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Ballantyne of Omaha Inc. (NYSEMKT:BTN)

Q4 2006 Earnings Call

March 9, 2007 11:00 am ET

Executives

John Wilmers - President and CEO

Kevin Herrmann - CFO

Analysts

Marla Backer - Soleil Securities

David Gorman - Benchmark Capital

Walter Winnitzki - Nicusa Capital

Karim Bardai - Fossil Capital

Rick Fetterman - Fetterman Investments

David Ross - Traxis

Bruce Galloway - Galloway Capital

TRANSCRIPT SPONSOR
Ballantyne of Omaha Logo

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ballantyne of Omaha 2006 Fourth Quarter Conference Call.

This conference call will contain statements that are forward-looking statements relating to the future financial results of Ballantyne of Omaha. Listeners are cautioned that such statements are based upon current expectations and assumptions and involve certain risks and uncertainties within the meaning of the US Private Securities Litigation Reform Act of 1995.

Listeners should note that these statements are only predictions. They are subject to the inherent risks and uncertainties, and maybe impacted by several factors, including but not limited to, customer demand for the Company's products; the development of new technology for alternate means of motion picture presentation; domestic and international economic conditions; the achievement of lower costs and expenses; credit concerns in the theatre exhibition industry and other risks detailed from time-to-time in the Company's other Securities and Exchange Commission filings.

The Company's actual performance and results could differ materially because of these factors and other factors discussed in the management's discussion and analysis of results of operations and financial conditions section for the Company's SEC filings, copies of which can be obtained from the SEC website www.sec.gov or Ballantyne of Omaha's website www.ballantyne-omaha.com.

All information in this conference call is as of today and the Company undertakes no obligation to update these statements or to update expectations from prior conversations.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Friday, March 9, 2007.

I would also remind listeners that this call is being webcast live over the Internet. Later, replay of the call will be available on Ballantyne's corporate website for 30 days after the call ends.

I would now like to turn the conference over to Mr. John Wilmers, President and Chief Executive Officer for Ballantyne of Omaha. Please go ahead, sir.

John Wilmers

Thank you, operator. I would like to welcome everyone to our 2006 fourth quarter and year-end conference call. With me today is Kevin Herrmann, our CFO, and after an initial overview of '06, Kevin will review a few aspects of our Q4 and '06 financials. We will then open the call to questions and answers.

Fiscal 2006 represented a transitional year for our company, as the promise of digital cinema projection technology began to emerge as the commercial reality, and we completed our first sales of digital equipment.

Through our master reseller agreement with NEC, we have positioned Ballantyne to participate in the very significant opportunity provided by the industry's move toward digital projection.

We are equally encouraged by the substantial potential to build the service network to address the growing maintenance, service, installation, and training needs that will be formed by the broad deployment of digital technology across the exhibition industry.

Of course, the change that presents these unprecedented opportunities is also creating some challenges for our traditional Analog Film System business. But they are challenges we believe are well within our ability to manage.

Despite the flux in our industry, we are very pleased with the financial performance we achieved from operations during 2006 as well as the progress we made in positioning for digital.

This morning, we reported 2006 net revenues of $49.7 million, representing a modest decline from the prior year, principally due to the lower sales in our Theatre segment where we achieved sales of $46 million versus $49.7 million a year ago.

Traditional projector sales amounted to 965 units during '06 compared to 1,579 units in '05. On the digital front during '06, we sold 28 NEC projectors and have several deployed to our customers for testing in the field. These early stage deployments provide a base from which to drive greater market penetration, as the market matures and more funding sources become solidify. Clearly, the decline in the traditional theatre equipment sales we are experiencing is the result of the disrupted nature of the early stage digital cinema rollout.

We believe Ballantyne is uniquely positioned to be a solid profitable cash generating performer during this transition. Our results in '06 reflect this posture as our revenue declined less than 8% from the prior year and we continued to generate cash of approximately $4.9 million from operations. That would be $3.6 million net of the purchase price of National Cinema Service during the year.

Lighting segment sales for '06 were $3 million compared to $3.4 million in '05. Though still a small portion of our revenues, specialty lighting delivered strong margins utilizes our manufacturing capacity and is complementary with our cinema customer base.

In '06 the geographic distribution of net sales was about 71% domestic with sales to foreign customers representing 29% of sales. These percentages are comparable to '05. Though, North America has long represented the bulk of our business, we continue to pursue opportunities outside of North America, with Latin America being an attractive market for traditional film equipment. We have also expanded our digital footprint to include Hong Kong, having secured a digital cinema projector distribution agreement with NEC for that territory.

In the coming quarters, we also believe many international markets could prove to provide good opportunities for traditional cinema equipment and replacement parts as these markets typically trail in the adoption of new technology.

With that top line overview, let me now turn the call over to Kevin, who will walk you through the rest of the income statement, and a brief overview of our strong balance sheet position. Kevin?

TRANSCRIPT SPONSOR

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Ballantyne of Omaha (ticker: BTN) supplies commercial motion picture and specialty projection equipment utilized by major theater chains and location-based entertainment providers. The company also makes, rents and leases specialty entertainment lighting products.

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Kevin Herrmann

Thanks John. John has reviewed the revenue drivers, so let's progress down the P&L, then to the gross margin and other operating expenses. I will focus my comments on the full-year results.

In 2006, our gross margin declined to 21.8% compared to 27.7% a year ago. The decrease was the result of lower throughput at our plant during the year, which more than offset our ongoing overhead reduction efforts, where such costs decreased over 20%, compared to a year ago.

2006 margins were also dampened by the impact of distribution revenues, the expensing of digital equipment during Q3, where Ballantyne financed and only recognized revenues on the payments received. And expenses pertaining to digital projection equipment being used for testing and customer demonstrations.

Selling expenses rose modestly in 2006 to $3 million versus $2.8 million a year ago, reflecting relatively stable activity in this area.

G&A expenses declined to $5.1 million in 2006, primarily a result of [our not] accruing executive bonuses, as we did not achieve certain financial targets during this transitional year.

The absence of bonus accruals in 2006 was offset to a degree by severance expense, computer upgrade costs, and stock compensation expense, pertaining to implementing FAS 123R during 2006.

Lastly, as a result of analysis conducted in our annual yearend review of goodwill, pursuant to FAS 142, we have recorded a pre-tax non-cash impairment charge of $1.25 million, on a portion of the company's goodwill, pertaining to our reporting unit within the theater segment.

The analysis took into consideration the ongoing transition taking place in our operations. Moving from the manufacturer of traditional film equipment to a business model focused on the distribution and service of digital projectors.

Given, the affect of the charge, as well as the addition of $600,000 in goodwill, relating to the National Cinema Services acquisition, our goodwill at yearend 2006 declined to $1.8 million compared to $2.5 million at yearend 2005.

On the net income line, again reflecting the non-cash goodwill impairment charge, as well as lower revenues, we reported net income of $1.6 million or $0.11 per share. Absent the impairment charge, our 2006 earnings per share would have been more in line, of approximately $0.17 per share.

Now, on to the balance sheet. Certainly, the highlight is our strong cash position of $22.6 million, which is net of our investment in the NCSC acquisition in Q2 of $2.1 million. Operating cash flow remained strong in 2006 at $4.9 million versus $5.5 million in the prior year period.

Accounts receivable declined modestly to $7.5 million, from $7.8 million in 2005. And we were able to mange inventory down to $8.8 million at yearend, from $9.9 million in 2005, despite purchasing $1.4 million of digital equipment at yearend for specific projects. Inventory remains a top priority.

With that, I will turn the call back to John for some overview of remarks on the business.

John Wilmers

Thanks Kevin. Certainly, the primary area of opportunity for our company and interest for investors remains the large scale rollout of digital projection equipment within our industry. We made good progress in this area during '06 and believe momentum continues to build as we progress through '07.

As we mentioned earlier this week, Ballantyne was selected to deliver 75 STARUS NEC projectors to Regal Cinemas in conjunctions with our partner REAL D. The installs are being timed to support the March 30th release, of Disney's, Meet the Robinsons and Disney Digital 3-D.

This piece of business leverages both the strength of our strong digital systems and our strong technical services subsidiaries. As it requires both providing the projectors, as well as the technical expertise to install them under a tight deadline.

As indicated in the news announcement, we formed an LLC with REAL D and contributed funding to the LLC in order to finance the installations.

Though, we and others in the industry have helped to initialize the market by providing some of the underlying funding for digital deployments. As in this recent order, it is not our strategy to fund digital cinema equipment, making the progress of the funding plans, a critical component of our growth.

As far as our view on where we are in the rollout of digital cinema, we continue to see the formation of funding and planning for deployment focused on the latter half of '07, principally with beta test that will pave the way for a broad rollout thereafter. It's difficult to predict exactly, but we remain all the more certain that a broad scale rollout is coming, given the comments we've received from our customers as well as the progress in funding plans to support the rollout.

At the end of the day, we believe the customer makes the decision on both the services and equipment that they will use for each projection booth. And we believe we are well positioned to provide the best in digital equipment installation and service to the benefit of all exhibitors and funding plans.

Now taking a brief look at our traditional film business, we have begun to take advantage of a few opportunities to purchase and resell used Ballantyne manufactured equipment, making our first purchase of equipment as well as our first sale in the first quarter of '07. We pursue such used equipment opportunities on a limited and selected basis.

Finally, with respect to acquisitions, Ballantyne continues to view activity in this area as the best use of our strong cash position, as it offers the potential to deliver the strongest long-term returns to our shareholders. Ballantyne has several acquisition targets under current review, each of which we believe could prove to be sound accretive additions to support and/or expand our current product and service offerings.

It is too early to provide any details on the Company's under review or to estimate any timing. And there is certainly no guarantee that any of the opportunities we are reviewing will be consummated. But we did want to underscore this as an area that we are investing substantial time and energy on an ongoing basis. That basically sums up our comments and the overview.

And at this point, I would like to open the call up to questions and answers. Operator, could you now proceed with the Q&A session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Marla Backer for Soleil Securities. Please proceed with your question.

Marla Backer - Soleil Securities

Thank you. And I thought the quarter, given that we are in a transitional period now, I thought the quarter was actually very strong, particularly your cash flow generation during 2006 remains impressive. Now, a couple of questions about this transitional period because what you said in your remarks was that you think we should be getting ready for an acceleration in deployment in the back half of 2007. The announcement you made yesterday that will hit in your first quarter, correct?

John Wilmers

That's correct.

Kevin Herrmann

Yes.

Marla Backer - Soleil Securities

So, should we start to see less impact from the transition and more impact from the move now into digital? In other words, what I guess I am trying to get at is, are we going to start to see more of the benefits of the digital going forward in 2007, beginning with the first quarter?

John Wilmers

I think looking through '07, Marla, all we can do is react to what our customers are telling us. And I think its information that you're all aware of that the NCM group is looking at beta test and that near the end of the year and then rolling out into '08 and '09 these kinds of things.

We certainly have business that we know, in the first quarter, obviously we have this business, and we also have business that is still on the books regarding the Dolby plan, which of course we're still shipping equipment into that plan. So, I think an answer to your question, yes, we will see the impact of digital as it rolls, but we are still cautious about giving any kind of timing, because we've been doing this for too many years.

Marla Backer - Soleil Securities

Right.

John Wilmers

And it's a problem to zeroing on it. But I think you will see some effects going forward.

Marla Backer - Soleil Securities

Right. Okay, that makes sense. Now, another thing that we've been thinking is that content and particularly, 3-D content will help drive deployments. And I think we saw some of that with yesterday's announcement because I think you are planning to install right ahead of a Meet the Robinsons. Do you know through your relationship with REAL D, do you know whether there is considerably more 3-D content planned for 2007-2008 that would help drive deployment?

John Wilmers

Yeah, we understand there are two to three more releases in 3-D this year, with the first being, I believe somewhere around in the July area. Other than that, that's as much as I as know about that. But we do know that there are additional 3-D releases coming out.

Marla Backer - Soleil Securities

Okay. And then finally my last question, you talked a little bit about still evaluating acquisitions, although it's a worry to really provide any disclosure on most of the things that you are looking at. Would they enhance your digital footprint? I mean, enhance your position within the digital cinema space? Or are you looking at things across the board for your various different operations?

John Wilmers

We're looking at things in the motion picture space. So, I believe that's in the digital space going forward.

Marla Backer - Soleil Securities

Okay. Thank you very much.

John Wilmers

Thank you.

Operator

Our next question comes from the line of [David Gorman] from Benchmark Capital. Please proceed.

David Gorman - Benchmark Capital

Good morning guys. Great quarter and we will have to see you guys getting some nice orders. Mine is a pretty simple question, $22 million in cash, your last acquisition. Obviously, we were talking about that, it was small one. Correct me, I think it was certainly quite a bit less than $5 million and in somewhere in $2 million range is that right?

Kevin Herrmann

Yes.

John Wilmers

Correct.

David Gorman - Benchmark Capital

Sitting with $22 million in cash on the balance sheet, which makes you guys very strong and obviously, you have talked about making some acquisitions in that arena. Are we talking about possibly much larger acquisitions? I mean, because it doesn't seem like, we [need] $22 million in cash to make an acquisition. Is that cash going to be utilized properly?

John Wilmers

No, we believe that it will be. Everything that we are doing in terms of acquisitions, what we are looking at, is all very strategic to where we are going with this company. It's all involved in the motion picture, movie, and digital business. And what it does is that, gives us a larger footprint in the business. So in terms of what it would take to do that. I won't say we are going to use all the cash we have, but we will use a substantial portion, if we are able to complete the targets we have to-date.

David Gorman - Benchmark Capital

So, it sounds like to me you are looking to step-up your acquisition trail, make some larger acquisitions in that arena?

John Wilmers

Exactly.

David Gorman - Benchmark Capital

Okay. So, that's interesting. Now, how many cinemas are there in the United States? I think there is somewhere over 30,000 or close to 30,000?

John Wilmers

38,000.

David Gorman - Benchmark Capital

Okay. Obviously it's pretty easy to have exposure to those cinemas. But, are you contemplating or have you done anything outside the United States?

John Wilmers

We have an office in Hong Kong, and we are the master reseller as I mentioned for the Hong Kong area. And we expect that agreement to start expanding more throughout Asia, as far as digital is concerned.

And speaking of our analog business, we have got this 50,000 to 60,000 machine installed base. It's on a worldwide basis, which, of course, supports our great parts business that we have year-over-year. So, in digital, yes, we are expanding in Asia primarily. But in analog, we are continuing to service basically the globe.

David Gorman - Benchmark Capital

Okay. One other question. Obviously, I guess, Mr. French, I don't believe is any longer with the company. If that's a fact, is he doing consulting with you guys?

John Wilmers

Yes, he is working on a part-time basis with us.

David Gorman - Benchmark Capital

Brad and I had discussed about Ballantyne getting out, and talking about this story. I mean you've got a couple of firms covering you now. Soleil, I believe, just put out the latest report, few months ago. It was great to see some coverage there.

How do you get your story out? There has been lot of volume in the stock lately, and I know there are a lot of large holes in it. And it seems to me that the invested base is starting to change a little bit.

But what is management's thought process on getting the story out and letting people know what you are really doing?

John Wilmers

We are going to be at Show West next week and we are going to be meeting with investors there. And at the end of this month, March, we are going to be on the East Coast in Boston, New York, on a small little road show selling the company.

David Gorman - Benchmark Capital

Yeah. The last road show you guys did, which was not too long ago. Nobody really knew too much about it.

John Wilmers

This one we're coming up with will be in the Boston area; it will be in the New York area, that's being handled by Jaffoni & Collins along with Marla Backer of Soleil and we are going to be involved with the number of people on the road show. So I am sure it will be out there, that we are on this road show and if it's possible, we are going to get to see and talk to as many people.

David Gorman - Benchmark Capital

John, I got to tell you, I am very pleased with the way you guys are managing the business. And I look forward to continue to be a shareholder going forward.

John Wilmers

I appreciate that. We thank you.

David Gorman - Benchmark Capital

Thank you very much.

Operator

Our next question comes from the line of Walter Winnitzki from Nicusa Capital. Please proceed.

Walter Winnitzki - Nicusa Capital

Yes, hi John, hi Kevin.

Kevin Herrmann

Hi

John Wilmers

Hi, Walter.

Walter Winnitzki - Nicusa Capital

I've got a couple of questions. First one, could you speak to the impact of NCS in Q4 revenues and how it maybe impacted margins?

John Wilmers

I am sorry, on who?

Walter Winnitzki - Nicusa Capital

NCS.

John Wilmers

NCS?

Kevin Herrmann

The acquisition.

John Wilmers

Oh, I am sorry. I was thinking about another customer. Yeah.

Walter Winnitzki - Nicusa Capital

You could speak about them too.

Kevin Herrmann

From a revenue standpoint, they did approximately $1.7 million in the fourth quarter, and $2.9 million overall since we purchased them on June 1. And their margins right now, there are distribution and service facility, mainly in the film-based equipment business right now. So, their margins now are 15%, 16% on the top line with not a lot of SG&A. I mean it's a pretty lien operation where you have technicians across the country that are servicing their customers.

Walter Winnitzki - Nicusa Capital

Okay.

John Wilmers

And Walter, what we are doing is, obviously, we continue to blend that operation into this operation, spread the cost over it, and we look to that the future of taking that 15% to 16%. And we see an opportunity to double that margin on our service and installation work, as the locations increase and that you are able to send people to locations that you have 6, or 8, or 10 or 12 accounts as opposed to one or two digital machines. So, we think that that obviously is what's going to be happening going forward. It's going to be the reoccurring revenue for the company and we look to increase that margin. And we think there is a real opportunity to do that going forward.

Walter Winnitzki - Nicusa Capital

Okay. Second question I had, if I heard you correctly, there were 28 digital systems in Q4, is that right?

John Wilmers

That was last year.

Walter Winnitzki - Nicusa Capital

Oh, I am sorry. That was for the year. Okay.

John Wilmers

Yeah, that was for the whole year.

Walter Winnitzki - Nicusa Capital

Okay. For the year, all right.

John Wilmers

Of course, we've eclipsed that with this 175 deployment already here going into '07.

Walter Winnitzki - Nicusa Capital

Okay. Do you want to break out the Q4, how many systems there were, or you rather not?

John Wilmers

I think approximately eight.

Walter Winnitzki - Nicusa Capital

Okay.

John Wilmers

And I don't have that really in front of me.

Walter Winnitzki - Nicusa Capital

All right. Order of magnitude, that's good enough.

John Wilmers

Some of them were the Dolby contracts that everyone was aware of.

Walter Winnitzki - Nicusa Capital

Right.

John Wilmers

We shipped some in Q4, and then we've already shipped some in the first quarter.

Walter Winnitzki - Nicusa Capital

Okay. So, I guess, what I am asking is, so it looks like we've got lined up the Q1 already, both the 75, and 25 and the Dolby systems. So, we are talking about somewhere of north of 100 systems in Q1?

John Wilmers

I would say around 100, when all is said and done, dependent on Dolby's movement.

Walter Winnitzki - Nicusa Capital

Okay.

Kevin Herrmann

We know the number on the Regal obviously.

Walter Winnitzki - Nicusa Capital

Right. Okay. So my question is, now that it's starting to become tangible, the business model that we've talked about for digital as a whole, should we see that similar kind of economics apply to this Disney REAL D business or is this kind of one offs little bit different?

John Wilmers

This is going to fall pretty much into the area. We've talked about in the past that what we were expecting from these rollouts was somewhere between 7% and 10% margins in that. And I think that's safe to say that this particular situation fell within those parameters.

Walter Winnitzki - Nicusa Capital

Okay. All right.

John Wilmers

That's the best for your question.

Walter Winnitzki - Nicusa Capital

Exactly. So, not too much different from what we've talked about the digital as a whole?

John Wilmers

Right. Yeah, we always said seven to ten, and there would be some above and some below, but this one is falling in that area.

Walter Winnitzki - Nicusa Capital

Okay. All right. So, last question in reference to, it sounds like you are talking about this year continuing to be somewhat like last year of a transition year with the opportunity that we could start to see some hockey stick pick up in the second half of the year. It may be towards the end of the year. Is that good characterization?

John Wilmers

I think so. And again, that was qualified by saying what all we can go on is what we get from our customers, but that's basically what everyone is talking about. And there are lots of things going on. And quite frankly, next week and ShowWest that's always a pivotal time of the year for this industry. So, we'll what announcements are made next week.

Walter Winnitzki - Nicusa Capital

Okay, all right.

John Wilmers

It might impact that.

Walter Winnitzki - Nicusa Capital

Okay. Great, thanks. We'll probably check in with you after next week.

John Wilmers

That would be good, Walter.

Walter Winnitzki - Nicusa Capital

Okay. Thanks.

Operator

Our next question comes from the line of [Karim Bardai from Fossil Capital]. Please proceed.

Karim Bardai - Fossil Capital

Hey guys, congratulations for the quarter due to the transitions. I have a couple of questions. You guys are generating $4.9 million of operating cash flow in '06, can we assume like, you guys are going through the transition that the same level of cash that will be maintained?

Kevin Herrmann

Obviously, it's dependent on your operating income first and foremost. But there are several assets with our inventory net adds assuming that profit stay steady, that we believe that we have some room to reduce inventory levels, turn that into cash, turn out their operating assets into cash. And so, as the business sits today relative to the fourth quarter, yeah, it should be doable.

John Wilmers

We have no reason to believe that it will not continue that way.

Karim Bardai - Fossil Capital

Okay. Good. Second, I assume like you guys are moving from manufacturing to distributors. That means the level of CapEx going forward will decrease. Could you give me an indication of what kind of level of CapEx would you be looking for?

Kevin Herrmann

Yeah, I mean, over the past few years, we've been in a pretty low level of capital expenditure. And the service side of the business, you do have to buy automobiles for tax, and things like that. So, it's going to drop because you are not going to be buying manufacturing equipment. But our CapEx is really pretty low, as it fits $500,000 or so. So, maybe it's half of that or --

Karim Bardai - Fossil Capital

Half of that, all right. We are talking about $250,000 to $300,000

Kevin Herrmann

We really need to see how fast the service organization really needs to grow to meet the demand.

John Wilmers

Yeah, we have the need for our test equipment and things like that in the service organization. But we don't have the need for any more, I mean, as we transition to a distributor, are the purchase of large machine centers and things as we did with the manufacturing. So, we do have some fixed capital expenditures that are going be there for ever. But it should come down, as Kevin says, but there will be a bottom of whatever a distributor or whatever we are, if you won't go away completely for sure.

Karim Bardai - Fossil Capital

I mean can we assume that it's going be like, the half CapEx that you guys assume, are we going to see some of that in '07 or pretty much in '08, the $250,000 drop from $500,000?

John Wilmers

I think you are going to see that probably in '07.

Karim Bardai - Fossil Capital

Perfect. Okay.

John Wilmers

I mean there is no reason for me to believe otherwise other than if everything changes dramatically.

Karim Bardai - Fossil Capital

Okay. And what do you guys intend, you guys are becoming big from a model that you guys are moving from, the whole world will go through digitalization, which we believe. And so, I assume your top line would become much bigger than it was before?

John Wilmers

That's right. The top line --

Karim Bardai - Fossil Capital

Have you thought about like changing your capital structure whereby like rewarding shareholders using the cash on the balance sheet and tap into the debt market as you guys are becoming a bigger company?

John Wilmers

I think it's premature to speculate on that right now. Now, we are sitting here with ample cash to conduct the business, and we are not against going to some debt. But as it is right now, we are going to utilize the cash we have for the acquisitions that we have coming up. And then we will make those decisions down the road when we really would need to. If we needed to take on some debt to do a larger acquisition, we'd certainly be willing to do that if that was a right thing to do.

Karim Bardai - Fossil Capital

And according to you guys, the concentration of shareholders is pretty big because a lot of people are in your stock, right, and they like it'd be, would you think that the investor base would be looking at going forward from a share perspective? I mean obviously, you guys have a third of our market cap in cash. Don't you think that's going to be a little bit of negative impact on the transition, if you guys are going to go and use the cash in any acquisition?

John Wilmers

I don't know why it would be. Frankly, our investors I think, as a rule, are interest in one thing, and they are interested in this opportunity as far as the digital rollout is concerned.

It's our position, that we are going to take them through this digital rollout and we are going to make everyone successful in it. And that's the strategy we have and part of that strategy is using that cash to go out and bring another companies that complement the movie and digital business. I would like to think that they would look at it that way.

Karim Bardai - Fossil Capital

I think you guys should consider it. You should pretty much vocalize how that's going to impact the valuation going forward. This is my advice. I like your company a lot, and I just would appreciate if you guys can communicate more of your intention to the market. So that there will be no surprises here.

Kevin Herrmann

Yeah. I think you are looking at from what's happening right now and we need to get to the digital cinema marketplace. And once that starts maturing and assuming the cash keeps accumulating, a year or two somewhere down the road. And you are looking at high cash balances and you don't really need acquisitions in the digital cinema marketplace anymore. What's the best use of that cash? And I think that's when that conversation really becomes critical to the shareholders.

John Wilmers

Well, as we move to a distributor and the top line grows and grows, capital management is the key for us. We do need to manage that capital much better as we get down the road when we deal with it like that. With inventories in there, it's just the way it is. And we will certainly do that.

Karim Bardai - Fossil Capital

Okay. And that's the [clear issue] guys and congratulations again for your good job. However, I would like to be on your road show, when you are coming to New York. How can I get there?

John Wilmers

One of you maybe speak with Jaffoni & Collins or just send us an e-mail here and we will let you in.

Karim Bardai - Fossil Capital

Okay. Are you guys planning on coming to New York end of March?

John Wilmers

Yes.

Karim Bardai - Fossil Capital

Okay. I will drop you guys an e-mail there. And congratulations.

John Wilmers

That would be fine.

Karim Bardai - Fossil Capital

Thank you.

John Wilmers

Thank you.

Operator

(Operator Instructions). Our next question comes from the line of Rick Fetterman from Fetterman Investments. Please proceed.

Rick Fetterman - Fetterman Investments

Good morning. The first thing is I wanted to get clarification on a question that Walter asked a few minutes ago. The two sales, the 75 and 100 that were recently announced, are at full price?

John Wilmers

The 75 was part of a 100 is what we were talking about. We said the possibility would be that, we might be reaching to a 100 in the quarter, because of the 75 plus whatever there was.

And in terms of price, what we have always talked about to everyone is that 7% to 10% was kind of a target for the company. As we become a distributor and go from the manufacturer and the way we answered it to Walter. And you have to understand that we are somewhat guarded in how we characterize it, because of course there is competitive things out there that we need to be aware of and that we need to take into consideration. So the easiest and best way we think is to give you a range of what the margins are, and we have always said that between 7% and 10%. And what we did say here on this particular one, that the margin did fall within that area.

Rick Fetterman - Fetterman Investments

Okay.

John Wilmers

That's the way we kind of did it, Rick.

Rick Fetterman - Fetterman Investments

That's fine. Have you experienced any real pricing pressure or attempted that? People have hooked for you to get initial orders?

John Wilmers

Definitely. Pricing pressure is out there today. It's out there in both the analog and in digital right now. And it has been and it's going to continue to be that way. When you have fine groups like the NCM group that basically, as I said, that one of the reasons they put it together here, two or three years ago was just to do that, to get the best price and all those kinds of things.

You have got fine groups within National Association of Theater Owners that has put together to: number one, ensure that they are going to get their piece of this pie, but on the other hand, to be able to get the right pricing.

So, yeah, the pricing pressure is going to continue. But I don't that's unlike any other business, as it becomes, the demand for the products go up from the marketplace, everyone, especially with this, when you have a single technology spread between three OEM providers, it's difficult. And that's where we've always felt we have had some advantages because of our relationships with people.

Rick Fetterman - Fetterman Investments

But in spite of the pricing pressure, you are confident that the margins you have referred to are still within their reality, knowing what you know today, going to remain so?

John Wilmers

As we sit here today, we don't see any reason why the -- holding it within. We've always said there is going to be may be somewhere it will go below and somewhere it will go above. But I think a real good benchmark to hold is somewhere between 7% and 10%.

Rick Fetterman - Fetterman Investments

Okay. My second question or last question is, do you have any either factual or an anecdotal information on what level of sales are the other two suppliers or manufacturers are experiencing?

John Wilmers

What we know that, I think everyone knows is that Christie is really the forerunner out there with AccessIT, with Carmike, there around 2000 systems installed. Barco in this country, I don't even have an exact number, a couple hundred in this country.

Barco would be a little stronger in the foreign markets and in Europe, obviously, because that's where they are at. But if you were to look at who has the most machines installed today, you would have to go at Christie, Barco and then Ballantyne/NEC. But again, when we start shipping 75 at a time and things like that, you can very quickly change the complexion of that.

And remember one thing, a year-ago January, we received the first production models of the NEC 2500 machine that we are selling today. The other guys had that machine or their machines comparable to that, a year ahead of that.

So we are kind of at a disadvantage of our timing in the market. But we are going to work very hard to catch up, so to speak.

Rick Fetterman - Fetterman Investments

Thank you very much. Good luck.

John Wilmers

Thank you.

Operator

Our next question comes from the line of David Ross with [Traxis]. Please proceed.

David Ross - Traxis

Hi, two quick questions please. One is, on the new business and the other on the old. Regarding the new business, this is yesterday's announcement with Regal, that's the most significant one you had to-date. Can you tell me or share what you think that implies for your relationship with Regal going forward?

John Wilmers

Well, we have always felt that Regal, being the largest cinema chain and our largest customer for many years. It was very important for us to maintain that relationship with them.

And we think going forward what this does with Regal, is as we perform not only the sale to them, but the installation with them. That we just strengthened the relationship. We replaced in their complexes, the NEC machine, which I must say they are very happy with.

And that they requested the NEC machine on this rollout from Ballantyne. So having said that; as far as our relationship, we look at this as just a strengthening of our ongoing relationship with our largest customer.

David Ross - Traxis

Have you mapped out with them what the aftermarket and service [model] of the business is going to be?

John Wilmers

Not really. We have a maintenance agreement with them from the Monster House rollout of last summer. We have yet to negotiate a maintenance agreement with them regarding the 75.

We are going to be installing the equipment with their engineers. Our STS people will be working with the Regal engineers on installing this. And we'd be working with them, as a matter of fact, we'll be discussing with them next week on the ongoing maintenance for this equipment.

David Ross - Traxis

Okay. And finally, only in your opening remarks you gave a comment about the older, the traditional business. Can you give us an update on the state of affairs they are now? Are you continuing to see an erosion? And also going forward now that the company appears to be meaner and leaner, what the margin structure that is going to look like going forward?

John Wilmers

It will get linear, we are sure of that. There is an erosion of the business domestically I should say, because internationally the conventional business seems to be holding its own.

As far as the margins on the equipment, running a facility like this when we reduce the new machines that we put through here and the throughput of the machines, we still have the existing overhead. So, we are going to see an erosion of the gross margin as the amount of machines go away. The situation is where it's reality here that we are becoming more of a distributor as opposed to a manufacturer. So, that gross margins going from what used to be in the upper 20s to now probably in the high teens when it's all said and done. So, we are just managing it down to that. So, to answer your question, the reason the margins are going to underway is because there are less of these manufactured machines being filled and sold. And that's the way it's impacted. And they will continue to go down over the next several years.

David Ross - Traxis

They will go down, but at some point you are going to be accruing the revenue from the digital machines?

John Wilmers

There is going to be a crossover point. And I am very pleased with the way the analog business has held up. You have people say to you, does anyone buy that anymore? They think that there is so much digital, but yes, we do sell. We sold 900 and something last year, and we are going to sell a number of them this year too. So, that business had held up. And what it's done is it's caused our, that crossing point with the digital to be extended so that we feel good about they are not being as real [get them] between.

David Ross - Traxis

Great. Okay. Thank you very much.

John Wilmers

Thank you.

Operator

Our next question comes from the line of Bruce Galloway for Galloway Capital. Please proceed.

Bruce Galloway - Galloway Capital

Can you just overview what the economics is of a theater converting to digital? How much it costs? Who bears the cost? How much of that revenue goes to Ballantyne? And is there a service element or a maintenance element of that going forward?

And my second question is, with the cash building and the free cash flow pretty stable, why not buyback some stock over here and enhance the stock price, so you could use it as a currency to buy other companies that are complementary?

John Wilmers

I think addressing that first, we think the best use of that capital is to expand the company through acquisition. And we think that if we do that the stock price will then probably increase. I don't want to say it will increase because of course I know it's better than speculating on stock price. But we feel that then as the stock price would increase it would become a more valuable currency to do bigger and better acquisitions.

As far as the model of how this works, if you took a look at REAL D situation today and how that's done, I think better it's how may be an AccessIT works, because it's more of the larger model, an AccessIT. And you have the distributors that are going to save the money because they don't have to make the film prints. You have the exhibitors that basically can run film more digital. And then at the end of the day, he is counting his money and it really is content of governance what he gets other than if it's 3-D or some other specialty things.

So, again you have vendors out there. So, the vendors sell equipment into the third party who is an AccessIT that provides the funding. They buy the equipment through the exhibitor. The funding is taken care of over the time by virtual print fees that the AccessIT (inaudible) associated with the film companies. And as far as service, there is generally an installation charge that's probably upfront. And then there is an ongoing maintenance charge that is negotiated directly with the exhibitor.

Bruce Galloway - Galloway Capital

Can you just give it in dollars and cents what it means to Ballantyne?

John Wilmers

No. Well, there are three pieces. There is the margin on the projector sale, there is the margin on the installation charges, and then there is the margin on the maintenance going forward. Now to give you specifics, as I said on the equipment is roughly 7% to 10%, as we sit here today with digital equipment. As far as installation --

Bruce Galloway - Galloway Capital

What's the dollar amount? Is it $50,000 projector?

John Wilmers

That's the other problem. If you're zeroing on a projector, we sell a projector, we sell a lens, and we sell a base with it. So, you can't just say it's on the projectors or other associated pieces of the system. But the bottom line is I am not going to go into exactly what the return is, because this again goes against what we are trying to do. We've talked about pricing pressure. And pricing pressure is out there, and it wouldn't do us very much good if I were to sit here and tell you, yeah, we'll get back X for selling a projector.

Bruce Galloway - Galloway Capital

You don't want to disclose the competition of what you make?

John Wilmers

No, I understand where you are going down. We have always talked about a system probably selling for somewhere around $75,000.

Bruce Galloway - Galloway Capital

Okay.

John Wilmers

If you need to use a number, you can use that one.

Bruce Galloway - Galloway Capital

Got it. And does that include the maintenance and the service on that, I mean installation?

John Wilmers

No, sir. As I said, these are separate entities or separate parts of it. There is the installation, which is a separate one, and there is ongoing maintenance, that's another piece. I mean if you went to an AccessIT and looked at their plan, their plan with Carmike is, I think there is $2,250 per year maintenance fee going forward per stream. Now, that's just what they do and that's public knowledge.

And as far as installation, an installation basically fluctuates, because if you are putting one in, it's different then if you are putting 16 in another complex. So I couldn't zero-in on that figure.

Bruce Galloway - Galloway Capital

It sounds very exciting. Congratulations. It sounds like you are really in a growth phase over here and a [thinkable phase]. Good luck next week.

John Wilmers

Yes it is. Starting to take off.

Operator

Our next question is follow-up from the line of [Karim Bardai from Fossil Capital]. Please proceed.

Karim Bardai - Fossil Capital

Hey guys this is me again. I have a question. You guys obviously have a 166,000 square foot of land in Omaha?

John Wilmers

Yes.

Karim Bardai - Fossil Capital

Since you're moving from manufacturer to distributor, I assume that you won't be needing all of that, right?

John Wilmers

That's a good observation. I think, what we are doing is we are addressing that situation. Keep in mind, that we own this facility. We own the land. We own all the equipment. We are a 100% investor in this place.

This is a part of our ongoing -- maybe it goes along with our inventory. Our facility reviews for both our operations here and in Fisher, Illinois. We are certainly aware of the situation. We don't remember in 1989 we made 3000 projectors. Last year we had 900. So, we are not at capacity by any stretch and we are continually evaluating that facility and coming up with the best solution for the over or the under capacity condition.

Karim Bardai - Fossil Capital

A friend of mine just visited a different company Omaha. It seems their per square footage is pretty high compared to five years ago. So, you guys can definitely use up some of that and do sale leaseback or something?

John Wilmers

Yeah, we are in touch with our realtors and everyone. Its an ongoing situation here.

Karim Bardai - Fossil Capital

Perfect.

John Wilmers

We understand that we don't need all this space we have. But then again we also own everything. So it's a part of our conversation everyday.

Karim Bardai - Fossil Capital

Okay. Just want to make sure that you guys will do the right things for yourself, for the company and then for the shareholders. I know land is very important.

Kevin Herrmann

It is one of the assets that we referred earlier, that any asset that you own, that has value, turn it into cash in one way or the other.

Karim Bardai - Fossil Capital

Exactly. Because if these are non-producing assets, right. So sitting there, does not really reflect on the stock, if you can produce them into cash.

Kevin Herrmann

Right.

Karim Bardai - Fossil Capital

Could be even better for your stock price, guys?

John Wilmers

We understand.

Karim Bardai - Fossil Capital

And I look forward to seeing you guys by the end of March.

John Wilmers

Very good.

Kevin Herrmann

Great.

Karim Bardai - Fossil Capital

Thanks a lot again.

John Wilmers

Thank you.

Operator

There are no further questions at this time.

John Wilmers

Okay. I want to thank you all for your interest in the company and participating in today's call. Ballantyne has positioned itself to benefit from the impressive and a creative change in opportunity that has emerged in the exhibition market that we have served for over 70 years.

We believe, we have built a strong product and service offering and posses an excellent customer relationship and a long-term track record of serving customers needs. Our digital product and service offerings are just an extension of our dedication to providing our customers with the best in products and services to support their long-term success.

Thanks again for the interest, we will see some of you, I am sure next week in Las Vegas and we look forward to seeing the rest of you either on our road show or on the next conference call. Thanks again.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you.

TRANSCRIPT SPONSOR

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Ballantyne of Omaha (ticker: BTN) supplies commercial motion picture and specialty projection equipment utilized by major theater chains and location-based entertainment providers. The company also makes, rents and leases specialty entertainment lighting products.

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Source: Ballantyne of Omaha Q4 2006 Earnings Call Transcript

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