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Ballantyne Strong, Inc (NYSEMKT:BTN)

Q4 2013 Results Earnings Conference Call

March 14, 2014 12:00 PM ET

Executives

Tricia Ross - Financial Profiles, IR

Gary Cavey - President and CEO

Mary Carstens - Chief Financial Officer

Analysts

Tristan Thomas - Sidoti & Company

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Ballantyne Strong Fourth Quarter and Fiscal Year End 2013 Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions)

This conference is being recorded today March 14, 2014. I would now like to turn the conference over to Ms. Tricia Ross of Financial Profiles. Please go ahead.

Tricia Ross

Good morning, everyone. And welcome today’s fourth quarter 2013 earnings call. Today’s call and webcast may contain forward-looking statements related to the company's future operating results.

Except for the historical information, it may include forward-looking statements that involve risks and uncertainties, including but not limited to quarterly fluctuations and results, customer demand for the company’s products, the development of new technology for alternate means of motion picture presentation, domestic and international economic conditions, the management of growth and other risks detailed from time-to-time in the company’s Securities and Exchange Commission filings. Actual results may differ materially from management’s expectations.

In addition, the company’s comments on today's call may contain certain non-GAAP financial measures, including non-GAAP earnings and non-GAAP earnings per share. For additional information, including reconciliations from GAAP results to non-GAAP measures are the non-GAAP measures provide useful information and why the company uses non-GAAP measures, please see the reconciliation section of the fourth quarter 2013 please release which appears on the company’s corporate website.

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

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

Gary Cavey

Thank you, Tricia. Good morning, everybody. Thanks for joining us. Earlier today we reported our results for the fourth quarter of 2013. From a revenue perspective, we had a strong finish to the year, which was driven by several large orders for digital projectors in our international markets.

We shipped a total of 350 digital projection systems worldwide in the fourth quarter versus 170 units in the 2013 third quarter. A significant portion of our fourth quarter sales were in the Latin America and Asian markets, where there is still good demand, although for lower margin projectors.

With the digital conversion cycle largely complete, we expect that our future product sales in the projector business will be primarily driven by the ongoing parts, refresh of existing theaters and newbuilds, as well as the future technology upgrades.

One of the technology upgrades that will be rolled out this year is a new laser driven projector from NEC. The laser driven projector has a number of advantages over the lamp driven projectors that tend to experience a slow deterioration in picture quality as the lamp ages.

We anticipate that there will be a strong interest in this new technology that should drive sales opportunities in the future. While there will still be a solid level of demand for digital projection systems, we are expecting our sales to be fairly lumpy in this business on a quarter-to-quarter basis.

Now that the conversion to digital is fundamentally complete, we can't rely upon the past historical sales trends to project the level of demand we will see in the future. Digital equipment sales are largely depended upon when the exhibitors decide to invest additional capital into their businesses, which tend to elongate the sales cycle and increase the volatility in the quarter-to-quarter trends. The increased lumpiness we are now seeing in the digital equipment sales underscores the importance of our ship towards our managed services business that creates a more consistent reoccurring revenue stream.

Moving to our recent acquisition of Convergent Media Systems, we are making good progress with the integration. We have spent the last few months meeting key customers and suppliers and based on the feedback we have gathered, it's clear that the digital media business is still in the very early innings in the terms of its rollout and we are currently at a very important transition point.

With in-store digital displays already being widely adopted within multiple industries, the next phase of the development of the digital media business will be more focused on integrating with mobile devices to create a deeper engagement with the customers. Businesses are seeking on omni-solutions that deliver dynamic content to the digital displays located throughout the retail locations, as well as delivering highly targeted messaging directly to the mobile devices of its in-store consumers.

This highly targeted messaging can educate consumers about new products, inform them about special promotions, create more awareness of other services that might be appealing among many other uses. It’s an exciting new opportunity for the digital media industry to create more holistic marketing campaigns that can be more accurately measured in terms of their return on investment and ultimately drive more marketing dollars for this category.

With Convergent’s comprehensive technical and creative capabilities and the ability to be an end-to-end single source solution for digital media campaigns, we are well positioned to capitalize on the evolution of the digital media industry. We will need to continue to make investments in this business to ensure that we remain at the forefront of the industry and we are exploring a number of strategic partnerships that will enable us to cost effectively utilize the latest technological innovations required for engaging with mobile platforms.

We have also started in the process of strengthening Convergent’s business development capabilities. We have hired a new Vice President of sales and marketing and we are adding salespeople with more direct experience in the vertical markets that we are targeting, mainly retail, healthcare, finance, hospitality and education. It is clear that the digital media business has a long sales cycle and it takes as much as a year to go from an initial dialogue to a full rollout.

It’s a business where customers typically run pilot programs before expanding to more locations. In those pilot programs, it can be modified several times, which lengthens the sales cycle. So while we're excited about the long-term growth opportunities in this business, we are cognizant that it will take some time to build our sales pipeline.

Following the acquisition of Convergent, we reorganized Ballantyne into two segments, managed services and systems integration, which will enable us to enhance the efficiencies across the company and better focus on the growth opportunities in our various markets.

Our Managed Services segment consists of the Convergent as a strong technical services business, which manages our two network operations centers that provide 24/7/365 monitoring, management and maintenance of network equipment for a variety of industries.

Our systems integration segment consists of our traditional broad line of products for the theater exhibition industry in our specialty lighting products. Within the systems integration segment, we are continually looking for new product opportunities that will enable us to leverage our existing infrastructure. With this strategy in mind, we have finalized an agreement to become a value-added reseller of a cloud-based video security solutions from VIAAS, which is a leading provider of video surveillance systems.

We have added experienced video surveillance industry veterans to lead this business for us. The video security solutions we will be offering will provide opportunities for both the product sales, as well as create ongoing maintenance and monitoring contract opportunities for us. We think these products are great extension of our core competencies and will become a meaningful contributor to our revenue mix during the second half of 2014.

Before I turn the call over to Mary for more detail on our fourth quarter results, I’d like to take a step back and look at the state of the company and how it has changed over the past year. We feel very good about the steps we took in 2013, and we are clearly as much stronger company now that we were a year ago.

We are more diversified and less susceptible to the cycles of any one particular industry. We have more exposure to the markets that are projected to experience strong long-term growth. We are growing the contribution of Managed Services within our total revenue mix, which will have a positive impact on our margins.

We are in a better position to generate more reoccurring revenue, which should result in a more consistent earning stream and we continue to help a strong balance sheet that will enable us to continue investing in growth initiatives, both organically and inorganically

With the new markets we have entered, our expanded capabilities to serve the digital media marketplace in the pipeline of innovative products we have built. We are excited about the long-term outlook for Ballantyne Strong. As we execute on our strategic growth initiatives, we are confident that we will create long-term value for our shareholders.

With that let me turn the call over to Mary for additional color on the company Q4 results. Mary?

Mary Carstens

Thanks, Gary and good morning everyone. As Gary mentioned, we have organized the company into the Managed Services and systems integration segments and all of our historical financial data has been restated to reflect the new segments.

Our total revenues in the fourth quarter of 2013 were $32.7 million compared to $39.1 million in the same period of last year. The Managed Services segment generated revenues of $10.6 million in the fourth quarter, compared to $3.9 million in the same period of the prior year.

The increase is primarily geared to the acquisition of Convergent Media Systems. During the fourth quarter, Convergent had a number of legacy projects that’s completed or started to wind down. And as Gary mentioned, we are just starting to revamp the business development capabilities and rebuild the sales pipeline. So we would expect to see some decline in our Managed Services revenues from the fourth quarter levels until the sales pipeline becomes more mature.

Our Systems Integration segment generated revenue of $22.1 million in the fourth quarter, compared to $35.2 million in the same period of the prior year. The decline is primarily attributable to lower shipments of digital theater equipment. Relative to the third quarter of 2013, our Systems Integration revenue increased by $6.1 million, which is attributable to a couple of items.

First, we have seen in the past several years that the fourth quarter had some seasonality impact in our Asia business. And second, as Gary indicated earlier, as we go forward to a more normal replacement refresh business, our sales would tend to be lumpy. We completed a large shipment of projectors to Latin America in the fourth quarter, which accounted for approximately half of the increase.

As we move into the first quarter, it’s unlikely that we will see the same level of projector sales that we had in the fourth quarter as we don't have another large shipment into Latin America in the pipeline and our Asia business tends to be seasonally weak due to the Chinese New Year.

Gross profit was $4.9 million, compared to $6.2 million in the prior year, which is primarily due to the lower level of revenue. Our gross margin was 15% in the fourth quarter, compared to 15.8% in the same quarter of the prior year. While the addition of Convergent’s revenues were additive to the gross margin, this offset by the low margins generated on the sales of digital projectors.

Selling and administrative expenses were $6.7 million, compared to $4 million in the prior year. Our fourth quarter 2013 expenses include $1.5 million in severance expense and $0.3 million in other acquisition and transition costs related to the integration of Convergent. Excluding these expenses, the remainder of the increase in SG&A was attributable to the addition of the Convergent operations.

A portion of the transition costs incurred were related to the rationalization of warehousing facilities following the Convergent acquisition. We closed our warehouse in Omaha and transferred all of our distribution and warehousing for business to the warehouse in Georgia, that was part of the assets we acquired with Convergent. The closing of the warehouse in Omaha will save the company approximately $300,000 in annual expenses.

Moving to taxes, we incurred an income tax charge of $1 million during fourth quarter associated with the change in our allocation of our cash within our business. We've recently reviewed our cash reinvestment policy and concluded that the cash that have built up in Canada exceeded our reinvestment opportunities in that country.

We determine that $12 million of our cash in Canada would no longer be considered permanently reinvested which resulted in additional income tax expense of $1 million. This $12 million in cash is now available to be distributed to, when needed to the United States to support the capital requirements of the business.

We generated a net loss of $1.7 million or $0.12 per share in the fourth quarter of 2013 compared with net income of $1.6 million or $0.11 per share in the same period a year ago. When the severance, acquisition transition costs and purchasing account adjustments related to Convergent and the income tax charge for the repatriation of cash are excluded, we generated net income of approximately $600,000 or $0.04 per share in the fourth quarter of 2013.

Ballantyne's cash and cash equivalence balance at yearend was $28.8 million, compared to $26.3 million at September 30th. The increase in cash reflects our strong level of sales this quarter with increased collections on accounts receivable and reduced inventory. We also had an increase in payables due to the timing of purchases.

We continue to have good liquidity and full access to our $20 million credit facility providing additional capital resources or potential transactions in internal growth. And finally, we continued to have solid cash flow in 2013 generating $8.5 million in cash flow from operations for the full year.

At this point, Gary and I are ready to answer your questions. Operator, please open the lines.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Tristan Thomas with Sidoti & Company. Please go ahead.

Tristan Thomas - Sidoti & Company

Hey guys how are you? Couple of quick questions, would you be -- are you planning on breaking out the revenues specific to Convergent at some point?

Mary Carstens

I mean we'll probably report on how we're doing based on our estimate, but I specifically, I mean, we'll be talking about the two segments.

Tristan Thomas - Sidoti & Company

Okay. And then can you maybe a, second you just comment on some of the customer retention you are seeing. I mean, if you mention some of the legacy programs that customers are ending. I was just curious what you expect to be moving forward?

Gary Cavey

This is Gary. I think, the question is, I think, the whole industry is in demand by our customers is evolving and using multiple devices to contact people both on-site and within their mobile devices. And it's creating a lot of opportunities for changing up systems and developing systems and developing connection points for these customers in all types of industries.

Tristan Thomas - Sidoti & Company

Okay. Are you involved in any, let’s say pilot program right now for some of these programs with mobile devices that you mentioned on the call?

Gary Cavey

Yes. We are.

Tristan Thomas - Sidoti & Company

Okay. Very good. And then what are you, in terms of, you mentioned you are increasing sales people and where are you at now and what do you hope to get in terms of the number?

Gary Cavey

Well, it takes, the sales, we’re making some nice progress on finding the right people that meeting these industries, but it takes a salesperson that has some skills particularly and the ability to provide solutions complex, complex solutions for customers and integration capabilities.

So we’re being very diligent on the type of people we’re hiring to meet these specifics in each industry that we’re trying to serve. So we're making some progress. We’ve hired some people and we’re still looking for more.

Tristan Thomas - Sidoti & Company

Okay. Great. I’m going to jump back in the queue for a second. Thanks.

Operator

There are no further questions at this time. I’d now like to turn the call back over to management for closing remarks.

Gary Cavey

Well, thank you all of you for joining us on today's call. We’re looking forward to speaking with you again next quarter. Have a nice day.

Operator

Ladies and gentlemen, that does conclude the Ballantyne Strong Fourth Quarter and Fiscal Year End 2013 Conference Call. If you’d like to listen to a replay of today’s conference, please dial (1800) 406-7325 or (303) 590-3030 with the access code of 4671381. We’d like to thank you for your participation. You may now disconnect.

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