Image Entertainment Inc. (OTC:DISK) F2Q09Earnings Call November 13, 2008 4:30 PM ET
Michael Bayer - General Counsel
David A. Borshell - President
Jeff M. Framer - Chief Financial Officer
Good day everyone and welcome to today’s second quarter 2009 results conference call. At this time I’d like to inform you that this conference is being recorded and all participants are in a listen only mode. At the request of the company, we will open the conference for questions and answers after the presentation.
I will now ask Michael Bayer, the company’s General Counsel, to read the Safe Harbor Statement.
Thank you, Operator. This conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, among other things, our goals, plans, and projections regarding our financial position, results of operations, market position, product development, and business strategy. These statements may be identified by the use of words such as will, may, estimate, expect, intend, plan, believe, and other terms of similar meaning in connection with any discussions of future operating or financial performance or other events or developments.
All forward-looking statements are based on management’s current expectations and involve inherent risks and uncertainties including factors that could delay, divert, or change any of them, and could cause actual outcomes and results to differ materially from current expectations. These factors include but are not limited to A) our ability to secure media content on acceptable terms; B) our ability to service our principal and interest obligations on our outstanding debt; C), the ability of our common stock to continue trading on NASDAQ; D) changes in the retail, DVD, and digital media and entertainment industries; E) changes in our business plan; F) our inability to raise additional working capital on acceptable terms; G) heightened competition, including with respect to pricing, entry of new competitors, the development of new products by new and existing competitors; H) changes in general economic conditions including the performance of financial markets and interest rates; I) typical adverse and volatile conditions of the global and domestic capital and credit markets; J) claims that we infringe upon other parties’ intellectual property; K) the performance of business partners upon whom we depend; L) changes in accounting standards, practices, or policies; M) adverse results or other consequences from litigation, arbitration, or regulatory investigations, and N) further sales or dilution of our equity which may adversely affect the market price of our common stock.
For further details and discussion of these and other risks and uncertainties, see Forward-Looking Statements and Risk Factors in our most recent annual report on Form 10-K and our most recent quarterly reports on Form 10-Q. Many of the factors that will determine the outcome of the subject matter of this conference call are beyond Image Entertainment’s ability to control or predict. Actual results of the periods identified may differ materially from management’s expectations. Unless otherwise required by law, we undertake no obligation to publicly update any forward-looking statement whether as a result of new information, future events, or otherwise.
Thank you, Operator.
I will now turn the conference over to David Borshell, President of Image Entertainment, Inc.
David A. Borshell
I’d like to thank everybody for joining us today. Before I turn the call over to Jeff to comment on the financials, I’ll take a couple of minutes to run through some of my own comments.
In early 2008 management set two primary goals for the company. First was to significantly increase our revenues over the last year. The second was to achieve profitability. To accomplish this, we leveraged our existing business by adding a new revenue stream derived from the acquisition and distribution of cash driven feature films that could be exploited across multiple platforms and formats.
We believe our strategy has led to the company accomplishing both goals. May of the films that we have acquired have now been released on DVD, are available digitally, and offered through various television and non-theatrical outlets. With two full quarters of fiscal 2009 under our belt, we can see that our financial results were greatly improved year-over-year. Our fiscal second quarter revenues increased 50% over the same period last year to $32.4 million which was comparable to our first quarter 2009 increase of 56% over the same period last year. We also had positive operating income this quarter compared to a significant loss from operations last year at this time.
For the six months ended September 30, 2008, we have generated revenues of $65 million as compared to $42.5 million last year. That’s an increase of over $22 million. What’s especially encouraging about the last six months is that we’re showing revenue increases across all formats with our DVD sales up 53%, digital up 58%, and television sales up over 130%, all as compared to last year.
These results coupled with the new releases we have scheduled over the remainder of our fiscal year have given us the comfort to increase our fiscal 2009 revenue guidance to an expected range of between $120 million and $130 million which would represent an increase of between 25% and 35% over last year. We see this as very positive, especially in light of today’s economic conditions.
While I’m very proud of our efforts thus far and expect this revenue uptick to continue for the foreseeable future, we’re still working hard to address profitability. Comparing this fiscal year to last fiscal year, our G&A expenses are down over 10% for the second quarter and over 14% for the six-month period. That’s encouraging news but we still need to find additional areas of cost reduction that would help deliver a stronger positive bottom line.
Our gross margins for the second quarter increased nicely to almost 25% which is primarily the result of the mix of higher versus lower margin products sold in that particular quarter. As we’ve discussed in the past, each deal carries differing gross margins and our quarterly margins are therefore determined by which titles are released in any given quarter.
Controlling our selling expenses going forward is critical. We have experienced an increase in selling expenses both our second quarter and full six months. This is expected as revenues increased significantly and there is a cost of doing business with the industry’s largest retailers. However, we continue to focus on areas such as freight expense and market development funds, otherwise known as product placement monies, and intend to try to reduce those aspects of selling expenses in future quarters.
As we look to our third quarter ending December 31, we anticipate solid results driven by film release schedule such as Jeff Dunham’s A Very Special Christmas, Big Vision’s continuing Ghost Hunter series, The Who Live at Kilburn 1977, and Criterion’s much-anticipated launch of Blu Ray releases.
Additionally, on the feature film side, we have stocked [inaudible], the Good Life starring Zoeey Deschanel and Bill Paxton, and Werner Herzog’s Encounters At The End of The World, which by the way was released by Image theatrically over the summer.
Over the past week we announced two major film acquisitions: In The Electric Mist starring Tommy Lee Jones and John Goodman and Management starring Jennifer Aniston and Steve Zahn. These two films significantly raise Image’s profile as a home for front line cast driven films. While In The Electric Mist will most likely have a small theatrical presence, Image is planning a nationwide theatrical campaign for Management. We will have more to discuss about these two films and others after the first of the year.
Before I turn the call over to Jeff, I do want to take a moment to briefly touch on the economic environment. At this time we do not believe that Image’s business has been significantly affected by the economy but we do continue to monitor the economic conditions out there. The entertainment industry, especially the home video side, tends to be counter cyclical during difficult financial times as watching movies and entertainment programming in general from the comfort of one’s home always seems appealing.
Secondly, as we look at our overall position in the market, we believe we have a strong foundation to build upon and feel very good about our current prospects. Lastly, while we are disappointed with our current share price, we believe it currently has little relation to our fiscal 2009 successes. We intend to continue to execute on our business strategy, stay in front of Wall Street, all of which put shareholder value as our guide.
At this time I’d like to turn the call over to Jeff.
Jeff M. Framer
Thank you, David. Good afternoon, everyone. I’m pleased to report that as David said we continue to experience significant revenue growth this quarter as well as our first quarter. We had an extremely strong new release schedule which included features such as Then She Found Me starring Helen Hunt, The Secret starring David Duchovny, and Autumn Hearts starring Susan Sarandon, and the documentary When We Left Earth: The NASA Missions. As we stated on our past conference calls, we continue to find ourselves with new higher profile contact position opportunities which is really exciting to all of us.
Now I’m going to spend a few minutes reviewing our consolidated financial results for the second quarter and six months in more detail. Our net revenues were up 50% to $32.4 million as compared to $21.6 million for last year’s second quarter. This was primarily on the strength as I said of our new release schedule. Our digital distribution revenues continue to grow nicely, coming in at a 63% increase to $975,000 versus $598,000 for last year’s second quarter. Our subsidiary Egami is now a direct provider of video content to iTunes which continues to dominate the digital rental and sell through space.
Our gross profit margin for the quarter increased to 24.8%. That’s up from 16.4% for last year’s second quarter. A more favorable mix of higher profit margin titles were sold during the quarter and we benefited from comparatively reduced distribution and freight expenses. Selling expenses were 12.5% of net revenues, up from 10.1% of net revenues for last year’s second quarter, primarily a result of increased advertising and promotion expenses associated with our new and emerging feature film business.
Approximately 2% of that 12.5% as a percentage of net revenues as relates to advertising expenditures for certain titles prior to their DVD release which will happen in the coming quarters. General and administrative expenses decreased 10.9% to $3,564,000 as compares to $4,035,000 for last year’s second quarter as a result of lower legal fees and lowered depreciation expenses as we closed our distribution facility last fiscal year.
Importantly, we had earnings from operations of $396,000 compared to a loss from operations of $2,859,000 for last year’s second quarter. Interest expense was $863,000 for the second quarter compared to $808,000 for last year’s second quarter. It’s important to note that of that $863,000, $375,000 or 43% of that figure is non-cash and relates to amortization of debt discounts and deferred financial costs.
Our net loss for the quarter was $465,000 or $0.02 per diluted share, lower than last year’s and the prior year’s quarterly net loss of $3,683,000 or $0.17 per diluted share. So actually it’s a $0.02 loss versus a $0.17 loss. Our weighted average shares outstanding for the quarter were 21,856,000. For the six-month period, net revenues were up approximately 53% to $65 million as compared to the $42.5 million for last year’s first six months.
Our digital distribution revenues showed 58% growth to $1,731,000 versus $1,093,000 for last year’s first six months. The gross profit margin for the six months increased to 23.6% and that’s up from 20.8% for last year’s first six months. Selling expenses were 12% of net revenues, up from 9.9% from last year’s six months. Again, higher advertising and promotion associated with the feature film business.
General and administrative expenses decreased 14.1% to $7,582,000 compared to $8,829,000 for last year’s first six months. Lower legal fees and lower depreciation expenses were the primary drivers. Importantly, we have slight earnings from operations for this six months, $15,000, compared to a significant loss from operations last fiscal year, $4,643,000 for the first six months.
Other income was $3,016,000, a significant portion of which was the receipt of $2 million from our settlement associated with the failed merger. Interest expense was $1,738,000 compared to $1,601,000 for last year’s first six months. [inaudible] $1,738,000 or 44% was non-cash and was associated with the amortization of debt discounts and deferred financing costs.
Our net earnings for the six months of this fiscal year were $1,231,000 or $0.06 per diluted share compared to the prior year’s six month period net loss of $6,282,000 or $0.29 per diluted share. We had the same weighted average share count for the six months as we did for the three months.
With regard to our balance sheet, we have cash of $753,000. It’s important to note that we again have a sweep account as cash is collected and swept out of the account to repay any outstanding amounts under our credit facility so at the end of the year the cash on the balance sheet represents cash that hasn’t cleared the bank yet and hadn’t been swept against our line.
However, it’s important to note our gross trade accounts receivables as of September 30, 2008 were $32.8 million which is 24% higher than the receivables at March 31, 2008, the end of our last fiscal year, and 30% higher than last year’s September 30, 2007 quarter. So receivables growth such as we’ve had enables us to access the entire amount of our line of credit should we need to.
At the end of September we had outstanding borrowings of $10.2 million and that’s under our maximum $20 million revolving line of credit. We had borrowing availability of $9.2 million. During the six-month period we paid down our [obodo] loan to $5.1 million from $6.8 million as of March 31, 2008.
Looking forward, as David stated, we’re very excited about the remainder of this fiscal year and as such we increased our annual guidance by $5 million so the low goes from $115 million to $120 million and the high goes from $125 million to $130 million so the new range is $120 million to $130 million and we anticipate profitability at the higher end of that range.
Now I’m going to turn the call back over to the Operator.
Your question and answer session will begin at this time. (Operator Instructions)
It appears there are no questions at this time. I will turn the conference back over to Mr. David Borshell.
David A. Borshell
Thank you, Operator. I just want to mention as far as if there’s any issues with Wachovia, I know some people have got those questions before. During the last quarter Wachovia began a transition where they’re being sold probably to Wells Fargo but I don’t believe the transaction has closed yet, but if anyone had any issues or concerns as to whether or not we’ve been affected financially by Wachovia, they are obviously our main lender, the answer is no we have not. There has been no interruption in our operating line with Wachovia and do not foresee any interruption in that relationship.
With that said, Operator, I’ll thank everybody for joining us and we look forward to talking to everybody the end of our third quarter.
Ladies and gentlemen, if you wish to access the replay of this call, you may do so by dialing 1-888-203-1112 or 719-457-0820, passcode 7492539. This concludes this conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.
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