Image Entertainment Inc. F3Q09 (Qtr End 12/31/08) Earnings Call Transcript

| About: Image Entertainment, (DISK)

Image Entertainment Inc. (OTC:DISK) F3Q09 (Qtr End 12/31/08) Earnings Call February 12, 2009 4:30 PM ET

Executives

Michael B. Bayer – Associate General Counsel

Jeff M. Framer – Chief Financial Officer

David A. Borshell – President

Operator

Good day, and welcome ladies and gentlemen to the Third Quarter 2009 Results Conference. At this time, I would like to inform you that this conference is being recorded, and then all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation.

I will now ask Michael Bayer, the company’s General Counsel to read the Safe Harbor statement. Michael, please go ahead, sir.

Michael B. Bayer

Thank you operator. This conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, among other things, our goals, plans and projections regarding our financial position, results of operations, market position, product development and business strategy. These statements may be identified by the use of words such as “will,” “may,” “estimate,” “expect,” “intend,” “believe,” “plan,” and other terms of similar meaning in connection with any discussion of future operating or financial performance or other events or developments.

All forward-looking statements are based on management’s current expectations and involve inherent risks and uncertainties including factors that could delay, divert or change any of them, and could cause actual outcomes and results to differ materially from current expectations. These factors include, but are not limited to, (a) our ability to secure media content on acceptable terms, (b) our ability to service our principal and interest obligations on our outstanding debt, (c) the ability of our common stock to continue trading on NASDAQ, (d) changes in the retail DVD and digital media and entertainment industries, (e) changes in our business plan, (f) our inability to raise additional working capital on acceptable terms, (g) heightened competition, including with respect to pricing, entry of new competitors, the development of new products by new and existing competitors, (h) changes in general economic conditions, including the performance of financial markets and interest rates, (i) difficult, adverse and volatile conditions in the global and domestic capital and credit markets, (j) claims that we infringe other parties’ intellectual property, (k) the performance of business partners upon whom we depend, (l) changes in accounting standards, practices or policies, (m) adverse results or other consequences from litigation, arbitration or regulatory investigations, and (n) further sales or dilution of our equity, which may adversely affect the market price of our common stock.

For further details and a discussion of these and other risks and uncertainties, please see “Forward-Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K, and our most recent Quarterly Reports on Form 10-Q. Many of the factors that will determine the outcome of the subject matter of this conference call are beyond Image Entertainment’s ability to control or predict. Actual results for the periods identified may differ materially from management’s expectations. Unless otherwise required by law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

Thank you, operator.

Operator

Thank you. I would now like to turn the conference over to Jeff Framer, Chief Financial Officer. Please go ahead.

Jeff M. Framer

Thank you, operator, and good afternoon everyone. I'm pleased to report that we experienced a near record quarterly net revenue this quarter. It was 43% revenue growth, compared to the quarter a year ago. We had extremely strong release schedule that included ventriloquists meeting Jeff Dunham’s Very Special Christmas, the feature film, Stuck, starring Mena Suvari and the popular television series, Ghost Hunters with Season 4, Part 1.

I am going to spend a few minutes reviewing our consolidated financial results for our third quarter and nine months ended in more detail. Our net revenues were up approximately 43% to $39.2 million. This compared to $27.3 million for last year's third quarter primarily on strength of our new release schedule.

Our digital distribution revenues continue to become meaningful quarter-after-quarter they grew 88% to 976,000 versus 519,000 for last year's third quarter. Our gross profit margin for the quarter increased to 25.4% from 19.4% for last year's third quarter. Generally, when we have higher quarterly revenues we show a higher quarterly gross profit margin as there are a lot of fixed costs within cost of sales and when you spread them amongst higher revenues you end up showing a greater profit margin. Also we had a more favorable mix of higher profit margin item selling during the quarter, and also, we continue to benefit from reduced distribution and freight expenses.

Selling expenses were 9.8% of net revenues, which were down from 10.3% for last year's third quarter. Again primarily, as a result of spreading, fixed selling expenses for the current quarter over significantly higher quarterly net revenues.

General and administrative expenses increased 1% to $428,000 or $4,128,000 compared to $4,071,000 for last year's third quarter. This is a result of the proposed merger related costs that we incurred during this third quarter. We incurred $561,000 towards this merger that is proposed currently, compared to $228,000 that we incurred last quarter relating to a terminated merger process.

Importantly, even with these proposed merger costs included in this period, we still had earnings from operations of almost $2 million. $1,988,000 compared to a loss from operations last fiscal year for the third quarter of $1,747,000.

Interest expense was $876,000 compared to $901,000 for last year's third quarter. The non-cash component of interest expense is $370,000, or 42% of our total interest costs. Other expense was $794,000, and this is compared to other income of $603,000 for last year's third quarter. Both of these items are non-cash expenses and they are solely a result of the fluctuating value of the warrant that we have on our books, the warrant liability and embedded derivatives that both related to the Portside Growth and Opportunity note.

So, as our stock price rises and as we have higher volatility in our stock those are the factors that go into calculating what the liability would be and they go up and down depending upon the fluctuation. In this case, because of the merger announcement the stock price is a lot higher, the volatility was higher and therefore led to an $800,000 charge. Again it’s non-operating and it’s non-cash, but it does lower our net earnings for the quarter, which was $304,000, or $0.01 per diluted share compared to last year's quarter net loss of $2,052,000, or $0.09 per diluted share.

And the weighted average diluted shares outstanding for the quarter were 21,947,000 shares. So, for the nine-month period, our net revenues were up approximately 49% to $104 million. Last year, our total revenues for the entire fiscal year were $95.8 million. So quarter-to-quarter is 49% growth, $69.9 million was the total for the nine months last year. This is primarily on the strength of our new feature film release schedule and some selected non-feature film releases that really did well this quarter and prior quarters.

Our digital distribution revenues grew 68% to $2.7 million, versus $1.6 million for last year's nine months. Our gross profit margin for the nine months increased to 24.3% that’s up from 20.3% for last year's nine months. Selling expenses were 11.1% of net revenues, up from 10.1%, of net revenues for last year's first nine months. This is primarily as a result of increased advertising and promotion expenses associated with our new and emerging feature film business.

G&A expenses decreased 9.2% to $11.7 million, compared to $12.9 million for last year's first nine months as a result of number one, reduced non-operating proposed merger-related costs. So, the costs we have incurred in this year for the first nine months relating to this proposed merger were $627,000, as compared to $1.2 million for last year's terminated merger, and that was during the first nine months.

Lower depreciation expenses of approximately $605,000 were realized this year as a result of the prior year closing of our distribution facility. Importantly, we had earnings from operations even with the merger costs of $2,003,000 compared to a loss from operations last year of $6.4 million.

Other income was $2.2 million, a significant portion of which was the receipt of $2 million from our settlement involving that terminated merger agreement. And, included would be an expense, a non-operating expense from the revaluation of that warrant and warrant liability, embedded derivatives liability.

Interest expense was $2.6 million, compared to $2.5 million for last year’s first nine months. The non-cash portion of that $2.6 was $1.1 million, or 44%. And that those non-cash charges are associated with the amortization of debt discounts and deferred financing costs.

Our net earnings for the nine months were $1.5 million, or $0.07 per diluted share compared to the prior year’s nine-month period net loss of $8.3 million, or a loss of $0.38 per diluted share. The weighted average diluted shares outstanding for the nine months we used for the calculation were 21,886,000 shares.

With regard to our balance sheet at December 31, 2008, we had cash of $780,000. We have a sweep account, meaning any cash that we collect automatically gets swept to reduce our revolving credit facility with our bank any expenses that we pay, we actually borrow to pay them.

So cash in to lower the debt, cash out to and that increases the debt. So, in cash of $780,000, but our trade accounts receivable at the end of December were $30.4 million, which was 70% higher than the receivable level at March 31. And 58% higher than last year's third quarter, December 31, 2007.

The collection of a large portion of these receivables in January 2009, helped us fund the first scheduled $4 million principal payment, on the senior convertible note with Portside Growth and Opportunity Fund. That was due January 30, and we did pay that.

At December 31, we had outstanding borrowings of $12.1 million, under our maximum $20 million revolving line of credit, and we had borrowing availability of $7.9 million. Looking forward, we continue to make remain very excited about the business, and we increased our annual guidance. We expect revenues of between $128 million and $131 million, which is up from the last guidance we gave of a $120 million and $130 million.

However, in this fourth quarter, we don’t believe that we're going to see the kind of performance we just completed in our third quarter due to AR release schedule and the economy, which so far last quarter left us fairly unscathed, but now, with more and more press. We are experiencing albeit nice sales, but just not at the levels that we were experiencing last quarter.

And now I am going to turn the call over to David Borshell for his comments.

David A. Borshell

Thanks Jeff. Good afternoon everybody. As I discussed in the last conference call, management set two primary goals this fiscal year for the company. The first was to increase revenues over the last fiscal year, and the second was to achieve profitability. Thus far, we have clearly achieved both of these goals. However, we will be the first to state that we do need to find ways to strive stronger bottom line results. Even when faced with non-cash and non-operating expenses as Jeff just described.

With that said, we're currently reviewing our overall selling and operating expenses and we will make adjustments that are plausible and necessary in an effort to operate this company on a consistently profitable basis.

Our industry faces numerous challenges. We're seeing everything from staff reductions and consolidation of divisions at the major studio level to reduce purchasing and store closures at the retail customer level. Yet through it all, we've been able to pose successive successful quarters, reinforcing the business plan we put in place about a year-ago. While we are certainly not immune from this challenging economic environment, we seem to have found a nice position in our industry and intend to preserve and grow it.

Our upcoming release schedule has several noteworthy projects. On the feature film side, we have "In The Electric Mist" starring Tommy Lee Jones and John Goodman, which will be available on DVD and Digital, March 3. We have "The Lost World" starring with Winona Ryder and Ray Romano available on April 21, "Incendiary" starring Michelle Williams and Ewan McGregor available May 5; "Powder Blue" starring Jessica Biel and Ray Liotta available June 9; "The Edge Of Love" starring Keira Knightley and Sienna Miller available on July 14; and "Five Dollars a Day" starring Christopher Walken and Alessandro Nivola available August 11.

Many of you are also aware of the film recently acquired entitled ’Management’ starring Jennifer Aniston, Steve Zahn and Woody Harrelson. Image will be releasing this film theatrically in a limited number of markets, through Samuel Goldman films on May 15.

While Jennifer's recent films have performed extremely well at the Box Office. It's important for everyone to note, that the studios releasing these movies spend a tremendous amount of advertising dollars to promote and launch them. Image cannot commit the level of capital at the studio's disposal in order to affect a wide release.

However, we are making a significant investment in this film, and are working closely with the filmmakers and talents to maximize its success. We also recently announced our deal with Terry Fator, the 2007 winner of America's Got Talent. Since then Terry has signed a multiyear groundbreaking deal with The Mirage in Las Vegas as their newest headliner. And Image will be filming this show later this month with [Audio Disturbance].

We continue to proudly represent programming from the Criterion Collection, Discovery Lemony, One Village and our two newest partners Big Vision, which represents amongst other programs the popular Ghost Hunter series, and BK Entertainment an acclaimed children's animation production company. We're currently operating in our fiscal fourth quarter and as Jeff mentioned, we have provided full year revenue guidance in the range of $128 million to $131 million, which is well ahead of the $96 million we attained last fiscal year.

Lastly, while we appreciate that our shareholders and others are highly interested in the ongoing merger transaction, management is unable to comment further that this morning's press release indicating the company received the additional $1.3 million merger deposits. And the company is moving forward with the special meeting on February 24, seeking shareholder approval of the merger transaction.

From the inception of this deal, Image's Board of Directors has been exclusively handling the merger process and has directed management to focus only on Image's day-to-day business operations. As a result, I would ask that you all please enter any questions that you may have on the business and of the merger.

Operator, let’s go to the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And there appear to be no questions at this time. I will turn things back to Mr. Borshell. Please go ahead.

David A. Borshell

Okay. Well, again thank you everyone for joining us. We certainly are pleased with the quarter we just completed. We're now in our fourth quarter as I mentioned, we're looking to finish up the year as strong as possible and get into fiscal 2010 and hopefully be as successful or more than compared to the current year. Thank you, everyone.

Operator

Thank you. Ladies and gentlemen, if you wish to access a replay for today's call, you may do so by dialing 888-203-1112 or 719-457-0820 using passcode number 9249104. This does conclude our conference for today. Thank you for participating. Have a nice day. You may now disconnect.

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