New Frontier Media Inc. F3Q09 (Qtr End 12/31/08) Earnings Call Transcript

New Frontier Media Inc. (NOOF)

F3Q09 Earning Call

February 09, 2009; 11:00 am ET

Executives

Ken Boenish - President

Michael Weiner - Chief Executive Officer, Secretary and Chairman of the Board

Grant Williams - Chief Finance Officer

Analysts

Jamie Clement - Sidoti & Company

John Rolfe - Argand Capital Advisors

Aram Fuchs - Fertile Mind Capital

Presentation

Operator

Welcome to the Third-Quarter Fiscal 2009 Earnings Release Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, February 9, 2009. I would now like to turn the conference over to Grant Williams, Chief Financial Officer. Please go ahead, sir.

Grant Williams

Thank you. Good morning, and welcome to the New Frontier Media fiscal 2009 third-quarter results conference call. With me this morning are Michael Weiner, Chief Executive Officer of New Frontier Media; Ken Boenish, President of New Frontier Media; Scott Piper, Chief Technology Officer of New Frontier Media; and Marc Callipari, General Counsel.

For the call this morning, Michael will begin with highlights from the quarter and comments on our strategic direction and then I will run through our financial results. Michael will then provide some closing comments before we open up the call for questions.

A replay of this conference call will be available for seven days at 1-800-405-2236 using the pass code 11126222#. This call will be archived for 12 months on our website at NOOF.com, under “Investor Relations,” “Webcasts and 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 [e-mail].

During this call, we will make references to certain non-GAAP financial measures. This information, including a reconciliation to the most directly comparable GAAP financial measures, is available in today’s earnings release. A copy of our earnings release is available at our website at NOOF.com under “Investor Relations,” “News Releases.”

All information discussed during the conference call is current only as of today or as of the date of the applicable financial results and the Company assumes no obligation to update information discussed during this conference call. During this conference call, management may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company’s expected financial position and operating results, its business strategy, its financing plans, and the outcome of contingencies.

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

With that being said, I’d now like to turn the call over to New Frontier Media’s Chief Executive Officer, Michael Weiner.

Michael Weiner

Thank you, Grant, and good morning, everyone. Like many companies, we are navigating through a tough economic environment. While these challenges have impacted our non-core Film Production segment, our core Transactional TV segment is solid and growing.

We believe that our strong balance sheet, our reputation and ability to move quickly when opportunities present themselves will enable us to emerge successfully from this difficult economic environment.

In the third quarter of fiscal 2009, our Transactional TV revenue increased 6% as compared to the same quarter last year. Year-to-date, the core Transactional TV revenue and operating income has increased 5%. We expect the outlook for the Transactional TV segment will continue to be positive through the fourth quarter of fiscal 2009 and into fiscal 2010 based on our accomplishments throughout the year.

During the current quarter, we grew our core business both domestically and internationally. The majority of the new growth came from international distribution, where we added more than 2 million linear pay-per-view network households and over 5.5 million Video-on-Demand homes. Our international distribution added approximately $0.5 million in new revenue and we expect this revenue will ramp, because much of the revenue is related to November launches, and we are still accumulating content on these new platforms.

In addition, we secured a new distribution deal for more than 3 million VOD homes on a domestic platform where we previously had no distribution. Contract for this deal has been successfully executed and we are hopeful that our content will launch in the fourth quarter of this fiscal year.

For our Film Production segment, our current quarter results were impacted by the economic downturn, which has been particularly difficult on the Film Production industry. We continue to believe the long-term growth prospects of the Film Production segment are good and the segment has proven to be a solid business since our acquisition two years ago. The recent impact on this business due to the economic downturn led us to reassess our forecasts and perform a goodwill valuation analysis.

Based on that analysis, we recorded an impairment charge of approximately $10 million. We are examining this segment’s operation to better focus on specific projects we believe will provide us with the highest returns.

Looking forward, the Film Production segment is pursuing a pipeline of meaningful deals. We expect to deliver a third installment of a 13-episode series in either the fourth quarter of fiscal 2009 or the first quarter of fiscal 2010.

We have begun production of a new producer-for-hire arrangement and we have begun distribution of the segment’s mainstream content in retail home video DVD markets.

Additionally, we have successfully leveraged our existing technology infrastructure and our strong relationships with US cable platforms to gain initial distribution for our mainstream movie content on platforms serving more than 10 million VOD homes. We’re optimistic that we will successfully and significantly expand that distribution.

For our Direct-to-Consumer segment, we are pleased to report that our technology continues to perform well. Consumers are able to self install the set-top box quickly and easily, and we have experienced little churn as we enter our fourth billing cycle with our initial customers.

While our UK customers have positive reactions, we are cognizant that the economy has hindered adoption. Because the technology has been well-received and has universal operability, we are evaluating options for expanding the territory in which we make our set-top box available.

As part of this evaluation, we are launching affiliate programs with partners throughout Western Europe. We are using this marketing approach as a more cost-effective means of acquiring new customers. Now I’ll turn the call over to Grant to discuss the financial results in more detail.

Grant Williams

Thank you, Michael. I will start the financial discussion this morning by providing some details on the operating segments and then briefly discuss consolidated results, unusual quarterly items and our liquidity position.

Starting with the Transactional TV segment, revenue for this segment grew to $10.5 million as compared to $9.9 million in the same prior-year quarter. The increase in revenue was driven by the contribution of $0.5 million in new international distribution revenue and improved domestic VOD performance on several top 10 cable MSOs.

Cost of sales for this segment was $2.9 million as compared to $2.7 million in the same prior-year quarter. The increase primarily reflects additional transport costs necessary to support the growth in our VOD revenue. Gross margins in the business have remained steady at 72% of net sales.

Operating expenses increased to $2.3 million from $2 million in the same prior-year quarter due to additional domestic advertising and promotion costs, and for the current quarter, the Transactional TV segment reported $5.2 million of operating income as compared to $5.1 million in the same quarter of the prior year.

For the Film Production segment, revenue was $1.8 million as compared to $7.6 million in the same prior-year quarter. As expected and previously discussed during our second fiscal 2009 earnings call, the prior-year third quarter included approximately $3.6 million in revenue associated with a producer-for-hire deal and the delivery of a 13-episode series, and we had no similar revenue in the current quarter.

Additionally, this segment’s owned and repped content revenue declined as a result of the difficult economic conditions in the film industry. Cost of sales for the Film Production segment decreased to $0.6 million for the current quarter as compared to $4 million in the same quarter of last year, consistent with the decline in sales.

Film Production operating expenses were $12.3 million, which included a non-cash goodwill impairment charge of $10 million and a $1.1 million non-cash impairment charge to write down certain film and recoupable cost assets. As Michael mentioned, we believe the long-term growth prospects for this business are good and will strengthen as economic conditions improve. However, we cannot accurately predict when the overall film market conditions will improve or how long the economic slump will continue.

Moving to the Direct-to-Consumer segment, revenue was $400,000 for both the third fiscal quarter of 2009 and the same quarter of last year. For the current quarter, this segment had an operating loss of $700,000 as compared to break-even in the same quarter last year.

The Direct-to-Consumer segment results include approximately $700,000 of incremental costs associated with the Company’s set-top box initiative.

For our corporate administration results, costs during the current quarter were $2.5 million and were consistent with the same prior-year quarter.

For the Company’s consolidated results, revenue in the current quarter was $12.6 million as compared to $17.9 million in the same prior-year quarter. And for the nine months ended December 31, 2008, we had revenue of $39.1 million as compared to $43.3 million in the same prior-year period.

For the current quarter, we reported a net loss of $8.9 million or $0.42 per share as compared to a net income of $3.1 million or $0.13 per share in the same prior-year quarter. The net loss for the nine months ended December 31, 2008 was $6.4 million or $0.28 per share as compared to net income of $6.8 million or $0.28 per share in the same prior-year period.

In addition to the current-quarter goodwill impairment charge of $10 million and the film and recoupable cost impairment charges of $1.1 million, the Company also recorded a $429,000 reversal of interest expense and a $430,000 reduction in the income tax expense, both of which relate to the expiration of the statute of limitations for uncertain tax position liabilities.

Moving to our liquidity, our strong cash position enabled us to take advantage of an opportunity this quarter to repurchase 2.6 million shares of our common stock for $1.55 per share. And at December 31, our liquidity position remains solid. We had $15.3 million of cash and investments and $5 million available through our line of credit.

Year-to-date cash flow from operations was approximately $6.7 million as compared to $4.6 million in the same prior-year quarter. And as a reminder, the prior-year period cash flows included $2.1 million of cash distributions related to a producer-for-hire arrangement.

Before we open up the call to questions, I’ll turn the call back over to Michael for brief closing remarks.

Michael Weiner

Thank you, Grant. Going forward, our strategic plan will be to continue to expand our core business by gaining shelf space on pay-per-view and Video-on-Demand platforms domestically, building upon the superior product performance we have already demonstrated and by launching our new platforms outside the US.

In addition, we plan to continue to leverage our existing content library and technology infrastructure to create additional revenue streams on new and emerging platforms. Now, let’s open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Jamie Clement - Sidoti & Company.

Jamie Clement - Sidoti & Company

I know you gave some metrics in terms of international households, but could you walk us back maybe three or six months or so, and what deals were generating revenue during the quarter? How would you expect revenue in future quarters to ramp based on what you have added over the last quarter or two? Can you kind of tell us what inning of the game we’re in, so to speak?

Ken Boenish

Sure, Jamie. This is Ken. I’ll take that question. We don’t really provide a lot of granularity so far for our international revenue. The information that we can provide to you is that as of December 31, we are distributing our content in Canada, Latin America and Europe. We are distributing to 2.6 million pay-per-view network households and 7.5 million VOD network homes.

We have generated about $0.5 million in revenue for the current quarter, as we said earlier. And despite that, the large portion of those new launches came in the month of November with a relatively small amount of content on those platforms. We’re ramping up the amount of content that we have on the platforms where we’ve already launched. And we do expect that revenue line to ramp, as well as, we are pursuing other international deals.

Jamie Clement - Sidoti & Company

Yes, and Ken, that was basically what I was asking, was that the numbers that you gave in your prepared remarks, those were not active during the entire December quarter, right?

Ken Boenish

Correct.

Operator

Our next question comes from John Rolfe - Argand Capital.

John Rolfe - Argand Capital

Just a couple of quick items. How many shares did you end the quarter with?

Ken Boenish

We are just a little bit over 20 million shares at the end of the quarter. And of course, that’s after the November acquisition we did of about 2.6 million shares from a specific investor.

Operator

(Operator Instructions) Our next question comes from Aram Fuchs - Fertile Mind Capital.

Aram Fuchs - Fertile Mind Capital

I was wondering if you could dive a little deeper into the Direct-to-Consumer IPTV set-top box. What is working? What’s not? Why have you decided to expand it to the continent? And regarding the affiliate group, is that all online affiliates? Or is that going to be some sort of different distribution system as well?

Ken Boenish

Sure, Aram. I will take that question. This is Ken. The technology is working perfectly. The back-end systems are working great. Customers are able to easily self-install the product and begin viewing within minutes. And we’ve really had no consumer problems per se.

The people that have signed on for the product so far seem to be sticking. We’ve experienced relatively little churn. So the challenge now is to find a cost-effective way of marketing the product and gaining new customers.

Because of the economic crisis that both the US and Europe are experiencing, we’ve decided to be a little bit more conservative in our approach going forward and concentrate more on marketing through affiliate partnership programs and less on direct cash expenditures on marketing.

The reason why we’ve decided to sort of cast a wider net and include all of Western Europe is that because of our server location in Amsterdam, we are really able to easily serve all of Europe. And we really don’t see a reason why we should constrict our activity just to the UK at this time.

We do have affiliate relationships in place right now that cover more areas than the UK and we would like to be able to fully leverage those relationships.

Concerning our tactics, they do include online tactics, some print tactics, as well as some other ways of reaching customers, including e-mail campaigns and things of that nature. So we are really moving forward with sort of a diverse approach to our affiliate partnership marketing programs.

Aram Fuchs - Fertile Mind Capital

Okay. And on the VOD business here in the states, I was wondering if you can talk about some of the different promotional things you have done this quarter about either providing the Internet VOD hybrids; how are those working? And is there any other way where you are trying to give greater value to the customer during this recession? Thanks.

Ken Boenish

What specifically do you mean by Internet hybrids?

Aram Fuchs - Fertile Mind Capital

There was something where you gave access to TEN.com if the consumer bought a VOD movie or something like that?

Ken Boenish

Those are some programs that we’re working on deploying. Those have not deployed yet so we really don’t have any market reaction to report. But we feel that any way that we can provide consumers with more value in the category, especially during these times, is going to be a good thing for us and is going to be helpful in keeping the category healthy.

We have been using or experiencing more and more marketing activity from our affiliates in terms of certain affiliates running cross-channel promotions, where they had not done any promotions in the past. This is where they’d run television commercials on services targeted toward men like ESPN or Spike TV, USA Network, some of those channels, during the later night hours. And we’ve also done a little bit of print campaign in certain markets, as well as some in-market promotions.

Operator

Our next question comes from Jamie Clement - Sidoti & Company.

Jamie Clement - Sidoti & Company

Michael, I think this question is usually asked every conference call, and obviously you all are comfortably free cash flow positive. What are your thoughts with the cash that’s on the balance sheet, even after the 2.6 million shares repurchased? I mean how much cash do you think you need? I don’t remember what the status is of any existing Board repurchase authorization at this point. Can you just give us a little update?

Michael Weiner

Well, right now, there are a lot of opportunities that have been presented to us. And right now, obviously, stock repurchase, we have always been kind of proactive on that I think as exemplified by the last repurchase of 2.6 million shares. But we are looking at several opportunities that we think that can be as accretive or more accretive than the stock repurchase, and we are looking at all of those.

There are companies that have lost their financing that have come to us to take over projects. There’s a potential asset purchases of content libraries that we could use worldwide. And we’re looking at all of those, obviously, including a continuation of buying additional shares.

Operator

(Operator Instructions) At this time, there are no further questions in the queue.

Michael Weiner

Thank you again, for joining us and we look forward to the next conference call.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconferencing Services. You may now disconnect.

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