National Cinemedia Inc (NCMI) 2011 Q1 法說會逐字稿

Greetings, and welcome to the National CineMedia, Inc. first quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. A 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, Mr. David Oddo, Vice President of Finance for National CineMedia, Inc. Thank you, Mr. Oddo. You may begin.

Good afternoon. I'd like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than the statements of historical facts communicated during this conference call may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties.

Important factors that can cause actual results to differ materially from the Company's expectations are disclosed in the risk factors contained in the Company's filings with the SEC. All forward-looking statements are expressly qualified in their entirety by such factors.

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

Thanks, David. Good afternoon, everyone. Welcome and thanks for joining us for our 2011 Q1 earnings conference call. Today, I'll provide a brief review of our Q1 results and an update on how our business is progressing and make some comments about the marketplace.

Gary Ferrera, our CFO, will then provide a more detailed discussion of our financial performance for the quarter and will provide financial guidance for Q2 2011 and our update our outlook for the full year. And then, as always, we'll open the lines for questions.

Once again, we exceeded the top end of our adjusted OIBDA guidance range, thanks in part to a 3.2% growth in National CPMs, local ad revenue growth, and tight expense controls. We were also able to effectively use our available inventory and impressions, resulting in a make-good balance that was at the low end of historical levels. This guidance, of course, included our expected Q1 revenue and adjusted OIBDA decline versus Q1 2010, related to the reduced spending by one of our military clients.

As we discussed on our prior call, we expected a somewhat soft first quarter off a very strong Q1 2010, as we could not replace the entire significant military contract. We did, however, offset some of the impact of reduced military spending as our national [mon] beverage revenue would've shown growth of over 14% in the current quarter, excluding that one 2010 contract. Unfortunately, there was not enough scatter demand in Q1 to offset the full impact of the loss of the significant military contract.

Q1 continues to be a challenging quarter for us, due to our low penetration into heavy Q1 spenders in the CPG, QSR, financial and pharmaceutical categories. In addition, TV and cable upfront dollars are heavily allocated to the Superbowl, Academy Awards, and other high-profile TV events. This once again highlights the importance of our strategy to expand and diversify our client base.

While there was no large new client contracts in Q1, during the quarter, nine new clients advertised with us. And so far this year, we have added 16 new clients that will spend during 2011, including a new deal structure with an insurance company. These new Q1 clients include businesses in the personal care, cable TV, video game, convention bureau, movies, and game and toy categories.

This continued progress to expand our client base reflects the great work of our sales, marketing, and research teams as they continue to sell through the benefits of our network relative to other national media networks.

In addition, we're also having some success with the development of demand-sensitive pricing structures, the use of our network scheduling technology to provide more targeted campaigns to our clients, and having our creative executives work directly with clients and their agencies to help them produce more cinematic ads and get them more comfortable with the fact that many of their better TV ads will be even more effective on the big screens.

We also have begun to more aggressively sell the benefits of our larger national network and the quality improvements that are on their way as we integrate our advertising and Fathom networks with the new higher-quality digital cinema systems.

So far in 2011, we have signed three new theater circuits with approximately 310 screens and 7 million annual attendees that will be added to our network throughout the second half of 2011. In addition to these new network affiliate deals signed in 2011, we'll also add approximately 875 Rave and Regal consolidated screens with over 30 million annual attendees at the end of Q2 of this year when their advertising contracts with Screenvision expire.

Once all of these circuits are added, we estimate our network will include theaters that represent 72%, 70%, and 67% of the attendance in the top 10, 25, and 50 US DMAs, respectively. While this is great progress, we still do not have the type of ubiquitous geographic coverage that national TV and Internet networks can offer to their CPG, QSR, and retail clients.

Becoming more competitive with these national networks across several client categories is a critical part of our national revenue growth plan. And thus, we continue to have productive conversations with many regional theater circuits.

We also continue to improve the technical quality of our network. As of last week, we were playing our advertising pre-show through digital cinema projectors on over 4,200 screens or 26% of our digital network screens and expect by mid-2012 that over 15,000 screens or approximately 90% of our digital network will be equipped with the higher quality digital cinema technology.

This higher quality projection across our national network will for the first time provide meaningful national reach for both 3D ads and Fathom entertainment programming, providing another unique value proposition versus other sight, sound, and motion networks.

We have already sold 7.5 minutes of new 3D ads across parts of our network to four different clients in 2011 with CPMs that average from 50% to 100% higher than our 2D averages. While we expect 3D to continue to provide some future revenue upside for us, broader adoption of the 3D medium will take some time as creative agencies and entertainment and sports programming producers get comfortable with a new medium and there is broader 3D distribution on TV and handheld devices.

Our local advertising business continued to grow in Q1 as revenue increased over 3% versus a difficult Q1 2010 comp that had increased 35% versus Q1 2009, while the number of Q1 contracts was down versus Q1 2010 due to cautious spending by smaller businesses, who are still recovering from the recession, our average contract values continue to increase during the quarter, reflecting stronger buying by midsized and larger local clients.

Our lower Q1 local growth also appeared to be somewhat related to the fact that there were very few [tempo] film titles during the quarter with a strong summer film slate beginning to create a little more excitement in the marketplace we are starting to see activity pickup in Q2 with larger local and regional clients and are projecting double-digit local revenue growth for the quarter.

Fathom's revenue for the quarter decreased as the Metropolitan Opera attendance was down versus Q1 2010. Much of this attendance decline appears to be timing as many of the stronger titles, including a record setting Carmen, fell in Q1 last year versus a stronger lineup in Q2 this year. In fact, the number of Fathom consumer events is expected to be up over 25% for the first six months, as we are planning to distribute over 50% more events in Q2 versus Q2 2010, including several strong Met titles, four nights of the Tony Award-winning Broadway play Memphis, and the third live installment of the LA Philharmonic.

In Q2, we saw some more promising signs in our Fathom Business Events division as larger companies started to spend again on network corporate communications and marketing events.

Looking ahead, while we continue to expand our network and client base and the overall development of our business continues to go well, we have some concerns that the impact of the earthquake and resulting tsunami in Japan could create some short-term headwinds for our national advertising business over the remainder of the year.

While we're still expecting solid growth in Q2 versus last year, over the last few weeks, certain Japanese car manufacturers and consumer electronics companies have asked to delay their Q2 and early Q3 advertising due to the disruption in manufacturing and other supply chain issues.

This may add to our late Q3 and Q4 booking and proposal activity. However, should disruptions in supply chains continue, there could be further delays in spending until later this year or possibly even into 2012 when product is available to consumers.

As we have mentioned, a higher percentage of our national advertising revenue relates to new product launches than is the case with the more mature, highly diversified TV networks. Thus, the inability for companies to get their new products to market will have a more meaningful short-term impact on us.

Our progress to diversify and expand our client base the way TV networks have should begin to help reduce the impact of these short-term disruptions in client spending. In fact, the robust TV upfront last year and the ability of agencies to shift those upfront commitments to a broader array of clients who shelter TV networks from some of the impact of this recent events in Japan.

Given this short-term uncertainty, we thought that it was prudent to widen our guidance range by reducing the lower end. The good news is that our network expansion later this year should provide plenty of national inventory and impressions to handle the spending shift and any additional demand that may materialize later this year. And thus, we did not change the top end of our guidance, as some of the clients who have delayed their spending have indicated that they plan to begin to advertise in the second half of the year as they restore their manufacturing and supply chain capacity.

In addition, we are continuing to experience good Q3 and Q4 proposal activity as well as client discussions that include some exploratory discussions related to the cancellation or delay in the start of the NFL season.

That is all I had for now. Now I'll turn over the call to Gary to give you some more details concerning our Q1 national or financial performance and guidance for Q2 and for the year.

Thank you, Kurt. I'll now spend some time reviewing our first quarter financial performance in a bit more detail as well as discuss our guidance for Q2 and full year of 2011.

For the first quarter, our total revenue decreased 16.3% to $70.8 million, driven by a 12.8% decrease in total advertising revenue, including beverage, to $59.1 million and a 30.4% decrease in Fathom Events revenue to $11.7 million.

Total Q1 adjusted OIBDA decreased 27.4% to $23.6 million from $32.5 million. As a result, our first quarter adjusted OIBDA margin decreased to 33.3% from 38.4% in Q1 2010.

Our Q1 2011 advertising revenue mix was 64% national, 22% local, and 14% beverage versus our Q1 2010 amounts, which was 68%, 18%, and 14%, respectively.

Q1 national ad revenue, excluding beverage, decreased 17.5% to $38.3 million from $46.4 million in Q1 2010, driven by a decrease in utilization to 71% compared to 78.1% in Q1 2010 across a 17.6% decrease in our Q1 impression base relating to the weaker box office.

As Kurt mentioned, these first quarter declines were primarily driven by the loss of a contract from one military client that was not repeated in the first quarter of 2011. In addition, our content partner shifted $3.2 million of spending to later in the year versus Q1 2010. These declines were partially offset by the addition of new clients and a CPM increase of 3.2%.

Our Q1 beverage revenue decreased 10.9% to $8.2 million from $9.2 million in Q1 2010, driven by a 15.4% decrease in founding member attendance, partially offset by the 6% contractual CPM increase in 2011.

The impact on OIBDA of this revenue decrease was more than offset by a decrease in founding member theater access fee, as they are both impacted by theater attendance. Our Q1 2011 local revenue increased 3.3% to $12.6 million from $12.2 million in Q1 2010 with same-screen sales increasing approximately 1%.

Our average contract value increased approximately 7% versus Q1 2010, while the number of Q1 contracts decreased approximately 3%.

As Kurt noted, the 2011 growth percentage was muted somewhat by a very strong Q1 2010 that grew 35.6% over Q1 2009.

Total Q1 advertising revenue per attendee increased 4.8% to $0.44 with our national advertising revenue per attendee, excluding beverage, decreasing 1% to $0.28, while our local ad revenue per attendee increased 12.5% to $0.09, both on a 17.7% decrease in Q1 theater attendance.

We entered the first quarter of 2011 with approximately $2.8 million of make goods. And as of the end of the quarter, we had approximately $800,000 of make goods. This result should help to illustrate that a soft box office doesn't necessarily correlate to a high make-good balance for us and vice versa as we are able to work with clients to utilize available inventory.

Our combined Fathom Events businesses Q1 revenue decreased 30.4% to $11.7 million from $16.8 million in Q1 2010. This was driven by a 39.2% decrease in Fathom consumer revenue, offset partially by flat performance in Fathom business revenue.

The Q1 Fathom consumer decrease was driven by an approximate 40% decrease in revenue per consumer event site on approximately the same number of events and event sites as we had in Q1 2010, as the Met titles and some other events were not as strong.

Looking briefly at diluted earnings per share for the first quarter, we reported a GAAP EPS loss of $0.02 versus income of $0.03 in Q1 2010, reflecting our lower operating income.

As of March 31st, 2011, we had 17,196 total screens in our network, representing a 0.7% increase versus the end of Q1 2010. This increase in total screen count was primarily driven by the addition of approximately 490 affiliate circuit screens, offset by the reduction of approximately 370 founding member screens, primarily through closures of underperforming non-digital locations.

Approximately 94% or 16,088 of our total screens are connected to our digital network versus approximately 91% at the end of Q1 2010. These digital screens generate approximately 95% of our attendance.

Approximately 13% of our network is now composed of affiliate screens versus 16% at the end of Q1 2010. This decrease related to the shift to founding member screens, resulting from the AMC Kerasotes acquisition in May 2010, partially offset by new affiliate additions.

Our capital expenditures were $2.2 million for the first quarter compared to $2.1 million in Q1 2010. We now estimate that 2011 CapEx will be in the range of $12 million to $14 million with the increase primarily driven by the cost of connecting our recently signed digital network [affiliates] to our digital network. This estimate assumes that no additional network affiliate agreements assigned during 2011.

Regarding our balance sheet, our total debt outstanding as of March 31st, 2011, was $778 million, comprised of our $725 million term loan and a $53 million balance on a revolver versus an $80 million revolver balance at the end of Q1 2010.

The revolver balance net of $8 million of NCM LLC cash and cash equivalents was approximately $45 million at the end of Q1 2011 versus $46 million at the end of Q1 2010.

At quarter end, we had approximately $58 million of cash short- and long-term investments in NCM Inc. versus approximately $48 million as of April 1st, 2010. Our short- and long-term investments are comprised of marketable securities, such as commercial paper.

A potion of the $58 million NCM Inc. 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 at the end of Q1 2011, we would be able to pay approximately four quarters of dividends, even if no additional cash were distributed up to NCM Inc. from NCM LLC.

In late March, our credit rating was upgraded by Standard & Poor's to BB-minus, trigging net reduction in the interest rate margin we pay on our term debt from 175 basis points to 150 basis points. This margin decrease will result in cash interest expense savings on our term loan of approximately $1.8 million on an annual basis.

Approximately $550 million of our $725 million term loan due in February 2015 is fixed under interest rate swap agreements at approximately 6.5%. And the remainder is floating rate debt at approximately 1.8%, as of March 31st, 2011.

The average interest rate on our $725 million term loan was 5.7% for Q1 2011 versus 5.6% for Q1 2010. The average interest rate on our revolver borrowings was 2.1% in Q1 2011 versus 2% in Q1 2010.

Our pro forma net leverage at NCM LLC as of March 31st, 2011, was 3.7 times trailing four-quarter adjusted OIBDA, including the Regal consolidated integration payments versus approximately four times as of Q1 2010.

You should note that we well below our financial covenant as of March 31st, 2011, which is now reduced to a floor of 6.5 times due to the maturity of the term of the term loan in 2015. While we currently do not anticipate paying down our term debt, our leverage is expected to continue to decline over time as OIBDA is projected to grow.

We also announced our regular quarterly dividend of $0.20 per share. This dividend represents an annual yield of over 4.5% based on recent trading levels. The dividend will be paid on June 2nd, 2011, to shareholders of record on May 19th, 2011.

Turning to our Q2 guidance and annual outlook, for the second quarter, we expect total revenue to be in the range of $108 million to $111 million and adjusted OIBDA to be in the range of $52 million to $55 million, implying OIBDA growth of approximately 5% to 10% over Q2 2010.

With respect to our annual bookings and outlook, our books in pending total advertising revenue, including content partner, beverage, cell phone, PSA, and scatter contracts, are approximately flat versus the comparable 2010 amount, as clients appear to be holding back their commitments related to product launches.

Only approximately 63% of the advertising revenue implicit in the midpoint of our full-year guidance range is booked and pending, whereas last year we had approximately 69% on lower actual 2010 total advertising revenue.

With this slowdown in bookings, we now expect total revenue to be in the range of $460 million to $475 million and adjusted OIBDA to be in the range of $235 million to $250 million.

With the supply chain issues caused by the tragic events in Japan, there's some downside risk should analysts delay their spending into 2012, when they can get their products to the retail outlets. However, our proposal activity remains strong. And [that's why we] remain optimistic about posting high single two-row double-digit growth for the year.

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

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Eric Handler from MKM Partners. Please proceed with your question.

Yes, thanks for taking my question. So, with regard to your guidance, I understand and get the situation in Japan. But, given the strength of the cable network scatter market right now, I'm curious why you don't -- you're not seeing a pickup from other areas, given that there's such tightness right now on the TV side.

When you say tightness, Eric, you're talking about just the rates?

A lack of inventory available.

Yes, I think that's true probably on the broadcast side. I don't know about the cable guys. Seemed like they had plenty of inventory, but that doesn't really matter. I think the difference that we're seeing is that we had several large contracts that were in our proposal activity, where the client has come back and it's both car companies and electronics companies. And they've just said, look, we need to delay. And we're thinking it's going to be this year, most likely this year, but it could go into next year.

And so we just thought it was prudent, if that risk existed -- and these are very specific product launches and other, what I'll say, marketing events. In one case, it was a relaunch of the brand. And so we just felt it was prudent to bring things down a little bit. We're still seeing good activity. And that -- we indicated that in our comments.

And can you give a sense of some of the verticals where you are seeing some strength right now?

Yes, we're seeing a lot of -- the new verticals we talked about, we're having a lot of very good conversations with the CPG companies, including the bigger ones that we've talked about in the past. So, we're having good conversations there. The insurance guys, which have not been historically big spenders in cinema, we're starting to have good conversations with them on a number of different programs. So, we are starting to see the broadening of the client base that we would like to see.

Okay. Thank you very much.

Yes.

Our next question comes from the line of Alexia Quadrani from J.P. Morgan. Please proceed with your question.

Thank you. Could you follow up a bit on your comments on the -- I guess the delays you're seeing or the pushed out advertising from both the auto and the consumer electronic businesses that have supply issues from Japan? I guess trying to get a better sense of quantifying how much that is or how significant that is. And also, if it does come back later in the year, will you have capacity issues, given how tight your inventory utilization levels are in the fourth quarter.

Well, actually, we've reduced our lower end of our guidance by about $5 million. So, I think that's a pretty good guide on some of the contracts that we think are at risk to happen this year. So I think that gives you a reasonable size. Could it be a little bit more, little bit less than that? Yes. But, that was the number that we felt comfortable with that had a risk of flowing out of the year entirely. And so, I think that's the answer to your first question.

The answer to your second question we alluded to in our guidance, we've got a lot of new impressions coming on. They'll start in July. The Rave and consolidated deals, which we've done in previous years and then we've signed up some new people. We're also very close on two or three other deals that we couldn't announce yet. But, we are pretty confident that we'll be adding some other impressions later in the year. So, I think the bottom line is I think we'll have plenty of inventory to meet the demand.

Okay. And then could you just remind us how big military is for you?

Well, last year, we did that one contract that we've talked about before, which was in the range of $13 million. So, that was -- we did a little more throughout last year but give or take $13 million to $15 million last year, a little bit more the year before. So, that's a reasonable range of that one client.

Now, remember, it's one client. It's the Army National Guard, which everybody knows. And we are doing some other deals with other parts of the military. So, it's not the total military's gone away. It hasn't.

And they still advertise locally with us.

Yes. Yes, it's just the Army National Guard used to use cinema as one of their primary recruiting vehicles. And with the cutbacks in budgets in Washington along with them meeting the recruiting goals, unfortunately, the lower -- or rather the higher unemployment rate, a lot of people go into the military because they can't find jobs in the private sector. So, that actually helps with the recruiting.

Okay. Thank you very much.

Yes.

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

Okay. Great. So, not to flog this auto thing too much, but I just want to make sure I understand as clearly as I can. So, you're saying that you've seen basically $5 million worth of contracts delayed where there might be a chance that they could be pushed into next year. And when you talked about risk, the risk would be that you see more impact than this $5 million. So, I just want to make sure I understand when you said that there was analyst risk that's what you're talking about.

There's actually probably more that we've been asked to move than the $5 million you mentioned. But, we do believe there's going -- based on our conversations and proposal activity, that there will be other contracts that will come onboard.

And Gary mentioned that, right now, we're only sort of booked up to 63% of our midrange of our guidance. So, that's a little bit lower than it was last year. But as was mentioned before, I think it was by Eric, there's a lot of demand out there right now. And we do think that that -- we're going to pick that up as the quarters start to evolve. So, we are going to offset that.

The real risk is that these supply chain issues linger further into the year and that some of this spending gets pushed into next year. And the fact that we've reduced the lower end of our guidance for the year, that's the risk that we sort of -- we saw out there. And that's the headwinds that we discussed in our comments.

That's also -- it's kind of interesting to me that the slope of your guidance -- I mean, you're basically saying that the second quarter revenue growth is going to be 9% to 11%. But, you're coming into a second quarter where I think everyone would figure audience would be up at least 5% given the great box office.

I actually hope it's up more than that. I think most of the projections up, it's going to be more than that. But, as we've talked about, we don't really track, at least on the national side, with the national box office. Our clients are not sitting out there looking out and looking at what films are being released and how much there's -- how much attendance there's going to be in theaters and deciding whether they advertise in cinema or not. So, there really isn't that connection.

On the local side, as we mentioned in our comments, clearly, the blockbuster lineup that's coming up over the next two or three months has helped create more excitement among our local clients. And that's led to some of the growth that we talked about in the second quarter for local. So, it really -- there really isn't that connection that you think or a lot of people have thought there was.

Okay. But, also, in the year-ago quarter, that was relatively low utilization. So, it sounds like the cancellations you're seeing are really concentrated in the second -- or the pushback is really concentrated in the second quarter I guess is what it seems like from your numbers.

Yes, as we said in our comments, there were several contracts and a meaningful amount of money for our second quarter that are getting delayed. And some of those people have told us they will be delayed into third and fourth quarter. Some have told us just stay tuned. We don't really know yet. Because the problem these guys have got, obviously, is they don't want to spend a lot of money if the products aren't going to be at the stores.

Okay. And this'll be -- .

-- Dealerships.

This'll be my final question then. And I appreciate it. No other kind of media company in the video business has really spoken to kind of auto cancellations, although everyone's been asking about it. The ad agencies have not really been speaking to us. You're kind of the first to put that out there. Do you think there's something unique to your medium? You mentioned the product launch. Do you think that's why you're seeing it before others are at this point?

Well, I can tell you that the bigger contracts that were directly related to either new product launches or in one case a complete rebranding and sort of rebranding launch, so I don't know whether those were particular to the theater business or what.

It could also be that the television networks right now are so flush that losing three or four contracts or getting them shifted isn't really going to matter to them. And that's one of the obvious differences between us and the networks. We have 14 30-second units a month. And you can do the math, how many that is in a quarter. And it doesn't take many of those contracts to move before it impacts our revenue enough where we've got to talk to you about it.

I suspect everybody's seen some of this or at least having some of these conversations with their agencies. It's just a matter of how significant it is to their actual business and to their revenue and cash flow.

Okay. Great. I'll leave it there. Thank you very much.

Yes.

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

Good afternoon, gentlemen. A couple things. I guess, just first, since you've been talking about product launches, do you have any rough sense as to how much of your revenue comes from advertising related specifically to product launches? And I mean, I suppose you could either include or not include the content partner money, where I gather most if not all I suppose could be that. I'm just curious as to kind of what the revenue mix is on the national side from what you consider to be kind of that marquis product launch type of spending.

And then I guess, second, I mean, Kurt, as a theme, you talk about with some consistency just the desire to get the network to be more ubiquitous to bring in advertisers who have that large footprint. I mean, is there a way of getting -- crossing that tipping point without doing a large acquisition like Screenvision or without the founding members, doing a large acquisition of a circuit? Or can you actually get there by just kind of acquisitions here, acquisitions there, just kind of curious on how you see that dynamic?

Yes, okay. Let me -- obviously, two questions. Product launches, I've never actually done the math. So, anything I give you, I'd be guessing. But, I can tell you for the car category, it's very, very high. I would say that almost every car ad that we're doing is some sort of relaunch of a brand, a new model that's coming out, or some other sort of special thing that we do.

I think we are probably considered a primary medium for the tier-one car spending that goes on by the manufacturers. So in that category, which unfortunately aligns very strongly with Japan, it's a very high number. And that's one of the things that has impacted us.

Now, having said that, there were some electronics, consumer electronics companies, that have asked to delay. In one case, I know it was from second to fourth quarter. So, there is a reasonable percentage in those categories.

To your point on the content partners, if the studios, if they're launching a new film, obviously, a lot of the stuff that we're doing with those guys are product launch type of stuff. So, I can't give you a direct number. It varies widely by category is probably the right answer.

On the network growth, the number of strategies that we're using, clearly, expanding our network and becoming more ubiquitous so we're more attractive to the CPG and QSR and other categories that need more ubiquitous geographic coverage, I would say that's a primary strategy with respect to those guys, although those guys are also sensitive to price and to the quality or the impression that their content is going to have on the big screen.

And so, we're working on all of those things simultaneously, so making our network bigger and more ubiquitous, making -- creating pricing structures that are more consistent with these guys. As you know, most of those categories buy away from television primetime or buy cheaper television generally. So, we've got to figure out strategies to do business with these guys without completely losing control of the rate card. And that's always the danger with taking certain categories and giving them price breaks is that the agencies will then want the same price breaks for clients that are used to spending much higher CPMs because it's the agency's job to get lower CPMs for their clients.

So, we are managing that process pretty carefully. We've talked about the airplane deals in the past. And we've talked about other flexible pricing strategies, which I sort of alluded to in our comments.

Clearly, if we can make a trade where we're trading lower price for more flexibility on our part on where we place the inventory, that's a trade that's a good thing for us. So, we will be doing that.

I think with a lot of the other categories, which view cinema favorably, there's no real problem, if you will, whether it be pricing or quality of content that they have, or any of that other stuff, it's really the blocking and tackling of just getting to them and convincing them of the metrics, convincing them that cinema does what they need to do and is consistent with their marketing strategies. So, it's really the blocking and tackling of sales.

And as we mentioned last year, we added 50-odd clients last year. That was really the accumulation of thousands and thousands and thousands of sales calls. And oftentimes, we'll have to call on a client five and six and seven times before they'll even show any interest. And there are some clients, a few that were actually going to advertise for this year we've been working on for six or seven years.

And so, it is a process of building that relationship and building that client base, which we will continue to do and I think we do a pretty good job and especially when we bring clients ideas that they've not seen before. And we're working on a lot of very interesting things there that we hope we'll be able to share with you later.

Okay. That was quite helpful. And I guess just one other thing, are you seeing any impacts in the local market or the dynamics of smaller advertisers being affected by any of these newer digital platforms, whether it's Groupon or other location-based services, other types of digital things? I mean, I'm guessing that to some extent that comes more out of promotional budgets that might not really be competitive with yours. But, I was just curious as to whether you had any insight into that.

Well, we're clearly seeing more resistance, the smaller the client, to spending. But, I think that's probably more related to just the economy. Everybody knows and everybody's heard and read about the fact that the local economies are still impacting the smaller businesses more than the larger midsized businesses. And even the recent increase in gasoline prices impacts that one location, small business, a lot more than it does larger businesses.

And we're seeing that in our activity. As we mentioned in our comments, our growth in the first quarter and our expected double-digit growth in the second quarter is really being driven by the midsized and larger regional clients, local and regional clients. And so, I think it's very consistent with what we're seeing in the overall economic environment and the impact of the sort of continuing recession, if you will, in some of these smaller markets.

But, do you think your position to pick up share when that market comes back, I mean, is that your sense that when the small advertisers do finally start to see that the economy is turning that you'll be positioned to be gaining share of that spending from other local media?

I do. And we -- one of the advantages we have is that we are geographically targetable, if you will, that you can buy just the theaters that are in a proximity or in your trade area around your business. So, that obviously is something that those small one-location or two-location businesses are very, very sensitive to.

For them to buy TV, radio, or newspaper in the local market is very expensive because they end up advertising to a lot of people that are not in their trade area. And so, I think the only two mediums I can really think of off the top of my head that are targetable within a neighborhood or trade area is our medium and billboards.

And I know in looking at some of the reports out of the last two days that it seems like [Lamar's] having some issues there. And I don't know whether they're being impacted by some of the digital stuff or not. We are starting to do a little bit more interactivity with our clients on the big screen. And I think that, obviously, is important. But, I think our ability to do sight, sound, and motion that is geographically targetable is a really good thing for us.

Right. Okay. Thanks very much.

Our next question comes from the line of Mike Hickey from Janco Partners. Please proceed with your question.

Hey, guys. Great job on your quarter, all things considered. Kurt, just to follow up with the Japanese situation, are you talking about companies domiciled in Japan with supply issues? Or are you also factoring in non-Japanese companies that may utilize Japanese suppliers that could also be disrupted?

The ones that I have specifically sort of referenced indirectly are Japanese companies. I don't know whether they're actual manufacturing plants for the products they've been talking about are in the States or in Japan. But, it really doesn't matter. The fact is they're not producing as many cars as they'd like to and as the demand seems to be out there.

Having said that, we are getting very strong support from the US car companies. They seem to be picking up their game as of late, seems to be showing through in the results. So, I haven't -- we haven't seen anything that is secondary, where there's just a part or two that's coming out of Japan and they can't build cars or whatever product we're talking about because of that. We haven't seen any of that. The stuff that we've seen has been very specific to Japanese companies.

So, you've seen no indication from, say, US technology companies that there could also be a supply disruption that could delay their advertising.

We haven't seen any specific stuff to that nature. I read about a lot of it, but I haven't seen any.

Okay. And then kind of a fringe question, Kurt, but you're Movie Night Out app is getting a lot of traction, I think 400,000 actives. And I was just curious how you plan to develop that app and if there's the opportunity for you in the future to perhaps use that to enable direct response, which I think is a vertical that hasn't -- you haven't really been able to utilize [into yours] so far.

Yes, it's a great question. We're actually over 500,000 downloads now as of a few weeks ago. So, it is continuing to grow. The strategy, as we've talked about before, is really a bundling strategy, where it's bundled with things that we're doing in the cinema. The whole concept is that we're able to follow the consumer from when they look for their films or look at trailers on the mobile devices, from that sort of first interaction, if you will, all the way through the actual playing of the film. So, it's really following them through the corridor, if you will, the transaction corridor. And so, that's really the strategy.

And we have a lot of deals that we're doing now that bundle in our online and mobile stuff. And I think that will continue to be the case going forward.

Your question that sort of gets to the direct response stuff is an interesting one because it's one we're playing around with, not only with our mobile device, but also onscreen because it is something that we're starting to do a little bit more of and experiment with on how we might engage audiences onscreen without doing it to the extent that it interrupts with people's movie-going experience.

Clearly, we want people to shut their devices at the end of the pre-show so it doesn't interrupt with the trailers and the feature film. And in fact, we've got this program, as you know, with Sprint that tells people to turn off their devices and silence their cell phones and do all that right at the end of our pre-show.

So, I think it's finding a good balance of interaction or engagement with the audience that provides some really cool marketing things we can do with clients but doesn't in any way interfere with the movie-going experience.

Okay. Thanks, guys.

Yes.

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

Good evening. Just two quick questions. The first, can you speculate if the events in Japan had not happened how you think that would've affected your guidance, if at all? And second, your selling and marketing expense this quarter was up on an absolute basis and also as a percent of revenue. Do you expect that to continue? That's all I have. Thank you.

The second question, I don't know whether you -- if you're looking at our press release, a lot of the increase in expenses was related to non-cash equity expense. In fact, I think there was almost $2 million worth of non-cash equity expense between administrative and selling and marketing. So, the increase was primarily related to those non-cash GAAP adjustments, had nothing to do with cash flow.

So, when you take those out, our expenses actually come back in line on a percentage basis, even though we have lower revenue. So, and again, you have to make sure you understand the first quarter is always a much lower margin quarter. So, when I say they come back into line, on a margin basis, that means with other first quarters.

And then the second question, you wanted me to speculate. Well, clearly, we've said that there was some money that's moved out of second quarter. So, clearly, our guidance would've been higher had this not happened in second quarter. I can't tell you what it would've been. That's a little hard to do. But, it would've been higher. And that's probably all we can probably say on that.

All right. Thank you.

Yes.

(Operator Instructions). Our next question comes from the line of Ben Mogil from Stifel Nicolaus. Please proceed with your question.

Hi. It's actually Adam calling in for Ben, but my questions have been answered. Thanks.

Okay. Great.

Our next question comes from the line of Marla Backer with Hudson Square. Please proceed with your question.

Okay. Thank you. In the past, we've talked about locking in some long-term advertising commitments. And I think that that's something you've done a great job with, particularly within the entertainment sector, but -- with your content partners. But, outside of entertainment, you just alluded to, Kurt, before your relationship with Sprint on the Sprint PSA. Do you think there are other opportunities to sort of partner with major advertisers to eliminate some of the lumpiness that you do tend to see on the network?

Yes, I think there are some opportunities, Marla, although, I will tell you, unless there is a very specific sort of sponsored type thing that you're doing, like what we're doing with Sprint, where a lot of the Sprint money's not actually coming out of media dollars, it's coming out of other buckets of money, whether it's promotional or PR or whatever.

And so, that is longer-term money that people can commit to. Even our content partner deals that are at two years are not easy for people because media is always done on a year-by-year basis. As you know, the TV upfronts are done once every year. And those are one-year commitments effectively, from October through the end of September.

And so, getting longer-term commitments that are longer than a year I think is a lot more difficult. That's not to say that we aren't working on a few things that could lead to something that's longer than a year and our content partner deals continue to grow and continue to do well.

So, I think that we're going to -- we're focusing more of our energy right now on just getting people locked into many upfronts, if you will, and being able to have the kind of money on the books starting the year the television guys. Now, I don't think we're going to get to where the network, broadcast networks get to, where they're doing 85% of their upfront, of their sort of inventory, if you will, upfront. The cable guys, as you know, are probably in the 50% or 60% range.

We are probably in that 50% to 60% range now. And so, we're going to continue to add to that. And as our revenue grows and our budgets grow and we're going to have to get those commitments up to stay in that range, but that's really our focus right now is to try to get people to buy multi-flight deals in advance. And we are making some progress. There's nothing I want to announce right now for competitive reasons. But, there are some deals that we've done that are multi-flight deals. They're reasonably large. And they are included in some of the numbers that Gary talked about.

So, that is a focus. The lumpiness, to me, that at the end of the day is really connected to getting our client numbers up. And as I -- I've talked about this a lot and probably getting sick of me talking about it. But, it is our number one focus. We're sitting there at 250 or so, 300 clients. And most cable operators are sitting there at 2,500 to 5,000 clients if you include all the direct response and everybody else.

Right.

And so, we've still got a ways to go on that. And there are going to be these periods of time. Obviously, none of us could've seen what happened in Japan coming -- .

-- Right -- .

-- obviously.

Right.

And so, there are going to be these short-term disruptions that are going to impact our business for now more than it impacts television and other guys that are more fully diversified and have a lot broader client base.

Well, okay, now, just drilling down a little bit on that topic that's impacting you a little bit more, would you think that there might be anything about your network, the fact that the recall rates are so high, or the picture's so large, do you think there's anything about your network that might bring to mind in the mind of the marketer, the advertiser that cinema is a great venue for marketing a new product launch versus ongoing marketing of the brand, which we know that they do all the time, just continue to market the brand.

Yes, that's clearly the point we've been trying to make is that a lot of people look for cinema to make that big splash that the need to get a new product into the marketplace. So, clearly, a higher percentage of our overall revenue is dedicated to programs that marketers are working on that relate to new product launches, rebranding, or some other big marketing event.

Clearly, we've done a good job in the third and fourth quarter on back to school, stuff around that, done a great job around Christmas with all the marketing associated with the Christmas shopping period. And the gap in our client mix, if you will, and advertising mix is the fact that we don't have these guys that are spending with us every single day the way they are on cable and broadcast.

But, it sounds like even within your advertising group, the 250, the ones who are advertising with you, maybe they're thinking of you a little bit more sensitively. They're thinking not in terms of just maintaining brand awareness but in terms of, as you say, the big spending for a long -- .

-- There's clearly a lot of that. There's no question. And there are other clients that are using us now. We're doing some business with some online companies. We're doing some business with some insurance companies, where they're using us more as just rating points and buying GRPs. Those kind of clients do come with it the downside of being lower priced.

So, as we've also talked about, as we focus more and more of our effort on expanding our utilization and selling more inventory, that will put downward pressure on our price. And that's why we keep guiding everybody to the sort of low single-digit CPMs. And there are going to be periods of time where we bring on a bunch of new clients and the client mix creates CPMs that are much higher than that. And that's happened to us over the last few quarters as well.

This quarter was maybe a little higher than the low single digits at 3.3 or whatever, but clearly in the range of what we've been telling people they should expect from a CPM standpoint. Could it go lower for some quarters? Sure. But, I think if it does go lower, that means that our utilizations are probably more than offsetting the financial impact of those lower CPMs.

Right.

The positive impact on our revenue and cash flow of adding that one more client offsets any negative impact of having CPMs down a few percentage points.

Yes. Now, I know that you are -- you don't sell to the box office, which is a point you always make. But, on the other hand, when there is a really nice box office, like post-2009, when there's a really strong box office, it does help, doesn't it? Doesn't it provide a tailwind in terms of your ability to sell? And if we do come out of the second quarter with the kind of box office we're hopeful about, do you think that will provide a tailwind for you that could even carry over into second half of this year?

There's no question -- clearly, on the local, as I've mentioned, there's a direct sort of connection to the film schedule and the ability to market tempo films and the excitement associated with that. So, putting aside the local, which there is more direct, there's clearly a tailwind effect.

But, I will say that the most important thing for us is just to get out there and prove that cinema is continuing to deliver. I think the questions that we get in our meetings are, okay, what's going on? Is this short term? Is it just a film cycle? We get some of those -- we get more of those questions when we're in a down cycle, like we have been for the last five or six months. I still don't think it necessarily impacts on the short term. The longer term, the tailwinds that you talk about I think probably will help us. And if we come out of a very strong next two or three months, that should help us going into the third and fourth quarter and into next year.

I think the film schedule for the next several quarters looks quite good. So, we should have a lot of things to talk about.

Okay. Great. Thanks.

Yes.

There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

Yes, we don't have anything else to say. This has gone on for quite some time. And so, I hope everybody got what they needed. And if there are any other questions, we'll obviously be here for awhile. So, give us a call. Thanks, everyone, for all your support. And we'll talk to you soon. Bye.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.