National Cinemedia Inc (NCMI) 2013 Q3 法說會逐字稿

Greetings, and welcome to the National CineMedia Incorporated Third Quarter of 2013 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. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Oddo, SVP of Finance for National CineMedia Incorporated. Thank you, sir. Please 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 Q3 Earnings Call. Today I'll provide a brief overview of our Q3 2013 results and comment on our outlook for the remainder of the year and our progress against our longer term operating strategy. David will then provide a little more detail about our Q3 financial results and full year guidance. And then as always we'll open the line for questions.

Our Q3 revenue came in near the upper end of our guidance range while adjusted OIBDA came in at the midpoint of our range. This slightly lower adjusted OIBDA margin reflected lower than projected ad revenue and higher Fathom revenue.

While we were comfortably within our guidance range, the current quarter could have been much better if it were not for some shifts from Q3 to Q4 of some regional revenue and a portion of four national campaigns that had creative delays. We also were forced to reduce the size of one national campaign due to exclusivity conflicts.

This national ad revenue decline was partially offset by the continued growth of our local and regional revenue and the continued expansion of our network, and a strong September box office. Our network expansion and strong box office resulted in a 9.6% increase in our saleable impressions. Despite the lower third quarter national ad revenue, with first half adjusted OIBDA of 22% versus 2012, 9 month adjusted OIBDA grew 6% to $172 million, which is a record first 9 months for our company.

Our 13% Q3 national revenue decline was driven by a 19 percentage point decrease in national onscreen inventory utilization and 5% lower CPMs, while offset by the higher network attendance. The decrease in utilization reflects the top 2012 comp that included the record 20 million Q3 2012 campaign by one of our advertising clients that launched a new product with a 2-minute made for cinema ad. While this client was one of our larger Q3 2013 spenders, this year they only represented approximately 7% of our Q3 national ad revenue versus 19% in Q3 2012. Excluding this client, in both 2012 and 2013, our 2013 Q3 utilization would have been up over 3 percentage points.

Lower CPMs are a trend that we expect to continue over the next several quarters as we expand our client mix into categories that have lower pricing expectations and we continue to seek new theater circuit affiliates to expand our saleable impressions. Having said this, our year-to-date CPMs are only down 3.3%.

These more aggressive pricing strategies, our upfront strategy, and our focus on developing unique integrated marketing campaigns contributed to the addition of 25 new clients in 2013 that had never spent with us or had not spent since 2006. 5 of these clients were added during the third quarter and 11 were included in Q3 2013 revenue.

The new national clients added so far this year included businesses in the computer hardware, personal care, liquor, cable TV, import auto, apparel, prepared foods, telecom software and insurance categories. These new clients helped drive a 9 month utilization increase of 3.5 percentage points on 2.8% more attendees, despite the decline in Q3 versus the record Q3 2012 national revenue.

While we are currently behind last year's upfront bookings at this same time we are continuing to work on several 2014 campaigns and have recently formed new long-term cell phone courtesy PSA partnerships with Geico and [M&MRs] and a new content partner deal with NBC Sports and other select Comcast cable networks.

As noted, our local advertising sales team had another strong quarter of growth with Q3 2013 revenue up 8% versus Q3 2012, as the number of the Q3 contracts booked increased as smaller businesses began to spend again with the improving economy, and we benefited from the continued expansion of our network through additional markets and their geographic coverage across existing markets.

These smaller contract increases were partially offset by a Q3 decline in the number of contracts over $100,000. This appears to be simply timing as our larger contract dollar value is up 8% through the first 9 months of 2013 and one of the primary drivers of our 14% local revenue growth for the first 9 months of 2013 versus 2012.

With over 1,000 screens added since 2011 now fully integrated into your digital network and sales process, and more new theaters continuing to be added to our network, we expect continued growth from our local and regional part of our business. In fact, while it's still very early in our 2014 sales process, our 2014 local and regional bookings are already 37% ahead of 2013 bookings at the same time last year.

With online and mobile video marketing platforms becoming an increasingly important part of national and local marketing campaigns, our various online and mobile initiatives are becoming an increasingly important part of our integrated bundling strategy. We continue to expand our network of online and mobile entertainment publishers that now are generating over 51 million unique visitors per month, including our Movie Night Out online site and Movie Night Out and FirstLook sync apps that now have over 2 million downloads.

While our FirstLook sync app was only recently launched as a way to connect movie patrons' smartphones to our FirstLook preshow, its response rates have been significantly higher than the market norms, providing a new, unique cinema marketing tools for brands.

As mentioned earlier, the competitive positioning of our ad business continues to benefit from our strategy to expand and improve the technical capabilities of our national theater network. During 2013 we have signed 5 new affiliates with theater circuits, (inaudible) theater circuits. And Southern, one our existing network affiliates, acquired a regional circuit that will join our network in mid-2014. These affiliate additions have 408 screens with over 12 million annual attendees.

Our business has also benefited from the recent founding member acquisitions of the Great Escape, Rave and Hollywood theater circuits. Net of required dispositions, these acquisitions have expanded our network by 12 theaters with 192 screens, and approximately 9 million annual attendees, and an additional 223 of these acquired theaters with approximately 10 million annual attendees will join our network when their contract expires with Screenvision over the next few years.

We currently expect to receive approximately $3 million of integration payments annually as compensation for NCM LLC units that have been issued until these screens shift from the Screenvision network to our network. While 97 of the new theaters with 1,245 screens acquired by our founding members were already part of our network, the shift to the higher margin theater access fee structure will increase our annual adjusted OIBDA and adjusted OIBDA margins.

While we've made good progress expanding our network, there is still more potential as we continue to have promising discussions with several regional circuits that are coming out of contract with Screenvision over the next few years. This more aggressive affiliate strategy is designed to allow us to keep our future impression base in balance with the growth of our client base and increasing inventory utilization. Also, with this expanded reach and broader impression base, we'll be more competitive with other regional and national video advertising networks.

Our Fathom Event business had its best Q3 ever as many of our higher quality events happened in Q3 this year. As a result, Q3 consumer revenue grew 53% with the number of Q3 events increasing to 17 from 13, and the average revenue per event increasing 17%. Successful events during the third quarter included Bruce Springsteen and the Grateful Dead concert events, Mayweather Canelo fight, and the record breaking Kirk Cameron Unstoppable event that played to nearly 170,000 people in one night.

The higher Fathom consumer revenue combined with lower programming cost percentages contributed to a 59% increase in Fathom's Q3 operating income versus Q3 2012. The 2013 Fathom operating income for the 9 month period decreased 17% versus the same period in '12 due to the wind down of the Business Meetings Division and a 10% decrease in consumer revenue for the current 9 month period versus 2012.

These strong Q3 operating results illustrate how Fathom's quarterly revenue continues to be very inconsistent due to the lack of a consistent supply of high quality programming. We believe that the spinoff and new ownership and business structure with our founding members discussed on the last call, will allow the Fathom business to attract a more consistent supply of high quality programming by more effectively leveraging its national network and theater owner operational support. Most importantly, it will let NCM management focus its full attention on our growing and much higher margin core advertising business. With the final documentation nearly complete, we now expect to close this transaction at the end of November.

Looking ahead, while October 2013 advertising and Fathom revenue tracked ahead of October '12, and we are well booked for December, the November national scatter market has been very soft. So while we have a number of national scatter proposals working, we believe that the [street] consensus at the upper end of our revenue and adjusted OIBDA guidance range is too high.

We now expect our revenues and adjusted OIBDA to be at the lower end of our existing annual guidance range. This guidance reflects another strong quarter of our local and regional advertising business against a difficult Q4 2012 comp, offset by the impact on our revenue and adjusted OIBDA of the Fathom restructuring and an assumption that we only close approximately $5 million or approximately 80% of the dollar value of scatter proposals that are pending, and a continued strong box office keeps [make good low].

As you know, due to our high incremental margins, the loss of only 1 or 2 national advertising deals can impact our near term adjusted OIBDA meaningfully. Consistent with our longer term strategy and our recent 9 month results, we expect our Q4 national utilization to be up but our CPMs to be meaningful lower due to a shift in our client mix, lower content partner spending versus Q4 2012, and a more competitive marketplace.

Now my view of the remainder of 2013 is a bit cautious. I continue to believe that over the longer term we will benefit from our unique and engaging theater environment where ads can't be skipped, and our ability to deliver increasing national reach versus other video advertising platforms that are losing viewership to multiple new online and mobile video entertainment platforms.

That is all I had for now and I'll now turn the call over to David, our interim CFO, to give you some more details concerning our Q3 2013 financial performance and annual guidance.

Thanks, Kurt. For the third quarter our total revenue decreased 6% versus Q3 2012, driven by 7.5% decrease in total advertising revenue including beverage, partially offset by 31.6% increase in Fathom Events revenue. Total Q3 2013 adjusted OIBDA decreased 9.9% and adjusted OIBDA margin decreased 240 basis points to 56.8%, reflecting the decrease in our high margin advertising revenue to 94% of our total revenue versus 96% in Q3 of 2012.

Our margin decrease was partially offset by acquisitions by our founding members of certain of our network affiliates and the resulting shift from the affiliate revenue share cost structure to the higher margin founding member theater access fee cost structure. We also recorded $1 million of AMC Rave and Cinemark Rave integration payments for the third quarter versus none in Q3 2012, and thus adjusted OIBDA, including integration payments, only decreased 8.7% for the quarter.

You should note that these integration payments are added to adjusted OIBDA for debt compliance purposes and included in the quarterly available cash distributions to our partners, but are not included in the reported revenue and adjusted OIBDA as they are recorded as a reduction to net intangible assets on the balance sheet.

Our Q3 2013 advertising revenue mix shifted to 71% national, 20% local, and 9% beverage, versus Q3 2012 which was 76%, 17% and 7% respectively. Q3 2013 national ad revenue, excluding beverage, decreased 13.1% and reflected a decrease in utilization of 117.6% compared to 136.1% in 2012, primarily due to the absence of the 2-minute ad that Kurt mentioned, and 5% decrease in Q3 CPMs. The utilization decrease was partially offset by a 9.6% increase in our Q3 2013 network attendance versus Q3 2012, related to the stronger industry box office versus the third quarter of 2012, and the continued addition of new network affiliates.

The strong box office for the last few weeks of the quarter resulted in a $500,000 make good balance, which approximated the make good balance at the end of Q2 2013 and was lower than the $1.8 million make good balance at the end of Q3 2012.

Our Q3 2013 local revenue increased 7.8% with same screen sales increasing approximately 5.6%. This was driven by an increase in total contract volume of 13.9%, partially offset by a decrease in average contract value of 4.7% versus Q3 2012. The average dollar value of contracts under $100,000 increased 2.9% and a number of these smaller contracts increased 14.1% while the average dollar value of contracts over $100,000 decreased 5.6%, and the number of these larger contracts decreased to 28 contracts from 30 contracts, or 6.7%.

Looking briefly at diluted earnings per share, for the third quarter we reported GAAP EPS of $0.24 compared to $0.30 in Q3 2012. This decrease was primarily due to a $10.7 million decrease in operating income and a 2.9% increase in weighted average shares outstanding that was due primarily to the 2.3 million share secondary sale by Regal during the third quarter.

For the first 9 months 2013 we reported GAAP EPS of $0.40 compared to $0.25 in 2012, excluding charges for derivative related items, swap terminations and write-offs of debt issuance cost, 2013 9 month EPS would have been $0.44 versus $0.42 for the comparable period in 2012. As I noted, our income statement does not include integration payments which provide an offset to increases in minority interest expense that negatively impacts our EPS.

For the first 9 months of 2013 total revenue increased 2.2% to $340.1 million from $332.9 million in the comparable 2012 period. This included a 4.1% increase in advertising revenue to $318.2 million versus $305.6 million in the first 9 months of 2012. 9 month adjusted OIBDA increased 5.6% to $172 million versus $162.9 million in the 2012 9 month period. Adjusted OIBDA margin increased to 50.6% versus 48.9% in the first 9 months of 2012.

We also recorded $2.1 million of AMC Rave and Cinemark Rave integration payments for the first 9 months of 2013 versus none in 2012. Thus adjusted OIBDA including integration payments for the first 9 months of 2013 increased 6.9% over the comparable 2012 period.

Our capital expenditures were $2 million, or 1% of total revenue for the third quarter, compared to $2.9 million or 2% of total revenue in Q3 2012. We currently estimate that 2013 CapEx will be in the range of $10 million to $12 million or approximately 2% of total annual revenue. While there are ongoing discussions with several regional circuits that could increase our future impression base, our current capital expenditure projection assumes that no additional network affiliates are connected to a network this year.

Moving on to our balance sheet, our total debt outstanding at the end of Q3 2013 increased to $884 million from $850 million at the end of Q3 2012 primarily due to the term loan funding of approximately $23 million in swap termination payments and approximately $13 million of cash to our balance sheet. The increase to our term loan was a result of November 2012 refinancing as well as a May 2013 repricing. Both transactions allowed us to capitalize on favorable debt market conditions that lowered our projected 2013 annual cash interest expense by approximately $5 million.

We had a $14 million revolver balance and a $23 million of NCM LLC cash at the end of Q3 2013, versus a $25 million revolver balance and $8 million of NCM LLC cash at the end of Q3 2012.

Our current average interest rate on all debt is approximately 5.5%, including our $270 million floating rate, term loan, bank debt and revolver balances at approximately 3%. Our total debt outstanding is approximately 70% fixed.

Our consolidated cash and investment balances at the end of Q3 2013 increased by approximately $45 million to $127 million from the end of Q3 2012 with the NCM LLC balance increasing $15 million and the NCM Inc. balance increasing $30 million.

Approximately $30 million of the $104 million of cash held by NCM Inc. is reserved for income tax payments and tax receivable agreement payments to the founding members. Thus, excluding these tax associated reserves, and after payment of the $0.22 per share Q3 dividend that we announced earlier this afternoon, we would be able to pay approximately 5 additional quarters of dividends even if no cash were distributed up to NCM Inc. from NCM LLC.

Our Q3 2013 dividend that will be paid on November 27th, 2013 to shareholders of record on November 13th, 2013, represents an annual yield of approximately 4.7% based on yesterday's closing share price of $18.91.

Our pro forma net senior secured leverage at NCM LLC as of the end of Q3 2013 was approximately 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 NCM LLC total leverage for NCM Inc. consolidated maintenance covenant, our total leverage at NCM LLC net of NCM LLC cash balances was approximately 3.8 times at the end of Q3 2013, approximating total leverage as of the end of Q3 2012. And our consolidated leverage net of NCM Inc. and NCM LLC cash balances was 3.3 times at the end of Q3 2013, down from 3.4 times at the end of Q3 2012.

Looking ahead to the remainder of the year, we continue to expect total revenue for the full year to be in the range of $455 million to $465 million, and adjusted OIBDA to be in the range of $230 million to $240 million.

As Kurt mentioned, we expect to be in the lower end of these ranges to provide some downside protection and adjust for the impact of the Fathom restructure. You should note that the bottom end of our adjusted OIBDA guidance reflects an assumption that we book approximately 80% of the national revenue that was booked from this point forward in 2012.

Our local advertising has performed well all year and while comps become more difficult beginning in Q4, we currently expect mid-single digit Q4 local revenue growth and low double digit full year 2013 local revenue growth. We will provide Q1 and full year 2014 guidance when we release our 2013 results in late February, although you should note that our 2014 fiscal year will have an extra 53rd week between Christmas and New Year's, a traditionally big week at the box office.

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

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You can press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * keys. One moment please while we political for questions.

Thank you. Our first question comes from the line of Ben Mogil with Stifel Nicolaus. Please proceed with your question.

Hi, thanks. A couple questions. So Kurt and David, I think I want to make sure, I think I heard you right but I just want to sort of make sure I got it right. In your guidance you're basically assuming that you will basically sell 80% of whatever national you had sold from today to the end of the year compared to last year, and that number is $5 million as opposed to something $6 million last year. Is that the correct way of looking at it?

Yeah.

Okay. And then, and so sort of staying on that topic, where are you this year on total sales as a percentage of midpoint of guidance compared to where you were this time last year against the final results? And I think historically you've given us the percentage and then of course we can just figure out the ad dollar difference.

Last year was a little was a little different than this year because as you recall we brought our values down in our Q3, our August call, we brought it down considerably. This year we actually took our guidance up in that call.

Okay.

So a little bit of apples to oranges comparisons.

I mean can you even give us say where you are against this year's midpoint?

Where we are against this year's midpoint. I think we -- I was pretty specific on that. I think we're at the lower end of the range. So I guess the answer then would be below the midpoint.

No, no, no, sorry. What I meant is how much have you sold so far as of like last week or something against, as a percentage of your let's call it you know 445 or something like that?

Yeah, I can't back into the number but you can. I mean we basically told you that we only have $5 million left to sell, to get to the lower end of our range. So you can kind of back into the number. We could probably figure it out while we're on this call.

Yeah, okay. No I see what you're saying. Okay. So maybe a better question may be how -- okay, so you've given a pretty, you know you've given a sense of where you are national, how much, like at this point going forward, how likely do you see to have any material more national scatter contracts come up? Do you have availability that's still relevant? Like are there a decent number of low-hanging fruit or is it you know if you can get that extra million to get to that equal 100% base, that's probably digging as deep as you could go? Is that --

Yeah. I think the caution that we're giving is because, as we said, we're very well sold in December, so that inventory's obviously farther away from where we are today, and not as well sold as we'd like to be in November. So obviously there's more risk in filling that November inventory because you've got less time, right.

Sure.

So you know we've had, as we've said in our comments, you know a good October, a good December, and we got this hole in the middle of November. So that's kind of where we're coming from. So it's not an inventory constraint issue. Clearly if stuff popped up in the marketplace in excess of the $5 million that we've talked about, we could clearly handle it.

Okay. Okay, that's great. Thanks guys.

You bet.

Thank you. Our next question comes from the line of Townsend Buckles with JP Morgan. Please proceed with your question.

Thanks. Kurt, just another on the Q4 trends. Anything notable about the November softness you're seeing in terms whether this is broad based or more specific to certain clients or categories? And you mentioned that December was [phasing] well, so is this sort of an air pocket in November and you've seen the rebound in December as we think about the risk of maybe these softer trends continuing?

Yeah, look, I mean you never know why something's happening. You know I could easily sit here and point to the government shutdown and all that baloney, but I just, you know, we continue to point at all these various things and I just don't think it's helpful.

The only thing I will tell you is that we've heard from a lot of other networks that we compete again, TV in particular, that they're a little softer than they like in Q4. So I don't know why that is specifically. Could it be the government shutdown? Who knows? I'm not going to go there. What we have heard is that the digital guys seem to be doing pretty well. Now, you know, they're much smaller revenue bases so it's a little hard to tell what the real meaning of that is. It's easy to grow some of these smaller businesses during short periods of time.

But I don't think, from what we're hearing, that we're too inconsistent with what we're hearing in TV. You know we often get out in front of these trends and maybe there's a little bit of that now. But clearly December, you know we continue to do okay there, so I don't view it as necessarily a long-term trend.

Clearly the marketplace is pretty competitive right now on the CPM because a lot of cable networks aren't sold out in the fourth quarter, and a lot of other networks. So there's a lot of people looking for money out there right now and that puts pressure on the CPMs, as we noted.

And Screenvision's been out you know sort of saying they've seen good success with bringing their CPMs down to kind of the broadcast TV levels and making audience demo guarantees, so basically trying to be just like TV. Has that been a challenge at all?

Well look, we'd rather CPMs not decline but as we've said for several quarters, I think the reality is if you're going to compete for cable money, and even you know brought lower price broadcast money, you've got to lower your CPMs during certain time period. A lot of people are becoming video agnostic, if you will, and they're looking across all video platforms and making decisions about where they want to spend their money.

So if you want to move money out of, you know, in lower priced categories, out of cable into cinema, you're going to have to lower the price. And I think, from everything I've read, the same stuff you've read, that seems to be the approach. And I think at year end you'll see market share movement positive to cinema. I think you'll see growth this year in cinema overall because there has been some lower price money moving. You know when that money moves and when you decide to lower your CPMs in certain flights versus other flights, to me is the more important question or strategic question.

Right, but that's not a strategy that you're so much going to pursue in terms of the very aggressive pricing, right?

Yeah, look we're going to be aggressive when we've got the inventory. For instance, would we be aggressive in November right now? Yeah, because the flight's starting in a few days. So of course we would be more aggressive in November where we have inventory availability.

Are we going to be more aggressive in January through April, in months like October where traditionally the utilizations have been lower? Of course we are. That's been our whole strategy. It's really a supply demand focused strategy and I think that's the prudent way to grow this business. Screenvision may have different inventory utilization issues that they're dealing with and so on.

Got it. Thanks.

Yeah.

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

Thanks. Good afternoon, guys. Two things. I guess any more color you can give on the outlook for 2014? I mean it sounds initially encouraging. You talked a little about local versus national, local and regional. I didn't hear quite as much on national, and I don't know whether you have any qualitative or quantitative color as to where you stand on 2014 bookings at this point. And then I just want to --

The national bookings, as we mentioned, on an upfront basis are down a little bit versus last year. And some of that could be timing. We're working on a number of deals. The number of deals we're working on right now is more than the dollar value of the deals we were working on at this time last year. So some of this could be timing.

We've still got some content partner inventory that we're trying to move into the new [comtel] partnerships, so that could be something that's beneficial. We've also lost a little bit of upfront money associated with our PSA. Our PSA with Sprint that ended at the end of September, we've replaced it, as we mentioned, with Geico and [M&MRs]. There's not as much of an upfront commitment associated with those deals, although the dollars associated with the PSA have actually gone up, so that was a pretty good trade for us actually.

So I don't think there's anything there that's all that concerning. The one other thing that I have noted is last year's money was driven by a smaller number of clients. There were two or three big deals sort of in the $5 plus million range. This year the number of clients that we're talking to about upfront deals, either talking to or have actually done deals with, has increased. The dollar values in some of them are a little bit lower, so I actually like that. Obviously the idea is to get people on board and then try to build the amount of revenue that they're going to spend.

And there have been some new clients that have come into the upfront marketplace. And clearly there's been two upfront voices in the marketplace this year, not just us. Screenvision has also been out there trying to bring money into the upfront place for cinema. So you know it's always better to have two voices rather than one, so I think that's been a benefit.

As we said, the local is up considerably. I know that part of that is because we have more screens. It appears as though some of our regional business is really kicking up because our digital network is penetrating markets better than it has in the past and we're in more markets. Obviously all those are good things.

So I think that's the extent of the color we can give you right now.

Okay. No, that's actually very helpful. And then just in terms of the growth of the network, either through picking up new affiliates or through what your founding members are doing. I mean do you think how much you've gotten this year from both of those sources and then what looks to be on the horizon over next year, I mean is that better than what you were expecting a year or so ago, kind of in line? And I'm just trying to get a sense of just strategically how it's playing out until the next round of Screenvision rumors pop up.

Yeah, well look, if you add up the number of affiliates we've added, either directly through acquisitions by our founding members, or in the case of the one I mentioned, by one of our affiliates, we've added about 21 million attendees that are coming online, either just had come online or will be coming online next year, on around 600 screens. So you know I don't know how you want to look at that. That's give or take 5% of Screenvision's base. That's a good thing. I know as time goes on there will be increasing number of deals that come up for renewal. As I mentioned, we are going to get more aggressive in that area.

You know given what I see in the marketplace, any time we can improve our reach and our overall impression base, given how quickly other networks are being fragmented, and programming is now being spread across many, many more networks than it has in the past, you know if you look at all the online networks that are popping up, whether it's on You Tube or others, you know programming is fragmenting and reach if you will and rating points are fragmenting across several more networks now than it ever used to.

So from my standpoint, I think our competitive positioning gets very much improved by continuing to expand our network. And you know you mentioned the Screenvision deal. There's always that out there, and it's still something that makes a lot of sense obviously from an extension (inaudible) standpoint for us but you know we can't control that. So you know our approach is going to be look, there's going to be plenty of impressions out there that we can go out and get.

And as we, as I said, the idea is to try to match the growth in in the demand in the marketplace with your impression base. And if you can keep those two things in balance, then pricing should stay in balance. Obviously to the extent that you have more impressions than demand in the marketplace, that generally puts downward pressure on pricing and obviously vice versa.

So through time, since we've gone public, we've always tried to keep those two things in line. And we continue to see new clients. As we mentioned, we added 25 clients this year. We continue to see a lot of new clients come into the market so it's our job to continue to supply the impression base to satisfy that demand.

Okay. That makes sense. Thanks very much.

Yeah.

Thank you. Our next question comes from the line of Eric Handler with MKM Partners. Please proceed with your question.

Yes, thanks for taking my question. Two questions for you guys. First, I was a little bit surprised when you were talking about that you had a greater number of lower CPM paying customers in the fourth quarter when usually the fourth quarter, particularly in December, it's a very crowded time for you guys, so therefore you get higher CPMs. Is that just because November is weighing things down or is there anything going on with a client mix shift? Obviously you do have some, fewer content partner spending, but aside from that.

It's a number of things, Eric. Clearly there's a client mix issue. So as you bring some of these people in, you're going to do it as lower CPMs generally. Some of these guys you're never going to get to come onto the cinema network unless you go lower. So there's clearly some of that going on. That's been part of our strategy for several quarters now.

And you know the hole in November doesn't help, obviously, because November's usually, especially as you get near the end of November, which does pick up a little bit for us because that's when the attendance starts flowing, that does hurt a little bit. And look, it's still a little early to tell where our growth and our change in CPMs are going to come in, in fourth quarter. As we said, there's a number of deals we're still working on that could impact the CPM.

But you know, we've been pretty clear, I think, for quite some time now, that you should expect CPM declines. And from my standpoint, what I look for, is if we're continuing to offset that CPM decline, or more than offset hopefully, that CPM decline with increasing utilization, and obviously higher cash flow, that's the focus that we're really looking at.

Okay. And then second, when you think about returning capital, you said you have, after this upcoming dividend payment, you've got 5 additional quarters of cash on hand. You're going to get, and if you could refresh us with the amount of cash that you're going to get for the Fathom transaction. It's been a while since we've seen a dividend bump. With cash accumulating is there any reason why it wouldn't [possibly] go towards a higher dividend?

Well look, as we've said before we're always going to look at our dividends relative to our free cash flow, if you will, or our available cash distribution increases. Fathom is going to come in over, as we've talked about before, it's a debt instrument that we're getting that gets paid over 6 years. So that will come in over a 6-year period.

And give or take, the effect on our cash flow is basically a wash. Whether you own the business and get operating cash flow or whether you get payments from the debt instrument, it's give or take somewhere in the neighborhood of the same number. So it doesn't really impact our cash flow and our distributions all that much.

So you know right now, if you look at our numbers, we're somewhere sort of in the [middish] 90s percent of our free cash flow that we're distributing. As I've said before, our plan is as that number approaches 90%, we'll start to look at potentially adjusting the dividend.

Your point on the amount of cash that is accumulating is a good one. And we have been looking, and we have $70 million sitting at the public company earning basis points 30 or whatever basis points, so that is becoming a big enough number that we should be looking at it. Is there a way that we can start generating more return from that?

Our structure is a little limiting, as you know, on what we can do with that cash because it is in effect, that cash has already been distributed out of the operating company and it's effectively the public's cash. And so I'm not sure a buyback of shares makes a lot of sense because it does constrict our flow, so that's something, you know while it's out there, it's not a high consideration. You bleed off some of this over time with some sort of special. I've never been a big fan of that quite honestly, Eric. I don't think you get a lot of credit for that.

So we are looking at a lot of different possibilities and trying to earn a bigger return on that $70 million that's sitting there. It does -- our structure's a little odd in that respect. We just can't reinvest that in our business because it's actually been already distributed to the public in some way.

Great. Okay, thanks Kurt. Appreciate it.

Yeah.

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

Yeah, hey guys. A lot of my questions have been asked already. But the one thing I was thinking as we just listened to your remarks, it sounded like the smallest advertisers were getting more bullish and growing, and the bigger seem to be cutting back. It almost reminded me of the odd lot theory on Wall Street where you have the smallest investors kind of driving the stock up, it's contrary an indicator.

And I just wanted to get a sense, is there any reason to believe that this is the beginning of a trend or do you think it's just short term? I'm just -- all the things that you were saying, Kurt, initially with national advertisers, whether they were delaying or downsizing or cancelling campaigns, it all sounded just pretty negative I guess.

Yeah, look I don't think there's an long-term trends here. I think the big thing that's trying to get sorted out in the marketplace right now is as all the agencies and various buyers of media out there start to think about being video agnostic, I think you're going to see a trend towards that. And there are various video platforms, including online and mobile, obviously TV and cinema and other video platforms, and I think as that gets itself sorted out, I think you're going to see these ups and downs quarter to quarter.

If you look at the gross numbers right now, the question I keep asking is everybody says they're growing, where the heck is it coming from? Video's growing, TV's growing, cinema's going to grow this year, where's the money coming from to fuel all the growth? I mean you know who's being hurt by this? I think the answer may be print. Maybe it's other promotional dollars. There's obviously a lot of marketing dollars sloshing around in the marketplace. So I think we're going through a transition period right now where a lot of this thing will get worked out.

When I look at our company, I think some of the trends that I'm seeing as some of this gets worked out are pretty positive in our favor. I think the issue of are your ads being seen on other video networks, including obviously most notably TV. You know we've noted some data recently where if you include the C3 ratings, certain programs are getting as much as a 40% bump in ratings if you include the three days after the broadcast. You know that tells me that 40%, at least for that show, 40% of the people time shifted. You know how many of those ads were really being seen?

And so that whole trend that's impacting the marketplace, I think is a positive one for us because our strongest selling proposition is you know we know they can't skip the ads. I mean you're sitting in the audience, it's there, you can't really -- it's very hard to get away from it. And so I think that trend of technology -- and by the way, online is not immune to that either. There are skip button obviously out there, most notably with You Tube.

And there's also been some data recently that's come out that as high as 70% of the ads online aren't being seen at all. And so I think there's a lot of people trying to work out exactly where they should put their money. And I think that's going to impact the business over the next several quarters.

And I like the fact that our network is getting bigger. As I mentioned before, I think fragmentation of programming across all these networks is reducing the amount of impressions that any one network has and the rating points associated with that. That's a good thing for us. And so I think we're in a bit of a transition period right now where media buyers are trying to sort that out.

Okay. All right. That's helpful. Thanks a lot Kurt.

Thank you. Our next question comes from the line of Barton Crockett with FBR Capital Markets. Please continue with your question.

Okay, great. Thanks for taking the question. Could you update us on where you are in the CFO transition at this point?

Sure. We continue to talk to some candidates out there, but clearly as time has gone on David and Jeff, our two co-CFOs have done a fantastic job and the urgency to replace the position is really not there. If we do find somebody that is the perfect candidate for us, we may move on it. Where if time goes on long enough, maybe we do something internally.

So I think with the experience base we have between myself and David and Jeff, I think we're pretty well covered and we really haven't missed a beat.

Okay. I mean that's great to hear. And then if I could get a little bit more color on what you mentioned at the beginning, which is that on national advertising you said there was some creative delays and conflicts that reduced the national ad campaign. I was wondering if you could elaborate on what exactly is going on there.

Sure. As we've talked, we've talked about this in the past. We just never had a quarter where some of the campaigns, the creative was late and it slid into the next quarter. It's one of the reasons, you know we mentioned October was doing okay, that obviously has helped us a little bit in the beginning of the fourth quarter. So it was really just purely creative delays.

The other one I mentioned was a situation where one of our clients couldn't, where we couldn't run as much media as we wanted to just because of exclusivity issues. They didn't want to run alongside other ads that were in the same category as them and in some cases had messaging they didn't like very much. So that's really the color behind that.

Okay, great. Thank you.

Yeah. You bet.

Thank you. Our next question comes from the line of Mike Hickey with Benchmark Company. Please continue with your question.

Hey guys, thanks for taking my question. Kurt, just a clarification. Sorry to do this, but for November, was that being negatively impacted by cancellations and or just a weak scatter? I missed that, I'm sorry.

Yeah, it wasn't cancellations. What we said is the scatter was just very soft.

Okay. Thank you. And then obviously I'm guessing you're still going through your budget for '14's share, but any thoughts on the Olympics and World Cup and potentially how disruptive that could be?

Yeah, look clearly there's going to be more money I think sucked up in '14 by sports. Where that money comes from, you know some of it will be increased budgets because some people do have commitments to the Olympics for instance, and they do in Olympic years increase their budgets, GM for instance and there are others.

The funny thing for us, if you look at our biggest quarter ever in the history of our business was last third quarter and you had the Olympics right in the middle of it. So I'm not going to say the Olympics are that punishing. I do think you are seeing some shift in GRPs and in dollars to sports, which by the way to me is perfectly consistent with what's going on with the DVR and time shifting and ad skipping and so on.

There's clearly a view out there that sports is more resistant to that and so I think it's natural you're going to see money move towards sports. And you know the beneficiaries of that are going to be pretty obvious. Obviously NBC's going to benefit next year from their Olympic broadcast and ESPN is going to benefit. And then you know we always have competition in the first quarter from the football playoffs and then of course the Super Bowl.

So I think the only new trend that we're kind of watching for next year is how much money is shifting into sports. And the only good news for us I guess in that respect is most of the money placed in sports, in Olympics and others, all have pretty sizeable CPMs associated with them. So it obviously puts a bigger floor underneath some of the pricing out there in the marketplace that we compete for. So I guess that's good news.

And you know how the market sorts that out over time I think will basically follow what the data starts to suggest about is ad skipping really having a big impact. And you know, other technologies, how are they impacting the way people view programming and the way they view ads?

Okay. Thank you. That's a great answer. The last question, just I mean Gravity was phenomenal at the box office over October. And just curious if you can kind of reset with us what's happening on the 3D ad side within your network and if that's kind of encouraged people to look at that as a potential medium?

Well clearly it woke, I think it woke the medium up a little bit. I think you know for a while the bloom I think had been off the rose a little bit of the 3D in cinema. I think the numbers are something like 84% or something like of the tickets have been 3D for Gravity, which is sort of unheard of. So clearly there's been a little more buzz about that.

You know one of the things that happened for us is that a lot of the TV, in fact all the TV networks that were doing 3D broadcasting now have shut down. And so I think you know any significant growth for us in the 3D sector is going to be tied to television's ability to relaunch 3D as a medium in the home. And I think when that happens, you know I think that could be a good thing for us because now there's more than one medium, or one platform, being cinema, to run 3D ads.

And you know we're still going to get the occasional deal from films that are 3D films or from products like 3D cameras or potentially televisions in the future that people start to roll out. But as you well know, the whole in-home distribution of 3D was kind of botched by the manufacturers, in my view. And everybody has now backed off from a distribution because there just aren't enough homes that can receive it. You know ESPN and others have pulled back their broadcast of 3D signals.

So we're really the only game in town, and we still get a few deals, and they're premium CPM so that's good. But this was never going to be a huge growth prospect for us. It's good for the cinema business. It's good for underlying impression base, because obviously it generates more interest and more attendance. Gravity is just one example of that. So don't get me wrong, 3D is a good thing for our business, for a big picture standpoint. Just the interest of advertisers to do something special with a 3D ad has always been somewhat limited and it will be I think in my view until TV gets its act together.

Thanks, Kurt.

Yeah.

Thank you. Again, if you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You can press *2 if you would like to remove your question from the queue. And for our participants using speaker equipment, it may be necessary to pick up your handset before pressing the * keys.

Thank you. Our next question comes from the line of Liang Feng with Morningstar. Please proceed with your question.

Hi, thanks and good afternoon guys.

Hello.

I guess could you talk some more about the steps you've been taking to attract some nontraditional cinema advertisers? Are you offering any of them introductory rates for instance to hook them into the system or do they sign up largely on the same terms as everybody else?

I don't think there's any rule of thumb. Clearly that's one of the strategies is to try to get people on board with a smaller buy usually at a lower CPM so they can test the medium. We also generally provide some research for them that will verify, if you will, or validate some of our metrics that we sell. The value proposition metrics are obviously sold pretty hard.

And really you know look, we're selling ourselves as a very high quality alternative to other video networks. And as I've said before, I think that selling proposition continues to get stronger given what's going on in other places like TV. So like I said previously, we've added 25 new clients this year that have never advertised, or at least haven't advertised since before IPO. So we are making some good progress on that.

Are you seeing some of your traditional customers that may be used to paying more for the higher CPM rates migrating to the lower price time slots or is it still primary the newer guys?

Yeah. No, you have a little bit of both. And clearly, as I said before, there's been some pricing pressure in the marketplace that we're reacting to in some cases, so it's a mixture of both. But overall our strategy has been very clear for quite some time now, is that the tradeoff between rate and utilization is a favorable tradeoff for us as long as we can continue to expand our client base and continue to expand the breadth of that, which hopefully over the long term leads to less volatility quarter to quarter in revenue. That's the ultimate goal.

Okay. Thanks guys.

Yeah.

Thank you. There are no further questions at this time. I would like to turn the floor back over for closing comments.

Okay, thank you everyone. We will talk to you all early next year after we have the results for the year and we'll obviously give you a lot more background on what we're expecting for '14. So thanks for all your support and we'll talk soon.

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