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Cinedigm Digital Cinema (NASDAQ:CIDM)

Q3 2013 Earnings Call

February 13, 2013 4:30 pm ET

Executives

Christopher J. McGurk - Chairman and Chief Executive Officer

Adam M. Mizel - Chief Financial Officer, Chief Operating Officer and Director

Analysts

Eric Wold - B. Riley & Co., LLC, Research Division

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

Kris Tuttle - Soundview Technology Group, Inc.

Russell Reed Silvestri - SKIRITAI Capital LLC

Operator

Good afternoon, everyone, and welcome to Cinedigm's Third Quarter 2013 Earnings Conference Call. With us today are the company's Chairman and Chief Executive Officer, Chris McGurk; and Chief Operating Officer and CFO, Adam Mizel.

Before I hand the call over to management, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risk and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, February 13, 2013, and Cinedigm does not intend and undertakes no duty to update further events or circumstances.

In addition, certain of the financial information presented in this call represent non-GAAP financial measures. The company's earnings release, which was issued this afternoon and is available on the company's website presents reconciliations to the appropriate GAAP measure and explanation of why the company believes such non-GAAP financial measures are useful to investors.

And now I'd like to turn the call over to Chris McGurk, Chairman and Chief Executive Officer of Cinedigm. Chris?

Christopher J. McGurk

Thank you, operator, and thanks, everyone, for joining us for Cinedigm's third quarter fiscal 2013 conference call. I'm going to first give a brief overview of our current achievements and then I'll spend the majority of my time today sharing a broad perspective on the industry and why we believe we are so well positioned to succeed. After I finish, Adam will review our financial highlights and our guidance for the remainder of the year, and then we will answer any questions you might have. So let's begin.

After pioneering the digital cinema rollout and divesting noncore businesses, Cinedigm is now #1 in each of its businesses, built off our strong digital cinema deployment foundation. We are the #1 servicer of digital cinema exhibitors, the #1 provider of software to exhibitors and movie studios and the #1 digital aggregator and distributor of independent film and alternative content.

Now I'd like to highlight some of the recent achievements in each of these businesses, and let me start with digital cinema deployment. This past quarter, we saw the final surge of exhibitors making the move to digital prior to the studio-imposed deployment deadline. Consequently, we installed 835 screens in the quarter, bringing our total domestic deployment to 11,697 screens across 269 exhibitors and giving us an unmatched digital theater footprint in North America. We are pleased that our domestic screen signing program is now complete, and we far surpassed our stated goal to deploy more than 10,000 screens.

Additionally, we've developed a program in partnership with the studios in the National Association of Theatre Owners to support the drive-in movie theater community, as it also moves from film to digital. We expect that program will result in 100 to 300 additional digital screens by the summer. We're also commencing our international servicing activities with a planned up to 290 screen installation by Caribbean theaters this quarter and next, as well as initial installations with our partner, ICAA in Australia and New Zealand. We also expect installations to begin in early fiscal '14 in Brazil with our local partner, Beyond All, and are in a number of conversations to further expand into other countries in Latin America and Asia.

Now to review the highlights from our software business. As we announced earlier this year, Dan Sherlock joined us in January as the new President of the software group. Dan is an entertainment software veteran with previous executive experience as President at baseline.com and General Manager of Movies.com, while it was owned by Disney. Through these and other experiences, Dan has deep industry relationships and a very strong track record of success. We are pleased Dan is now on board to lead our growth efforts in this business.

On the exhibitor software front, during our last call, we announced our expanded software relationships with both Carmike Cinemas and Goodrich Theaters. This quarter, we are pleased to add Southern to our roster for our Exhibitor Management System and our TCC Enterprise system. On the distributor front, we added LD Entertainment as a licensee for our TDS product, and in January, we added distributor RCR for that product as well.

Internationally, we are seeing equally positive results as we begin software installations in Ireland and the U.K. And our software group also expanded its global footprint this quarter with Caribbean theaters and a variety of exhibitors in Australia and New Zealand. With these new customers and a very active sales pipeline, we continue to add to our over 70% share of all studios using our distribution product and our footprint of over 16,000 exhibitor screens using our theater software solutions.

Now I'll turn to our content distribution business. As we underscore regularly, Cinedigm is the largest end-to-end distributor of independent digital content across all platforms in the world and has rapidly become a key player in the multibillion dollar independent film and alternative content distribution business.

During the quarter, our entertainment group acquired the distribution rights for 3 films. Subsequent to quarter end, we acquired The English Teacher, starring Julianne Moore and Greg Kinnear; and the Sundance documentary, NARCO CULTURA. Year-to-date, we've acquired 13 films and have released 3 theatrically. And we are very pleased that The Invisible War, our first release as a complete studio, was recently nominated for an Academy Award for Best Documentary, a tremendous endorsement for this powerful film and also our release in marketing strategy. In other theatrical news, we released Citadel and In Our Nature in the third quarter, and both of these titles will be released into the Home Entertainment markets in the fiscal fourth quarter. We expect to be profitable on these titles as we benefit from our focused and disciplined acquisition strategy.

During the current fiscal quarter, we will release a highly acclaimed documentary, Don't Stop Believin', about the band Journey, as well as the horror film, Come Out and Play. And we plan for a heavy release late in our first fiscal quarter with 3 major releases in April and May.

On the digital distribution front, we saw impressive progress in performance. During the quarter, Cinedigm distributed 2,830 hours of film and TV content to more than 22 digital partners. Cinedigm's content available on digital platforms totaled over 2,130 films and 365 seasons of TV, comprising over 5,732 episodes. We acquired 714 hours of new movies and TV series, including the classic anime franchise, Digimon, 22 new festival films, via our Sundance partnership and the highly rated series Coast Guard Alaska and Coast Guard Florida. With this recently acquired content, the company's industry-leading library now totals over 19,000 movies and television episodes.

Subsequent to quarter end, we announced a partnership with Rapid Eye Film and Voltage Pictures. In this 3-year 5-picture output deal, Marco Weber's new genre label, Rapid Eye Film, will develop, fully finance and produce these films with Cinedigm providing a U.S. theatrical release and subsequent rollout across on-demand, digital, TV and DVD. All of these deals should keep us on track to produce a strong and positive remainder of this year, as well as provide a stable foundation for growth in fiscal 2014 and beyond.

And I want to point out that as the leading digital distributor for independent content, we are in a strong position to stay ahead of the curve on new distribution opportunities. Our relationships and track record with the established key distribution platforms creates a unique barrier to entry for us. From the 269 separate digital theatrical exhibitors to in-home digital retailers, including iTunes, Netflix, Amazon, Microsoft and Hulu to mobile phone applications to cable and satellite operators, as well as the new emerging platforms we're not able to discuss at this point due to NDAs. All of these close partners reinforce our leadership status and foster strong upside potential as we rapidly grow this business.

Now as I mentioned at the onset of the call, I'd like to spend some time looking at Cinedigm's broader opportunity. In essence, a game-changing digital revolution is sweeping the entire entertainment business, not just in cinemas, but in homes and on mobile devices. And Cinedigm is uniquely well positioned to capitalize on it. We're in a time that in important ways is reminiscent of the 2 previous extraordinary transformations in the independent content business.

The first was during the late '60s and early '70s, when movies like Easy Rider and Five Easy Pieces were being made. Thanks to more portable equipment that allowed films to be shot inexpensively on-location, technology was a key enabler of that shift. And a similar production shift is happening now, once again due to technology. Red cameras, computer-based editing programs and other digital technology improvements enable content producers to produce better content with bigger stars and in 3D and hi-def for much less money than ever before. And all this content leads innovative digital distribution partners to monetize it in theaters and on all home and mobile platforms.

The second golden era of independent content occurred in the late '80s and '90s. This, too, was enabled by technology. But in this case, growth wasn't driven by the technology of production, but rather the technology of distribution. On the television front, instead of just 3 broadcast networks, there were suddenly hundreds of cable channels offering both free and paid services. Additionally, home-viewing technology entered the market in a big way, first with the VHS and then DVD and Blu-ray. And all of this drove huge demand for high-quality, independent content and dramatically increased the revenues available to support this content.

This same type of distribution transformation is happening now, and this time, on an even bigger scale. We're all aware that theaters have gone digital, creating opportunities for more targeted movie releases and programmatic options. But now, more and more digital retailers and platforms are also emerging in the home and mobile arenas, creating an arms race for more new content and libraries to fill their pipelines. They want it all, independent film, TV shows, web-based shows and more.

And just as there are more ways to distribute content, there are more and more rapidly evolving devices to view it on. Hard as it is to believe, the iPhone is just 5 years old and the first iPad came out only 3 years ago. As a result, the market is dramatically expanding and independent content is more valuable as consumers increase their entertainment spending to watch more content when they want, where they want it and how they want it.

So what does all that mean to the industry in general and Cinedigm's business in particular? First, more quality, independent movie and television content with star talent is available at a lower cost than ever before. Second, multiple low-cost digital distribution platforms are in an arms race for a high volume of quality content. And third, aggregators and programmers are in high demand to thoughtfully guide and monetize this pool of content in all -- on all existing and emerging platforms.

And Cinedigm's plan to capitalize on this digital revolution is very focused and clear. We will continue the high-volume, high variety release strategy for independent content that we've already begun. We will continue to grow our 19,000-title library by acquiring distribution rights to high-quality movie and television product demanded by our rapidly expanding digital and VOD partners. We will continue to extend Cinedigm's leadership position and relationships with core theatrical and digital platforms. We will continue to identify and partner with innovative first movers in the digital content revolution, including exhibitors, producers, financiers and new digital platforms. And finally, we will leverage our successful distribution strategies by growing with our customers internationally.

Now I'll turn the call over to Adam Mizel, our Chief Operating Officer and CFO, to discuss our financial results for the quarter.

Adam M. Mizel

Thank you, Chris. I will begin with a review of our financial results for the third fiscal quarter, which ended on December 31, 2012, and then will discuss our outlook for the balance of fiscal 2013. Please note that all comparisons referenced in my prepared remarks reflect quarterly year-over-year comparisons unless I clarify otherwise.

Revenues for the third quarter of fiscal 2013 were $23.2 million, a 17% increase from $19.8 million in the third quarter a year ago. The increase in revenues was primarily the result of solid performance in Cinedigm's entertainment group, including results from the New Video acquisition, which closed in April 2012, as well as continued steady results from the company's recurring revenue digital cinema servicing and software platforms. Digital deployment revenues will continue to remain steady, as we are no longer increasing the deployment footprint, and the resulting consolidation of VPF revenues will track to historical levels going forward.

Non-deployment revenues were up 53% to $9.6 million, including the New Video acquisition. Our content unit revenues alone increased 3% year-on-year, pro forma for New Video results in both periods, as rapid digital revenue growth of over 54% offset a planned reduction in revenues attributed to customers pursuing solely DVD distributions.

In the third quarter of fiscal 2013, adjusted EBITDA from continuing operations totaled $14.5 million, an increase from $14.3 million in the year-ago period, as the number of consolidated Cinedigm nonrecourse finance screens did not increase significantly year-over-year. However, excluding Cinedigm's VPF business units, adjusted non-deployment EBITDA was $2.2 million, a strong increase of 58% from the year-ago period and an increase of 81% from the previous quarter. This quarter saw in excess of $1 million in software revenues and EBITDA pushed into Q4, as our customers did not complete installations in time for us to achieve revenue recognition.

In addition, non-deployment EBITDA in the quarter included $0.4 million of J Curve film distribution costs incurred as CEG ramped up its film-releasing business, building toward a goal of 20-plus releases per year. These third quarter distribution costs were incurred in advance of any home entertainment revenues for those film releases, which will be realized in subsequent quarters. As Chris mentioned earlier, we expect these releases to be ultimately profitable.

Consolidated net loss decreased to $1.8 million or $0.03 per share for the quarter compared to a consolidated net loss of $10.6 million or $0.28 per share in the comparable prior year period, which included a number of onetime charges related to our asset sale in that quarter and a decrease from a net loss of $2.6 million or $0.06 per share in the preceding quarter.

As Chris mentioned earlier, we have nearly 12,000 screens installed and all of these screens generate recurring and stable service fee revenues for our digital cinema services unit, as well as upfront license fees and recurring maintenance fees for our software division and will support solid results the remainder of this fiscal year and beyond.

We continue to aggressively strengthen our balance sheet as we take down nearly $38 million of nonrecourse debt in the first 9 months of fiscal 2013. Total nonrecourse debt is now down to $137.3 million from $171 million at the beginning of the fiscal year, and going forward, we expect to continue this significant deleveraging of our balance sheet from our stable deployment cash flows.

As we've discussed on previous calls, we'll also continue to evaluate opportunities to improve our balance sheet and reduce our cost of capital. To that end, Moody's will be issuing shortly at preliminary new rating report, reaffirming our existing debt rating of Ba1 with the potential of an upgrade to an investment grade rating of Baa3 as part of an amended expansion in size and maturity extension transaction we are exploring for our nonrecourse loan facility. Any transaction will be dependent upon market conditions at that time. As we actively consider various financing alternatives, we will, of course, announce a transaction if and when we complete the refinancing of both our nonrecourse debt and our recourse mezzanine note.

Year-to-date, Cinedigm has produced total consolidated GAAP revenues of $66.7 million, consolidated EBITDA of $42.1 million, as well as non-deployment EBITDA of $4.3 million. We are reaffirming our annual guidance. In total, we continue to expect consolidated GAAP revenues, including our deployment unit of $91 million to $97 million and consolidated adjusted EBITDA of $57 million to $59 million for the fiscal year 2013. We expect to produce reported adjusted EBITDA from non-deployment operations for fiscal 2013 of $6.7 million to $7.7 million.

As a reminder, quarterly results are not a predictable metric alone for Cinedigm as we build our software and content release-driven businesses. Each quarter can be significantly impacted by factors such as software deployment timing and revenue recognition outside our control, by the timing of our content acquisitions and the corresponding release dates and by changing movie release dates by the major studios and the resulting impacts on VPF revenues.

Now I'll turn the call back over to Chris.

Christopher J. McGurk

Thank you, Adam. In summary, we're excited about both the near- and long-term prospects for this business. Perhaps most significant, it was less than 2 years ago that we laid out a new strategy to transform Cinedigm to take full advantage of the digital distribution revolution that's changing the entire entertainment business. Today, we're doing exactly what we said we were going to do and are fully executing against that strategic plan in all areas. We have a clear roadmap for where we're headed and the entire management team is focused on producing results. We thank you for your time and attention today and look forward to sharing our continued progress on next quarter's call. And with that, I'll open this call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Eric Wold of B. Riley.

Eric Wold - B. Riley & Co., LLC, Research Division

A couple of questions. I guess one, you mentioned that some of the digital deployments were delayed and this revenue recognition delayed into this quarter due to timing. Can you give us a sense of how many deployments have been completed so far this quarter and if you're done through this quarter, is there anything done now [ph]?

Adam M. Mizel

Eric, it's Adam. I didn't say that about deployment. I said on software revenue recognition for several of our inclinations [ph] and licenses. We completed all of our -- we had a very small number of deployments in January on the basic Phase 2 deployment. We will be doing some drive-ins, some this quarter and then into the summertime as part of the drive-in program. Obviously we're also going to have, as we described, the Caribbean installations and other international installations. So the big issue, as we've seen previously this year is we can't control the installation timing and the acceptance testing that our customers do, and couple of things we thought would happen will happen, and -- well, 2 of them already happened this quarter and a couple more, I expect, before the end of the quarter.

Eric Wold - B. Riley & Co., LLC, Research Division

Okay. Then sorry if I misunderstand, so help me understand then if you've -- I guess, last quarter's call, you had 12,252 screens under digital deployment agreements and you've done 11,697. What is the delta there and when do those -- are those kind of lost or they get...

Adam M. Mizel

Got you. Well, any in the 12,252 was the Caribbean screens that will be installed, those 290, although that's part of our international program. The about 300 screens that were signed up for conversion were not able to get their own financing, exhibitor buyers. And so they will not get installed, they're not converting effectively. So that's how you reconcile those numbers.

Eric Wold - B. Riley & Co., LLC, Research Division

Okay. And then what is the opportunity with the drive-in theater market? I know there's not a ton of screens other, but are the economics similar to the previous VPF deals?

Adam M. Mizel

There, we think we'll end up installing somewhere between 100 and 300 screens. They are a shorter duration of VPFs than the traditional or the original Phase 2 screens, but from our perspective is a servicer and a provider of software they're the same economics to us, they will not likely -- they won't be 9 or 10 years, they'll be, I forget, it's 7 years or 6 years of something to that effect.

Eric Wold - B. Riley & Co., LLC, Research Division

Okay. And then lastly, kind of moving to the, I guess more importantly, the indie film side, I know you've had some good success with a number of films that have been released so far. Maybe kind of grade -- I know the films that have been out there since the -- last summer, kind of maybe grade the -- how you've monetized those films sort of all the channels versus kind of your original expectations and if you believe you're still on track to reach overall profitability in that division maybe right around the middle of this year?

Christopher J. McGurk

No, I think we've been very pleased with the films that we've released so far and the acquisitions that we've made. The acquisitions that we've done, and I think we mentioned that I think we've got 13 films that we've either released or we have in inventory right now. We've been acquiring in the range that we had targeted when we entered the business last year. We've released just a few films to date on the -- maybe on the smaller end of the spectrum of acquisitions, the first being The Invisible War. As I mentioned, we're very pleased with that one as the first one out of the chute that we got an Academy Award nomination for Best Documentary. But that, we never thought it was going to be a world beater theatrically. We took it out on a very, very limited basis, did less than $100,000 at the box office, but we screened the hell out of it I think in 400 different locations because of subject matter. It's about sexual assault in the military and just got a huge amount of publicity around it. And then we subsequently took the movie to iTunes and to DVD, where we bought the movie basically. And we don't get too specific in terms of disclosure because we're subject to confidentiality arrangements with our participants, but for basically just the marketing commitment. And for so an upfront commitment of probably only around $200,000 or $300,000, we've taking in into iTunes and the digital platforms and then DVD more than twice that today and we think that we've got an opportunity to generate significantly more revenues on top of that. So we're already profitable. We'll become much more profitable as we go forward. And if it wins the Academy Award, we're not counting on that, but we've been nominated. It'll be significantly more profitable. The other 2 movies that we released, Citadel and In Our Nature are just about to go into the home entertainment market. They're both going to be in the black. And then going forward, we're going to step up with some films that are probably more commercially viable than our first 3 or 4 releases that we have high hopes for that we can generate revenues in the millions, if not multiple millions of dollars on. That's the Journey documentary that I mentioned, Don't Stop Believing, that comes out on March 8. A movie that we acquired at the Toronto Film Festival called ARTHUR NEWMAN, starring Colin Firth and Emily Blunt, that I mentioned in our last call, that should be coming out in the spring. A movie called VIOLET & DAISY that was directed and written by Geoffrey Fletcher, who wrote PRECIOUS and stars James Gandolfini. And a movie we just picked up and announced yesterday called The English Teacher with Greg Kinnear and Julianne Moore. Those are movies that we think are going to have a much higher revenue profile than the first 3 movies that we released. But net-net, we feel we're completely on track in the film business and the market realities are matching up very, very closely to the original plan that we set for that business a year ago.

Eric Wold - B. Riley & Co., LLC, Research Division

Perfect. And then just a final question, Adam. I know you mentioned Moody's and that taking a look at some of the possible restructuring. I know there's a lot of options probably out there, but what would you -- kind of how would you characterize an optimal scenario in terms of how the debt would look afterwards? And does that involve any of that coming off the balance sheet or to still kind of be on the balance sheet and how would that change possible rates or interest?

Adam M. Mizel

Sure. We're working and having as much of the debt that we have nonrecourse as possible. We can't, given the nature of GAAP accounting, get it off our balance sheet, but we certainly can make it nonrecourse. We certainly expect to be able to meaningfully lower our average -- weighted average cost of capital in our debt facilities and we're working hard on that. And I think the first step is the process that we go through with Moody's is we rate and expand the size of the senior facility to go with the junior piece and refinancing all of it.

Operator

Our next question comes from Joel Achramowicz of Merriman Capital.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

I was interested, Adam, can you perhaps quantify what everybody is talking about, maybe some of the pushouts into the fourth quarter? Can you quantify that, the amount of revenue that might have been booked if they hadn't been pushed out?

Adam M. Mizel

Well, as I said in my comments, over $1 million of software revenues that we had expected to recognize in the third quarter, pushed into the -- or I think it'll be the fourth quarter. I think a couple of those customers have already accepted it and gone through user acceptance testing, so we will recognize revenues. A couple more that we hope and expect to be installed by the end of the quarter, but we can't control the pace at which an exhibitor or studio does their testing, their installation and their user acceptance. So that's what we're – we're delivered everything. It's really out of our hands in many instances.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

I understand. What -- as far as the guidance goes, now the $91 million to $97 million, do you feel comfortable at this point with the midpoint of that range? Can you -- there's obviously been a little bit of slippage via the consensus here. But at the same time, too, it's still been a solid quarter sequentially, but -- and year-over-year. But do you have a feeling for that, that the midpoint is definitely doable of that range?

Adam M. Mizel

I think that, if I break, there's 3 pieces, there's -- we've given revenue, consolidated revenue, consolidated EBITDA and non-deployment EBITDA. And I think both on the consolidated revenue and the consolidated EBITDA, the low to midpoint of the range is certainly doable. We've discussed last call there's a couple million dollars of virtual print fee revenues and EBITDA that, given the events in the summer, between the Batman release and the Aurora shooting and the movies that were moved around, and the studios being very careful what they did in July and August, that, you don't make up. As onetime things in our DPS business, that is not impactful and driver of the long-term value. So in both of those areas, you can't make up what you can't make up. The calendar is the calendar. And in our non-deployment business we are making progress with that timing and software. So I certainly think that the middle of our range on our non-deployment EBITDA, if we didn't think that, that was the case, we would have said something differently.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

Great. Were there any signings at all, additional signings for digital screens? Or is that pretty much done?

Christopher J. McGurk

Well, as we -- when we announce -- when we sign up a large number of drive-in screens, we'll do some press release on the total number of screens that signed up for drive-ins. We're not going to announce one screen here and there, obviously. We already do a lot of press releases, we don't want to drive everyone that crazy. And as we do more things on the international side, we'll clearly announce things that we do there. But you won't see the kind of consistent releasing of this exhibitor or that exhibitor because that part of our business is now sort of at a close. And we will service those screens, very predictable, very steady cash flows going forward.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

And how was -- the new properties that you've put together, that you've increased 3 new property -- important content properties. What kind -- how have the releases gone with those particular properties? Have you released any of them into the distribution?

Adam M. Mizel

I'm not sure which ones you're referring to.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

Just the new properties that you just talked about adding to the portfolio this quarter.

Christopher J. McGurk

Oh no, we haven't released them yet. The ones we added were THE ENGLISH TEACHER, which -- that's the Julianne Moore, Greg Kinnear movie which we're trying to settle on the release date now. It'll either be this spring or it'll be in the fall. A movie that we acquired at Sundance is the acclaimed documentary called Narco Cultura, and we're working on setting a release date for that soon. And by the way, we've really kind of established ourself as a go-to company in the documentary business. New Video already had a significant number of docs in their library when we acquired them. And I think now, we have the rights to over 900 docs in total, and a vast experience in working with documentary filmmakers and maximizing the value of those documentaries. And so we're -- and we just got nominated for best documentary with The Invisible War. And when you add all those things up, we've been noticed in the community by documentary filmmakers and we've become sort of a go-to stop. That was one of the reasons why we bought Narco Cultura, how we acquired the Journey doc, Don't Stop Believin'. We've bought another documentary called Call Me Kuchu, which is going to be released later this year. And that's a whole area of business where we sort of separated ourself from the rest of the indie herd out there. But I think as I mentioned, 3 important movies to watch in our release slate going forward, because they're -- we think they have a higher revenue profile than the -- our first 3 releases are Don't Stop Believin', the Journey doc which comes out in March; Arthur Newman, which is a Colin Firth, Emily Blunt movie, which is going to come out later in the spring; and then this picture, The English Teacher, with Julianne Moore.

Joel W. Achramowicz - Merriman Capital, Inc., Research Division

So Chris, my final question. Just each quarter, we kind of expect to hopefully get more feel for the presence and the image of the content group that you're developing with New Media, do you continue to see progress in having access now to new and more extensive properties than you had before? I mean and your image is much more ostensible in the market in the entertainment market there?

Christopher J. McGurk

Absolutely. And again, after we bought New Video, and we went in the market, we were in the process of sort of assembling our team as we went along. We hired a head of marketing, a head of acquisitions and we recently hired, a couple of months ago, a head of theatrical distribution. Now with that team in place, the successful release of The Invisible War that really got us noticed in the marketplace, we're getting access to a higher caliber of content and a higher caliber of movie and I think that's reflected in the recent acquisitions that we've made, Arthur Newman that I mentioned, The English Teacher, Don't Stop Believin', having access to high-caliber projects is not our issue at all. Our issue is just being smart about picking them and keeping to the discipline of acquiring them at the right price and then settling on the most flexible and proper release plan for each piece of content. And the other way that we've sort of tried to separate ourself from the herd of independent film companies, I think I mentioned this on the -- on our last call, is we don't have one model for releasing a film. What we plan on doing is putting forth the right releasing model that matches up most properly with the dynamics of that movie. So for a movie like this Journey documentary, we think yes, it deserves a theatrical release but because of its kind of rabid fan base for the band Journey and everything, we think that doing a day-and-date VOD release on the property is the right way to go. And we think that gives us the best chance to maximize revenues. For a movie like Arthur Newman which is an indie -- a movie star indie movie, with Colin Firth and Emily Blunt, we think that's a movie that sort of deserves a traditional theatrical release, and we think that theatrical release will really enhance the value -- its value in the ancillary markets. And we think this kind of flexible approach, where we don't try to acquire a movie and fit it in all of our cases, into our -- into one releasing model really gives us a competitive advantage in the marketplace as we're out there talking to filmmakers and agents and producers, and I think it's stood us in good stead so far.

Operator

Our next question comes from Kris Tuttle with Soundview.

Kris Tuttle - Soundview Technology Group, Inc.

I wanted to ask you if you might elaborate a little bit on the software business. Obviously you brought in a new senior executive, Dan Sherlock. And so I'm curious to know what you have planned there in Q4 or the beginning of the next fiscal year? If there are things in the pipeline new release-wise that you could talk a little bit about. Just kind of give us a sense of where you see that division of the company kind of unfolding in the next, let's call it 3 to 6 months.

Adam M. Mizel

Sure. This is Adam. I think we're both excited about the prospects that sit ahead of us. Dan has hit the ground running and doing a terrific job in focusing in on the opportunities that we have. I think that you'll continue to see a lot coming out of our pipeline. Remember, Larry McCourt started running the sales of that unit last April, May. And exhibitors and studios don't move super quickly, and you've seen more and more momentum over the last 6 months as we've signed and announced new transactions. We certainly have a lot more coming. We have a couple of interesting, sort of value-added reseller and strategic partnerships that I think will drive some sales of our existing products. We're also now talking with a number of studios on data and analytical products as they look at how they better track both features and trailers in light of all the digital systems and digital information that's out there. So we've been discussing how we develop some things for them that we can then monetize in the marketplace. So I think all that's happening and you'll see more and more announcements as we make progress on that front.

Kris Tuttle - Soundview Technology Group, Inc.

Okay. Yes. That whole data area is -- obviously there's monstrous opportunity there, if we could figure out how to do all this stuff better.

Adam M. Mizel

Yes. Totally agree. I mean, I think the caution that we have is, and it's part of the nice part of our business model is, a, our existing products are selling more rapidly because they're there and they're an easier-to-understand demand. The data side and the analytical side, we need the studios and the exhibitors to partner with us in what they want to do. And that – those conversations and some of that development's happening. But they don't move as quickly as you would like or I would like, I assure you.

Operator

Our next question is from Ron Chez [ph].

Unknown Analyst

I have a couple of balance sheet questions and a couple of operating questions, if you would. What is the -- first of all, on current assets, liabilities, the significant increase in AR and AP, would you comment on the nature of that, and DSOs?

Adam M. Mizel

Sure. I mean it's normal course in our content business that in the -- our fiscal third quarter, so the December quarter and a little bit into the fiscal first quarter, we build up AR and AP, because you're distributing and selling a lot of movies in both physical and ancillary markets around the holidays. So effectively, we build working capital and we add cash for that in the, kind of, October-through-February timetable, because you have a relatively decent period of time between the revenues and when then you pay your participations to the content right holders in the spring and summer. That's most of what you're seeing there.

Unknown Analyst

With respect to the payables increase, that's principally money you have to pay to the owners of the content?

Adam M. Mizel

Right. So we're get -- receivables go up because we're selling DVDs in Wal-Mart or Target or whatever it is, or we're selling rentals on iTunes, or we have contracts signed with Netflix, in which we book rev -- we don't book the revenues, we book a receivable. We book revenues when the product goes live on the service, whatever it may be. There's a lot of that activity in the third fiscal quarter and the fourth – early fourth fiscal quarter. That's the receivable. The payable is, we have to then give the content owner their share of that and we keep our fee out of that. So it's the timing of that going on.

Unknown Analyst

And so you're not concerned about the DSOs? That's not a problem?

Adam M. Mizel

No. It's totally normal course, totally normal course.

Unknown Analyst

Okay. And what -- to the debt, and in this low-interest-rate environment, your qualitative comment about getting the right -- you would care principally about the recourse debt and its refinancing, correct?

Adam M. Mizel

Yes.

Unknown Analyst

And so in this low-interest-rate environment, what are the impediments? Are you making progress towards refinancing the debt?

Adam M. Mizel

Yes. We would only -- the only refinancing that we will be doing is one that involves our entire debt side of our balance sheet. And so I would rather generally not say anything until we have closed the transaction, but because we are working on both the senior and on the mezzanine piece, Moody's has issued, it's probably on their website now, a release about the rating -- potential rating upgrade on our existing senior piece as we amend it and extend it and expand it. So increasing the senior facility, which obviously has a much lower cost. The use of those proceeds would be part of refinancing the recourse debt, which is higher cost.

Unknown Analyst

And the range, what could you look for in terms of the range of basis points that you would save in getting this refinancing done, when and if it gets done?

Adam M. Mizel

Ron, I'm going to be quiet, because it's market condition. There's 100 other things. I think what you can read into the fact that we're even talking about it is it's probably not that far away if Moody's is issuing releases. And so we're informing people that those things are out there because Moody's doesn't want to be the one issuing releases about a public company versus the public company talking about it. But I think you can assume that we're actively in it. It can't be that far away in what we hope to see accomplished given there's information from a ratings agency. And in this environment, we'd expect to secure significant savings in our weighted average cost of capital against where we sit today.

Unknown Analyst

Okay. Okay. As to an operating question, I think that you said that you expect, for the 12 months, $6.7 million to $6.9 million non-deployment EBITDA.

Adam M. Mizel

$6.7 million to $7.7 million is the guidance we have out there.

Unknown Analyst

$6.7 million to $7.7 million?

Adam M. Mizel

Yes.

Unknown Analyst

Okay. So now you've talked about 3, 5 -- 3 to 5 years in terms of, what was it, $40 million to $50 million of EBITDA?

Adam M. Mizel

Yes.

Unknown Analyst

What is the non-deployment revenue that's going to produce the $6.7 million to $7.7 million for this year, for this fiscal year?

Christopher J. McGurk

Yes. Probably in the mid to upper $30 million.

Unknown Analyst

So what is it going to take? Is that relationship going to stay the same? I would assume that it's not. But what is it going to take in revenue to achieve the goal of $40 million to $50 million of EBITDA? And do you think you're still -- is that still what you envision today?

Adam M. Mizel

Sure. Let me go at it. I'll answer a slightly different way, but I think gets the same places. We think that our content business should be a mid-20s EBITDA margin business, and so we said, we think that's a -- in giving our kind of long-run goal of $40 million to $50 million of EBITDA, we've generally said that we think the content business can be at least a $20 million EBITDA business, so call that $80 million of revenues at a 25% margin, and we think that our software business, and those are higher margin businesses, they tend to be in the 40%, 50% EBITDA margin businesses. And so we think software can also get to a similar kind of $15 million, $20 million revenue scale. And so that tells you you're going to have a, call it, $40 million revenue business. And our Digital Cinema Servicing business, which we've said is going to be a $6 million to $10 million EBITDA business, it's already, to be honest above this $6 million. And that's a very high margin business, because it's servicing fees on a lot of screens, so that's a 70% or 80% margin type business. So when you add all that up, that's going to get you to revenues in $120 million to $140 million range and $40 million to $50 million of EBITDA.

Unknown Analyst

And do you believe, just to complete that, do you believe you're still, as you look out that far, do you believe you're on track to be able to do that? Are the ingredients there to be able to do that?

Adam M. Mizel

Sure. I mean, remember, we've released 3 movies this year and 3 small movies as we kind of build up the both -- the movie release slate and our experience set. So those movies have contributed very little to our financial performance, with a goal that we're going to be releasing 20 to 25 movies a year, right? And we're not talking massive movies, but as we've talked about in the past, we think talking about given the very focused and risk-attuned model of releasing, those are movies, we think, that each are -- we look at movies today that we think are low single-digit millions of revenues in which we're going to make a 25% -- let's call it a 25% margin on. If we do 20 or 25 of those, then we've effectively gotten under -- well, well under $1 million of revenues from movie releases this year. That's a big driver of the scale in our content business. Similarly, as we said in our script, our digital aggregation revenues have been growing over 50% a year. That won't last forever because that is part of the shift from physical goods to digital goods. But that's a significant growth in our business, and those 2 factors are driving the growth that we see today and that we see coming in the future. That's the platform and the foundation that we're building out as we speak. We talked about this year being a year of investment and growth. That's the investment piece of it. The growth will start coming over the ensuing 12, 18 months as that slate rolls through. So given that, sure, I don't think there's anything we've learned and seen in our business that's different, that changes our expectations. We're along the path we're on. I mean I wish it were quicker, but we're building a business and we're building it, hopefully, with the foundations for a long-term solid performance.

Unknown Analyst

Do you still regard the competition in the software business as being Inertia? I mean is there somebody who's come to challenge you with regard to software deployments?

Adam M. Mizel

As we settle on domestically, the competition is Inertia/in-house product. And internationally, we certainly have a couple of competitors. And as we move more internationally, we bump heads with those people. But we make good progress and we're getting a number of international sales. So I think we still feel good about where we sit there. And as we've also said, and we didn't really talk about in these comments, I think in both our content business and our software business, we'll continue to grow as we are organically. We'll also continue to look very thoughtfully at accretive strategic acquisitions because I think those will exist and we are -- we've done one good acquisition to date in the New Video acquisition. We've digested and integrated that well. We will look at things that make sense along the way. There's nothing that we're doing at the moment, but we will always be looking.

Unknown Analyst

And one more question about software. And that is have you seen what you consider to be an appropriate increase in the pipeline?

Adam M. Mizel

Yes. I think our pipeline is in pretty good shape.

Unknown Analyst

Should it not be by now significantly improved over where it was 6 or 9 months ago? Or is that...

Adam M. Mizel

Well, it definitely is significantly improved over where it was 6, 9 months ago, our head of sales started 8 or 9 months ago. So yes, he's done a very good job and we've got a very significant pipeline.

Operator

Our next call comes from Russ Silvestri of SKIRITAI.

Russell Reed Silvestri - SKIRITAI Capital LLC

Real quick question. Mr. Chez asked all the ones I wanted to ask, but what's the headcount today and what was it a year ago?

Adam M. Mizel

Oh my gosh. Let me think. I don't have the exact headcount number in front of me. I would say it's approximately 150, 155 people today between all of our businesses. A year ago is sort of a hard comparison because the content business we bought at New Video had about 80 people. So let's say a year ago, it was then 70-ish right, somewhere there. We have -- where we have grown headcount has been predominantly growing, both software and content, but a lot of that has been tied to the new customers and new revenues we've added. So I mean I think when you'll see our Q, you'll see that corporate expenses and overhead and SG&A have been well -- if you back out, which we do in the Q, the impact of new expenses from acquiring a new business, they're generally flat to down from a year ago in all other expenses.

Russell Reed Silvestri - SKIRITAI Capital LLC

Okay. And then my other question was, I mean as you look at next year with the fewer deployments, should we see any margin -- should they improve sequentially? Is that how we should think about it? Or is there going to be much seasonality to the margins?

Adam M. Mizel

I think the biggest impact on margins, on a quarterly basis will be when we release movies and the P&A expenses associated with those releases vis-a-vis the revenues kicking in. So example being, as we said, we have several significant releases planned in the fiscal first quarter. We will then have a lot of expenses for those releases in that quarter and we'll highlight that as we do in the J Curve. But we expect a lot of revenues to come from that, to come in the ensuing couple of quarters. So you're going to have margins that move around based upon that kind of timing that's driven by releases. And that's why, as we've said a lot and you hear in my scripts, that quarter-to-quarter is not the easiest metric for the way our business operates and the growth curve that we're in.

Christopher J. McGurk

Right and you're even going to see that. Even though once we get the critical mass in our indie releases and we're at 20 to 25 releases a year, you're not going to see our release pattern being linear where we're taking out 2 titles per month, because we're going to avoid the crowded major studio releasing periods in the summer and Christmas. So you're going to see moving around in the release slate to find the right dates, which matches up with this more flexible approach to distribution that I talked about before and then to find the best competitive environment to release the movie. So our activities in that space are going to probably compound the volatility that Adam mentioned, even when we're at steady state.

Adam M. Mizel

Yes. We'll try to always call out, though, the sort of timing-related issues so that one -- you guys can understand it and adjust for it in your own thinking.

Russell Reed Silvestri - SKIRITAI Capital LLC

So like this last quarter was $400,000?

Christopher J. McGurk

Yes. Correct.

Russell Reed Silvestri - SKIRITAI Capital LLC

All right. Okay. And the last question I have, just in terms of the software sales, do you sell a perpetual license with maintenance? Or do you guys do some SaaS type of thing where it's monthly recurring revenue?

Adam M. Mizel

Both. Both. And I think our customers are beginning transition more and more to wanting a SaaS model. I mean, the studio and exhibition world tends to lag trends in other industries around software. But we're getting a lot of -- we're doing more and more SaaS sales because our customer -- we think it makes sense for us, and our customers are now more receptive to it, so there's both of those going on.

Russell Reed Silvestri - SKIRITAI Capital LLC

So I mean if you're going to SaaS model, your revenues in software should actually shrink a little bit on an annual basis, or just on a quarter-to-quarter basis, as you sign up more folks, wouldn't they or…

Adam M. Mizel

Well, I think, yes, it depends on the mix of licensing and SaaS customers. We have a lot of new customers and new growth going on. So I wouldn't jump to that conclusion by any stretch. And I think I...

Russell Reed Silvestri - SKIRITAI Capital LLC

What's the mix today of license versus SaaS?

Adam M. Mizel

It is, oh gosh, almost all -- 80%, 90% license business to date.

Russell Reed Silvestri - SKIRITAI Capital LLC

Okay. Okay. Are you going to make an active effort to convert these guys to SaaS? Or...

Adam M. Mizel

It is -- no, I think where we're focused on SaaS products, for instance, with our new – the TCC enterprise product that sits on top of the basic exhibitor TCC software, that we're selling as a SaaS model. So that new sale is generally predominantly a SaaS model. Right now, when we think about some of the new data stuff that Chris was asking about earlier, that will be in a SaaS or subscription model. And most of -- with the studios, the smaller studios have always sort of used our TDS software on an indie-direct basis, but most have wanted to continue to license that. We're having 1 or 2 interesting conversations with some larger players as they think about upgrading to a new software package, thinking that they might prefer to go at it from a SaaS basis than a license and maintenance basis, and so we may see that shift a little bit going forward, but that wouldn't impact the existing customer base.

Operator

[Operator Instructions] Our next question comes from Caskel Golga [ph] of TG Capital [ph].

Unknown Analyst

I had a question regarding the possible debt refinancing. First, can you talk about what there is -- what the penalty is for prepaying the mezzanine early? And second of all, in terms of maturity, what -- it would be one debt facility, you said that would basically refinance all of your debt, what will be the maturity timeline and would it be an amortizing facility, like your current one or would it be basically one with a balloon at the end?

Adam M. Mizel

I'm not going to really answer the latter one. I don't want to go into huge detail about things that are in process and not definitive. It's just, I don't think it's appropriate and -- but I would say that obviously, we would expect, compared to where we sit today, to be increasing our company's flexibility and extending its maturities. And your first question on the existing mezzanine debt, the prepayment penalty is 3.75%.

Operator

I'm showing no further questions in the queue at this time. I'll hand the call back to management for closing remarks.

Christopher J. McGurk

Yes. This is Chris again. And on behalf of Adam and myself, I just want to thank you all for your time and attention, and we look forward to talking to you on our next quarterly call. Thank you all very, very much.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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