Crown Media Holdings Inc. (NASDAQ:CRWN)
Q1 2008 Earnings Call
May 7, 2008 11:00 am ET
Henry Schleiff - President and Chief Executive Officer
Brian Stewart - Executive Vice President and Chief Financial Officer.
Mindy Tucker – Investor Relations
Alan Gould - Natexis Bleichroeder
Salvatore Muoio - SM Investors
Good day, ladies and gentlemen, and welcome to the Crown Media first quarter earnings conference call (Operator Instructions)
I would just like to take a moment to remind everyone that statements made on this conference call may be forward-looking statements, as contemplated by the 1995 Private Securities Litigation Reform Act, that are based on management’s current expectations, estimates, and projections.
Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied in the forward-looking statements.
Such risks and uncertainties are detailed in the company’s filings with the Securities and Exchange Commission, including the risk factors included in the company’s 10-Q report for the three months ended March 31, 2008 and the company’s 10-K report for the year ended December 31, 2007.
Any forward-looking statements are made only as of the date of this conference call based on information known to-date to the company’s management. The company is not undertaking any obligation to update any forward-looking statements.
I would like to turn the call over to Mindy Tucker.
Thank you, operator. Good morning, everyone. Welcome to Crown Media’s first quarter conference call. With me today are Henry Schleiff, Crown Media’s President and Chief Executive Officer, and Brian Stewart, Executive Vice President and Chief Financial Officer.
Henry and Brian will make some comments about the operating results and financial performance for the quarter and then we’ll open up the call for questions.
I would like to remind everyone that our press release, which contains information on non-GAAP measures, was distributed earlier this morning and is available through the Investor Relations section on our website at hallmarkchannel.com. In addition, our 10-Q will be filed later today.
Now, I’d like to turn over the call to Henry Schleiff.
Mindy, thank you. Good morning, everyone, and thank you all for joining us today. We have just completed the first quarter of 2008, once again with record results in all areas. Our ratings continue to build upon our strong performance during the holiday season in 2007.
We have now completed the renewals of all of the distribution agreements that expired in 2007, which have contributed to our growth in subscriber license fees. We launched the high definition version of Hallmark Movie Channel, the emerging top HD choice for viewers, with the greatest family movies of all time.
All of these very positive results, combined with a robust scatter market have contributed to the tremendous growth in our advertising revenues.
Indeed, looking at our bottom line, Crown Media had a very successful first quarter. I will use this report to give you an update and provide specific details. Last month, I reported to you that Hallmark Channel finished 2007 as its highest rated year, including its highest rated quarter, month, week and day.
We have maintained this tremendous momentum and success through the first quarter of 2008 with the delivery of our highest first quarter ratings ever.
More specifically, we have also maintained our position as a top-ten rated cable channel with the Hallmark Channel ranking seventh in primetime, with a 1.2 household rating and 10th in total day with a 0.7 household rating for the quarter.
Moreover, I should note that our ratings remained strong throughout the entire first quarter, as reflected by the fact that for the last week in March, Hallmark Channel ranked 7th in primetime and 8th in total day.
Perhaps even more importantly, we experienced double-digit growth in nearly every demographic segment, while still generating the second highest quarter for household delivery in our network’s history.
Indeed, March marks our 22nd consecutive month in the top 10 for primetime. I think it’s obvious by now that it is exactly where Hallmark Channel intends to stay.
Once again, this consistent success is tied directly to the popularity of our original programming and to our ability to maximize ratings with a mix of classic series, feature theatrical films and cost efficient marketing.
During the first quarter, we premiered 7 original movies including 3 new installments in our very successful original Mystery Movie series. These original movies hit a new ratings high with an average of 2.3 household ratings, an increase for an average of 2.0 household ratings for all of 2007.
We started the quarter in January with Charlie & Me, which generated a 1.9 household rating beating out even popular theatrical films including My Big Fat Greek Wedding and Ocean’s 11.
The Good Witch earned a spectacular 3.8 household rating, making it the second highest rated original movie ever to debut on our network and enabled it to win its time period for households in all key demographic groups against all other ad-supported cable networks.
Daniels Daughter was another success, with a 2.7 household rating and was the highest rated ad-supported cable movie of the week. Bridal Fever, which aired in February, earned a 2.2, making it the highest rated ad-supported cable movie of the day, beating box office hits such as The Pacifier on USA, What Women Want on tbs and even The Wedding Planner on tbs.
Our Mystery Movies also perform well, and continue to build their audience. Jane Doe: Eye of the Beholder with a 2.0 household rating was our highest rated Jane Doe ever.
Clearly, our strategy of working with a number of new and talented television movie producers is paying off in huge ratings dividends for both our viewers and for our network’s advertisers.
I would also like to take a moment here to mention the important contributions of our marketing campaigns. As you know, Hallmark Channel is extremely prudent in its marketing spending.
While many of our competitors utilize much larger marketing budgets as well as cross promotional opportunities with related networks, our marketing department stretches a relatively small budget with very creative and targeted campaigns.
In the first quarter of 2008 we focused on expanding our audience of women 25 to 54 for two of our originals: The Good Witch and Bridal Fever. In each case, we utilized an off-air campaign and achieved two- and three-fold increases in our prime time key demographic in household period averages.
Our marketing group really knows when and where to put our marketing dollars to work, which of course, is the key component to the cost effectiveness of our successful business model.
In early April we launched Hallmark Movie Channel in high definition, a state-of-the-art cable network featuring the greatest family movies of all time. Hallmark Movie Channel HD is dedicated to bringing viewers a mix of classic theatrical feature films, presentations from the acclaimed Hallmark Hall of Fame library, and the very best of our own Hallmark Channel original movies, and a variety of special events.
By the way, Hallmark Hall of Fame movies will appear every Sunday night in primetime, just where they will be the exclusive destination with a high definition premier of these award-winning programs, which have been one of the very cornerstones over the years of the Hallmark brand.
This new channel will also spotlight major quarterly programming events, such as the four-hour miniseries, Son of the Dragon starring David Carradine. Our schedule for the remainder of 2008 is filled with many more original movies which we are confident will continue to draw audiences of all ages.
We are particularly enthusiastic about our summer schedule kicking off just this month. With new installments in our Murder Mystery series featuring Dick Van Dyke, Lea Thompson and John Larroquette; and the premiers of exciting originals starring exceptional talent such as Jacqueline Bisset, Daryl Hannah, Armand Assante, Academy Award winning actress Vanessa Redgrave, and Maximilian Schell as well as specials with the ever-popular Regis Philbin.
We are also expanding into other areas in the digital world and attracting a younger audience. Just this past January, Hallmark Channel delivered its highest website audience ever, beating Lifetime and putting it on a par now with both ABC Family and TNT.
I should also note here that our website audience has a very attractive, younger, upscale profile with a median age of 49. I believe this demonstrates our ability to tap in to all forms of media in alternative platforms to create increased awareness and even further extend the viewer experience of our audience.
Our results in terms of distribution have been equally remarkable. Hallmark Channel currently has 84 million subscribers representing an increase of 11% over where we were one year ago.
Our attention over the last several months has properly been focused on the renewal of our distribution agreements. And with that achieved, we can expect growth to be slow but sure in our status now as a fully distributed network.
Indeed, there are just a handful of networks with over 90 million subs and, while we certainly plan to be one of them through hard work and determination, it will just take a little time.
Let’s talk briefly about these various renewals. Last year we announced new distribution agreements with Comcast accounting for 22 million subs; EchoStar with almost 13 million subs and NCTC, whose members account for over 7 million subs.
As I reported to you on our last call in January of this year, we announced the renewal of our distribution agreement with Time Warner, which accounts for 13 million Hallmark Channel subscribers and provides the opportunity for distribution of Hallmark Movie Channel in high def as well as standard.
In March, we announced the renewal of our distribution agreement with DirecTV, accounting for nearly 17 million Hallmark Channel subscribers and which also provides the opportunity for distribution of Hallmark Movie Channel in both standard and high definition.
And just last week we announced the renewal of our distribution agreement with Cablevision, with 2.5 million subscribers in some extremely important markets in the New York Metropolitan area. Cablevision will also have the right to distribute both the standard and high def versions of Hallmark Movie Channel.
In total, these renewals will contribute to the continuing growth in our subscriber revenues. Although we still believe that Hallmark Channel is undervalued relative to its competitors, we are certainly pleased with the round of substantial progress that we have made here.
In addition, we have successfully solidified our distribution base amidst substantial doubt regarding our ability to do so. We have done this with all of our distributors and on reasonably favorable terms.
Our next renewal does not come up until the end of the year. It will be with Charter, which accounts for just under 5 million subs. I can assure you that our distribution team has already initiated these conversations and I am confident that we will again reach an agreement on mutually satisfactory terms.
Finally in this area just last month, as I mentioned, we launched the high def version of Hallmark Movie Channel, home of the greatest family movies of all time. With 8 million subs, this new second channel is just getting started having been launched on EchoStar with 4 million subs.
We are also distributed on Time Warner in San Antonio, and just last week Time Warner launched Hallmark Movie Channel on their high def network throughout New York City.
We will continue to push for the expanded distribution of Hallmark Movie Channel throughout the U.S. Indeed I very much look forward to reporting the continued growth in subscribers on this new and uniquely appealing network.
Our strength and success in programming and distribution have contributed to the extraordinary growth we have had in advertising revenues. For the first quarter, advertising revenues increased 23% over the first quarter of 2007.
Our CPMs in the scatter market were up 71%, over the upfront, continuing to significantly outpace the market as reflected in the fact that many of our competitors in the cable industry were typically up only 15% to 20% over the upfront.
We have been successful in capitalizing on several different opportunities which enabled us to enjoy this strong growth in our revs.
Many of our incumbent clients who buy in this scatter market, specifically in the entertainment, travel, financial services and insurance sectors have expanded their buying and we have been able to obtain a greater percentage of this additional business.
In addition, we’ve expanded our client base itself with several new advertisers including Marshalls, Frito-Lay, Motel 6 and Match.com.
All of these advertisers are developing a stronger conviction in the value of targeting the baby boomer market and of course, they recognize that Hallmark Channel is the ideal vehicle to reach this increasingly important demographic.
As I speak today our advertising sales team is busy with preliminary meetings for the upfront process for the 2008-09 broadcast season. While it is still too early to make any meaningful predictions, I can say that the appetite has never been stronger for Hallmark Channel, as well as Hallmark Movie Channel.
Throughout the past year, the scatter market has been extremely robust and we feel that the market will continue to support the kind of growth we’ve seen in the past. Indeed on the heels of such a strong scatter market, we are highly confident about our prospects for this upfront season.
As I previously reported, research results for the Hallmark Channel go a long way in supporting our selling efforts. For the first quarter of 2008, Hallmark Channel continued to dominate in ad effectiveness, earning the second highest ranking for live-plus-3 commercial ratings, with 95% audience retention.
This is a relatively new industry standard, which refers to the ratings for commercials viewed during the live broadcast of a program plus time-shifted viewing for an additional 3 days.
Hallmark Channel has also earned the top spot in length of tune for primetime with an average length of tune-in of 24 minutes. These rankings include all major distributing cable and broadcast networks.
In addition, according to Nielsen time shifting data, movies are the top entertainment genre viewed live, ahead of sports and second only to news. Another area of research that we are focused on is exactly who is watching television today.
In an effort to help our advertising clients evaluate the evolving media environment, Hallmark Channel commissioned a study with the respected industry research firm of Millward Brown to consider the adoption of new technologies, viewer engagement, buying power and brand loyalty by baby boomers versus millennials, the 14 to 31-year-old offspring of baby boomers.
What we have found is a surprisingly large media generation gap. Baby boomers, those who are 40 years and older, are more traditional in their viewing habits. They watch more television, tend to avoid using DVRs, are less likely to view their media on alternative devices, and are more attentive with longer length of tune-in.
Millennials, on the other hand, are earlier and more active adopters of new technologies − viewing media on the internet, MP3 players and cellular phones; are more likely to skip commercials; and have a shorter attention span.
Two data points that speak loudly to advertisers are that baby boomers are more affluent, tending to be primary wage earners. And contrary to traditional views, they are very likely to switch brands often directly as a result of a commercial message.
We have been tremendously successful in taking these results and communicating them to existing and potential advertisers to demonstrate the incredible power of Hallmark Channel, its brand and its audience.
Indeed these are the kinds of results that have driven the double-digit increases in our advertising revenues over the last several years, and I believe will continue to drive the solid growth for the foreseeable future.
And now I would like to turn things over to our CFO, Brian Stewart.
Thanks, Henry. As Henry has indicated in the first quarter of 2008, Hallmark Channel continued its strong ratings performance, had a great deal of success in the advertising sales scatter market and enjoyed the financial benefit of our recently renewed distribution agreements.
These factors contributed to a very strong first quarter of 2008, including a 32% annual quarter to quarter increase in revenue, positive EBITDA and positive cash flow.
The specific numbers for the quarter: total net revenue of $70.6 million increased 32% from $53.6 million in the first quarter of 2007, which is the largest quarterly percentage increase in the network’s history.
Total subscriber revenue of $13.9 million was up 85% from $7.5 million in the first quarter of 2007. This increase reflects the rate increases within the recently renewed distribution agreement and contractual rate increases from our other agreements.
As we previously discussed, we expect Crown Media’s full year subscriber revenue to increase substantially over 2007 as a result of these new agreements and quarterly revenue for the rest of 2008 will be comparable to that of the first quarter.
Total first quarter advertising revenue was $56.4 million, an increase of 23% from $45.9 million in the first quarter of 2007. As Henry mentioned, the very strong scatter market has resulted in significant CPM increases over above 2007 rates and rates for inventory in the first quarter of 2008 that we sold in the upfront.
Crown Media’s advertising revenue was also driven by increases in ratings, nominal increases in distribution and increased advertising sales on the Hallmark Movie Channel.
The first quarter continues the network’s history of tremendous advertising revenue growth, and we expect revenue growth rates in 2008 to continue in the high-teens over 2007.
On the expense side, total cost of services for the first quarter of 2008 were $38.9 million, down from $50.8 million in the first quarter of 2007. Within costs of services, first quarter of 2008 programming expenses decreased 11% to $35.4 million from $39.7 million in the first quarter of 2007.
The decrease in the first quarter programming expenses resulted primarily from the termination of our programming agreement with the NICC. Adjusted for the NICC programming, our first quarter 2008 programming expenses would have increased by about 3%. We continue to expect nominal increases in our full year 2008 programming expenses versus 2007.
First quarter of 2008 costs of sales were $7.8 million lower due to the absence of subscriber acquisition fee amortization as the launch support payments that we made over the years are now nearly fully amortized. The remaining amortization is being netted against our revenue.
Other costs of services including the amortization of our satellite capital leads increased 7% from $3.2 million in the first quarter of 2007 to $3.5 million in the first quarter of 2008. The increase was primarily due to a $176,000 non-cash impairment on a film asset.
SG&A expenses for the first quarter of 2008 totaled $13.5 million, down 5% from $14.2 million in the first quarter of 2007, primarily due to a reduction in compensation expenses related to the company’s stock appreciation rights plans.
Marketing expenses for the quarter were $6.4 million, an increase from the $4.2 million of marketing expense in the first quarter of 2007. In the first quarter of 2008, we supported two original movies, The Good Witch and Bridal Fever, with substantial off-air media campaigns compared to first quarter of 2007 when we had only one such campaign.
As we’ve discussed our marketing expense trends year-over-year are subject to the timing of these large purchases of consumer media, and we do expect 2008 marketing costs to increase at single digit rates over 2007.
Our adjusted EBITDA for the first quarter of 2008 was a positive $14.5 million versus a first quarter 2007 loss of $5.1 million.
Cash provided by continuing operating activities totaled $306,000 for the first quarter of 2008 compared to a use of cash from operations of $12.8 million for the same period of 2007.
Crown’s net loss for the quarter was $14.7 million or $0.14 a share versus a loss of $40.2 million or $0.38 a share in the first quarter of 2007. We continue to expect our EBITDA to exceed $50 million in full year 2008.
From a liquidity perspective as we discussed on our fourth quarter call, we have extended the term of our credit facility to May 31 of 2009 with an initial commitment of $90 million and commitment reductions scheduled at the end of each quarter of 2008.
In the first quarter of 2008 we borrowed $2 million, bringing the total amount drawn on the facility at March 31 to approximately $72 million. Subsequent to March 31 we’ve made additional reductions to the facility and currently have an outstanding balance of about $62 million and we’re on schedule to stay within the second quarter commitment reduction to $60 million.
So in conclusion, with the benefit of our new distribution agreement, first quarter of 2008 represents Crown’s first quarter with a financially positive adjusted EBITDA.
As we discussed, the continued significant growth of the Hallmark Channel advertising revenue, contributions to earnings from our renewed distribution agreements, a continued focus on operational efficiencies and cost management, all combined with the growth potential of the Hallmark Movie Channel in both standard and high definition, all present a tremendous opportunity for revenue and earnings growth at Crown Media.
With that I’ll turn it back to you, Henry.
Thank you, Brian. In summary let’s take a look at what I consider to be the 3 key areas of our business: programming, distribution and advertising. Clearly our programming on Hallmark Channel offers and exciting lineup of original movies, combined with classic series favorites along with popular, theatrical feature films, all of which appeals on a very fundamental level to our ever growing audience.
2008 is off to an excellent start, the highest rate first quarter in network’s history and the second highest rate quarter overall. The tremendous growth Hallmark Channel has experienced in terms of ratings demonstrates that viewers recognize that Hallmark Channel is one of the very few destinations where they are guaranteed a valuable family-friendly viewing experience.
We have developed a brand based upon original and themed programming, complimented by classic series and feature films with a focus on the holidays, with Hallmark Channel as the number one destination for these special events.
We have an ambitious slate of programming scheduled for the remainder of 2008 with 30 original movies in total, more than 2 a month, planned to continue to meet viewer demand for positive stories with wholesome and uplifting conclusions.
We have already added the very popular series 7th Heaven to our schedule earlier this year and have secured the addition of the perennially popular Cheers which will begin airing in October and baby boomer favorites, I Love Lucy, which will be added to our schedule in the beginning of 2009 and Golden Girls shortly thereafter.
Our new sister network Hallmark Movie Channel offers the greatest family movies of all time launched in hi def in April. This channel has a unique appeal and helps fill the void for wholesome, uplifting and appealing entertainment on television across America today.
Certainly our distinctive combination of family friendly programming and a recognizable brand are important not only for our viewers, but also for our advertisers and distribution partners. In that respect, it has obviously been a very successful quarter with regards to our distribution.
Last year we renewed our distributions with Comcast, EchoStar, NCTC. Since the beginning of 2008, we have also renewed our agreements with DirecTV, Time Warner and Cablevision, thus securing our base and doing so on favorable terms, which will support the further growth of both Hallmark Channel and Hallmark Movie Channel.
Needless to say, I’m very pleased with the significant progress we have made in this area. With the success this past year in ratings growth and distribution expansion, it’s really no surprise that we delivered another quarter of double-digit growth in advertising revenues.
Our extremely positive brand image, combined with our distinct ability to attract the baby boomer generation audience with its enormous purchasing power and continued growth adds up to a unique appeal for advertisers.
Both Hallmark Channel and Hallmark Movie Channel were successful in expanding their client base with new blue chip advertising clients from industries across the spectrum. The increasing demand for Hallmark Channel is clear, with CPMs in the scatter market up 71% over the upfront.
As we begin to plan for the new upfront season I am highly confident that we will be able to deliver another year of double-digit growth for Hallmark Channel and continue to expand upon the strong foundation of clients that we have already established for Hallmark Movie Channel.
As we look ahead through the remainder of 2008 and beyond, we will of course continue to be focused on pursuing our goals in a fiscally responsible way, one which enables us to maximize our revenues and reduce our debt, while keeping a close eye on the requisite cost structure of our business.
As Brian mentioned, we have an excellent start to 2008 with significant increases in advertising revenues and subscriber license fees, generating positive cash flow for the first quarter.
Our business model is a very attractive one with a relatively fixed cost structure. Indeed, I believe that we have finally entered a more mature phase in this model with a majority of the increases in our advertising revenues and subscriber fees now falling to the bottom line.
At this point, I will turn these proceedings over to the operator to assist us with the question-and-answer part of the call.
Your first question comes from the line of Alan Gould - Natexis Bleichroeder.
Alan Gould - Natexis Bleichroeder
Thank you. Henry, congratulations on getting all these subscriber deals redone. If I look at the affiliate fee per sub per month it looks like it’s about $0.058 per sub per month this quarter. Is that a good number, Brian, going forward for the full year?
How should we look at that number increasing in the out years? Are these contracts structured in aggregate, so they increase every year or are they’re flat for a couple of years first and then they start increasing − how should we look at that?
Yes, Alan, a good question. As I mentioned, the first quarter of 2008 is a pretty good proxy for the subscriber revenue for the balance of the year. There are contractual rate increases in our distribution agreements. They vary by contract. Also we expect the number of paying subscribers to increase over time.
Over time that number will continue to grow, obviously at a much diminished rate in going forward years versus the increase we have had in 2008. But there are rate increases in all the deals, marginal rate increases, and we do expect our paid subscribers to grow over time.
Alan Gould - Natexis Bleichroeder
Okay. And second question is, you’ve clearly got the ratings in great shape. You’ve got the sub-fees or sub-contracts with the distribution renegotiated. I would think one of the next things would be to try and work on the capital structure. What is your strategy to try and reduce the debt now that you’re showing this nice positive free cash flow or adjusted EBITDA?
As we’ve talked, Alan, the strategy for 2008 was to put in place terms and conditions that gave us the breathing room that we needed. And we’ve got that in the form of the restructured JPMorgan facility. Again, we think we will able to continue to pay that facility down through the course of the year. And that will be the use of most of our free cash flow in 2008.
As we get to very late 2009 and the beginning of 2009, certain of the Hallmark notes turn cash pay and we expect to be able to service those notes.
The expectation is that as we get to early 2009, maybe as soon as late 2008, with a potential rebound of the credit markets, we may be in a situation where we can restructure some of that Hallmark debt into a more traditional third-party debt, but again, that will be subject to some improvement in the credit market.
The good news for us is that to your point, we will continue to increase our cash flow and have the ability to service the existing note that we’ve got in place.
I’d only add, Alan to that. Thank you for your congrats on the renewals. I think that’s a little bit reflected in our strategy overall, with respect to the debt. Meaning that, principally I think one of the headlines − and I don’t want that to get lost in the analysis of the growth in sub revenues − is the securing of the distribution base.
I think our network and I think indeed, much of cable network’s future is indeed on the growth of advertising revenues. And part and parcel of that effort obviously is to have your base secured. In our case now, 84, I think we’re on the way to 90-plus million subscribers.
But I think the principal benefit there is, as I have commented extensively here, is on the extraordinary growth versus the upfront and indeed just on a quarter-on-quarter basis of our advertising revenues. I think we have a very unique benefit in the brand, that Hallmark brand, if you will. I think it is properly complemented by the programming, especially our original movies.
I think clearly, you’re seeing demonstrably the results in terms of ratings of those original movies and of course, the off network series. And I think part and parcel of that is the greater recognition in the marketplace of the baby boomer generation and its importance, I think, in terms of effectiveness for advertisers.
So, I think that research and all of the other component parts put our advertising revenue with a secured base in a strategically very good position going forward. And then, we can look at usage of funds as we continue to grow.
Alan Gould - Natexis Bleichroeder
Henry, speaking of advertising, can you just remind us how much you were able to generate in the upfront market last year?
Yes, I think it was just about $96 million or so.
Alan Gould - Natexis Bleichroeder
Okay, thank you.
Your next question comes from the line of Salvatore Muoio - SM Investors.
Salvatore Muoio - SM Investors
Salvatore Muoio - SM Investors
I wanted to just ask about the cash generation in the quarter. Maybe you could add some color to it, just EBITDA 14.5 adjusted plus 15 to your favor on programming amortization versus outlay, and that’s 30. And then free cash flow was relatively flat for the quarter.
Maybe you can just talk a little bit about the difference and some of the things that make up that line in the table called “changes in other operating assets and liabilities, net of above adjustments.”
Sal, on your first point about the cash flow, the first quarter we believe will be somewhat unique compared to the balance of 2008 where you’ve got a bit of a larger disconnect than we will have going forward between our adjusted EBITDA and our net cash flow.
In the first quarter there were a couple of primary contributors to that difference, the largest of which was the fact that we, to some degree, frontloaded the original production activity for the year. Somewhere between 25 to 30 original movies that we’ll take delivery of in 2008, most of the production activity for those films has begun and is most active in the first part of the year.
So, the first quarter is disproportionately large in our funding of those films. Those films don’t go on our balance sheet as film assets until the windows open on those. So we’ve got a bit of a disconnect between the amortization of the film assets and the actual cash paid against the production of those films.
The second fairly large piece are the bonus payments that were paid in the first quarter of 2008 against 2007 bonuses earned. And then, a third and smaller piece would be payments that we made to the NICC related to the termination agreement.
If you take all of those payments, that contributes, probably $12 to $13 million of the $14 million delta between cash and EBITDA, adjusted EBITDA, and the rest would just be working capital adjustments.
To your second point, around the other amortization type adjustments, there are 3 primary components to that. There was residual and participation expense, non-cash, but our residual and participation expense related to the retained obligations on a library that we sold. That was about $100,000.
There was amortization related to a film asset of about $70,000 and there was an impairment against a film asset of about $176,000. So that’s what makes that, I think about $300,000 of other…
Salvatore Muoio - SM Investors
The other I was referring to was called “changes in other operating assets” of $27 million. How about maybe I’ll ask it a different way. Just for the year, your prior guidance was $50 million of adjusted EBITDA for the year?
Salvatore Muoio - SM Investors
And at that time, you thought your ad revenue would be up approximately 15% on the year. So it sounds like you are thinking you may come in a little ahead of that this year. And therefore, my assumption just from talking with you is that your programming amortization versus cash outlay would still be a positive this year, although not as much as last year.
So I’m thinking perhaps your free cash could be $60 plus this year. Does that make any sense? And does that square with the first quarter numbers at all? This is excluding NICC payments and unusual things that I don’t really think of as operating.
Right, not fully (attracted?) to your $60, but I think in our previous guidance we included some of those adjustments around the programming expenses. The first quarter really affirms the guidance which we had put our earlier which was for adjusted EBITDA north of $50 million and operating cash flow north of $44 million.
Again we feel very good about the quarter. We are tracking with where we thought we needed to be. The first quarter is typically not our highest rated, but our second highest rated quarter of the year. So we feel good about hitting those numbers. But there is a lot of work left to be done. So we haven’t changed our guidance that we had put out earlier.
Salvatore Muoio - SM Investors
All right, thank you.
There are no additional questions at this time.
Thank you very much for taking this call. We look forward to speaking to you on the next earnings call and to another successful quarter and year. Thank you very much.
Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Good day.
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