Executives
Mindy Tucker - IR
Bill Abbott - President and CEO
Brian Stewart - EVP and CFO
Charles Stanford - EVP - Legal and Business Affairs, General Counsel
Analysts
Peter Alkin - Stifel Nicolaus
Sal Muoio - SM Investors
Lawrence Stern - Stern Capital
Michael Kupinski - Noble Financial
Crown Media Holdings Inc. (CRWN) Q1 2010 Earnings Call May 5, 2010 11:30 AM ET
Operator
Good day, ladies and gentlemen and welcome to the Crown Media first quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.
Today's presentation includes forward-looking statements regarding the company and its performance. The forward-looking statements may concern, for example, accepted financial positions and operating results, its business strategy, its operating and financing plans and other matters. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in or implied by any forward-looking statements and should be considered in conjunction with the cautionary statements including in our press release and our most recent reports filed with the Securities and Exchange Commission including our most recently filed annual and quarterly reports.
Any forward-looking statements are made only as of the date of this conference call based on information known today to the company’s management. The company is not undertaking any obligations to update any forward-looking statements.
I would now like to turn the call over to, Mindy Tucker. Go ahead, Mindy.
Mindy Tucker
Thank you. Good morning everyone and welcome to Crown Media’s first quarter conference call.
With me today are Bill Abbott, President and Chief Executive Officer and Brian Stewart, Executive Vice President and Chief Financial Officer. Bill and Brian will make some comments about the operating results and financial performance for the first quarter and then we will open up the call for questions.
I would like to remind everyone that our press release, which contains information on non-GAAP measures, was distributed this morning and is available through the Investor Relations section on our website at hallmarkchannel.com. In addition, our 10-K will be filed later today.
Now, I would like to turn the call over to Bill.
Bill Abbott
Mindy, thank you. Good morning everyone and thank you all for joining us today. Our results for the first quarter of 2010 reflect the continued challenges of operating our business, although the adjustments we have made to offset our reduced revenue growth continue to be effective in increasing our adjusted EBITDA.
Revenues were down for the quarter, but despite this, our adjusted EBITDA increased over 30% as compared to the first quarter of 2009. Our strategic initiatives to develop two distinct yet complementary channels have been moving forward with several developments all the time to maximize the value of each channel by getting further distribution, appealing to more viewers, and attracting advertisers at higher rates.
The recapitalization of our company is proceeding as planned and we expect to complete this transaction sometime in the second or third quarter of this year, creating a more financially sound structure, which will better position us for long-term financial success.
Now let's get to some of the details. We continue to experience a decline in our ratings for the first quarter as our daytime programming schedule has undergone changes, as we work to develop the most daytime lineup in advance of our launch of the Martha Stewart Show: Season 6.
In prime time, we are more successful with our schedule premiering five original movies the quarter, which were among the top performing programs in their time period.
Acknowledging that we needed to reinvigorate our daytime lineup with a new approach, the first quarter of this year was one of significant strategic development in positioning Hallmark Channel for future rating success.
We solidified and reformulated daytime strategy for introducing a lifestyle programming block with the formation of a partnership with Martha Stewart Living Omnimedia, which includes the exclusive license of the Martha Stewart Show, development of additional original lifestyle series, original prime time specials throughout the year tied to holidays and the exclusive rights to the extensive library of lifestyle programming.
This programming will provide us with a full weekday daytime schedule of popular and established lifestyle programming from 10 am through 6 pm with additional episodes daily on weekends.
Our prime time and weekend schedule will continue to feature our strong slate of original movies, specials and Hallmark Hall of Fame presentations.
The addition of Martha Stewart programming allows us to reach a new level in terms of programming, ratings and advertising. The possibilities for new original series of specials are endless. Martha Stewart is the premier name in terms of lifestyle, creativity and home orientation covering everything from entertaining, weddings, and holidays to crafting, cooking, gardening, and pets.
Combined with the obvious synergies with Hallmark Cards and Celebrations, the programming ideas are unlimited. We believe this programming will work extremely well in appealing to our key demographic of women 25-54.
In addition, we expect a strong audience in the heartland, will combine with the metropolitan appeal of the Martha Stewart Show to improve and solidify our ratings.
An important benefit recently to the introduction of the new programming is the potential for increased advertising revenues. The Martha Stewart Show attracts a significant number of advertisers with attractive sponsorships and product placement opportunities.
We believe that the Martha Stewart programming, in general, will bring in new advertising categories and new clients. We recently participated in the Martha Stewart upfront media presentations for the upcoming broadcast year in New York, Los Angeles and Chicago, which will help to maximize the benefits of our new relationship as it relates to advertisers and agencies.
Looking ahead, we also have a very exciting lineup of original movies scheduled for the rest of the year. We will be premiering 24 original movies in total this year, continuing the networks' legacy as the premier destination for family movies and the leader in original movie premier hours, among all ad supporting cable networks.
We are especially excited to be developing original movies for Hallmark Movie Channel, which will serve as the cornerstone to attract ratings and establish this second network as a unique and independent channel that our audience, advertisers and distributors will embrace.
Although it is very early to comment, we now have several weeks of ratings for Hallmark Movie Channel and we have seen a steady rise in both prime time and total day household ratings, according to the Nielsen numbers.
Again, this represents just very first weeks of ratings for Hallmark Movie Channel, but it is certainly moving in the right direction.
Our distribution story continues its positive trend with steady growth for Hallmark Channel, consistent increases in our license fees and robust expansion in subscribers for Hallmark Movie Channel. Distribution for Hallmark Channel is nearing 90 million Nielsen households, with 89.3 million subscribers at the end of first quarter.
With growth support at our all three platforms, cable, satellite and telephone distributors, through organic growth as well as new launches and repositions, we expect to be in 91 million homes by the end of 2010.
Our progress on Hallmark Movie Channel continues to exceed our highest expectations growing to 34.2 million subscribers at the end of the first quarter.
Since the beginning of the year, we added over 5 million new subscribers increasing our delivery by 18%. With our planned rollouts for the months ahead, we expect to finish the year in 40 million homes.
We continue to grow with important new launches on Comcast, DIRECTV, Time Warner, Charter and NCTC. Hallmark Movie Channel is now available on Dish Network, throughout the entire U.S.
We are optimistic about the continued growth of Hallmark Movie Channel and its ability to become a more important contributor to our advertising revenues. Hallmark Channel in High Definition, officially launched on February 1, 2010. Hallmark Channel in HD immediately obtained 5 million duplicated subs from the first month that it was available to distributors.
DIRECTV is planning on adding the service next month, which will a significant event adding another 10 million duplicated subscribers. Additionally, DIRECTV is jointly adding Hallmark Movie Channel in HD to 1 million new subscribers, which is positively impact our advertising revenue.
Our license fees for the quarter increased to $17 million, representing an increase of 11% over the first quarter of 2009. The steady and predictable increases we negotiated in our distribution agreements continued to add to our bottom line and underscore this important addition to our revenue stream.
I would like to take this opportunity to publicly thank Janice Arouh, Executive Vice President Affiliate Sales and Marketing for her dedication and significant accomplishments to our company. As many of you have heard, Janice has accepted a position, which will enable her to tap into her entrepreneurial spirit and we wish her the best of luck in her new endeavors.
Advertising sales for the first quarter were down 7% as compared to the first quarter of 2009 with declines in Hallmark Channel offset by important growth at Hallmark Movie Channel. For Hallmark Channel, the improving economic conditions and an aggressive sales strategy produced a 73% increase in scatter CPMs for the first quarter 2010 as compared to pricing for the upfront commitments obtained nearly a year ago.
We continue to see that the ad-sales strategy to hold back inventory in the upfront and some short scatter has proven to be a successful approach.
Hallmark Channel capitalized on the short scatter marketplace and secured advertisers in important high CPM categories including automotive with Chrysler and home improvement with Pergo Flooring and Glidden Paints. However, the decline in ratings year-to-year has hindered our ability to maximize share and as a result Hallmark Channel ad revenue experienced a 10% decline versus last year.
Hallmark Movie Channel advertising revenue increased 48% for the first quarter compared to last year reflecting the strong distribution growth and improved scatter marketplace. We anticipate significant increase in advertisers support as we introduce Hallmark Movie Channel as a rated network beginning in the second quarter of this year.
Discounted marketplace continues to strengthen as advertisers’ stake confidence in the improving economy. We anticipate that this will lead to stronger cable upfront. Hallmark Channel is well position to capitalize on the upfront as anticipation for Martha Stewart and lifestyle programming block has been met with high demand from incumbent and new advertisers.
The Hallmark Channel ad-sales teams is working very closely with Martha Stewart Living Omnimedia to create integration and cross platform sponsorship packages with significant interest from advertisers in new categories including home-improvement, automotive and travel. Countdown to holiday sponsorships continues to deliver exciting opportunities that will continue to be a big part of our upfront presentations and offers.
We anticipate a strong upfront market for the Hallmark Movie Channel as well as we offer advertisers measurable and guaranteed ratings for the first time. We are seeing strong interest of a network that can deliver quality, family movies in High Definition under the strength of the Hallmark brand.
I will turn the call over to Brian now to discuss the financial results.
Brian Stewart
Thanks Bill. In the first quarter of 2010, Crown Media generated $24.4 million in adjusted EBITDA representing a strong 31% increase over the same period of 2009. Some of the revenue details for the first quarter of 2010, Crown Media's total revenue decreased 4% from the first quarter of 2009 to $68.4 million.
As Bill mentioned, we continue to see improvement in ad-sales rates in the first quarter with scatter rates 73% higher than upfront rates for the same period, an 18% higher than the first quarter 2009 scatter rates.
The increase in advertising rates was offset by declines in our overall ratings, and specifically, the delivery of our key demographic, women 25 to 54. The net effect was a decline in our total advertising revenue of 7% from the first quarter of 2009 to $51.3 million.
First quarter subscriber revenue increased 11%, compared to the first quarter of 2009, driven by its strong growth in the number of paid subscribers and contractual rate increases in certain of our distribution agreements.
On the expense side, total cost of services decreased 12% to $31.9 million in the first quarter of 2010. During 2009 and the first quarter of 2010, apart from the Martha Stewart agreements, we did not enter into significant program license agreements so the expiring programming rights and the related amortization resulted in reductions in our programming expenses in the first quarter.
As Bill indicated, the Martha Stewart agreements provide a broad source of quality content for our lifestyle programming efforts. As a result, we don't expect to enter into significant programming agreements impacting 2010, so we expect that first quarter programming expense trend to continue throughout the full year 2010.
Other operating costs decreased $1.3 million, compared to the first quarter of 2009, due in part to the $600,000 decrease in bad debt expense and as a result of our cost reduction efforts entered into in 2009 and in early 2010.
Our first quarter 2010, SG&A expenses decreased slightly compared to the first quarter of 2009 due to a reduction in salary expenses offset by slight increases in other operational areas. Marketing expenses were approximately $1 million in the first quarter of 2010 down from about $5 million in the first quarter of 2009 when we had expenses related to a significant marketing effort for our Hallmark Channel original movie presentation.
In terms of EBITDA and cash flow, again, first quarter 2010 adjusted EBITDA was $24.4 million, up 31% from first quarter '09, cash provided by operating activities in the quarter was $7.8 million compared to a use of cash of $400,000 in the first quarter of 2009. As a result of this positive cash flow we had no outstanding balances under our credit facility at the end of the first quarter 2010 and had approximately $17 million in cash on the balance sheet.
Based on our operating results and significantly lower cash payments due in 2010 under certain programming agreements, we continue to expect strong growth in 2010 cash flow from operations compared to 2009.
Recall that as part of the proposed refinancing our J.P. Morgan credit facility has been amended to extend the term to August 31, 2010 with an available balance of $30 million. We continue to complete the closing requirements for the proposed restructuring and expect to be in a position to close the transaction in the second quarter or early in the third quarter of 2010.
So, our outlook, we believe that the continued strengthening of the advertising market will provide an excellent environment for us to leverage the upcoming markets to our programming. We expect continued growth in Hallmark Channel's subscription revenue and expect the growth of the Hallmark Movie Channel distribution to provide support for the sale of general rate advertising on-that channel. These factors combined with nominal growth in cost and expenses throughout the year. Based on this, we continue to believe that our EBITDA and cash flow growth will continue in 2010.
With that I'll turn it back to you Bill.
Bill Abbott
Thank you, Brian. In summary despite the ongoing challenges faced in our business, we continue to respond with innovative and compelling strategies to ensure the future growth and success of our company.
We have established a foundation to refresh and reprogram the data and schedule for Hallmark Channel that we believe will be well received by our target audience. In addition, it allows us to adjust the programming for Hallmark Movie Channel, offering movies 24/7.
This is the beginning of a new phase of the development of HMC emphasized by the shift in programming at Hallmark Channel were created by the achievement of a key threshold in subscribers.
Over the next several years, our focus will be to continue to grow distribution, gain awareness for the network and drive the critical mass necessary to maximize our advertising revenue potential.
Each network is developing an independent and unique niche while staying true to the overall message of family values and general entertainment that is defined by our brand. I believe that this is critical to our future success as we distinguish our channels so that each becomes a must-have for advertisers and distributors and a must-watch for our audience.
At this point, I'll turn the proceedings over to the operator to assist us for the question-and-answer part of the call.
Question-and-Answer Session
Operator
(Operator Instructions). Our first question comes from the line of Peter [Alkin] of Stifel Nicolaus.
Peter Alkin - Stifel Nicolaus
Do you guys have an estimate for EBITDA for the year and cash flow for the year?
Brian Stewart
We have not released specific guidance on that, Peter. As we've talked, we do believe that we will have relatively significant growth over 2009, again, from cash flow standpoint driven partly by some contractual payments. We'll have lower contractual payments on some of our significant programming agreements this year compared to last year, and as I mentioned, we expect our run rate of expenses to be a little bit lower than last year, but we haven't released specific numbers for EBITDA and cash flow.
Peter Alkin - Stifel Nicolaus
No, the lowered expenses is great, and it seems like you're doing well at that, but can I assume your EBITDA for the year and your cash flow for the year will be record numbers?
Brian Stewart
Well, as I said, we expect it to be higher than 2009.
Peter Alkin - Stifel Nicolaus
Which will be record numbers?
Brian Stewart
By some definition, yes.
Peter Alkin - Stifel Nicolaus
The MSO deal, can you give us an idea of what type of ad revenue numbers we could expect and when they might start to hit?
Brian Stewart
Again, the Martha Stewart programming will start in earnest toward the end of September of this year, so the full year impact will be really just for the fourth quarter of this year. The contract of that deal is the revenue share with Martha Stewart, so specific to that agreement; we don't expect significant incremental revenue specifically as a result of that agreement in 2010, again based on the last start in the year and some of the revenue share components.
As Bill mentioned, we're already seeing the introduction of new categories, higher CPM deals in the upfront, so we certainly expect over time to expect to generate increased revenue from that content, but based on the structure of the deal, we don't expect a significant boost from that in 2010.
Peter Alkin - Stifel Nicolaus
No, but I think the ad revenue is picking up. I think, Bill was quoted in a publication that it’s a perfect storm from a sales perspective in terms of the gains that he is seeing as we build up to the upfront. Is that true?
Bill Abbott
We feel very good about the upfront and certainly the economy is turning around and we are positioned very, very well with the launch of a lot of new and exciting properties that we are very confident we will deliver on our core demo and dropped pricing, yes.
Peter Alkin - Stifel Nicolaus
Okay and just this far unfortunately there is a litigation going on obviously. Can you give us an idea of what the litigation expenses have been so far?
Charles Stanford
This is Charles Stanford. I don’t think we would have a comment on that. As you know the expenses are covered in part by insurance, so we are still under our deductible for the insurance and once the deductibles satisfy, they will be picked up by our insurer.
Brian Stewart
Then, Peter, I would just.
Peter Alkin - Stifel Nicolaus
What the deductible are?
Brian Stewart
Yes, I would just say that we have a relatively low deductible and so we are don’t expect any significant change to our operating expenses as a result of the litigation.
Peter Alkin - Stifel Nicolaus
Even if it continues for an extended period of time? Let me just ask you guys a question, because unfortunately you are dealing with minority shareholders, right? It is known that controlling shareholders have a duty of loyalty for the minority shareholders of the corporation. You guys agree?
Charles Stanford
All of these issues are issues in the litigation and we don’t have any comment on that.
Peter Alkin - Stifel Nicolaus
This is the only place that we are able to speak to you guys about. How unfortunate I am a minority shareholder and it doesn’t seem that we are getting a fair shake. Let me ask another question and as far as this goes, do you think Martha Stewart will be happy with this extended litigation that your company is in with all this excitement and all this excitement for you guys in projected revenues and I’d think that she wouldn’t want to get involved in anything it has litigation here.
Bill Abbott
We don’t have much choice because we are not the plaintiffs in the litigation. The plaintiffs would have asked for an expedited proceeding at the trials can schedule for September 21st that’s pretty fast and it’s hard to predict, but rest to know say we are hopeful that will be disposed very quickly.
Brian Stewart
I would say we are certainly equips to talk about the operations of the business again from with the insurance protection in place we don’t see significant exposure from the litigation in terms of our financial statements in our operating results. Bill is much closer to this than I, but certainly in terms of the Martha Stewart activity its full court press on the upfront process on getting the word out in marketing and promoting. The exciting move of her program to our platform and really both companies are very enthusiastic and very motivated and very focused on that process. So I would say that it certainly is not hindering the day in and day out execution of what we think is a very exciting plan around that program.
Peter Alkin - Stifel Nicolaus
Let me ask you something, there is about 20 million minority shareholders, 20 million shares?
Brian Stewart
Yes, there is about 10 million, 10 lot of million suppose in the public and other smaller shareholders that are part of the tax sharing structure, but yes.
Peter Alkin - Stifel Nicolaus
Who the Crown family? By the way is it the special committee made up of three Crown directors?
Bill Abbott
All of these matters have been covered extensively in our public filings. We are in the midst of litigation. We just have no further comment on the matters that are covered by the litigation.
Peter Alkin - Stifel Nicolaus
Well, then it doesn't seem that the majority shareholders are looking after the minority shareholders and as I've seen the truth will be told in the future it sounds like because it doesn't seem like you guys are giving any consideration to the minority shareholders and Brian, I still haven't gotten my proxy to vote on this reorganization, but I guess you guys aren't asking for a vote.
Operator
Our next question comes from the line of Sal Muoio.
Sal Muoio - SM Investors
I just wanted to ask some fundamental things. Brian, if I could. Is that okay?
Brian Stewart
Yes.
Sal Muoio - SM Investors
All right thanks. Just comment or talk more about the advertising number at the Hallmark Channel, you've got the audience efficiency reserve is up almost $9 million versus first quarter of last year. I supposed to ask what gross advertising is or what percent sold out you are or when you're looking at the advertising number you make whole and then how was direct response, talking about some of the segments of advertising and how more granularity?
Brian Stewart
A few things there, I'll definitely have Bill chime in as well, but I think again just to recap the numbers a little bit. The Hallmark Channel was down quarter-to-quarter was down 10%. Our overall advertising was 7% because the Hallmark Movie Channel grew significantly kind of in reverse order. The Movie Channel story is really one of distributions and the transition to fully rated services late in the first quarter, early in the second quarter.
So the Movie Channel story is one began continued strong growth. The Hallmark Channel story is really two pieces. It’s again a return of the fairly strong advertising market and I think renewed an additional enthusiasm around our particular platform in services as a result of the introduction of some new and exciting opportunities for advertisers in the form of lifestyle contents.
So, rates are very strong. Pricing is very good. The ratings are down and Bill can walk through the transition process as you shift genres and shift programming direction there is a natural decrease in the rating. So as a result of that, our delivery is down. So our revenue recognition in the first quarter was lower than prior periods the net result of that increase in price, but decrease in ratings.
To your point, we continue to build in audience efficiency reserve. Now that reserve is on our balance sheet and is an obligation that we have to those advertisers it get made good in a number of different fashion typically with other inventory that we have in on a going forward basis. So you’re right, there is the additional impact that has on pricing going forward and inventory management going forward. We continue to be as we are fully sold out, but it’s definitely come and plan out to manage our inventory going forward to make sure that we continue to grow revenue, but also make that audience efficiency.
Sal Muoio - SM Investors
I guess you had made us in the quarter, right?
Brian Stewart
Yes.
Sal Muoio - SM Investors
When you look at the advertising number as reported that’s net of, how do you work the numbers relative to the audience efficiency for reserve?
Brian Stewart
Well I’m not, say that again.
Sal Muoio - SM Investors
Was that just too granular?
Brian Stewart
Well, maybe we have had a little bit of it offline. From an accounting standpoint, we recognize the revenue based on our actual delivery and the guarantees that we have in the marketplace to the extent that we under deliver on those guarantees we offset that with, again, the reserve that went up by about $4 million or $5 million in the first quarter representing obligations that we have to make good in later periods. So, we get to net it out of the revenue.
Sal Muoio - SM Investors
All right, so if I added those change over the quarter-to-quarter to the advertising revenue, I can get some idea maybe something that you might call growth advertising if I wouldn’t call that. Is that the idea here?
Brian Stewart
Yeah, growth number.
Sal Muoio - SM Investors
That other little small advertising revenue category called sublicense fees and other?
Brian Stewart
Right.
Sal Muoio - SM Investors
So, last year it was sort of around that 0.4 rounded number and you have a 4, but it looks like this quarter is a little different. I just kind of forgot what’s in there and…
Brian Stewart
Yes, and that number eventually goes away. That has to do with just the revenue recognition around certain of our programming agreement and actually historically it's some of the revenue recognition related to some satellite agreements that we entered into. So it's a couple of different components both relatively insignificant and eventually go away and not part of our normal course of operations.
Sal Muoio - SM Investors
Okay, I think you may have commented on programming expense. Actually I think you did. So, I just maybe want to know why was it down and how was it going to change the rest of the year. I think you have addressed that. But how do you account for the Martha Stewart deal in private programming agreement. Is that an addition of programming? Or is that something called a prepaid license fee?
Brian Stewart
Well it's a little bit neither and it gets to Peter’s early question just about how it's going to impact our financial statements going forward. That agreement is different than most of our other agreements because it is a revenue share structure. So the benefit that we have is we won't have significant programming cost as a result of that agreement, but it also, unlike our other programming agreements, require some revenue sharing back to Martha Stewart.
So, it will get booked up little different. The net of it, to be honest, is as I mentioned to Peter, is that it won't significantly change our revenues nor will it significantly change our programming expense. We don't anticipate in 2010. It will be a little bit different in 2011 when we have a full year effect, but in the essence that this will be recognizing the net effect of it on our P&L.
Sal Muoio - SM Investors
This is a 50-50 share, or is this.
Brian Stewart
It's not quite 50-50 and yes, we probably don't want to get into the specifics of the deal, but based on that revenue share structure, it impacts both our expenses and our revenue differently than other program agreements.
Sal Muoio - SM Investors
Meaning if you book a $1 revenue you booked your share of that dollar becomes your revenue.
Brian Stewart
In essence that's right. We will only be booking our share of the revenue from that inventory from that program.
Sal Muoio - SM Investors
Those are little small contract termination number. That's just the tail end of the satellite uplink termination?
Brian Stewart
That's correct.
Sal Muoio - SM Investors
Just something I didn't understand the category, prepaid programming license fees, so I thought I should just throw it out there on the call.
Brian Stewart
Yes, most of that has to do with our original programming. There are certain number of our regional agreements where we fund the productions during the production process in advance of the asset becoming available to us air. So there's a bit of a prepaid related to those original movies.
Sal Muoio - SM Investors
And that’s just a seasonal number, I guess?
Brian Stewart
Correct. Yeah.
Sal Muoio - SM Investors
All right. That was it. Thank you. Thanks for taking them.
Operator
(Operator Instructions). Our next question comes from the line of Lawrence Stern of Stern Capital.
Lawrence Stern - Stern Capital
I am picking up on the first caller's question regarding minority share owners. If that proposed transaction on the recapitalization takes place, the minority share owners end up with somewhere between 2.5% and 3% of the equity of this private organization.
Can you explain the strategy of the company on a go-forward basis, if your recapitalization transaction closes at the end of the second quarter or the beginning of the third quarter and leaving the 10 million shares out in the public float?
Charles Stanford
Well, Lawrence, this is Charlie Stanford. Your question implicates things that are issue in this litigation and I don’t think we have any comments.
Lawrence Stern - Stern Capital
Okay, Charles. Let me interrupt. This is a public company and there is no other forum in which minority share owners get to express our opinions with company management, so what is.
Charles Stanford
I am not sure I understand your question. Is your question, what if recapitalization is completed, what our plans are?
Lawrence Stern - Stern Capital
Explain to me a public company with 2.5% of the common shares held out in the public and 98% held by private parties, post transaction, as to what the strategic vision is for Crown Media, as a public entity into the future? Thank you.
Charles Stanford
Well, that's a global question. I don’t think we have any comment on it at this time.
Lawrence Stern - Stern Capital
Under what conditions and in what forum will management or the Board of Directors take comments from minority share owners?
Charles Stanford
We do take comment from minority shareholders and I have taken your comment on right implications. I think that since the litigation.
Lawrence Stern - Stern Capital
In private and not in a public forum.
Charles Stanford
Lawrence, we are in litigation. We have no further comments on these matters. Once the litigation is over, we may be able to speak more freely about it. We can't now.
Lawrence Stern - Stern Capital
What is the company's strategic direction on an operating basis since there is no other chance for minority share owners to ask these questions?
Charles Stanford
That's a broad question, strategic direction can you be more specific?
Lawrence Stern - Stern Capital
You are certainly two very strong individual channels that have very strong individual identities that are one being certainly full distributed and other on it's way to be fully distributed that are attractive to advertisers, viewers and distributors alike with the Hallmark brand attached in all of the different ways that Hallmark has been successful for movies to series.
Bill Abbott
I would just add to that Lawrence I guess in terms of the strategic vision that would be those two operating platforms that are generating significant positive operating cash flow with substantial requirement for additional investment going forward, so a very strong and growing cash flow business with very little demit is the structure and the vision going forward.
Operator
Our next question comes from the line of Michael Kupinski of Noble Financial.
Michael Kupinski - Noble Financial
I just have a couple of quick questions in terms of, I know that you are talking about scatter prices and how they are up significantly but did you provide pace and data going into the second quarter? What kind of already largely through the second quarter?
Bill Abbott
The second quarter market continues to be extremely strong. Volume is up, pricing is up comparable way to first quarter and we believe that will lead to a very, very strong upfront as well.
Michael Kupinski - Noble Financial
Okay. So, are you guys anticipating then revenue growth out from the advertising side of it in the second quarter? I know that ratings are little soft, but in combination with the ratings are you looking for revenue growth?
Brian Stewart
Little soon to tell because the bid dynamic out there is really performance as we make this change from significantly series other skewing base schedule to one that is more indicative of lifestyle product that will be ultimately supported by Martha Stewart Season 6.
Michael Kupinski - Noble Financial
I see and then in regard to going back to Martha Stewart again, is the reason why the programming expenses are going to influence you as much this falls. Isn’t because the deal itself, doesn’t the revenue actually go to Martha Stewart to cover the production cost at least initially and then on then after that then it becomes a rough share, is that the reason, why your programming doesn’t really influence your numbers as much?
Brian Stewart
Definitely that’s right, Michael. It is that, again based on the revenue share, our revenue won’t go up, but we won’t incur significant programming cost for that block of inventory item.
Operator
At this time we are showing no further audio questions available. Bill Abbott, you may proceed.
Bill Abbott
Thank you very much for joining us and we look forward to seeing you at the end of second quarter.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.
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