National Cinemedia Inc (NCMI) 2012 Q3 法說會逐字稿

Greetings and welcome to the National Cinemedia Third Quarter 2012 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, 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 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 2012 Q3 earnings conference call. Today I'll provide a brief overview of our Q3 results and make some brief comments about the advertising marketplace and how our business is performing since our last call. Gary Ferrera, our CFO, will then provide a more detailed discussion of our Q3 financial performance and full-year guidance and then, as always, we'll open the lines for questions.

Q3 2012 marked another record quarter for us with revenue of $143.7 million and adjusted OIBDA of $85.1 million representing growth of 5.7% and 6.4%, respectively, over a very strong Q3 2011. You may recall that third quarter 2011 adjusted OIBDA grew 7.5% over a very strong Q3 2010. In fact, we have grown Q3 adjusted OIBDA 64% since 2009. These Q3 results reflect the continued expansion of our network and broadening of our national client base offset somewhat by lower local revenue.

Our Q3 national advertising growth was driven primarily by a meaningful 15.9 percentage point increase in utilization on network attendance that was 2.8% lower than Q3 2011. This higher utilization reflects oversell conditions in some flights and rating groups that was driven by several longer-form ads including a two-minute ad for one of our telecommunications clients.

The slightly higher CPMs reflected our tight inventory offset by the impact of lower CPMs on longer-form ads as we generally give a CPM discount for ads in excess of 60 seconds. As we have discussed in the past, we can expand the number of units in the First Look pre-show when market demand dictates, especially when there are longer ads, which make the pre-show less choppy.

The two-minute telecommunication ad was part of a groundbreaking integrated campaign that we launched during the last week of the second quarter and ran until September. This campaign was the largest and most integrated deal we have done in our history providing clear evidence of the value of our strategy to create a digital media company for the unique combination of high-quality, creative production and technology development and operations capabilities that support our world-class sales organization. This unique combination of core competencies has positioned us very well to meet the needs of our clients as they look for more creative and integrated ways to market their products.

In the case of this deal, we provided an integrated campaign that included a two-minute 3D and 2D made-for-cinema spot, several lobby promotions, a 2D and first-ever 3D interactive onscreen audience motion game, online and mobile ads, plus creative production services related to the various theater ads in a New York City launch event.

While this groundbreaking deal was an important part of our Q3 results, as it's held primarily in July and August, we believe that it should not create a comp issue in 2013 that was as significant as when we were not able to replace the 2010 contract for a military client in Q1 2011. In fact, we stopped selling July and August of this year in early May, as we were in an oversold position, which is never the case in Q1.

Our Q3 and nine-month national growth was also driven by the addition of several new clients. So far this year, we have received commitments from 23 national clients that have never spent with us or have not spent since 2006, six of which were added during Q3. These new clients that were added during Q3 included businesses in the banking, shipping services, department stores, apparel, video games and nonprofit categories.

We are also beginning to benefit from another part of our growth strategy launched earlier in the year when we participated in the TV upfront process for the first time. While we view our upfront initiative as a multi-year strategy that will require hundreds of meetings over the next several years, we are already beginning to see an increase in overall upfront bookings for 2013 as we are embedding ourselves earlier into the media planning process rather than simply waiting for money that comes available during the media buying process.

In the future, this will allow us to better match our inventory availability, unique product integrations, and more flexible pricing structures with the annual marketing plans of our clients. While it will likely take several years of participation in the upfront process to achieve the market awareness and upfront commitments garnered by TV networks, I am hopeful that with the success of this first year, we will be one step closer to achieving upfront commitments that are consistent with a 65% to 70% of annual budgets secured by the larger cable networks.

Going into 2013, we are targeting to sell approximately 60% of our annual national budgets including Contemp Partners, beverage, and cell phone PSA.

Similar to the second quarter, our local advertising continued to be a bit disappointing, as a weak July and August was offset somewhat by a stronger September that was actually up 21% over 2011, possibly due to the crowding-out impact of the election spending that will also benefit the first part of Q4.

For the quarter, the positive impact from an increase in the number of smaller local contracts versus Q3 of 2011, was offset by lower average contract values for our larger regional clients. Having said this, while the number in total value of contracts below $10,000 were stable for Q3 versus 2011, there were some good signs related to the pickup in the deal flow near the end of the quarter with smaller businesses, and we have booked some larger regional deals in Q4. We currently expect local revenue growth in Q4 2012 in excess of 20% versus Q4 2011.

I've mentioned on previous calls that our online and mobile initiative is becoming a more important part of our integrated bundling strategy. During the quarter, we continued expanding the sale of online and mobile ads including leveraging our broad local salesforce, which is a unique capability in the online and mobile world.

We also will continue to expand the distribution of our new CinemaSync app, as it recently became available as a standalone app in the iPhone and Android stores. While we don't expect meaningful near-term direct revenue from CinemaSync, as we continue to expand its distribution, it will become a much more important marketing tool for our theater partners to engage directly with their patrons to market tickets for upcoming films and all of their various concession products.

It also provides a unique marketing tool for our local and national advertising clients who can use it to distribute coupons, other value-added elements by syncing to consumer smart phones during the playing of ads and content segments in our First Look pre-show or on our lobby network.

Third quarter Fathom events revenue declined by $3.1 million, all of that decline related to the wind down of the Fathom business division, as our Fathom consumer division revenue increased by 11.4% and overall Q3 adjusted OIBDA for Fathom events grew over $0.5 million, or over 900%, as we benefited from a higher-quality mix of events and lower fixed sales and operating costs and lower NCM support costs as a result of the restructuring of the Fathom business division.

Some of the successful Q3 Fathom consumer events included the classic film series events, "Singin' in the Rain," and "Star Trek the Next Generation," and successful Drum Corps International and RiffTrax events. Our focus on event quality rather than quantity resulted in revenue per event night more than doubling on just half the number of event nights held during Q3 2012 versus Q3 2011.

During the quarter, we continued to enhance our competitive positioning versus other national and local media networks as we continued to expand and improve the quality of our digital network. So far in 2012 we have signed seven new theater circuits with approximately 390 screens and 12 million annual attendees. These recent additions will bring our total network screen count to over 19,400 screens in 183 DMAs. We expect this expansion to continue on a selective basis as we are currently targeting several smaller regional circuits with over 900 screens and over 36 million annual attendees and are working on finalizing on two renewals of existing affiliates representing approximately 800 screens and 20 million annual attendees.

We also continue to improve the technical quality of our networks. As of last week we were playing our advertising pre-show through digital cinema projectors on over 14,100 screens, or 77% of our digital network screens and expect approximately 80% of our digital network will be equipped with a higher-quality digital cinema technology by the end of this year.

Over 8,000 of those screens will be capable of playing 3D ads. We have also increased our Fathom-wide broadcast network to 720 2D and 85 3D live locations.

Looking ahead, while October 2012 tracked ahead of October 2011, we have taken our annual guidance down to give us some room as the November and December scatter market is proving to be softer than we had originally projected. The overall ad market appears to be very cautious as brands monitor inconsistent economic data and the uncertainty associated with the upcoming elections and the fiscal cliff that could impact 2013 consumer spending.

While some of this national advertising marketplace softness is being offset by the renewed strength of our local and regional advertising business, given the higher margins of our national ad business, we felt it prudent to trim our annual guidance.

Additionally, the effects of Hurricane Sandy could impact deal activity over the near term as northeast economic activity has been adversely affected, and agencies and clients struggle to get back to business while Internet, telephone, and transportation systems are being restored.

As you know, due to our high margins, only one or two deals can impact our near-term OIBDA meaningfully. Even with this adjustment to our Q4 guidance, our national revenue growth for the year is expected to be strong at 5% to 9% while our 2012 adjusted EBITDA growth did not keep pace with this revenue growth due to the increase in our theater access fees that happens once every five years. Our cost structure for 2013 through 2016 should be relatively stable and with our upfront and other strategies designed to increase our inventory utilization and expand our network are in full swing. We are well positioned for free cash flow, though, in 2013 and beyond.

That's all I had for now. So now I'll turn the call over to Gary to give you some more details concerning our Q3 financial performance and annual guidance.

Thank you, Kurt. For the third quarter our total revenue increased 5.7% to $143.7 million driven by an 8.5% increase in total advertising revenue including beverage, partially offset by a 35.2% decrease in total Fathom events revenue.

Total Q3 adjusted OIBDA increased 6.4% to $85.1 million from $80 million, and our third quarter adjusted OIBDA margin increased to 59.2% from 58.8% in Q3 2011.

The adjusted OIBDA margin increases were primarily due to the increase in our high margin national advertising revenue partially offset by the impact of a contracted 8% increase in 2012 for the attendance-based portion of our theater access fee that occurs once every five years, and the incremental digital cinema maintenance fee related to the increase in the number of high-quality digital cinema projectors connected to our network. Together, these increased our operating costs $1.6 million for Q3 and $5 million, year-to-date, versus 2011.

Additionally, our margins were slightly impacted by the fact that our lower-margin network affiliate-based revenue, which operates under our revenue share model grew to 17.2% of our total Q3 attendance versus 14.2% in Q3 2011.

Our Q3 2012 advertising revenue mix shifted slightly, and was 76% national, 17% local, and 7% beverage versus Q3 2011, which was 72%, 20%, and 8%, respectively.

Q3 national ad revenue, excluding beverage, increased 13.7% to $104.8 million, primarily driven by a strong 15.9 percentage point increase in utilization from Q3 2011 and a 0.8% increase in CPMs, partially offset by a 2.8% decrease in network attendance.

Inventory utilization increased during the quarter because we had a greater number of long-form ads, which included the two-minute telecommunications ad that ran during most of the quarter.

We entered the third quarter of 2012 with approximately $1.4 million of made goods and as of the end of the quarter, we had approximately $1.8 million of made goods due primarily to a weaker-than-expected August and September box office. You should note that this was slightly higher than the Q3 2011 made good balance of $1.5 million.

Our Q3 beverage revenue decreased 4.8% to $10 million primarily driven by the 6.2% decrease in founding-member attendance partially offset by the approximate 1% beverage CPM rate increase for 2012.

The impact on adjusted OIBDA, this revenue decrease was offset by a decrease in the attendance-based component of the founding-member theater access fee, as both are based on theater attendance.

Our Q3 2012 local revenue decreased 5.3% to $23.2 million, with same-screen sales decreasing approximately 12.6%. The number of Q3 local contracts increased 1.4% to approximately 3,600 contracts. While the average contract value decreased approximately 6.4% versus Q3 2011 driven by a decrease in the average contract value of larger regional clients and nationally recognized clients placing ads locally.

The total dollar value of our contracts over $100,000 decreased approximately 17%, and the number of these larger-value contracts increased by 7% from 28 to 30 contracts.

Total Q3 advertising revenue per attendee increased 11.8% to $0.79, with our national advertising revenue per attendee, excluding beverage, increasing 16.9% to $0.60 per attendee, partially offset by local ad revenue per attendee decreasing 2.9% to $0.13 per attendee. The increase in total advertising revenue per attendee was due to the 8.5% increase in total advertising revenue including beverage revenue, and the impact of the 2.8% decrease in network theater attendance.

As we have mentioned in the past, it typically takes a few quarters to fully integrate new impressions into our local and national sales process and, thus, the new screens added to our network late last year and earlier this year have slightly reduced our 2012 per attendee metrics.

Our combined Q3 Fathom events revenue decreased 35.2% to $5.7 million. Our Fathom consumer revenue increased 11.4% to $4.9 million as revenue per consumer event increased 122% on 13 events versus 26 events held during Q3 2011. This increase in our Fathom consumer business was more than offset by a $3.6 million, or 81.8% decline in Fathom meetings business revenue.

As we mentioned on prior calls, we restructured the Fathom events business to focus on the consumer business and no longer actively market the meetings business. However, we may occasionally facilitate a small number of meetings across our network on an opportunistic basis.

Looking briefly at earnings per share for the third quarter, GAAP EPS was relatively flat at $0.30 diluted and $0.31 basic.

For the nine months of 2012, total revenue was $332.9 million compared to $320.8 million the first nine months of 2011, an increase of 3.8%. This included an advertising revenue of $305.6 million compared to $284.9 million in the first nine months of 2011, an increase of 7.3%.

Adjusted OIBDA and margin were $162.9 million and 48.9%, respectively, in the first nine months of 2012 compared to $161.3 million and 50.3% in the comparable period in 2011.

As discussed, 2012 adjusted OIBDA and margin are impacted by the contracted increases in theater access fees and the expansion of our lower-margin network affiliate attendance base.

We continue to expand our network and as of September 27, 2012, we had 19,328 total screens in our network representing a 5.2% increase in total screens versus the end of Q3 2011, and a 6.2% increase in digital screens. As of the end of Q3, approximately 95%, or 18,431 of our total screens were connected to our digital network, generating approximately 97% of our attendance.

Our capital expenditures were $2.9 million or approximately 2% of total revenue for the third quarter compared to $3.3 million, or 2% of total revenue in Q3 2011. We currently estimate the 2012 CapEx will be in the range of $11 million to $13 million, or approximately 3% of total revenue. This estimate assumes that no additional network affiliate agreements are signed during 2012.

Moving on to our balance sheet, our total debt outstanding as of September 27, 2012, was $850 million versus $774 million at the end of Q3 2011. The increase in our total debt balance is primarily related to $40.2 million in payments related to the partial termination of swap agreements in April 2012 and transaction fees associated with the July 2011 and April 2012 notes placement.

Our net revolver balance was approximately $17 million at the end of Q3 2012 versus $15 million at the end of Q3 2011.

Our consolidated cash and investment balances at the end of Q3 2012 increased by approximately $6 million to $82 million versus Q3 2011. Our investments are comprised of marketable securities such as Treasuries and in commercial paper. Approximately $74 million of our consolidated cash balance was at NCM Inc. level with a portion reserved for tax-associated payments. Excluding these tax-associated reserves at our current dividend rate at the end of Q3 2012 would be able to pay four quarters of dividends even if no additional cash was distributed to NCM Inc. from NCM LLC.

The average interest rate on our term loan and note borrowings was 6.6% in Q3 2012 versus 6.9% in Q3 2011. The average interest rate on our revolver borrowings was 4.6% in Q3 2012 versus 3.8% in Q3 2011. As of July 2011 and April 2012 refinancings resulted in an increase of our revolver commitment fees of higher undrawn revolver balances and higher interest rate margins on drawn balances.

Our pro forma net senior secured leverage at NCM LLC as of September 27, 2012, is 2.9 times trailing four-quarter adjusted OIBDA, which is well below our senior secured leverage maintenance covenant of 6.5 times. You should also note that while we have no total leverage maintenance covenant, our total net leverage in NCM LLC was 3.8 times versus 3.5 times at the end of Q3 2011 primarily due to the funding of the $40.2 million of swap termination payments as part of the $400 million note issuance in April 2012, which significantly linked on the average maturity of our debt.

We also announced our regular quarterly dividend of $0.22 per share. This dividend represents an annual yield of approximately 6% based on recent trading levels. The dividend will be paid on November 29, 2012, to shareholders of record on November 15, 2012.

Looking ahead to the remainder of the year, we now expect total revenue for the full year to be in the range of $445 million to $455 million, and adjusted OIBDA to be in the range of $215 million to $225 million. This downward adjustment is due to the limited visibility into the last two months of the year.

National marketers and their agencies have recently been more cautious and, in some cases, were almost completely shut down this week due to Hurricane Sandy. You should note that the bottom end of our guidance reflects an assumption that we booked approximately 25% of the national revenue we've booked from this point forward in 2010 and 2011, while the top end reflects national bookings consistent with 2010 and 2011 levels.

In contrast with the softening national advertising market, our local advertising has been performing well in Q4 and we anticipate that it will continue its strong booking and significantly outperform Q4 2011. We'll be providing Q1 and full-year 2013 guidance when we release our 2012 results in late February.

That concludes our prepared remarks. We will now open up the lines for any questions you might have.

Thank you. (Operator Instructions) Eric Handler, MKM Partners.

Two things -- first, when you look at the fourth quarter numbers and what you've booked, so far, the weakness that you're seeing in November/December -- is that a function of any particular verticals or maybe a content partner spending and what you're seeing there? And, secondly, you said you're sort of targeting being 60% sold as you enter 2013 for national advertising. Just curious -- how close are you to that goal as of right now?

Thanks, Eric, this is Kurt. I don't think there's any specific category that is weak. We're seeing activity, we're just not seeing anybody pull the trigger. And it almost appears to me like everybody is just waiting to see what happens with the election, because there's, I think, varying views of where the economy and where consumer confidence and all these things are going to go during the election. I think that confusion, if you will, or uncertainty, heightened because of the debates because I think it's very clear where things were going to go until the debates, and now it's tightened things up considerably.

So we mentioned October has actually been quite good and during October we kept monitoring things and evaluated whether we needed to come out and talk to the Street early like we did last year, and there didn't seem to be anything going on. And then the last week or so, it's just -- everything is just -- it's like it's all on hold now.

This week, everything actually has been on hold because our people have not been in our office in New York all week, and I think that's the same for all the people that work for all the advertising agencies. So business transactions in the advertising world has come to a screeching halt.

They're happening -- we had bookings today but they were all LA based.

All the West Coast stuff. Look, Gary gave you, I think, a little more color on the guidance than we usually do on how we formulated the bottom end and the top end, which I hope helps everyone assess that. And we've got plenty of inventory if things open up a little bit. The theater slate looks very strong, so I think there's going to be plenty of impressions in attendance.

Again, we've always been as transparent as we can possibly be with where we think the market is and maybe to a fault at times but that's kind of where we're sitting.

Remind me, I went on for so long on this question, Eric, remind me what your second one was?

So you're targeting to be 60% sold -- that's your bogey that you want to head for it to enter 2013. How close are you to that level right now?

Well, we're still building the book, and the only thing that I can share with you -- if you look at our national scatter, which excludes beverage and Sprint and everything else, it's up 18% now versus last year at this same time. So that's a really good sign.

The other thing that's very interesting, which, quite honestly, I don't have a great answer for, but our local business is up fairly dramatically -- our bookings for 2013 versus last year. Now, the numbers are relatively small, but the percentages are -- in this case, it's almost 75%. So we're seeing some things that I kind of like for 2013. And we've had two or three deals that we've booked that have been direct results of our upfront process. One recently with a fast-good chain where our business development guys sat down with all of our [avails] for the whole year, a number of really good ideas throughout the year that were all integrated new product stuff, you know, very creative stuff. And we sat down with the client, and they shared with us their whole year's plan.

And we were able to mix and match our avails and our thoughts and ideas with what their needs were and, in some cases, come up with very creative pricing strategies and ended up booking a deal. And that is really the essence of what we're trying to do with our whole upfront strategy.

As I mentioned in my comments, the real underlying goal is to get into the planning process, because once we're in the planning process then we can do this sitting down and matching of their needs and the tools that we have. And so that I continue to be very bullish on where this upfront thing is going to go. I mean, we're already starting to schedule meetings for this coming December that are related to next year's upfront and, as you know, we didn't really get into the fray last year until first quarter, so we were a little bit late.

But I think after two or three years, we're going to be a fixture in that process, and I think we're going to be much more embedded in the planning phases or the planning process of the agencies and clients. And that will be a key, I think, to trying to grow beyond sort of product launch and some of the other things we do that are more transactional-oriented or special market event-oriented.

Thank you. Barton Crockett, Lazard Capital Markets.

I was wondering, it would seem that the backdrops for auto advertising would be relatively strong with car sales good, the Japanese coming back into the market. You guys have some exposure there in auto. What are you seeing in auto? Is that a category that's strong, and it's other categories that are causing some of the weakness in the fourth quarter? (inaudible) would be helpful.

Yes, I would say auto is still pretty strong, Barton. It's still one of our top categories, and so I don't think there's anything particular going on in auto. We've done some deals throughout the year with the automakers. So that's not the problem.

And if you look at our book, across our book, it's a pretty good mix of clients. As I mentioned in my comments, we've brought on quite a few new clients, some of which are in categories that are more difficult.

So -- again, there's just a lot of stickiness out there that we're hoping it releases. If it doesn't release, then we'll likely be at the bottom of our range. If it does release, we'll likely be at the top, maybe over it. And I don't know how we can be any more transparent than that.

Okay, now, four years ago in 2008, it seemed that political advertising took up some slack and scatter and squeezed some stuff towards you guys. Is there anything like that happening this year? Or, it would seem not from your guidance, but how would you compare and contrast the impact of political this year?

I think where you're seeing it is in our local. I think this year more than any other election there has been a much greater focus on what are called the swing states or the battleground states. And that is more of a local play because you've probably seen this in some of the other companies that you follow. It's the local affiliates that have really benefited mostly by the television spending that's happening right now. And, obviously, there's been a lot of online and mobile spending that hasn't been there in prior years.

But, for us, what we seem to have happened is that it was like a complete flip. As soon as August was over, which was down a little bit from last year, September just took off. And as we mentioned in our comments, we were over 20% up in September. October is strong, our fourth quarter is going to be strong on the local. So -- we can't tell you exactly where the money is coming from, but it would seem to me that we're seeing the election crowding-out effect, if you will, more in our local and regional business clearly than we are in the national, and I think that's just because the preponderance of money is being spent more regional and local because of the battleground thing.

And, Barton, in Q3 our auto was significantly higher than it was the year before. We had a lot of Nissan in there. If you were in the theaters, you would have seen it.

Thank you. Townsend Buckles, JP Morgan.

As we think about your new guidance, can you say how much of the revision is the softer [status] you're seeing versus the potential impact of the storm? And your revenue guidance is a bit wider than usual. Is this higher level of inventory still to be sold in the past, or, again, is the storm uncertainty at play there?

Yes, let's face it. If the storm hadn't happened, and we could have closed a few more deals this week, we may have had a little more confidence, and you may have seen a narrower range. It's just that there's so much sitting there right now that people haven't pulled the trigger on. And we, literally, can't -- we haven't been able to get ahold of anybody. And, as I said, our office has been closed now for four days, and for any of you who live in New York, you probably know why.

We didn't even get Internet connectability in our office until today, and we still don't have reliable phone service. So our guys, I think have been doing the best they can from home. Cliff, actually, the last time I talked to him on the way to Newark airport to try to get on a plane.

So it's been a pretty difficult situation, and we were hopeful this week we would close a few more deals and maybe able to bring the range down a little bit, or at least the high and low part. So, look, I can't tell you the percentage of what is what, but as we said at our last call, and we're sitting here now with a pipeline that is basically the same, give or take, as it was last year. But as Gary said in his comments, I think we've created a lot of -- I guess you'd call it "downside protection," just in case everybody freezes up.

Because there's no question that the economic activity in the all-important northeast corridor, unless you're in the construction or cleanup business, is going to be stalled here for a month or two. Whether or not that gives pause to certain clients in certain categories, we don't know the answer to that. But there's going to be an economic impact over the next couple of months, again, unless you're in the construction or cleanup business, and I think they're going to be having an economic boom probably over the next couple of months.

That makes sense. And you mentioned the impact on getting deals done. Are the theater closings also a factor? Or are those more immaterial for you?

Yes, it will be a factor, but we've got so many impressions. We've done a good job, I think, of building up our affiliates. I also think the film schedule -- October actually turned out to be quite strong, and November and December look quite strong, especially relative to last year. So I'm not too worried about that.

We definitely have some theaters down right now, and we're going to have to get out and repoint some dishes and do some other stuff. I don't have an exact count of how many theaters are actually still closed, but there are, obviously, some. And that's not even the big issue. The big issue is can people actually even get there?

And so I suspect you're going to see this week be a pretty low attendance week in the theater business, and usually what that means is that the weekend -- the first weekend that things are back on track is usually a big weekend. The only blessing in this storm is it didn't hit smack-dab in the middle of a big opening weekend for a big film. It sort of hit -- it hit, obviously, during the week, and it hit during a time when there wasn't a big film opening. That could have been a lot -- it could have been a lot more damaging to the theater industry than it's going to be.

James Dix, Wedbush Securities.

Two questions -- do you think there's any potential impact of advertisers who spent a lot on the Olympics maybe kind of relooking their budgets for the rest of the year and being, maybe, a little bit more hesitant to commit at this point? I've heard that speculated by some of the ad agencies who saw some slowdown in September, going forward. So I was curious on your take on that. And then I have just one follow-up.

Okay. Yes, we actually toyed around with talking about the Olympics but our Q3 was so strong on the back of the big deal we talked about and some other stuff that we had going that it was hard to say whether we were impacted or not by the Olympics.

The facts are that could we have taken a little more money in September and handled it? Sure. If that money were to come in in August, we couldn't do anything about it, anyway. We were completely oversold. I mean, you can tell by our utilizations at 130% for the quarter, July and August were completely oversold, and we stopped selling July and August in late April or early May. And I'm sure that helped the other guys because I'm sure there was a lot of money that ended up going to them as a result of us being sold out.

So -- I can't say what the Olympic impact -- I do know that the ratings on the Olympics put another $200 million or so of inventory into the market that nobody expected would be there. So there was clearly a big sucking sound sometime in August or late July, whenever they figured out they had all these incremental rating points. And could that have maybe sucked up some money that would have flowed into September? I don't know, could be.

I was also curious as to whether you thought that might be having any impact on the hesitancy about the fourth quarter -- just that a lot of -- there might have been some pull forward. Advertisers who said, look, we had to spend on the Olympics and now after it, the macroeconomic environment seems somewhat uncertain. The fact that they just spent on a big event, does that increase their level of hesitancy as you look into the fourth quarter?

I think there's probably no question that that was the case with the Olympic sponsors. Because I'm assuming when the extra rating points came into the market, that they had first shot at it on some basis. And so, clearly, it impacted, for instance, our spending with GM this year because GM spent so much money on the Olympic connection.

So I think there could be some of that, but I haven't gotten any specific data to support that.

Somebody's phone is open and loud, I don't know what's going on there, but --

And then I just had one other one -- looking longer term, Kurt, as you think about the place of cinema and as you're rolling out a more aggressive upfront strategy, do you think there are any milestones that you guys need to reach in terms of data on impact and having a better targeting capability just as more advertisers think about using TV in a targeted way with better cross-platform measurements and just better use of data, going forward, instead of just a purely mass reach play? Thank you.

Yes, look, I think all of this for us goes back to this idea of getting into the planning cycle of the brands. And there's no question that we're going to have to -- as we work with the brands in the planning cycle, we're going to have to give them more flexibility to target in certain ways, whether it's by genre -- types of film groups. Probably we'll never get to just allowing people to buy a specific film in a specific theater.

But, clearly, targeting is an ongoing theme. I think, clearly, the other ongoing theme, and we've talked about this in our last calls, is pricing, especially for the what I'll call "maintenance spending." Not necessarily product launches or special events or any of that kind of stuff, but just for the maintenance spending, there's going to continue to be pressure on pricing and pressure on us to come up with pricing strategies and combinations of strategies that will allow people like P&G and other CPG companies and retailers to use some of their GRP, or maintenance money, if you will, in cinema.

And we experimented a little bit in the first quarter with quite a bit of success. Our CPMs were down 11% but our cash flow was up double digits, so that's obviously a good trade. At certain times of the year we don't have to do that, clearly, third quarter, with all the demand that's there, we don't have to really do that.

Our third quarter CPMs would have been up quite a bit more had it not been for the mix of ads that we had playing, one of which was a two-minute ad, which clearly garners a meaningful CPM discount once you get past the 60 seconds.

So -- I think, for us, it's just building these deeper, more planning-oriented relationships with clients so they know how to use cinema better. And, you know, cinema, while I think we have come from a tertiary now to a secondary, and we sold a lot of clients a primary medium, we still don't spend enough time talking to clients during the planning. And that's really been our focus, and you're also going to see us start adjusting some of our investment in people to more and more -- and we've been doing this over the last two or three years -- more and more business development type people because I think that's -- we've got to continue to focus on developing the business.

Thank you. James Marsh, Piper Jaffray.

A couple of questions here. One -- I'm just really trying to get a sense for what's so much different this year when you guys eased back your guidance and last year when you did the same. It's just -- it seems like there's a number of similarities there. I mean, both had uncertainty going into year-end. Last year we had the big snowstorm on the East Coast. This year it's the hurricane.

And you guys ended up doing much better than you originally guided to, obviously, last year. So I'm just trying to get a sense -- what's it (inaudible) when you compare the two?

Here's a big difference, James, is that we started to sense that there were issues in August. And, of course, the market fell apart significantly in August, the financial markets and pretty much every market, and didn't get much better in September and then it started to recover a little bit in October.

So that didn't happen this year, and, in fact, our September, and as we've already mentioned, October numbers are actually quite good. And one of the reasons we gave you a little more color, or Gary gave you a little more color this time on exactly what we were thinking about when we set the low end and the high end of our guidance was because there's clearly that -- there's a different level of uncertainty staring us in the face.

A week from now, we will be smarter about where the economy is going to go than we are right now. I can't remember in my lifetime, an election that was so uncertain this close to the day. And, by the way, not only uncertain but the outcome, depending on who gets elected, being so diametrically different as it relates to the economy and the direction of the economy.

And so -- and then, of course, all of this is a little bit colored with what the hell is going to happen with the fiscal cliff and all of that, which, of course, is tied to the election as well. So I think there's a lot more what I would call "near term" uncertainty that could get cleared up in the next two or three weeks. But we're sitting here today having to give you numbers, and the last thing we want to do is have to come out three weeks from now or four weeks from now or whenever before we report and do this again.

And, look, Gary told you the bottom end of our guidance is only 25% of what we booked from this time forward last year. So that should give you a pretty good indication and what we've got in the book right now, basically, if we book that we'll be at the high end of our guidance.

So you guys will use that however you want to use it, but we thought that, given all of this uncertainty, we needed to be a lot more transparent with our guidance thinking than we usually were.

I appreciate that. Just one quick question -- on the wireless advertising side, we've got some consolidation taking place on the wireless carrier side. What's you guys take on how this could impact ad spend? Does this kind of reinvigorate one that was a little tired, or does it become more oligopolistic? I mean, what are your views there?

Are you talking about the Sprint deal?

Yes.

Yes, well, clearly we have a big deal with Sprint that goes through the end of next September. So, obviously, we're continuing to work with them and quite a few others on our PSA thing, because with new ownership coming in, theoretically, or I guess that looks like that deal is actually going to happen, you never know. And we're not counting on -- we never count on a renewal. We always make sure that we have backups. And I think for our Sprint, you know, the PSA that we have -- that inventory is the absolute -- that 30 seconds is the best inventory we have.

We have other people that we're talking to that are interested in it. There could be structural changes to that placement that makes it even more valuable. So it's not something that is a big worry just because of the quality of the inventory.

I do think that it's going to create some interesting dynamics in the telecommunications industry. I think it's going to get more frothy around marketing, more frothy around trying to move people over to your network versus another. It's going to be very interesting to see how it plays out. Clearly, it's going to make, I think, Sprint a much stronger competitor, which may -- because I'm assuming they're going to use a lot of the money to rebuild their network and finish some of the things they've got to do there. So -- I think it's going to be actually more competitive than it even has been.

Thank you. Anthony DiClemente, Barclay's.

This is actually [Beau Tannion] for Anthony. In one of the broadcasts you see them getting off to somewhat of a sluggish start for many of the broadcasters. Is this generally a positive for you guys or is it possible that if we end up seeing a squeeze in scatter pricing from these broadcast ratings, true or false, that this would actually pose somewhat of a challenge for you guys?

It's a great question, thank you for asking it. Here is my sort of macro view on where this could all go over the next two or three years. There's clearly -- we're clearly approaching very quickly a tipping point on DDR penetration, and I don't know what is impacting the ratings, because you see these week-to-week ratings being down as much as 20% or 30% for some networks, but most of them are all high single digits or low double-digit decreases week over week over week.

So -- there's clearly something going on. I don't know exactly what it is. It could be that people's viewing is shifting to some of the online platforms. Now, for the networks that's not necessarily bad news because they're just moving the money from something call "broadcast" to something called "digital," and they own both of them.

Now, whether or not they're able to maintain their CPMs, for a lot of the online video, especially the player stuff, you can't skip the ads. So they're getting quite good CPMs for those. Now, I have a view that that's not going to last for long because technology will figure out how to let consumers skip ads if they want to.

It took a while for television to figure that out, but we're clearly there now. And so when I look at our business, there aren't many sight, sound, and motion -- in fact, I can't think of any sight, sound, and motion businesses out there where you can't make the ads go away. And over the next two or three years, I think we're going to see the DDR and maybe other things like our friend Charlie Ergen are doing to profoundly affect viewing on television.

Now, whether this is just a shift from one pocket to the other for the owners of the programming and the networks, we'll have to wait and see. And some of that is going on right now. A lot of the money the networks are retaining is not actually broadcast money. It's actually money that's online because they're allowing people to watch the programming online. And so all you're doing is moving the money from one thing to another.

I happen to view online is just another distribution mechanism, no different than when cable came along or when satellite came along. It's just another way to distribute programming to the consumer.

So -- some of this is just definitional, but the one thing I know for sure is technology is creating more and more ways for people to skip ads. I do not think the data in the mindset of media buyers has caught up with the reality yet. I find it very hard to believe, given our own family's viewing habits of late, that anybody that has a DDR isn't using it actively, and anybody that's using it is actually watching the ads. That I find hard to believe.

I actually heard a story that an investor told us. The media executive, a network executive, was trying to convince him that the DDR was no problem because people could see the logos, and they could see the ad even if they were fast-forwarding it. So I thought that was very telling. And, of course, there's been a lot of talk about going from C3 to C7. My view is why don't they just go to C365 and call it good?

And it's just -- this is going to have a profound effect on the way consumers consume programming. I like where we sit in that world. We have a saying that our sales guys have come up with -- Cliff actually invented this term called the "MIGA device," and the MIGA device is a "make it go away" device. And cinema doesn't have one, and pretty much every other medium does.

So when I look at the next two or three years, cinema is going to be one of those places that if media buyers really start to get nervous about their ads being seen, and I think we're starting to see the start of that, they're going to look elsewhere. And we're one of those elsewheres. Clearly, right now, online platforms where you can't skip the ad are other places that you're seeing growth. So it will be interesting to see how it plays out. But we are clearly reaching a tipping point with the DDR impact.

Mike Hickey, National Alliance Capital.

Kurt, can you just update us -- your thoughts on Screenvision?

Sure. I would say, given that we do see their results, you know, we've been monitoring them. We can do this through the Cinemark -- or -- sorry -- the Carmike financial statements. If any of you have looked at the 10-Qs and 10-Ks of Carmike, they actually have a footnote that discloses Screenvision's revenue and income. So we can see what's going on there, and they've had a reasonably difficult year. Their third quarter was a bit stronger than we actually thought it was going to be. We assume that some of that was because the market was tight. We were sold out, in particular, in July and August, so that helped.

But we just continue to monitor them. We continue to believe that a combination of some sort would be very beneficial for all parties involved, including media buyers and so on, because they would have a bigger platform to be able to buy consistent pricing, consistent programming, consistent pre-show, all that kind of stuff.

So we monitor it very closely. We're not, obviously, just sitting around doing nothing. We continue to aggressively go after new affiliates and, as we mentioned in our comments, there's a lot going on there that we think could be positive. There's a lot of M&A activity that's going on. The only thing that's been announced recently was Carmike buying some of the rave theaters, as those theaters were already part of the Screenvision network. It had not impact on us at all.

So, yes, we're going to continue to do what we've been doing, and I'm hopeful that at some point it makes more sense for the Screenvision owners to own maybe a piece of us as opposed to trying to make a go of it owning private equity.

Okay, thank you. And then on Samsung, obviously, you had a huge success this year from an integrated solution, and you created kind of a mega deal. Just curious -- the data that you got back from that, maybe on the success or not, and the relationship with Samsung. (inaudible) creates a competence, it seems it also created an opportunity for you. So when you think forward into 2013, how should we think about these mega deals from the integrated solution?

Well, the integration has always been a part of our strategy from day one. So this just happened to be one that just hit on all cylinders. And as I mentioned in my comments, a lot of our capabilities from a production standpoint, a creative standpoint, and so on, led to us getting this deal and, as it turned out, getting 100% of the deal.

And so I think the strategy that we've employed here of really being a creative and production agency inside of us has really borne some fruit in this instance and will continue to do that, especially as clients get more and more demanding around integration. The day where you're just are buying 30s, and that's all you're going to buy, you know, that happens. But even in the networks today, they're doing a lot of other things at the same time, whether it's online or whatever.

In the case of somebody like ESPN, you're getting the online, the mobile, the magazine, obviously, the broadcast and so on. So this is a trend that if you're not in an integrated -- if you don't have the capability to be an integrated seller, it's going to be very tough in the future media world.

So I'm very bullish about what we can do, and it's further -- we can do 3D and we can do a lot of other things that other people can't do at all. So all of that, I think, plays a good role in that.

Yes, thank you. And then a last one -- on the CinemaSync, can you give us any update there on how that's tracking?

Yes. The use of it -- some of our affiliates are starting to adopt it. We're working with some of our founding member circuits to try to build it into some of their future marketing plans so that they can use it to sell more concessions, possibly tickets. We have a lot of our content partners that are very bullish on it, especially the entertainment guys.

So all of these things, I think, are very positive. The key is, of course, building distribution, and one of the things that we recently did is that we originally released CinemaSync as an integrated of our Movie Night Out app, and it became apparent that it was a better strategy to just give consumers the opportunity to just get CinemaSync and nothing else.

And so we've just released a version of CinemaSync in the iPhone and Android stores on a standalone basis, which we think -- you know, that just happened a few weeks ago. We're working on some marketing campaigns for that, and so you're going to see more and more about this as the circuits start to embrace it to try to help their business and then, obviously, we're going to use it to try to get clients to use it for, you know, as I mentioned in my comments, coupon downloading and other things.

(Operator Instructions) Kevin Lee, Stifel Nicolaus.

It's actually Ben Mogil. So a quick question -- I was gone for the most of the call, but I just want to get a sense from you from a color perspective -- if we were to rewind two weeks from now, or two weeks back in time -- there was no storm, the election was maybe not as close as it is right now, and I'll leave my own political views aside -- what's your thought on where you would have stood for fourth quarter guidance? Would you be more -- would the range be tighter, which I gather, or do you actually feel that you also would have actually been higher up on the range?

Both.

Okay.

In fact, we had significant debates as much as an hour before we had the call -- or before we released our earnings release.

Just to be fair, I think things are starting to pick up, Ben. I mean, literally, we booked some money today. Granted, it wasn't New York money, but I think things are starting to pick up. People get back on the phones, but when you have a situation like this, and you're -- the market is not super strong, in general, something like this just gives you a little --

I'll tell you what I really wanted to do, Ben. I wanted to wait until next Wednesday to even release. This idea of releasing a week before this kind of election or six days or whatever it is -- five days before this election creates pause, because, as I said before, I don't think there's ever been something -- an election that's this close and where the two candidates were so far apart on their vision for our country and for the economy.

Do you think there's any chance that advertisers are simply using the election as an excuse to just get you to leave them alone for a couple of weeks? I would never do that to you, Kurt, because I love --

They didn't even have to use that excuse this week, because we've left them alone because we can't get hold of them. So that kind of goes to your question on the storm. I mean, who the hell knows, you know, what we would have booked this week.

For us, the difference between a guidance that's $5 million higher on the low and high end is one or two deals, right? So it doesn't take much to move where we've moved the guidance. And as I said in my comments, two or three deals and we're, all of a sudden, right at the top end of the range and even over it.

So -- that's the problem with the uncertainty that we're dealing with right now and, again, even the fiscal cliff, you could argue, is directly related to what goes on in the election. And not only the presidential but does the Senate move or what happens there? So -- we'll see. Again, I don't know if you were on the phone, I know you had another call you were on earlier, but Gary, I think, gave a lot more color on what we were thinking and how we developed our guidance. And just to reiterate, the bottom end is -- we only have to book 25% of where we booked last year forward at this time.

So -- and if we book what we did last year, we're at the high end of the guidance, so --

And I think one of the interesting things that we didn't talk about all that much and we put in the script that no more questions have come. It's been the disconnect between the local market and the national market. I mean, the local market, [local flash] regional is very, very strong and continues to be -- and this week will, I'm sure, affect that a little bit, but not enough to make a huge difference.

Yes, I think our September numbers and our October numbers were probably election-motivated because they turned around so quickly. It was like you turned a light switch on in September. And we went from down in August versus August up 21%, September versus September. So it's hard for me not to think that that didn't have some election overflow money sitting in it somewhere.

I haven't watched much television for a whole bunch of reasons the last few weeks, but what I'm told is that pretty much every pod is either 100% election or 60% or 70% election. Now, we're in Colorado, in a swing state, so that probably makes more sense. But we've been inundated.

The other thing, Ben, that is going on, and this is something that, to the extent that you dig into some of the networks, is how much money are they retaining because it's going to online video as opposed to their broadcast? Because there's clearly some shifting going on between the two, and it will be interesting, and it kind of relates to my comments earlier on the impact of the DDR tipping point that we're approaching, but there's clearly a lot of shifting going on. And what I expect is going to happen is that shifting is going on now because some of these players, you can't skip the ad. That's going to change. It already has on YouTube. You can skip the ad on YouTube if you want to.

And so I suspect on some of these network players, you're going to see some of the same thing. Technology is going to eventually catch up with that, and people are going to figure out ways to skip ads. And then, all of a sudden, online video players are going to be the new darling that they are right now.

Thank you. Jim Goss, Barrington Research.

As you pursue your strategy on the national side, is it generally purely national, or do you get very active in the national spot market, which is sort of a hybrid involving national advertisers trying to fill in in local markets where you have the discrete sights that could play very well in that sort of market maybe at a very good advantage for you?

Yes. We are, actually, playing -- when we say "regional," I think regional probably captures some of what you're talking about, because some of our regional are national clients that are just deciding to buy certain states, certain DMAs or certain combination of DMAs. And so we do have a lot of that.

We are futzing around a little bit with our segment 2 inventory to see if there are some ways of attracting more money in that area, because some of those clients are a little particular about where they're placed in the show because they view themselves -- even though they're buying regionally, they view themselves as national clients. So I think you're going to see more of that happening.

I don't know if that's responsive to your question, but I think that's what you were asking for.

Yes, and it sort of is. But I guess you can probably get premium pricing for a national spot if, I guess, I'll use Coke since it's always there. But, say, if they weren't, and they're trying to position themselves in certain markets, they're probably willing to pay a premium price over what they'd want to on a national basis in order to get better penetration in certain markets. So I'm just wondering --

There's no question -- and we don't sell our regional and local ads on a CPM basis. But if you actually converted it back into a CPM basis, the CPMs would be much higher, which is completely consistent with what you see in the TV marketplace where local affiliate CPMs are generally higher than national CPMs. Now there are exceptions, obviously, national sports and certain events like the Academy Awards and other special events, that's not the case. But generally local affiliate pricing on a CPM basis is higher than national.

Okay. And also when you talked about the significant sellout you had in July and August, what would you attribute that? Was it this year was unique because of a couple of bigger movies? Or you're just getting further down the line in terms of getting penetration in the blockbuster periods and hopefully can spread out to other markets?

If you analyze Q3, Q3 is the only quarter of the year where we don't have a weak month. If you look at first quarter, you could argue all three months are weak -- weaker. Second quarter, April is always weak; May sometimes is weak; June is usually strong. July and August are always strong, and September, over the last several years, last three in particular, we've developed a business around back to school and other priorities -- the sweeps for networks has become very important in September for some of our clients like CBS, for instance, and some of our cable clients as well.

So -- we've got a quarter where all three months are really pretty strong. So that's one of the reasons that Q3 has developed into our best quarter of the year. And that transition, by the way, happened in 2009. It used to be fourth quarter was actually the biggest quarter of the year.

So it's all about developing clients that will buy certain time periods that you don't just have a lot of general demand for. Now, the facts are, we were sitting in late April when Samsung came to us, and we were very well sold already. And the reason that you're seeing 130%, give or take, utilization in Q3 is because we added basically a two-minute ad on top of already a very strong sell through. So that obviously put us, especially in July and August in an oversell.

Now, the good news is is that we not only had that two-minute ad, we had some other long-form stuff in third quarter. So it played -- the show played very, very well because of the longer-form stuff. If you have too many adds that are all 30 seconds, the show plays very choppy, and we generally won't even oversell if that's the case -- if all we've got are bunch of 30-second ads.

So I think it was the combination of just our ability to sell third quarter, in general, and then, obviously, we had Samsung come on top of that. Now, the other question that a lot of people are probably thinking is, "Oh, my God, how are they going to replace Samsung next year," and I mentioned in my comments, I am much more comfortable trying to replace July and August money than I am like we had to do back in 2011 when we lost a $13 million -- it happened to be Army National Guard contract that was there in 2010, January/February, and, obviously, they didn't come back in 2011.

Refilling July and August inventory, there's plenty of demand there, and while, clearly, Samsung put us over the top, there's no question about that, I don't think the comping issues are as significant, and as I mentioned that in my comments.

Thank you. We have no further questions in queue at this time. I'll turn the floor back over to management for closing remarks.

Great. Well, thank you very much, everyone, for tuning in, especially for those of you on the East Coast because I know it was probably challenging even getting a phone line that worked. So I really appreciate that. And we will continue to keep you posted on the growth of our business, and we'll be talking to you sort of middish, I guess, first quarter. So thank you very much for all your support.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.