New Frontier Media CEO Discusses F2Q2011 Results – Earnings Call Transcript

Nov. 5.10 | About: New Frontier (NOOF)

New Frontier Media, Inc. (NASDAQ:NOOF)

F2Q2011 (Qtr End 09/30/10) Earnings Conference Call

November 5, 2010 11:00 AM ET

Executives

Grant Williams – CFO

Michael Weiner – CEO

Ken Boenish – President

Analysts

Greg Scott – Merriman Capital

George Whiteside – SWS Financial Services

James Simone – Wentworth

Jerry Falkner – R.J. Falkner & Company

Operator

Welcome to the Second Quarter Fiscal Year 2011 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open to the questions. (Operator Instructions) This conference is being recorded today, Friday, November 5, 2010. I would now like to turn the conference over to the Chief Financial Officer, Grant Williams. Please go ahead, sir.

Grant Williams

Thanks Christina. Good morning and welcome to the New Frontier Media’s fiscal 2011 second 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 Marc Callipari, the company’s General Counsel.

We will begin the call this morning with Michael’s comments on the second 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 4380641. 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 the New Frontier Media’s Chief Executive Officer, Michael Weiner.

Michael Weiner

Thank you, Grant, and good morning, everyone. New Frontier Media continued to execute its long-term strategic plan during the second quarter of fiscal 2011. As part of this effort to advance the strategic plan, we have been focusing our attention on expanding the transactional TV segment’s international footprint.

During the reported quarter, we grew our international revenue to $1.4 million, up 75% as compared to the same prior year quarter. The large majority of this revenue has been generated through VOD distribution. We are expanding the international service we provide to include pay-per-view channels and then recently we made several key investments in order to further these efforts.

In April, we announced a new transponder agreement allowing us to distribute up to three pay-per-view channels in Latin America. During the completed quarter, we successful launched these channels and are already distributing the pay-per-view channels on the largest system in Mexico and Columbia.

We also announced in August a new lease arrangement that allows us to launch up to three pay-per-view channels in Europe. We are currently working to secure distribution agreements with platforms throughout Europe and we have several significant deals in the pipeline.

Due to the strong performance of our VOD content, most our current VOD affiliates have shown strong interest in our pay-per-view channels. These new pay-per-view channel launches require additional investment and we believe our distribution of new channels will generate an exponential return on those investments over the long term.

We are encouraged with the slight increase in our sequential transactional TV segment revenue as compared to the results from the first quarter of fiscal 2011, and believe this could be a further indication of our success in stabilizing the domestic revenue. We believe there will continue to be opportunities to improve the domestic VOD and pay-per-view revenue as we grow our market share with existing customers.

In addition, we continued to expand our testing of pricing and packaging strategies aimed to improve the value of our content to consumers.

Regarding the film production segment, although we have made good progress with our initiatives, the film production segment continues to be under pressure as a result of the continuing challenges within the film markets. These challenges were evidenced by the noncash billing, cost impairment charges, and increases in our recoupable costs of producer advance reserves during the quarter.

We do continue to believe, however, there are opportunities to capitalize on this segment’s assets and relationships as we develop and refine our long-term strategy to this division.

Looking ahead, the company is gaining traction with many of its strategic initiatives as well as making investments that we believe will generate long-term shareholder value.

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’ll begin the financial review this morning by discussing the second 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, second quarter revenues declined to $9.1 million as compared to $9.3 million in the same prior year quarter. The decline was primarily due to lower domestic pay-per-view revenue, including a $0.5 million decline in revenue from the loss of a channel on the DBS platform in November 2009.

Pay-per-view revenue also declined as a result of lower revenues from other domestic DBS and top 10 cable customers, and we believe that the declines are due to weak consumer spending.

The declines in domestic pay-per-view revenue was partially offset by a $0.5 million increase in international VOD revenue as a result of new launches as well as gains in shelf space, improved content performance, and changes in the menu structures with several existing VOD customers.

Our second quarter domestic VOD revenue was flat as compared to the same prior year quarter. In order to stabilize the revenue, we have made adjustments on our customers’ platforms, including changing our programming mix by adjusting the type of content we distribute and by launching new unique content packages.

For the transactional TV cost-to-sales, cost increased by approximately $0.4 million as compared to the same prior year quarter. The increase in expenses was primarily from incremental costs incurred to support the company’s growth initiatives and included transponder costs for channels distributed in Latin America, employee costs to support analysis of our programming performance, transport cost to support increases in our domestic and international distribution, and higher content amortization cost.

Operating expenses within the transactional TV segment also increased by approximately $0.3 million due to higher depreciation expenses primarily for storage equipment that was purchased to support our content distribution growth as well as higher domestic advertising and promotion costs incurred in an effort to improve domestic revenue. Expenses also increased as a result of a vendor settlement gain of $0.1 million that occurred in the same prior year quarter, but did not recur in the second quarter of fiscal 2011.

Overall, the transactional TV segment reported $3.2 million of operating income as compared to $4.1 million in the same quarter of the prior year.

Moving onto the film production segment, owned content revenue declined by $0.2 million as compared to the same prior year quarter. Revenue declined by approximately $0.4 million, because the same prior year quarter included revenue from the delivery of a horror title to a pay TV customer and no similar revenue recurred in the most recent quarter.

Owned content revenue was also lower due to a $0.1 million decline in VOD revenue and a decline in one-time international and domestic distribution revenue. We believe these declines reflect a continuation of the challenging economic conditions.

The owned content revenue declines were partially offset by $0.4 million increase in revenue from the completion of our fourth installment of an episodic series with a premium cable customer.

Web content revenue within the segment increased by approximately $0.3 million primarily as a result of our distribution of mainstream content to domestic VOD platforms. We also believe our ability to obtain higher quality mainstream content with recognized actors and actresses contributed to the increase in web content revenue.

Cost to sales for the film production segment decreased slightly during the quarter in a manner consistent with the decline in the owned content revenue. The film production segment’s operating expenses increased to $2.1 million as compared to $1 million in the same prior year quarter due a $0.6 million noncash charge for film cost impairments, a $0.3 million noncash increase in the allowance for unrecoverable recoupable costs and producer advances and a $0.2 million severance charge related to the departure of one of the segment’s co-presidents.

The film cost impairment charges were primarily a result of the under performance of several titles within the segment’s film library. Overall, the film production segment generated an operating loss of approximately $0.8 million as compared to operating income of $0.1 million in the same prior year quarter.

The direct to consumer segment reported an operating loss of $0.3 million, which was relatively consistent with a $0.2 million loss reported in the same prior year quarter.

Corporate administration segment expenses increased to $2.4 million from $2.2 million in the same prior year quarter, primarily due to higher employee costs related to stock options that were issued in the third and fourth quarter of the prior year, as well as certain annual salary increases.

Overall, we generated a net loss from continuing operations of approximately $0.2 million or $0.01 per share as compared to net income and continuing operations of $1.1 million for $0.06 per share in the same prior year quarter.

Moving onto the company’s cash liquidity, as of September 30th, 2010 we had approximately $14.8 million of cash on hand. We generated approximately $0.4 million in operating cash flows from continuing operations; however, those results include approximately $3.6 million of cash temporarily invested in the funding of a producer for higher arrangement that we executed in the first quarter.

We currently anticipate that we will complete the producer for higher agreement and collect the outstanding investment with a slight margin by the end of the fiscal year. We expect that the collection of our investment in the producer for higher arrangement as well as the cash generated by our other operations will result in a strong cash position by the end of fiscal year 2011.

That will conclude our prepared remarks, and now let’s please open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Greg Scott with Merriman Capital. Please go ahead.

Greg Scott – Merriman Capital

Hi guys, how are you doing?

Michael Weiner

Good. How are you Greg?

Greg Scott – Merriman Capital

Just one question. I was wondering if you guys have seen any changes in the usage stemming from the change in the Time Warner New York platform?

Ken Boenish

Hi, this is Ken. I’ll take that question. We have seen a significant uptick in the number of orders on a weekly basis as well as the number of unique set-top box orders, so we’re getting a greater diversity of customers onto the platform.

Generally, when we make pricing changes in order to provide an improved value proposition to consumers, it takes about 90 days to a 120 days before we begin to see a positive ramp in category revenue, but so far things are looking like they’re going according to plan.

Greg Scott – Merriman Capital

Okay, sounds good. And so are you seeing people going – purchasing the lower price – the lower price movies?

Ken Boenish

Yes, we’re getting a lot of volume in the lower priced assets. If you look at that platform, you’ll notice that they lowered the price on the full-length movies as well as introducing content by the scene, which is about 15 minutes in length, and then multi-scene shows, which are 30 minutes in length, as well as the introduction of subscription options that include a subscription to one of our linear channels, as well as a package of VOD programming.

So this is the first time that we’ve seen an operator make this many changes all at one time. It’s I think a pretty aggressive approach to improving the value proposition and we are very, very excited about this and anticipate very good results.

Greg Scott – Merriman Capital

Okay, great, thank you very much.

Operator

Thank you. (Operator Instructions). 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. Certainly I’m impressed by your cast flow situation and I know that or I presume that there are many, many challenges in your industry, and that you’re doing all that you can in making adjustments. In terms of your transactional business, is that something that you are going to keep for the foreseeable future or will you redeploy assets perhaps intensifying your efforts in the international sector?

Ken Boenish

Hi George, this is Ken, and I’ll take that question. We see our transactional business as a good long-term business for the company where we’ve made adjustments in improving the consumer value proposition, we’ve actually seen a double digit in improvement in our results in certain test markets, and so we’re very encouraged by that.

We really don’t necessarily need to redeploy assets in order to take advantage of opportunities outside the US. We’ve added a little bit more infrastructure in terms of storage capacity so that we can process more content effectively. But there is relatively speaking little investment required to take advantage of new distribution opportunities outside the US, particularly in the VOD space.

We did have to make an investment into some transponder and uplink capacity in order to take advantage of linear distribution opportunities. But we’re able to initially open up those markets and test the waters with our VOD content. In a sense, we got such good results with our VOD content and encouragement from our distribution partners to go ahead and launch linear channels. We feel very confident in the success of those channels and the return on investment.

George Whiteside – SWS Financial Services

Well, like everything, obviously it takes time. And I think you’re in a favorable position regarding your cash, and I presume that you are continuing to look at intent acquisition, organizational acquisition, et cetera, opportunities that may present themselves. Is that correct?

Ken Boenish

We keep our options open, and at any one time we’re looking at any number of opportunities in terms of improving shareholder value.

George Whiteside – SWS Financial Services

Thank you.

Michael Weiner

George this is Michael. You know, we deploy our capital very judiciously. I mean we did not go into the linear end of the European and South American business until we were confident that our content was acceptable in those countries on VOD. And I think we’re – as I said in my speech, I think we are expecting exponential growth in those areas.

George Whiteside – SWS Financial Services

Well, that is certainly encouraging, and it looks as though on an overall basis, we are making gradual improvements in the economy, and hopefully that will be reflected in some of the results that you’re able to produce.

Michael Weiner

Thanks George.

Operator

Thank you. And our next question comes from the line of James Simone with Wentworth. Please go ahead.

James Simone – Wentworth

Hi guys. I may have missed this, but –

Michael Weiner

Hi James.

James Simone – Wentworth

Hi. Can you talk about the incremental CapEx you guys spent in the quarter? What that was for? To me, it looks like an incremental $2 million.

Grant Williams

Yes, I’ll start with that James, this is Grant. So the majority of the CapEx that we spent in the most recent quarter related to additional storage equipment that we acquired. Because of the incremental distribution we have associated with the growth internationally for the transactional TV business as well as some incremental distribution, we’ve had domestically, we’ve had some needs to beef up our storage equipment to support that. So we’ve made some investments and equipments in order to support that growth, and we think that ultimately that’ll generate a good return on investment.

James Simone – Wentworth

Okay, so that’s sort of a one-time thing.

Grant Williams

Yes, that’s really a more of a one-time thing associated with the storage equipment. Now we are expecting in the second half of the year to make some other investments from a CapEx standpoint associated with some receivers and rather than get into the details of it, generally investment – it’s an upfront investment we’re making in equipment that ultimately we’re expecting to save money over the next five years or so.

So we are seeing some increases in our CapEx this year relative to where were last year. But we think over the long term that’s definitely going to provide us a good return on the investment.

James Simone – Wentworth

Okay thanks.

Operator

Thank you. And our next question comes from the line of Jerry Falkner with R.J. Falkner & Company. Please o ahead.

Jerry Falkner – R.J. Falkner & Company

Hi guys.

Michael Weiner

Hi Jerry.

Jerry Falkner – R.J. Falkner & Company

You’re going to be moving and consolidating – it looks like you’re going to be consolidating all of your activities into one location I think I read that, and I’m wondering given the nature of the digital broadcast center out by the airport, if you’re going to have to move all of that into a new facility, are we going to be looking at a substantial moving cost in one of the next couple of quarters?

Grant Williams

Yes, sure Jerry, this is Grant, and I’ll take. Frankly we’re still in the process of working through our analysis to determine exactly what the effects are going to be from that change. Basically what we’re doing is we’re consolidating our two facilities, our corporate location as well as the digit broadcast center into one location which obviously is going to allow us to improve our efficiency, which we think will provide a decent return.

There are going to be some moving costs associated with that, because we’re going to be moving some sensitive equipment from one facility to another. And then there could also be some additional expenses that we’ll incur associated with vacating one of the buildings early relative to the full term of the lease agreement.

But generally we think overall that moving both of our facilities into one facility is going to allow us to realize some efficiencies and over the long term again. As we mentioned in our discussion we’re making some investments now that we think over the long term are going to provide a nice return for us.

Michael Weiner

Jerry, this is Michael. Just, one is we got a very favorable lease from the new landlord, number one. Number two is, the landlord gave us a very, very substantial leasehold improvement allowance to redo the space and relocate.

We obviously will have some costs associated with moving, but we estimate combining the facilities and what we have to look forward to, we will save a substantial amount of money over the next several years by having everything in one facility, and plus the ability to grow.

So it was a very, very favorable deal. We, again, we look at these things very judiciously and carefully. And as I say the amount of money we got from the landlord was substantial and made the deal very economically viable.

Jerry Falkner – R.J. Falkner & Company

Okay. And a second question relating to the film production segment; we saw additional noncash impairment charges this quarter. How does that segment of your business look on your balance sheet in the context of assets that could be at risk for further noncash impairment charges or are we pretty well conservatively reserved there now?

Grant Williams

Yes sure, Jerry, this is Grant. We take a hard look at all of our assets typically on a quarterly basis. And as it relates to the film production segment specifically, their film library as well as the recoupable costs and producer advances is associated with the mainstream content we distribute. And based on the challenges we’ve seen or the continuation of the challenges we’ve seen in the marketplace within that segment, we’ve had some specific content whose performance has been lower than expected, and that’s really what’s driven the impairment charges in the most recent quarter.

Obviously, we typically are going to take – we’re always going to take a conservative approach in trying to appropriately value those assets. But to the extent that the content that we review it performs lower than – or has a performance just lower than we expected – and there’s always a possibility that we could take impairment charges associated with that in the future.

Jerry Falkner – R.J. Falkner & Company

Okay, thank you.

Operator

Thank you. And I’m showing no further audio questions at this time. And I’ll now turn the call back over to management for any closing remarks you may have.

Michael Weiner

Thank you everybody for joining us, and we look forward to talking to you again next quarter.

Grant Williams

Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!