YOU On Demand Holdings, Inc. (NASDAQ:YOD)
Q2 2013 Earnings Conference Call
August 14, 2013, 16:30 p.m. ET
Jason Finkelstein – IR
Shane McMahon - Chairman
Marc Urbach - President and CFO
Jay Srivatsa – Chardan Capital
Ladies and gentlemen, thank you for standing by. Welcome to the YOU On Demand 2013, Second Quarter Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions).
I would now like to turn the conference over to Mr. Jason Finkelstein, Director of Strategy and Investor Relations at YOU On Demand. Please go ahead sir.
Thank you, operator and good afternoon everyone. We appreciate your participation on YOU On Demand investor update call. Please note that we will also be referring to the company as of course either YOU On Demand or YOD throughout our commentary.
Joining me today are YOU On Demand’s Chairman and Principal Executive Officer, Shane McMahon and YOU On Demand’s President and CFO, Marc Urbach. Following their prepared remarks we will open up the lines for your questions.
Today’s call may contain forward-looking statements related to the company’s future operating results. Listeners are cautioned that such statements are based upon current expectations and assumptions and may involve certain inherent risks and uncertainties within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements are not guarantees of future performance and actual results may differ materially from the expectations expressed, implied or forecasted.
Certain risks and uncertainties are detailed from time to time in the management’s discussion and analysis section of our corporate filings, copies of which can be obtained from the SEC or our website www.yod.com. All information discussed on this call is as of today August 14, 2013 and YOD undertakes no obligation to update any statements or expectations from prior conversations.
I would now like to turn the call over to Shane who will provide a brief overview of our business and Marc will then discuss our financial results and capital position.
Thank you, Jason. We sincerely appreciate all of you joining us today. The second quarter was very important period for YOU On Demand and we are pleased that we were able to achieve a number of our strategic objectives during this time. I’ll also highlight several important developments that occurred subsequent to quarter end.
In July we announced that C Media which is a leading Chinese mobile video service provider made an initial strategic investment in YOU On Demand totaling $4 million. They also have the right to make an additional investment of between $12 million and $21 million by the end of October, October 31 which we are very optimistic about. This significant investment is a strong vote of confidence in YOU On Demand’s business model and the company’s future growth potential.
C Media’s investment and potential future investment will help adjust our capital needs for the foreseeable future and this cash infusion also supports our entry into the blooming mobile video space while also establishing the mutual goal of securing a mobile distribution agreement that we hope to forge in the coming months. We are confident that C Media will be able to utilize their wealth of experience and history of achievement in China as well as their expertise and range of industry relationships to assist YOU On Demand with our future success.
Also in July we announced that Weicheng Liu, the company’s China-based Chief Executive was elevated to Chief Executive Officer of YOU On Demand. Weicheng has done a wonderful job as the company’s China-based CEO and as our growing organizations operations and footprint continue to expand it is clear that the role of CEO is best based within China for both strategic and operational reasons. Weicheng is the perfect choice to fill this critical position and lead our business forward in the rapidly evolving Chinese media market.
I’ll continue to serve as YOU On Demand’s Chairman and Principal Executive Officer with continued active involvement in our organization’s day-to-day operations and strategy.
Following quarter-end, we also successfully divested the final piece of our non-core legacy business with the sale of YOU On Demand’s interest in Jinan Broadband for a total consideration of approximately $4.7 million. The combination of C Media’s Phase 1 strategic investment and the sale of YOU On Demand’s legacy Jinan Broadband assets will ultimately provide gross proceeds of $8.7 million to our company.
We welcome these additional financial resources that will assist us pursuing our growth opportunities and further expanding the YOU On Demand platform. It is important to note that the cash and cash equivalents line item on our balance sheet at June 30 does not reflect either of these capital infusions as both transactions were agreed upon subsequent to quarter-end. But with the capital from C Media and the cash that will be received from the Jinan Broadband’s non-core asset sale, we’ll materially bolster our balance sheet and improve YOU On Demand’s financial health.
Having said that, we’re also cognizant that there is much work still to be done and we must all focus on achieving improved consumer traction over the coming months. Although the initial YOU On Demand platform launch was very successful from a technology standpoint, overall adoption and user rates have been slower than we originally anticipated but still have promising results.
Our team continues to take key steps to expand our core entertainment distribution business across China, not just in the number of homes passed, but more importantly in the number of active users. We have learned a great deal over the past six months following our Chinese New Year launch about what works and perhaps more importantly what does not work. As a result, we are increasingly confident that our sales and marketing team is on the right path as we seek to increase the active user base and also grow our per cap spending.
On our previous update, we highlighted three key components that are a must in place for a venture like ours to ultimately be successful in the challenging Chinese market place. I like to highlight those again briefly for new investors with us today.
The first component is you must obtain a license which YOU On Demand has successfully done. We have a 20-year joint venture with the government approved license with China Home Cinema that allows us to operate across the country. There is approximately eighteen years remaining on our license, and this is one of the major barriers and one of the highest barriers for entry for anyone looking to directly compete with us.
The second piece of the equation is content, and we have tremendous content available to all of our consumers. We have primarily every leading U.S.-based studio including Warner Brothers, Disney, Paramount, NBC Universal, Miramax, Magnolia to name a few, along with more of the popular theatrical titles produced domestically in China.
Keep in mind that films are only the first (inaudible) entertainment that YOU On Demand will be offering to our consumers. Lot of other varieties from kids to Karaoke to special paper (inaudible) will also be available for purchase.
The third critical component of course is distribution. And we’ll be forging these relationships at the provincial and local levels across China. We ended Q2 with seven cable MSL partners representing a potential reach of 18.2 million cable homes passed, and we intend to be very active in continuing to expand this footprint.
While our initial progress has been targeted at the MSL market, our plans for the business have always been to create a platform agnostic offering including emerging platforms such as mobile, IPTV, OTT which is over-the-top, and to that end we signed agreements earlier this year with two IPTV distribution partners; Tianjin IPTV and Jiangsu IPTV, and they have combined a subscriber base of 1.5 million subscribers.
Importantly You On Demand also retained and obtained an Internet publishing license from newly formed GAPP and SARFT government entity which affords us the right to commercially offer content on both mobile devices and our view-on-demand dotcom website via a PC and also for mobile devices, as we transform our website to be more mobile friendly.
The future transition of our website from B2B to B2C will also give us another enormous channel to market and promote You On Demand brand. We have also and are continuing to move into the over-the-top space from the back of our distribution partnership with CNTV’s Future TV.
CNTV is one of the several companies holding the license for OTT solutions as they are the largest. You On Demand has a five year agreement with CNTV and Future TV to supply premium content to a branded You On Demand environment. In addition and to be very brief at this point in time, we are also in discussions with multiple hardware manufacturers and working with them on several alternate distribution in delivering that we hope will see the You On Demand brand and offering expand even further.
In summary our focus and our goal is that by a compelling consumer offering, we believe You On Demand can achieve great things and will continue to build upon our strength as we leverage our strong and deep distribution footprint and the unique partner relationships. Further we now have the capital and feel very well position to execute. And with that I’d like to turn the call over to Marc Urbach, our President and CFO for some additional color on our numbers.
Good afternoon, everyone. As Shane briefly touched upon in his notes, the company’s Q2 revenues do not reflect the operations of our recently divested legacy businesses and that our second quarter balance sheet does not include the investments by C Media and the first tranche of proceeds from the sale of our legacy business.
In aggregate these two events ultimately will add approximately $8.7 million to our cash balance. Taking closer look at Q2 starting with income statement, revenue for the third quarter ended June 30, 2013 was approximately $50,600 and the gross loss amount to $739,400.
We are lowering our full year revenue guidance from $4.5 million to $7 million to $1.5 million to $4 million which is solely due to the loss of revenues from earlier than forecast sale of our Jinan broadband assets which was slated originally to be sold in 2014.
Total operating expenses declined 20% to a $2.8 million resulting in operating loss of $3.5 million. The decline in operating expenses in Q2 is attributed of sale of Jinan broadband and other cost savings initiatives.
Looking at an operating expense in the second half of 2013 and 2014 we've already begun and will continue to roll-out more significant cost cutting initiatives including headcount reductions and options to reduce professional fees as we streamline operations and leverage some of our new partnerships.
On a net basis the loss attributable to YOU On Demand shareholders is $3.3 million or $0.22 on the diluted per share basis. At June 30th we had approximately 14.9 million diluted shares outstanding.
Taking closer look at the balance sheet cash and cash equivalent on June 30th was $292,000 and total assets were 18.2 million. Total liabilities amounted to $14.7 million and total equity was $1.6 million.
In summary while this current cash position significantly improves at quarter end, affording enhance liquidity and flexibility to support our long term growth plans we move through the balance of the year and beyond.
We also expect to receive the second tranche of C Media investments between $12 million to $21 million, our cash at the end of October, our marketing teams actively working to raise awareness of the YOU On Demand brand and platform and we’re optimistic that those efforts will result in more improvement including higher usage and an increased subscriber base.
At this point I’d like to turn the call back to the operator so Shane and I can answer your questions. Thank you.
(Operator Instructions). And our first question comes from the line of Jay Srivatsa with Chardan Capital. Please proceed.
Jay Srivatsa – Chardan Capital
Yeah, thanks for taking my question. Can you help us understand how the subscriber uptick has been thus far for the SVOD platform, if you could help us to understand whether you’re seeing good growth or are you seeing some delays? I think you alluded to delays, maybe you can clarify why there is delays, paint a picture for us as do you see the rest of (inaudible) as well?
Sure Jay, it’s Shane, again thanks for the question. Of course, we want to have more subscribers. We want to again take our subscribers and we want to grow them and that is our first and top priority. One of the major things we have been delayed, and that is primarily because we need to make people aware that the concept is there and it's reachable.
If you remember, this is the slow build, no different than it was here in the United States when we first started, or when the U.S. first stated I should say the Video On Demand aspect, so people need to be made aware that the content is attainable on their cable system and the fact that they’re able to go in and select it and watch it, however, it’s all about choice now and this is the brand new concept that we are prompting, and that’s really what’s going on now.
So we have great, again technically we launched, as you’re well aware during Chinese New Year which is February of this year has very good technical traction, we did a lot free sponsoring, we did a lot of promotional aspects, which is a very positive thing and we are seeing good take rates.
So, now we have to continually move forward and convert more of those people into now buys. And that’s one of the main focuses from now and for the rest of the year and then moving forward.
I think just to add on to that Jay, the video business we have seen the system build since February on growth. And the first couple months, we gave away a lot for free just to get people used, especially Chinese New Year. So, revenue then was very low but we’re seeing traction and we are seeing which marketing stuff works and which marketing things don't work, but I think that overall it’s very positive, and I think we’re very excited about the track that we are on.
Jay Srivatsa – Chardan Capital
All right, so if I’m looking at the revenues that you’ve shown for the first six months and you strip away the Q2 numbers, I mean so, you have clearly come from something line $1,500 in the first quarter it's almost $50,000 in second quarter from S Video, is the right way to look at it?
Jay Srivatsa – Chardan Capital
Okay, very good. May be you can talk to us about some of the marketing and sales efforts that we are going to be doing in order to promote the take rate. What are some of the things that are in the pipeline, when do you hope to start launching on those efforts?
Immediately, one of the things that has not worked, so let me start with that is the fact that when you don’t have what was called first page promotion, everyone on the call has video on demand in their home, when you go to your homepage, no matter what your video on demand provider and you see the menu that pops up, that is one of the major ways that you start surfing for your own channel, and you find out that there is movies and there is sports and there is other things that are all on demand.
Currently working with our MSO partners and again there are seven of them, some are much more conducive to working with than the others because we are teaching them for the first time that if you do promote or put things on your homepage, if you will, that you will see a much better take rate, and those that did our stunting and followed the promotion that they wanted to do, there was significant take rate and those that did not do promoting much more of their own service, that is where it fell down.
So, that is what everyone is starting to realize and see now from a cable standpoint, and that’s how we are moving forward with it is to do that promotion. That’s one aspect from a cable promotion. Another way we will start promoting is again through our new partnership with C Media. C Media has access to an immense amount of people from a subscriber standpoint.
For those of you not familiar with C Media, again we will try to categorize them. They do many things, but in the mobile space specifically, they have consistent consumer touch points which allows us to market to all of their users through a variety of different ways specifically through many of their mobile channels.
So we are excited to be able to say, look as a reminder, checkout view on demand for your cable system and/or our own Internet or IPTV, or whatever medium we want to push them through. So, that’s one thing. Another one will also be social media, the equivalent of Weibo, if I’m pronouncing correctly is the equivalent now to Twitter. And we have several things that we’re starting doing with them, again making our concept well-known as something to promote out there.
So, all of the normal things that all of us here in the U.S. see on a daily basis and we think that is like a no-brainer, how to reach people is exactly what we are starting to instill in China. The unfortunate thing is, China is catching up to where the U.S. is, they are getting there very quickly, but they are not accustomed to marketing and promotion and those types of messages.
So everything, it’s an amazing market, the model is going to work. I am very excited about it, it just takes time, no difference than it did here in the United States. Everyone here in the U.S. thinks that video on demand was an overnight success and I can tell you having lived through it, through its inception it definitely was not.
Jay Srivatsa – Chardan Capital
Okay, fair enough. In terms of C Media can you speak to us on when do you expect your mobile initiatives to just start become meaningful and what are some of the steps you are taking to adapt your model to the mobile world versus video on demand through set-up?
Well, it's Shane here, let me first address from a distribution standpoint. Again, You On Demand's model has always been to remain platform agnostic. Again we started with the cable license and now that we have our Internet publishing license as well as mobile, that is again OTP, IPTV et cetera, that is a logical step to roll things out. So, we are growing our brand, You on Demand, and we don’t care which medium our consumers come through as long as they are able to access our top quality concept and that’s exactly what are starting to roll out now.
I will just add to that, our mobile initiative has started. We are working on some of the -- how we work with C Media, and how ultimately we will go out with their platform, but in the meantime, we are rolling our mobile as we speak, and in Q3 we will see revenues for mobile users and we have lots of good mobile content, we believe. So, we will start seeing [immediately] (ph) with that.
And then gentleman, the model is not -- it’s the same, no matter what distribution platform we are on. Things are based off of our revenue share, they are small minimum guarantees, and that’s how it all works. So whether it be mobile or IPTV or cable, that’s again how the model was all set up.
Jay Srivatsa – Chardan Capital
Understood. In terms of the second tranche of investments from C Media, you mentioned October. Any color as what is the deliverable that needs to happen by then for them to invest another 12 or 21 or in between, can you help us understand when is the next investment going to happen and what needs to happen for that source of investment to materialize?
Sure, there are a bunch of things, one of them obviously being the sale of Jinan Broadband which we were very happy to make this quarter and was well in advance of what we thought would sort of happen at the end of the year, but we were able to sell that for $4.7 million, which they were very happy about and we’re very happy about.
As far as the deliverables go what will make them comfortable to make the next tranche of investment they wanted to assess kind of what we do over the next little while between the two tranches and how our companies work together and how we can leverage their infrastructure and our infrastructure and our content and may be some of their content and then also they wanted to see what new content we’re getting here, to what others can get to deploy over their platform.
So far I can say that we’ve worked very well with them, and everything's very positive. I think that we are hitting all of our goals what we’ve said we could accomplish over the three month period in between tranche one and tranche two and we are very optimistic that they’ll involved again going to, working over the second half.
And Jay, it's Shane. Again there is an immense amount of synergy and that’s why C Media was interested or one of the major reasons they were interested in our company in YOU On Demand. So we’re now working together with them which we’ve already started doing in a very effective basis and we move forward now.
Initially one of the reasons why we are able to go in mobile so quickly was even before we signed the deal, we started using some of their R&D people. They have, I think 200 R&D people that were solely on mobile app. So we were able to use their R&D people to get what probably would have taken us six months at least to get up and ready, we did it in probably two weeks to get us ready to launch mobile and that's why we were able to get out there so quickly.
Jay Srivatsa – Chardan Capital
All right. In terms of cash burn rate with the Jinan Broadband bring stripped off what does it do to your cash flow on a quarterly basis?
The amount of cash burn will be significantly lower. We save money in R&D fees and professional fees from that perspective. We also have, we've also gone through a bunch of cost cutting initiatives and we’ve taken a look at our head count and we looked overall at how we can get the number down as we especially to delever some of C Media’s assets as well as some our own internal assets. Our cash flow has already gone down a few hundred thousand dollars and we are going to continue that throughout the year that we get even lower so that so that we can make this money last for a long time.
We don’t anticipate at response to raising money any time soon as ever.
Jay Srivatsa – Chardan Capital
Couple of housekeeping questions, I know you didn’t report the legacy business in Q2 but what was the contribution from the legacy business in Q2?
I would -- it's about the same, it was $1.3 million in revenue but we - it all gets rolled up one [inaudible] asset held for sale.
Jay Srivatsa – Chardan Capital
Okay. Last question
Obviously it was up and then it got lower than, now that we passed at next quarter we’re going to recognize the $3.8 million deal I think.
Jay Srivatsa – Chardan Capital
Understood. Last question on outstanding shares what do you expect it to be exiting Q3?
Jay Srivatsa – Chardan Capital
What do you expect the share count to be exiting Q3?
Fully diluted about 90 million.
Jay Srivatsa – Chardan Capital
Okay. Thank you good luck.
(Operator Instructions). And our next question comes from the line of Sean O'Neil, who is a private investor. Please proceed.
So I just have two quick questions. How confident are you that you'll be able to maintain the advantage that you have over your competitors?
Hi, Sean it’s Shane. I think again it’s enormous marketplace. There is plenty of room for lots of people. And the barrier to entry is extremely high. I think we have at least a two or may be even three year advantage over anyone else trying to do it in the space.
Again it’s a very large economy and large market and but we’ve been at this for a while our name is now well known and we are building our brand name and awareness. And all of that blocking and tackling is now ready to start paying dividends and that’s exactly what the plans have been.
If we went back over the kind of inception of the company we knew it was going to take this long to be able to get where we are today. We'd all like to happen faster of course we would adoption rates for the U.S. and everything else to come in very quickly. But again this is the long term play and there could be enormous growth opportunities that we are going to take full advantage of.
Okay and then this brings me to my next question, because I believe it was Shane or Marc that mentioned earlier in the call that you are in discussion with several hardware manufacturers. Can you elaborate on that at all and what’s that in connection with?
No, you can take it Marc.
Sure, we are always looking for other distribution platform that we said. We have been -- without giving away the information we have been without giving that information we haven't disclosed yet, nothing is finalized. But we are in talk with multiple hardware providers, multiple alternative distribution methods and platforms and devices.
And we hope that in Q3 to be able to announce some deals in place where we start distributing in different ways. The plan always has been to be platform agnostic and going into as many platforms as we can that and just to say that we are actively looking to be moving as fast as we possibly can across all avenues that we can exploit.
Okay. Great thanks.
Thank you, Sean.
And our next question comes from the line of [A J Tandon with C2C Equity]. Please proceed.
Thanks for taking the question guys. First one about the C Media transaction. Can you just give us a little bit of color of why it was done in two tranches?
I think that C Media -- I mean I know that C Media saw our need for capital. They wanted to get involved but they wanted to make sure that we could hit some of the goals that they want. They believe in our business they like our management team we’ve all had some great meetings.
We started talking to them a long time ago. And I think they kind of wanted to -- they wanted to make the investments they wanted to show their commitment but they want to make sure that we have the capabilities going forward to gain all the mobile platform and internet plays and also we can grow.
So they wanted to put the money in when we need the money and they said they were going to come in with rest assuming that we all can deliver what we think we can deliver and as I said before so far as things have been great and we are working very well together and we are very optimistic from what they do.
This is Shane and I’ll add a little color on it. And again this has been in YOU On Demand business plan since conception and that is again to be platforming out as I mentioned earlier. C Media again came on board at a great time and they are very welcome and one of the things -- of the two tranches they did say they are like great you guys have this in your plan. Now let's get executing it and let's see which we never have a problem here raising our hand and say absolutely. So that's exactly what we are doing.
Got it and with regards to Phase 1 what is going to be use of proceeds.
So I am interested we will get working capital, applying more content getting confident again that we can use the mobile space and just general business needs over the next few months.
Okay and the last question this is more long lived just operationally. Can you give us a little bit of further color on how Shane's role is going to change if at all and also just a little bit more color on your newly appointed CEO, Weicheng.
It’s Weicheng And this is Shane speaking. The roles doesn’t change that much other than we’ve shifted a lot of the operations or actually all of the operations now into China into Beijing. When we first started the company we didn’t know what operation should be there, since there is a lot of expertize here in the United States.
We moved a lot of people from the U.S. over to help start training people et cetera and the market in China has grown so quickly, you have the lot of western educated Chinese now returning and we also have very capable management people, Weicheng specifically has been exceptional.
So when again C Media came on Board we all sat down started really looking at how can we advance YOU On Demand faster. All agreed upon moving all the operations in China and elevating Weicheng to the CEO which I’ve announced that prior and he is doing a fantastic job.
So that’s one aspect as it relates to Weicheng. So he is much more in the driver seat as he was. I should go back here, he was really kind of behind the scenes but doing exactly the same job as he is doing now. He just has more autonomy and more authority to do it. Weicheng and I work together very famously as well as Marc and we’re constantly in daily communication with each other.
And that’s really the only thing that’s changed. My role stays primarily the same. I am still involved every day in the company. I am involved in every day operation. I’m working a lot more China hours. So I’m doing a lot of night time or super early in the morning but that’s fine with me.
So I remain as Chairman, I will continue to be on calls such as this, from an investor standpoint going out educating and evangelizing our brand through non-deal road shows and creating awareness in market for liquidity in our stock and to increase shareholder value.
And also we are going to benefit also as sign a long lived strategic price in China as we’re now kind of the -- we are done with the building phase of our infrastructure and moving in to the execution phase. Weicheng being the actual company’s CEO gets in the clout or the level of respect to be able to sign deals in China and has higher levels of people there to be able to be comfortable who they’re talking to.
So it’s a big deal from a China facing perspective as well. So again not much change from the database perspective but we it means a lot to the outside world probably.
Understood, great, thanks guys.
And our next question comes from the line of Jason Parnoe, please proceed.
Good afternoon. Can you provide little more granularity as to what's working on the content side and touch on the promotional activity i.e. do you offer a free trial period.
Sure I can take that, we are still moving on very well and we’re pleased about that. We have entered in Disney, [inaudible] are all top sellers over the past quarters and our legacy subscribers they’re going and more excited about it and from a marketing play like Shane already kind of touched on a little bit, we -- some of the stuff we do in the U.S. and kind of tailored for what works in China and we have in country marketing teams that actually teach marketing to our immediate base and we’re very excited with what we’re doing and it's going very well.
And of course that promotion stuff. We did give a lot away in the first quarter. A big selling point was take on, take a few months free and depending how long you plan for the year and then you get a whole year.
So we continue to do promotions a little bit less rather than more and market in a lot of these place but we certainly in Q1 and in Q2 gave a lot of it for free just to get people use to it, as Shane mentioned this is completely new especially in the cable platform even people that are so much used to U.S. movies and either stealing it over the Internet or even using Wi-Fi and YouTube, cable is so different.
So when you switch on your TV and you are watching cable television so we did give some for free at the beginning.
When you talk about transitioning your website and to offering content over that what's the timeline look for something like that?
That’s what we are again, we are right now we’re evaluating how much time A, will it take to build, but more importantly what's the best one for us to do that and again that’s much more of a collaboration that we’re working on daily with our new partners C Media.
They have a lot of expertize, again not only in mobile but from an Internet space to how to reach people, how to formulate content, how to get the word out there as well as Weicheng who has an amazing background in all that as well.
So by putting it all together and working again through New York and Beijing, that's what we are doing, again. But it's much more of when you will announce and it should be by the mid of this coming year.
Is there a platform that's sticking out, i.e. whether it's subscription base or U.S. content or Chinese content, something that's really working well?
U.S. based subscription is probably the best so far. It is the best so far. So that's kind of what we anticipate but there is some selling as well, Chinese economy definitely does so also and those are the biggest ones.
The Chinese consumer is no different than any other consumer, people want a very good deal and that's where our subscription obviously you get more bang for your buck that way.
Great thank you.
We are now out of time for questions. I will now turn the call back over to you.
Okay, I want to thank you very much. We greatly appreciate everyone joining us today and we kind of look forward to updating everyone on our ongoing process when we host our third quarter call later this year. We really appreciate it and I am very excited by you guy's interest in YOU On Demand and thank you all very much.
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