Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Scott Ginsburg - Chairman and CEO

Omar Choucair - CFO

Analysts

Richard Fetyko - MCF

Mitch Bartlett - Craig-Hallum

Jarod Schram - Roth Capital Partners

Jason Helfstein - Oppenheimer

Carter Malloy - Stephens Incorporated

Murray Arenson - Janco Partners

William Morrison - ThinkEquity

DG FastChannel, Inc. (DGIT) Q4 2008 Earnings Call February 12, 2009 11:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the DG FastChannel Q4, 2008 Earnings Call. My name is Jen, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference.

As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s conference Mr. Scott Ginsburg, Chairman and Chief Executive Officer. Please proceed, sir.

Scott Ginsburg

Thank you, operator. Good morning everyone and thank you for joining us for our fourth quarter and full year 2008 earnings call. As you know there is some disclosures we need to make and with that let me introduce to you Omar Choucair, the company’s Chief Financial Officer.

Omar Choucair

Thank you, Scott. Before we begin, I would like to remind listeners that today’s discussion may contain certain forward-looking statements related to the company including the expansion of our digital distribution network and demand amongst certain clients the digital audio, video media services and other expectations for, Vyvx ad transaction as well as the Unicast and Springbox.

These statements are based on economic and market conditions as of February 12, ‘09 and assume no material changes from those conditions that exist today. The company can give no assurance as to whether these conditions will continue or if they change, how such changes may affect the company’s current expectations, while the company may from time-to-time provide its outlook and assumes no obligation to do so.

Listeners are further cautioned that these forward-looking statements involve risks and uncertainties, which could cause actual results to differ materially from those projected. These and other risks relating to DG FastChannel are set forth in the company's filings with the SEC.

Today’s call and webcast will include non-GAAP financial measures within the meaning of SEC Reg G, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today’s press release.

At this time, I would like to turn it back over to Scott.

Scott Ginsburg

Thank you, Omar and again thank you everyone for joining us today. I am pleased to announce that we met our 2008 revenue and EBITDA forecast, which resulted in record results for the fourth quarter and full year 2008.

During the fourth quarter, we delivered revenue of $52 million and adjusted EBITDA of $20.2 million representing growth over last year of 68% and 97% respectively. Adjusted EBITDA margin was strong at 38.9% a significant improvement over the year ago period and on par with last quarter.

For the full year 2008, revenue was $157 million and adjusted EBITDA was $60.3 million representing year-over-year growth of 61% and 86% respectively. Adjusted EBITDA margin of 38.4% to the year was 530 basis points higher than the full year 2007, driven by realizing our operating synergies, continued growth in HD revenue and increasing mix of electronic deliveries.

Importantly we continue to post exceptional results in HD advertising revenue, a key business driver for our company. For the quarter HD revenue grew 365% to $12 million bringing the full year HD revenue to $31.7 million up 415% over 2007.

These are strong to be sure, but particularly impressive in light of the current economic environment. While we would be naïve to say that we are immune to the broader economic headwinds, we are getting our stride at the right time and benefiting from sustainable trends in our industry right now. They give us confidence in our ability to continue performing to a maximum level.

The most critical of the transits the migration towards HD advertising, today HD advertising has remain resilient in spite of the broader economic condition, which is reflected in our exceptional growth in HD revenue. We believe that tremendous market opportunities still lie in front of us and the advertisers increasingly will transition to new standards as we move fully into the digital switch during this year.

As most of you have seen congress recently voted to delay the nation's transition to digital television by four months to June 12th from its prior schedule date of February 17th. This has had a little effect if any in our business; in fact one could argue that this will benefit us and the industry as triggers an additional $650 million in government fund to help ad risk consumers and high no awareness and visibility of the conversion.

In addition, you may have read in the Wall Street Journal that a number of TV stations on February 17th will be making the switch and while this may create some confusion, in terms of the HD broadcasting initiative, it certainly will continue to bring attention to it, it will bring a spotlight on the changeover and certainly by the middle of this year, all stations will have made the transition.

We are making this transition in light of the fact and in view of the fact that $4 billion in investments have been made for this digital conversion. And advertisers and distributors are already migrating in mass to HD ready formats. HD capacity among media alert has increased to less than 5% in early 2008 to over 10% at the end of the year. But most importantly this 10% includes the most important, top tier broadcasters, and TV and cable networks, which are providing us and do will provide us with the lion share of growth opportunities during this year.

We believe that all markets will ultimately convert to HD enabled formats this year, but in addition to that, their TV platform other network platform will be able to ingest an HD format during this year and over a very short time in the future year.

Today we stand uniquely positioned to benefit from this critical trend as the authoritative source for agencies, advertisers and media outlets in delivering content through the most efficient and effective electronic platform available.

As our long-term shareholders already know, we have spent the last few years investing in our technology platform and executing on multiple fronts to fully build out our HD infrastructure.

As we closed the book on 2008, we are pleased to have the heavy lifting behind us. We have fully deployed our new spot boxes to over 4200 video locations, laying the foundation for seamless electronic delivery. We have worked tirelessly to ensure quality control at every level of system integration within video location, so that our technology is properly embedded at every outlet for HDs available supply.

And most importantly, we have assembled and retained the industry's best staff including both technical and customer support. With this phase of our evolution complete, we are working through the next stage in our development in adoption to fully harness the significant long-term opportunity.

We continue to broaden awareness around our service offerings and demonstrate to advertisers how our HD distribution will benefit their marketing efforts. In support of this initiative we have visited with nearly every one of our major customers holding seminars, informational Meet & Greet, and sales meetings.

We are available to them at every step of the way and we have had the opportunity to present our value, and show them and demonstrate to them how we fit in their future plans for distributing their content.

Now, beyond HD electronic deliveries, of the conversion of standard definition that haven’t shifted to electronic distribution remains a compelling opportunity because about 40% of advertising deliveries are still left to convert to electronic.

In particular, we see our potential at the regional and local level, where historically we have not competed. The main impediment to our network adoption has simply to make it easy for local agencies to use our network and our systems.

We are bridging this gap by deploying our sales organization to educate potential customers about our network and service offering. Now, let me shift gears one more time to talk about our rich media initiative, which represents another significant growth driver for the company in 2009 and beyond.

Today rich media remains one of the fastest growing sectors in the advertising business. The opportunity and the long-term potential remain excellent even as we look at the current economic situation. Specifically in 2008, we made the strategic decision to enter this market by acquiring Enliven, which gave us the Unicast technology platform and related services necessary deliver rich media online and to mobile devices.

Unicast has earned a strong position in this marketplace. In fact ad impressions a key metric in the rich media industry more than doubled in 2008 for Unicast to over $13 billion impression. Unicast unique and engaging format, flexible technology platform and license arrangement with all the major online publishers including Fox, Microsoft, NBC, ABC and AOL have drawn significant interest from advertisers and agencies.

At the publisher level channel Unicast has the leading position among all the companies. Now the opportunity have combining Unicast strengths on the publisher side with our core competency on the agency side makes a very compelling statement for how we can grow this business in 2009 and beyond.

We go to market with an industry leading platform that can be deployed across our customer-based and even bundled with traditional media. We have a natural entourage in a very cost conscious environment as large media companies are more often returning to their purchasing departments to bring out savings, presenting us with the opportunity to offer our compelling bundled service offering unmatched in the industry.

Before I wrap up, let me provide a brief update on our integration efforts for both, Vyvx advertising service business, which we acquired last year and Enliven.

As our long-term shareholders know, we have a significant track record and long history of successfully integrating acquisitions into our platform and extracting substantial cost synergies over a short period of time.

Between Fastchannel, Point 360, GTN, Pathfire, Vyvx Ads and Enliven, we identified $30 million in synergies that we could capture. Today, we have completed $25 million of the $30 million and we would expect by March 31, 2009 to capture the additional $5 million as we sunset the Vyvx operating platform.

The full impact of these actions will benefit our operating results, those last $5 million beginning in April 2009.

At the Enliven level, we already took action last year on $3 million in operating cost synergies, which began to benefit our operating results in January. We have accumulated the major pieces we needed and place today and we will see the opportunities in front of us.

We are going to continue to operating our business, stay in front of the industry curve and include select opportunistic acquisition opportunities if they should arise.

If I might indulge our audience just for a one moment, I would like to reiterate our unique and compelling value proposition. We are the market leader that is revolutionized electronic content delivery with a technology platform that is second to none in the industry.

We have the ability to make the distribution business extremely efficient, at a reduce cost for both SD formats and multiple HD formats within unmatched additional work flow. We have ability to serve both the traditional media outlets including broadcast station, networks and cable operators as well as new media outlets such as online and mobile devices.

And as I have said most importantly our personnel has the most experience and is the industry's best. We have lead affiliate relations group and 24/7 client care and a level of party control that creates environment in which we fully confirmed every single spot, whether it’s HD or SD provide our customers with an incredible service package and remain committed to running a mutually beneficial customer relationship with them.

The near and long-term prospects for DG FastChannel are extremely bright as we continue to benefit from the forthcoming digital conversion, leverage our leading electronic delivery platform, extend our offering to rich media both online and through mobile devices and offer our customers innovative technology-based solutions that will allow them to work faster and more efficiently at lower overall cost.

Let me now turn the call over to Omar for a discussion of the company’s financials.

Omar Choucair

Good morning everyone I want to joint Scott and thank you everyone for participating in today’s call. For the three months ended December 31,’08 DG FastChannel reported consolidated revenues of $52 million compared to $31 million in the past year’s fourth quarter.

Fourth quarter reported consolidated adjusted EBITDA was $20.2 million versus ’07 fourth quarter of $10.3 million. Unicast and Springbox reported consolidated revenues during the fourth quarter of little over $5.2 million in addition we reported Linco revenue in the quarter of about $3 million.

Our gross profit margin in the fourth quarter was approximately 59%, which is consistent with the prior year period. Fourth quarter adjusted EBITDA margin was about 38.9% to 40% reflecting the strength of our model and the ability to draw significant EBITDA growth over our largely fixed cost structure.

Our operating expense in the fourth quarter breakdown is as follows and we actually included these in the press release and the release that went out this morning. Cost of revenues were $21.4 million, sales and marketing expenses were $2.6 million, R&D expenses were $1.5 million and G&A expenses were $6.2 million.

In addition our net interest expense during the fourth quarter was $4.6 million versus $1 million in last year’s quarter. We also reported non-cash stock comp are approximately $754,000 during the fourth quarter.

Now let’s turn to the full year results. Consolidated revenue for fiscal year ’08 was $157.1 million compared to $97.7 million in fiscal year ’07 an increase of 61%. Full year 2008 consolidated adjusted EBITDA $60.3 million versus $32.3 million in ’07 representing growth of about 86%.

On a pro forma basis assuming Vyvx and Enliven transactions that closed on January 1, 2008 and reflecting actual anticipated expense synergies as of January 1, 2008. DG FastChannel generated full year 2008 pro forma revenue of $187 million and pro forma adjusted EBITDA of $68 million. Full year 2008 gross profit margin was 59% compared to 57% for the prior year. Adjusted EBITDA margin for the full year was 38.4%.

Our operating expenses for the full year of '08 breakdown as follows, cost of revenues were $64.4 million, sales and marketing $8.3 million, R&D was $4.3 million and G&A was $19.9 million.

Turning to the balance sheet, our outstanding debt of $173 million is comprised of two term loans, totaling a $108 million plus a bridge loan of $65 million. Additionally, the company has a pro forma debt to EBITDA ratio of about 2.5 turns.

During the first half of 2009, we intend on refinancing our $65 million bridge loan. Given our strong liquidity position, expected cash flow generation and our ability to reduce our leverage to existing cash on the balance sheet, we're very focused on refinancing alternatives.

Our liquidity position includes unused revolver loan capacity of $30 million, $17 million of cash on hand and expected future cash flow. We expect to have the flexibility to replace the bridge loan with our current liquidity and additional long-term debt instruments available to us.

Next, I want to provide an update on the status of our net operating loss position. As of December 31, 2008 we have over $180 million of NOLs resulting in roughly $64 million tax effected, which will benefit the company over the coming years. This provides a substantial benefit to our free cash flow.

Last, we've incurred CAPEX totaling $2.5 million during the fourth quarter of '08 and with that I would like to mention that we expect to make certain reclassifications to the balance sheet that was included on our press release as we finalize certain account groupings for deferred taxes and related goodwill.

Now, with that I'll turn it back over to Scott for closing comments before we open up for Q&A.

Scott Ginsburg

Thanks Omar. As we can see 2008 was a year of exceptional performance for DG FastChannel. And I could be more pleased with the contributions made by all of our employees and we have done I think we have been extremely sensitive to integrating the Vyvx ADS Operation and a number of their employees as well as the Enliven.

Obviously we have had made changes and will continue to make changes, not only to those staffs, but for our own staff. But I heartily congratulate all our employees and particularly all of our key leaders, who have helped us, weather the storm and bring this company to its full potential.

The company continues to create an outstanding track record of success, further validating our market position, delivery platform and profitable business model. We are firing on all cylinders and benefiting from the investment positions, we have made over the past two years.

I know that all of us debated, whether moving in to rich media was a good idea or whether collecting this and assembling this group of companies was a good business decision. But as we enter 2009, I think we have those debates behind us. And we are now poised to seize the opportunities in front of us and to deliver continued growth and profitability.

I can go on obviously about this company for very long time as most of you know Omar and I have each have been for at least over 10 years now. And have seen this industry change from a basic dub and ship model, all based on SD without lot of attention to the internet and mobile devices and to the digital world to the world’s HD meeting something to in everybody's life to the time when I also have moved away from the TV screen and to the third screen and fourth screen and in this change this company has remain relevant.

It is remained important and has gotten better with each passing month, year and during this decade of revolution this company has about into a critically important services company, media services company for the most important broadcasters and the most important advertisers and advertising agencies in the world.

With that operator I would be happy, as Omar would be happy, to open up the line for some questions.

Question-and-answer session

Operator

Thank you, gentlemen. The first question will come from Richard Fetyko with MCF.

Richard Fetyko - MCF

Good morning, guys. Congrats on great results. I’m curious about the HD penetration as a percentage of volume deliveries. I think you mentioned those were about 3% in September. Please give us an update on that and what are you doing to drive increase usage by ad agencies of your HD services from here on?

Scott Ginsburg

Good question. The fourth quarter, it was an increasing number over each quarter of 2008 as it will be in 2009. At towards the end of the year, we had 3% for the full year was something lower than that, of all advertising moving in HD.

As far as the so called issue driving the HD advertising forward, we participate in that. We become an essential and important part of every advertising agency, and Chief Marketing Officers’ plans on how their brands will be presented over the TVs ad and with that we are a resource, an important resource in helping them to get additional work flows put in order to say that we haven't influenced over when they will actually begin using HD would not be correct.

But we are influential and when they do make that decision, we can help them execute their plan. We have seen a limited number of brands doing HD in 2007 -- in 2006. In 2007 it grew. In 2008 almost 1500 brands were using HD at one-time or another.

That will grow and continue to grow because it’s self-evident at least to us, I don’t know, if it’s self-evident everybody else. That once this digital switchover is made the most important brand of the world, have remained the most important brand for the world because of their marketing and excellent marketing efforts and the way they present themselves to the public.

The plans we do know about, on behalf of the advertiser and advertising agencies are highly confidential. So we couldn’t speak to any one brand or any specific plan nor would we. But we feel overall with the information we do have, the material information we have then, it is treated highly confidentially.

We believe that this will just continue to grow and as I mentioned earlier, the focus of the President of the United States, the Congress of the United States, the Federal Communication Commission on this issue has no negative impact on this company at all. We consider it a positive impact that every man, women and child is being focused on in the United States to maintain their connection with their TV set and a digital connection with their TV set.

Richard Fetyko - MCF

I got it, thanks. I think you guys talked about sort of going back to advertisers who are doing some HD already to see if they could subsidize some of their orders, I was just wondering if that continues to be an effort?

And then, and do you think that, the fact that the HD TV penetration at this point, as a percentage of household, show 25% and growing. Is that an important factor in your conversation with agencies that, sort of going through a critical mass point where it is becoming more and more interesting in terms of Ad agencies, airing in HD?

Scott Ginsburg

Yeah. I think that the origination of ads, we used to call it filming, but obviously, there are digital devices that create these ads now. It’s clinically done on a hard drive and not done in film. And then the finishing of the commercial NHD and the distribution through our electronic network is all part and parcel of how the work gets done. You use the word as we may have used it, the supersizing orders, making very clear to the agencies, which station can accept and play over the air, HD commercials.

We continue to provide the educational background for these agencies, post production houses and the industry, through their various associations. And we believe that, this year Omar and I, in our model of where we think this is going we have expanded from an average of 2.5% or 3% to something more like 9% of the ads going digitally.

So, we haven't with -- in our minds, it will go up three fold again, we haven't any reason to believe, we have every reason to believe that will happen and it may happen even more rapidly towards the end of the year, then certainly towards begin of the year. But if you are a Chief Marketing Officer and you are sitting with your feet up in your living room and you see your competitor in HD, what are you going to do? You will walk in the next day and be happy or you will walk in the next day and say, never again?

So, what we believe is that the adoption of HD advertising will in our model will go up two or three-fold this year, certainly more at the end of the year. We believe that it will be like wildfire, you can't see smoke fire when the whole house goes up. But I think, that's why we are.

Now, there are a lot of advertisers at the local level that may not move, afford this past, but at the national level, with the largest advertisers and the most important and most buyable brands in the world. That's our view of it and it's been our view of it and we won't change that because of the dynamics of the industry.

Let me take it in a different level. If you are giving an advice and you are in advertising marketing company among the four or five largest in the world, it would be, and the number one advice you are giving them is in marketing strategy is how to use the videos, present your company. It's hard for us to imagine that you are going to walk-in and take position of forget this HD stuff; let's just keep everything in SD.

It's a very difficult for us to imagine a Marketing Officer getting that advice from a major agency, anywhere in the world on behalf of US advertising. So, I think, that might put some perspective on it for you.

Richard Fetyko - MCF

All right, thanks guys.

Operator

Your next question is from Mitch Bartlett with Craig-Hallum.

Mitch Bartlett - Craig-Hallum

Hi, Scott and Omar. Maybe if you could detail how the Unicast business did in the fourth quarter and talk about what you're doing with that business now and hiring the sales folks and perhaps in that conversation you could give a few more tips of the discussion that you mentioned earlier bundling the service offerings on board?

Scott Ginsburg

Thank you for the question. Unicast was acquired because of its technology platform and because let’s set aside for a second that we did like their national platform, we did like a number of their divisional heads and they remained with the company.

And we did like the opportunity to be able to take their publisher relationships, which were astounding and leading market share and move that towards the agency offering. In the publisher share well that where we have a good a very nice market share there, it’s not the largest of the vertical, the largest vertical is the agency vertical in which you provide an advertising campaign on the internet on behalf of a brand over a short period of time.

We believe that there were some things that we could do to really penetrate the agency vertical. The first thing is that we're fortunate to be able to acquire the talents of Derek Smith, who had run the Vyvx Advertising Services business and we were very fortunate to be able to bring him on and to let him lead this effort for us. He has a wealth of knowledge; he spent well over a decade inside of Vyvx. And so he knows the agency channels, he knows the traditional distribution model and has a wealth of knowledge when it comes to video and video platforms.

So he moved over to the Unicast service offering and with that he immediately began to get his arms around the product and to begin the process of establishing a sales and marketing organization both in Europe and in the United States to push on this agency channel.

We believe the opportunity there is tremendous. We have acquired the talents and I think we put out a release on this of Richard Kidd in Europe who headed the DoubleClick efforts over there and is a true internet and rich media star in the European theater. He lives in Germany and has already established himself throughout Western Europe with our service offering and we’re making good progress there.

And then in the United States, we have begun to establish with our offices in New York, on the West coast and in the Midwest, also in Austen, an agency sales organization with the idea that we will be able to integrate in the US, with the sales organization run by Neil Nguyen who is our head of sales and operations inside of the DG FastChannel traditional media business.

We have moved this business and the business has moved us, so that while we have great relationships with each of the brands. The brands are more and more pushing us towards their purchasing officers and providing them with more detail of how this company and their companies can benefit from having a single service provider. It was, let a thousand flowers bloom just like it was in traditional advertising ten years ago.

But as we have moved into a new era, where everybody is extremely thought conscious, not that they want people, but I think, we would all agree that we are tightening our belts and we are looking for ways to secure more beneficial cost conscious relationships with our vendors.

This company stands uniquely positioned to take our best of breed technology platform and demonstrate how we can assist our partners in the advertising industry with an offering that will give them maximum benefit of the economics. That just is importantly gives them the absolute best platform with the richest of all services, with the best of all services available to them.

And so, as you all know that we deal with most of the top Fortune 100 companies. We deal with a good deal in most of the Fortune 500 companies and we think that’s a great opportunity for us to be able to come in and bundle our service that we currently have in traditional media and move it towards the new media and the mobile devices.

So, I don't know I can you more case examples, but I think that we've taken this from an idea a year ago or year and half ago, when we first invested in Enliven. We've acquired the company. We have put in place all the synergistic cost savings and now we're building out the infrastructure, the product and we're building out our sales organizations throughout the world.

Operator

Thank you, sir. Our next question comes from Richard Ingrassia with Roth Capital Partners.

Jarod Schram - Roth Capital Partners

Good morning gentlemen. This is [Jarod Schram] filling in for Rich today. Congratulations on the great quarter. Operating expenses were considerably lower than we anticipated. Can see it as sustainable going forward and consider that run rate?

Omar Choucair

Hi, good morning and thanks for the phone call. We had the opportunity last quarter to hear from our shareholders, they want us to provide some additional disclosure in the release. So, that’s we've done and hopefully that’s helpful for everybody.

Now think if you look at the quarter four reported cost of sales and all the expenses that is probably a good run rate. As Scott and I both mentioned; there are continuous expenses as they relate to the Vyvx ads business that will be eliminated going forward. And we expect that those will be fully in effect in beginning of April or the second quarter of '09.

So, I would say that those are good, that's a good base line if you will, with two items, one would be the expenses that are redundant if you will, that will be eliminated in April. And the second thing is, as Scott has mentioned between Derek and between Richard, we have added to the sales team on the Unicast side. So, you will see some additional expenses related to that, but for the most part I think that's a good base for people to look at the company in '09.

Jarod Schram - Roth Capital Partners

Okay. And turning to the bridge loan during 2010, can you provide some color on that? The feedback you're getting from the credit markets?

Omar Choucair

And to just remind everybody when we entered into the agreement with Level 3, we were in the position of providing a commitment letter and we provided that commitment letter to get the transaction need then we when closed that transaction inked and then when we closed on the transaction and just pull down a (inaudible) from our lead bank, Bank of Montreal.

The company is focused on what needs to be happen over the next 90 to 120 days and we have talked to our existing bank group, we worked with BMO, we talked to other people in the marketplace and we feel very good about our opportunity to replace the bridge loan with longer term debt. And that's what Scott and the team and I are focused on doing.

Jarod Schram - Roth Capital Partners

And as far as an Enliven goes, is there any track you're getting cross fertilization between customers you're online and versus going to broadcast and vice versa?

Scott Ginsburg

I think that as we look at it, I don’t think that if so much the online going towards broadcast. I think it’s more the people already in broadcast looking at it. There are some facts here that it might be helpful or might just be extraneous, but let me give you to anyway. There is this feeling as we all notice with our kids and in our own life that the computer and the internet and the mobile device are becoming and more and more important piece of the video puzzle.

Interestingly enough Nielsen came out with a report over the last few days; Nielsen is part of the VNU Corporation. And they stated that the eye balls and the amount of time spent on TV has not decreased and in fact last year it increased significantly.

But they also stated that while watching TV, people are increasingly on their computers and watching that screen at the same time, call it multitasking or attention deficit, whatever we want to call it. But people are just getting more and more stimulated, by more than one screen at the same time.

So it’s my fundamental belief that we were never really going to move people from the rich media side, over to the broadcast side and that was not our theory of investing.

On the other hand it was our theory that once a, the most important and most expensive and elaborate asset had been created for the television screen that a harmonious way be made available for the computer screen and for the third screen, the mobile device and that we would need in order to have a full offering, and in order to be fully relevant as we move to the future, would need a service offering in the rich media.

And so I believe that we will increasingly see instead of three and four groups inside of advertising agencies and we see it getting reduced to one and two groups, all of whom will be responsible for video assets. And at that time, we believe and as we move towards that time, we believe that those assets that were moving towards the TV stations, the cable systems, and the TV and cable networks.

We believe that we'll have the opportunity to reconfigure those assets and use our, I think we have a 130 unique ad formats we announced in rich media and developing new ones every single week.

We believe that will be an opportunity for us to take our content providers, the advertisers, the major film producers in Hollywood, and be able to create for them these engaging ads on the internet and for mobile devices and take advantages of those relationships.

Jarod Schram - Roth Capital Partners

Great. That's all questions I have today. Congratulations again and thank you very much.

Scott Ginsburg

Okay. Good, we look forward to seeing you next week.

Operator

Your next question is from Jason Helfstein with Oppenheimer.

Jason Helfstein - Oppenheimer

Hi, thanks. Three questions. One, what's the current price of HD or what's your HD price for '09 and then like if there is a standard rate card or something per unit. And then how has it changed for 2008? Then I've got two more, thanks.

Omar Choucair

You want just this rate, Jason?

Jason Helfstein - Oppenheimer

Sure. Any trends to help us better understand how to model the FD cannibalization as revenue mix shift towards the HD. So, for example for every HD dollar that we might assume you are getting, basically what's the loss $0.10 in the $1 something $0.20 in the $1 to SD. And then the question, Scott based on your comments, can we take what do you think Unicast will grow revenues in 2009 and then, I didn't hear anything outlook for Springbox, can you give us an outlook for '09, generally for that? Thanks.

Omar Choucair

Sure. Yes, let me see if I can go back. In terms of the pricing, and when we talked about the pricing before and I don’t know if we really need to talk about pricing. As Scott talked about, we've talked about it before and I don't know if it's necessarily relevant time and place to talk about all the pricing that we have with our outside customers right now, Jason.

Jason Helfstein - Oppenheimer

Okay.

Omar Choucair

But you can expect that they are roughly the same as what we've talked about in the past, and I think that's probably the best way to handle that.

In terms of the SD, HD revenue mix, there is a pattern, we are seeing it. As we have customers that are submitting orders in HD, then those orders are not coming in SD. So, you should assume, and anybody else that's run into the model. You should assume that if HD is going to grow, it's going to be at the expense of SD and I think that's best fair.

So, I think, in the other piece, as it obviously relates that the HD comes in, obviously is at a higher price than what the SD is. In terms of Springbox, you're right, we should have talked about Springbox is, what Scott had mentioned, lot of the managers and the owners of the business did stay within Unicast and Springbox in between.

Adam and Dan running the business in Springbox, they have an operation in Austin, they have an operation in Los Angeles and they are doing a very good job in terms of managing that business in uncertain economic times. So, they have a good group of people that are very focused on super serving the customers that they have and they have blue chip customers, some of the same customers that we do. And we continue to have a lot of confidence in fact that those guys can run that business for 2009 and 2010.

Jason Helfstein - Oppenheimer

And just on Unicast just confirm that we should takeaway that you think that business is going to grow in '09 Scott based on your comments?

Scott Ginsburg

I think that from a top line point of view you should take away that we will have significant revenues in Europe that we not had before and it's our agency channel business in the US will grow and that we will maintain and grow our publisher channel as well.

Jason Helfstein - Oppenheimer

Okay. Thank you.

Omar Choucair

Thanks.

Operator

We will now take Carter Malloy with Stephens Incorporated.

Carter Malloy - Stephens Incorporated

I understand you're reluctant to give guidance in this type of operating environment. Can you maybe just give us a sense of your comfort as it relates to consensus for '09 maybe like you did in last quarter?

Omar Choucair

Hi, good morning Cart, how are you?

Carter Malloy - Stephens Incorporated

Very well, thanks.

Omar Choucair

Good. I think in terms of answering specifically the question about the guidance and obviously the company, Scott and I and members of the company spend a lot of time looking at what's going on in the marketplace and how we feel about our company and the prospects that we have inside our business.

And I think we came to the conclusion that, we feel very good about our business. We feel good about our people. We feel good about our technology, but I think the issue and we feel good about the long-term prospects that we have inside the company, but the fact is there is some uncertainty that's in the marketplace that we think limits the visibility that we have and the predictability that we have.

And I think what we are trying to say is, that because of that, people shouldn't take from that, that we don't feel strongly about the opportunity in the growth prospects and the company. Is just that today on February 12th, is just not appropriate for us to really talk about full year guidance for '09 and really discuss the consensus numbers that analyst have for '09. So, that just where we came out based on what we see in the marketplace, but again, we going to reiterate that doesn't it all suggest that we're not confident with the long-term prospects of the company.

Carter Malloy - Stephens Incorporated

Okay, great. And then some maybe couple of more and I get out anyway here. So, the other is outside of the very impressive HD revenues you guys put up this quarter. Can you talk about the relative softness in the core business, was that, I mean, I guess a little bit there was related to Enliven, but also maybe internal transition of Vyvx customers to digital indoor and ad slowdown some kind of combination of all three?

Scott Ginsburg

This is Scott. I’m not exactly sure, which of one of your point that, I should take up, but. If we’re talking about 2008, we didn't see any slowdown in the fourth quarter, in fact as you can see it was a stellar quarter. We have noticed obviously, as you have noticed that a number of companies have taken some dramatic actions with respect to the workforces.

Obviously, with respect to their advertising for the first half of 2009, because of our HD efforts and because of our movement forward in the rich media, two areas that are growing, probably the two brightness spots in advertising this company has its arms around and continues to move forward on. So, in light of that, we've also want to be aware and knowledgeable and not overstate anything that we feel, but I got to tell you that our business is been based on continuing to convince those who do not use electronic distribution platforms to use electronic distribution platform. Let’s recall that 65% of the marketplace is electronic and 35% is dub and ship.

Our efforts this year will continue to move that 35%. One of every $0.03 that are dub and ship and we don’t touch into our electronic distribution platform. It will be to turn the FT work that will be turning to HD work into DG FastChannel work. It will be to move towards the rich media sector and grow our publisher business and move into a much, a larger vertical, which is the agency business.

We have no ability to predict where the economy will go. Obviously like everybody on this phone call, we want it to be over like a one-hour drama, we would like to think we are in minute 54. So that during the next six minutes, we can get the drama over and get our commercials run and hopefully we get to run them.

But we are not in a position. We are aware of the macroeconomic situation. We are aware that it probably makes more sense for us to talk about our long-term prospects, to talk about where we sit inside this advertising environment and be aware that the HD TV trend is getting stronger. It is being focused on like it never has. A few years ago when Omar and I would talk about HD, people would raise their hand and say what does HD mean? They would have no idea.

So we are way beyond that and we're down a path where the President, the Congress, advertisers, and advertising agencies, TV stations, investors are all trying to figure out what is the right thing to do for the country and what is the right thing to do for their brand and we are in a very fortunate position to take advantage of that, this year, next year and beyond.

So, as far as commenting on the advertising recession or the overall economic condition, this company has seen, that there are fewer commercials being made and that’s a fact but the commercials that are being made and we're distributing, we're doing more business with more customers than we ever have before.

We are selling out more HD spots than ever before and we are working on more campaigns. Newer campaigns on behalf of rich media service than we ever had before. So we are cautiously optimistic about this year and we are extremely optimistic about our prospects moving forward.

Carter Malloy - Stephens Incorporated

Okay great. I appreciate that and may be one last on the HD there. We've already seen around 190 broadcast stations sending out digital signals and it's expected something about 500 more that will go ahead and switch next Tuesday despite the date being pushed back. Do you guys have a sense of how many of these have already switched or that are about to, will be going ahead and broadcasting HD signal as well.

Scott Ginsburg

Well, we think that the Federal Communication Commission and the Congress was taken by surprise by the number of stations that want to turn off their analog switch mix on the 17th. When that happens obviously they can broadcast. Every station in America today has the ability to broadcast an HD signal and then the question is do they have to run HD content?

And from a national network point of view they will be able to. The only issue for us and our company is whether they can ingest at a local level and take a HD spot. And so we believe that there is over 400 stations today that can in fact, ingest one in cable and TV networks. That’s where the bulk -- that's actually where 100% of the HD advertising we carry has been directed. So there are another 3800 outlets that will be turning themselves on over the next four months.

And then the question is at what rate will those 3800 additional stations be able to take and ingest an HD spot and that gives you a feeling for how bright our future is versus what we've done with limited signals and limited stations that take our spot. That number is apparent from our release and from Omar's and my comments today.

So the future is very bright for the company in terms of what's going to happen from this point forward. It’s bright not only because of the number of signals that turn on, the number of stations that become capable, but to focus the country’s and the consumers focus on HDTV over the next 120 days. It’s very significant and I think it’s very helpful for this company.

Carter Malloy - Stephens Incorporated

And I will appreciate being able to see the piece of that 3800 that does go to HD, but I guess my question was more around with the 190 that are already switched that it’s fairly good sample size. If you guys have engaged for how many of those would be broadcasting HD?

Omar Choucair

I’d have to say we hadn’t cross represented the way that you are suggesting, but I’d say it’s probably a pretty high percentage. And we can go back and do that Cart, we just haven’t gone back to cross reference and I guess really what we were going to wind up is let just see you know sometime over the next week or so. How many actually start broadcasting in the digital transmission and then we will have a better sample size if you will. We haven’t done that math yet. But we will and I appreciate you highlighting to us.

Carter Malloy - Stephens Incorporated

Okay, great. Thanks a lot guys.

Operator

Your next question is from Murray Arenson with Janco Partners.

Murray Arenson - Janco Partners

Thanks good morning guys. Congratulations on the quarter. Couple of questions, can you and follow-up on your macro commentary Scott, can you talk about try to correlate ad deliveries with what’s going on in the overall environment with respect to ad spending or pricing or inventory levels. Just so we can get more a year end of the business.

Scott Ginsburg

Yes, I would tell you that, we have the opportunity to make some I think we have some fairly good insights into the industry, but it’s not as positive and there is lot’s of inputs that we get.

From our perspective as you well know when the broadcast and TV market. Let me give you as an example, the Super Bowl. The Super Bowl gets approximately $3 million per spot and the DG FastChannel delivered most of the spot for Super Bowl this year. But we didn't get more money to deliver a $3 million spot then we got when that spot only cost $10,000.

So, luxury member in the advertising services business, we don't see the wild swings in the advertising market between what a spot might be worth on the open market for an event such as an Academy Award or the Super Bowl or what it might be worth on the local news or on afternoon TV or in primetime.

We don't have those fluctuations and in this environment, in which we're seeing a revolution between our SD offerings and our HD offerings, we have this opportunity to move our company forward even in light of the fact that the advertising recessions here.

Now, it will mean that obviously that would we like to see a marketplace in which TV advertising is increasing at unprecedented rate, the answer to that is obviously, yes. That's not happening and it's not happening for two reasons. One which you pointed out is, there are probably fewer commercials and two, they're not getting as much for those commercials.

So, those are all true statements and it is one of the reasons that Omar and I today have made the statements we've made. We see that we are in the right place, positioned in a very a new role position and at the same time, we're well aware of what's going on in the broadcast TV station model, at the network level, at the content level of all the people providing content, we are very aware of that.

And so, with that, you'll have to see that there is the good and the bad, but this company has positioned itself pretty much for it's, what good is happening in our broadcast industry and then certainly in the new media and mobile device. What's going on there? I said, unfortunately I’m one of these people that would like to say, when I take my family out to dinner that I leave my mobile phone behind, I don't think that many of us doing shame on us, but we're just a different society.

We are going to get our information from an elevator, a video and an elevator, we are going to get our information from an electronic outdoor sign or from at the gas station or from our mobile device or from just sitting behind our computer and reading the news on one of the major portals, be it AOL, ABC, episodic players, whether it would be ABC's episodic player or FOX or someone.

We are going to fully participate in all that and the goal of this company always was is to position ourselves in our unique way for technology that would be adopted in the years 2009, 2010, 2011 and in the future and I think we've gotten that. And that doesn't mean we're finished and it doesn't mean that it's game over. The way we look at it, the game just got started.

And, there is going to be challenge after challenge, that's what we have confronted for 10 years now as officers of this company and as owners this company and we continue to believe that those challenges provide us with additional opportunities.

Murray Arenson - Janco Partners

Okay, great. And then Omar I had a couple of financial questions. I want a follow up on your comments on the bridge loan refinance. Can you talk through it? Are you still talking about getting that down first half of '09 and I how you saw the credit markets right now in assessing what your opportunities are going to -- what kind of terms your looking at refinancing at now versus maybe waiting a little bit longer and seeing how the credit markets behave over a longer term?

Omar Choucair

That's fair and obviously we try to follow the credit markets as closely as we can and I am not sure if Scott and I can look in our crystal ball and make a determination as to the impact of a stimulus plan, the federal reserves plan. It’s really hard for us to do that. So because of that, I think our view is that we just need to take action as soon as we can as opposed to wait and I think in terms of the company, we would like to get this done as soon as we possibly can.

So I would just take from this comment that we were interested in doing it now and not later. So that's one thing and the second thing is I mean there are ranges of opportunities for us in term of pockets of liquidity and I think what we have to identify those pockets of liquidity and how they relate to a small and mid cap public company, such as ourselves that has a good profile, has liquidity on the balance sheet and undrawn revolver, a free cash flow generating company. And we feel good about the opportunity to leverage those things with the opportunities as they arise. And we do have a range of alternatives and we just have to get through the next 90 days and execute on one of them and that's really where we are.

Murray Arenson - Janco Partners

Okay. Perfect.

Omar Choucair

Hopefully that helps little bit for you.

Murray Arenson - Janco Partners

Yeah, absolutely.

Omar Choucair

Okay.

Murray Arenson - Janco Partners

Do you have a number for cash flow from operations for the quarter?

Omar Choucair

We don’t do a cash flow from operations for the quarter, but I mean obviously if you want to look at free cash flow, for the quarter, if you just took our EBITDA and then reduce the EBITDA for the interest and then for the CAPEX, we would consider that a free cash flow number. I am not sure that’s an operating cash flow number that you’re referring to.

Murray Arenson - Janco Partners

Okay. All right, we will work with that. All right. Thanks very much.

Omar Choucair

All right, take care.

Operator

Your next question is a follow-up question from Richard Fetyko with MCF. Mr. Fetyko, you may proceed with your question.

Richard Fetyko – MCF

Guys you mentioned initiatives or ways to bench rate some of the local regional markets with additional sales. Could you elaborate on that and how you’re approaching that?

Scott Ginsburg

Would you repeat that question please?

Richard Fetyko – MCF

You mention that there 40% of the industry is still dub-and-ship and that’s most of that happens on the local or regional level and that you see there is an opportunity. How you’re going about addressing that opportunity?

Scott Ginsburg

I see, well obviously we using our crack sales team and throughout we have a platform that is located throughout the country. We’re going down to the local level and visiting with every TV station and getting information from them on local, from local advertising agencies and regional advertising agencies and then beyond that we also have an opportunity and have been converting a number of direct response advertisers, who need a significant amount of handholding through either tagging efforts or other efforts to put on their specific 800 numbers or whatever at a station at a time and we have developed a service to get that done as well.

So we believe that we've had to improve our services platform and improve ability to go from the national and regional level, to move our sales staff to regional and local level. So I think that all those shift in the balance of our being able convert the one-third of the market that really is a dub-and-ship market to our electronic platform.

And we won’t get it all at once. If you look at the growth curve from over the last 10 years, it has gone from 7% or 8% that was electronic, up to 65% is electronic as of the end of 2008 and so it wont all happen in one year, two years or three years, but certainly it will happen over the next three or four, five years.

Richard Fetyko – MCF

Okay. Thank you.

Operator

Your next question is from Robert Coolbrith with ThinkEquity.

William Morrison - ThinkEquity

So three or four questions I'll shoot them out now and you can maybe respond on them in whatever way you like.

Scott, I think you said on the call that you are aiming for 6% to 9% of volume in HD by the end of the year. Last quarter I believe you guys said it was 9%, so are you lowering your expectations there or if you just have to give the range of last quarter?

Question number two is that I was a little bit surprised that HD didn't pick up as a percent of volume. I think you said it was 3% plus or minus last quarter and 3% this quarter. What I'm wondering is can you give us maybe little bit finer detail because there is so much leverage in the model it makes a big difference, for instance if you were at 2.8% last quarter and 3.2% this quarter, I just was wondering if you could kind of narrow down, and give us a little bit more detail there.

Question number three is, can you give us what percent of the HD was electronic versus dub-and-ship in the quarter. And last question is, can you give us some kind of an idea, what the Enliven revenue was in the quarter?

Omar Choucair

Hey Bill Good morning. Let me see if I take some of these in reverse. So in terms of the Enliven and we've actually started to referring to the companies as Springbox and Unicast and the revenues for the combination of those two was about $5.2 million or $5.3 million during the quarter.

In terms of the next question, the amount of HD that was submitted electronically, I think it was a little less than 20% during the quarter for Q 4.

William Morrison - ThinkEquity

Okay.

Omar Choucair

In terms of the next question, we look at the HD penetration during the quarter, at the end of the quarter; I know you're trying to get to a very granular number. So maybe we can talk a little more about the granular numbers, because we know that they are sensitive on the model. We can take that outline. But I guess, from the way we look at it is, we had roughly coming out of the Q3, I think it was 2.8, Scott and I just, we just said 3%. I mean if it’s two points every round.

So when we look at Q4, the number was obviously a little higher than 2.8%, it was 3%. So I can try to go back and dig those and offer those up to you. But I think the takeaway is, yes, it did go up from Q3 to Q4.

William Morrison - ThinkEquity

Right.

Omar Choucair

But there were percentage points in…

William Morrison - ThinkEquity

No that’s helped. I was just wondering if those go up.

Omar Choucair

And then in terms of the other thing, I know people are very focused on the expected penetration on HD. And I think what we said back in November, was that we thought it would triple up to about 9% and I think that’s what we are saying today and like we said, we don’t have this crystal ball that's any better than somebody else's crystal bal. And we think by the end of the year that hits that 9%.

And if it’s somewhere between 6 to 9%, it’s hard for us to say but that's where we think it is. So I don’t know if that's helps you or not. I wouldn't characterize our comments as retreating from what we had back in November, it’s just that if you look at the numbers and say that we did $9 million in Q3, we did $12 million in Q4.

William Morrison - ThinkEquity

Okay. That's helpful. I appreciate it. Thank you.

Omar Choucair

And we can talk offline a little more about the percentage points.

Unidentified Analyst

Thank you very much.

Omar Choucair

You are welcome.

Operator

Ladies and gentlemen, I would now like to turn the call back over to Mr. Scott Ginsburg for closing remarks.

Scott Ginsburg

We've had a, very good discussion today and we have provided our investors with an opportunity to understand our business and our business model moving forward. We feel very good about our position. And the acquisitions we have undertaken have done well for us.

There is a lot of opportunity as we move forward and we think that as we do move forward we will be able to see our investors, glad to have one-on-one discussions, be on the telephone at anytime and certainly on the internet and see you there. And appreciate the level of support we have received in the past and appreciate the opportunity today to have this discussion.

So with that operator, this will conclude our phone call. Thank you very much.

Operator

Ladies and gentlemen we thank you for your participation in today's call. This concludes the presentation and you may now disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: DG FastChannel, Inc. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts