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New Frontier Media, Inc. (NASDAQ:NOOF)

F2Q2012 Earnings Call

November 14, 2011 11:00 a.m. ET

Executives

Grant Williams - Chief Financial Officer

Michael Weiner - Chairman and Chief Executive Officer

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Second Quarter Fiscal 2012 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Monday, November 14, 2011.

I’d now like to turn the conference over to Grant Williams, Chief Financial Officer. Please go ahead sir.

Grant Williams

Okay, thanks, Elisha. Good morning everyone and welcome to the New Frontier Media 2012 second quarter results conference call. Joining me this morning are Michael Weiner, Chief Executive Officer of New Frontier Media; 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 first 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 passcode 4487049. 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 email to jelder@noof.com.

All information discussed during the conference call is current only as of today or as of the date of the applicable financial results and the company assumes no obligation to update information discussed during this conference call. During this conference call, management may make forward-looking statements within the meaning of the Safe Harbor provided by the SEC for such statements, including statements regarding the company’s expected financial position and operating results, its business strategy, its financing plans and the outcome of certain contingencies.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any forward-looking statements, and should be considered in conjunction with the cautionary statements included in our press release and our most recent reports containing risk factors filed with the Securities and Exchange Commission, including our most recently filed Forms 10-Q and 10-K.

I’ll now turn the call over to New Frontier Media’s Chief Executive Officer, Michael Weiner.

Michael Weiner

Thank you, Grant, and good morning everyone. New Frontier Media made good progress towards strategic initiatives during the second quarter of fiscal year 2012. Within the Transactional TV segment, we focused our efforts on expanding our distribution of new and unique content packages including short-form, lower priced content. We are gaining traction with these efforts. As we have mentioned on previous calls, the new content packages have been tested in certain customers markets and the results of these tests have been positive. We are optimistic that the expansion of these initiatives throughout the U.S. markets will improve the Transactional TV segment’s domestic performance.

However, we expect the impact from the rollout of these initiatives will be gradual and occur over time, due to the long lead-time in marketing and executing these plans with our customers. Internationally, the Transactional TV segment once again showed growth as compared to the same prior year quarter. The sequential results were slightly lower as a result of increased competition on a platform in Latin America. But we do not believe this impact is indicative of a future trend. We expect continued growth within the Transactional TV segment’s international revenue, and this will be key focus of the company.

Within the Film Production segment, we generated another quarter of profitable result despite incurring film cost impairment charges. We are optimistic about this segment. Our efforts to maintain lower overhead costs while also focusing on higher quality sales, are having a positive impact. We plan to continue our efforts to distribute higher quality content to our customers. We will also continue to execute targeted production arrangements when the economics are attractive. Such as the episodic series we announced in the earnings release this quarter.

On a consolidated basis we continued to generate positive operating cash flow for the company, and we expect to continue to generate positive cash flow from our operations in the future. We have substantially completed our stock repurchase program during the quarter by repurchasing approximately 700,000 shares at an average price of $1.26 per share. We also recently authorized a new repurchase program that allows for the repurchase of the lesser of an additional 800,000 shares or $1 million worth of common stock.

To date we have repurchased approximately 6.1 million of common stock. Overall, we continue to believe New Frontier Media’s prospects are good and that our strategy will generate solid shareholder returns over the long term. Now I will turn the call over to Grant to discuss the financial results and related information in greater detail.

Grant Williams

Thank you, Michael. I will start the financial review this morning by discussing the second quarter operating performance by business segment and then briefly discuss the liquidity position of the company before opening up the call for questions.

For the Transactional TV segment, revenue in the second quarter decreased to $8.7 million, as compared to $9.1 million in the same prior year quarter. Domestic revenue declined by approximately $0.1 million and $0.3 million within the VOD and pay-per-view categories, respectively. And we believe these results reflect weaker consumer discretionary spending for our products, as well as competition from other alternatives such as lower cost and free internet websites.

The decline in domestic revenue was partially offset by a slight increase in international revenue to $1.5 million as compared to $1.4 million in the same prior year quarter. Cost of sales for the segment was relatively flat. Operating expenses increased by approximately $0.8 million and included $0.4 million in higher employees costs, incurred to support the development of new and unique content packages. $0.3 million in higher rent cost associated with leasing our new corporate facility, and $0.2 million in higher employee cost from the reassignment of the former corporate administration segment executive to this segment in order to lead the European sales efforts.

Overall, the Transactional TV segment reported $2.1 million of operating income as compared to $3.2 million in the same quarter of the prior year. For the film production segment, revenue declined to $1.4 million as compared to $1.9 million, primarily because we executed fewer repped content arrangements during the quarter. Cost to sales declined slightly during the quarter, which was consistent with the decline in owned content revenue.

Operating expenses within the film production segment also declined due to a $0.5 million decline in employee cost associated with the departure of the segment’s Co-Presidents and other employees during the second half of fiscal 2011; a $0.4 million comparable reduction in film cost impairment charges; a $0.4 million decline in expenses incurred in connection with the allowance for unrecoverable accounts; and $0.2 million decline in amortization cost because certain intangible assets because full amortized in the prior year fiscal year.

For the quarter, the Film Production segment reported operating income of $0.1 million, as compared to an operating loss of $0.8 million in the same prior year quarter. As mentioned in the earnings release and Michael’s remarks, the Film Production segment executed a new episodic series agreement during the quarter, and we wanted to provide some additional details on our expectations related to the arrangement.

We currency expect to complete and recognize approximately $2.3 million of revenue from the series during the first half of fiscal year 2013. We had cash outflows during the quarter of approximately $0.7 million associated with production of the series, and we expect total cash outflows for the production to be between $1.6 million and $1.7 million.

Moving to the corporate administration segment. Operating expenses for this segment declined primarily due to the previously mentioned reassignment of an executive to the Transactional TV segment, as well as from the resignation of the company's former President. On a consolidated basis we generated net income from continuing operations of approximately $0.1 million or $0.01 per share, as compared to a net loss of $0.2 million or $0.01 per share in the same prior year quarter.

For the company's liquidity we generated approximately $1.4 million in operating cash flows during the first half of fiscal 2012. Keep in mind that cash flow from operations includes approximately $1.7 million in collections associated with the tenant improvement allowance related to our move to a new corporate facility; and $0.7 million of cash disbursements associated with our initial production of the Film Production segment’s episodic series. We ended the quarter with approximately $15.5 million of cash on hand.

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

Question-and-Answer Session

Operator

(Operator Instructions) And I’m currently showing no questions at this time, I’ll turn it back over to management.

Grant Williams

Okay. Thanks everybody for joining the call and we look forward to speaking with you again next quarter.

Operator

Ladies and gentlemen, this does conclude the conference call. You may now disconnect and thank you for your participation.

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