New Frontier Media Inc. F1Q10 (Qtr End 06/30/09) Earnings Call Transcript

New Frontier Media Inc. (NOOF)

F1Q10 (Qtr End 06/30/09) Earnings Call

August 7, 2009 11:00 am ET

Executives

Grant Williams - CFO

Michael Weiner - CEO

Ken Boenish - President

Analysts

Eric Wold - Merriman Curhan Ford

Eric White - VR Innovations

Presentation

Operator

Welcome to the First Quarter Fiscal 2010 Earnings Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded Friday August 7, 2009.

I will now turn the conference over to Grant Williams, company's Chief Financial Officer. Please go ahead, sir.

Grant Williams

Good morning and welcome to the New Frontier Media fiscal 2010 first quarter results conference call. Joining me this morning are Michael Weiner, Chief Executive Officer of New Frontier Media, Ken Boenish, President, Marc Callipari, the company's General Counsel and Scott Piper, the company’s CTO.

We will begin the call this morning with Michael's comments on the first quarter results and our progress on key strategic initiatives, and then I will discuss the detailed financial results and strategy, before we open up the call for questions.

A replay of this conference call will be available for seven days at 1-800-406-7325 using the passcode 4132354. This call will be archived for 12 months on our website at www.noof.com, under the Investor Relations “Calendar of Events” tab. This call is also being webcast. During the question-and-answer segment, those of you listening via the internet will be able to ask questions. Please submit your question via 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” tab.

All information discussed during the conference call is current only as of today or as of the date the applicable financial results and the company assumes no obligation to update information discussed during this conference call.

During this conference call management may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including statements regarding the company’s expected financial position and operating results, its business strategy, financing plans and the outcome of certain 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 10-Q and 10-K.

I will now turn the call over to New Frontier Media’s Chief Executive Officer, Michael Weiner.

Michael Weiner

Thank you, Grant, and good morning everyone. I would like to start the call this morning by discussing several of the company’s key competitive advantages and the current market conditions and then briefly discuss the first quarter results.

Although New Frontier Media has been negatively impacted by the material deterioration in the global economy and related reduction in consumer discretionary spending, we continue to be well position to weather the current economic downturn and have positioned ourselves to benefit from the future economic recovery.

We are currently distributing content to approximately 224 million network homes, including almost 32 million new international network homes. We have replaced our competitor channels in our 70 million network homes, including nearly 3 million homes in the last 12 months.

Due to the superior performance of our branded content packages, we have able to secure a material amount of additional hours, a most major VOD platforms over the last year, and we believe this trend will continue.

For example, during the last quarter we gained nearly 30% more shelf space on the largest VOD platform in the United States. Our relationships with the largest cable and satellite distributors in the US remain very strong. We believe our customers recognize that we are in the premiere program provider in the industry.

As illustrated by our customer willingness to seek advice, recommendations from us on how to improve the adult category results. We believe the strong customer relationships and superior product performance will allow us to gain even more market share over time.

Operationally, we continue to be a very efficient and effective company. We operate a sophisticated technological infrastructure that could support a substantial increase in both international and domestic distribution without incurring material incremental costs. This infrastructure also provides us with a significant competitive advantage, because we can grow our business or even absorb another business without requiring any significant additional capital expenditure.

The company continues to be alert to technological changes and trends within the content distribution markets and prepared to provide our content on a variety of distribution platforms including satellite and broadcast through dish and internet via PC and mobile communication devices.

In addition, we are working with our distribution partners to underling the services. Although we are prepared to weather prolonged economic downturn, we believe the adult category will recover and that we are best equipped to take advantage of that recovery.

During the first quarter, the company made measurable progress towards its current year’s objectives and despite the considerable challenges we face, we are optimistic about the company's outlook for the fiscal year.

Lastly, we had a strong technology infrastructure. We have a strong balance sheet. We have well-seasoned executives with solid relationship with the largest television distributor platforms in the world, and as importantly we have employees, who have a strong work ethic and a strong desire to win.

I will now turn over the call to Grant, for the financial results.

Grant Williams

Thank you, Michael. I will start the financial review this morning by summarizing segments results and then I will briefly provide some consolidated information before opening up the call for questions.

For the Transactional TV segment, the first quarter revenue declined to $9.6 million, as compared to $10.6 million in the same prior year quarter. VOD revenue declined by approximately $0.2 million primarily due to lower domestic revenue, which we believe is due to reduced consumer spending in response to the economic downturn. The decline in domestic VOD revenue was partially offset by approximately $0.5 million, an incremental revenue from our international initiatives.

Pay-per-view revenue also declined by approximately $0.6 million during the first call, also due to the general decline in consumer spending. Cost of sales for the segment were $3 million, an increase primarily as a result of additional transport costs, necessary to support additional VOD distribution, higher transponder costs to support additional pay-per-view channel offerings and an increase in content amortization costs related to the distribution of higher quality in costs content.

Operating expenses also increased to $2.7 million from $2.4 million in the same prior year quarter primarily due to higher advertising and promotional costs related to our efforts to increase domestic revenue, and for the first quarter, the Transactional TV segment reported $4 million of operating income, as compared to $5.5 million in the same quarter of the prior year.

The Film Production segment, revenue increased 25% to $2.5 million and benefited from the delivery of owned content titles from our third installment of an episodic series. The Film Production segment also reported revenue from the distribution of mainstream content for the same VOD platform that distribute adult content and this incremental revenue is reflected within the repped content revenue line item.

Cost to sales also increased [$1.1] million due to additional film cost amortization consistent with the increase in owned content revenue.

Operating expenses for the Film Production segment declined to approximately $0.2 million in the first quarter, as compared to the same prior year quarter from a reduction in tradeshow and travel costs. We reduced these costs in response to changing market conditions and specifically the decline in customer attendance at these tradeshows.

For the first quarter the Film Production segment return to profitability, generating $0.4 million in operating income versus an operating loss of $0.1 million in the same prior year quarter.

Moving to the Direct-to-Consumer segment, revenue was approximately $0.3 million, a decline from approximately $0.5 million in the same quarter of last year due to a decline in web memberships believe to be associated with the unfavorable economic environment.

For the first quarter, this segment had an operating loss $0.4 million, as compared to approximately $0.5 million in the same quarter last year. The reduction in the loss reflects the restructuring of this segment’s new product line operations in the fourth quarter of fiscal 2009 and should result in meaningful cost reductions throughout fiscal 2010.

For our Corporate Administration results cost declined approximately 10% to $2.6 million in the first quarter. This reduction in expenses was primarily due to lower employee costs associated with the departure of the company’s former COO in the fourth quarter of fiscal 2009, as well as lower auditing and accounting fees from our ongoing cost reduction efforts.

To summarize the company’s consolidated results, revenue in the first quarter was $12.5 million, as compared to $13.1 million in the same prior year quarter and we reported net income of $0.8 million, or $0.04 per share, as compared to $1.2 million, or $0.05 per share in the same prior year quarter.

We reduced our operating expenses in the first quarter by approximately $0.7 million as compared to the same quarter last year. As always we continuously review all expenses at a very granular level and have been taken advantage of the competitive landscape to renegotiate with our vendors and further reduce expenses. This has resulted in meaningful cost reductions across each of our Film Production, Direct-to-Consumer and Corporate Administration segments.

However, we also recognized that certain additional expenses are necessary to support the company’s revenue growth objectives and these costs may increases, as we work to drive that growth. For example, we previously mentioned that the Transactional TV segments operating expenses increased in the first quarter, as a result of additional advertising and promotional costs incurred in an effort to improve the segments’ domestic revenue.

Regarding our cash liquidity, we generated approximately $1.4 million of cash flows from operations during the first quarter of fiscal 2010. Keep in mind that those results included $1 million of cash used for the producer for higher services, which we expect to recover later in the fiscal year upon delivery of the movie.

We ended the first quarter with approximately $17.3 million in cash and our balance sheet should provide us with the strong base going forward.

So, that concludes our prepared remarks, and now let' open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Eric Wold with Merriman Curhan Ford. Please go ahead.

Eric Wold - Merriman Curhan Ford

Just a quick question on the last comments talking about the marketing dollars would be spent in the Transactional TV space. Can you give a sense of how much was spent by you in the quarter and then versus year-over-year kind of what areas, where you are targeting that spend and then what is the mix of spend versus, what is on your plate versus what is on the MSOs plate?

Grant Williams

Sure. This is Grant. I will take a portion of that one. The majority of the increase in the operating expenses with the Transactional TV business really relate to specifically the advertising and promotional costs. There is really not much else in that number. So, that was up approximately $0.3 million.

As compared to the same prior year quarter, we frankly didn’t have much in a way of marketing and advertising cost is, we kind of seen the falloff somewhat in the domestic TV revenue, within that business segment we really try to focus on other ways to drive revenue growth there, and one of the ways is through advertising and marketing across variety of different platforms.

Michael Weiner

Some of the tactics that we have employed are cross-channel advertising. We have launched our new series of cross-channel spots. These are commercial that run on channels like Spike, ESPN, USA Network, Tele-Network Television.

We have increased the number of affiliates running cross-channels dramatically, over 2000 affiliates, which addressed by 25 million network households and that number continuous to grow. We've executed on a number of direct mail campaigns, web advertising campaigns in association directly with our affiliates, as well as in-market promotions. For instance, most recently we partnered with Time Warner Cable of New York to sponsor the Siren music festival on Coney Island.

Eric Wold - Merriman Curhan Ford

Okay and just when you think about the spending on the marketing plans, do you work with cable operators and come up to some agreement, not [very good] numbers now, but they cover X%, you cover X%, or kind of just [toll] your decision on your own incremental, what they many be spending?

Michael Weiner

Everything we do is in partnership with our affiliates directly and most times on a shared cost basis, and we also are very diligent in implementing measurement tool so that we can see what the effect of this advertising is, on the market, where we execute.

Eric Wold - Merriman Curhan Ford

Perfect. Thanks guys.

Operator

(Operator Instructions). Our next question comes from Eric White from VR Innovations. Please go ahead.

Eric White - VR Innovations

I know that you are trying to expand Direct-to-Consumer. Could you give some information on what new things you might be doing there?

Ken Boenish

Sure. This is Ken. I’ll take that question. We’ve done a lot of work in making improvements to our consumer website and we’ve begun talks with many of our affiliates in terms of offering bundled television and web products much like you're seeing being rolled out with Comcast and Time Warner on lot of their mainstream products.

I think there has been a lot of press about their partnership with Showtime Networks and I think possibly HBO were they offer access to that premium programming to subscribers both over the television platform and on the internet. We think going forward that internet is going to be a very big component of our television product as well as expanding our ability to offer our content to consumers directly via the internet.

Operator

(Operator Instructions). Thank you and at this time, I am showing no further questions. I’ll turn it back to management for any closing remarks.

Michael Weiner

All right. Well, thank you everybody for joining the call this morning, and we look forward to speaking with you again soon.

Operator

Ladies and gentlemen that’s concludes the first quarter fiscal 2010 earnings conference call. You may now disconnect. Thank you for using ACT teleconferencing.

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