New Frontier Media, Inc. F4Q09 (Qtr End 5/31/09) Earnings Call Transcript

New Frontier Media, Inc. (NOOF)

F4Q09 Earnings Call

June 11, 2009 11:00 am ET

Executives

Grant H. Williams – Chief Financial Officer

Michael Weiner – Chairman of the Board, Chief Executive Officer & Secretary

Ken Boenish – President

Scott A. Piper – Chief Information Officer

Analysts

[John Ralph] – Aragon Capital

Eric Wold – Merriman Curhan Ford & Co.

Presentation

Operator

Welcome to the New Frontier Media fourth quarter fiscal 2009 earnings release conference call. During today’s presentation all participants will be in a listen only mode. Following the presentation instructions will be given for the question and answer portion of the conference. (Operator Instructions) As a reminder, today’s presentation is being recorded June 11, 2009. Before beginning today’s presentation I’d like to turn the conference over to our Chief Financial Officer of New Frontier Media Grant Williams.

Grant H. Williams

Welcome to the New Frontier Media fiscal 2009 fourth quarter results conference call. With me this morning are Michael Weiner, Chief Executive Officer of New Frontier Media, Ken Boenish, President of New Frontier Media and Scott Piper, the company’s CTO. For the call this morning Michael will begin by providing his thoughts on the current quarter results by providing his thoughts on the current quarter results and also comment on our strategic direction. Then, I’ll discuss the detailed financial results and strategy before opening up the call for questions.

A replay of this conference call will be available for seven days at 1-800-406-7325 using the pass code 4091972. This call will be archived for 12 months on our website at www.Noof.com under investor relations calendar of events. This call is also being webcast. During the question and answer session those of you listening via the Internet will be able to ask questions. Please submit your question via email to [e-mail].

During this call we will make references to certain non-GAAP financial measures. This information including a reconciliation to the most directly comparable GAAP financial measures is available in today’s earnings release. A copy of our earnings release is available at our website at Noof.com under investor relations news releases. All information discussed during the conference call is current only as of today or as of the date of the applicable financial results and the company assumes no obligation to update information discussed during this conference call.

During this conference call management may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 including statements regarding the company’s expected financial position and operating results, it’s business strategy, it’s financing plans and the outcome of contingencies.

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

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

Michael Weiner

Under uncertain economic times New Frontier had a solid quarter. We did this by focusing on our core competency, managing our costs, being flexible by actively managing both our current and new business models relative to the changing economy and by consistently providing what we believe to be the highest quality content to our customers. Before I discuss the quarterly results first and foremost I want to thank the employees of this company for their hard work, creativity and attention to detail in helping us maintain the high standards we bring to the industry.

We believe our operational philosophy as well as the experience of our employees will keep us in the forefront of our industry for a long time. By way of example, our directors, managers and key executives have been with us on an average of seven years. This has provided the company with what we believe to be an operational advantage. Many of our employees have held a variety of positions within the company which provides us with an infrastructure of key people with a vast amount of legacy knowledge. We believe these skill sets provide us with the ability to continue to grow the business worldwide both in efficient and cost effective manner in the future.

For the current quarter results we reported growth in revenue of 8% as compared to the same prior year quarter. Net income from operations was also strong and increased as compared to the prior year quarter after normalizing the results for a non-cash intangible asset impairment charge and other restructuring charges. For the full year we improved our cash flow from operations to $8.5 million.

Over the last year we have successfully diversified our revenue by gaining distribution for our core TV product in markets outside the US. In addition, we have demonstrated our ability to distribute content outside of the adult category to our domestic partners with the launch of our Lightning VOD product. Overall, we believe that the company is solid and poised for growth in fiscal year 2010 and the years to come.

For the transactional TV segment we received a partial year benefit from our new international distribution and effectively one month of benefit from an additional distribution to a new VOD customer with 3 million subscribers. We expect to receive full year benefit from this new distribution in fiscal year 2010 which will contribute to revenue growth next year. Additionally, our superior content performance on both domestic and international platforms has provided us with opportunities in some select geographic regions to replace our competitors pay-per-view channels and gain incremental shelf space on existing VOD customer platforms. We expect to continue this trend and that this incremental distribution will also contribute to growth within our transactional TV segment in fiscal year 2010.

For the film production segment, we believe this business has now stabilized and should grow revenue and return to profitability in fiscal 2010. We expect to recognize an additional $2.5 million in fiscal 2010 from a producer to hire arrangement and we’re optimistic that our distribution of mainstream content to retail VOD markets and domestic VOD customers will contribute meaningful revenue for this segment in the year 2010.

Regarding the direct to consumer segment, we are enthusiastic about the [inaudible] that is occurring with IPTV and the emerging customer electronic platforms. Our direct to consumer segment has made investments in technologies to exploit these markets and will judiciously continue to pursue research and development projects that capitalize on and to leverage these emerging technologies.

Future opportunities within the segment may include exploiting new product or partnering with companies already gaining market share with offerings that may include display devices such as network televisions and other in home consumer electronic devices, set-top boxes and mobile communication devices. Our current direct to consumer initiatives have been streamlined based on current economic conditions. In that endeavor we expect to reduce the company’s ongoing cost by between $1 and $1.5 million in fiscal year 2010 and still maintain the integrity of the projects.

We recognize that there are many challenges for us ahead but at the same time we see a wealth of opportunity. Overall, we are optimistic about the outlook of fiscal 2010 and expect to continue to gain market share in the US, expand our distribution to international markets and roll out new mainstream services.

Now, I’ll turn the call over to Grant to discuss the financial results in more strategic detail.

Grant H. Williams

I’ll start the discussion by providing some details on the operating segment performance and then briefly discuss consolidated results and our liquidity position. I’ll wrap up my discussion by providing some strategic directional information before opening up the call for questions. The transactional TV segment revenue was in line with the same prior year quarter and was $10.7 million. VOD revenue included approximately $0.9 million of revenue associated with the settlement of historical paid and unpaid amounts from a domestic cable operator.

We believe the unfavorable economic conditions have caused downward pressure on the general adult VOD category revenue during the current quarter resulting in fewer consumer buys. However, our successes in adding new domestic and international VOD distribution offset the general decline in category revenue. The current quarter of VOD revenue results included approximately $0.4 million of incremental international revenue.

Our pay-per-view revenue was also negatively impacted by the unfavorable economic conditions which resulted in a decline in that product’s revenue of approximately $0.9 million. Unlike our VOD product, it is much more difficult to positively impact the pay-per-view revenue through actions such as adding incremental shelf space and changing menu structures and as a result, we believe our pay-per-view product has been more significantly impacted by the unfavorable economic conditions.

Moving to the transactional TV segments cost of sales, expenses increased by approximately 11% to $3 million. The increase is due to additional transport costs necessary to support the VOD growth, higher transponder cost to support additional pay-per-view channel offerings and an increase in content amortization costs related to the distribution of higher quality and cost content. Operating expenses also increased to $2.3 million from $2 million in the same prior year quarter primarily due to additional domestic advertising and promotional costs and for the current quarter the transactional TV segment reported $5.4 million of operating income as compared to $6.1 million in the same quarter the prior year.

In the film production segment, revenue increased 86% to $2.6 million as compared to the same prior year quarter. The current quarter benefited from an increase in owned content revenue related to the partial delivery of the third installment of a 13 episode series and the delivery of other owned content titles to premium owned cable channel customers. Cost of sales for the film production segment increased to $1.1 million as compared to $0.6 million in the same prior year quarter as a result of additional film cost amortization consistent with the increase in owned content revenue.

Operating expenses were in line with the same prior year quarter and the film production segment generated operating income of $0.3 million in the current quarter as compared to an operating loss of $0.3 million in the same prior year quarter. Moving to the direct to consumer segment, revenue was approximately $0.3 million and declined from approximately $0.5 million in the same quarter of last year due to a decline in web memberships believed to be associated with the unfavorable economic environment.

For the current quarter this segment had an operating loss of $1.9 million as compared to approximately $0.3 million in the same quarter last year. The current quarter loss includes approximately $1.1 million in charges associated with the impact from restructuring our new product operations. For our corporate administration results costs declined to $1.8 million as compared to $2.5 million in the same year prior year quarter. This decline was primarily caused by the company’s decision to not award any executive bonuses for fiscal year 2009.

For the company’s consolidated results, revenue in the current quarter was $13.6 million as compared to $12.6 million in the same prior year quarter and for the full fiscal year 2009 we had revenue of $52.7 million as compared to $55.9 million in fiscal year 2008. For the current quarter we reported net income of $1.2 million or $0.06 per share as compared to net income of $1.9 million or $0.08 per share in the same year prior quarter and the net loss for the full fiscal year 2009 was $5.2 million or $0.24 per share as compared to net income of $8.7 million or $0.36 per share in the prior fiscal year.

Keep in mind that we recorded $12.4 million in impairment and restructuring charges in fiscal year 2009, the majority of which were non-cash. We generated $8.5 million of cash flows from operations for fiscal year 2009 as compared to $8.2 million in the prior fiscal year and as of March 31, 2009 we had approximately $16.1 million of cash and investments.

Before we move to the Q&A portion of the call I’d like to discuss our strategic objectives for fiscal year 2010 in a little more detail. As a reminder, the company’s policy is to not provide specific forecasts for the operating segments or consolidated results. However, we do feel it’s important to provide general directional information for purposes of communicating the company’s strategic direction and our internal objectives.

For the transactional TV segment we will be focused in fiscal year 2010 on continuing to grow our international distribution. New international revenue contributed approximately $1 million during fiscal year 2009 and we expect that international revenue will increase to between $2 and $2.5 million in fiscal year 2010. Domestically we’re expecting transactional TV revenue to be flat to slightly up. This expectation assumes that we will continue to increase our shelf space on domestic VOD and pay-per-view platforms and the benefits from the incremental shelf space will be partially offset by the recent depressed buy rates which we are expecting to be a continuing trend in fiscal year 2010.

For the film production segment, we expect revenue to benefit from a producer for hire deal in the second half of fiscal year 2010. We are also optimistic that new distribution of mainstream content through domestic VOD and retail markets will result in a meaningful increase in this segments revenue in fiscal year 2010. Within the direct to consumer segment, as previously discussed, we have restructured our operations related to new product initiatives within that segment and we are expecting that this restructuring will result in a reduction in fiscal year 2010 ongoing expenses of between $1 and $1.5 million.

For our cash flows we expect the impact of our combined efforts will translate to a meaningful increase in our cash flows from operations in fiscal year 2010. So, overall we are cautiously optimistic about fiscal year 2010 and we believe that we can grow revenue, net income and operating cash flows despite a very challenging economic environment.

That concludes our prepared remarks so now let’s open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [John Ralph] – Aragon Capital.

[John Ralph] – Aragon Capital

A few questions for you, first of all just a little bit of detail, it looked like the tax rate in the fourth quarter was a few points higher than what you’ve been booking historically. What should we be using on a go forward basis for the company’s consolidated tax rate?

Grant H. Williams

The way we’re forecasting it right now internally is our expectation that that rate going forward will be around the 40% mark.

[John Ralph] – Aragon Capital

Secondly, you had mentioned last quarter on the call that you were I guess given the sort of restrictive financing environment that you guys were seeing some external opportunities where you could invest some cash for a nice return particularly in the film production business. Any updates in that regard? Are those opportunities still there? Sort of where do things stand? Are you still seeing things come your way that you think would be interesting?

Grant H. Williams

I think what we talked about on the last call is for our film production segment with what’s been occurring with the credit markets a lot of our competitors within that space really require the credit markets to finance their productions. Our film production segment has the benefit of having the parent company with a large amount of cash and investments back those productions so we’re not required to access the credit market.

So, we don’t have any definitive arrangement set up where we’re capitalizing so far on those situations however we are speaking with potential distributors about additional distribution deals. We’re optimistic that we’ll be able to capitalize on that but at this point in time we don’t have anything definitively papered in connection with those opportunities.

[John Ralph] – Aragon Capital

Then my last question I was hoping you could provide maybe a little bit more color on the direct to consumer segment. Again, going back to last quarter I think what you had mentioned was that you had sort of developed I guess a partnership structure whereby you could I think push some of the expenses off and maybe give up a little bit of the upside to some partners in the local markets. What has the response been? It sounds like you’re taking the expenses down but you’re not kind of killing the project all together. Can you give any more color in terms of sort of what the response rate has been and sort of how this segment is being restructured to take the expenses down? Is it just sort of moving further in the direction of what you had talked about last quarter with respect to partnering or sort of what’s going on there?

Ken Boenish

As you know, we’ve successfully rolled out the set-top box service to some customers in the UK based on our previous marketing efforts. What we found is that a cash spend on marketing to acquire those customers was not a real efficient way to acquire new customers and we decided to turn down our own marketing efforts and partner with other companies that have an existing customer base that they can easily and cost effectively market our product to.

We have at least one deal in place to that effect and that should be rolling out in the next few months. We’ve got a few other deals, partnership marketing arrangements that we’re currently working on and we’re hopeful that we’ll be able to get those instituted in the next few months as well. So, we’ve successfully eliminated a lot of the expense associated with that product. We’re confident that consumers enjoy the product and that we have a very low churn rate and so to the extent that we can find some success through these partnership marketing arrangements we think we’ll have a decent business here.

[John Ralph] – Aragon Capital

Just the last follow up in that regard, in terms of the one deal that you’ve signed with a partner, is that a UK based partner or sort of geographically is it still a UK focus or are you looking at other partners across continental Europe at this point?

Ken Boenish

We’re actually looking at partners across continental Europe and we’re looking at some niche partners in other parts of the world s well. For competitive reasons I really don’t want to get in to any more detail than that.

Operator

Your next question comes from Eric Wold – Merriman Curhan Ford & Co.

Eric Wold – Merriman Curhan Ford & Co.

Do you mind, do you characterize, you talk about the buyer rates domestically declining [inaudible] do you characterize the magnitude of that if there’s anything you’re kind of specifically seeing regionally, type of product, price points?

Ken Boenish

We’re seeing a slight decline on just about every platform across the country in terms of category decline. Even though the category has been declining our performance on many of these platforms is actually improved as operators continue to allocate more shelf space to the New Frontier product because of its superior performance. But, we are concerned about the category as a whole and our distribution partners are sharing that concern with us. This is why we’re really working with our affiliates to do a lot more marketing of our product.

We’ve seen our distribution partners become much more motivated to execute on marketing strategies and we’re also exploring new concepts like cross platform bundling, over the top IP delivery through the cable operators and also exploring a reset of retail prices. Because of the economic downturn we think that consumers are being a lot more cautious about how they spend their money and when they see a single adult movie for $14.95 that maybe for the first time they’re thinking twice about that purchase. So, we do actually have a few customers instituting some price testing and we’re hopeful that that will return the category to its previous luster.

Eric Wold – Merriman Curhan Ford & Co.

If we look at operating expenses at the company obviously, it seems to have come down significantly from where they were in Q4, $5.7 million the past quarters were somewhere in $6.5 to $7.1 million. I know you mentioned you didn’t pay any bonuses in Q4, have they been accrued in the prior three quarters, does Q4 represent kind of a reversal of accrual or was the Q4 ’09 number kind of a true operating expense number?

Grant H. Williams

So, we had accrued some level of bonus amounts in some of the prior quarters but relative to Q4 last year there was also some expense within that quarter consistent with the current quarter. I guess the way I would suggest thinking about those expenses and specifically the corporate administration segments expense going forward in to 2010 is I think a better picture of what we would expect those expenses to look like going forward is what we saw during the first three quarters of fiscal 2009. That’s probably a more appropriate run rate to consider for 2010 versus just taking the current quarter and pushing it out.

Eric Wold – Merriman Curhan Ford & Co.

Just a couple of housekeeping things, on the $900,000 catch up that was done on the settlement on the VOD side, were there any costs involved in that in the P&L or was that a pure almost pass through down to the pre-tax?

Grant H. Williams

That was pretty much a pure pass through.

Eric Wold – Merriman Curhan Ford & Co.

Lastly, on the international side obviously great growth going from the million or so on the back half of this year to $2 to $2.5 next year. Can you give a sense of kind of what you’re assuming in that level in terms of potential household adds, kind of what the revenue per household looks like versus what we’re seeing here in the US? Is it comparable to what we’re getting here or are you kind of assuming a little bit of a lower level to be conservative?

Ken Boenish

It’s been a little bit lumpy lately because of fluctuations in currency. So, there is a little bit of that affect but overall on a per household basis we generate a bit more revenue because our splits with operators are much more favorable outside the US. In some areas we’re operating as high as a 50% split. So, when we look at the environment outside the US we really look at the fact that our largest competitor generates in the neighborhood of $50 million a year from international distribution and that’s just from the existing market.

However, many markets such as in Latin American and Europe are just not rolling out digital services and the capacity to offer VOD. We think that will create even more opportunity for us going forward. So, the bottom line is we think we will compete just as well internationally as we do domestically. The early trends are proving that out, we’re quickly emerging as the top performer on many of the larger systems that we’ve recently gained distribution on and these operators have already begun allocating more shelf space to our product. We think that’s all good news for us.

Eric Wold – Merriman Curhan Ford & Co.

Last question, on the film production group side, some of the shrink in Q4 was the partial delivery of the 13 series episode so will that be another kind of partial delivery in the current quarter?

Grant H. Williams

That’s our expectation right now Eric. We’re expecting kind of based on where we are right now to pick up in Q1 through the remaining delivery of that episodic series another $1 million in revenue.

Operator

Management at this time we have no additional questions in the queue and I’ll turn the conference back to you at this time.

Michael Weiner

Thank you all and we look forward to talking to you again next quarter. Thanks everybody.

Operator

Ladies and gentlemen at this time we will conclude today’s teleconference. We do thank you for your participation on the program. You may now disconnect and thank you for using ACT Teleconferencing.

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