Grant Williams - Chief Financial Officer
Michael Weiner - Chief Executive Officer
Ken Boenish - President
Marc Callipari - General Counsel
Scott Piper - Chief Technology Officer
George Whiteside - SWS Financial Services
[John Rolff - Argon Capital]
New Frontier Media Inc. (NOOF) F2Q10 Earnings Call November 9, 2009 11:00 AM ET
Welcome to the New Frontier Media second quarter fiscal 2010 earnings conference 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)
I’d now like to turn the conference over to our host, Grant Williams, Chief Financial Officer; please go ahead, sir.
Thanks Alicia. Good morning and welcome to the New Frontier Media fiscal 2010 second quarter results conference call. Joining me this morning are Michael Weiner, Chief Executive Officer of New Frontier Media; Ken Boenish, the Company’s 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 second quarter results and strategic initiatives and then I’ll discuss the detailed financial results 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 pass code 4180598. 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 questions via email to firstname.lastname@example.org. 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 www.noof.com under the Investor Relations news releases tab. 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 the Safe Harbor provided by the SEC for such statements, including statements regarding the company’s expected financial position and operating results, its business strategy, its 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 and Exchange Commission including our most recently filed Forms 10-Q and 10-K.
I’ll now turn the call over to New Frontier Media’s Chief Executive Officer, Michael Weiner.
Thank you, Grant and good morning everyone. New Frontier Media reported solid results for the second quarter of our fiscal year 2010. Although we continue to experience pressure on our core Transactional TV domestic revenue primarily due to consumer spending, we believe that domestic revenue will stabilize.
Additionally, we are working closely with our domestic partners to improve the consumer value proposition by considering a variety of alternatives including various pricing and packaging options. The international Transactional TV revenue continues to grow. International revenue improved by approximately 33% as compared to the first quarter of fiscal 2010.
Similar to our content performance domestically, our content performance internationally has been superior to our competitors, which should provide new opportunities to expand our distribution with existing and new international customers. We believe our Film Production segment has turned the corner and we have a multitude of large productions in the pipeline. We have completed the previously announced producer-for-hire services and expect to recognize revenue in the second half of the fiscal year.
In addition, we have executed a new producer-for-hire deal, which has already begun production. We also expect to begin production on our fourth installment of an episodic series for a premium movie channel in the second half of the fiscal year. This segment has already begun to see meaningful rep revenue from the distribution of mainstream content via our domestic VOD partners and we expect that this VOD distribution will drive growth within the segment’s rep revenue in the future.
Overall we are encouraged by the turnaround in the Film Production segment’s operating results. On a consolidated basis we believe the company is well positioned to execute its strategic objectives. We continue to grow our Transactional TV distribution in markets outside the U.S. using the same infrastructure and business model that has proven successful in the U.S.
We are also diversifying the company’s operations into a new mainstream market through the distribution of the Film Production segment’s repped content on domestic VOD platforms. We remain very optimistic about the company’s future and its long term growth potential.
I’ll now turn over to Grant to discuss the financial results. Thank you.
Thank you, Michael. I’d like to start the financial review this morning by summarizing the segment results and then I’ll provide some consolidated information as well as liquidity comments before opening up the call for questions. For the Transactional TV segment revenue in the second quarter declined to $9.3 million as compared to $10.8 million in the same prior year quarter due to lower domestic revenue.
We believe the decline in domestic VOD and pay-per-view revenue is from reduced consumer spending. The second quarter results include approximately $0.6 million in international VOD revenue and $0.2 million in international pay-per-view revenue. Although our domestic revenue continues to be under pressure, our international revenue has gained more momentum.
Total international revenue for the Transactional TV segment was $0.8 million in the current quarter, which is up from $0.6 million in the prior sequential quarter ended June 30, 2009 and we are on track to exceed our internal international revenue objectives for fiscal year 2010. Cost of sales for the segment were $2.9 million and consistent with the same prior year quarter costs.
Operating expenses declined $2.3 million from $2.4 million in the same prior year quarter primarily due to reductions in advertising and promotion costs. Although we reduced our advertising and promotion costs in the current quarter we do expect to increase spending on advertising in future quarters in an effort to drive domestic revenue growth.
The Transactional TV segment reported $4.1 million of operating income as compared to $5.5 million in the same quarter of the prior year. Although the operating income for the segment is down year-over-year, it’s worth noting that when comparing the second quarter results to the sequential first quarter ended June 30, 2009. The Transactional TV segment’s operating income has improved slightly to $4.1 million from $4 million.
For the Film Production segment revenue declined to $1.7 million from $2.2 million in the same prior year quarter, primarily because the prior year quarter reflected revenue from the delivery of owned content titles to a premium cable channel customer including the partial delivery of the second installment of an episodic series and this revenue did not recur in the current quarter.
Partially offsetting the decline in owned content revenue was an increase in repped content revenue primarily from the distribution of the segment’s mainstream content to several of the same domestic VOD platforms that distribute our owned content. Cost of sales declined to $0.7 million from $1 million in the same prior-year quarter due to lower film cost amortization consistent with the decrease in owned content revenue.
Operating expenses for the film production segment also declined approximately $0.1 million to $1 million from lower employee costs as well as lower recoupable cost and bad debt charges. For the second quarter the Film Production segment had operating income of $0.1 million as compared to breakeven in the same prior year quarter. For our direct-to-consumer segment revenue was generally flat and was approximately $0.3 million as compared to $0.4 million in the same quarter of last year.
The segment had an operating loss of $0.4 million as compared to approximately $0.7 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 we expect to continue to experience meaningful cost reductions from this restructuring throughout fiscal 2010.
For our Corporate Administration results, costs declined approximately 19% to $2.2 million in the second 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 legal, third-party advisor, and travel costs from our general cost reduction efforts.
To summarize the company’s consolidated results, revenue in the second quarter was $11.4 million as compared to $13.4 million in the same prior year quarter and we reported net income of $1 million or $0.05 per share as compared to $1.3 million or $0.06 per share in the same prior year quarter. Although our year-over-year net income is down, it’s noteworthy that through our cost reduction efforts our net income has improved to $1 million as compared to the sequential first quarter ended June 30, 2009, net income results of $0.8 million.
Regarding our cash liquidity, we generated approximately $2.2 million cash flows from operations during the first half of fiscal 2010 and those results included $2 million of cash used for the producer-for-hire services, which we expect to recover later in the fiscal year upon delivery of the movie. We ended the second quarter with approximately $17.3 million in cash and investments, so our balance sheet continues to be solid.
So that concludes our prepared remarks. Now let’s open up the call for questions. Alicia.
(Operator Instructions) Your first question comes from George Whiteside - SWS Financial Services.
George Whiteside - SWS Financial Services
I’ve got a couple of questions. You remarked on the Internet the opportunities in the international markets and recently Playboy had made a report and saying that they were facing increased competition in the international markets. Is there something unique about your product offering, or where you are going to put your emphasis with the various countries? What distinguishes your opportunities as contrasted to, well organization like Playboy?
I believe in part, we are the competition that Playboy is referring to. We’ve experiencing some pretty decent growth outside the U.S. and I think, based on their experience with us here at home they’re probably justifiably a little bit nervous about our entry into markets outside the U.S. I think what makes us different in our content offering is the fact that our acquisition of content in our programming strategy is based on a combination of consumer research and actual performance data for the markets which we enter.
So our approach is to create a customized content package for each market that we serve outside the U.S. to really maximize the revenue potential in each and every market rather than applying a cookie cutter approach that is used by most companies in this space.
George Whiteside - SWS Financial Services
In other words, you’re customizing your offerings to your perception of the market in individual countries. Is that correct?
Well, not only our perception of the market, but based on data that we collect through primary consumer research and actual performance data. Once our content is launched, we continuously refine our programming strategy in order to maximize revenue.
George Whiteside - SWS Financial Services
Some of your major customers, have they done any surveys or marketing studies relative to this that you could sort of piggyback on in terms of customizing your offerings, both domestically and foreign?
Generally, operators don’t do any market research that pertains to adult content specifically. Generally any research that they do really encompasses the entirety of their transactional content offering.
What New Frontier has done that’s been a bit different is in the last couple of years we’ve fielded in the neighborhood of seven unique research studies that really have given us a lot of inside into the buying habits, the likes, the dislikes of our consumer base and it has given us a greater understanding of how these people consume content, what other platforms they consume content on, what they like, what they don’t like, why they buy, why they don’t buy, who they watch with.
To be honest with you it’s in part shattered a lot of conventional wisdom that we’ve had at the company, it has created an opportunity for us to really improve in certain areas. So the research data that we’ve gotten so far has been very actionable indeed.
Your final question comes from [John Rolff - Argon Capital].
John Rolff - Argon Capital
A couple of questions for you, at first, you’ve referenced a couple of deliveries that you are expecting for the Film Production segment in the back half of the fiscal year. Is it possible for you to give any, I guess, more sort of specific guidance in terms of what kind of incremental revenues those projects are expecting to generate for the segment?
I’ll try to give a little bit more color around it. So the other large productions we currently have in the pipeline are our fourth installment of an episodic series. We’ve actually already done three installments of that. Right now, we’re expecting the fourth installment will likely be delivered and we’ll recognize revenue on it in the fourth quarter of this fiscal year.
There’s a possibility that it could slip into the earlier part of what’s our fiscal year 2011 due to some factors that we don’t necessarily have control over, but we’re expecting revenue in the neighborhood of between $1.7 million and $1.8 million associated with that deal.
The other future large production that we mentioned that we had in the pipeline is another producer-for-hire services deal that we’ve been working on. We’ve actually have completed a producer-for-hire deal that we previously announced and we’re expecting to deliver that in the fourth quarter of our fiscal year, the third or fourth.
This new producer-for-hire services deal that’s in the pipeline will likely be delivered in the fourth quarter again of this fiscal year or slip into fiscal year 2011 and that deal will be similar in magnitude to the other deals, the other producer for hire deals that we’ve done, which is around $2.5 million in revenue.
John Rolff - Argon Capital
My only other question is with respect to Transactional TV. How do you guys get comfort that the downturn there domestically is a result of overall kind of macroeconomic weakness? I guess I ask the question, obviously from a timing perspective that that segment has weakened over the last quarter couple quarters along with the economy.
I think sort of longer term one of the concerns that people have always had is that there’s more sort of fundamental changes going on in terms of how people purchase and buy the product that you provide. Can you provide any kind of an additional sort of thoughts in terms of how you get comfort that it is just a kind of macro weakness issue and not something more fundamental going on?
Sure, John, this is Ken. I’ll take that question and it’s a great question. First of all, one of the primary reasons, why we take comfort in the fact that it’s the economy that’s affecting our domestic transactional businesses, because we see a similar trend line in the mainstream side of the business in terms of Blockbuster, Hollywood Movies.
Our distribution partners are telling us that, they’re down in the neighborhood of 15% to 20% on the Hollywood content. As you know, Hollywood doesn’t face the same sort of competitive environment relative to the internet as the adult-themed content that we distribute. So that gives us a bit of comfort first off.
The second half of the question, I think really is the fact that due to our primary consumer research that we started fielding a little over three years ago, part of the focus of the initial study that we did had to do with internet consumption and what we found is that about 80% of the people who purchased content on TV at that time were also purchasing content on the Internet.
So what that told us was that depending on the use occasion consumers would buy content on TV but also by content on the internet. It wasn’t a case where people who bought on TV were ignorant of the internet and now they’re finally figuring out that content is there. I think that all things being equal people really enjoy a television delivery platform. It’s a large-screen platform. It’s the perfect platform for watching with a partner. More often than not it’s a screen that is located in the bedroom.
So there are a lot of reasons to choose TV over the Internet and we really think that when the economy begins to rebound a little bit more and consumer spending is trending up that our business will experience a lift at the same time.
I show no further questions in the queue at this time. I would like to turn the call back to Grant Williams.
Thanks, Alicia. We’d like to thank everyone for joining the call this morning and look forward to speaking with you again in the future.
Ladies and gentlemen, this concludes the New Frontier Media second quarter fiscal 2010 earnings conference call. You may now disconnect. Thank you for using AT&T conferencing