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Ballantyne Strong, Inc. (NYSEMKT:BTN)

Acquisition of Convergent Media Systems

October 1, 2013 10:00 AM ET

Executives

Tricia Ross - SVP and IR

Gary Cavey - President and CEO

Mary Carstens - CFO

Analysts

Eric Wold - B. Riley

Tristan Thomas - Sidoti & Company

Kyle Cerminara - Fundamental Global Investors

Operator

Ladies and gentlemen, welcome to the Ballantyne Strong Conference Call, following today’s announcement of the acquisition of Convergent Media Systems. During the presentation, all participants will be in a listen-only mode. Following the prepared comments, we will open the call for a short question-and-answer session. As a reminder, this conference is being recorded, Tuesday, October 1, 2013.

I would now like to turn the call over to Tricia Ross, Ballantyne Strong’s Investor Relations representative. Please go ahead.

Tricia Ross

Thank you and good morning everyone. Today’s call and webcast may contain forward-looking statements related to the Company's future operating results. Except for the historical information in this conference call, this call includes forward-looking statements that involve risks and uncertainties, including but not limited to quarterly fluctuations and results, customer demand for the Company’s products, the development of new technology for alternate means of motion picture presentation, domestic and international economic conditions, the management of growth and other risks detailed from time-to-time in the Company’s Securities and Exchange Commission filings. Actual results may differ materially from management’s expectations.

I’d also like to mention, that we will only have limited time for the Q&A session today. Management has a number of other meetings scheduled with employees related to today’s announcement. If we do not get to your questions on today’s call, we will be sure to follow-up with you in the coming days.

Joining us today from management are President and CEO, Gary Cavey and CFO, Mary Carstens.

At this time, I would like to turn the call over to Gary. Gary?

Gary Cavey

Thank you, Tricia. Good morning everybody. And thank you for joining us this morning. Earlier today, we announced the acquisition of Convergent Media Systems which was a subsidiary of Sony Electronics. This is an all cash transaction valued at approximately $16 million. As we have indicated for quite a while, we’ve been looking for acquisitions that would enable us to extend our core expertise and assets into adjacent markets experiencing strong growth. In particular, we’ve been focusing on industries where a network operation center or NOC plays an integral role in customer service, which would enable us to leverage the robust infrastructure we have developed with our own NOC.

Convergent Media Systems is a perfect fit for the criteria we indentified. Convergent was founded in 1980 and has become a leading player in digital signage and content creation and distribution systems. If you’ve been in a Safeway or a Kroger store, you’ve probably seen Convergent’s digital signage at work. In total, Convergent manages digital solutions for over 95,000 displays, more than 22,000 locations that are viewed by more than 10 million people every day.

Like Ballantyne, Convergent has a strong presence in the cinema market and while also having customers in retail, hospitality, financial services and government markets. Convergent has a strong presence in two attractive segments of the digital solutions industry; first, the digital out-of-home or DOOH market, which provides digital technologies for out-of-home messaging, advertising, communication; second, the enterprise video solutions or EVS market, which provides enterprises with infrastructure to allow for communication, collaboration, training and education of employees.

In aggregate, the domestic DOOH and EVS markets are estimated to be more than 4 billion annually and growing quickly. Industry reports project that the DOOH market and EVS market to grow at a compound annual growth rates of 26% and 16% respectively through 2015. The dynamics driving the growth in the DOOH market in particular are quite interesting. With the proliferation of DVRs and online video streaming, fewer people are actually watching commercials on televisions. Some recent data indicates that 79% of the viewers skip the commercials when watching televisions. So, advertisers are looking for new ways to get their messages in front of the consumers which is why the digital out-of-home market is seen more add dollars following its way.

Advertisers recognize that people standing in line of [indiscernible] is a rare opportunities these days to market to a captive audience and we put our ads on a digital display in those locations you’re going to get your message seen by a lot of people. This presents a really big growth opportunity for a company like Convergent which has established itself in the DOOH market and has a blue chip client base.

As the DOOH market is still in its relative infancy, its high fragmented with no clear market leader which creates a great opportunity for the larger better finance companies to take market share. Convergent has a distinct competitive advantage and that it’s the only company in the market that can provide customers with an end-to-end single source solution with digital signage campaigns.

Convergent has a the creative abilities to develop content, it has the technical capabilities to provide the hardware, software and system integration necessary for these campaigns and it has the infrastructure and staff in place to provide the network monitoring in field services required to manage the digital campaigns on an ongoing basis. No other company in the industry provides the entire spectrum of services.

Over the past several years, Convergent has focused primarily on Sony’s specific objectives for their vertical segments. They’ve continued to maintain service and legacy customer relationships but did not grow the business. As a result revenues and profitability at Convergent has declined over the past few years.

We believe an opportunity exist to refocus Conversion’s business on a broader market opportunities by leveraging the assets of two strong companies. Convergent has the state-of-the-art digital technology and complete end-to-end service offering that mix of them, a one-stop shop for digital solutions.

Great people with great ideas in an outstanding portfolio of work for blue chip customers that will be impressive to new prospects we will be targeting. Bryan Allen has been with Convergent for about 30 years. He has been managing the business for 8 years and will continue to do so going forward.

Over the next several months we will be rebuilding Convergent sales and marketing capabilities and reengaging with their target markets from a business development perspective. The most near term opportunities would be likely to come from introducing conversions capabilities to our existing clients in the Cinema market.

Convergent has done some good work for Cinemas and we are excited about the prospect of showcasing these offerings to our clients. But in terms of penetrating the other vertical markets, we expect it to be a longer ramp up period. While we will aggressive in our approach towards maximizing the value of the acquisition, it will take some time to rebuild Convergent sales and marketing functions and develop a pipeline of new business opportunities.

Convergent generates approximately 40 million in annual revenue in over the last three years it is average 700,000 annually in EBITDA although the trend has been declining as I’ve indicated earlier. There will be some modest cost savings but we will be increasing the investment in the business. So, we are expecting the improvement in the financial performance in Convergent to taking out expenses.

It’s going to come from the revenue growth as we turn this operation back into a more business development focus company. As we grow the business and add more customers, there will be opportunities to get more leverage out of our NOC infrastructure and this is a key element in managed and the national network of digital displays.

In terms of financial impact, we are projecting that this deal will be $0.06 to $0.10 accretive to EPS in 2014 and $0.15 to $0.20 accretive in 2015 as we start to get more attraction in building the customer base.

In all respects this is truly a transformed acquisition for us. Obviously this business will now make up a meaningful portion of our total revenue and getting into the DOOH and EVS markets completely changed the growth profile of the company. Needless to say we are very excited about this transaction.

We took a long time to execute this first step in our M&A strategy because we wanted to be very diligent in evaluating opportunities and making sure we pick the right one. We think Convergent is a great fit for us and we’re really enthusiastic about leveraging the combined strengths of Ballantyne and Convergent to create a power house in the digital solutions industry.

With that, we’ll be happy to answer any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Eric Wold with B. Riley. Please go ahead.

Eric Wold - B. Riley

Gary, you obviously comment about how this business has been kind of mismanaged or underutilized for some time, give us a sense was 40 million of sales and appears probably less than 0.7 million of EBITDA given that the trend has been on decline. Can you give us a sense of the cost structure this company in terms of where margins are, where all that revenue is flowing currently before you can get and there and make any changes?

Gary Cavey

Well nothing like starting up with a complex question here, and I’ll try to keep you a good answer here. First off, Eric, thank you, always for your insights and support, and now what about interest in our company and I wanted to thank you for that. In addition, the company was more focused on servicing very limited customer base although the opportunities to go to more customers was there and it just did not have the resources or the opportunities to do that. And I really it just the way it was part of a much larger corporation. This is obviously very significant thing for us and we think between the two companies we have a knowledge base as well as customer contacts that we can reach out to a number of other verticals to be able to supply the current services and talent that Convergent has. As far as you asked the question about margins, we see that to be more in line with our present service business, and Mary you can add a little color to that, would you like…

Mary Carstens

Right, we certainly don’t want to get too specific on margins just to make sure that we don’t give information out that could be helpful to competitors. But we’ve spent quite a bit of time expanding our margins especially over the last several quarters. And the acquisition of Convergent what we see is that we expect the margins to be similar or slightly higher to Ballantyne’s current gross margins for this acquisition.

Eric Wold - B. Riley

Perfect, and then one more question. I know you’re going to build this pipeline backup. Is there anything you can say in terms of maybe that some of the customers in the press release I assume those are probably some of the major customers of the company. But give us a sense of just how contracts or agreements to the customers are set up are these annual contracts, multiyear contracts any sense just kind of what an average length maybe still?

Gary Cavey

Yes, it’s made up of two components, Eric; one is a project job of doing an install and setting it up, and those projects can run anywhere from a year or shorter six months to a year to maybe two or three years depending on the size of customer. And in addition then the service aspect can go for many multiple years contracts. And as I’ve said before including Ballantyne those contracts could be cancelled at any time if we didn’t do a good job of service and maintenance. And so far both companies have had a great track record of holding onto customers.

I might also say that we have on our Blue Chip customer line-up is we have a lot of other very well known customers. But due to restrictions on using their names we can’t mention those but it’s a very impressive list and very diverse list of customers.

Eric Wold - B. Riley

Perfect, thank you guys very much, appreciate it.

Operator

Our next question comes from the line of Tristan Thomas with Sidoti & Company. Please go ahead.

Tristan Thomas - Sidoti & Company

Hi guys, how are you?

Gary Cavey

Fine thanks Tristan.

Tristan Thomas - Sidoti & Company

Excellent, couple of questions, first one is most of your business is in North America, correct?

Gary Cavey

North America, yes.

Tristan Thomas - Sidoti & Company

Okay, is that going to impact your tax rate? I know it’s come down significantly just due to percentage of business overseas. I mean, do you think it’s going to be similar moving forward or do you think it’s going to tick up a little bit?

Mary Carstens

Yes, I think, Tristan if you just look at the earnings per share guidance that we gave you that will give you a sense of kind of the impact that it should have with the business.

Tristan Thomas - Sidoti & Company

Okay, great. Another question I had was do you know what Sony acquired this business more in 2010?

Gary Cavey

I don’t have any answer for that one Tristan.

Tristan Thomas - Sidoti & Company

Okay, not a problem. I was just curious because I mean a three year kind of turnaround and then you sell it any color you can give on that or is it just something that just moved out.

Gary Cavey

I think probably you seen a lot of changes going on with Sony so I think this is just part of the overall strategy maybe.

Tristan Thomas - Sidoti & Company

Okay, got you, and make sense. One final question, in terms of your, you mentioned the, gross margin is similar to what you currently run in terms of the operating margin how are they in terms of SG&A cost? Do you think there is some facts there?

Gary Cavey

It’s hard to tell right now. We see more opportunities on the growth line Tristan.

Tristan Thomas - Sidoti & Company

Okay and I’m sorry one final question. You’re not, doesn’t seem like you’re really projecting any revenue recognition in the last quarter, fourth quarter this year. Is that accurate?

Mary Carstens

Yes, right now Tristan actually we're comfortable talking about 2014, with regards to the near term impact we'll probably be a better position on our, to address that in the third quarter earnings call.

Operator

Our next question is from Kyle Cerminara with Fundamental Global Investors, please go ahead.

Kyle Cerminara - Fundamental Global Investors

I had a few questions. The first was the, just looking at their website it looks like they have a location in Alpharetta, Georgia. Is that where the network operating center for Convergex is, and will you be running this simultaneously with your Omaha one, are there any synergies between the two.

Gary Cavey

You answered the question very well for us, yes we'll be operating both, this is the headquarters and this is where the operating center is and their NOC and we'll be leading both facilities.

Kyle Cerminara - Fundamental Global Investors

I think in your opening statement that Safely and Kroger were large customers of Convergent. Are you willing to share how material each of those customers are to the revenue base.

Gary Cavey

No, we can't do that.

Kyle Cerminara - Fundamental Global Investors

And then Kroger recently announced the acquisition of Harris Teeter, is that a further revenue opportunity to take what Kroger is doing with its existing store base and expand it to perhaps some of the stores that they've recently acquired or is that already factored in.

Gary Cavey

I don't know the answer to that we'll have to get back to you on that, good question.

Kyle Cerminara - Fundamental Global Investors

My last question is, as you think about this acquisition from sort of the grand strategy of what you'd like to do with Ballantyne. Is it that the numbers of this acquisition sort of worked because it certainly is very accretive which is great? Or is it that the strategy of this company sort of goes very well with you so it's not just a numbers thing but it's also qualitatively a very good acquisition for you.

Gary Cavey

[indiscernible] we feel it's a perfect fit, we feel we can execute on it and we're in the process of developing specific tactics now, this is our very first day and we obviously feel that it'll be very accretive and a good thing for the investors and shareholders and our customers. I think the customers are looking for somebody that's a larger and stronger financially based business to deal with, because we're talking about some very large blue chip customers, when we're dealing with this business.

Operator

There are no further questions at this time; I'd now like to turn the conference back to management.

Gary Cavey

Thank you, operator, thanks again for everyone taking the time to join us this morning, we're looking forward to speaking with you again when we report our third quarter earnings, and over the coming months we'll be trying to get out and see as many of you in person, so please feel free to let us know if you'd like us to reach out to you as we make our plans. Thank you and have a great day.

Operator

Ladies and gentlemen, this concludes the Ballantyne's Strong Investor Conference Call, this conference will be available for replay after 12pm today through October 8, 2013 at midnight eastern time, you may access the replay system at any time by dialing 1-800-406-7325 and entering the access code of 464-33-94, thank you for your participation you may now disconnect.

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