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New Frontier Media, Inc. (NASDAQ:NOOF)

F3Q10 (Qtr End 12/31/09) Earnings Call Transcript

February 9, 2009 11:00 am ET

Executives

Grant Williams – CFO

Michael Weiner – Chairman, CEO and Secretary

Ken Boenish – President

Analysts

George Whiteside – SWS Financial Services

John Rolfe – Argand Capital

Al Shams – Midsouth Capital

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the third 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). This conference is being recorded today, Tuesday, February 9, 2010.

I would now like to turn the conference over to Chief Financial Officer, Mr. Grant Williams. Please go ahead, sir.

Grant Williams

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

We will begin the call this morning with Michael’s comments on the third quarter results and strategic initiatives and then I will 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 4215769. 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 hpatton@noof.com.

During this call, we may 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.

Michael Weiner

Thank you, Grant; and good morning, everyone. We reported solid profitability this quarter, despite challenging market conditions. We are seeing some signs that our core domestic business may be stabilizing. Although our Transactional TV revenues declined during the third fiscal quarter, revenue from many of our large customers was consistent with the second quarter levels. We are optimistic that these results are indicative of a stabilization of our domestic revenue performance.

We also continue to successfully execute our aggressive Transactional TV international expansion strategy. During the first nine months of fiscal 2010, we generated $1.7 million of incremental revenue from international distribution. We have experienced a consistent improvement in our revenue with existing international customers, and we have multiple distribution initiatives in the works with new international customers that will help drive our revenue growth in the future. We are looking forward to discussing these initiatives in greater detail once they are finalized.

Our Film Production segment continues to benefit from the company’s solid cash position. We are able to fund new productions, whereas many of our competitors in this space need to access the credit markets and we believe that gives that segment a clear competitive advantage. Our production pipeline remains strong. We expect Film Production to complete two producer-for-hire productions and an episodic series production within the next three to nine months. This should provide the Film Production segment with strong momentum during the fourth quarter of fiscal 2010 and into 2011.

Regarding the larger media landscape, we consistently monitor new developments and new technologies within the media industry, and understand the challenges the industry is facing. We are leveraging our extensive relations and developing new strategies with manufacturers of internet-enabled devices such as TVs, Blu-Ray players, game consoles, mobile devices, and cell phones, in order to remain a top provider during a period of continued platform evolution. Additionally, over the past 18 months, we are focused on tuning our tuning our delivery processes and infrastructure to efficiently distribute content to all available platforms.

Although unstable market conditions continued to challenge our industry, we believe our ability to execute against our strategic objectives and our ability to leverage our technological infrastructure to distribute to both traditional and new media platforms will provide the company with steady long-term growth.

Now, I will turn the call over to Grant to discuss the financial results and related information in more detail. Thank you.

Grant Williams

Thank you, Michael. I will start the financial review this morning by discussing the quarterly segment and consolidated performance, and then I will briefly discuss our liquidity position, before opening up the call for questions.

For the Transactional TV segment, revenue in the third quarter declined to $9.1 million as compared to $10.5 million in the same prior-year quarter, due to lower domestic revenue. We believe this decline is from a reduction in consumer discretionary spending. Although we continue to experience pressure on our domestic revenue during the reported quarter, revenue from many of our larger domestic customers was consistent with the prior sequential quarter results. We are encouraged by the quarterly sequential performance of these large domestic customers, and believe this may be a leading indicator that the business is beginning to stabilize.

Partially offsetting the decline in domestic revenue was an increase in international revenue of $0.3 million for VOD services and $0.1 million for pay-per-view services. In total, we generated international Transactional TV revenue of $0.9 million in the fourth quarter. For the Transactional TV segment’s expenses, cost to sales were flat and operating expenses increased to $2.6 million in the reported quarter from $2.3 million in the same prior year quarter due to business development activities as well as advertising and promotion costs incurred in an effort to drive domestic revenue growth. Overall, the Transactional TV segment reported $3.5 million of operating income as compared to $5.2 million in the same quarter of the prior year.

Moving to the Film Production segment, revenue increased to $2.2 million from $1.8 million in the same prior quarter, primarily as the result of an increase in mainstream repped revenue. This increase is primarily due to the distribution of content to VOD platforms in retail DVD markets. Revenue also improved as a result of the distribution of mainstream content to home video and VOD platforms through our arrangement with a mainstream film distributor. Generally, we believe that our ability to represent and distribute mainstream film titles with widely recognized actors and actresses will continue to drive revenue growth for our repped content. Cost of sales for the Film Production segment was relatively flat.

Operating expenses for this segment have declined significantly, because the prior year quarter included approximately $11.1 million in non-cash goodwill and film cost impairment charges. Operating expenses were also lowered by approximately $0.2 million from a reduction in trade show costs as we scaled back our trade show activities in response to the soft market conditions. For the third quarter, the Film Production segment generated operating income of $0.4 million as compared to an operating loss of $11.2 million in the prior year quarter.

The Direct-to-Consumer segment reported an operating loss of $0.3 million in the reported quarter as compared to $0.7 million in the same prior year quarter, primarily as a result of lower operating expenses resulting from our restructuring of the business in the fourth quarter of fiscal 2009.

The Corporate Administration expenses also declined in the reported quarter to $2.4 million from $2.5 million in the same prior quarter, primarily due to our efforts to renegotiate contracts with our vendors in order to obtain more favorable fee structures.

Before I move on to summarize the company’s overall consolidated results and discuss liquidity, let me provide a little more detail on the company's income taxes for the quarter. During the third fiscal quarter, we completed a research and development or R&D tax credit study. Based on the results of that study, we determined that the company was eligible for tax credits dating back to fiscal year 2006, and so we filed amended and current returns for the fiscal years 2006 through 2009 in order to receive the benefit of approximately $0.6 million in tax credits. That benefit is reflected in the tax provision line item within the income statement for the third quarter of fiscal 2010. Additionally, we believe that we will also be eligible for an R&D tax credit for fiscal year 2010. We have estimated the fiscal year 2010 amount to be between $0.1 million and $0.2 million, with a portion being reflected in this reported third-quarter of fiscal 2010 and the remaining amount to be reflected in the fourth quarter of fiscal 2010.

To summarize the company's consolidated results, revenue in the third quarter was $11.5 million as compared to $12.6 million in the same prior quarter and we reported net income of $1.5 million or $0.08 per share compared to a net loss of $8.9 million or $0.42 per share in the same prior year quarter. Keep in mind again that the prior year quarter included $11.1 million in non-cash goodwill and film cost impairment charges.

Regarding our cash liquidity, cash flow from operations for fiscal year to date December 31, 2009, was approximately $0.6 million. Those results include approximately $4.7 million of cash outflows for two producer-for-hire deals and our fourth installment of an episodic series. For comparative purposes, it is necessary to add back the $4.7 million in production cash outflows when comparing to reported period results, because the prior year period did not include similar outflows. As mentioned earlier, we expect that within the next nine months, we will complete these projects and will cover these cash outflows with a positive margin.

We ended the second quarter with approximately $14.7 million in cash and investments, and additionally, we executed a new line of credit during the reported quarter that includes a maximum borrowing line of $5 million, and we had $3 million outstanding under the line of credit at December 31, 2009.

That concludes our prepared remarks. Now, open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of George Whiteside with SWS Financial Services. Please go ahead.

George Whiteside – SWS Financial Services

Tough quarter. But fortunately, you were able to adjust your costs so you ended up with a good bottom line and that is certainly important in this economic environment. You had commented about the international opportunities. How would this compare in terms of your split with your partners overseas versus the splits in revenue domestically?

Ken Boenish

George, this is Ken Boenish. I will take that question. As you know, domestically, there has been an awful lot of consolidation in the cable business over the past six years or so, which has created a few very large companies that have an awful lot of negotiating muscle. We haven't seen that same sort of situation outside the US and so the market is much more diversified. As a result, our splits outside the US are far more lucrative than they are domestically. In many cases, we operate on a 50-50 rev share with operators outside the US.

George Whiteside – SWS Financial Services

Well, that certainly explains why you see (inaudible) to go overseas is to improve your splits percentage. And you commented on some of the competitors futures domestically and so much content is “being offered free”. How do you see that playing into your future?

Ken Boenish

Well, there is no doubt that free content has had an effect on the business and you are talking about the free content that is currently available online. We see, you know, a couple of things happening there. First of all, free content online has actually been effecting the online business a lot more than it has the television business. The thing that our TV business has going for it is really that it is TV, and consumers still see an awful lot of value in being able to see this type of content presented on television and they are willing to pay for it. In fact, our latest consumer research shows us that people are far more willing to pay for content on TV than they are to pay for content online.

The other thing that we see happening is that content producers are becoming much smarter and more aggressive about protecting the content that they produce from being pirated and being distributed for free online. And so, we anticipate sort of seeing a washout of content that is currently being offered online and the newer content that is now being produced is protected to a far greater extent than some of the older content. And so a lot of companies that are producing exclusive new, interesting niche content are actually performing very well in this market, despite the fact that some content is being offered for free.

George Whiteside – SWS Financial Services

And you commented on those producers that in effect are protecting their output. And how does that play with your various platforms?

Ken Boenish

Well, to the extent that we are licensing new content, the content that we license is the content that is protected better and not available for free. And so that definitely works to our advantage. I think you can see that, you know, Hollywood producers have historically done a much better job of protecting their content than adult producers and you know, we see adult producers really sort of drafting on Hollywood success in that area.

George Whiteside – SWS Financial Services

Well I can certainly understand the (inaudible) in terms of the “theatre” presentations by Hollywood, although they have certainly had a tough time protecting content. Well, I will let someone else get into the queue and thank you very much. Keep up the good work.

Ken Boenish

Thanks, George.

Operator

Thank you. (Operator Instructions). And our next question comes from the line of John Rolfe with Argand Capital. Please go ahead.

John Rolfe – Argand Capital

Could you guys talk a little bit about the operating cash flow in the quarter. I think last quarter, you had said that you had expected to recoup some of these producer-for-hire cash outlays in the back half of the fiscal year. It looks like maybe that didn't happen this quarter. What are your expectations going forward with regard to cash flow?

Grant Williams

This is Grant. I will take that one. So the way that we are suggesting you think about the operating cash flow for the year-to-date period is there is about $4.7 million of cash that we have out the door right now associated with some of these large productions that we have going on within the Film Production segment. There is two producer-for-hire service deals that we have as well as our fourth installment of an episodic series. Now I think on the last call we had indicated that we expected that the first of the producer-for-hire deals would be completed and we would recover the cash associated with that during the second half of the year. We didn't get that deal completed in the third fiscal quarter, but we feel highly confident that we are going to get it completed in the fourth quarter and recover all that cash. So that will probably be in the neighborhood of about between $2.6 million and $2.7 million of cash that comes back in the door in the fourth quarter.

As far as the other two deals are concerned, the second producer-for-hire services deal will likely be completed either partially in the fourth quarter of this fiscal year or in the first quarter of fiscal year 2011 and in all likelihood, the cash associated with that deal will come back in in the first quarter of fiscal year 2011. Similarly, with the episodic series that we are working on, we also are expecting that that will be completed during the first half of fiscal year 2011. So again, a lot of the fluctuation in the cash flows year-to-date year-over-year relate to the timing of some of this cash going out for these productions and the lag in when we recover that cash along with the margin sometime later.

John Rolfe – Argand Capital

Okay, great. Thanks very much.

Operator

Thank you. (Operator Instructions) And our next question is a follow-up question from the line of George Whiteside with SWS Financial Services. Please go ahead.

George Whiteside – SWS Financial Services

I thought that last question about cash flow was rather interesting and you remarked about how you are going to recover that cash flow, plus the margin. Now will that be the extent of your participation in those kinds of prospects or that particular project or do you have ongoing revenue coming out of that segment of your business?

Grant Williams

It depends on the production for the major studio productions. Our participation is concluded when the content is delivered and we recover our investment plus our margin. For the episodic series, we do have some extended rights after the first view window for the premium service that we deliver that content to.

Ken Boenish

And typically, the premium service is for rights in the US that we retain the rights, then go out to international markets and distribute that same content.

George Whiteside – SWS Financial Services

I take it that you have not had an opportunity to do that yet in terms of that portion of your business, that is a future development or a future opportunity, is that a proper interpretation of your comments?

Ken Boenish

Well, as it relates to the fourth installment of the episodic series, I would say that that this the case, George, but as it relates to some of our previous episodic series, we had taken those same assets and distributed them internationally and typically, that distribution revenue would show up in our own content revenue line item within the Film Production segment.

George Whiteside – SWS Financial Services

Great. Thanks so much.

Operator

Thank you. And our next question comes from the line of Al Shams with Midsouth Capital. Please go ahead.

Al Shams – Midsouth Capital

I am pretty new to the company, so I am not that knowledgeable about the company's operations, but just wanted to ask a few real general questions. Number one, do we have adequate capital to carry forward on our plans? And two, has the company enunciated any intermediate term goals like over the next two or three years; goals with respect to revenues, gross margins, things of that nature?

Grant Williams

Sure I will take those questions, Al. First, from a capital standpoint, we feel pretty confident that we are in a good position. You know, we have a really strong balance sheet at the end of this quarter, we had, you know, in the neighborhood of $14.7 million in cash and investments. We recently entered into a new line of credit to extend that. It expired. Our original line of credit expired on December 15, but we entered into a new arrangement to extend that out for another year, and that has a maximum borrowing of about $5 million. So based on those levels of cash available, we think we should be in really good shape. In fact, we think in some aspects of the business, it puts us at a competitive advantage as far as our ability to use our existing balance sheet and cash to fund ongoing projects or as in some cases, our competitors are in a position where they are having to access the credit markets and obviously we know that that has been difficult as of late.

Al Shams – Midsouth Capital

Okay.

Grant Williams

As far as the second question about intermediate goals, you know, I think from a policy standpoint, the company has made the decision not to provide specific guidance. However, we do expect to have some directional information available once we work through our fiscal year 2011 budget process. That is actually going on now. So our expectation is that when we are back on the call for quarter of this fiscal year, we will be able to provide a little more guidance on our expectations and strategy and goals going forward.

Al Shams – Midsouth Capital

Okay, thanks.

Operator

Thank you. And management, I show no further questions at this time. These continue with any closing remarks.

Grant Williams

Great. Thanks everybody for joining the call. We are looking forward to speaking to you again next quarter.

Operator

Ladies and gentlemen, this concludes the third quarter fiscal 2010 earnings conference call. You may now disconnect. Thank you for using ACG Conferencing.

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