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New Frontier Media, Inc. (NASDAQ:NOOF)

F4Q10 (Qtr End 03/31/10) Earnings Call

June 10, 2010 11:00 am ET

Executives

Grant Williams – CFO

Michael Weiner – CEO, Secretary, Director, and Chairman

Ken Boenish – President

Analysts

John Rolfe – Argand Capital Advisors

George Whiteside – SWS Financial Services

Steve Kohl – Mangrove Capital Partners

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the fourth quarter fiscal 2010 earnings conference call. During today’s presentation, all parties will be in a listen-only mode and following the presentation, the conference will be open for questions. (Operator Instructions). As a reminder, this conference is being recorded today, Thursday, the 10th of June, 2010.

I'll now hand the conference over to Mr. Grant Williams, Chief Financial Officer. Please go ahead, sir.

Grant Williams

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

We will begin the call this morning with Michael’s comments on the fourth 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 4313809. This call will be archived for 12 months on our website at 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 questions via e-mail to hpatton@noof.com.

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

Thanks, Grant and good morning, everyone. New Frontier Media continued to advance its strategic objectives in the fourth quarter of fiscal 2010. Although our Transactional TV results were down relative to the prior-year quarter, this segment has returned to a growth trend when compared to the third quarter of fiscal 2010. This is significant when you take into consideration the fact that this was the first full quarter that included the reduction of our carriage on the largest DBS platform in the U.S. to two channels.

We have been working with our domestic distribution partners to increase the value and appeal of our content on their platforms. Some of our distribution partners have begun to implement our suggestions and we are seeing positive results. The growth has been augmented by the success of our international initiatives. Overall, international revenue was up over 250% as compared to the same prior-year quarter.

During the fourth quarter, we expanded our international footprint, increasing the number of programming hours on existing customer platforms and generally improving our content performance. We are also expanding the product offerings available to our international customers. This can be seen in our new linear pay-per-view channel offerings in Latin American markets, as well as high definition content in select markets. We believe these efforts will result in another year of strong international revenue growth and improved domestic results in the fiscal 2011 year.

In our Film Production segment, we generated revenue from several producer-for-hire arrangements during the fourth quarter and we expect to execute a new producer-for-hire deal in fiscal 2011. We have also completed production on the fourth installment of an episodic series that should be delivered in the first half of fiscal 2011. In addition, we continue to grow the mainstream component of this business segment.

Market conditions have allowed us to secure a distribution of higher-quality films, featuring strong, well recognized Hollywood stars, which has bolstered the overall performance of our repped content revenue. Additionally, we continue to believe that distribution of mainstream content to VOD and retail DVD markets will generate further growth for our repped content revenue. Although we incurred significant non-cash impairment charges in the fourth quarter due to a slower-than-excepted recovery in the film markets, we believe that Film Production segment is well positioned for solid performance in fiscal 2011.

Investors have periodically asked us about the future prospects of the Film Production segment, which has had significant non-cash write-downs of goodwill and other assets in the past two fiscal years. Unfortunately, market conditions and asset valuation multiples have declined since we acquired this business in early calendar 2006. And as a result of these declines, we have recorded impairment charges. However, we believe there is significant opportunity for this business segment, which could be meaningful for the company and we plan to continue to capitalize on these opportunities.

Overall, we feel good about the company's prospects going forward. Strategically, our key focuses will involve growing the international Transactional TV business, increasing our shelf space, and creating additional value propositions for consumers.

The company generated strong operating cash flows from continuing operations in fiscal year 2010 of $6.5 million. We ended the fiscal year with $17.2 million of cash and we have approximately $1.8 million currently outstanding for a producer-for-hire arrangement. Our balance sheet continues to be strong. We believe that fiscal 2011 will represent the beginning of a period of long-term growth in revenue and earnings for this company.

Now, I'll turn over the call to Grant to discuss the financial results and related information.

Grant Williams

Thank you, Michael. For this morning's financial review, I'll start by discussing the fourth quarter segment performance and then I'll briefly discuss our liquidity position. I'll finish with some comments regarding our fiscal year 2011 strategic and financial objectives before opening the call up for questions.

For the Transactional TV segment, revenue declined year-over-year in the fourth quarter to $9.3 million as compared to $10.7 million in the prior-year quarter, primarily due to lower domestic revenue. Approximately $0.9 million of the decline was related to a customer settlement of paid and unpaid items in the fourth quarter of the prior fiscal year and so similar settlement occurred in the reported quarter.

Domestic revenue also declined due to what we believe is the continuing impact of lower consumer discretionary spending, as well as the loss of a pay-per-view channel on the largest DBS platform in the U.S.

Despite the year-over-year decline in revenue, our sequential quarter results are encouraging. Domestic VOD revenue increased by $0.1 million as compared to the December 31st, 2009 quarter and pay-per-view revenue was relatively flat after adjusting for the previously announced loss of a channel on the largest DBS platform in the U.S. We are optimistic that the sequential quarter results are indicative of a stabilization of our domestic revenue.

Our international revenue within the Transactional TV segment continues to generate strong growth. International revenue improved by $0.9 million as compared to the year-over-year quarter and approximately $0.4 million as compared to the sequential quarter ended December 31st, 2009. Our fourth quarter international revenue growth reflected a new VOD launch in Spain, as well as gains in shelf space and improved content performance with several existing VOD customers.

For the Transactional TV segment's expenses, cost of sales was flat and operating expenses increased to $2.8 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 $5.4 million in the same quarter of the prior year.

Moving to the Film Production segment, owned content revenue declined by approximately $1.1 million in the reported quarter because the prior-year quarter included revenue from the partial delivery of an episodic series and no episodic series revenue was recognized in the reported quarter.

Repped revenue improved during the quarter due to higher revenue from the distribution of mainstream content to VOD and retail DVD markets. Producer-for-hire and other revenue increased by approximately $3.9 million due to the completion of one producer-for-hire arrangement and the initial delivery of films from a second producer-for-hire arrangement.

Although we cannot guarantee our future performance, we expect to complete the delivery of the remaining titles from the second producer-for-hire arrangement and recognize revenue between $0.7 million and $0.8 million in the first quarter of fiscal 2011.

Cost of sales for the Film Production segment increased during the reported quarter by approximately $2.9 million as compared to the prior-year quarter due to the recognition of production costs associated with producer-for-hire arrangements and that increase was partially offset by lower film cost amortization, consistent with the decline in owned content revenue.

Operating expenses for this segment increased in the reported quarter, primarily due to $4.9 million of non-cash goodwill impairment charges, $1.2 million of non-cash film cost impairment charges, and $0.8 million of non-cash recoupable costs and producer advances impairment charges.

Although the performance of the Film Production segment in fiscal year 2010 was consistent with our internal forecasts, primarily as a result of revenue that we generated from producer-for-hire arrangements, we have not observed a meaningful improvement in the film markets as expected.

As a result and as part of our year-end goodwill impairment analysis, we revised our future five-year forecast downward to reflect the expectation that the film markets will remain depressed. As a result, we impaired the goodwill and other impairment charges. The goodwill balance within the Film Production segment has now been reduced to zero. So there will be no further goodwill write-offs for this business segment in the future.

Overall, the Film Production segment generated an operating loss of approximately $6.3 million in the fourth quarter of fiscal 2010 as compared to operating income of $0.3 million in the same prior-year quarter.

The Direct-to-Consumer segment reported an operating loss of $0.5 million in the reported quarter as compared to $0.3 million in the same prior-year quarter. And those results include a $0.3 million impairment charge associated with certain consumer websites and related reporting software that is no longer in use because it did not meet the company's quality standards.

Corporate Administration segment expenses in the current quarter were relatively flat as compared to the same quarter a year ago. Similar to the Corporate Administration results in the prior year, the reported quarter includes the reversal of approximately $0.8 million in bonus accruals associated with the payout of lower-than-estimated bonuses for fiscal year 2010.

Another item of note for the reported quarter is our presentation of discontinued operations. You may recall that the company began operating an IPTV set-top box business beginning in late fiscal 2008. In the fourth quarter of fiscal 2009, we restructured the business in an effort to reduce operating costs and we also implemented a different strategy that involved partnering with affiliates to generate sales rather than attempting to sell directly to customers.

During the reported quarter, the company revisited the IPTV set-top box business and based on performance that was lower than expected, the company elected to discontinue the operations of that business. We believe that the decision to discontinue the operations will result in meaningful savings to the company in fiscal year 2011.

Moving on to the company's cash liquidity, operating cash flow from continuing operations for fiscal 2010 was approximately $6.5 million. Those results include approximately $1.8 million of cash outflows for our second producer-for-hire arrangement. For comparative purposes, it's necessary to add back the $1.8 million in production cash outflows when comparing the reported period results, because the prior-year period did not include similar outflows. We expect to recover these cash outflows with a positive margin during the first half of fiscal 2011.

We ended the fiscal year with approximately $17.2 million in cash. We had $1 million of outstanding debt under our $5 million line of credit, and our total shareholders' equity balance is $52.1 million.

Before we open up the call for questions, I'd like to spend some time discussing several of the company's key strategic objectives for fiscal year 2011.

Within the Transactional TV segment, we will continue to focus our efforts on expanding our international distribution. We expect our efforts will include the addition of new cable and satellite customers, further expansion of our shelf space on existing international customer platforms, growth in our international footprint, and new product offerings to our customers such as the augmentation of our Latin America VOD services with the previously announced addition of three linear pay-per-view services.

For the Transactional TV domestic revenue, we will focus our efforts on stabilizing the business and returning the revenue to a growth trend. We plan to achieve our objectives by improving the value proposition of our products and by continuing to take market share from our competitors. We are optimistic that these efforts will stabilize our domestic revenue in fiscal 2011.

Moving to the Film Production segment, we have built strong momentum for fiscal year 2011. We expect to deliver the remaining titles from a producer-for-hire arrangement and complete our delivery of the fourth installment of an episodic series. These deals should generate revenue between $2.4 million and $2.5 million. We are also pursuing a new producer-for-hire arrangement and if we are successful in securing this deal, we expect to generate an additional $3 million to $3.5 million of revenue in fiscal year 2011.

For the Film Production segment's mainstream content, our objective will be to continue to grow the revenue through the distribution of content and VOD and retail DVD markets. We are also working to leverage our horror title content in existing relationships to generate a more meaningful revenue stream from those titles. Overall, we expect to generate moderate revenue growth within the Film Production segment in fiscal 2011.

In order to support our growth next year, we expect to incur additional infrastructure costs. And as a result, we believe our CapEx spending in fiscal 2011 will increase as compared to fiscal year 2010.

So that will conclude our prepared remarks. Let's open up the call for questions, please.

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions). And our first question comes from the line of John Rolfe with Argand Capital Advisors. Please go ahead.

John Rolfe – Argand Capital Advisors

Hi, good morning. A few questions for you. You said that you expected in the Film Production segment to show moderate growth next year. Does that assume that you get the additional $3 million to $3.5 million on the other producer-for-hire deal you are trying to nail down?

Grant Williams

Yes, John. This is Grant. It does. I mean, at this point in time, we are – we think we are very close to getting that deal done and feel relatively confident that it will happen. Obviously, we don't have an executed contract at this point, so we can't say definitively. But we do have a high level of confidence it will get done. And so that comment regarding the moderate growth does contemplate getting that $3 million to $3.5 million producer-for-hire deal.

John Rolfe – Argand Capital Advisors

Okay. Okay, great. Thank you. And then on the Transactional side, you gave a number of data points out there. But is it – to paraphrase it, is it fair to say that you guys are hoping for or expecting stabilization in the domestic business given what you've seen on a sequential basis there? And then on top of that, some growth or decent growth on the international side, which I guess would lead overall to some growth year-over-year for that segment. Is that fair?

Ken Boenish

This is Ken, John. That's exactly how we see it. We think that consumer spending is starting to stabilize and we expect it to improve a little bit through this next fiscal year domestically.

In addition, a lot of the tactics that we've been presenting to our distribution platform partners to improve the consumer value of our product are starting to be implemented. There has been some early testing done of some of these tactics and we've seen some very favorable results. So we think between the return of consumer confidence and the increased value proposition, we expect to at least stabilize, if not grow, the domestic business and we do expect continued growth internationally.

John Rolfe – Argand Capital Advisors

Okay. And can you give some order of magnitude in terms of what the set-top box initiative cost you from an expense side this year that would presumably be showing up in savings next year?

Grant Williams

Sure, John. This is Grant. So when you look at the set-top business, the way to really think about it is if you look at the discontinued operations line item year-to-date, I think the results are net of tax and showed about a $600,000 loss for the full year. Keep in mind though that that $600,000 amount included a couple of write-downs associated with some inventory in equipment. So I think looking forward, the savings relative to fiscal year '10 would be somewhere in the neighborhood of $300,000 to $400,000.

John Rolfe – Argand Capital Advisors

And that would be a pretax number?

Grant Williams

That's correct.

John Rolfe – Argand Capital Advisors

Okay. Okay. And you mentioned as well that you expected CapEx to pick up a bit next year given some investment in growth initiatives. Are those all – are all – is the totality of those initiatives likely to show up as capitalized costs or do you expect to have ongoing sort of additional operating expenses as well? And I guess what I'm getting at is I'm just trying to figure out whether those savings on the set-top box initiative will or should slow right through on the P&L or if some of those are going to get eaten up by additional initiatives you are looking at.

Grant Williams

Well, I – let me start with the CapEx. The large majority of the incremental CapEx we are expecting in fiscal year '11 primarily relate to capitalizable equipment. So from a cash standpoint, that's cash out the door, but from a GAAP P&L standpoint, we will be depreciating those costs over the estimated lives. I don't recall exactly off the top of my head, but I think the lives are typically between five and seven years.

As far as other initiatives, we do expect to incur some additional cost in fiscal year '11 associated with some of these growth initiatives, especially on the international side. I think what we've said in the past is to the extent that we think incurring additional expenses drives growth within our business, we will incur those expenses.

So I guess, overall, what I say is that I wouldn't expect that the savings we'll generate through the discontinuation of the set-top box business will be eaten up by the CapEx spend. But I guess what I would say is that there – we do expect some incremental increases in expenses in fiscal year '11 to drive some of the growth initiatives we have, primarily in the international side of the Transactional TV business.

John Rolfe – Argand Capital Advisors

Okay. Okay. I guess just directionally though, so to assume you are reinvesting some of the savings in growth initiatives, layer on top of that that you are expecting or hoping to grow the top line next year, which I would assume would generate some positive operating leverage. Is it fair to conclude that if things go planned, you would hope to see some margin expansion directionally next fiscal year versus what you generated for this full fiscal year?

Grant Williams

I – yes. Without getting into specifics, I would say that that is a fair assumption.

John Rolfe – Argand Capital Advisors

Okay. Okay, great. And last question for you. The business clearly continues to generate good cash. Can you just talk a little bit about potential uses for the cash? You've been out there on the share repurchase side in the past and I assume there is some continued appetite for that, although I guess you need to balance liquidity concerns as well. On the acquisition front, I guess partly because of a tough environment, the last sort of material acquisition on the production side hasn't quite delivered what you hoped it would. So how are you thinking about uses for that cash and priorities going forward?

Michael Weiner

John, this is Michael. Well, we do have a stock buyback plan in place and historically, we have executed on our last buyback program and we expect to do the same on this one. In addition, we have been out in the marketplace and there are some strategic opportunities for us that we are looking at very carefully. There are some asset plays, some content libraries that have come into our foray that we are looking at.

And so I think anything we looked at is going to be accretive for New Frontier. I mean, we are very – as you know, we are very judicious on how we spend our money and we just think that there are more and more opportunities, there are several opportunities for us in Europe to deploy some capital that we think would be accretive for the company, as well as some domestic assets that we are looking at, plus the stock buyback.

John Rolfe – Argand Capital Advisors

Okay. Okay. And not in your industry, but in a lot of other folks I talk to, in other industries, they've commented that despite the sort of brutality of the recession in '08, a lot of sellers of assets haven't really come to grips with the new reality and are still holding on to what might be considered unrealistic expectations from a price perspective. What are you seeing in terms of the opportunities and the libraries and the assets that you are looking at? Have sellers become any more realistic or rational in terms of their expectations?

Michael Weiner

Yes. You know, there are certainly a lot of guys – as you know, there are certainly a lot of guys out there that still think it's 2004. But we have seen some opportunities and we are negotiating with several people. And again, if it's not realistic, we are not going to do it and a lot of people are coming to the table, particularly in our industry and we do look outside the box in terms of assets that we could deploy using our infrastructure. But we are seeing prices of things that we are looking at coming down to a more realistic number.

John Rolfe – Argand Capital Advisors

Okay. Okay, great. Well, thanks very much. I appreciate you taking the questions.

Grant Williams

Thanks, John.

Operator

Thank you. And our next question comes from the line of George Whiteside with SWS Financial Services. Please go ahead.

George Whiteside – SWS Financial Services

Good morning. Congratulations on the year's results, even though there was a net operating loss. It's certainly a dramatic improvement over the previous year. And you noted that there were certain impairment charges that you took, non-cash charges. You've got substantial intangibles still on the balance sheet. Do you intend to amortize that and I think there was some reference to that a little bit earlier. How do you – how are you going to be handling that in the future?

Grant Williams

George, this is Grant. I'll take that. The majority of the intangibles that we really have left on our books at this point are – it's goodwill related to the Transactional TV segment. As far as the Film Production segment is concerned, we've now written off all the goodwill on that operating segment's books. So looking forward, there is no doubt that we won't have anymore goodwill impairment charges within that segment.

As far as the remaining goodwill is concerned, we – you don't amortize goodwill, you just test it at least annually for impairment or more frequent than that if there is indicators on impairment. And at this point, we – whenever we went through our year-end goodwill impairment testing, we tested both operating segments, both the Film Production and the Transactional TV segment. And at this point, we have a pretty substantial amount of cushion as far as the fair value of the Transactional TV segment is concerned relative to the goodwill.

So I guess what I can say definitively at this point is we are not expecting goodwill impairment on that business segment in the future. However, depending on what market conditions look like in the future – we can't predict those, so those could change. But at this point, we have a nice amount of cushion. So we are not expecting a future goodwill impairment charge.

As far as the other intangibles are concerned, we don't have a lot of additional intangible assets on the books that are being amortized at this point. There were some intangible assets that were set up in the purchase accounting when we originally acquired MRG, but for the most part, those intangibles have almost been fully amortized at this point. So I think overall, we are in pretty good shape. Obviously, business conditions can change and – which could generate impairments in the future, but at this point, we don't foresee that happening.

George Whiteside – SWS Financial Services

Well, I also recognize that some of the accounting rules have changed so that you are not forced into certain actions in terms of write-offs, et cetera, and if – and going through the testing, you feel that the value is still there. So I understand that we are unlikely to see substantial future write-offs in that area from what I understand you've just remarked upon.

Grant Williams

Yes. I guess based on this – the current condition of the company today, I would agree with that.

George Whiteside – SWS Financial Services

Then in terms of your performance in the international area, certainly you've had excellent results there with a high growth rate. How does the international segment for the fiscal year of '10 compare to the prior year?

Grant Williams

Well, are – George, you are referring to the – so I think as we mentioned, in fiscal year 2010, we generated, as far as the Transactional TV business is concerned, about $3.6 million of total international revenue. That's both VOD and pay-per-view. That compares to total revenue in fiscal year '09 of about $1 million. So we have seen some pretty significant growth within that – those revenue streams and looking forward in the fiscal year '11, we expect to see growth continue, maybe not at the same level, but still a very significant growth.

George Whiteside – SWS Financial Services

And that's totally understandable that the larger the figure becomes it's going to be tougher to turn in, say, 250% growth rates. That's certainly unreasonable, but to have a maybe similar dollar growth would certainly be attractive and do you think that would be a reasonable target?

Grant Williams

I guess – let me characterize it this way. We generated about $3.6 million in fiscal year '10. The expectation in fiscal year '11 is we'll see growth in the neighborhood of 30% to 40%.

George Whiteside – SWS Financial Services

Excellent. Thank you very much.

Ken Boenish

Thanks, George.

Operator

Thank you. And our next question comes from the line of Steve Kohl with Mangrove Capital Partners. Please go ahead.

Steve Kohl – Mangrove Capital Partners

Yes, good morning, guys. I have a handful of questions. Why don't we start on international for a sec? You mentioned that was $3.6 million versus $1 million and you are looking for 30% to 40% growth. If my math is right, that's $1 million incremental.

So I guess let me start with why – maybe you can explain why we are up $2.6 million this year and only have $1 million next year? And not to – again not to say that 30% to 40% growth isn't bad, but I guess I'm just curious what are some of the factors that are driving the reduced growth rate in absolute dollars, particularly given the fact that you are spending more money there and that seems to be where the growth impetus is. So why aren’t you going to grow faster internationally on the Transactional business?

Ken Boenish

Well – this is Ken. What Grant gave you was a conservative estimate and the thing that we don't control is timing on some of the new deals that we are working on. To the extent that we get the deals in place and get the content up on the platforms earlier in the year, we'll realize more benefit from specific deals that we launch. So at any given time, we've got half a dozen to a dozen different deals in motion and the Europeans tend to work at a little bit different pace than we do here domestically and we can run into some problems during the summer holiday season when people step out of the office for six or eight weeks.

Steve Kohl – Mangrove Capital Partners

I got it. And obviously I've seen that with other companies as well. But let me just back up for a sec. So what – when we look at the growth this year in the $2.6 million, is it that – was it the easier low-hanging fruit that we got?

And obviously, you guys have expanded the platform, put on new content; you've done some wonderful things there. I guess I'm just trying to understand where are we kind of in the maturation process of international? Are we in the first inning of a nine-inning game, are we waiting for extra innings or where are we kind of on where this opportunity is? And how big can it be, without getting too specific, but is it the type of opportunity that's a like amount domestically in three or four years or what should we look for and what will be the factors that will ultimately determine that?

Ken Boenish

Well, we've always said that we think that international distribution can be just as big as our domestic business. There is a couple of things that are happening. We are starting to get a foothold internationally and starting to see some results, the performance of our product as compared to competitive product in the marketplace. And the good news is that we are competing very well and that our product is outperforming incumbent competitors and we are beginning to do the same thing on an international basis that we've done domestically and that is, steal a lot of shelf space from incumbent competitors.

The other thing that's happening is that international platforms are beginning to roll out both digital television and VOD services where they had not built out the infrastructure to accommodate those services in the past. And so – for instance, in Latin America, on a lot of platforms where we've already launched, we've just got a small portion of the – what will be the total subscriber base that had – even has access to our content. So every month, we are seeing more and more of the subscribers on any given platform having new access to our content where they did not have access before.

In addition, in this fiscal year, we will begin to see the first iterations of distribution of our content to Asian markets. So we are looking forward to that. Since we don't have any experience in Asia yet, we are not exactly sure what the revenue stream is going to look like. But we've built some models based on the data that we do have and we are very confident that that will be a good business for us.

Steve Kohl – Mangrove Capital Partners

Got it. Well, thank you. And let me ask one question about – you mentioned the channel that you lost and I think you – we talked about that last quarter as well. I'm just curious, what's happened since you lost that channel in the sense, what has the customer found in terms of experience with the folks they replaced you with and what is the chances – I know in the past, some of these folks tend to flip back to you as the folks recognized that it didn’t turn out as well as they had thought with the old greener – grass is greener on the other side here.

So what's happened in this case? I mean – I'm sure you guys get some reasonable data. How do they seem to be performing and how does that customer seem to be – are they seem to be inclined to flip back to you since these contracts technically don't have language that would necessarily beholding them for years and years?

Ken Boenish

Right. So what we've seen in the last couple of years is due to the downturn in the economy, a good portion of multichannel customers are coming into the Transactional TV category a bit less frequently than they had in the past. For instance, in any given month, a little over half of the customers that buy in that month have not purchased in the last six months.

And what that does is sort of it expands the honeymoon period for any new services, because there is always a good amount of sampling whenever a new channel or a service is added to the platform. People are curious about it, they try it out, see if they like it or not, some of them are going to like it, some of them aren't. And once that don't and they go back to the services that they know and love from years past, which are our services and we definitely benefit from that.

But because people are into the category a bit less frequently than they had been in the past, we are seeing that – that honeymoon period can take 12 to 18 months really to run – to run its course and for customers to really settle in on what channels they like and what channels they don't like.

Steve Kohl – Mangrove Capital Partners

Okay. So the bottom line is that we are in the honeymoon period for right now?

Ken Boenish

We are in the honeymoon period. And the competitive channels on that platform are doing okay, not great. So it tells us that any new channels that were added to the platform really weren’t a game-changer as far as customers are concerned.

Steve Kohl – Mangrove Capital Partners

Okay. And last question is just on – I know you guys don't give specific guidance, but I'm just curious – clearly, we've eliminated the write-downs and the goodwill on the Film Production business. We shouldn’t have any future problems hopefully there. It's hard to get into negative territory I guess on goodwill. So we won't have any more write-downs to impact next year.

But when do we see margins – when we start getting clean financials and resumption, kind of – I know you talked about stabilization the last couple of quarters. I'm curious not only about stabilization, but on growth and on improved margins and I guess I'm a little curious about how that works with your international investments and should we expect margins to improve. I think you said earlier margins are going to improve this year, but how does that happen when you have the international investments going up or did I miss something? Maybe I missed a little bit of a nuance there.

Ken Boenish

Right. To be clear, the investment – or the distribution that we brought on so far on an international basis has been very, very high margin for us. We've to date incurred almost no capital expense associated with the international business.

However, as that business expands, it does tax our existing infrastructure and so we have to do things like buy more storage, because we are trafficking more and more content, both domestically and to markets outside the U.S. and to the extent that we make investments like we did in Latin America for linear channels, we incur a fixed cost of satellite transponder expenses that once we meet or exceed those costs with linear channel distribution in Latin America, all additional distribution is 100% accretive to the company.

So that's sort of what you are seeing right now is the capital expenditure is coinciding with actual growth in the business and it's going to kind of come in lumps.

Steve Kohl – Mangrove Capital Partners

Okay. So just turning to the corporation as a whole, is the expectation that margins are going up in fiscal '11 or down in fiscal '11?

Grant Williams

Our expectation at this point, without getting into the specifics, is we will see improvement in the margins in fiscal year '11.

Steve Kohl – Mangrove Capital Partners

Okay. Okay. Great, guys. Thank you very much.

Grant Williams

Thank you.

Operator

Thank you. And our next question is a follow-up question from George Whiteside with SWS Financial Services. Go ahead, sir.

George Whiteside – SWS Financial Services

An earlier question – questioner had asked about the possibility of share buybacks, acquisitions, et cetera. I was wondering, since you appear to have almost $1 per share in cash, more than 50% of the current market value, have you any thoughts in terms of initiating a dividend policy on a very modest level, but on a regular level because it would appear that one-off distributions on an intermittent basis don't attract very much attention in the marketplace. What are your thoughts?

Michael Weiner

George, this is Michael. First of all, as you know, we did – we have previously given dividends, we've done share buybacks, we did an acquisition. We are constant – constantly looking at the best way to utilize our cash and between the – we are looking very carefully, as you know – as the stock buyback, which we do have in place.

But right now, there are some really strategic opportunities for us and I think we are looking at – that right now is a – is kind of a priority, because we think there are some really growth opportunities for the company. If in fact none of these things come into place, then I think that we would certainly look at a modest dividend. And that's something – those are the three things we look at and we do look at them quarterly and analyze where we are in the scheme of things.

George Whiteside – SWS Financial Services

Thank you. I can certainly understand that right at the moment with the stock price where it is that the buyback situation looks extremely attractive and hopefully, there is an acquisition out there and I have an idea with financial stresses throughout the world economy, there is very likely to be some attractive purchase opportunity and hopefully, that would come to fruition. Then another question on a different topic. What initiatives have you considered relative to things like services to smartphones, the iPad, game devices, et cetera?

Ken Boenish

This is Ken. I'll take that question. We've actually done a lot of development for distribution on new and emerging platforms. Our content is currently available for iPhone users. You just have to go to our consumer website ten.com and you can download an application directly to your iPhone and then have access to our content there.

Really what we are looking at is internally being ready for distribution on these new platforms and then to the extent that there is a significant enough consumer base to really go after in a – in an attractive way. Then we will put some resources behind that. Right now, it's difficult to get any adult-related content in the Apple application store and so that sort of hamstrings people in our business. We have to figure out ways to go to direct to consumers. But we think that as consumer electronic devices emerge and become more prevalent in the market that that will definitely be a real business for us.

George Whiteside – SWS Financial Services

Are there other segments of your business other than adult that would lend itself to these kind of applications?

Ken Boenish

Sure. The mainstream content that we are putting into cable platforms on a VOD basis as either day-and-date releases or world premieres, we are definitely going after some opportunities there on the new platforms. Unfortunately, the volume of content that we have in that segment isn’t quite as significant as on the Transactional side of the business.

George Whiteside – SWS Financial Services

That's totally understandable and I guess it's a little bit challenging to drive business to those devices or attract delivery via those devices without very, very significant advertising, et cetera. Thank you very much.

Ken Boenish

Thanks, George.

Operator

Thank you. And ladies and gentlemen, that does conclude our question-and-answer session. I’ll now hand the conference back over to Mr. Williams for any further remarks.

Grant Williams

Well, we just want to thank everybody for joining the call and look forward to speaking with you again about the first quarter. Thank you.

Michael Weiner

Thanks.

Operator

And ladies and gentlemen, that does conclude the New Frontier Media, Incorporated fourth quarter fiscal 2010 earnings conference call. Thank you for your participation. You may now disconnect.

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Source: New Frontier Media, Inc. F4Q10 (Qtr End 03/31/10) Earnings Call Transcript
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