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DG FastChannel Inc. (NASDAQ:DGIT)

Q3 2007 Earnings Call

November 12, 20078:00 am ET

Executives

Scott K. Ginsburg - Chairman of the Board, Chief ExecutiveOfficer

Omar A. Choucair - Chief Financial Officer, Director

Analysts

Rich Ingrassia - Roth Capital Partners

David Cohen - Midwood Capital

Darren Aftahi - ThinkEquity Partners

Swaraj Chowdhury - Dalton Investments

Thomas Eagan - Oppenheimer

Operator

Ladies and gentlemen, thank you for standing by and welcometo the DG FastChannel third quarter conference call. (Operator Instructions) Iwould now like to turn the conference over to Mr. Scott Ginsburg, Chairman andCEO. Please go ahead, sir.

Scott K. Ginsburg

Thank you, Operator and welcome, everyone, to the call.Before we proceed further, I would like to ask Omar to read the Safe Harborlanguage.

Omar A. Choucair

Our discussion with you today may contain certainforward-looking statements relating to the company, including the expansion ofits digital distribution network and the demand among certain clients fordigital, audio, and video media services and its expectations for the mergerwith the Point.360 ads media services business, the acquisition of GTN, and thestrategic alliance with Viewpoint Corporation. These statements are based onthe economic and market conditions as of November 11, 2007 and assume nomaterial changes in economic conditions or other major world events. Thecompany can give no assurance as to whether these conditions will continue orif they change, how such changes may affect the company’s current expectations.

While the company may from time to time revise its outlookor issue updated guidance, it assumes no obligation to do so. Listeners are furthercautioned that these forward-looking statements involve risks and uncertaintieswhich could cause actual results to differ materially from those projected.These and other risks relating to DG FastChannel are set forth in the company’sfilings with the Securities and Exchange Commission.

Today’s call and webcast include non-GAAP financial measureswith the meaning of SEC Regulation G. Areconciliation of all non-GAAP financial measures to the most directlycomparable financial measure calculated and presented in accordance with GAAPcan be found in today’s press release.

Scott K. Ginsburg

Okay, Omar, thank you and thank you everyone forparticipating in this morning’s call. We are hosting our call a little earlierthan usual as we are presenting at Oppenheimer’s third annual digital mediaconference a little later this morning.

As outlined in today’s release, DG FastChannel reportedexcellent third quarter 2007 results that reflect continued business success aswe serve the advertising, syndication, news, and video news release communitieswith digital media solutions. We have quickly developed best-of-breed mediasolutions and made them available to more advertisers and agencies, contentproviders in general. Additionally, we are pursuing significant operatingsynergies and cost efficiencies from our recent acquisitions.

Today we reported record third quarter revenues, EBITDA,operating income, and EPS. As we look at our consolidation of the two newbusinesses into our current operating model, it indicates today that we haveacted on $6.3 million of annual operating synergies and we expect to realizethe upper end of our $6 million to $8 million of projected annual operatingsynergies.

The growth and the success brought to the company throughthe recent corporate activities drove the seventh consecutive quarter ofyear-over-year EBITDA growth. We are reaffirming our 2007 and 2008 financialguidance. Ongoing significant upgrades to our information systems and softwaredevelopment departments and systems continue to be made and we continue to workon our rollout of a new interactive online advertising service with ourstrategic partnership with Viewpoint.

We will discuss all these efforts in greater detail shortlybut first let me ask Omar to review the second quarter ’07 financial results insome detail.

Omar A. Choucair

Good morning. I want to join Scott in thanking everyone fortoday, participating in today’s early call. For the three months endedSeptember ’07, DG FastChannel reported consolidated revenues of $25.1 millioncompared to consolidated revenues of $18.8 million in the year-ago quarter.

As mentioned in today’s press release, we closed on Point.360Ads effective on August 14th and GTN Ads on August 31st during the most recentquarter.

Third quarter 2007 reported consolidated EBITDA with $7.8million versus 2006 Q3 EBITDA of $4.6 million, representing a 71% increase on ayear-over-year basis. In the third quarter of ’07, we reported net income of$2.1 million, or $0.12 per net income per share versus a net loss of $4.5million or $0.35 loss per share in Q3 of ’06.

Gross margins in the second quarter were approximately 56%compared to Q306 margins of 50%. This achievement highlights our continuedoperating leverage from our business as we drive higher revenue and theprogress we’ve made in executing our integration plan.

Q3 EBITDA margins were 31%, again reflecting the fixed costnature of our digital network and our ability to drive significant EBITDAthrough incremental revenue growth. Interest expense during Q3 of ’07 was$932,000 versus interest expense of 762 in the year-ago quarter.

We reported non-cash stock compensation expense of $122,000during Q3, which reduced our EBITDA for the period.

Turning to the balance sheet, our outstanding debt of $53.8million was comprised of both term and revolving bank debt. We currently haveapproximately $31 million of unused revolver capacity and we have approximately$17.9 million of cash at the end of September 30, 2007 quarter.

We incurred CapEx totaling approximately $1 million duringQ3 of ’07.

I also want to point out as previously disclosed in thismorning’s announcement that in the second quarter of 2007, DGIT recognized anon-cash gain of approximately $900,000 relating to the settlement of a disputebetween one of our subsidiaries and Pathfire in connection with our purchase ofPathfire in June of ’07. Upon further review of the accounting for this, wedetermined that the purchase accounting guidance and EITF 0401 was not appropriatelyapplied. As such, we will restate the second quarter of ’07 results toeliminate the non-cash $900,000 gain which was recorded in other income and therelated tax effect and recording adjustment to reduce good will on the balancesheet, and this will result in a $0.03 per diluted share reduction in the EPSfor the period.

Additionally, this adjustment did not impact the reportedrevenues, EBITDA, or operating income for the second quarter.

Finally, we expect to record GAAP taxes using an effectivetax rate of 40% in ’07 and this tax provision should not result in the paymentof regular cash taxes during 2007. Scott.

Scott K. Ginsburg

Thank you, Omar. As Omar’s review and my opening remarksindicate, the third quarter was a very busy and productive period for DGFastChannel. Our completed acquisition with Point.360 Ads media servicesoperations and acquisition of GTN ad services division demonstrate our strongcommitment to the advertising media services industry. Also, our continuingintegration of Pathfire into the DG FastChannel networks indicates anddemonstrates our strong commitment to long form programming as well.

Our strategic alliance with Viewpoint sets the stage for ourmove into a new growing, and the potentially massive, market of online videoadvertising.

A little bit on the high-def update; we’ve seen increaseddemand for high-def services resulting in approximately $3.6 million ofyear-to-date reported HD revenues through 9-30-07. We continue to invest inupgrading our regional service facilities to manage our customers growingdemand for HD services.

As we look through 2008, we are getting commitments from anumber of our customers to send their files in an HD format and distribute HDadvertising, and as everybody knows, we are not that far away -- only 64 weeksaway from when the networks and the TV stations will be broadcasting in digitalformats as they take on the FCC and congressional mandate to switch over.

We believe that our current financial models will realize avery positive benefit from the ongoing shift to HD commercials. We haveestimated each 1% transition from standard definition to high definitiondeliveries. Given the current mix of electronic and physical deliveries couldresult in approximately $3 million to $5 million incremental revenues.

Let me talk a little bit about our Viewpoint strategicservice offerings. Our online video Internet service offering powered by Viewpoint’sunicast platform will enable brands and advertisers to turn their traditionaland broadcast video assets into cutting edge display ads that are pre-certifiedacross thousands of websites.

As we have looked at this service, we believe that the mostvaluable asset that’s created by a [branded] agency is their broadcast TV spotand that if we can repurpose that spot and send it across different platforms,and particularly as we move towards the Internet and mobile advertising, thatwe would have a winning and successful service.

We have worked closely with the Viewpoint corporation to getthis up, running, and then adopted by our clients and in Viewpoint’s conferencecall last week and in my conference call today, we can tell you that we’ve gottwo or three large wins there. We believe that later this month, WarnerBrothers will begin rolling out their home video using our mutual solution andthat would be on behalf of the Harry Potter movie.

A little bit of a technology update; we continue to upgradeour spot central order management systems to provide the best advertisingworkflow solutions for our customers. We are upgrading our proprietary digitalmedia asset management system [ad gallery]. We have made significantinvestments and upgrades to our IT, IS, and software development groups and weare shifting a portion of our software development offshore to accelerate ournew tools solutions to the marketplace.

Let’s move on to our 2007 and 2008 outlook. On a full-yearbasis, assuming the acquisition of Point.360 Ads media distribution servicesoperations, GTN ads service acquisition operations were effective -- we’regetting a lot of noise, Operator. Are you on the line?

Operator

Yes, I am standing by.

Scott K. Ginsburg

What is that noise, please?

Operator

I’m not sure. It’s very clear for the participants. We’renot hearing noise.

Scott K. Ginsburg

Okay, thank you very much.

Operator

Thank you.

Scott K. Ginsburg

On a full-year basis, assuming the acquisition of Point.360Ads media services operations, GTN ads services acquisition and Pathfireoperations were effective as of January 1, 2007, and reflecting anticipatedrevenue and expense synergies, we expect: one, 2007 pro forma revenues willapproximately $110 million to $113 million, and 2007 EBITDA is expected to bein the range of $37 million to $39 million; 2008 revenues will approximate $122million to $126 million and 2008 EBITDA is expected to be in the range of $41million to $44 million.

We are reaffirming those numbers today and we believe thatshould everything continue to operate normally in our business and lookingforward to next year’s Olympics, the election, the presidential election andour continued success with HD content moving through our networks, we thinkthese numbers can be relied upon.

With that, Operator, I would like to proceed to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of RichIngrassia from Roth Capital Partners. Please proceed with your question.

Rich Ingrassia - RothCapital Partners

Thanks. Good morning, everybody.

Scott K. Ginsburg

Hey, Rich. Are you on the East Coast or West Coast?

Rich Ingrassia - RothCapital Partners

West Coast. Thanks for the wake-up call. Just to be clear onguidance, Scott, this is actually in fact the first time you’ve given specific’08 guidance, right? Beyond the pro forma ’07 guidance?

Scott K. Ginsburg

Well, this is guidance. It is a bit pro forma yet because westill have another we believe two quarters to incorporate the additionalsynergies that we’ve found in operating the three, Pathfire, GTN, andPoint.360’s businesses. So while we’ve taken action on them, as we said onabout $6.3 million up until this time, we expect further action of another $1.7million at least. Those will not be -- we’re working on those. It will be fullyincorporated into our numbers by the end of second quarter.

Rich Ingrassia - RothCapital Partners

Okay, but if I take the midpoints of the guidance here inthe press release, it looks like EBITDA margin is roughly flat from ’07 to ’08,but I would expect that’s probably the least case scenario?

Scott K. Ginsburg

We are giving them what we like to call a minimumperformance budget here.

Rich Ingrassia - RothCapital Partners

Okay, fair enough. And then on Viewpoint, they in factreported decent results for the quarter themselves. To what extent do you thinkthat was due to any relationships DG made available to them via theco-marketing agreement?

Scott K. Ginsburg

I would suggest to you that -- I’d want you to talk to Viewpointdirectly but my view of it is that we are just getting geared up now. Theadoption of our mutual product is coming with the Warner Brothers, which we’llhave a more specific general release on that I believe later this week. But Ithink it’s a wonderful opportunity for us. It’s our first customer. Thecontract value is in the six figures, and I think that it’s demonstrative if wecan do this with one client and get the adoption, then we have really literallyhundreds of clients and it could be a nice upswing for us as we project 2008.

I don’t think that Omar put a significant amount of relianceon our projections for next year on the adoption of this and it will just be alittle bit of extra frosting on the cake for us, given the HD adoption nextyear, the presidential election, and the Olympics.

Rich Ingrassia - RothCapital Partners

Okay, so as far as Viewpoint is concerned, those numbers areall theirs for the third quarter?

Scott K. Ginsburg

Yes.

Rich Ingrassia - RothCapital Partners

Okay, and then last question, but this is the hundred-milliondollar question, I guess; would you consider any other use for the cash and thecredit besides the widely held assumption that it’s for M&A? For example,with the consistent cash flow, would you ever consider a dividend to commonshareholders?

Scott K. Ginsburg

We haven’t really explored a dividend. The company hasenjoyed tremendous success, as you well know. This is our seventh quarter ofcontinuing progress on our EBITDA number. Fourth quarter is off to a very goodstart and we think that we’ll enjoy continued success on our EBITDA line andmanaging our cash and cash flow.

As far as dividends are concerned, the question there isthat a dividend is probably appropriate if you are really at the end of yourgrowth cycle and I don’t think that DG FastChannel meaningfully is at the endof that, or even begun to see the end of that growth cycle.

So while I would never refuse a dividend, we’d never refuseto consider a share buy-back if it were appropriate, we certainly at this pointdon’t have contemplated an annual dividend for 2008.

Rich Ingrassia - RothCapital Partners

So really all earmarked for potential M&A?

Scott K. Ginsburg

I think we would look for opportunities to continue ourgrowth and particularly as we look at our platform and we are able to take careof old world media, which is newspaper, traditional media, which is radio, TV,cable, and those networks that serve those industries, we are really lookingnow towards new media, which is the Internet, video on-demand and mobile, whichcan be anything from a handheld telephone to going down the elevator, to beingin a movie theater, to pumping some gas and seeing a screen there.

Wherever video advertising has to be delivered, DGFastChannel needs to continue to build the platform. We have the order entrysystem. We have the customers and we need the products to serve thosecustomers.

Rich Ingrassia - RothCapital Partners

Okay. Thanks, Scott.

Operator

Thank you, and the next question comes from the line of DavidCohen from Midwood Capital. Please proceed with your question.

David Cohen - MidwoodCapital

Good morning. Scott, did you say that by your calculation,given current mix, each 1% shift in AC equals what kind of incremental revenueaccording to your model?

Scott K. Ginsburg

Well, our model indicates that there’s a percentage rightnow that we look at that moves by physical delivery and a percentage that movesby electronic delivery. As we move forward, we’ll see more and more of our HDrevenues come in through an electronic delivery rather to physical, but on ourcurrent model in which we are delivering most of our material throughnon-electronic means, physical means, we believe that each 1% conversion isequal to $5 million of additional revenues to the company.

David Cohen - MidwoodCapital

Okay, and if you look say Q3 versus the start of the year,what kind of shift have you seen in percent of traffic that’s gone digital orelectronic delivery versus physical delivery in the HD space?

Scott K. Ginsburg

Well, you know, I’m not sure it’s that significant, David,in terms of -- what we’re looking at now is that there’s more and more TVstations turning on their HD capacities. We are working with well over 100networks currently to get them up and running on our electronic solution and wethink that as we move to the future, we’ll see more electronic deliveries.

But the numbers we use were that there would be about a $5million delta for each 1% additional HD traffic. So if you want, that’s anotherway of saying this year, we think about 1%, maybe slightly more, will be HDcompared to where we think we’ll be next year and the year beyond, which ismore and more of that traffic going in the HD mode.

David Cohen - MidwoodCapital

Okay, so it’s only -- so I guess it’s two questions; theshift, it’s from standard def to high def and you only see that as being at avery low level, so there’s still a lot of upside, and then still today morephysical delivery of that HD, of HD spots versus an electronic delivery?

Scott K. Ginsburg

That’s correct.

David Cohen - MidwoodCapital

Okay. Thanks, guys.

Operator

Thank you. The next question comes from the line of DarrenAftahi from ThinkEquity. Please proceed with your question.

Darren Aftahi -ThinkEquity Partners

Good morning, guys.

Scott K. Ginsburg

Are you in Minneapolis?

Darren Aftahi -ThinkEquity Partners

Yes, I am. So a couple of questions here. I just want to beclear; so in your prepared remarks, you talked about 1% implying $3 million to$5 million of HD growth. I mean, is it three, is it five? I’m just trying toget my handle around -- my arms around your ’08 guidance. Are you guys seeinganything in sub-prime, a softening economy that would imply a more conservativeestimate for advertising going into ’08? I’m just trying to get my arms aroundmargins and things of that nature for your ’08 EBITDA guidance.

Scott K. Ginsburg

Our visibility into ’08 revenue really does not give usenough information to know whether the sub-prime and the pronouncements by theFederal Reserve and whether we are going to lower interest rates and what thedollar is doing. We had to take our experience based on an election year cycle,Olympic cycle, and what we are seeing in terms of HD adoption on behalf of ouradvertisers, content providers, and how we are moving it through the network.

We didn’t -- our advertising community is so diverse that noone sector right now is controlling and certainly not the mortgage universe. Itdoes not control in any way -- it has no real significant impact directly onthe number of commercials that we are able to distribute or the other contentthat we distribute through our Pathfire network.

Darren Aftahi -ThinkEquity Partners

Okay, and then two other questions; one, what was theorganic growth in the quarter?

Omar A. Choucair

During Q3, when you look at the year-over-year or pro formarevenue growth, the number was basically flat and the reason it was basicallyflat is that in the Q3 period of 2006, that was probably our most significant-- well, one of the significant quarters along with Q4 in terms of politicaladvertising in 2006. I think we had already mentioned this in the previouscalls during 2007 over the last three quarters that we were up against somepretty difficult comps during Q3 and in Q4, so actually we’re pretty happy thatduring Q3, we were basically at a flat number.

Scott K. Ginsburg

And in fact, I think we said something else -- I think wesaid that it would be the first year that in a non-election year, our organicrevenues would be higher than they were compared to a political year, that wehad actually for the full year, our revenues would be higher. So that’s also ananomaly for us, and it’s a very good and positive sign for us.

Darren Aftahi -ThinkEquity Partners

And then in terms of absolute dollar HD revenue, remind me-- it seemed like it flattened quarter on quarter. Is that correct?

Scott K. Ginsburg

That’s correct. Third quarter, as you’ll recall, Darren, isreally the summer season and so when you say it flattened, we had a little morethan $1 million in each of the second and third quarters. And then, as weapproached fourth quarter, we’ve made a statement today that we see a reallygood start to the quarter and we think it’s trending up again as we’ve hadadditional stations and additional programming adopting the HD mode.

Darren Aftahi -ThinkEquity Partners

So we can infer from what you are saying that it’s moreseasonal than anything on a reversal on the HD front?

Scott K. Ginsburg

I think the issue of summer reruns and what kind of copy wascoming from the advertisers is true, and also a lot of our advertisers haveduring the year been going through their workflows and, if you want to call itproof-of-concept, but making sure that they can get their HD commercials shot,finished, and distributed and the played over the air in HD. That’s been anongoing process so that virtually every one of our top advertises now have gonethrough that entire process some time during the year 2007 so they are readyfor 2008 and beyond.

Darren Aftahi -ThinkEquity Partners

And then finally, so you have your partnership with Viewpointbut a lot of the major [CDNs] are talking about migrating traffic to high defgoing forward and the battle for the living room. Are you guys pursuing anyrelationships with people like Akamai or Limelight or Level Three in terms ofessentially being a digital ad network with those parties?

Scott K. Ginsburg

We are having a number of discussions and unfortunately, I’mnot privileged to tell you exactly who we are having discussions with, but wedo see DG FastChannel having to move from our media services business, in whichwe are distributing ads to traditional and to old world media, and moving nowmore into the position of being able to serve these ads to others or throughour relationship with Viewpoint and others to be more of an ad-serving network.

Darren Aftahi -ThinkEquity Partners

Okay, great, and nice win by the Cowboys.

Scott K. Ginsburg

31-20, I think. Thanks, Darren.

Operator

(Operator Instructions) And the next question comes from theline of Swaraj Chowdhury from Dalton Investments. Please proceed with yourquestion.

SwarajChowdhury - Dalton Investments

Good morning. You said your EBITDA for the quarter was $7.8million. Can you take me through what was the interest, CapEx, and taxes forthis quarter?

Omar A. Choucair

Sure. The CapEx was roughly $1 million for the quarter andthe interest was approximately $950,000, and the depreciation and amortizationamount was roughly $4.0 million.

Swaraj Chowdhury -Dalton Investments

And you paid no cash taxes for this quarter?

Omar A. Choucair

I think we paid our estimated AMT, which is alternativeminimum tax. You may remember that the company has a significant number of netoperating loss carry forwards, and so the company is just in the mode of payingAMT tax instead of a regular taxpayer.

Swaraj Chowdhury -Dalton Investments

And the guidance that you have given for 2008, what kind of-- you have done a lot of acquisitions in the last few months. What was theorganic growth you are assuming between 2007 and 2008 in all the businesses?

Omar A. Choucair

I think when you look at all the businesses, it was -- youjust look at the range of the numbers that we have, it was --

Scott K. Ginsburg

Eight to 10%.

Omar A. Choucair

Yeah, I was going to say almost a double-digit revenuegrowth.

Swaraj Chowdhury -Dalton Investments

Organic growth in [aggregate] of all businesses?

Omar A. Choucair

That is correct. That’s on an apples-to-apples, on a pure --if the companies were in both 2007 and 2008 for the full 12 months.

Swaraj Chowdhury -Dalton Investments

Okay. Give me a little more detail about your balance sheet.You said your total debt right now is $54 million and cash is about $18million. Is that debt of $54 million is after all acquisitions and assumed debtof those acquisitions? Or it is going to rise from here?

Omar A. Choucair

No, that outstanding debt of $54 million is reflective ofall the transactions that have been closed at the end of September 30th of2007. It’s comprised of a revolver and a term loan. It’s a five-year term loan.

Swaraj Chowdhury -Dalton Investments

Right, right. And also, you filed a shelf registration forissuing more stocks and also you negotiated a new credit facility. Looking intothat, it looks you are planning to raise a very substantial amount, in excessof $100 million. What is the objective of this and what kind of opportunitiesthat you think you’ll be going for?

Omar A. Choucair

Well, let me take that in two parts; I think from a company,as Scott mentioned, that we haven’t reached the end of our growth cycle. Ithink from a financial point of view, from the CFO’s office, I think a companyalways wants to have as much flexibility as possible and in terms of filing theshelf, we’ve always had an unwritten policy that we always want to have a shelfavailable. And since we were in the SEC all during the summer with thePoint.360 transaction, we really weren’t able to file the shelf after we hadpulled it down a year ago.

I think from my perspective, we had an opportunity to takeadvantage of the capital markets in the summer, which obviously those marketshave tightened a bit, so we were glad that we were able to take care of thebalance sheet and clean up the capital structure with our credit facility. Andthen we just need to always have availability under an active shelf.

Swaraj Chowdhury -Dalton Investments

Okay, so when do we get to know that you are planningsomething? Will it be first quarter of ’08, do you think, or before that?

Omar A. Choucair

It’s really hard to talk in terms of timing. As Scottmentioned, timing is always something that we just need to be prepared for. Ithink as long as the company continues to generate EBITDA and generate freecash flow, than I think we’ll be in a good position.

Swaraj Chowdhury -Dalton Investments

Right, but the debt on the balance sheet is rising. Whatlevel of debt to EBITDA you are comfortable with?

Scott K. Ginsburg

Let’s be clear about one thing; the coverage of our debt hasbeen going down steadily over a period of two years, of our debt to EBITDA.It’s not rising. The total debt may be rising but not the comparison of EBITDAto total debt.

Omar A. Choucair

Just to accent on Scott’s comment, at the end of September,our debt to EBITDA is about 1.5 times, which in terms of historically lookingat the company, that’s a very low debt leverage in terms of looking back overthe last two or three years, so we feel confident with our banking group and wefeel confident with the model that we have going forward.

Swaraj Chowdhury -Dalton Investments

You are comfortable with constantly changing capitalstructure because of the dilution of stock and increased debt because you areon a growth cycle. But you feel comfortable at the end ’07 that you are at yourdesired levels.

Scott K. Ginsburg

Well, you’re asking us do we do an accretion analysis beforewe buy something or before we take on debt or before we issue securities, andthe answer to that is obviously we do. This is -- there’s two issues alwaysinside of any growth company and that is, is this part of building anenterprise or is this part of building shareholder value? And I can assure youthat shareholder value comes first and in all our considerations.

Swaraj Chowdhury -Dalton Investments

Okay, that’s nice to hear. Okay, another question I had wasI think at the beginning of 2007, because your business is highly fixed cost innature, we understood that around $50 million or $52 million is your totalfixed cost of operating your business and anything above that is straight,comes to the profit line. After all the acquisitions, where does that fixedcost number go up to? Any approximate number will do.

Omar A. Choucair

I think in terms of looking at what we reported for 2007 orlooking at what we reported for 2008, I think that number is around $72 millionto $75 million, somewhere in that range.

Swaraj Chowdhury -Dalton Investments

Okay, that helps. And your HD revenue is really not risingthat fast as we were thinking. Is there any particular reason for that? Or youthink it will take a little longer? I want to know about the pricing of HD.Have you been seeing -- volume and pricing, basically, are you are seeing declinein pricing and rise in volume, or rise in both? What are you observing? Thetotal level is too small, that’s what I think.

Scott K. Ginsburg

I’m not sure what your opinion is, but we see the HD volumesrising. We see the prices that we’re charging holding steady. We see increaseddemand in 2008 and, as I mentioned, we are now within 63 weeks or 64 weeks ofthe HD standard being fully adopted and the analog signals having to beforfeited back to the government.

We’ve been tested a number of times on our view of when weare going to get this revenue, how it is going to affect our model, and it’s --for us, it seems like an eternity but if you really look year over year, thingshave gone extremely well. We are the ones establishing the standards, meaningour company establishing the standards, between the advertising community andthe broadcasters, between the content providers, on behalf of syndication.

Recently, I think during the third quarter, we began sendingTwo And a Half Men in syndication out to almost 40 TV stations for the firsttime, so I think the HD experience is going extremely well.

Swaraj Chowdhury -Dalton Investments

Right. Okay, and my last question is your NOLs, how much itis right now and how long you think you won’t be paying taxes -- I mean, fulltaxes?

Omar A. Choucair

I think at the beginning of the year, the company hadcombined between $80 million and $85 million to $90 million of NOLs, and Ithink we’ll continue to be able to utilize those NOLs over the next five to sixyears.

Swaraj Chowdhury -Dalton Investments

Okay. Thanks a lot.

Operator

Thank you. The next question comes from the line of TomEagan from Oppenheimer. Please proceed with your question.

Thomas Eagan -Oppenheimer

Thank you very much. Two quick questions; Scott, could youtalk about what you may expect in terms of the increase in the volume of adunits in 2008 with the Olympics and the elections? And then I have a follow-up.Thanks.

Scott K. Ginsburg

I’m not sure that we have an exact view of the number ofunits, Tom, and have put that anywhere in our models before or after. We lookat this as the advertisers, how active we think they are going to be and inwhich quarter, so we have some decent views but they are not 52-week contractsin which we can really chart that out specifically by week, by month and byquarter.

What we know is that a number of our advertisers intend todistribute in 2008 all of their material in HD as opposed to 2007 in which they were gettingstarted or sporadically did a proof of concept, or as football season gotstarted for fourth quarter immediately got more involved in HD.

With respect to the election cycle, four years ago -- well,I should say not four years ago; three years ago, which will be four years agonext year, we distributed the preponderance of the political advertising onbehalf of both the Democratic Party and Republican Party for national andstatewide elections. So we anticipate, based on our conversations with ourcustomers, that that will occur again.

As you well know, all these primaries are heating up alittle earlier than they did in the last election cycle and of course, that’s agood thing for us. And we also know there is going to be record fundraising formedia this year, this election year and again, that’s a good thing for ourbusiness.

Thomas Eagan -Oppenheimer

Great, thanks. And then Scott, you mentioned VOD and mobile.I guess if you could just talk a little bit about mapping out the next coupleof years; is ’08, for example, is that the year for online or for HD? And thenis ’09 really a VOD and mobile?

Scott K. Ginsburg

I think in terms of revenue growth, that’s true. I think2008 and 2009, we’re going to continue to see a nice ramp-up of our HDbusiness. At the same time, we have shifted the company’s resources extensivelytowards our digital asset management and our multi-platform distribution. Andthe way we’ve done that is that we’ve literally changed everything about ourITIS structure, our software development, and the products that we’redeveloping for the industries affected.

We now have almost 100 people working full time, whetherthey be in our Dallas or Atlantaoffices or now over in [inaudible], in our off-shore development. And thatgives us the flexibility to get our software, which is our order entrysoftware, our digital asset management software and our distribution to be ableto tie all this together so that I think 2009 would be more of our acceleratedgrowth rates on behalf of the online and the advertising and mobile advertisingand so forth.

Having said that, I think that you can’t underestimate, andof course, as you know, Omar and I don’t overestimate, the impact of HDrevenues. It’s just getting closer and closer to that moment when I think wewill see some significant revenue enhancements.

When we look at our revenue models, as you can see, we aremoving it more from a static revenue model up to more of a dynamic revenuemodel, showing what we’re willing to commit to for our minimum performance fornext year. We think it shows 8% to 10% revenue growth and it shows a high-teenEBITDA growth. So the company for the first time in its history has now made aprojection and we think that we’ll be able to meet those projections as minimumperformance standards.

Thomas Eagan -Oppenheimer

Great. Thank you very much.

Operator

Thank you. We have a follow-up question from David Cohenfrom Midwood Capital. Please proceed with your question.

David Cohen - MidwoodCapital

With the series of acquisitions you’ve made, would you saythat it’s changed the nature, the degree of the operating leverage in thebusiness? So as I look at the 2007 or 2008 revenue change versus the EBITDAchange, given -- has that been affected by the mix that you have now, like thenew business, Pathfire, Point.360 actually given their maybe more variable coststructure compared to your core DG platform?

Scott K. Ginsburg

I think that if you look at the Pathfire model, it is not asrobust an economic model as the advertising distribution business. We’ve beentalking extensively both internally and externally to our customers, to the TVstation groups, and internally on changing that business model. We’ve begun totake action this quarter, after having our arms around that business for aboutthree or four months, on streamlining that business, David.

I think that no, it does not have the economics that ouradvertising distribution business does and that has retarded slightly ourEBITDA margins overall for our business.

But having said that, I think that as we look to the futureagain with the ability to distribute HD advertising through that series ofrelationships and with our technology, we think we can significantly change thedynamics of that business.

David Cohen - MidwoodCapital

And another follow-up on the Point.360 business that youacquired, have you made meaningful -- since they didn’t have a network of theirown in that business, have you made a meaningful shift of the volume of theirtraffic that flows electronically versus via tape?

Scott K. Ginsburg

Well, you know, we have to deal with customer transitionsand as we have with each of our other acquisitions, the most important thing weneed to protect is our customer list and the way we do that is by getting veryup close and personal with the customers, make sure they understand thetransition, everything from rate cards to how they want to ingest their mediato how they want to get it distributed over our electronic network.

And so that’s an ongoing process during fourth quarter andfirst quarter of next year, and we would expect by the end of second quarter tohave all that traffic fully adopted inside of one our electronic networks.

David Cohen - MidwoodCapital

Great. Thanks.

Scott K. Ginsburg

Operator, we need to move on to a meeting, so what we wouldlike to do at this point is again thank everybody very much for their questionsand answers. Thank you for being here early this morning and on somewhat shortnotice, and we look forward to reporting back to you further on our plans andresults we are achieving. We are presenting at Oppenheimer’s third annualdigital media conference at 9:50 a.m. Eastern Time and there is a webcast ofthat presentation at www.dgfastchannel.com.

Again, thank you very much. We look forward to talking toeach and every one of you again very soon.

Operator

Thank you. Ladies and gentlemen, that does conclude theconference call for today. We thank you for your participation and ask that youplease disconnect your line.

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Source: DG FastChannel Q3 2007 Earnings Call Transcript
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