NOOF NOOF
Q3 2011 Earnings Call Transcript
Transcript Call Date 02/04/2011

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the New Frontier Media Third Quarter Fiscal 2010 Earnings Conference Call.

During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. This conference is being recorded today, Friday, February 4, 2011.

Now, I'd now like to turn the conference over to Chief Financial Officer, Mr. Grant Williams. Please go ahead, sir.

Grant Williams - CFO: Thank you. Good morning everyone and welcome to the New Frontier Media's fiscal 2011 third quarter results conference call. Joining me this morning are Michael Weiner, Chief Executive Officer of New Frontier Media; Ken Boenish, the Company’s President; and Marc Callipari, the Company’s General Counsel and Scott Piper the Company's Chief Technology Officer.

We will begin the call this morning with Michael’s comments on the third quarter results and strategic plans and then I'll discuss the detailed financial results before we open up the call for questions. A replay of this conference call will be available for seven days at 1-800-406-7325 using the pass code 44406727. This call will be archived for 12 months on our website at noof.com, under the Investor Relations' Calendar of Events tab. This call is also being webcast. During the question-and-answer segment, those of you listening via the Internet will be able to ask questions. Please submit your questions via email to hpatton@noof.com.

All information discussed during the conference call is current only as of today or as of the date of the applicable financial results and the Company assumes no obligation to update information discussed during the conference call.

During this conference call, management may make forward-looking statements within the meaning of the safe harbor provided by the SEC for such statements, including statements regarding the Company’s expected financial position and operating results, its business strategy, its financing plans, and the outcome of certain contingencies.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any forward-looking statements and should be considered in conjunction with the cautionary statements included in our press release and our most recent reports containing risk factors filed with the Securities and Exchange Commission, including our most recently filed forms 10-Q and 10-K.

I’ll now turn the call over to New Frontier Media’s Chief Executive Officer, Michael Weiner.

Michael Weiner - Chairman and CEO: Thank you Grant, good morning everyone. New Frontier maintained a solid financial position through the third quarter of fiscal 2011 and the Company continues to improve its position in the marketplace. Within the transactional TV segment we continue to have success with our international expansion. We are now distributing content in over 28 countries and we expect that we will continue to grow revenue and expand our distribution in international markets.

In order to support this growth, we are making investments in the business including launching new channels in Latin America and Europe, developing new and unique content packages and investing in technology that allows us to expand our international footprint and realize scalable efficiencies.

Domestically, we experienced the second consecutive quarter of stabilized VOD revenue and we are continuing to implement new merchandising strategies for our future growth. We are also focused on stabilizing the domestic pay-per-view revenue and believe many of our initiatives may improve revenue in the future.

Within the film production segment, we are pleased to announce the completion of our production-for-hire arrangement during the quarter, which resulted in $3.3 million in incremental revenue.

Additionally, we have made good progress with our distribution of mainstream content to domestic VOD, as well as retail VOD and other home video markets. We’re focusing our efforts within this segment on the profitable components of the business, which has allowed us to take advantage of reducing the segment's overhead and improve margins, which should become visible in fiscal year 2012.

Overall, New Frontier Media continues to expand the quantity of content it distributes to customers as our customers dedicate more and more shelf space to our products. We currently process up to 15,000 assets or VOD films a month through our digital broadcast facility, which is a year-over-year increase of 88%.

As we previously announced in October, 2010, and in order address our future growth and approve our operational efficiency, we will be merging our corporate and digital broadcast facilities into a new combined facility. In connection with the move we also plan to update certain aspects of our technology infrastructure, which would otherwise require replacement in the next 12 to 24 months.

By executing our equipment upgrades concurrent with the relocation, we expect to realize cost savings and minimize the operating risk that goes with such major upgrades. We originally expected to begin construction in fiscal year 2012, but due to timing and additional cost saving opportunities, we are beginning the relocation in the fourth quarter of fiscal 2011.

We continue to focus our efforts on growing the Company, and as discussed, we have been and continue to make investments in the Company that we believe support that growth. We believe the future prospects of the Company are good and that our strategic objectives will generate shareholder value over the long-term.

Now, I will turn over the call to Grant to discuss the financial results and related information in greater detail.

Grant Williams - CFO: Thank you, Michael. I will begin the financial review this morning by discussing the third quarter operating performance by business segment and then I'll briefly discuss our liquidity position before opening the call up for questions.

For the transactional TV segment revenue in the third quarter decreased to $8.8 million as compared to $9.1 million in the same prior year quarter. Domestically, pay-per-view revenue was lower by approximately $0.9 million, primarily due to $0.6 million decline in revenue from the loss of a channel on a DBS platform in November 2009 and from a reduction in consumer buy rates on other domestic DBS and top 10 cable customer platforms.

We believe the declines in buy rates are due to a continuation of weak consumer spending. Our domestic VOD revenue continues to be stable and was flat for the second consecutive quarter, partially offsetting the declines in overall domestic transactional TV revenue or increases in our international revenue during the quarter of $0.5 million within VOD and $0.2 within pay-per-view.

As Michael mentioned, we are continuing to experience a growth trend within our international distribution and are currently generating approximately $1.5 million per quarter from this international revenue. We expect the revenue trend for our international business will continue to improve and will be a key component for our growth over the next three to five years.

Within cost to sales the transactional TV expenses increased during the quarter, primarily due to activities intended to support the Company's growth initiatives. These expenses included higher transponder costs for channels distributed in Latin America and Europe, and higher content amortization costs from additional spending on content.

We also incurred higher costs from the acceleration of certain tenant improvement depreciation costs in anticipation of merging our current facilities into a new combined facility. These higher costs were partially offset by reduction in our transport costs, associated with our execution of a new services agreement that provides for more beneficial financial terms.

Operating expenses within the transactional TV segment increased by approximately $0.4 million during the quarter and were also higher due to additional spending on growth related initiatives, including higher employee cost to develop new and unique content packages, higher depreciation expenses for storage equipment purchased to support our content distribution growth, and higher costs from accelerating certain tenant improvement depreciation costs. Overall, the transactional TV segment reported $2.6 million of operating income as compared to $3.5 million in the same quarter of the prior year.

Moving on to the film production segment, revenue increased approximately $3.3 million associated with the completion of producer-for-hire arrangement during the quarter. Partially offsetting this increase was the decline in owned content revenue due to a reduction in buy rates on domestic VOD platforms, which we believe is due to the continued weakness in consumer spending.

Ripped content revenue was generally flat and although we continue to expand our distribution of mainstream content to domestic VOD platforms and retail DVD and home video markets, the improvement in revenue from these initiatives has been offset by a reduction in revenue from the execution of (indiscernible) one-time film distribution agreements due to a general weakness in the film markets.

Cost of sales for the film production segment increased $3 million during the quarter due to production costs incurred for the completion of the producer-for-hire arrangement and operating expenses were also higher due to cost incurred for strategic consulting activities.

For the quarter ended December 31, 2010 film production segment generated operating income of approximately $0.3 million as compared to $0.4 million in the same prior year quarter.

The quarterly results within the direct-to-consumer and corporate administration segments were generally consistent with the prior year quarter and on a consolidated basis we generated net income from continuing operations of approximately $0.02 million or $0.01 per share as compared to $1.06 million or $0.08 per share in the same prior year quarter.

Moving on the Company's cash liquidity, we successfully extended our $5 million line of credit through December of 2011 during the quarter. As of December 31, 2010, we had approximately $14.7 million of cash-on-hand and for year-to-date fiscal 2011, we generated approximately $1.50 million in operating cash flows from continuing operations.

We expect to collect $3.3 million of outstanding produce-for-hire receivables as well as $0.08 million of other receivables from the sale of certain production tax credits in the fourth quarter of fiscal year 2011. We would also like to provide a few more details on the investments we expect to make over the next several quarters related to our relocation to a new facility.

We’re continuing to work with our facilities group toward finer expectations related to the move, however, we want to provide some tentative expectations during the call this morning.

Generally we expect that the cash outflows related to the relocation will be split evenly between the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012. We expect to incur approximately $2 million in cash outflows for equipment related to capital expenditures.

As Michael previously mentioned the Company expected to incur these capital expenditure outflows during the next 12 to 24 months regardless of the relocation. We also expect to incur approximately $2.7 million for tenant improvements related to the facility and $1.07 million of those tenant improvements will be paid for by the new landlord of the facility. Mechanically, we will pay $2.7 million for tenant improvements and the new landlord will reimburse us for $1.7 million of those disbursements. Although we may receive some reimbursement for the tenant improvements in fiscal year 2011, we currently expect that the large majority of the reimbursement will occur in fiscal year 2012.

So, that will conclude our prepared remarks. Let's please open up the call for questions.

Transcript Call Date 02/04/2011

Operator: Mr. Williams, I don't show any questions in queue at this time.

Grant Williams - CFO: Thank you everyone for joining us and we look forward to speaking with you again next quarter.

Operator: Ladies and gentlemen, this concludes the New Frontier Media third quarter fiscal 2011 earnings conference call. You may now disconnect. Thank you for using ACG Conferencing.