National Cinemedia Inc (NCMI) 2011 Q3 法說會逐字稿

Greetings, and welcome to the National CineMedia, Inc., third 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. Thank you, Mr. Oddo. You may begin.

Good afternoon. I'd like to remind our listeners that this conference 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. Welcome, everyone, and thanks for joining us for our third quarter 2011 earnings conference call. Today, I'll provide a brief overview of our Q3 results and a brief update on changes in the marketplace since our call a few weeks ago. Gary Ferrera, our CFO, will then provide a more detailed discussion of our Q3 financial performance and provide some comments regarding our revenue and adjusted OIBDA guidance for the remainder of 2011. And then, as always, we will open the lines for questions.

Q3 was a record quarter for us with revenue growth of 8.2% and adjusted OIBDA growth of 7.5% over a very strong Q3 2010. You will recall that third quarter 2010 adjusted OIBDA grew 44% over Q3 2009. These Q3 results that were at the high end of our adjusted OIBDA guidance range reflected the continued expansion of our network and broadening of our national and regional client bases.

Our Q3 ad revenue growth, excluding beverage, related primarily to the strong demand from existing clients as well as the addition of new national clients in the QSR, personal care products, and movie studio categories. So far this year, we've added 30 new national clients.

Our quarterly results also benefited from a 10.5% increase in theater attendance across our national network due to the addition of several new network affiliates and the strong 2011 summer box office. Even with this meaningful growth in advertising impressions, we are able to maintain a national utilization rate of 120% that was only slightly below Q3 2010.

Our national CPMs remained essentially flat versus Q3 2010 due primarily to advertiser mix. As we have indicated previously, our future CPMs in any given quarter will be impacted by the overall TV scatter market environment, downward pressure caused by the expansion of our client base into categories that are not traditional buyers of cinema advertising, and the growth of our higher CPM 3D advertising.

Our online and mobile initiatives are also beginning to provide more benefit as clients look to execute integrated marketing plans across our online, mobile, lobby, and on-screen inventory. As part of this strategy, in August, we launched the new version of our mobile app Movie Night Out that included some enhanced social features. With these enhanced features, user sessions have begun to increase among the nearly 1.2 million people who have already downloaded the Movie Night Out App.

While our digital revenue is still very small, the dollar value of the 2011 national on-screen contracts that have included mobile or online inventory has nearly tripled to 25 million in 2011. This clearly indicates the increasing desire of marketers to launch integrated campaigns that include a digital component.

Given the increasing importance to marketers of this new digital medium, we will continue to develop new ways to connect our growing cinema inventory to the online and social worlds.

Our Q3 local advertising business continued to expand with solid revenue growth in the quarter of 14%. This growth was once again driven by an increase in regional contracts as our average local contract value increased 30% during the quarter, more than offsetting a 13% decrease in the total number of contracts.

Our increase in average contract value reflects the spending of larger regional businesses or national brands buying on a regional basis just the way they do in the spot television market.

Client categories where we have seen strength include banking, retail, auto, insurance, and tourism. Our regional business has also benefited from the expansion of our network as a better geographic coverage in individual DMAs has made us more competitive with radio, TV, newspapers, and traditional outdoor.

We have also benefited from the high local sales force retention rates as our local advertising management has done a great job with training and other job quality initiatives that has created a culture where local sales personnel work together to combine their inventory into the larger regional buys. A decrease in the number of local Q3 contracts reflected cautious spending by smaller local clients, who continued to be negatively impacted by the slow economy.

Our overall Q3 Fathom Events revenue increased 10% over Q3 2010 as the 25% revenue increase in our Fathom Business Events Division offset a 2.2% decline in the Consumer Events Division. The Fathom Consumer revenue declined slightly as the 24% increase in event nights was offset by lower attendance per event related to the testing of new types of programming.

The slight quarterly decline in our Consumer Division revenue was more than offset by the Fathom Business Division revenue growth related to an increase in the corporate events that featured the screening of a film before its release to the general public.

While we have done a good job of bringing more digital programming events to our theater network, creating sufficient market awareness about individual consumer events continues to be a major challenge.

With the increasing scale of the Fathom Consumer Division, in September, we began to make a more meaningful investment in event marketing, as we hired new marketing leadership and began to test various traditional as well as several new online and mobile marketing strategies.

While this increased focus on event marketing is important, continuing to expand the reach and upgrade the technical capabilities of our network with 3D will also be a future focus.

Our advertising and Fathom businesses both continued to benefit from the expansion and improving quality of our national network. Since our call in August, we have signed new network affiliate agreements with three high-quality regional circuits and have recently expanded the number of theaters with an existing affiliate as some of their theaters come out of contract with Screenvision.

These new affiliate additions will add 324 new screens and approximately 7 million annual attendees to our network, strengthening our coverage in several existing markets and expanding our network reach.

With the addition of these new circuits, so far this year, we've signed contracts and added new founding member theaters that will add approximately 54 million new annual attendees to our network. With this growth and assuming a stable industry box office, our network is expected to have approximately 700 million annual attendees during 2012.

While this was very good progress, we continue to have productive conversations with many regional theater circuit as we look to continue to improve our competitive positioning versus other national and local media networks.

We also continued through the technical quality of our network as our founding members aggressively deployed digital cinema projectors through their DCIP partnership. In addition, many of the network affiliates that we have recently added have already deployed or are in the process of deploying the new technology.

As of last week, we were playing our advertising preshow on over 9,000 digital cinema projectors or 52% of our 17,349 digital network screens. By late 2012, we expect that approximately 90% of our digital advertising network and nearly all of our Fathom broadcast network screens will be equipped with the higher-quality digital cinema projection technology.

Once this digital cinema deployment is completed, we will not only be able to provide our clients with higher-quality 2D presentation, we will also have one of the largest 3D advertising and live 3D broadcast entertainment networks in the world.

Looking ahead, we have seen some sporadic movement in the national scatter bookings and proposal activity for Q4 since our last call. While this is promising, the amount of scatter activity is still below what we have seen in prior years as marketers continue to spend carefully as they monitor the pace of economic recovery.

While it's still to early to give any specific 2012 financial guidance, especially given the current economic uncertainty, we are positioned well for growth in 2012. With the signing of two new content partners and the renewal and expansion of one of our existing partners for 2012 and '13, we have increased commitments for our 2012 content partner packages.

We have also finalized the renewal of our multiyear cell phone courtesy PSA agreement that began in October, which also included a meaningful 2012 upfront scatter commitment.

With year-over-year increases in our long-term agreements and a number of 2012 scatter commitments, our booked and pending national advertising revenue for 2012 is higher than at the same time last year for 2011. In addition, the new network affiliate screens recently added will provide the inventory we will need to meet increased demand as the economy continues to recover.

We may also benefit from the projected record 2012 political spending that could crowd marketers out of TV and create overflow into other high-quality video networks, like ours.

With these specific factors positively impacting our business and the prospect of a slow but improving broader economy, we have maintained our quarterly dividend of $0.22 per share in keeping with our commitment to distribute a significant portion of our free cash flow to our shareholders.

While our dividend payout ratio increased slightly on a pro forma annual basis due to our lower projected Q4 results, we believe that this is a short-term issue that is a normal part of the growing pains of a young growth company like ours.

We are confident that continued favorable long-term trends in the media marketplace, our unique, high-quality network, our high operating margins, combined with our strong liquidity position will provide sufficient cash to fund our current dividend policy as well as the continued expansion of our business for the foreseeable future.

That's all I had for now. So, now, I'll turn the call over to Gary to give you some more details about Q3 and our Q3 -- or Q4 and annual guidance.

Thank you, Kurt. I'll 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 2011.

For the third quarter, our total revenue increased 8.2% to $136 million, driven by and 8% increase in total advertising revenue, including beverage, to $127.1 million and a 10% increase in Fathom Events revenue to $8.8 million.

Total Q3 adjusted OIBDA increased 7.5% to $80 million from $74.4 million in the third quarter of 2010. Our Q3 adjusted OIBDA margin decreased to 58.8%, down from 59.2% in 2010 as the impact of the increases in our high-margin national and local revenue were more than offset by the increase in lower-margin network affiliate screens and Fathom revenues.

Our advertising revenue mix for Q3 2011 was as follows, 72% national, 20% local, and 8% beverage versus Q3 2010, which was 74%, 18%, and 8%, respectively.

Total advertising represented 93% of our total Q3 revenue versus 94% in 2010. Q3 national ad revenue, excluding beverage, grew 6.5% to $92.1 million from $86.5 million. As CPMs were basically flat versus Q3 2010, this growth was primarily driven by the continued expansion of our client base along with a continued expansion of our network. Additionally, we had a slightly higher amount of content partner spend allocated to the quarter versus Q3 2010.

While our utilization rate decreased slightly to 120.2% versus 121.8% in Q3 2010, this rate was across a 10.5% increase in our Q3 attendance base, which was driven by a rebound in the theatrical box office as well as the addition of several new network affiliates.

We entered the third quarter of 2011 with approximately $2 million [makegoods], and at the end of the quarter, we had approximately $1.5 million of makegoods. This balance is significantly lower than the Q3 2010 balance of $4.2 million, primarily due to the better performance of PG-13 and R-rated films during the quarter versus the impressions sold.

Our Q3 beverage revenue increased 8.2% to $10.5 million from $9.7 million Q3 2010, driven by the 6% contractual CPM increase and an increase in founding member attendance. The impact on OIBDA of this revenue increase is offset by an increase in the attendance-based portion of the theater access fee, as both are driven by the level of founding member theater attendance.

Our Q3 2011 local advertising continued to perform very well as local revenue increased 14% to $24.5 million from $21.5 million in Q3 2010 with average same-screen sales increasing approximately 11%.

This strong performance was due to the increase in larger contracts. And ad contracts over $10,000 were approximately 69% of local advertising in Q3 2011 versus approximately 62% in Q3 2010, while contracts over $100,000 were 35% of local advertising in the current quarter versus 28% in Q3 2010.

Total Q3 advertising revenue per attendee increased 2.4% to $0.705 with our local ad revenue per attendee increasing 3% to $0.136 per attendee and our national advertising revenue per attendee, excluding beverage, decreasing 3.6% to $0.507 per attendee, reflecting the impact of the 6.5% national revenue, excluding beverage, increase across the 10.5% increase in Q3 theater attendance.

Our combined Fathom Events Business revenue increased 10% to $8.8 million. This growth was driven primarily by an increase in the number of business event sites of 7.9% due to strengthened lower-margin meeting-and-a-movie category. This growth in our business division was partially offset by a 2.2% decrease in Fathom Consumer revenue due to a 13% decrease in revenue per site partially offset by a 23.8% increase in the number of event nights versus Q3 2010.

Looking briefly at diluted earnings per share, the third quarter GAAP EPS increased 29.2% to $0.31 from $0.24 in Q3 2010. This increase is primarily driven by our higher operating income.

For the nine months of 2011, total revenue was $320.8 million compared to $309.4 million in the first nine months of 2010, an increase of 3.7%. This included advertising revenue of $284.8 million compared to $275.6 million in the first nine months of 2010, an increase of 3.3%.

Adjusted OIBDA was $161.3 million in the first nine months of 2011 compared to $156.8 million in the comparable period in 2010, an increase of 2.9%. Adjusted OIBDA, including Regal and Consolidated integration payments increased 1.6% to $162.1 million for the first nine months of 2011 from $159.5 million in 2010.

We continue to expand our network. And as of September 29th, 2011, we had 18,365 total screens in our network, representing a 6.1% increase versus the end of Q3 2010. This increase in total screen count was primarily driven by the addition of 990 affiliate circuit screen and the net addition of 74 founding member screens that included the Regal and Consolidated screens, partially offset by closures of underperforming and in most cases non-digital locations. Approximately 17% of our network is now composed of affiliate screens versus approximately 12.3% at the end of Q3 2010.

Approximately 95% or 17,349 of our total screens are connected to our digital network versus approximately 91% at the end of Q3 2010. These digital screens generate approximately 96% of our attendance.

Our capital expenditures were $3.3 million for the third quarter compared to $2.5 million in Q3 2010. We now estimate that 2011 GAAP CapEx will be in the range of $15 million to $17 million with a year-over-year increase of approximately $5 million to $7 million, primarily driven by the cost of connecting our recently signed network affiliates to our digital network and tenant finishes associated with our corporate office expansion and lease renewal.

While these tenant finishes will be capitalized during 2011 for GAAP purposes, they will be fully reimbursed by the landlords, reducing GAAP rent expense over the term of the lease. But, our actual cash capital expenditures for 2011 will be in the $13 million to $15 million range or approximately 3% of our revenues.

Moving onto our balance sheet, our total debt outstanding September 29th, 2011, was $774 million, comprised of a $550 million senior secured term loan due February 2015, $200 million in senior tenure notes issued July 5th, 2011, and a $24 million balance on our revolver. This is compared to total debt at the end of Q3 2010 of $757 million, comprised of a $725 million term loan, a $30 revolver balance, and a $2 million balance on a non-interest-bearing note.

The revolver balance net of $9 million of NCM LLC cash and cash equivalents was approximately $15 million at the end of Q3 2011 versus $19 million at the end of Q3 2010.

At quarter end, we had approximately $67 million of cash and investments at NCM Inc. versus approximately $50 million as of September 30th, 2010. Our short- and long-term investments are comprised of marketable securities, such as commercial paper. A portion of the $67 million NCM Inc. balance is reserved for income tax payments and tax receivable agreement payments for the founding members.

Excluding these tax-associated reserves at our total dividend rate, at the end of Q3 2011, we would be able to pay approximately four quarters of dividends, even if now additional cash were distributed up to NCM Inc. from NCM LLC.

The entire $550 million balance of our term loan is fixed under interest rate swap agreements at approximately 6.5% with interest payments due quarterly. Our $200 million notes are fixed at an interest rate of seven and seven-eights percent with interest payments due each January 15th and July 15th, beginning in 2012.

The average interest rate, including commitment fees, on our revolver borrowings increased to 3.7% in Q3 2011 versus 2.7% in Q3 2010, primarily due to higher-average unused revolver balances and a slightly higher commitment fee rate, both resulting from the July 5th amendment of our credit facility that significantly increased our liquidity.

Our pro forma net senior secured leverage in NCM LLC as of September 29th, 2011, decreased to 2.6 times the trailing fourth quarter adjusted OIBDA, including the Regal and Consolidated integration payments, which is well below our financial covenant of 6.5 times as of September 29th, 2011.

You should also note that our total leverage ratio at NCM LLC, including our senior unsecured notes, is just under 3.5 times.

Looking ahead to the remainder of the year, as we indicated a few weeks ago, we expect total revenue for the full year to be in the range of $425 million to $435 million and adjusted OIBDA to be in the range of $210 million to $220 million. We will be providing Q1 and full-year 2012 guidance when we release our 2011 results in late February.

That concludes our prepared remarks. And we'll now open 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.

Hi. Thanks for taking my question. Two things for you. First, just trying to reconcile the CPMs in the third quarter. You saw -- I think you said you saw slightly higher content partner spending, which usually helps your CPMs, but CPMs are flat.

And then secondly, it seems like -- tell me if I'm wrong -- your regional business seems to be a little bit stronger than your national right now. If that is the case, are you -- is it a more fluid business right now? And if so, is it possible to increase the amount of regional buys relative to the amount of national buys?

Thanks, Eric, for the questions. The CPM question's just a mix question. And clearly, as you indicated, we get a little positive impact from the content partner mix. But, we mentioned QSR, and we mentioned some other categories that generally are going to have lower CPMs. So, they offset it. And we also didn't have a lot of 3D contracts in the quarter either. So, when you combine all those together, they're flat for the quarter.

Okay.

Second question about the regional strength, a lot of that's a comp issue. I mean, if you're just looking at the percentage growth, obviously, the regional is comping easy -- off easier comps, mostly because we put more and more resource in it as the last two years have gone on. We've also benefited, as I mentioned in my comments, from our network getting more -- having more coverage in a lot of these bigger DMAs and even some of the smaller DMAs. That's where we're able to compete more with the other media in those various DMAs.

And, Eric, the local salespeople eat what they kill. So, as you can imagine, if you're out there trying to survive, you're going to move to wherever you can find the money, just on a survival basis.

Great. Thank you.

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

Okay. Great. Thanks for taking the question. Kurt, I know you spoke a little bit about this. But, I just wanted to kind of go over it in a bit more detail. Since you warrant a couple of weeks ago or so, what's changed? It sounds like you feel a little bit better about the scatter activity. And you still feel like there's opportunity in 2012. But, can you be more specific about what exactly has changed since you warrant?

Well, I think, clearly, the economy picked up a little bit. We had an October that was a bit of a record as far as growth in the stock market and all of that. So, coming off a really, really bad August, a real lumpy September, and then quite a bit better in October, it's amazing to us anyway how our activity, scatter market activity seemed to almost correlate perfectly with what was going on in the stock market.

And the last few days has been -- today was good. Yesterday was good. But, the two days before that were pretty poor. People I think react to those things. So, we've seen -- just they way you've seen the stock market be a little lumpy over the last 60 days or 90 days, we've seen a lot of the same.

And so, like I said, there's been a few weeks, the last few weeks where it's actually been quite good and then other weeks where it's not. And we just don't have -- we obviously are telling you we didn't have enough confidence in the remainder of the year to take our guidance up from where we took it down. So, I think you have to kind of go with that.

Okay. Great. That's helpful. And then one thing that's out there is the flooding in Thailand interrupting car production. And last time with the tsunami in Japan, we were surprised to see you guys suffer a bit from that. Are you seeing any impact from this now, either in terms of risk of losing ads or maybe some of the Japanese guys who yanked ads not coming back when you think they might've otherwise because they're not fully back in their seat in production?

Yes, we haven't seen anything -- any impact from the Thailand flooding, clearly nothing at the magnitude of what we heard on the Japanese side. And we continue to have a lot of very productive conversations with Japanese and other Asian car manufacturers about 2012. So, that one hasn't hit our radar screen yet.

Okay. That's great to hear. And then just a final bookkeeping question. And, Gary, I apologize if you gave this. Did you give the cash split out between LLC and NCM?

The cash -- say that one more time.

So, the cash at NCM Inc. and NCM LLC, the breakdown?

Yes, let me -- think it was nine -- revolver balance at -- is $9 million. Cash and equivalents was approximately $15 million at NCM LLC.

Okay.

Inc.?

Well, the rest is all Inc. And the year before, it was $19 million.

Okay. That's great. Thank you.

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

Hi, guys. This is Stan Meyers (inaudible) James. You guys hearing anything on upfront cancellations from the networks? Is this helping you guys? And has it helped in October?

Usually, fourth quarter or first quarter of the media calendar is firm. So, there's, as expected, not really any fourth quarter cancellations. We are starting to hear about a few first quarter and other people talking about other cancellations throughout the year.

I think the relevant thing about that is that there's clearly a lot of what I would call buyers' remorse out there about the level of commitments that were made in the upfront before the economy softened again. And I don't know whether that gives you any information about the upcoming upfront in May of '12. But, if history holds, these things usually alternate every other year. People feel like they -- that bad deals in the scatter market, the tend to do up -- higher upfronts the next year and then vice versa if people feel like the scatter market has been the better place to be. So, be interesting to see what happens.

Clearly, money coming back into the scatter market, either through cancellations or not having as much committed upfront, those are good facts for us.

Okay. And also, are there any new insights into the Asian car launches?

No, but again, as I just mentioned before, we are having a lot of very productive conversations with people about launches in '12. There seems to be more conversations about the first part of '12 than there usually is. That's not generally when people launch their cars. And that would seem to indicate to me those are the ones that got delayed. And they now started to be able to be able to get their cars to the dealerships and so on. So, we'll have to wait and see. But, the conversations are very promising.

All right. Thank you.

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

Good evening. Just two questions. First, for Kurt, the events that you've seen in the scatter market and the Q4 you're looking at, has this made you rethink or reconsider your approach to pricing or your philosophy with regard to the product at all?

No, I wish I didn't have to give fourth quarter guidance at the beginning of August. We've clearly demonstrated that. No, look, as we said before, we're going to have to create some new pricing structures to be able to attract some of the content or some of the advertiser categories that are out there. And we're having a lot of productive conversations around the airplane structure. And there's also a lot of other things you can do to differentiate the type of contract that it is relative to people that want their monies placed when they want it placed.

We're also looking at some other strategies around how we sell our inventory. The good news is, with our increasing network and the high number of impressions we have, we have a lot more flexibility to experiment with some of these things now and not adversely hurt revenue because we end up with a bunch of scraps or remnant that we can't sell.

And so, we're being very careful in how we do this because I am a firm believer that, over the long term, you've got to be very careful about letting go of your rate card because, once it slips, it's very hard to stop it. And so, we're being very careful about that. But, we're very mindful that, in order to diversify our client base and expand our client base, we're going to have to get more creative about some of these things.

And television over the years has done a fantastic job of differentiating the various day parts that they have, differentiating the various types of contracts the have. When you look at most cable networks, 15% to 25% of their inventory is taken up by direct response or some other kind of lower-priced inventory. That's clearly a part of the business that we do not operate in right now. And the airplane deals that we've started to put on the books have actually helped us fill out some of those slow periods or remnants that we have.

Thank you. And, Gary, just one for you. The interest expense on borrowings picked up pretty considerably this quarter. What was behind that?

Well, the interest expense on borrowings, the part I mentioned with the revolver amount, I mean, that had to do specifically with the fact that we have a much larger revolver now. So, we've got a commitment fee on that. So, we increased our liquidity substantially. And then at the same time, obviously, we have a bond that we're accruing interest on at a higher interest rate.

So, the commitment fee encompass the whole -- I guess it's $3.5 million of incremental expense, $2.5 million.

Say it one more time.

Does the new commitment fee, does that explain the whole increase in borrowings from -- ?

-- No, we've also -- as we mentioned, we replaced what we had with -- we paid down that portion of the term loan and replaced it with a high-yield bond at $200 million.

Okay.

And we're accruing interest on that. So, that's at a little bit higher rate.

All right. Got it. Thank you.

Our next question comes from the line of Mike Hickey from National Alliance. Please proceed with your question.

Hey, Kurt, Gary, and David. Thank you for taking my questions. Just curious on Screenvision if they're doing anything unusual in this environment, maybe if they're being more aggressive with pricing as they chase scatter.

I would say they're definitely not being less aggressive. Is that a reasonable answer?

Yes. And then, obviously, 2012, it looks like political spending's a big theme. And I know it's going to likely be a benefit for you guys. Is there any way that you can help quantify that impact, maybe where we should see it the most and how maybe you adjust your network in terms of the utilization or CPM assumptions?

Well, it's hard to say where most of that money is going to be spent. Clearly, a lot of it will get spent in the battleground states. And so, that will make local inventory or regional inventory quite a bit tighter on television. Whether any of that national -- those national units get sort of allocated to that and there's some sort of deal made between local affiliates and the national broadcaster, that's actually happened in the past. So, that could also have the impact of tightening up the national inventory, which is good news for us.

When you combine that incremental pressure on the national broadcast inventory with the decline in ratings that they've had, that's going to tighten up inventory in the second and third calendar quarters pretty significantly I would expect. And so, that should be good for us. We're also toying around with the ideas of how we might participate on a very limited basis in that money as well. Nothing really to report yet. But, we've had some conversations along those lines.

It's a tough one because, if you look at most advertising, political advertising, it is very negative, and we will not put any negative ads up on the big screen. And so, if you could ever get a politician to do a positive ad that was uplifting or at least informational about him or her, that might actually be something we would consider.

Yes, that's a tough one.

Yes, very tough.

The legal and some other of the theaters are experimenting with movie prereleases over kind of premium theaters. And just curious if you saw this as an opportunity for you to sell kind of a premium CPM to that impression base.

Pretty tough. I mean, at the end of the day, the programming's pretty much the same. It's just a little bit earlier. If we had a larger big-format network, like with IMAX and the other big-format screens that the larger exhibitors have created, the brands they've created, you might consider, although when you really put it in perspective, it's not a big amount of impressions to deal with. And it also complicates the sale a little bit.

But, I think it's a good idea. Anything that attracts more people into the theaters is good news for us. So, all these new strategies that the circuits are doing, whether it's big format, 3D, or the strategy that you've talked about, all of those I think are good strategies for our business as well.

Okay. Thanks, guys.

Yes.

Our next question comes from the line of Bo Tang from Barclays Capital. Please proceed with your question.

Great. Thanks for taking my question. Kurt, you mentioned in your remarks that [both impending] business is higher now than at the same point last year. Could you give us some more color around that? Is that driven mainly by higher content partner spend?

It's both, higher content partner spend and higher scatter, sort of upfront buying, if you will. Both of those are skewing positive right now. So, that's good.

Yes. Great. And then, just from a pricing standpoint, looks like pricing was roughly flat in the quarter. And I know kind of over the medium to long term, you guys have kind of talked about pricing growing in the low single digits. Kind of in the near term, do you say -- do you think that pricing is -- will grow at a slower rate, or what's your stance on pricing over the next, let's say, one or two quarters?

Yes, I think you got to be a little careful about just looking at any one- or two-quarter time period. Year to date, I think we're up 2% or 3% through the nine months. And that's been our guidance for people, kind of in that range. But, that's going to -- it's going to be all over the place. And it's going to -- in each quarter, just because it's going to be impacted by the mix of advertising clients. And so, again, I just kind of go back to what we've said before is, over an annual period, you should look at it sort of in that 2% to 3% range.

Perfect. Thank you.

And could there be some pressure over any sort of shorter period? Sure. Absolutely.

Got it. Great. Thank you.

Yes.

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

Thanks a lot. Good afternoon, guys. I guess a couple questions. I guess, first, just in terms of the fourth quarter, is there anything in how things have changed in the fourth quarter that should make you or make investors any more cautious about your growth next year, or is it really more just -- it's the change in macro? I'm just wondering if there's any particular dynamic in what you've seen that changes your outlook or the degree of confidence you have in your outlook for next year.

No, none whatsoever. In fact, as I mentioned, the base of business it appears as though we're going to go into 2012 with will be higher. And that gives me comfort because that gives us a lot more flexibility in the scatter market obviously. I mean, one of our primary strategies from the very get go was to get our upfront or money that we've got committed day one of any given year higher. And we're probably in the 50% range now. Most cable networks are 60% to 70%. Broadcast guys are 80% or more.

We've got to get up to the cable level at least. That's where I would like to get to. And that will give us a lot more flexibility. In fact, it's a primary strategy in defending our CPMs is to do that because then you don't have to do things in the scatter market that you might not want to do for long-term purposes.

We've been very careful to not do that, and we will continue to do it. And I think the more upfront money we can get will allow us to continue to do that. So, I'm -- look, I'll go back to what I've said a couple of times. I think I said it on the last call. It was in my quote today in our press release.

There was a very unusual and unfortunate, at least for us, timing that happened where all the upfronts got placed during a very positive economic time period. Everybody was very positive in the May-June time period. That quickly changed in August and went from nobody thinking there would be a double dip to everybody thinking there'd be a double dip, almost in a 30-day period.

And that -- I think it's gotten a little better since then, as I mentioned in my comments. We've seen a little bit of signals of some scatter activity over the last few weeks since our update call a few weeks ago. But, the fact that there was so much upfront money committed and now the economy is a little uncertain and brands are holding back any additional money they may have put into the scatter market, and all those commitments that they made in the upfront are firm in the fourth quarter. That's kind of the key.

And as I said I think in one of the previous questions, we have heard of some cancellations going on that'll impact first quarter and TV, impact TV in the first quarter. And we suspect you may see that throughout the first through third quarter.

Just on that, Kurt, is your sense that those cancellations are happening more for cable networks or broadcast networks or both?

I haven't actually heard that there's been a differentiation. Clearly, cable has the advantage of being a lower CPM. So, I guess you could reason, if you wanted dollars back, it doesn't cost you as many GRPs to cancel broadcast. But, I don't know what the specifics are. You just hear these things in the marketplace.

For us, just cancellations isn't enough. What I'm hoping will happen next year is that we'll have some level of cancellations, and then the economy will continue to recover. And that money will get replaced, and we'll get a shot at it.

Right. Okay. And in the -- going back to the ITO and even since then, you've made reference to other countries and CPM differences versus other media and cinema there, cinema being much, much higher. Are there any particular ad categories that you see in other countries which you -- where you think the advertisers are probably likely to be higher-paying advertisers, which you just haven't made as much penetration of here in the US? And if so, why do you think that is? And what do you think the prospects are for gathering in some advertisers who might be some of those higher-paying categories?

Look, the mix of advertisers over there is probably broader than ours. I can almost guarantee it is because they've been doing it for a much longer time period. But, CPM is just a reflection of the supply-demand economics. And if you look at how many years they've been sold out over there effectively, they're going to have a higher CPM. You don't have to even look that far. You can look up in Canada and see what Ellis is getting at Cineplex for his inventory.

It's much higher than down here. But, it also has to do with the fact that he's got a much higher utilization and obviously a much different, more simple marketplace. They've got six or seven key markets up there, and that's it.

So, I think there's factors that will tell me that our CPM will never get to the seven or eight times multiple that you have in some of these locations outside the US. But, given where we are, I think there's still plenty of upside. But, we're not going to really capture that upside in any meaningful way until we can sell more of our inventory.

And last year, we were give or take 80% sold. And we're kind of tracking towards that this year, maybe a little less because we brought on all this inventory late in the year. But, we've got to get closer to sellout before we can really start to drive the CPM growth.

So, it's not really ticking off certain categories which you think you're lacking. It's just expanding the overall breadth of categories using cinema.

Well, I think it's both. There's still some car companies that we don't do as much business as we'd like with. There's still some telecommunications companies we don't do business with. There's entertainment companies.

So, in our core categories, there's still a lot of clients that don't spend as much money with us as I would like. So, it's both getting your core to spend more and more regularly and getting the P&Gs of the world and all these other guys that spend lots and lots of money on television to think about cinema outside of their normal -- outside of their launch or very high-priority things.

Cinema has historically been thought of as a marketing event medium. And we're in the process right now of transitioning that perception, keeping that, obviously, so that people will still use us for their event launches and other things, but also use us for their day-to-day marketing activities.

Great. All right. That's very helpful. Thanks.

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

Thank you. As you look over the next several weeks through year end -- and I know you've consistently told us that you sell towards ad buyers and not in term -- your selling doesn't correspond to the movie slate. But, if the movie slate starts to perform over next few weeks, as we're hoping it will, do you think that that will provide an extra lift, even in this kind of an environment?

Well, clearly, it provides tailwind to our local business. There's no question about that because titles are something that we do market to these local and regional advertisers. Clearly, the overall -- how the overall business is doing impacts the way national advertisers feel about the medium. And you don't have to spend the first 20 minutes of every sales call explaining to people why the cinema business isn't in secular decline.

So, clearly, that provides a better backdrop to market our advertising products when the business is doing better. And we clearly have seen an upswing with a good summer and looks like the next two quarters have fairly easy comps. So, I think, clearly, that's going to give us a tailwind, Marla. But, I don't think marketers necessarily spend a whole lot of time looking at the film schedule and planning their product launches or their other major priorities around our business.

Right.

Having said that, clearly, people like reach. They will pay a premium for reach. We're seeing that in the broadcast business today. And so, that's clearly why we've had very [slow] Julys and Augusts and Decembers pretty much every year.

Now, I will tell you September this year turned out really, really well because we were able to do great back to school and a number of other things. We developed a business, if you will, in September. And it's one of the reasons the third quarter has developed into our best quarter of the year because it's the one quarter of the year that does not have a weak month.

If you look at first quarter, all three months are a little bit slower. Second quarter, April's a little slower, although I looked at the last four second quarters the last four years. And every single second quarter, we've grown our business for the last four years. And then fourth quarter, of course, has a slower October.

So, the real challenge with our business and the real opportunity at the same time is to find more clients that will spend during those slower five or six months of the year.

Well, a follow up to what you just said, if there is that seasonality that you're referring to in the fourth quarter with October being weak, isn't there any way to try to offset that with perhaps seeking Halloween advertising, pre-Thanksgiving advertising, seasonal advertising?

Yes, there's no question about that. And first quarter's a great example. A lot of the first quarter advertising revenue gets sucked up by events, like the Superbowl, all of the other football playoffs, the Academy Awards, the Grammies, all sorts of different event television. And trying to do stuff around those events has been part of our strategy.

We did a deal last year with the Academy Award and Sprint. So, clearly, your observation is a good one. And there are things that we can sort of glom onto, if you will. And there's also -- like back to school is something that we went after in the late August, early September timeframe and have successfully grown a business around that sort of marketing focus.

Thank you.

Yes.

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

Great. Thank you very much, everyone, for joining us. I know there were a lot of other options of calls today that people could've gone to. So, I appreciate you called into ours. And thank you very much for your overall support. We'll talk to you soon.

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.