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New Frontier Media, Inc. (NASDAQ:NOOF)

F4Q 2011 Earnings Call

June 3, 2011 11:00 a.m. ET

Executives

Grant Williams - Chief Financial Officer

Michael Weiner - Chief Executive Officer

Ken Boenish - President

Marc Callipari - Chief Legal Officer

Scott Piper - Chief Technology Officer

Analysts

James Simone - Wentworth, Hauser & Violich

Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to the fourth quarter fiscal 2011 earnings conference call. (Operator instructions) I would now like to turn the conference over to Mr. Grant Williams, Chief Financial Officer. Please go ahead sir.

Grant Williams

Thank you. Good morning everyone and welcome to the New Frontier Media Fiscal 2011 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 Chief Legal Officer, and Scott Piper, the company’s Chief Technology Officer.

We will begin the call this morning with Michael’s comments on the fourth quarter results and strategic plans 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 4444131. This call will be archived for 12 months on our Web site 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 email 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 finished fiscal year 2011 with a strong balance sheet and achieved many of its strategic objectives during the fiscal year. Within the transactional TV segment we grew our international revenue from 3.6 million in fiscal 2010 to 5.9 million in fiscal 2011 and significantly expanded our international footprint.

We expect this new distribution pipeline to fuel our growth for the coming future. Domestically we have made significant progress with three of the top five cable MSOs to introduce lower priced content offerings. This improved value proposition we feel will have a positive impact on purchases.

In addition, we continue to take market share from our competitors by creating innovative and appealing new products. As the economy recovers our increased market share and improved pricing should have a positive impact on our domestic results. Within the film production segment we completed several producer for hire arrangements during the fiscal year and expanded our distribution of mainstream content to DOD customers and other retail markets.

We also modified and streamlined the operations of the segment. This will continue to reduce the film production segment’s cost structure. Our fiscal year 2011 achievements have provided us with solid momentum and we plan to build on these accomplishments as we move into the new fiscal year. In preparation for our growth (opportunities) we made meaningful investments in fiscal 2011.

For example, we invested in digital storage and distribution equipment as well as a new state of the art facility. These investments are included in the $5 million of property and equipment purchases reflected in our fiscal 2011 cash flows. We also strengthened our operations in anticipation of expanded international distribution by launching new pay per view channels, acquiring additional worldwide content rights and supporting our business development and sales force.

We believe the investments we made in fiscal 2011 will provide us with the necessary infrastructure and updated technologies to achieve our future objectives. For fiscal 2012 we plan to continue our expansion of the international business within the transactional TV segment by executing new launches, gaining additional shelf space and generally improving our content performance.

We will also be focused on continued efforts to stabilize the segment’s domestic revenue and return it to growth by improving the value proposition of our products. In addition, we will actively explore opportunities to leverage our technology infrastructure and solid relationships with platform operators to develop new content verticals and establish incremental revenue streams for the company.

Within the film production segment our objectives will be to maintain the stabilization of the owned content revenue and execute new, multi-episode arrangements with premium movie channels. We will also focus on improving the revenue we generate through the distribution of mainstream films by expanding our distribution into international VOD markets, improving the content performance within the domestic VOD markets and by continuing to generate meaningful revenue through our arrangements with mainstream distributors.

Despite all our investments in fiscal 2011 to support the company’s future growth, we ended the fiscal year with approximately $18.8 million in cash after generating 7.6 million in cash flows from operation. Our balance sheet continues to be solid and we expect it will support our efforts in fiscal year 2012 to generate improvements in 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 fourth quarter operating performance by business segment as well as the liquidity position of the company and then we’ll open up the call for questions.

For the transactional TV segment revenue in the fourth quarter decreased to $9 million as compared to $9.3 million in the same prior year quarter. Domestic revenue declined by approximately $0.2 million and $0.4 million within the VOD and pay per view categories respectively and we believe these results reflect weaker consumer discretionary spending for our products primarily from employment and economic uncertainty.

The declines in domestic revenue were partially offset by higher international revenue within the segment, which increased to $1.7 million or 31% as compared to $1.3 million in the fourth quarter of fiscal 2010. Within cost of sales expenses increased in connection with efforts to support the segment’s growth initiatives and included higher international transponder costs to support new pay per view channels in Latin America and Europe and higher content amortization costs from additional spending on content that contains worldwide distribution rights.

Operating expenses within the transactional TV segment also increased as a result of investments made to support growth efforts. The higher cost reflected a $0.3 million increase in depreciation and maintenance costs from storage equipment purchased during the second quarter of the fiscal year, a $0.2 million increase in employee costs for the development of new content packages and to bolster our international sales force;

A $0.2 million increase in expenses from our participation in a promotional event and $0.1 million in higher costs from international consulting services. The operating expenses of the segment also included approximately $0.3 million in long-lived asset impairment charges primarily related to writing off certain content and distribution rights assets that no longer met our quality standards for distribution.

Overall the transactional TV segment reported $1.7 million of operating income as compared to $3-1/2 million in the same quarter of the prior year. Moving on to the film production segment, revenue was lower because the fourth quarter results for fiscal 2010 included approximately $3.9 million in producer for hire revenue and no similar producer for hire revenue was realized in the fourth quarter of fiscal 2011.

Owned content revenue was also lower by approximately $0.2 million due to a reduction in revenue from one-time film distribution agreements with premium cable channel customers. These declines in revenue were partially offset by higher content revenue as a result of our distribution of mainstream films to domestic VOD platforms and retail markets.

Cost of sales for the film production segment decreased by approximately $3.6 million during the quarter primarily because the fourth quarter of fiscal 2010 included production costs from the provision of producer for hire services. The decline was also due to lower film cost amortization from a decline in owned content revenue and from our delivery of higher margin films during the fourth quarter of fiscal 2011.

Operating expenses for the film production segment included $1.7 million in charges to record film cost impairments and increases in the allowance for unrecoverable accounts, which reserves for certain producer advances and recoupable costs. Comparatively, the prior year quarter results included $6.8 million in charges for goodwill and film cost impairments as well as increases in allowance for unrecoverable accounts.

Overall the film production segment reported an operating loss of $1.3 million as compared to $6.3 million in the same prior year quarter. The quarterly results within the corporate administration segment reflected higher costs primarily due to an increase in certain year end bonuses and the direct to consumer segment results were generally consistent with the prior year quarter.

On a consolidated basis we generated a net loss from continuing operations of approximately $1.3 million or 7 cents per share as compared to $4.8 million or 25 cents per share in the same prior year quarter. For the company’s cash liquidity, we ended the fiscal year with approximately $18.8 million of cash on hand and we generated approximately $7.6 million in operating cash flows from continuing operations.

We also have a line of credit available for our working capital needs and we had approximately $500,000 outstanding under that facility as of March 31, 2011. So that will conclude our prepared remarks. Let’s please open up the call for questions now.

Question and Answer Session

Operator

Thank you sir. We will now begin the question and answer session. (Operator instructions) One moment please for our first question. We do have a question from the line of James Simone with Wentworth, Hauser and Violich. Please go ahead.

James Simone

Hi guys. Good morning. Just two quick questions. First, what are the CapEx plans for this year? Any sort of outlook on that line and then secondly, what’s the confidence level that the spending this past year will actually turn into revenue growth in this current year?

Grant Williams

Hey James. This is Grant. So from a CapEx standpoint for fiscal year ’12 there are a couple of pieces that you have to consider in what our expectations are. So the first one is if you remember as we mentioned on the previous call we’re in the process of combining two of our facilities into a new single facility.

And in connection with that we have some tenant improvement as well as some equipment spending. The expectation currently is that we’ll spend about $2 million on tenant improvements and approximately $300,000 on equipment associated with that move. Now the piece that’s a little more tricky is that we will receive a reimbursement associated with those tenant improvements.

And our expectation is that will be about $1.7 million. But from a cash flow standpoint the tenant improvements and equipment spend will run through the investment line item within cash flows whereas the $1.7 million of reimbursement for the allowances will actually run through the operating section of the cash flows.

So that’s really the first kind of piece to it. The second piece, which I would sort of characterize as the ongoing CapEx spend is going to be much lower this year as compared to last year. We only expect to spend somewhere in the neighborhood of $300,000 on sort of ongoing CapEx. So that hopefully will give you a little bit of visibility into what the expectations are from a CapEx standpoint.

Ken Boenish

Hey James. This is Ken. I’ll take your second question regarding our confidence in revenue growth associated with the investments that we’ve made in the business over the past fiscal year. I would say that our confidence is rather high.

The majority of those investments had to do with supporting our international expansion, which is going very, very well as well as supporting our ability to continue to take more shelf space domestically and take market share away from our competitors. And we definitely think that will accrue to our benefit in the future. So I would say that management is very confident in its ability to grow revenue as a result of those investments.

James Simone

Just to follow on that, any changes to the incentive comp plan in terms of what it might be tied to going forward?

Michael Weiner

When you say incentive, do you mean for the officers or what? Could you clarify that for us James a little bit?

James Simone

Just any sort of incentive comp bonuses that will be paid out either to the officers or to division heads, whatever. How are you guys going to be thinking about that going forward?

Michael Weiner

Yes. I mean I think at this point we don’t have anything new to share as it relates to the incentive program associated with the officers. I think I would suggest stay tuned for the proxy, which we’ll be filing in a couple of months that describes the company’s compensation plans and philosophy in a little more detail. But currently I guess we would characterize no significant changes at this point.

James Simone

Okay. Thanks guys.

Operator

Thank you. And there are no further questions at this time. Please continue with any closing remarks you may have.

Michael Weiner

Thanks everybody for joining the call. We look forward to speaking with you again on the first quarter of fiscal 2012 call.

Operator

Ladies and gentlemen, this concludes the fourth quarter fiscal 2011 earnings conference call. You may now disconnect. Thank you for using ACT Conferencing.

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