry, end of the quarter, it was 11, and again, it moves around throughout the quarter. If you had asked what it is today, it's probably down to zero, but at the end of the quarter --

30.

-- it was around 30.

At the end of the quarter, it was around 30?

Yes.

Yes.

Okay. And I see that your total debt, long-term debt was 755. I wonder if there's any capital leases or anything. It's just the revolver and the term loan of 745?

Yes.

Yes.

Okay. And the last question I have on there is a little bit more on -- if your goal on here is to try and convince customers to book ahead of time and to book for longer times by making sure they have run into times where you're out of capacity, but yet your utilization, you're selling to 121%. How -- first off, how do you get to 121% of utilization and secondly, do you cut the line off? It seems like you're past the line where you tell everyone you're sold out.

Here's what we do. We have a base inventory load of 30 -- of 11 30-second units and that's sort of what we give to our sales force to go out and sell. As we start to bump up against selling that, we release other inventory. We have up to three 30-second units, two in segment one and one in segment two that we will release if the demand if there. So the total possibility for us is 14 over 11, which happens to equal 128%. That's if we sold everything single thing we had, every fragment, everything. So that's how you get there. So obviously, in the third quarter, we were pretty heavily sold.

The good news, if people are thinking about, okay, well, what do you do for next year? Well, the good news, as Gary mentioned, we've got 30 or 35 million new impressions -- new attendees coming on. So the media mass on that to get to total impressions would be to multiply that number by 14 potentially and that's how many new impressions we have to sell, so for next year, because most of those impressions will come on midyear -- mid-next year.

Okay. And so you're not -- you really issue -- we assume that 14 out of 11 is the hard number on there when you're (inaudible) the utilization number or is it that you get to 14 when you're selling out that number, then you'll add a 15 or --

Well, I'm not going to say we never do, but we would consider it if there was enough demand. We try to not do it because there is this issue with the audience, and so we're very careful and that's why we've tried to create this preshow that doesn't overload the audience with too many ads.

And Steven, what we do is we look to see how many 60-second ads are in there and if there's a long-form content because you don't want one 30-second ad (inaudible).

Yes. And even just establishing or deciding whether we go to 14, if everything that we've sold at 11 is a 30-second ad, we may not go up from there just because the show just feels too choppy. So we are taking a lot of time to make sure that we take care of the audience. That's been one of the primary focuses from day one.

Okay. Thank you.

Thank you. At this time, we have no further questions. I'd like to turn the floor back over to the speakers for any closing comments.

Great. We don't have much else to say. Thank you very much for all your support and if anybody else has any other questions, you know where to call us. So thanks very much for everyone's support.

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