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RealD (NYSE:RLD)

Q3 2014 Earnings Call

February 05, 2014 4:30 pm ET

Executives

Andrew Greenebaum

Michael V. Lewis - Co-Founder, Chairman of the Board and Chief Executive Officer

Andrew A. Skarupa - Chief Financial Officer and Principal Accounting Officer

Analysts

James M. Marsh - Piper Jaffray Companies, Research Division

Eric C. Wold - B. Riley Caris, Research Division

Townsend Buckles - JP Morgan Chase & Co, Research Division

Ralph Schackart - William Blair & Company L.L.C., Research Division

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Steven B. Frankel - Dougherty & Company LLC, Research Division

James C. Goss - Barrington Research Associates, Inc., Research Division

Operator

Good afternoon. My name is Laurel, and I will be your conference operator today. At this time, I would like to welcome everyone to the RealD Third Quarter Fiscal 2014 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to Andrew Greenebaum of Addo Communications. You may begin your conference.

Andrew Greenebaum

Thank you, and welcome to RealD's conference call to discuss our financial results for the third quarter -- fiscal quarter 2014 ended December 31, 2013. By now, everyone should have access to the earnings press release, which was distributed today at approximately 4:00 p.m., Eastern Time. It is available on the Investor Relations portion of RealD's website at www.reald.com. Also available on the website is the financial highlights presentation that provides a detailed review of our results for the third quarter. This call is being webcast and will be available for replay.

In our remarks today, we will include statements that are considered forward-looking within the meaning of the United States securities laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management's current knowledge and expectations as of today, February 5, 2014, and are subject to certain risks and uncertainties that may cause actual results to differ materially from forward-looking statements. A detailed discussion of these risks and uncertainties is contained in our Annual Report on Form 10-K and quarterly reports on Form 10-Q. The company undertakes no obligation to update any forward-looking statements.

On this call, we will refer to non-GAAP measures that, when used in combination with GAAP results, provide us with additional analytical tools to understand our operations. In our earnings press release and in our SEC filings, we've provided reconciliations of these non-GAAP measures to the most comparable GAAP measures.

And with that, I'd like to now turn the call over to RealD's CEO, Michael Lewis.

Michael V. Lewis

Thanks, Andrew. Good afternoon, and thanks for your participation today. RealD delivered a strong third quarter, outperforming across nearly every financial measure. Both RealD box office and licensing revenue were up year-over-year. We experienced meaningful growth in both box office and licensing revenue in China, a key growth market for us.

Profitability and free cash flow benefited from reduced OpEx and CapEx, the results of our actions last quarter to optimize our financial performance and better position the company for the future. Specifically, we focused on maximizing our existing cinema platform in mature markets, investing in our growth markets and maintaining our commitment to expand beyond a pure 3D cinema technology company. Our strong top line performance this quarter was led by Gravity, which to date, has delivered over $300 million in RealD box office. We're pleased to see that Gravity received 10 Academy Award nominations, including best picture, ranking it among the most nominated 3D films ever. Once again, Gravity proves that when done right, 3D enhances the overall movie-going experience.

Looking back at calendar 2013, 8 of the top 10 highest grossing films globally were released in 3D, up from 6 films in the prior calendar year. Clearly, 3D is a valuable tool for filmmakers to enhance their story, and the 3D medium continues to evolve and improve, a great trend for RealD.

As we've said before, and as Gravity's success demonstrates, RealD's platform can deliver strong results when a high-quality film is supported with proper marketing of the 3D format and appropriate 3D programming. As we did with Gravity, and we'll consider for certain films that check these boxes in the future, RealD intends to offer select incentives. These incentives can be made available to our studio and exhibitor partners and may be promotional or financial in nature. Our goal is to identify these types of films early on, work closely alongside the key film constituents and dedicate resources to maximize the performance of each film across RealD's platform. The extent of RealD's resources and incentives may vary based on quality of the 3D experience and box office potential. In addition to maximizing the performance of our existing cinema platform, we continue to focus our expansion efforts in fast-growing emerging markets, where we expect to realize an improved return on investment.

We installed approximately 600 screens during the quarter, with the vast majority of our deployments falling within our key growth markets of China, Russia and Latin America.

Strong demand for 3D content continued to be a driver of RealD's performance in our international growth markets, in general. China alone saw an increase in 3D box office from 37% of the total box office in calendar 2012 to 44% in calendar 2013. Our performance in China was particularly notable during the quarter. License revenues grew approximately 140% year-over-year to over $5 million, which approximates more than half of the license revenue generated in the prior 12-month period for the region.

In addition, China, like our other emerging growth markets, continues to exhibit strong demand for local 3D content. In fact, 3 of RealD's top 4 3D films during the quarter in China were locally produced. The top-selling film for the region, Journey to the West, set a new box office record for local 3D films in China, reaching nearly $200 million in box office, almost double the top grossing local 3D film from last year.

Likewise in Russia, in its opening weekend, the locally-produced adventure film, Viy, topped the opening weekend records previously set by Stalingrad, Russia's biggest grossing locally produced movie of all time.

As highlighted last quarter, we continue to make investments to position RealD as a technology company committed to enhancing the visual image across all formats and all markets. Along these lines, we were proud to introduce RealD TrueImage, the first example of our effort to expand RealD's business beyond 3D.

RealD TrueImage, which recently debuted with Peter Jackson's sequel to The Hobbit, is a visual enhancement technology, applicable across all formats, 2k, 4k, large format, 2D and 3D. Through a proprietary RealD process, RealD TrueImage eliminates artifacts commonly associated with digital and film-based capture, resulting in a higher quality, more detailed and lifelike imagery.

Given the involvement of award-winning director Peter Jackson, the film's global appeal and distribution in formats, including 2D, 3D, High Frame Rate and Premium Large Format, The Hobbit was a perfect film to demonstrate this new technology.

Further, we are in active discussions with studios, filmmakers, post-production and visual effects houses, and we expect to announce additional films that will utilize RealD TrueImage in the near future.

While, initially, RealD TrueImage is being launched in the cinema space, longer term, we expect to make RealD TrueImage available for consumer applications, where the technology also has distinct benefits, including more efficient compression and higher image quality.

Over the past decade, we've developed unparalleled expertise in 3D visual technologies. This expertise, combined with RealD's extensive patent portfolio will enable us to expand beyond 3D cinema technologies. We believe a large and growing market exists for technologies that enhance the visual image across all formats and devices. We are confident that our visual technology expertise will prove directly applicable to these new markets.

With that, I'll turn the call over to Drew.

Andrew A. Skarupa

Thank you, Michael. I'd like to begin with a brief review of our key financial highlights for the quarter: most notably, the 140% year-over-year growth in Chinese license revenue, driven by strong demand for locally-produced 3D content; second, the 9% improvement in product and other margin, primarily driven by cost reductions, and to a lesser degree, increased demand for RealD Eyewear; and thirdly, the year-over-year reduction in operating expenses net of restructuring costs and capital expenditures stemming from cost reduction efforts implemented last quarter.

Now turning to our fiscal third quarter results in more detail. Revenues were $55.4 million, which included license revenues of $35.6 million and product and other revenues of $19.8 million.

License revenues increased 17.4% from the prior year quarter, and represented approximately 64% of total revenues.

Domestic license revenues represented 33% of total license revenues, and international license revenues represented 67% of total license revenues.

Product and other revenues increased 19.4% from the prior year quarter, and represented approximately 36% of total revenues.

Domestic product revenues represented 67% of total product revenues, and international product revenues represented 33% of total product revenues.

Licensing gross margin was 68% compared to 65% in the prior year quarter. The increase was due to lower impairment and field support costs, partially offset by higher depreciation expenses from an increase in RealD-enabled screens, as well as costs from severance payments made to employees impacted by the cost reduction plan.

Noncash depreciation expense included in license cost of revenue was $8.3 million, representing 23% of license revenue, up from $7.4 million, or 24% of license revenue in the prior year quarter.

Field support-related costs, including impairment expense of $800,000 included in license cost of revenue, were $1.9 million, a decrease from $2.7 million in the prior year quarter.

Including impairment expense, total cost of license revenue increased to $11.5 million from $10.5 million in the prior year quarter. Also included in license cost of revenue for the third quarter of fiscal 2014 was approximately $900,000 of restructuring expense.

Product and other gross profit was $3.1 million, or 16% gross margin compared to $1.1 million, or 7% gross margin in the prior year quarter. The improvement was primarily due to product cost reductions and, to a lesser degree, increased demand for RealD Eyewear.

RealD Eyewear represented 31% in the recycle mix for domestic shipments, an improvement from 29% in the year ago quarter.

Operating expenses were $25.2 million, an increase of 6.2% from $23.8 million in the prior year quarter.

On a pro forma basis, excluding $2.8 million of restructuring expenses, operating expenses declined approximately 6% year-over-year.

Share-based compensation expense included in operating expenses was $4.3 million, down from $4.8 million in the prior year quarter.

GAAP operating income was $2 million versus a loss of $2.9 million in the prior year quarter.

Net loss attributable to common stockholders was $271,000, or a loss of $0.01 per share, compared to a net loss attributable to common stockholders of $4.2 million, or a loss of $0.08 per share in the prior year quarter.

Adjusted EBITDA, a non-GAAP financial measure, was $21.3 million versus $10.9 million in the prior year quarter. The increase was primarily due to higher license revenues with improved gross margin and reduced operating expenses, excluding restructuring costs.

Cash flow from operating activities for the quarter was $13.6 million and total capital expenditures were $3.1 million, resulting in positive free cash flow of $10.5 million.

Turning to our balance sheet. As of December 31, 2013, cash and cash equivalents were $29.6 million, a decrease of $4.6 million from the prior quarter. Total borrowings on our credit facility were $49.4 million, a decrease of $15.6 million from $65 million in the prior quarter. As a result, net debt was approximately $19.8 million at the end of the quarter.

Now let's talk about box office metrics. In the third fiscal quarter, our license revenue of $35.6 million represented 4.7% of the $752 million in estimated worldwide RealD box office for the quarter. The variation from our previously guided 4.5% reflects a higher proportion of Chinese license revenue during the quarter, which is not accounted for in our box office results. For added perspective, license revenue in China accounted for approximately 0.7% of the quarter's box office as compared to 0.3% of the box office in the prior year quarter. This effect more than offset the impact from higher average ticket prices, reflecting a lower percentage of admission from family films during the quarter. That said, for modeling purposes, we continue to believe 4.5% is an appropriate approximation of RealD's license revenue as a percentage of the estimated worldwide RealD box office. However, we do expect variation in this percentage from quarter-to-quarter due to the reasons we just discussed, in addition to film genre and other factors.

Moving on to discuss our outlook for the balance of the fiscal year ending on March 31, 2014. As we discussed in detail last quarter, we began the implementation of a cost reduction plan to more efficiently manage our cost structure, while continuing to make targeted R&D investments for future growth. We expect this plan will result in annualized operating expense reductions of approximately $15 million, excluding restructuring charges and annualized cost of sales reductions of approximately $2.4 million, excluding restructuring charges.

During the third quarter, we incurred approximately $3.7 million in onetime restructuring charges, of which $600,000 was included in license cost of revenue, $300,000 was included in product cost of revenue and $2.8 million was included in operating expenses.

We estimate that we'll incur an additional $700,000 to $1.2 million in onetime charges related to our restructuring in our fiscal fourth quarter.

Taking into account all these aforementioned factors, we are reiterating our annual guidance as follows. We continue to expect total operating expenses for the full fiscal year of 2014 to be in the range of $94 million to $98 million. On a fully-allocated basis, we estimate that our investment in consumer visual technologies, which include both 2D and 3D products and applications, during the third fiscal quarter, was approximately $6.1 million, which includes restructuring charges of $1.8 million, in addition to research and development, sales and marketing, and general and administrative expenses. Year-to-date, we estimate that our investment in consumer visual technologies was approximately $18.2 million, of which $1.8 million is related to restructuring charges. This estimate includes a variety of accounting assumptions regarding the allocations of certain shared overhead functions, including fixed costs such as facilities and other general and administrative expenses.

Assumed in our guidance is share-based compensation expense of approximately $16 million in the operating expenses and restructuring charges of approximately $4.4 million to $4.9 million.

On a pro forma basis for the full year, we expect operating expenses less restructuring charges to be approximately $90 million to $93 million.

We continue to expect depreciation and amortization expense will be approximately $40 million, of which approximately $33 million is included in cost of revenue.

We expect field support and other costs included within license cost of revenue to be in a range of $11 million to $12 million.

We expect the dollar amount of income tax, as shown on our income statement, will be approximately $7 million for the full year.

We remain comfortable with our previously guided to estimate of theatrical capital expenditures of approximately $21.8 million for the full fiscal year. We also anticipate other capital expenditures, including maintenance capital expenditures of approximately $8.8 million for the full fiscal year.

And with that, we'll open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of James Marsh with Piper Jaffray.

James M. Marsh - Piper Jaffray Companies, Research Division

Two quick questions here. First on the TrueImage product, who are your competitors in this space? Do -- I mean, do these visual effects houses and postproduction houses have their own proprietary software? Or they're just buying it from others. If you could just kind of explain the competitive landscape there. And then, secondly, I was hoping you could give us an idea of what the trend in international 3D releases will look like, the local language 3D releases. Can you just provide any numbers there? Where it'd been historically and where they're going?

Andrew A. Skarupa

So I can comment on the second, on 3D trends here. We're seeing a significant impact in local indigenous content. I think one of the big exciting movies that we've seen in China, James, is actually The Monkey King. Pretty amazing numbers here. It was released on January 31, and through just 4 days, we've seen the movie gross in box office $68.6 million, 98% is 3D. And as you know, China is a growth market for us. So this just demonstrates the fantastic opportunity for growth in China. Also during the quarter, as Michael spoke about, of the 3D films available in China in the quarter, 3 of the 4 were local indigenous content, including the top one. And these films included Young Detective, Firestorm and Police Story. We're also seeing local content being produced in Europe as well, Russia, and we're seeing an increasing number. So we think the trend is very positive for an increase in the number of films, as well as an increase in the potential box office and license revenues for RealD.

Michael V. Lewis

And, James, I'll comment on TrueImage, on your question. This is really works in tandem with visual effects and post-technology. So we think this is a really, really unique and very important product for the industry moving forward. I guess the most recent example, obviously, is Hobbit. Peter Jackson has probably, arguably, the best visual effects house in the world at Weta, and certainly state-of-the-art production facilities. And they use this product because of the ability to remove artifacts and visually clean up the image, which sort of goes hand-in-hand with postproduction and other visual effects technologies. In fact, we think not only do you get a qualitative improvement, but we think there may be some economic advantages, because a lot of the work that's done in visual effects in postproduction is to clean up, if you will, these artifacts that occur when you capture an image with both a digital or a film camera. So we're very excited about this product. We expect to add more films that will be using it this year. And we'll keep you updated as to sort of the financial impact. We don't expect significant financial impact this year, but we think it is important for the future.

James M. Marsh - Piper Jaffray Companies, Research Division

So just a quick follow-up there, Michael. Is that something that's licensed by film? Or do you license it to the effects house and they can use it for the year? I mean, how does it work here?

Michael V. Lewis

We expect that -- probably all the above. There may be visual effects houses that use it but probably, initially, we will be doing this work in-house and doing the work. It's very efficient. It's -- we did an enormous amount of work on The Hobbit, which was in, literally, the last 3 to 4 weeks of production, and both for 2D, 3D, High Frame Rate, 4k. So there's a lot of data that we were improving on. And so, it's just an amazing technology. It was invented in-house at RealD in Boulder. And I'm just personally very excited about it.

Operator

Your next question comes from the line of Eric Wold of B. Riley.

Eric C. Wold - B. Riley Caris, Research Division

Two questions. I guess, first, maybe provide a little more detail around the financial incentives that you talked about would be offered to exhibitors, to be more aggressive around certain films. Would any of these negatively impact kind of the baseline license fees you've had in the past? Or are they kind of really just incentives to go up and beyond the normal base rate of kind of 3D box office they generate? And then, secondly, I know you're not giving guidance yet for next year in terms of screen installs or system installs, but maybe talk about some of the selectivity -- your changes in your selectivity criteria around screen deals you'll take. How have you changed your IRR parameters to accept a deal or pass on a deal versus where you were historically?

Michael V. Lewis

Hey, Eric. So on the incentives, the incentives can take the form of a number of things, some financials, some marketing. And they would be not only with the exhibitors but also with studios, in the form of either potentially discounting on glasses, could be royalty discounts to exhibitors. But our experience is that by doing these incentives, the net result to us is accretive. So we don't see a compression in our margins. In fact, what we're doing is we're incentivizing the entire ecosystem to have a better result. So we're going to look at these films very closely in 2014. We're going to focus on films that are qualitatively, we think, are great examples of RealD. We're going to focus on films that we think we can market specifically as a RealD film, as a 3D film. So that's sort of how we're looking at it and how we're going to target. So we're not looking at every film. It's -- we're going to be selective in what we choose.

Andrew A. Skarupa

So, Eric, this is Drew, commenting on really IRR deal terms. Some of it actually has just been self-managing. Many of our exhibitor partners have publicly stated they've reached their stated capacity. So on many of our installs, these are really the new deals in Latin America, China and Russia where, first of all, the 3D percentages are extremely high, with very high IRRs. Second, without specifically discussing our deal terms, we have modified our deal terms to ensure that we have strong and acceptable returns for our shareholders.

Operator

Your next question comes from the line of Townsend Buckles with JPMorgan.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Another one on the incentives. Any sense you can give on how material the financial component could be for these? And will they mostly be kind of a fixed upfront commitment or more variable, depending on how well a movie performs in 3D?

Andrew A. Skarupa

Townsend, it's Drew again. These incentives are not material to the financials, taken as a whole. As Michael said, it's accretive to our overall returns. And each type of incentive is different depending on the film.

Townsend Buckles - JP Morgan Chase & Co, Research Division

And will you know which titles you'll be supporting?

Andrew A. Skarupa

They will vary throughout the year.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Okay. And then, Drew, just on the recurring operating cost outlook, is $80 million to $85 million or so still the right assumption for fiscal 2015? Or do you feel it could possibly come in better than that?

Andrew A. Skarupa

Well, obviously, on our year-end call, when we file our 10-K in the June time period, we'll provide specific guidance then. As we've said on this call, the guidance for operating expenses, when you take out the restructuring charges we disclosed, we're about the $90 million mark. And that had -- $90 million to $93 million. And that had a higher run rate. And so, we've also said looking ahead, we should have annualized operating expense savings, a reduction of $15 million. So I'll leave it up to you and other analysts to draw your own conclusions on our expense level. But we will be providing investors and analysts with more detail on operating expense guidance on our next call.

Operator

Your next question comes from the line of Ralph Schackart with William Blair.

Ralph Schackart - William Blair & Company L.L.C., Research Division

First one's for Drew. Drew, the licensing revenues as a percentage of box at 4.7% in the quarter, I think you called about 70 basis points from China, if I'm not mistaken, on the upside of international rate. The domestic rate was a little bit at the lower end of historical. I just want to clarify, was that due primarily to the higher-than-anticipated family tickets? Or was there some of the royalty discounting going into that as well?

Andrew A. Skarupa

No. That one is ticket price. As I said to Townsend, Ralph, that the incentives were not material. It's all genre-specific ticket pricing.

Ralph Schackart - William Blair & Company L.L.C., Research Division

Okay, it's helpful. And, Michael, on TrueImage, it sounds like it's going to start at the effects houses. Just curious, are you eventually thinking that you'll be able to commercialize this at the consumer level? And any other color you might be able to add there would be helpful.

Michael V. Lewis

Yes. Actually, just to be clear on that. We expect to probably do the initial films directly in-house at RealD, and then longer term, probably work in tandem with visual effects and post houses. So point number one, yes, we do think there is a consumer application for this. And I should point out again that this is sort of the first example of where we want to go as a company, which is expanding beyond 3D. This technology is applicable for both 2D and 3D. In the consumer market, as I mentioned in the opening remarks, we believe there are advantages in terms of compression, in terms of file size that -- as that market grows through mobile devices and so forth, and streaming is going to be very important. So we don't think it's going to happen tomorrow. We obviously want to bring this into the cinema market, but we think introducing it in cinema and one of the biggest films of the year with Hobbit was a really good move. It was a great test of the product. Peter Jackson is a big fan of it. And we believe that, longer term, this is going to apply to a lot of markets moving forward.

Operator

Your next question comes from the line of Ben Mogil from Stifel.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Just want to touch a little bit on the product revenue side. So on the product revenue side, besides glasses, is there anything else? Was there any kind of license material that was -- license revenue that was material in there?

Andrew A. Skarupa

No, no. It's just glasses.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

So you're running -- in the first 9 months of the year, you're running a pretty healthy gross margin in there. In the past, you've talked about it being around breakeven or a little bit of a margin on the COGS side. Is that -- is your views changed on that at all?

Andrew A. Skarupa

Well, Ben, it's a 10% margin year-to-date. I wouldn't exactly call that robust. So we still believe it -- breakeven is the right guidance. We're still working on trying to improve our recycle rates and trying to reduce our costs. We -- as in my prepared remarks, the recycle mix was up this quarter. And that had a significant impact as well. It was up to 31% from a year ago, 29%. So we're not putting the stake in the ground that we're higher than breakeven. We're keeping it at breakeven for now.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then, lastly, on the international front. As we sort of start to -- I mean, is there a way we should be thinking about the box office, that the share of unreported is going to start to get you into increases, trying to become as a bigger market for you, and that will lead to sort of slightly higher international conversion rates against the reported box office number?

Andrew A. Skarupa

Well, in periods of lower box office, it has a demonstrable effect, very profound effect. And -- I'm sorry, in periods of box office that are lower, it has a large effect. In periods of box office where it's higher, such as the summer tentpole season, then that percentage is much lower. Over time, obviously, China is going to be the largest box office region in the world. And our revenues from there will become very large. At some point in time, we believe there'll be some type of standardized box office reporting to the public in China as well and, at some point, get incorporated. I think taken as a whole, all in all, on an annual basis, 4.5% is the right percentage to use for now. In periods of high box office, it's going to be lower. In periods of low box office, China will have a greater effect.

Operator

[Operator Instructions] Your next question comes from the line of Steven Frankel of Dougherty.

Steven B. Frankel - Dougherty & Company LLC, Research Division

Could you start by reviewing what the take rates were domestically and internationally in the quarter?

Andrew A. Skarupa

Sure. When you say take rates, you mean the 3D percentages, right? The percentage of people seeing 3D versus 2D?

Steven B. Frankel - Dougherty & Company LLC, Research Division

Yes.

Andrew A. Skarupa

Okay. So for -- Steve, for the quarter, blended worldwide, 51%; domestic, 44%; and international, 56%. So year-to-date, worldwide, 43%; domestic, 36%; and international, 49%.

Steven B. Frankel - Dougherty & Company LLC, Research Division

Okay. And going back to TrueImage. Can you just give us a little more detail on what the pricing model is? Is this a per-film service fee? Or some kind of license fee that's either onetime or annual?

Michael V. Lewis

Yes. We're not providing any information on that right now. We'll be able to give you more information over the course of the year as we announce deals.

Steven B. Frankel - Dougherty & Company LLC, Research Division

Okay. And can you review for us what the expenses in CE are likely to be for this year?

Andrew A. Skarupa

We're reiterating about the same guidance we previously had. On a fully-allocated basis, we've talked about $20 million for fiscal 2014.

Steven B. Frankel - Dougherty & Company LLC, Research Division

Okay. And in terms of the glasses, is there anything with your either formal or informal agreement with the studios that might -- this profit position might lead to price cuts?

Andrew A. Skarupa

Well, no. There's no contractual obligations to our partners. Without going into deal specifics, we continue to guide to a breakeven position.

Operator

Your next question comes from the line of Jim Goss with Barrington Research.

James C. Goss - Barrington Research Associates, Inc., Research Division

As you look at non-3D applications within films, are you also looking at 3D applications in other areas beyond films?

Michael V. Lewis

Are you speaking about products in general that we're introducing or TrueImage or...?

James C. Goss - Barrington Research Associates, Inc., Research Division

Well, no. I mean, to the extent that TrueImage is both 2D and 3D within the film base, I'm just wondering if the reverse is true, that there might be ways that you'll take the 3D technology you created and look at applications that don't have anything to do with films.

Michael V. Lewis

Yes. I mentioned earlier, TrueImage is applicable both for cinema 2D, cinema 3D, and then we believe there will be an appetite for using it beyond cinema on a multitude of devices and delivery mechanisms. And I would just say that, overall, our philosophy is to expand beyond just 3D. And so the products that we'll be bringing out this year will be both applicable in the 2D and 3D market.

James C. Goss - Barrington Research Associates, Inc., Research Division

Okay. And to the extent that you've had success with some indigenous products in various other markets, are any of those 3D films transportable back into the United States, in areas where there might be enough of a population base that it would appeal to, that it might be another opportunity for you?

Michael V. Lewis

Yes. We've seen some examples of that. I think that, that market is still developing. Stalingrad, for instance, which was initially released in Russia, was one of the largest -- or was the largest grossing film, and Viy may surpass it, as I mentioned in the earlier comments. But the biggest film, that was -- that went out into a number of markets outside of Russia. China, it did quite well. I think Germany it performed. They're still looking at a U.S. release, though, it'll probably be on a limited number of screens. So yes, there are examples of that. And I think it's just a trend, probably, longer term that you're going to see. You're seeing a lot of effort being put into joint coproductions with Chinese films right now in the U.S. So I think, clearly, everybody sees that this is going to be important for the industry. Films have to be able to travel globally in order for them to really maximize their potential.

James C. Goss - Barrington Research Associates, Inc., Research Division

All right. And lastly, Michael. You had mentioned that the dynamics or the sorts of things you would look for in determining whether you would create some of these incentives seems to be entirely subjective. Or are there some other attributes as to recognizing films early that you can then push further for a 3D penetration?

Michael V. Lewis

Yes. I would say it's subjective with, probably, some economics thrown into it. It's clearly, we start with quality. Does it really represent RealD in the best light from a 3D standpoint? Gravity being the most recent example of that. The Hobbit being an example of that. And then, from there, you look at how do we think the form is going to -- how will the film perform throughout all our markets globally? And so those are -- that's the lens that we look through. It's economic and it's qualitative.

Operator

There are no further questions at this time. I would like to thank everyone for their time and participation today. This concludes today's conference call. You may now disconnect.

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Source: RealD Management Discusses Q3 2014 Results - Earnings Call Transcript

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