New Frontier Media, Inc. Q4 2006 Earnings Conference Call Transcript (NOOF)

Jun. 6.06 | About: New Frontier (NOOF)

New Frontier Media, Inc., (NASDAQ:NOOF)

Q4 2006 Earnings Conference Call

June 6, 2006, 11:00 a.m. EST

Executives:

Karyn L. Miller, Chief Financial Officer

Michael Weiner, Chief Executive Officer

Ken Boenish, President

Analysts:

Michael Kelman, Susquehanna Financial Group

Rich Ingrassia, Roth Capital Partners

James Clement, Sidoti & Company

Eric Wold, Merriman Curhan Ford

Jack Ebstein, Putero

Dennis McAlpine, McAlpine Associates

Adam Weinrich, Brookfield Asset Management

Dan Mendoza, Rising Core Capital

Adam Prance, Team Capital

Jason, Clayton Capital

Operator

Good morning ladies and gentlemen and welcome to the New Frontier Media Fourth Quarter Fiscal 2006 Earnings Release Conference Call. At this time all participants are in a listen-only mode. Following today’s presentation, instructions will be given for the question and answer session. If any one needs assistant at anytime during the conference, please press the “*” followed by the “0.” As a reminder this conference is being recorded Tuesday, June 6, 2006. I would now like to turn the conference over to Ms. Karyn Miller, Chief Financial Officer of New Frontier Media. Please go ahead Ms. Miller.

Karyn L. Miller, Chief Financial Officer

Thank you and good morning. Welcome to the New Frontier Media Fiscal 2006 Fourth Quarter Results Conference Call. This is Karyn Miller, New Frontier Media’s Chief Financial Officer. With me today is Michael Weiner, Chief Executive Officer of New Frontier Media, and Ken Boenish, President of New Frontier Media. Also on the call is our FCC Counsel, Steven Pappas with the law firm of Lehman Island.

During this call Michael will give an overview of the Company’s strategic position, and then I will review New Frontier Media’s results of operations for the quarter. After our commentary, we will open up the conference call for questions. A replay of this conference call will be available until June 13th at (800)-405-2236 using the pass code 11062066. This call will be archived for 12 months on our website at www.noof.com under “Investor Relations Webcast & Events.” 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 question via e-mail to hpatton@news.com.

During this call we may make references to non-GAAP measures. This information including reconciliation to related GAAP measure is available on today’s earnings release. A copy of our earnings press release is available at our website at www.noof.com under “Investor Relations New Releases.” All information discussed during the conference call is as of today and the Company assumes no obligation to update information discussed during this call.

During this conference call management may make forward-looking statements and intends for these statements to be covered by the Safe Harbor provisions for forward-looking statements. All statements regarding the Company’s expected financial position and operating results, its business strategy, its financing plans, and the outcome of any continuity are forward-looking statements. In addition, forward-looking statements maybe identified by the use of words such as “believes,” “expects,” “intends,” “seeks,” “estimates,” and “anticipates,” or variations of such words. 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. For more information about these risks and uncertainties please refer to the Company’s press release and its filings of the Securities and Exchange Commission including the Company’s Form 10-K in the risk factors section and Form 10-Q.

And now I would to turn the call over to Michael Weiner.

Michael Weiner, Chief Executive Officer

Thank you Karyn and good morning everyone. We are this morning reporting a 90% increase in year-over-year revenue. The increase is mainly attributable to our Video On-Demand business in which our execution continues to improve. As VOD evolves we are becoming both smarter and more efficient in the way we develop, package, and manage the content we deliver to it. When one makes an apples-to-apples comparison, no one in the industry performs better than New Frontier. We take each piece of our content extremely seriously and spend material time researching which elements of content, packaging, and trademarks are most appealing to our viewers.

Additionally, we continue to replace our competitive service on cable television platforms around the country. As cable operators begin to reclaim bandwidth, which was previously dedicated to linear channels, they are actively scrutinizing all services based on performance. Their goal is to offer few linear channels and only those channels with the best performance in order to maintain maximum revenue. Since our channels are the best performing services available, we have enjoyed expanded distribution at the expense of the competition. Recent evidence of this is we saw the communication recently replaced all of Playboy services with our channels and systems serving nearly 2 million households.

Consistent with this approach, this quarter we introduced a new business-to-business advertising campaign under the theme of “The Science of Adult Entertainment.” I am pleased with this approach as I believe it accurately represents a core value of the corporation. We do believe that our approach to this business is more disciplined, scientific, and rigorous than that of anyone else in the industry. The result is better buy rates and more revenue for our distribution partners.

The greatest evidence of our superior approach to this category was our announcement in April of our carriage agreement with DirecTV. More than any other element, it was our expert understanding of this business and the means of creating retail profits for our partners that was key in DirecTV’s decision to terminate the de facto exclusivity, which our competition had enjoyed on that platform. In April, we launched two networks on this platform -- TEN and TEN Clips -- replacing two channels that were previously supplied by Playboy. Early indications show that these networks are now the leaders in the category in terms of buys to revenue generation. With the addition of this important distributor, New Frontier now serves more than 120 million network households making our services the most widely distributed adult movie channel in the United States. From our perspective, Spice Networks now covers roughly 70 million network households and Playboy fewer than 60 million.

Because of this extensive lineup of premium programming, DirecTV is the service of choice for a disproportionate number of professionals in the media and entertainment sectors. We believe our exposure on this platform carries myriad intangible benefits, the fruits of which we will see in the coming months and years.

The success of DirecTV was a full company effort, one that we actively worked on for most of the full year proceeding the announcement and one that I’m extremely proud of. But make no mistakes, our core business continues to have its challenges. Our guidance for the fiscal 2007 includes an expected reduction in our historical revenues with EchoStar. While we continue to negotiate with EchoStar, our guidance reflects our expectations with respect to the likely outcome of this dialogue. Because we believe, we have the top three performing adult services on this platform we do expect to be able to come to terms with EchoStar. However, I want to be clear that our guidance is not a worst case scenario as there are new competitors in this space that are eager for distribution and willing to offer reduced rates and other incentives.

As we consistently reported, we have been operating under a month-to-month contract with EchoStar for most of the past three years. We do believe we will secure a new agreement for the continuing carriage of the three services, but we will under no circumstances agree to effective rates that are lower than the rates we offer to other large affiliates. EchoStar is our oldest and most valuable customer. Our dialogue with the company is ongoing and we are doing all we can to see that these negotiations conclude in a proper manner for both parties. We will continue to keep investors apprised of any material news coming from these conversations.

In the meantime, as we always have, we continue to take a very thorough and pragmatic view of our present business. The fact is that as New Frontier has exceeded, a host of competitors have entered the market seeking to challenge us. Simultaneously, with the advent of the VOD, barriers to entry have declined.

Fiscal year 2007 will be the year in which we will establish the strategies and partnerships that will guide our company into the areas of greatest future growth. Strategically, it’s clear that our core business is well suited for some kind of consolidation whereby a larger player could obtain the leverage required to maintain and ultimately grow splits from operators. Where these opportunities exist, we are diligently exploring them. Our roll up of MRG Entertainment, which serves many of the same multichannel customers as our core business, was the first step in this direction.

We are also exploring a range of opportunities to provide an engine for future growth. For example, we are presently testing exciting new products for the domestic wireless market; our market which today is large and is not open to explicit adult content. The challenges of finding a niche, which would employ the company’s strength and at the same time the acceptable to domestic wireless operators, is one which we believe we’ve resolved, and we hope to be announcing some new products in this space by midsummer.

We’re also working on the development of exiting new original content specifically for VOD platforms. Our projection for fiscal 2007 is that New Frontier will have free cash flow of nearly $19 million. This is up roughly $1.5 million from the just ended fiscal year; so our company is growing. It is growing from a revenue perspective and from cash flow perspective. Our EPS projection appears softer in that when we acquired MRG we acquired $30 million worth of capitalized assets, which must now be amortized.

The amortization expense is the key driver of our slow EPS number. If we look at our numbers net of the MRG amortization, we’d see EPS in the range of $0.47 to $0.52 per share. It is our view that EPS does not provide investors with the most accurate look at the health of our business. Instead the metric, which does give us a better view, is our free cash flow as it excludes the amortization of assets acquired in our MRG deal.

Our Company’s financial position is strong, our products are performing, and we continue to be profitable. Our MRG division is producing and representing new exciting content in the US and overseas. Our Lightning Entertainment label, for example, is representing the acclaimed documentary Wal-Mart, the high cost of low price in international markets.

We do face challenges, but I do not believe these challenges are anymore significant than the ones which we successfully and profitably overcame over the past seven years. I believe we have the infrastructure, the financial resources, and the know how to carve out a greater and more valuable role for New Frontier in the field of both erotic and general market entertainment. And now Karyn will walk you through our most recent financials.

Karyn L. Miller, Chief Financial Officer

Thanks Michael. Now, starting with an overview of the entire company on a quarterly basis, net revenue for the company was $12.9 million for the current year quarter compared to $10.8 million for the quarter a year ago, representing an increase of 19%. The gross margin percentage for the Company increased to 68% from 63% for the quarter a year ago, and operating expenses were 36% of revenue for the quarter ended March 31, 2006, as compared to 38% for the quarter a year ago. This excludes a recession reserve recovery of $0.4 million in the prior year quarter. The Company reported net income of $3.3 million or $0.14 per fully diluted share as compared to net income of $2.4 million or $0.10 per fully diluted share for the fourth quarter last year.

Net income for the current year quarter reflects an effective tax rate of 25%, which is lower than our usual effective tax rate. This lower tax rate is the result of the Company releasing its valuation allowance against the deferred tax asset related to our net operating losses, which we have determined is more likely than not that we will recognize in future years. The valuation allowance release is approximately $522,000.

The Company reported EBITDA for the fourth quarter of the current year of $4.7 million as compared to the $3.1 million for the quarter a year ago, representing an increase of 52%. The reconciliation of EBITDA to our GAAP numbers is included in our press release on our website. The Company has approximately $23.3 million in cash and marketable securities on its balance sheet as of the end of the fourth quarter. In addition, we have approximately 23.7 million shares outstanding as of today and 2.5 million options outstanding of which 1.6 million are exercisable.

Moving on to look at the segment starting with the Pay Televisions results, quarterly revenue for the Pay TV group increased to $11.1 million for the quarter ending March 31, 2006, from $10.1 million for the quarter a year ago representing a 10% increase. As you know, our Pay Television revenue is comprised of both revenues from sales to our C-Band customers, which is a direct-to-home sales for consumers with a large DISH and revenue from our core business of distributing our pay-per-view networks and VOD offerings via our relationship with cable, DBS, and hotel partners.

The group’s quarterly C-Band revenue decreased 33% to $0.65 million for the current year quarter from $0.9 million for the quarter a year ago. As always, we continue to monitor the margins of this business and work to find ways to decrease our cost as this revenue erodes. The C-Band market now has less than 115,000 total active units. The group’s cable and DBS pay-per-revenue decreased 2% to $5.7 million for the current year quarter from $5.8 million for the quarter a year ago. This decline is the result of a decrease in revenue from our largest customer. This decline in revenue was partially offset by an increase in pay-per-view revenue related to new launches of our network including the re-launch of TEN Blox on one-time ownership and had removed most of its adult services from its pay-per-view platform in an effort to transition customers to VOD only. This system relaunched TEN Blox in an effort to recapture the Blox size.

The Pay TV Group’s VOD revenue increased 41% to $4.8 million in the fourth quarter of the current fiscal year from $3.4 million to the quarter a year ago. Currently, we provide VOD content to over 20 million VOD enabled cable customers, up from 18.3 million a year ago and 800,000 hotel rooms in the U.S.

Our VOD revenue increased due to an increase in revenue from the Time Warner VOD platform as well as to increasing launches on the VOD platform of new MSOs added during the year such as Adelphia.

As you know, our largest competitor joined us on the Time Warner platform during the third and fourth quarters of the prior fiscal year. We experienced a decline in revenue those quarters because of that change. The impact from this transition was fully absorbed during our 2006 fiscal year.

In addition, this quarter’s VOD revenue was impacted by adjustments made to prior quarters under accrual. As you are aware, because there is a delay of 30 to 90 days and sometimes more, in receiving remittances from our customers, we must make estimates of our revenue. Once the actual remittance is received, we adjust our estimates up or down for any difference. Because our VOD revenue is trending up, our estimates were based on lower numbers than were actually remitted. This quarter has an unusually large amount of adjustments to increase revenue for this difference. This is enforced to correct GAAP accounting for our revenue but in some instances it can lineage itself to trends that may not continue. In this instance, we do not believe that this level of quarterly VOD revenue will be a continuing trend.

Cost of sales for the Pay TV Group decreased 14% to $3.2 million for the current year quarter from $3.7 million for the quarter a year ago. The quarterly year-over-year decrease in cost of sales is primarily related to a decrease in our C-band call center cost, a decrease in our uplinking and transponder cost as a result of negotiating more favorable rates with our vendors, a decrease in VOD transport fees, and a decrease in depreciation and operating lease cost.

Quarterly operating income for the Pay TV Group increased 32% to $5.8 million for the current year quarter from $4.4 million a year ago. The group’s quarter EBITDA increased 30% to $6.1 million for the current year quarter from $4.7 million for the quarter a year ago.

Operating expenses are flat at $2.1 million for both quarters ended March 31, 2006 and 2005.

Moving on to the Internet Group, the Internet Group’s revenue declined 14% to $0.6 million from $0.7 million for the quarter a year ago. Cost of sales were flat $0.3 million for both quarters and operating expenses were flat year-over-year for the quarter at $0.3 million as well as operating income was flat year-over-year for the quarter of $0.1 million. This is without giving effect to a $0.4 million restructuring reserve recapture that occurred during the prior year quarter. This current year quarter includes no material revenue from our wireless platforms.

Moving on to MRG, as you know, we completed the acquisition of MRG Entertainment and its related companies as of February 10, 2006. In our public filings, we will be referring to MRG as our film production group. The quarter ending March 31, 2006 includes results for the film production group from February 11, 2006 through March 31, 2006.

The film productions group is comprised of two segments. They are rest titled revenue and our owned titled revenue. Revenue earned from our rest titled business is a result of licensing film titles which we represent but do not own under International Sales Agency Agreement with various independent film producers. We have a portfolio of approximately 80 mainstream titles that we represent through our mainline releasing and Lightning Entertainment label. Revenue from our owned titles is earned as we license our own erotic film library either on a flat fee or revenue share basis to customers such as Cinemax, ShowTime, DirecTV, In Demand, and DISH.

The film production group earned $0.5 million in rest title revenue and $0.6 million in owned title revenue during the period of February 11, 2006 through March 31, 2006.

Cost of sales for the film production group was $0.5 million for the February 11, 2006 to March 31, 2006. Cost of sales relates entirely to owned titles in case just primarily of film amortization cost as well as delivery and distribution cost. Film amortization is higher than what we would recognize due to the fact that our film library was valued at two and half times more than what was carried on MRG’s books prior to the acquisition.

As we begin to monetize content that we are currently producing, we expect our amortization cost will begin to decline resulting in higher margins.

Operating expenses were $0.7 million for the film production group and the film production group has an operating loss $0.2 million for the February 11, 2006 through March 31, 2006 period.

Operating expenses include amortization related to over $4.6 million in identifiable intangibles but as a result of the acquisition s well as to the accrual that are not related to the acquisition. The value of these intangibles is still being assessed at this time and may change. Due to the higher film amortization cost, the amortization of the acquired intangibles and the earn-out accrual, it is not expected that the film production group will have operating income during the 2007 fiscal year. However, the cash flow generated from the segment is expected to be over $4 million for the 2007 fiscal year.

Going on to corporate overhead. Our corporate administration operating expenses declined 12% to $1.5 million for the current year quarter from $1.7 million for the quarter a year ago. This decline is a result of a decrease in accounting fee related to our compliance in Section 404, the Sarbanes-Oxley Act, which was offset by an increase in legal and accounting fees for the year.

As I’m sure you saw in our press release, our guidance for fiscal 2007 which I will refigure was revenue of $56.5 to $58.5 million, net income was $7.7 to $8.9 million, and EPS of $0.32 to $0.37 per fully diluted shares. Our guidance in stock option expense of $0.8 million which is based on the options that exist today and are issued and outstanding. It also assumes that our DISH contract is re-negotiated and results in lower license fees. It also assumes a continued investment in wireless which will result in a loss from this segment of our business for the 2000 fiscal year and it is the entire marketing promotion cost to continue to brand our networks that market our product. Other items impacting EPS which are non-cash in nature include the set up in the library for the film amortization from the film production segment and the amortization of the intangibles and the acquisition as well as the stock option expense.

And now I’d like to open it for questions and answers.

Question-and-Answer Session

Operator

Ladies and gentlemen at this time we will begin the question and answer session. If you’d like to ask a question, please press the “*” followed by the “1” on your push button phone. If you would to decline the calling process, press the “*” followed by the “2”. You’ll hear a three tone prompt acknowledging your selection and your questions will be polled in the order they are received. If you are using a speaker phone, you will need to lift the handset before pressing the numbers. One moment please for the first question. Our first question comes from Michael Kelman with Susquehanna Financial Group, please go ahead.

Michael Kelman, Susquehanna Financial Group

Thanks. First a housekeeping question. Can we get the actual number of free cash flow for fiscal 2006, so we have a good base to compare the $18 and $20 million guidance for 2007? And then staying on guidance for next year, what kind of a substance do you have for MRG on the revenue side in your guidance? Because if we assume a normalized buy rate level for the new DirecTV subs and we assume around $13 million of revenue from MRG last year, which is consistent with the 12 months and we include some type of hit from re-negotiation of EchoStar, it would still assume a pretty healthy decline in your core business. And then lastly, what is the annual amortization expense from MRG, perhaps you can walk us through how you reconcile between your net income guidance of $8 to $9 million and your free cash flow guidance of $18 to $20 million including any assumptions you would have for working capital?

Karyn L. Miller, Chief Financial Officer

I’ll try to remember everything you just asked. Okay, free cash flow last year for fiscal 2006 was about $17.5 million; I’m giving you cash flow prior to the tax payments that we would have to make. The revenue, guys, I don’t want to go line by line, what I will tell you that is the revenue that we anticipated from MRG, we actually — there’s a piece of their business that relates to the sequel business where they are basically an outside producer for a major studio each year. And this generally contributes, not a significantly part of their revenue, but a good amount of revenue. At this point in time, we are not clear that we are going to have that business for fiscal 2007 as far as making that sequel. We took that out of the guidance again to kind of be prudent. We would rather err on the side of being conservative and if we end up getting that business we will put that back into the guidance. So, actually the MRG revenue is a little lower than we’ve expected when we acquired than they incurred last year based on the numbers that we have from the audit, but overall in the core business, what I would say as far as the guidance goes, like you said, we are obviously expecting a significant increase from DirecTV but that was tempered by the DISH Network license fee re-negotiation, which hasn’t happened yet, we’re in the process of negotiating and attempt on giving more color on that but we again felt it was prudent to give our guidance assuming that we reset of license fees was going to occur during this fiscal year. You also have to remember that our C-band business continues to decline, not a surprise to anybody. We’re anticipating almost $1 million decline in that business. We do expect that that business will be gone completely by the end of this current fiscal year and it may occur even before that. There’s a particular vendor that serves the C-band business that we have to have in place and they may go out of business by the end of the calendar year. We don’t know that for sure yet. What else did you ask…the amortization, I’m sorry — the amortization expense for MRG — the content amortization for their film libraries projected at about $7 million and $7.5 million for the year. It is an estimate until things roll out and we can see what content is used, but we don’t know that number, but that’s the estimate for today and the intangibles amortization was estimated about $1 million for the year. As I said, we’re still valuing those intangibles. There is a possibility that that evaluation be changed. The amortization may change because of that and if so, we’ll readdress that during our first quarter.

Michael Kelman, Susquehanna Financial Group

Would that also include the asset step-ups as well?

Karyn L. Miller, Chief Financial Officer

Yes.

Michael Kelman, Susquehanna Financial Group

Okay, and then also any type of working capital assumptions that you may have in your free cash guidance?

Karyn L. Miller, Chief Financial Officer

The only other couple of assumptions that I think are relevant are; we are expecting an increase in our cap exp. fee. Our cap expenditure for fiscal 2006 was a little under $1 million. We are expecting that to increase to $1.7 million mostly because there are some pieces of our broadcast infrastructure that we need to upgrade, so that that will be a big piece of that $1.7. We are expecting that our film production cost will be about $2.1 million and that our content acquisition cost will be over $3.5 million that probably gives you every number you need to get to my guidance.

Michael Kelman, Susquehanna Financial Group

Okay, thanks very much.

Operator

Our next question comes from Rich Ingrassia with Roth Capital Partners, please go ahead.

Rich Ingrassia, Roth Capital Partners

Thanks and good morning everybody. I know the main battle this year is on the splits, but do you still have hope for adding channel deployments there once the contract is worked up?

Ken Boenish, President

Rich, this is Ken I’ll take that question. The space becomes more and more competitive everyday and the one thing that we can really be confident of is that our channels are the best performing services on the DISH Network platform, in fact according to our rough calculations our best performing service on the platform performs somewhere in the neighborhood of 60% better than the best performing competing service and so what that tells you is that our existing competitors could significantly reduce their license fee or even give their channel to DISH Network for free and DISH Network would still make more money on our service while paying us a fair license fee. That does give us some confidence that we’re going to be able to maintain our existing care at DISH Network. We are little less hopeful that we’ll be able to add new services. However, as Karyn said the negotiations are still in progress, nothing’s been decided for sure. We know that they are very interested in the concept of a new service that we’ve presented. However, the economic battle is pretty heated right now. So, everybody is really kind of fighting for that space. Our advantage is that we are incumbent and we do perform very, very well and we’re confident in our performance and we’re confident in how we will perform on an ongoing basis, no matter what the competitive landscape looks like.

Rich Ingrassia, Roth Capital Partners

Okay, thanks and on DISH as the quarter just passed, if some of the weakness in the quarter was caused there does that mean there were pressuring splits at all in the March quarter or what are the issues?

Ken Boenish, President

We see some fluctuation from quarter to quarter on that platform and it really has to do with the manner in which they pull information from their boxes. The DISH Network boxes have a capability of storing a number of transactions before they‘re downloaded into the billing system and we actually get credit for that, but the slight weakness that you saw was a little bit result of that, a little bit of a result of minor seasonality that we see on the platform, but definitely not a result of any change in our splits.

Rich Ingrassia, Roth Capital Partners

Okay, and just a couple of quick questions for Karyn on MDG again. I think when the deal is announced, you were saying gross margins would run in the 60% range but it actually looks more like 70% in March, is that more like the run rate?

Karyn L. Miller, Chief Financial Officer

For MRG?

Rich Ingrassia, Roth Capital Partners

MRG, sorry.

Karyn L. Miller, Chief Financial Officer

I think that our gross margins did $0.5 million with 6.6 in cost of sales. I think their margins are actually more like 50%. And again that’s the difference between what we thought in February once they turn out to be, it’s really the step up in the film library.

Rich Ingrassia, Roth Capital Partners

Okay, and then explain that a little bit more why the capitalization of the MRG library was so much higher on your books than theirs.

Karyn L. Miller, Chief Financial Officer

Well, as obviously it is part of the acquisition, we had evaluation done of their library and evaluation is going to look at the projected revenue of that library over a three or five-year period of time and they are able to monetize their library in great excess to what it cost them to create the content, and some of the evaluation was done — that was taken into consideration and that’s why the library was set up so much, which is great because library of content was $8.9 million now, and Ken and the MRG folks are busy trying and getting that value out of that.

Rich Ingrassia, Roth Capital Partners

You got a better deal for the library it looks like?

Karyn L. Miller, Chief Financial Officer

Absolutely.

Rich Ingrassia, Roth Capital Partners

All right, that’s all I have, thanks.

Operator

Our next question comes from James Clement with Sidoti & Company, please go ahead.

James Clement, Sidoti & Company

Good morning. I’m not sure if this was — Karyn a comment that you had made or Michael had made it, I think you mentioned MRG looking for free cash flow of approximately $4 million this year, is that an EBITDA type of number that you’re using there?

Karyn L. Miller, Chief Financial Officer

Well, it is and it isn’t, it depends on how you…I’m sure everyone noticed we started giving adjusted EBITDA in our press release and we’ll continue to do that.

James Clement, Sidoti & Company

So, is that an adjusted EBITDA number?

Karyn L. Miller, Chief Financial Officer

It’s really looking at cash. We are adding back the content amortization and driving out the production cost.

James Clement, Sidoti & Company

Okay, and just second followup question, this is part of the series of the initial questions were asked. Are we to assume that sort of the kind of revenue or revenue per sub expectation that you guys had, when you originally announced the DirecTV deal, is that essentially kind of what you’re modeling, in terms of your own guidance right now or does that change in any way?

Karyn L. Miller, Chief Financial Officer

I think on DirecTV is we absolutely still believe that that’s the correct…

James Clement, Sidoti & Company

Okay, in terms of switching types to the core business, you got the DISH business and then you got the rest of the business; in terms of the revenue that you think is at risk here this year, what percentage of that is attributable to expectations regarding the DISH negotiation versus just overall market expectations; is that an okay question to ask? I’m not sure I made that clear.

Karyn L. Miller, Chief Financial Officer

I don’t know what you’re asking exactly, I’m sorry.

James Clement, Sidoti & Company

Basically what I was asking is if you take your core revenue and you add in revenue expectations from MRG plus revenue expectations from DirecTV, the difference between sort of that number and your guidance is the majority of that difference, because you’re talking basically a $10 million type number. Is the majority of that coming from your assumption of how the DISH Network negotiation is going to play out?

Ken Boenish, President

The vast majority of that is from DISH Network. We took about $2 million out of the revenue line because we’re not 100% confident that we’re going to secure the sequel business for the fiscal year. We got about $1 million pull up of the C-band business and really the remainder of that revenue is coming from DISH Network and like we said we’re being conservative. We’re being prudent and the negotiations with that client are still in progress.

James Clement, Sidoti & Company

Okay for the whole year, revenue associated with DISH was what somewhere between 35 and 40% of total?

Karyn L. Miller, Chief Financial Officer

Yes, about 35%.

James Clement, Sidoti & Company

35%, okay great thanks very much.

Operator

Our next question comes from Eric Wold with Merriman Curhan Ford, please go ahead.

Eric Wold, Merriman Curhan Ford

Good morning. I know you probably can’t talk too much on DISH negotiation, I just want to get a sense what’s put into the assumptions going forward. I know you talked about it’s not what plays, it’s kind of what you believe that could shape up to be and you wouldn’t put those numbers below with respect to what you’re doing with the other major tier customers, but kind of putting it where the other customers are at now or if you are just a little bit above where the customers are?

Michael Weiner, Chief Executive Officer

In terms of what we expect our revenue split to be?

Eric Wold, Merriman Curhan Ford

Yes.

Michael Weiner, Chief Executive Officer

We’re operating off of a month-to-month extension of a contract that was done around seven years ago with DISH Network and at that time we came into the market as the value proposition for all of our distribution partners including DISH Network by offering more favorable splits than what was available from our chief competitor. At that time, DISH Network elected to launch our least edited service called Ecstasy and that’s the service that we expect to bring down to market and be in line with the rest of our services and the equivalent license fee to which we sell our services to most of our large distribution partners.

Eric Wold, Merriman Curhan Ford

And then the guidance, what part of the year or when in the year did you assume that change take place?

Karyn L. Miller, Chief Financial Officer

It took in April…again conservative.

Eric Wold, Merriman Curhan Ford

Okay, I’m looking at the MRG acquisition, not specifically on that but kind of what the dollars are in cash in generating another $0.80 or so this year in free cash flow, what other types of companies are you looking at potentially acquiring, is it more content plays and more companies that kind have some strategics to offer you to get into the wireless site into international, and is there still potential that you would do anything beyond adult or is it pretty much adult or nothing?

Michael Weiner, Chief Executive Officer

This is Michael. Obviously we are looking at adult because we can get larger, ultimately we’ll be better but after looking at the library of MRG and seeing how we could monetize that and package it and it also is bringing us some strategic opportunities, we are looking at other similar types of libraries that we can monetize. So, on both ends, one is we’re looking obviously to get a larger share of the adult business by becoming a larger player that we are right now and also we’re looking at other opportunities in the content outside that we feel we can monetize and we’re feeling very confident about the library that we got from MRG and what we’re currently doing with it.

Eric Wold, Merriman Curhan Ford

I think it’s fair to say that the guidance you gave in fiscal 2007 excludes any potential new acquisitions?

Michael Weiner, Chief Executive Officer

Yes.

Eric Wold, Merriman Curhan Ford

Lastly, excluding C-band and kind of the dynamic happening there, how much more cost can you take out of the economy structure of your company, I know you’ve done a lot of job getting down in the past, re-negotiating the satellite contracts and doing all that, so how much more that is potentially left in the core business going forward or is the cost cutting or cost savings kind of behind you at this point?

Karyn L. Miller, Chief Financial Officer

I would say that we’ve negotiated with all major vendors at this point in time. So, I don’t anticipate much more.

Michael Weiner, Chief Executive Officer

In fact, in this competitive environment, I would expect over the next few years that we’re going to be reinvesting money into our business in terms of marketing our product, buying and possibly producing through MRG more content and putting money into the promotion of our brand in the competitive advantages of the products and services that we offer to the industry.

Eric Wold, Merriman Curhan Ford

Fair enough, thanks guys I appreciate it.

Operator

Our next question comes from Jack Ebstein from Putero, please go ahead.

Jack Ebstein, Putero

Good morning. Can you guys hear me? Good, good. Question on the DirecTV, was any of that in this quarter’s numbers?

Michael Weiner, Chief Executive Officer

No.

Jack Ebstein, Putero

Okay, so that starts now I would assume.

Michael Weiner, Chief Executive Officer

That we launched April 5th.

Jack Ebstein, Putero

Okay, in terms of size, I mean should we assume that should the pre-negotiation to be a similar sort of revenue contribution as DISH.

Michael Weiner, Chief Executive Officer

Probably not. We only have two services on the DirecTV platform where as we have three services on the DISH Network platform and there’s just not that big of a gap in the number of digital subscribers that those two platforms serve to equalize that business.

Jack Ebstein, Putero

Okay, and then Karyn kind of a second question, I think you said something to the effect of cash flow would not be the same sort of after taxes as pretax, is that $18 million or so of guidance including taxes?

Karyn L. Miller, Chief Financial Officer

That’s pretax.

Jack Ebstein, Putero

Pretax, and what tax rate, you had a little bit of a different tax rate this time, acquisition has little bit of cost, what kind of tax rate should we put in going forward?

Karyn L. Miller, Chief Financial Officer

I would use about 37.5%.

Jack Ebstein, Putero

Okay, so 18 before we tax that for less. And in terms of competition, when you guys say competition is coming on, are you talking about someone new that we haven’t already seen or you’re talking about just pricing to get carriage.

Michael Weiner, Chief Executive Officer

Well, it’s actually both. There’s competition from our friends over at Playboy. There’s competition from Hustler who has been gaining distribution on VOD platforms and has aspirations for a linear launch. We’ve seen announcements from the likes of Penthouse that they intend on launching a linear service and competing in the VOD space. There is competition from Private Fantasy who enjoys a little bit of distribution on the EchoStar platform. So, there is now and always has been a myriad of competitors that are seeking distribution on various platforms to the extent to which they’ll be successful and obtaining that distribution is really yet to be determined. And we would tend to think that any distribution that is gained by a new company would probably not come at our expense since our distribution partners are seeking to really maximize the revenue through the bandwidth allocation that they have for the adult category and since our networks and services are among the top performing services, we don’t think we’re at risk in that sense.

Jack Ebstein, Putero

It is kind of, sort of interesting. It sounded like — maybe I’m just taking it the wrong way, but the VOD platform enabled for competition. It seems to me it might be the other way round, but that was one of the comment that was made early on in the call…

Michael Weiner, Chief Executive Officer

The cost of entry in the traditional linear broadcast pay-per-view business has been the associated cost of broadcast play out uplinking and satellite transponder space and on the VOD platforms both costs do not exist and so it’s much easier for smaller companies to put together program packages and seek distribution to cable operators.

Jack Ebstein, Putero

Okay, well I assume you get the same benefits as well?

Michael Weiner, Chief Executive Officer

Yes.

Jack Ebstein, Putero

Okay, great thanks.

Michael Weiner, Chief Executive Officer

You’re welcome.

Operator

Our next question comes from Dennis McAlpine from McAlpine Associates. Please go ahead.

Dennis McAlpine, McAlpine Associates

Thank you and good morning. Would you talk about what you are seeing if anything in terms of buy rates on DTV; I guess you probably got April numbers, maybe some indication on May. Given what you’re talking about as far as MRG on the production, what does that do to the earn out, is that factored in or was that excluded originally? And then I guess I missed the number count on what you’re doing for production cost at MRG calendar 2006 versus calendar 2005.

Ken Boenish, President

Okay, Dennis, this is Ken. As far as the DTV buy rates, we haven’t seen any official reporting yet, and so I really can’t comment on that. Karyn, Dennis had a question about the earn out in production cost.

Karyn L. Miller, Chief Financial Officer

The earn out, obviously you can take a look at the 8-K, but for right now we’re going to continue to assume that they’re going to make their earn out. It is partially cumulative, so it’s a calendar year basis that they will make it in one year. It could carry over to the second year, so that earn out will remain accrued. I won’t comment today as to whether they’re going to make it or not, because I don’t know one way or the other; we’re not that far into the year. I’m not quite sure on the production cost you were asking in the calendar year; obviously we look at fiscal year and we expect the production cost for fiscal year 2007 to be about $2.1 million.

Dennis McAlpine, McAlpine Associates

Then, when you gave the numbers, there was something after the $2.1 million; I think it was $3 million or something, I don’t know what that was?

Karyn L. Miller, Chief Financial Officer

That’s our content licensing cost. Basically, now in the Pay Television business obviously license is their content and we expect that to be about $3.5 million.

Dennis McAlpine, McAlpine Associates

Good, thank you.

Operator

Our next question comes from Adam Weinrich, Brookfield Asset Management. Please go ahead.

Adam Weinrich, Brookfield Asset Management

Thanks. Just a followup on the previous question, with respect to MRG, it sounds like you included the full cost of the earn out, but you took out the revenue numbers, and isn’t that kind of just ultra-conservative a little bit, just as I understand?

Karyn L. Miller, Chief Financial Officer

Again, the earn out on the calendar year basis, we’ll be looking at what they did prior to the acquisition as well, because it’s partially cumulative and they may not earn it all in calendar 2006, they may earn it in calendar 2007, we continue to accrue it.

Adam Weinrich, Brookfield Asset Management

Okay, got it. I’m trying to figure out how you get to the revenue number, is it fair to say that you’re closer to even under $0.02 per subscriber per channel per month on the DTV?

Karyn L. Miller, Chief Financial Officer

No, I think our estimate is about that $0.02 per subscriber per month is pretty accurate.

Adam Weinrich, Brookfield Asset Management

Anything going on in terms of the share buyback?

Karyn L. Miller, Chief Financial Officer

With the share buyback, as you guys know — Michael may add some color on this — but we actually announced buyback in December and we’ve literally been in a closed period either through quarter ends or through what was going on with the DirecTV contract since we announced the share buyback, and again we’re going to go right into a closed period after this announcement. So, the next time it will be open will be in August, so obviously the corporation is under the same blackout period as individuals, and so I think at that time the board will assess what they want to do.

Michael Weiner, Chief Executive Officer

This is Michael. We are still planning to do a share buyback.

Adam Weinrich, Brookfield Asset Management

I’m sorry I didn’t quite understand, why are you closed through August?

Karyn L. Miller, Chief Financial Officer

Because we have to wait three trading days before we can trade after earnings announcement and then we close down three weeks before the quarter ends; that’s our corporate trading policy. So, based on the timing of this and when the first quarter ends for us, we go right into a closed period.

Adam Weinrich, Brookfield Asset Management

This is Adam Weinrich, on the $0.02 per subscriber per channel per month, is that a decent estimate for DISH. I know it’s in plus, but is that a reasonable number or is that too high, too low?

Karyn L. Miller, Chief Financial Officer

A reasonable number as to what it will be once the licensing completed, negotiations are completed.

Adam Weinrich, Brookfield Asset Management

Well, either way to the extent you can tell me, is that a reasonable number now, tell me what you can tell me?

Ken Boenish, President

I don’t understand the question, could you ask that one more time, I’m sorry?

Adam Weinrich, Brookfield Asset Management

We had asked if $0.02 to $0.03 per subscriber per channel per month was a decent way to model the revenue for DirecTV and I’m asking whether it’s also a decent way to model the revenue for DISH as we’ve seen it and what you might expect given the re-negotiations to the extent you can comment on it.

Ken Boenish, President

Yes, that is the runrate on our DBS platforms, so you can use that number.

Adam Weinrich, Brookfield Asset Management

Thanks a lot.

Operator

Our next question comes from Dan Mendoza with Rising Core Capital. Please go ahead.

Dan Mendoza, Rising Core Capital

Hi, most have been asked and answered, but can you just help us understand the sequel business at MRG a little bit, what’s going on that they might not get that business this fiscal year and does that mean it goes away permanently, or is it kind of an annual negotiation?

Michael Weiner, Chief Executive Officer

That’s a piece of business that they’ve had for actually quite sometime on a year-over-year basis. It’s with a major Hollywood studio and what happened is that there have been some distribution anomalies that have happened relative to large studios and their ownership rights on certain libraries of content. So, the library of content that they had slated to produce the sequel for has actually traded hands and now it’s owned by a different studio. So, we are approaching the studio executives at this other company that now owns this library to produce the sequel that we had pitched the original studio, but we’re kind of starting over and not completely confident that we’re going to secure that business for this fiscal year. So, again, we think the prudent thing is to not count on that business, but if it happens we’ll be grateful for it.

Dan Mendoza, Rising Core Capital

But, going forward, would the sequel business continue to be with this new owner or will the other studio will have another content library where similar amounts of revenue could be generated from that sequel business?

Michael Weiner, Chief Executive Officer

The executives at MRG have some really good relationships within the various Hollywood studios. They’ve always been very successful at producing the sequels in a way that is profitable for their company and profitable for the studios, and we’re confident that business will remain viable for the company.

Dan Mendoza, Rising Core Capital

Okay, thanks.

Operator

Our next question comes from Adam Prance with Team Capital. Please go ahead.

Adam Prance, Team Capital

Thank you for taking my call. Karyn, if I could bother you with reconciling $0.32 to $0.37 guidance, and then you said you go to $0.47 to $0.52 without the MRG amortization. It is a simple math I’m just not getting, is that including both the content and the purchased intangibles, what do you do in order to get that number?

Karyn L. Miller, Chief Financial Officer

Assuming all the amortization related to content be intangibles.

Adam Prance, Team Capital

So, that’s $8.5 million?

Karyn L. Miller, Chief Financial Officer

It’s about $7.5 million and we’re normalizing that for library plus the $1 million in intangibles.

Adam Prance, Team Capital

Thank you.

Operator

Our next question comes from Jason with Clayton Capital. Please go ahead.

Jason, Clayton Capital

Hi, I was just curious, how much you’ll be investing in the cellular phone product this year?

Karyn L. Miller, Chief Financial Officer

We’re not sure that we necessarily want to give that information out. We’ve given a lot of information regarding our guidance right now and we don’t want to go into every single penny that we’re spending. But, obviously this is a segment that’s important to the business and we’re going to make some infrastructure and human resource investments during the year.

Jason, Clayton Capital

In the cellphone business in particular?

Karyn L. Miller, Chief Financial Officer

In the wireless business, exactly.

Jason, Clayton Capital

And if you do announce something this summer, mechanically when would we able to see revenues, is it something that you could switch on easily or are there still technological issues to get through?

Michael Weiner, Chief Executive Officer

We’ve got several developments that we’re initiated currently. The timing of those I really can’t get more specific than sometime in the summer. We’re in beta mode with a couple of projects right now. We’re confident that these initiatives present a nice opportunity for the Company and are definitely worth pursuing, and we’ve got a lot of confidence in the wireless space in general.

Jason, Clayton Capital

Maybe if I ask it differently, if the carrier said go this summer, are you guys ready to go or are there impediments to switching something on and starting to collect revenue?

Michael Weiner, Chief Executive Officer

We have not impediments to integrating our content into the wireless carrier deck. We own and operate a carrier grade platform which gives us the ability to plug directly into the carrier deck and facilitate the delivery of content. We’ve also got a number of initiatives that are direct to consumer that I guess what is known as off-deck marketing. A couple of these initiatives are community based and viral in nature and we think that they could be quite compelling.

Jason, Clayton Capital

And I would just say probably most of the shareholders would really urge the board to take a look at the buyback policy and maybe finding a way to make it fit in with whatever your securities lawyers are comfortable with but also give you a chance to actually opportunistically be in the market for the stock and not handcuff you so severely throughout the year. Thanks.

Operator

Our final question is a followup from James Clement. Please go ahead.

James Clement, Sidoti & Company

Hey, Karyn, I just want to make sure that I interpreted one of your answers to the one of the questions properly. In terms of the cash flow guidance for the year, I think you were talking about 37.5% tax rate, is that what you’re talking about in terms of cash taxes on that pre-tax, free cash flow guidance, because that tax number seems awfully high?

Karyn L. Miller, Chief Financial Officer

It would be on the net income.

James Clement, Sidoti & Company

Okay, great, thank you.

Operator

Sir, at this time there are no further questions, please continue with your presentation.

Michael Weiner, Chief Executive Officer

Thank you very much for joining us and we look forward to talking with you next quarter. I appreciate your confidence.

Operator

Ladies and gentlemen, this does conclude the New Frontier Media Fourth Quarter Fiscal 2006 Earnings Release Conference Call. You may now disconnect, and thank you for using AT&T Teleconferencing.

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