RealD's (RLD) CEO Michael Lewis on Q4 2014 Results - Earnings Call Transcript

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 |  About: RealD Inc. (RLD)
by: SA Transcripts

Operator

Good afternoon. My name is Laurel, and I will be your conference operator today. At this time, I would like to welcome everyone to the RealD’s Fourth Quarter Fiscal 2014 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the conference over to Christine McLaughlin of RealD. You may begin your conference.

Christine McLaughlin

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

In our remarks today, we will include statements that are considered forward-looking within the meaning of the United States securities laws. In addition, management may make additional forward-looking statements in response to your questions.

Forward-looking statements are based on management's current knowledge and expectations as of today, June 4, 2014, and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.

A detailed discussion of these risks and uncertainties is contained in our annual report on Form 10-K and quarterly reports on Form 10-Q. The company undertakes no obligation to update any forward-looking statements.

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

With that said, I'll hand the call over to Michael Lewis.

Michael Lewis

Thanks Christine. Good afternoon and thanks for joining us on today’s call. As our results show, we ended the year on a high note. Our fourth quarter reflects the proactive steps taken throughout fiscal 2014 to enhance our financial performance with a particular emphasis on improving profitability and generating free cash flow.

Specifically during the fiscal year, we initiated our theater optimization program also known as TOP to maximize performance of our cinema platform. We focused our expansion efforts on high growth markets and lastly, we executed a cost reduction plan which reduced OpEx and CapEx dedicating resources to project that we expect will strengthen our market-leading position in cinema while positioning us for profitable growth in the years to come.

The result is a more efficient organization positioned to deliver long-term shareholder value. For the year, adjusted EBITDA increased 12% and we generated free cash flow of $13 million.

Importantly, we were able to do so while maintaining our focused R&D efforts, investments we believe not only strengthen our core cinema platform, but also present future revenue opportunities. More on this to come but first I would like to comment on our core business.

As we enter the summer blockbuster season, quarter-to-date we have seen industry 3D percentages moderately increase and relative to last year we have maintain our share of 3D box office.

Core to driving these results is our theater optimization program which is collaboration between RealD and our studio exhibition partners, and we applaud their efforts to help drive the 3D ecosystem.

We fundamentally believe that directed programming and aggressive marketing of the 3D format not only benefits RealD, but our exhibitor studio partners as well. Given a high degree of confidence in this program during the quarter we offered and will continue to offer targeted incentives that are accretive, which are based on the quality of the 3D experience and box office potential of a particular film.

In addition to maximizing the performance of our existing cinema platform, we continue to focus our expansion efforts in fast-growing emerging markets. Over the course of fiscal 2014, we installed 2,500 screens and slowed our pace throughout the year to approximately 400 installations at our most recent quarter. Once again, the majority of these installations were in our key growth markets, Latin America, China and Russia.

With respect to China we recently expanded our relationship with Wanda Cinema, China's largest movie theater circuit, agreed to add an additional 780 cinema systems to potentially double our 3D installed base with Wanda to more than 1,500 auditoriums.

In fiscal 2014, total RealD licensing revenue for China was up 81% over the prior year growing to over 12% of total license revenue. In the quarter, total 3D box office for the region was up 67% and seven of the top 10 films were shown in RealD 3D. The top selling film for the region, the locally produced Monkey King generated approximately $180 million in box office with 3D percentages of 90% plus.

Similarly, we continue to experience robust growth in Russia where our license revenue increased dramatically in fiscal 2014. Seven of the top 10 films were shown in the RealD 3D. Russian consumers continue to exhibit strong demand for 3D content, but more specifically a premium 3D experience.

It’s with this in mind that we are excited to announce the first openings of LUXE, a RealD experience, under our PLF brand for the region. Over the next few years, we expect to rollout 25 LUXE auditoriums with both [Carol] (ph) and Cinema Park. We are initially focusing our LUXE efforts on Russia and Eastern Europe, but expect to expand globally overtime.

Given our focus on maximizing free cash flow and are targeted expansion in key growth markets, we will maintain a reduced pace of the actual installations in fiscal 2015 and beyond. As a result, we expect further reductions in OpEx and CapEx that Drew will cover in more detail in just a few moments.

At the same time we continue to focus on our four R&D initiatives, which we believe will strengthen our core cinema business and create new revenue opportunities, while leveraging our expertise in visual technologies. Let me briefly touch on these projects.

Earlier this year we announced the introduction of RealD TrueImage, developed initially to elevate our technology advantage in cinema to improve 3D image quality. The application of TrueImage extends beyond 3D, offering improved 3D image quality in cinemas and beyond cinema in the consumer market.

Since its initial debut with The Hobbit, we’ve had opportunity to demonstrate technology for many prospective partners and based upon our conversations, we look forward to bring this technology to market on a licensing basis as we've done with our core cinema technologies.

We are also developing new screen technologies that improve the projected brightness, light distribution, reflection efficiency and overall quality of imagery on the screen. Through our proprietary engineered approach, our screen technologies enable us to control the light coming off the screen significantly improving both 2D and 3D performance. We anticipate rolling out a beta program in the second half of this year.

Our laser initiative remains another top probity, laser technology promises brighter and more consistent imagery across a broader spectrum of colors, enabling a next-generation movie going experience in both 2D and 3D.

We believe our laser initiative is unique from others in the market, design to offer exhibitors the most cost-effective laser projection solution and to facilitate mass adoption. Like our other cinema technology initiatives, our lasers designed to be complementary too and compatible with most existing and future projection systems and applicable in 2D and 3D formats.

And lastly, we're working on 2D and 3D technologies for smartphones and tablets. Unlike other 3D solutions in the market that use external filters on the display, our patented intelligent backlight technology allows us to manipulate and focus the light sources in a mobile device directly to the users eyes, enabling glasses free 3D viewing and providing certain 3D benefits, such as power savings.

While we're still in technology development phase on this initiative, we are currently working to commercialize our intelligent backlight technology through a licensing model and expect to make it commercially available in calendar 2015. We are confident that our focused R&D approach, discipline investment strategy and continuing market leadership in cinema position us to drive increasing shareholder value.

With that, I'll turn it over to Drew

Drew Skarupa

Thank you, Michael. I'll begin with a brief review of our key financial highlights for the quarter and will conclude by discussing our outlook. Most notably during the quarter, we saw 82% growth over the prior quarter in Chinese license revenue, driven by strong demand for locally-produced 3D content and growth of our installed base in China. As a percent of total license revenue, China license revenues double over the prior period to comprise 18% of our overall license revenues in the quarter.

Second, adjusted EBITDA improved 10% over the prior year quarter, benefiting from our proactive effort to reduce operating expenses.

And third, we generated $11.3 million of free cash flow in the quarter as the result of reduced operating expenses, as well as reduction in capital expenditures.

Now turning to our fiscal fourth quarter results in more detail. Revenues were $40.6 million, which included license revenues of $28.6 million and product and other revenues of $12 million.

License revenues decreased 8% from the prior year quarter, which was partially offset by 2% increase in international license revenues and represented approximately 70% of total revenues.

International license revenues grew to 67% of total license revenues from 61% in the prior year quarter, which is on par with the industry overall box office average of 66%. Central to this progression has been the year-over-year growth in license revenue for China, which for the full fiscal year increased 81%. Product and other revenues decreased 15% from the prior year quarter and represented approximately 30% of total revenues.

Domestic product revenues represented 70% of total product revenues and international product revenues represented 30% of total product revenues. Licensing gross profit of $17.2 million or 60% gross margin, which was flat for the prior year quarter.

Non-cash depreciation expense included in license cost of revenue was $8.4 million, representing 29% of license revenue, up from $7.5 million or 24% of license revenue in the prior year quarter. Excluding non-cash depreciation and amortization expense, our pro forma license margin was 94%.

Field support-related costs, including impairment expense of $880,000 included in license cost of revenue, were $1.3 million, a decrease from $2.9 million in the prior year quarter. Including impairment expense, total cost of license revenue decreased to $11.4 million from $12.4 million in the prior year quarter.

Product and other gross profit was $2.7 million or 22% gross margin compared to $1.4 million or 10% gross margin in the prior year quarter. The improvement is primarily due to product cost reductions as well as an increase in the recycled eyewear mix to 56% of domestic shipments for the quarter from 31% in the year ago quarter.

Operating expenses were $22.1 million, a decrease of 4% from $23 million in the prior year quarter, reflecting the benefits of our cost reduction plan initiated in fiscal 2014. Share-based compensation expense included in operating expenses was $4 million, down from $4.3 million in the prior year quarter.

And another $1.1 million in one-time restructuring charges incurred during the quarter. $1 billion was included in operating expenses. For the full fiscal year, operating expenses of $97.4 million were in the range of our previously issued guidance of $94 million to $98 million and were up 5% from the prior year period.

Of that, on a fully allocated basis, we estimate our investment in consumer visual technologies was approximately $20 million. However, direct consumer spend is estimated at approximately $10 million for the year. Further, of the $19.4 million in companywide R&D expenses for the year, we estimate approximately $7 million was direct R&D spend on consumer visual technologies.

GAAP operating loss was $2.2 million versus a loss of $2.7 million in the prior year quarter. Net loss attributable to common stockholders was $5 million or a loss of $0.10 per share for the fourth fiscal quarter of 2014 versus a net loss attributable to common stockholders of $4.3 million, or a loss of $0.09 in the prior year quarter.

Adjusted EBITDA, a non-GAAP financial measure, was $14.2 million, up 10% from $12.9 million in the prior year quarter. Of note, for the full fiscal year, adjusted EBITDA of $65.1 million was up 12% year-over-year. Cash flow from operating activities for the quarter was $14.2 million and total capital expenditures were $2.9 million, resulting in free cash flow of $11.3 million.

Turning to our balance sheet. As of March 31, 2014, cash and cash equivalents were $28.8 million, a decrease of $821,000 from last quarter. Total borrowings on our credit facility were $36.3 million, a decrease of $13.1 million from $49.4 million in the prior quarter. As a result, net debt was approximately $7.5 million at the end of fiscal 2014, resulting in a 55% decline in net debt for the year.

Now let's talk about box office metrics. In the fourth fiscal quarter, our license revenue of $28.6 million represented 5.7% of the $499 million in estimated worldwide RealD box office. The variation from our previously guided 4.5% reflects a higher proportion of Chinese license revenue during the quarter, which is not accounted for in our box office results.

For added perspective, license revenue in China accounted for approximately 1% of the quarter's box office as compared to 0.4% of the box office in the prior year quarter. Further local Chinese indigenous content accounted for approximately 57% of RealD’s Chinese license revenue in the fourth quarter. In fact, three of the top five license revenue producing films for RealD in China were locally produced indigenous content.

Now, moving on to discuss our outlook. We are initiating our annual guidance for the fiscal year ending on March 31, 2015 as follows, we expect total operating expenses to be in the range of $85 million to $88 million, which reflects an 11% anticipated year-over-year decline at the midpoint of our guidance range and highlights the impact from our previously discussed cost reduction plan.

For added color, we expect on a fully allocated basis, our investment in consumer visual technologies will be approximately $12 million. And of that, we expect approximately $6 million will be direct consumer spend, a decline of $4 million from the prior year.

Further, of our anticipated $20 million in total companywide direct research and development expenses for fiscal 2015, we expect approximately $5 million will be direct research and development spend on consumer visual technologies, a decline of $2 million from the prior year.

Assumed in our guidance is share-based compensation expense of approximately $17 million in operating expenses. We expect depreciation and amortization expense will be approximately $43 million to $45 million for the full fiscal year, for which approximately $36 million is included in cost of revenue.

We expect field support and other costs included within license cost of revenue to be in the range of $8 million to $10 million, which is a decline of $3.4 million from the prior year. We expect the total dollar amount of income taxes shown on our income statement will be approximately $8 million for the year.

Regards to capital expenditures, we anticipate theatrical capital expenditures of approximately $13 million to $15 million for the full fiscal year, which is a decline of $4 million at the midpoint from the prior year. This reflects a run rate of approximately 400 screen installations per quarter and anticipated decline of 36% from the prior year for our installations. We also anticipate other capital expenditures, including maintenance capital expenditures of approximately $4 million to $5 million for the full fiscal year.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of James Marsh with Piper Jaffray. Your line is open.

James Marsh - Piper Jaffray

Great. Thanks very much. Two quick questions here. First, Drew, on licensing revenue as a percentage of RealD box, they were trying to getting bigger. Should we start thinking of that range being closer to 6%, rather than the kind of 4% to 5% that we’ve used as a guideline in the past and then I have a follow-up?

Drew Skarupa

Yeah. James, good question. Several of the ways to look at this, if we pro forma out China, we are looking at for the whole fiscal year, excluding China about 4.35%. So that's a good number right around that range if you exclude. We’ve always used China -- 4.5% as a proxy to include China. But the growth in local indigenous content has been so strong recently. In fact, on the film slate for this next fiscal year, we see approximately 15 films in China that are locally produced indigenous content. And in fact in this fourth quarter, three of the top five films in China were locally produced content that were seeing tremendous growth, nearly 90% growth year-over-year.

So the best way to really look at the box office percentage is something of itself, the 4.5% around 4.35%, with then an add for China. And we’ve really seen about a per screen average of around $10,000 little north of $10,000 per screen per year. So when you look at our screen count in China but the average screen count in the midpoint of the year was around 1,300 screens, 1,500 about the end of the year. And really what you want to model is without China and add an estimate for China there, but we also see just tremendous upside on China going forward.

James Marsh - Piper Jaffray

Okay. I just had another question. Maybe for Michael regarding this SID conference out in San Diego, are you guys doing anything special out there, any interesting presentations or anything that we should be looking at?

Michael Lewis

Yeah. I mentioned consumer initiative, we actually -- our scientists will be presenting a white paper on the technology that I mentioned for consumer and that will be on Friday.

James Marsh - Piper Jaffray

That’s specific. Is that the one for the battery saving and the other three piece of those apples-to-apples?

Michael Lewis

Yeah. It is multiple technologies that they will be presenting on both. It’s a collective technology that has both benefits to stereoscopic viewing as well as added benefit of power savings.

James Marsh - Piper Jaffray

Okay. And how much could that power savings be Michael? I mean, do you guys have a, what range is it?

Michael Lewis

Yeah. We are not getting into that right now. We expect to provide more information over the timeframe. I did mention that we expect to commercialize this in calendar 2015 but we are not really giving any other guidance at this moment.

James Marsh - Piper Jaffray

Okay. All right. Thanks very much.

Michael Lewis

Thanks, James.

Operator

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

Ben Mogil - Stifel

Hi. Good afternoon. Thanks for taking my call. So a couple quick questions, when you are talking about the China box office, you are talking about, both U.S. films or Hollywood films as well as local films. Are your royalty rates the same for both or you just sort of talking about, do you have a sense of how broad the market is?

Michael Lewis

Good question as well, Ben, we are seeing box office performance of the local indigenous content sometimes as high as a Hollywood produced content. So when you look at Police Story 2013, the Monkey King Firestorm, in China, those films about on par with some of our major tent-poles released in China.

So we are seeing at times the same, like any type of piece of content you also have some at the lower range at all. But when you have, let’s say 15 films a year that has a nice impact on our overall revenue. We are not breaking out locally produced indigenous content from a revenue perspective in terms of disclosure but it still has a nice impact on our financials.

Ben Mogil - Stifel

And then and this is -- I mean, I’m not expecting you to sort of give us a huge amount of clarity on this. But when you see other companies that have a lot of IP that have gone to China, ultimately seek local partners from equity perspective. Do you have sort of any views from that? We see Disney do it, DreamWorks Animation, obviously IMAX did it recently. What are your thoughts on sort of balancing out ownership versus IP protection?

Michael Lewis

We are comfortable where we are at right now. We’ve established strong relationships, most notably with Wanda, but we have quite a few exhibition partners and we are comfortable with our relationships in China now and we don't see in the short-term any reason to change how we operate in China. We continue to evangelize and professor value proposition for the RealD experience.

Ben Mogil - Stifel

Okay. That’s great. Thanks Michael. Thanks, Drew.

Michael Lewis

Thank you.

Operator

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

James Goss - Barrington Research

Thank you. Couple of them also. First, regarding some of your R&D initiatives, maybe starting with the TrueImage since that’s probably the closest to market, I’m wondering what sort of economic model you expect to develop. You said you get into a licensing basis. Is this something you’re going to try to, I mean, have a shared up charge as you have with your traditional 3D business? Or is there some other way where you will be able to be paid and it might be a less transparent in terms of increases in ticket prices or something that would relate to it?

Michael Lewis

Yes. Let me just give a little history. We started -- the thought was that we would do a select number of films on a service model type basis. And as we’ve met with people around the world with this technology, it’s received very, very, very positive reviews. And so I think our thinking has evolved somewhat and we believe that this is a very important technology for the industry, it’s very important for our company. And so we want to try to get it out there as broadly as possible. And the way to do that is really have a number of partnerships that allow us to license that technology, so that they can be used across a broad range of content. So we are looking at this as a different model. It will be a licensing model. We are not going to go into details today about the specifics, but I would expect this calendar year we will have more report, more details on both partnerships as well as the specific licensing model that we will be doing with those partners.

Jim Goss - Barrington Research

And Michael, do you think ultimately those might set some sort of template for the other items you had talked about and if they are in the R&D initiatives category?

Michael Lewis

Well, I think our consistent True line throughout our company has always been we’re licensing company, and so we develop technologies and then we partner with companies to bring products to market. And so that model is consistent with all of our R&D projects. We intend to license all of the four initiatives that I discussed earlier will be on a licensing/partnership basis.

Jim Goss - Barrington Research

And are you keeping any pushback in terms of the sharing relationship with traditional 3D or do you have any renewals coming up that might pose any risk? Or is the fact that maybe some of the percentages have leveled off or started to turn back a little bit taken some of that pressure off?

Michael Lewis

All our exhibition partners are very committed to 3D and are always trying to raise the bar, Jim, both from a presentation perspective as well as financial performance. So our relationships had been quite successful. Many of our contracts don’t expire for quite some time, but we don’t see 3D percentages really coming into play with respect to new deal negotiations with future customers.

Jim Goss - Barrington Research

All right. And then final thing, in the last quarter or two, you talked about how you are going to try to focus on some of the releases as ones that you had potentially put some marketing muscle behind, you’re talking about that a little earlier today as well. Are there any specific films and like pages three and four or whatever of your release -- of the release slate that you would point to as being the types of films that you feel from this standpoint that might be able to warrant such additional marketing push?

Michael Lewis

Well, this is a partnership with both the studios as well as exhibition, so we don’t want to call out any specific film or two, but let’s just say that all films there are some level of involvement at either exhibition or studio or both. They are just varying degrees to the level of involvement or participation the various stakeholders. So we are not going to comment at any particular film today, but we are excited about the upcoming films slate this summer. There is a quite a few tent poles in RealD this summer and we are looking forward to really strong summer.

Jim Goss - Barrington Research

Would you pick like one or two per quarter or something like that to try to focus on?

Michael Lewis

It’s always back to what we talked about when the stars align when it’s really well done in 3D and it’s a must see in 3D, and everybody in the ecosystem gets behind that. And we talked about there is a good 10 films, 10 to 15 films a year that all of us in the ecosystem really get behind in a big way.

Jim Goss - Barrington Research

All right, sorry. Thanks.

Operator

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

Ralph Schackart - William Blair

Good afternoon. Just want to follow up on the tablet commercial comments. I was just curious maybe give us a sense where you are in a conversations in the tablet market and maybe how that has deferred from your CE conversations that you had historically? And for example, do you plan to have any launch partners with publishers or content providers in tablets or your conversations primarily with the hardware OEMs and chip manufacturers at this point?

Michael Lewis

Yes. Ralph, we are not getting into the commercialization details right now. And what we are saying is we are introducing the technology specifically at the SEED conference, which is Friday, which is couple of days from now and very excited about the technology. We think it’s a very important technology both for 3D and also for some added benefits. And we are very confident in it, but we will be rolling out more details as we make those partnerships during the next year or so.

Ralph Schackart - William Blair

Okay. I will try one more. Historically, the market has sort of been standards driven industry. Do you see any differences this time around with 3D since we have more devices that are portable versus sort of just being in an in-house or in-home environment?

Michael Lewis

Standards probably with these technologies are not so much an issue. It’s interesting there haven’t really been standards in the theatrical film side technologies either. So now we don’t see that as an issue.

Ralph Schackart - William Blair

Okay. Thanks.

Michael Lewis

Thank you.

Operator

Your next question comes from the line of Steven Frankel with Dougherty & Company. Please go ahead.

Steven Frankel - Dougherty & Company

Good afternoon. One more crack at the commercialization of the consumer product. When you say you’re going to commercialize it in 2015, does that mean you anticipate getting license revenue in calendar 2015 or you have a product ready to get into being licensed in ‘15 and we shouldn’t anticipate revenue until calendar ‘16?

Michael Lewis

I would say both. We expect to have a product with partners available in the marketplace and start to generate revenue in calendar 2015.

Steven Frankel - Dougherty & Company

Okay. And then Drew, could you give us the take rates domestically and internationally during the quarter?

Drew Skarupa

Sure. During the quarter, the take rate for domestic 3D was 35%, the international 3D was 49%.

Steven Frankel - Dougherty & Company

And has it deferred materially from that quarter to date in Q1?

Drew Skarupa

Well, no, now we were at through really the end of May. We’ve seen it completely stabilize. So we’re on equal footing to the prior year. So we haven't seen a decline this year so far.

Steven Frankel - Dougherty & Company

Okay. And you talked last quarter about an uptick in inventories going into the summer film season and obviously that didn't happen and you had a great recycle rate. What’s going to happen with inventories in the current quarter?

Michael Lewis

Well, the team has done a great job of managing inventory through innovative supply chain approaches. So we're seeing improvement in efficiency at that point. Typically, we still expect to see relatively high inventories through the summer on glasses and then a reduction moving into the fall. So once our 10-K is filed, you won't see a significant change in inventories but it will go down a bit but then it rises season.

There’s a band. We have an acceptable band from our company because we’ve really become cash flow -- free cash flow focused. So we’re really managing our inventories tightly. So there is a band. You’re going to have variability in inventories up and down depending on film slate box office performance. But we find it within a manageable acceptable range.

Steven Frankel - Dougherty & Company

And you’ve made a comment a couple of quarters ago that your priority for free cash flow, which shifted to debt reduction away from stock repurchases. Given that you’ve driven the debt down significantly, what’s the company's attitude toward stock buybacks at this point?

Michael Lewis

We’re constantly looking at our capital structure and how best to allocate. Obviously, we took our debt significantly down over the last quarter and that’s where we continue to stay focused right now and really the deleveraging. So we have a lot of strong financial leverage and we’re going to continue on that approach for now. But we constantly reevaluate our capital structure. We’ll let shareholders now if that changes.

Steven Frankel - Dougherty & Company

Okay. Great. Thank you.

Operator

Your final question comes from the line of Eric Wold with B. Riley. Your line is open.

Eric Wold - B. Riley

Thank you. And don't mean to beat a dead horse on the commercialization issue that's been going on but going back a few quarters ago, I recall, you mentioned that you expected to have products hit the shelves this year and recognize revenue this year and you were working on prototypes for those products with the OEM. Has something changed along those lines where either, this is a completely different product, it’s a new focus or initiative for you or does it represent an delay in those original plans?

Michael Lewis

No, I believe what we discussed was bringing product to market, in other words introducing product. And then we also mentioned that there were no material revenues in this fiscal year for those products for consumer.

Eric Wold - B. Riley

Okay. And then I know you’re talking about specifics on the financials but should we think about on a licensing model under the consumer electronics side being more of a per unit with a minimum guarantee per year, or you think it’s going to be purely variable?

Drew Skarupa

At this point with all of our R&D technologies, it would be premature to start discussing commercialization path as well as business model. To repeat what Michael said, a core investor value proposition of RealD is we always license. So we're not going to be in a product sale business. It’s a licensing model but it would be premature to start discussing details of any of our R&D projects.

Eric Wold - B. Riley

Okay. And then just lastly on China, given how important China is going forward, I know you’ve got the deal with Wanda that was recently announced. They are reports that China as an industry as a whole country could increase the number of screens this year by as much as 25%. What are you seeing from your standpoint in terms of, as theatres have being built, what percentage of those auditoriums are being allocated towards 3D capable versus seeking on other regions and maybe kind of where China was a couple years ago. Has that ratio changed at all?

Michael Lewis

Well, our guidance is 400 a quarter on install, so that’s 1,600 a year. We probably see around the 25% of that in China and the rest that spread throughout emerging markets such as Russia and Brazil. Nearly all of our 1,600 installations will be international. So we will see a nice growth in China. We’ll continue to again evangelize the RealD value proposition in China to increase market share for the future.

Eric Wold - B. Riley

Okay. Thank you, guys.

Michael Lewis

Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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