Sonic Solutions F3Q09 (Qtr End 12/31/08) Earnings Call Transcript

Sonic Solutions (SNIC)

F3Q09 (Qtr End 12/31/08) Earnings Call Transcript

February 5, 2009 4:30 pm ET

Executives

Nils Erdmann – VP, IR

Dave Habiger – President and CEO

Paul Norris – EVP, Interim CFO, and General Counsel

Analysts

Ralph Schackart – William Blair

Barbara Coffey – Kaufman Brothers

Steve Sullivan – Horizon Financial Group

Presentation

Operator

Good day, everyone. Welcome to the Sonic Solutions fiscal year 2009 third quarter earnings release conference call. As a reminder, today’s conference is being recorded and will last approximately 60 minutes. Now at this time, I would like to turn the conference over to Mr. Nils Erdmann, Vice President of Investor Relations. Please go ahead, sir.

Nils Erdmann

Good afternoon, and thank you for joining Sonic Solutions earnings conference call for the fiscal 2009 third quarter ended December 31, 2008. I would like to inform all participants that this call is being recorded. And with me on today’s call are Dave Habiger, President and Chief Executive Officer; and Paul Norris, EVP, acting Chief Financial Officer and General Counsel. Before I hand the call over to Dave, I’ll review our customary Safe Harbor statement.

During the course of this call, we may make forward-looking statements within the meaning of the federal securities laws. All statements other than those of historical fact are forward-looking statements, including but not limited to, guidance for the fourth fiscal quarters and full fiscal year 2009 as well as fiscal year 2010. All forward-looking statements are made as of today based on current information and expectations and are inherently subject to change. We ask that you review these cautionary statements in today’s press release and refer to Sonic’s recent filings on Forms 10-K and 10-Q for more detailed discussions of the relevant risks and uncertainties that would cause actual results to differ from these forward-looking statements. Except as required by law, Sonic Solutions undertakes no obligation to review or update any forward-looking statements.

In addition, unless otherwise noted, we will present financial information on a non-GAAP basis. These non-GAAP measures should be considered a supplemental to and not a substitute for or superior to the corresponding measures calculated in accordance with GAAP. While we believe that the non-GAAP measures provide information that is useful to investors, we recommend a careful review of the reconciliation between GAAP and non-GAAP measures provided in today’s press release as well as the detailed disclosures related to the purposes of and limitations on non-GAAP disclosures.

Today’s press release, as well as a replay of this conference call, can be found on the Sonic Web site at www.sonic.com under About Sonic/Investor Relations.

With that, I would now like to introduce Dave Habiger.

Dave Habiger

Thanks, Nils, and welcome everyone. For Sonic’s third quarter, Sonic generated revenues of $26.5 million, our non-GAAP gross margin was 75%, our operating expenses were $23.8 million. This yielded an operating loss of $3.7 million and negative EBITDA of $3.1 million. The primary cause of our disappointing results was the downturn that affected the world economy. The PC industry was hit particularly hard with most major PC and semiconductor companies reporting sharply reduced revenues at consumers and businesses, deferred purchases, and upgrades of PC and related products.

As the quarter progressed, we saw increasing weakness across all our major lines of business. Retail internet sales were down, OEM sales were significantly below target, and enterprise software sales were light. Even our professional software sales, though up year-over-year, reflected the tight credit markets and had sales fell below expectations.

In October, we implemented a significant reduction in force, designed to return Sonic to cash profitability in the March quarter. In that RIF, we eliminated approximately 100 positions worldwide, resulting in annual cost savings of approximately $14 million. Later, as we closed the December quarter, and saw where our revenue results had landed we realized that to achieve profitability we would have to implement additional cost reductions. In mid-January, we executed another RIF, combined with the general company reorganization that I will discuss in a few minutes. The second RIF involved the elimination of approximately 75 positions worldwide and should reduce our operating expenses by about $8 million annually.

At this point, while we believe that revenue levels will not further deteriorate our forward budgets assume that we will continue to experience revenues at these relative levels for the next few quarters until the latter part of calendar 2009. With operating expenses significantly reduced, we expect that Sonic will generate a reasonable level of cash profit over the next year. When our revenue growth resumes because of the initiatives we are undertaking, we should be able to generate significant profit. In spite of the difficult economic environment in the December quarter there were some encouraging developments. Blu-ray adoption accelerated, our retail software position improved, and we acquired CinemaNow.

For Blu-ray, this holiday season, price points of standalone hardware players declined to as low as $140. Blu-ray disc sales grew to account for 10% or more of the overall optical disc market, and on some specific releases, such as Dark Knight and Iron Man Blu-ray sales approached 20% of the total optical disc market. Worldwide sales of Blu-ray titles topped $1.1 billion in 2008. These results are very strong in comparison to the early years of DVD, and we expect that the rate of adoption of Blu-ray by both consumers and studios will continue to accelerate from here. This will have nothing but favorable implications for our professional and consumer software products. Though our consumer software sales were down, because of the recession, Roxio branded products grew market share far outpacing the competition. According to the NPD Group, which tracks retail sell-through in North America, in 2008, Roxio applications increased their market share over the previous year by five percentage points, and clearly lead their category with a 45% market share. I should note that because NPD results do not include reports from Costco, Sam's Club and Wal-Mart, Roxio's overall results are even stronger than indicated by the statistics.

In the December quarter some of our largest or strongest retail performance was at Costco, Sam's Club and Wal-Mart, where we enjoy category exclusivity. Through the December quarter, financial environment was challenging; it also afforded us some opportunities. Over the past year, we have been developing our Qflix initiative for the legitimate download and burning of premium content to DVD video disc. CinemaNow, one of the leading digital video distributors of Hollywood film and television content on the web was the primary content partner, and we were already cooperating closely with them as Qflix began to roll out. With the financial downturn, CinemaNow encountered financial difficulties in the late summer. We quickly negotiated a deal to acquire CinemaNow in mid-November. With CinemaNow a part of Sonic, we should be able to accelerate the adoption of Qflix, which already bundled with optical disc drives from Dell, Pioneer and Plextor. But more significantly, the arrival of CinemaNow has accelerated our long-held plans to become more involved in premium content delivery and serve as a catalyst for a general reorganization of our company. The aim of this reorganization, combined with the reduction in force we discussed a few minutes ago are simple. First, to enable Sonic to achieve significant and consistent cash profitability; and second, more importantly to reignite our company's growth.

I would like to discuss this last point with you a bit further. But before I do, I'd ask Paul to lead us in a more detailed discussion of the financial results for the quarter. Paul?

Paul Norris

Thanks, Dave. Before I talk about our operating results for the December quarter, let me discuss a couple of non-cash adjustments that impacted our GAAP financial results. First, like many other companies, we reviewed the current economic environment and our market capitalization and concluded that we should perform an impairment analysis on our goodwill and acquired intangibles. In performing this assessment we compared these assets and our financial statements to their current fair value and determined that it was appropriate for us to write off a substantial portion of their book values. The write-down results in the $56.2 million decrease in goodwill and a corresponding non-cash increase in operating expenses. Acquired intangibles were reduced by $19.6 million on our balance sheet with a corresponding non-cash increase in cost of goods sold. In addition, we analyzed the substantial cash assets that we have been carrying on our balance sheet. Under applicable accounting rules we assessed the likelihood that we could reasonably expect to realize the benefit implicit in this asset. Based on this assessment we have reduced its value on our balance sheet by approximately $29 million with a corresponding increase to our cash provision.

Turning to our third quarter results. As Dave mentioned, our net revenue for the quarter was $26.5 million, a decrease of approximately 25% year-over-year. Revenue for the December quarter was comprised of consumer revenue of $24.3 million, and professional revenue of $2.2 million. Consumer revenue was down 28% year-over-year, reflecting weaker sales to our OEMs and retail and through the internet. On the other hand, professional revenue was up more than 35% year-over-year. Cost of revenue, which excludes the non-cash amortization and impairment of acquired intangibles, was approximately $6.4 million, resulting in a gross profit of $20.1 million down from approximately $28.8 million in the December quarter last year. Gross margin for the third quarter was 76%, a decrease from 81% in the quarter last year.

Operating expenses totaled $23.8 million for the December quarter, down 12% from last year’s December quarter expenses. Our GAAP operating expenses break down as follows; sales and marketing expenses totaled $8.7 million, down 7% from the prior year period; research and development expenses totaled $8.9 million, down 18% from the prior year period; general and administrative expenses totaled $6.7 million, down 17% from the prior year period. These numbers include $595,000 in depreciation, $12,000 related to stock option review and $388,000 in share-based compensation. These numbers do not include $1.1 million in restructuring charges relating to the headcount reduction we announced at the end of October for the goodwill impairment discussed earlier.

Our non-GAAP net loss for the quarter was $2.2 million or $0.09 per share. At the end of the quarter, we had approximately 26 million basic shares outstanding, essentially the same as last quarter.

Turning to our balance sheet; cash, restricted cash, cash equivalents and investments ended the quarter at $25.6 million, down $5 million from $31.6 million at the end of the prior quarter. The decrease is due to the purchase of CinemaNow, expenses related to our headcount reduction, and amounts used in operation. We ended the quarter with accounts receivable of $10.2 million, down from $14.4 million at the end of September. DSOs at the end of December were 35 days, down from 42 days at the end of the prior quarter.

Looking forward, we feel that our product line and the organization are well positioned, and as Dave highlighted we are seeing some substantial business opportunities; however, given the current economic condition we are taking a cautious approach in our projection. We anticipate net revenue for the fourth quarter will slightly exceed net revenue this quarter. As you know, we announced an additional restructuring in January, and we expect operating expenses for the fourth quarter to continue to drop as a result. We often discuss adjusted EBITDA to facilitate better understanding of our operating results. Adjusted EBITDA is comprised of our earnings before interest, taxes, depreciation and amortization and excluding impairment charges, restructuring expense, stock option review expense and share-based compensation.

We expect to generate positive adjusted EBITDA during fiscal year 2010. Our goal in this challenging economic environment is to achieve EBITDA breakeven in the fourth quarter of fiscal 2009 as well as in first quarter of fiscal year 2010, and cash profitability in the second quarter and throughout the remainder of fiscal 2010.

At this point I will turn the call back over to you Dave.

Dave Habiger

Thanks, Paul. As I mentioned earlier, as we've integrated CinemaNow into Sonic we've also reorganized our company in a significant way. For the past few years Sonic has been organized into three business units, professional authoring tool, licensing technology solution, and Roxio consumer software. Most of our Roxio software and some of our licensed technology (inaudible) creation and sharing of personal content. Our professional and some of our licensed technology provided solution that enable the delivery of Hollywood premium content, but the actual delivery of such content was left to others. As we began the Qflix initiative a few years ago we took a step closer to providing a complete delivery chain for premium content. Now with the arrival of CinemaNow it's clear that a major focus of our company will be premium content delivery. And we've reorganized Sonic to take full advantage of opportunity. Sonic will now include two distinct operating units, our Roxio products group, which includes most of what used to be our Roxio division combined with part of our former licensed technology unit. The group will develop end-market applications and software technology for data, music, video disc burning, photo and video editing, and media backup.

The group solutions will reside on both PCs and in web applications. Channels will include OEM, retail, web store, and enterprise sale. The mission of this group will be to enable consumers to create, edit, enjoy and share the personal digital media. Our newly formed premium content group combines CinemaNow, Qflix, our professional authoring tools business and parts of our former licensed technology unit. The group will enable delivery of Hollywood movies and TV shows through the internet to a variety of destination, including PCs, Qflix disc burners and an array of CD devices. The mission of the premium content group is simple, consumers should be able to buy or rent premium content on any connected device down, from Blu-ray players to smart TVs to mobile internet devices, and view that content on any other device they own. Purchase experience should be immediate, direct, hassle free and compelling. To achieve this mission, our job is to build a tightly connected set of software and services to make it easy for consumers to get great entertainment to never have to think about codecs or DRM or copying or anything that gets in the way of their content experience.

Our premium content group will expand on professional authoring and encoding tools to enable Hollywood to deliver content not only for Blu-rays and DVD but also for web deliveries to a range of devices and venues. The group will enhance CinemaNow services to make it easy for consumers to find, buy, and enjoy the content they want. And the group will create software that enables CE manufacturers and PC OEMs to easily embed these services into their devices. While these aren't easy tasks, Sonic is one of only a few companies in the word today that has all the pieces needed to achieve this goal. The group's business model will focus on two key groups. The first is content owners; the studios who have to date experimented only tentatively with internet delivery of content, our goal with the studios will be to increase the reach and accuracy of their marketing efforts, offering them a set of delivery capabilities with attractive economics. The second is delivery partners; the companies who make or sell devices that can be used for the enjoyment of premium content and who desire to distribute content in a way, which leverages their brands and their products.

With the announcements we've already made, you can see clear evidence of this approach. A great example of a delivery partnership is our alliance with Blockbuster to give consumer access to a combined library of premium digital entertainment across a wide assortment of phones and mobile electronic devices. Blockbuster will supply the brand new consumer interfaces and Sonic will be under the hood powering the content delivery across PC, consumer electronic devices. We've also announced that we will be powering the new network Blu-ray disc players from LG Electronics and the Fuji Soft enabled Nintendo Wii game console in Japan. Watch for other announcements in the coming months, as our deliver partner list expands. Despite the stresses of the economic downturn the outlook for Sonic is bright. With a resized organization, we know that we can operate profitably. And with our recent expansion into internet delivery of premium content we are certain that Sonic will expand rapidly and deliver compelling experiences to our customers and end-users.

Thanks to all of our stakeholders, Sonic shareholders, employees, customers and partners for their ongoing commitment.

At this point, we will open the line for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) We'll have our first question from Ralph Schackart with William Blair.

Ralph Schackart – William Blair

Hi, good afternoon guys. This question for Paul. Paul can you walk us through the math again? Sorry, it went kind of fast. Did you say that from your first RIF you had $14 million in annual savings from 100 people, and then incremental to that was your $8 million RIF of 75 people, so in aggregate $22 million in OpEx taken out and roughly 175 people?

Paul Norris

Yes, you got it dead on right.

Ralph Schackart – William Blair

And then, so can you help us think about that $22 million, how much of that sort of big picture percentage will flow through calendar ‘09 actually coming out of the company?

Paul Norris

Well, if you're talking about calendar ‘09 struggling to get a bulk of that. You're going to get essentially all of the $14 million from the RIF that we announced in October, essentially all of that. You know, it may be a little bit still kicking in, but basically you're going to see all of that. And then on the reorg that we just announced in January, that's going to sort of phase in over the next quarter or two. So you're going to start seeing the – I think of it as – $2 million a quarter savings. There are going to see the slow impact of that probably until after next quarter.

Ralph Schackart – William Blair

Okay, so more than half of the $22 million –

Paul Norris

Yes, you will certainly see more than half of it.

Ralph Schackart – William Blair

Okay. And then as it relates to – this is probably a better question for Dave. Dave, can you give us a sense of reaction from the end market, both from the CE side and the studios, now that you have the CinemaNow asset in-house, and sort of maybe give us an update of what your partners are saying?

Paul Norris

Sure. Thanks, Ralph. The reaction's been very favorable and I think it's fair to say the studios obviously have to be involved and endorsed deals like that and the reaction from the studios has been very positive. OEM and CE partners have responded well both with CinemaNow and Blockbuster relationships. And it's timely in that the market for digital downloads has, we think, reached a point of maturity. For us it's just like any other format and we've always worked very closely with the studios to release formats, whether that was CDs or standard def or Blu-ray. And I think it is fair to say they are treating this just like any other format. The electronics sell-through of content to devices both PCs and CEs, it's really just another format, and that requires serious software engineering, it requires production tools, closely working with studios to conclude that ecosystem. And you know, so at this point, I think we are very pleased and the people we deal with in the space and the customers that want to deliver those products are happy.

Ralph Schackart – William Blair

And just sort of order of magnitude, I’m sure for competitive reasons you can't give us the number just but directionally, the number of titles that you have today, there would you expect that number to go in the next 12 months to 18 months, just sort of big picture.

Paul Norris

The title availability, you can expect obviously to double and quadruple, but the catalog depth though, isn't what's really driving the business. So catalog depth isn't necessarily hard to achieve. What's important is the timeliness of the release, where Sonic at the moment as tools provider has a unique position in this ecosystem that allows for the ownership of content under a release window, that is when people are willing to pay for content, they'll buy discs or they'll buy movies. So we are focused on premium content and delivering that at the highest quality, making it very easy. So, as much as I tell you to watch the depth of the catalog as much as you can expect that to grow and we certainly combined Blockbuster's catalog and our catalog and have one of the largest in the world right now. I don't think that's the most important metric. I think our ability to deliver new current releases that traditionally has only been available on DVD is probably the thing we will focus most on, that premium content where people are actually spending money.

Ralph Schackart – William Blair

And you fall within the DVD release window, correct?

Paul Norris

Correct, CinemaNow and Blockbuster were two of the major players and delivering new premium contents in an ownership model or rental model, whether it's burned to a disc or streamed or downloaded to your TiVo, and I think you can expect us working together, we will plan on doing that in a more dramatic way.

Ralph Schackart – William Blair

Great. One more and I will turn it over. You made some comments about Blu-ray accelerating, could you give us may be a little bit more granularity and exactly what that means both sort of at the player level and in the title level? Last we counted, there's 1,000-plus, they're kind of expensive and there's some puts and takes on what's going on with the economy, but I think by and large, Dolby talked about it last night that they were seeing some growth in the category as well.

Paul Norris

I think as we indicated in the prepared remarks we certainly think it's growing with the pricing at a $140 from some players we are starting to see a price point that is appealing to the masses. In the first year of Blu-ray as its own format, it certainly outpaced standard def and standard def was one of the fastest-growing formats in the history of consumer electronics. So I think by most measures, if you really look at the data and the numbers one would make good argument this has been a successful format, has plenty of traction, and I'm convinced not going away, that's for sure. And our ability to connect both disk and electronic sell-through with the deals we announced with some of partners we are building Blu-ray players, that's important to studios and the content owners as well; a device that plays back your DVD and also allows you to buy and stream content is, I think going to be a very important category and certainly format going forward.

Ralph Schackart – William Blair

Actually I have one more if I could. Paul, on the OpEx savings of $22 million on an annual basis, what is the sort of add-back from the assets of the people that you acquired at CinemaNow in terms of the OpEx that you would be adding?

Paul Norris

We took on approximately 30 people as part of the acquisition. So I think you can look at that as being perhaps $1 million to $1.5 million a quarter, just based upon that on the headcount piece of it. So, you can do the math from there.

Ralph Schackart – William Blair

Is there any more incremental expenses aside from the 30 people, marketing, sales, R&D or anything?

Paul Norris

We had some facilities there. It's a relatively modest setup, so that's not going to be too much of a driver. Like our business, it's mostly going to be headcount, but obviously if we're growing the business and expanding the volume that we're doing, we could take off some cost there that goes along with it. A lot of that would be on the cost of goods sold side rather than the OpEx, but it's a lower margin business in general, and there are some of the third-party costs like hosting and that sort of thing which do come in on the OpEx side too. So those would grow as the business expands.

Ralph Schackart – William Blair

Okay, great. Thank you.

Operator

(Operator instructions) We will go next to Barbara Coffey with Kaufman Brothers.

Barbara Coffey – Kaufman Brothers

Yes. Good afternoon. CinemaNow has been with you, probably about three months; have you seen any uptick in people downloading, can you speak to both the Qflix drives getting sold, as well as sort of the attachment rate and flow-through you're seeing on CinemaNow?

Dave Habiger

Hi Barbara, it's Dave. Yes, we've certainly seen a correlation between the Qflix drive and movie sell-through. We are not yet ready to give out metrics – very specific metrics on movie download size etc. However, as this business ramps, you can expect that we'll provide a lot of color and content on the amount of movies sold, titles, all the information that you could use to model the business. The ecosystem though really starts to build out this summer, so as we deliver devices. Both the Nintendo Wii sales in Japan just started about a week ago, TiVo has just turned on, we are just in a very beginning stages of starting to deliver LG TVs and DVD players with CinemaNow built in. That all starts to come to fruition this summer and those we will be able to model much more significantly than we do now. And also the way that those are audited and we count the revenue will start to show up. I can say though that we do have some experience with the launch of Qflix and movies and giving people a clear indication and making it simple to download a movie and put it onto a disk dramatically increases the attach rate and sell through of movies. I think we knew that implicitly, which is why we spent four years trying to get that launched and that ecosystem built out. I think the studios knew it and we now have data to support the theory. And so we also know that when you turn on games, for example, Nintendo we've only got a couple weeks worth of numbers, but we certainly know that that is a dramatic impact. When people are connected already to the web, they're working on a device that's hooked up to a TV, and they can buy a movie easily, they are willing to do it. So we certainly believe the theories are being proven and we'll provide a lot more color as to start launch devices in a meaningful way.

Barbara Coffey – Kaufman Brothers

Thank you.

Dave Habiger

You are welcome.

Operator

We have a follow-up from Ralph Schackart with William Blair.

Ralph Schackart – William Blair

Dave, one follow-up if I could. I know you said that you only have a couple weeks of data with Nintendo, but can you sort of speak high level. Have you seen access to the content that you sort of own in the cloud with the CinemaNow ecosystem, have you seen access by, let’s say, a user or owner on multiple devices so the ecosystem is playing out where people actually want to access the content in multiple areas versus just on their PCs?

Dave Habiger

Yes, we have a lot of data. The exciting thing about this space is again, if you view it as a format. It requires professional tools; it's a relationship with the studios, that trust with them. And we certainly – the exciting thing is the feedback that you get on this kind of a business, where you can clearly watch and monitor the business and model it. So, we do have information there. We certainly know that once consumers understand conceptually that the content that they own is stored in the cloud and that the store – my movie store, the movies that I want to access and rent are accessible on my TiVo and the same store is accessible on my PC, which is also accessible on, for example, a handheld or a game device, that eventually clicks and then you start to watch the behavior where people ultimately just see these as terminals where they can buy content, and so that’s one of the metrics we've seen is where you provide consumers with a more than that allows content availability very easily at a high quality anywhere. They start to understand it and they start to change the behavior. I think Apple saw that with iTunes. Eventually you buy some music and Apple made it very simple for people to buy music. And you start to self-train people and they start to get the concept rather than some advertisement. Just the use model itself facilitates the educational process.

Ralph Schackart – William Blair

And how are you going to sort of rebrand or retrain consumers, because I think it's fair to say CinemaNow is seen as sort of a destination content purchase site historically, and now we are partnering with Blockbuster now, and just given sort of your capital limitation, how are you going to get that message out the consumers?

Dave Habiger

Certainly we are not the most well-known brand, but Blockbuster obviously is very well-known brand. So we'll be working with those partners in this space. Sonic, we are in the business of developing tools, we by far has the most significant position in the space as a tools provider and we'll certainly want to work through our existing channels and work with our partners to help educate consumers. The good news is unlike two or three years ago, where one could argue consumers weren’t exactly comfortable with the concept. I do believe that consumers are generally becoming comfortable with the idea of consuming contents in different forms and fashions different devices. So, I think that's been a process and we think we are entering the space at the right time and at a time when the studios have very clear desire and edict to build out this model.

Ralph Schackart – William Blair

Does the blockbuster have any formal campaigns or branding campaigns about the service that they've announced or is it sort of logical to think about going forward?

Dave Habiger

I’ll leave that to Blockbuster to talk to, but I certainly think that it's fair to say that both Sonic and Blockbuster are taking this very seriously. We recognize the size of this opportunity. And I have no doubt that you will see plenty of very clear and strong messaging from them as we start to rollout devices and services.

Ralph Schackart – William Blair

Thank you.

Operator

We will go next to Steve Sullivan with Horizon Financial Group.

Steve Sullivan – Horizon Financial Group

Dave, can you talk about when the blockbuster will start rolling out? And secondly, can you give us a little bit more detail on the points of revenue generation for Sonic in this deal?

Dave Habiger

Let’s see, when they'll roll out, again, I think I'd stick to the – a lot of our devices will start to hit the streets going into the summer timeframe and I think you'd want to think of Blockbuster as starting to see something to hit your radar in that timeframe, a Sonic/Blockbuster partnership and some of the ecosystem. But there are a lot of initiatives right now. So you will see rolling offerings from various companies and devices, and there won't be a single announcement. As far as, I think you asked about terms of the deal, at this point that's obviously something that we are not discussing.

Steve Sullivan – Horizon Financial Group

I guess really what I was – where is the revenue generation coming from the Blockbuster, kind of give us generalized what points in this agreement does Sonic drive revenue from, not the terms of the deal, but just walking me through the mechanics of it.

Dave Habiger

yes, I think the mechanics that I'd be comfortable sharing, let's see. So we are going to be operating the Blockbuster download store on the web and supporting any devices that implement a partnership with Blockbuster. From Blockbuster's viewpoint, they are able to partner with the technology we have in this area at a time when it's becoming crucial for download sites to connect seamlessly with a broad range of devices. So, they will be able to take advantage of the technology depths and breadth of our content and (inaudible) capabilities. From our standpoint, we obviously get the advantage of a well-known brand and one that has great recognition and reach, and it will add significant warning to our download operation. So I think that you want to – you want to think of it as there is certainly revenue share components, so as we sell movies there are revenue share components and we're working with all the major studios, given our technical leverage and relationship with them and Blockbuster's writing very large checks to them. So you would see a revenue split, and there is some service components that are also in that relationship like that where Sonic is providing some services and technology. But again outside of that I just don't think we are comfortable sharing much more details at this point.

Steve Sullivan – Horizon Financial Group

and one last question, Paul, can you give us a sense on facility consolidation, are you saving any money there going forward?

Paul Norris

Yes, we're looking at that very actively. We haven't, I don't think, announced any specific facilities that we're combining at this point, but as you're probably aware, we've got several locations here in the Bay Area and we're looking very hard at how we kind of take the existing locations we have and look at where we're focusing our initiatives and how we can best most efficiently combine those to save cost. That's absolutely part of what we're going to be doing over the next little bit, over the next quarter or so.

Steve Sullivan – Horizon Financial Group

Okay. Thank you very much

Operator

And that does conclude our question-and-answer session. I will turn the conference back over to our speakers for additional or closing remarks.

Dave Habiger

Thanks operator. And thank you everyone for joining us. We will look forward to speaking with you next quarter.

Paul Norris

Thanks, very much.

Operator

That does conclude today’s conference. You may disconnect at this time. We do appreciate your participation.

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