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New Frontier Media, Inc. (NASDAQ:NOOF)

F1Q11 (Qtr End 06/30/10) Earnings Call Transcript

August 6, 2010 11:00 am ET

Executives

Grant Williams – CFO

Michael Weiner – Chairman, Secretary and CEO

Ken Boenish – President

Analysts

John Rolfe – Argand Capital

Jerry Falkner – R.J. Falkner & Company

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the first quarter fiscal year 2011 earnings conference call. (Operator Instructions) This conference is being recorded today, Friday, August 6, 2010. I would now like to turn the conference over to the Chief Financial Officer, Mr. Grant Williams. Please go ahead, sir.

Grant Williams

Thank you. Good morning everyone and welcome to the New Frontier Media fiscal 2011 first quarter results conference call. Joining me this morning are Michael Weiner, Chief Executive Officer of New Frontier Media, Ken Boenish, the Company's President; and Scott Piper, the Company's CTO. We will begin the call this morning with Michael's comments on the first quarter results and strategic initiatives. And then I'll 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 4336930. 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 day of the applicable financial results and the company assumes no obligation to update information discussed during this conference call.

During this conference call, management may make forward-looking statements within the meaning of the Safe Harbor provided by the SEC for such statements, including statements regarding the company's expected financial position and operating results, its business strategy, its financing plans and the outcome of certain contingencies.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any forward-looking statements and should be considered in conjunction with the cautionary statements included in our press release and our most recent reports containing Risk Factors filed with the Securities and Exchange Commission, including our most recently filed Forms 10-Q and 10-K. I'll now turn the call over to New Frontier Media's Chief Executive Officer, Michael Weiner.

Michael Weiner

Thank you, Grant and good morning everyone. New Frontier Media began fiscal year 2011 with a solid profitable first quarter. The results benefited from incremental revenue generated by the Transactional TV segment's international distribution, which doubled to $1.2 million as compared to the same prior year quarter.

We continue to believe international distribution will play a key role in the company's growth in the future. As you know, we have successfully launched our content on several VOD platforms throughout Europe over the past 20 months. To date, our content is performing exceedingly well and is outperforming most, if not all, competitors.

Based on this success, we were pleased to announce earlier this week that the company has entered into a five-year licensing agreement whereby we will rebrand and distribute up to three linear pay-per-view channels. The channels can reach all of Europe as well as parts of the Middle East and North Africa with our primary distribution target being Europe.

Domestically, while revenue has stabilized and even increased with some customers, our overall Transactional TV segment revenue is still being impacted by last November's loss of a channel on the DBS platform and the continuation of lower consumer spending.

In order to address this challenge, we continue to work with customers on key initiatives that could strengthen the domestic revenue. These initiatives include a multi-tier pricing strategy that is designed to improve consumer value and offer some content at more approachable price points. We have completed extensive nationwide consumer research, whereby we measured consumers' attitudes and propensity to purchase when presented with certain value propositions.

Based on these results, we have tested several tactics with some of our distribution partners and the results were very positive. Based on these tests, we are entering into more significant testing with much larger cable systems, which we believe, will ultimately lead to a complete overhaul of the adult category.

Our goal is to make our product on TV platforms more competitive with other consumer options and attract a greater percentage of discretionary entertainment dollars. In our Film Production segment, we completed a producer-for-hire project in the first quarter that originally began production in fiscal 2010.

And we also completed a partial delivery of films from our fourth installment of an episodic series. Additionally, we are pleased to announce that we executed a new producer-for-hire agreement and have already begun production on the related film.

We expect the production of the film will be completed during the second half of fiscal 2011. Generally, we are optimistic that the film production segment will build on this current momentum and continue to identify opportunities to expand its existing and new product offerings.

Investors have asked me about the long-term prospects of the company, particularly in light of the changes in the economic climate and the new emerging technologies. Over the long-term, New Frontier Media plans to grow its operations to become a leader in the global distribution of both mainstream and adult content across all popular delivery platforms.

More specifically, we expect to increase our distribution to over 300 million worldwide network homes, representing an increase of approximately 40% over our current distribution. Our vision includes the further development of our scalable world-class technological infrastructure and content processing center to support those distribution goals that will allow us to exploit the myriad of Internet connected Blu-Ray players, Internet-enabled television sets, games and entertainment consoles as well as mobile devices such as Smartphones and mobile TV platforms.

By way of example, we are currently processing and encoding between 8,000 and 12,000 video assets each month. We are confident our long-term strategy will be achieved over the next two to three years and we believe our efforts to realize these goals will result in the long-term growth we often discuss.

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

Grant Williams

Thank you, Michael. I will begin the financial review this morning by discussing the first quarter operating performance by business segment. And then I'll briefly discuss our liquidity position before opening the call up for questions.

For the Transactional TV segment, first quarter revenue declined to $9 million, as compared to $9.6 million in the same prior year quarter. The decline was primarily due to lower domestic revenue including the $0.2 million decline in domestic VOD revenue and a $1.1 million decline in pay-per-view revenue. Pay-per-view revenue from a DBS provider in the U.S. declined by approximately $0.6 million, primarily due to the loss of a channel on that platform last November.

Other DBS and major cable MSOs in the U.S. also experienced revenue declines, which we believe reflects the continuation of a soft economy in the U.S. Internationally, our Transactional TV segment experienced another quarter of meaningful growth.

International revenue increased to $1.2 million or 100% when compared to the same prior year quarter. The improvement in the Transactional TV segment's international revenue was due to a combination of new launches as well as gains in shelf space and improved content performance with several existing VOD customers. The Transactional TV cost of sales was flat versus the prior year period, while operating expenses declined to $2.5 million as compared to $2.7 million in the same prior year quarter, primarily due to lower advertising and promotion costs. Overall, the Transactional TV segment reported $3.5 million of operating income as compared to $4 million in the same quarter of the prior year.

Moving on to the Film Production segment, we recognized approximately $1.3 million of owned content revenue in the most recent quarter from the partial delivery of our fourth installment of an episodic series to a premium cable customer. This compares with $1 million of revenue in the same prior year quarter from the partial delivery of the third installment of an episodic series. So on a net basis, we generated a $0.3 million increase in owned content revenue from the partial delivery of the episodic series.

This increase in revenue was offset by a decline from international distribution deals, which resulted in flat overall owned content revenue when compared to the same prior year quarter. We expect to complete the delivery of the remaining films from the fourth installment of the episodic series and recognize revenue of approximately $0.4 million in the second quarter of fiscal 2011.

Within the producer-for-hire and other revenue line item, we generated just over $0.7 million of incremental revenue from the completion of a producer-for-hire project that we began in the prior fiscal year. Also as previously mentioned by Michael, we executed a new producer-for-hire agreement for fiscal year 2011.

We began production on the related film in the most recent quarter and expect to complete the arrangement during the second half of fiscal year 2011. We currently expect to generate between $3.1 million and $3.3 million of revenue from this project. Cost of sales for the Film Production segment increased during the first quarter by approximately $0.7 million as compared to the prior year quarter primarily due to the recognition of production costs associated with the completed producer-for-hire project and operating expenses for the segment were flat.

Overall, the Film Production segment generated operating income of approximately $0.4 million, which was comparable with the same prior year quarter. The Direct-to-Consumer segment reported an operating loss of $0.2 million, which was relatively consistent with the $0.1 million loss reported in the same prior year quarter and the corporate administration segment expenses of $2.7 million were also consistent with the expenses incurred in the same quarter a year ago. Overall, we generated net income from continuing operations of approximately $0.6 million or $0.03 per share as compared to $1 million or $0.05 per share in the same prior year quarter.

Moving on to the company's cash liquidity. As of June 30, 2010, we had approximately $14.1 million of cash on hand and we were in the unusual position of having cash used in operating activities rather than having cash generated from operating activities in the first quarter. Cash used in operating activities totaled $2.8 million. It's important to consider several key items when reviewing these results.

We have approximately $2.3 million of cash temporarily invested in the funding of the new producer-for-hire arrangement that we executed in the first quarter. Additionally, we have approximately $1.7 million in outstanding receivables related to the recently completed producer-for-hire project and approximately $1.3 million in outstanding receivables related to the first quarter partial delivery of titles from an episodic series.

We expect to collect these outstanding receivable balances in the second or third quarters of fiscal 2011. And we also currently expect to collect the cash due for the completion of the new producer-for-hire agreement by end of the fiscal year. These collections, combined with the cash generated by our other operations, should result in a positive cash flow for the full fiscal year 2011 and higher cash balances by the end of fiscal year 2011.

In addition to a strong cash position, we also have an additional $4 million of available borrowing capacity under our line of credit. So overall the company continues to be in a very strong liquidity position. That will conclude our prepared remarks, so let's please open up the call for questions.

Question-and-Answer Session

Operator

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

John Rolfe – Argand Capital

Hi. Good morning guys.

Grant Williams

Good morning, John.

John Rolfe – Argand Capital

A few questions for you. One, I guess in terms of the domestic Transactional television. I guess, after showing some stability last quarter it was down a bit this quarter. Last quarter, you had commented that a reasonable expectation might be for that business to be sort of broadly flat for the year. Do you have any updated expectations as to what – how maybe we should be thinking about domestic Transactional television for this year?

Ken Boenish

Sure, John, this is Ken. I will take that question. VOD showed mild growth quarter-over-quarter while pay-per-view was slightly down. Our view is that VOD is improving due to our ability to introduce new products and services as well as our efforts to improve the value proposition through our multi-tiered pricing strategy. We believe pay-per-view will recover a bit more slowly just because it's more difficult to effect change on a linear channel than it is on a VOD platform.

So overall, we think that we'll continue to make some mild improvements in our VOD revenue line and the pay-per-view we think will come around a little bit more slowly.

John Rolfe – Argand Capital

Okay. Okay. In terms of the new license agreement on the international business that you announced a few days ago, could you help me out? I mean, in terms of the business and the penetration that existed prior to that deal. What does that represent in terms of kind of incremental households for the company or incremental sort of revenue potential on that international base that existed prior to that deal being announced.

Ken Boenish

Sure, until now we've been pursuing solely VOD distribution on a platform-by-platform basis. And we were able to craft deals with some rather large platforms in Europe and we've got quite a few new deals in the pipeline. Due to the success of our VOD content in that market, we began talking to operators about the possibility to offer linear pay-per-view channels that can be sold either as transactional content by movie or by time block or on a monthly subscription basis. And in Europe adult channels are often packaged with other programming channels as well.

So we look at this as a completely new revenue opportunity for the company. Our deal allows us to gradually scale up that business and really control the cost associated with linear channel distribution. So we are really enthusiastic about this new opportunity.

John Rolfe – Argand Capital

Okay. Okay. And are you guys still looking at potential acquisition opportunities, I know you've mentioned in a couple of past calls that you are sort of always assessing opportunities. And I just wondered if the environment there has changed or if it's still pretty similar to what it was last quarter and the quarter before.

Michael Weiner

John, it's Michael, we are looking at actually several opportunities and in fact that we're expanding rapidly in Europe and South America. There's some opportunities over there that have presented themselves. We are running that area pretty conservatively. But we are going through a bunch of deals right now that could be important for the company.

John Rolfe – Argand Capital

Okay. Okay. Great. Thanks very much.

Operator

(Operator Instructions) And our next question comes from the line of Jerry Falkner with R.J. Falkner & Company. Please go ahead.

Jerry Falkner – R.J. Falkner & Company

Hey guys.

Grant Williams

Hi, Jerry.

Michael Weiner

Hi, Jerry.

Jerry Falkner – R.J. Falkner & Company

Question for you on the international, can you give us an idea of how the international Transactional TV margins compare with the domestic TV margins?

Ken Boenish

Sure. Internationally, there's been much less operator consolidation. And so we're able to craft deals that are much more favorable to the company on a revenue share basis. Typically, we run in the neighborhood of 30% to 50% of the revenue coming back to New Frontier depending on the market.

Jerry Falkner – R.J. Falkner & Company

And that would compare with, what, around 10% to 15% domestically?

Ken Boenish

Correct.

Jerry Falkner – R.J. Falkner & Company

Okay. And one other question on the international and the costs of getting into this new licensing agreement. Normally, I guess if you go for linear channels you have to purchase or acquire satellite or satellite transponder capacity and everything? Was that the case in this situation?

Grant Williams

Actually no. It's interesting, the deal that we have was really born from a company that we looked at acquiring. We actually ended up not pursuing an acquisition but we’re able to do a license arrangement where we are licensing channels that already exist. So the uplink and transponder lease agreements are already being paid for by this other company. Our contribution is that we are going to leverage our programming library to effectively program the channel in a way that will be much more appealing for customers and also include our branding and packaging elements, which consumers typically really enjoy. So we're able to offer these channels on a much lower cost basis. It's a very accretive deal for the company.

Michael Weiner

Yes, Jerry, this is Michael. This is a deal – we looked at, actually we looked at acquiring the company. We spent quite a bit of time doing the due diligence and the real asset we wanted was the linear channels and which we were able to get without actually buying the company. So it's a very accretive deal for the company.

Jerry Falkner – R.J. Falkner & Company

Okay. Okay. Thank you. And one final question on the international, I know that – I think the last time I looked, maybe it was a few SEC filings back, that Playboy does something like $40 million in international Transactional television business. And I'm wondering is there a potential for international to eventually be comparable or close to comparable in size to your domestic business?

Grant Williams

We think our international business can be just as big, if not bigger than our domestic business eventually. The number that you quoted from Playboy, I'm not sure if you listened to their call yesterday, but that number is down a little bit. And one of the reasons they cited for their decline in revenue internationally was increased competition. So I think that gives you the idea that New Frontier is having an impact already.

Jerry Falkner – R.J. Falkner & Company

Okay. Thank you.

Michael Weiner

Thanks, Jerry.

Operator

Thank you. And management, we have no further questions in queue at this time.

Grant Williams

Great. Thanks. Well we appreciate everybody joining the call this morning and look forward to speaking with you again on the next call.

Michael Weiner

Thanks.

Operator

Ladies and gentlemen, this concludes the first quarter fiscal 2011 earnings conference call. You may now disconnect. Thank you for your participation.

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