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DG FastChannel, Inc. (NASDAQ:DGIT)

Q1 2008 Earnings Call

May 8, 2008 11:00 am ET

Executives

Scott K. Ginsburg - Chairman and Chief Executive Officer

Omar A. Choucair - Chief Financial Officer

Patrick Vogt - Director, President and Chief Executive Officer, Enliven

Analysts

Jason Helfstein - Oppenheimer

Richard Fetyko - Merriman Curhan Ford & Co.

Murray Arenson - Ferris, Baker Watts

David Cohen - Midwood

Josh Colson - Millennium Partners

Jim Leahy - Morgan Joseph

Operator

Welcome to the DG FastChannel 2008 first quarter and Enliven transaction conference call. (Operator Instructions) It is now my pleasure to introduce Scott Ginsburg, Chairman and CEO of DG FastChannel.

Scott K. Ginsburg

This morning we announced two significant positive advances reflecting further progress and development for DG FastChannel as the leading digital advertising solution company. We recorded record, quarterly revenue, EBITDA and income and announced that we have reached a definitive agreement to merge with Enliven Marketing Technologies which will immediately make DG FastChannel a leader in the rapidly expanding Internet and mobile advertising verticals.

We’ve been active on many fronts since our last call, as we also move forward with Vyvx transaction, had considerable tracks with our HD offerings and embarked on our plan to strengthen that platform.

Before we proceed further, I would like to ask Omar Choucair to read the Safe Harbor language.

Omar A. Choucair

Our discussion with you today may contain certain forward-looking statements related to the company including the expansion of its digital distribution network and the demand amongst certain clients or digital audio and video media services and its expectations for the pending transactions with Vyvx ad distribution and Enliven. These statements are based on the economic and market conditions as of May 7, 2008 and assume no material changes in economic conditions or other major world events.

The company can give no assurance as to whether these conditions will continue or if they change, how such changes may affect the company’s current expectations. While the company may from time-to-time revise this outlook or issue updated guidance, it assumes no obligation to do so.

Listeners are further cautioned that these forward-looking statements involve risks and uncertainties, which could cause actual results to differ materially from those projected. These and other risks related to the DG FastChannel company are set forth in the company’s filings with the Securities and Exchange Commission.

Today’s call and webcast include non-GAAP financial measures within the meaning of SEC Reg G. A reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance of GAAP can be found in today’s press release.

Scott K. Ginsburg

The highlights of the press releases that were put out today, I’m going to just make several points and then turn over some detailed information to Omar. But as you know if you’ve read the releases that we’ve announced that we’ve signed a definitive agreement to merge with Enliven in a stock-for-stock transaction. It is a strategic transaction for our company and shareholders for several reasons.

One, it will take advantage by growing demand for online media. Two, it broadens our service offerings for our advertising and agency customers. It will create a robust and comprehensive platform, integrated platform for our customers. And through a single work flow platform we will have the ubiquitous reach of TV, radio, print, mobile, the Internet and other digital devices and outlets. And we can take our customers messages anywhere and everywhere.

In a few minutes, I’ll ask Omar again to fill in on the financial details of the merger, but let me turn for a moment to our first quarter results. DG FastChannel reported an excellent first quarter 2008 results that reflect continued success on our mission to serve the advertising community while extracting operating efficiencies and improvements. We continue to enhance our media solutions to make them available to more advertisers and more agencies. Additionally, we have realized significant operating synergies and cost efficiencies from the recent acquisitions.

We reported record first quarter revenues, EBITDA and operating income. We reported record quarterly HD revenues of approximately $3.7 million. We concluded our program to realize approximately $7 million of annual operating synergies from our 2007 completed transactions. And today, we’re reaffirming our 2008 financial guidance including all the transactions that were completed in 2007.

We will discuss all these efforts in greater detail shortly, but first let me ask Omar to review the first quarter ‘08 financial results.

Omar A. Choucair

Thank you for joining today’s call for the activities that we’ve had over the last couple of days. As you’ve read, the company did enter into definitive agreement to merge with Enliven and I’m just going to cover a couple of the high points.

The company will issue approximately 4.5 million DGIT shares, which were exclusive of the shares that are currently owned by DG to the Enliven shareholder base reflecting an exchange ratio of 0.51 shares of DG for each share of Enliven.

The DGIT shareholders will own approximately 80% of the combined common stock of the company and the Enliven shareholders will own the remaining 20%. The company DG will assume to retire approximately $4.5 million of fair value of Enliven debt.

The combined company will have nine total Board members and the Enliven company group has reflected the two new Board members which we have mentioned inside the press release. The company intends to file a Form S-4, which is basically a joint proxy within the next several weeks. And we anticipate the process to conclude sometime in Q3 with a closing sometime during that period.

In terms of the financial reviews, just want to give people just a quick highlight in terms of the Enliven reported numbers and just some thoughts in terms of what we think 2008 would look like and some ideas about 2009.

The Enliven entity reported pro forma revenue in 2007 of about $23.3 million, which reflects the completed transactions that they had closed down in Q4 of 2007. In terms of what we are looking at for 2008, we believe that Enliven as a standalone entity will do anywhere between $25 and $26 million of revenue in 2008.

And as the quarter comes through in Q4, we believe as the company is combined with DG we think on a run rate that number should be $28 to $30 million in 2008. And as we look into 2009, we would expect that entity and the performance of that company to be at 20% plus in terms of what we’re expecting for the business in 2009.

So hopefully that will give you just some high level views in terms of the financial impact on Enliven. And now what I’d like to do is just spend a few minutes and talk about Q1 particularly on a historical basis. As Scott mentioned, Q1 was a very good quarter for us. We reported $29.2 million of consolidated revenues compared to $19.9 million in the year ago first quarter, an increase of 47%.

The first quarter EBITDA was $10.4 million versus $6.6 million representing a 58% increase. In the first quarter of ‘08, we reported income from continuing operations of $3.2 million or $0.18 per net share versus $2.3 million in the previous quarter.

Our gross margins were approximately 60% in Q1, versus 55% in Q1 of 2007. I think that just continues to highlight the leverage that we have in the business and the fact that we have concluded our program of extracting the synergies from the previous transactions.

Related the Q1 EBITDA margins were 36% reflecting the continued growth in the digital network and the fact that the majority of the costs that we have inside the company are fixed. Interest expense was $763,000 versus a much smaller number in the year ago period, which is not subject to the debt that we pulled down in Q1.

Looking at the balance sheet, we had outstanding debt of $65 million which is comprised of a term loan and as you probably remember, we did execute a new senior credit facility for $145 million during the quarter and resulting from that, we have a $30 million unused revolver and an un-drawn acquisition term loan of $55 million.

We have approximately $34 million of cash and we continue to hold a commitment to fund a bridge loan to finalize the Vyvx transaction, which we think will close towards the end of the second quarter.

Just a few more items, in terms of our CapEx we incurred a little between $500,000 and $600,000 of CapEx in Q1. And we expect based on a couple of different non-recurring items that we will have a larger CapEx number in the back half of the year related to the upgraded HD Xtreme deployment that we had issued a press release for a couple of a weeks ago. And I think we’ve mentioned before, we’re creating or building a redundant ad distribution [inaudible] in Atlanta.

So those two items, which we would call non-recurring, will increase the amount of CapEx that we’ve had over the past year or so. And as it relates to taxes, we continue to record our taxes at an effective rate of 40% of the net income before taxes and we continue to believe in terms of full taxpayer that we will not be a full taxpayer until the end of 2009 or 2010.

And with that, I’m going to turn it back over to Scott.

Scott K. Ginsburg

As Omar’s review and my opening remarks indicates, the first quarter 2008 was another active and productive period for DG FastChannel. Particularly, our strong HD performance underscores our customer’s momentum in transitioning to HD advertising and now we’re around 40 weeks away from the time at which the analog signals will be turned off and we will be in an all digital broadcasting world.

Our announced merger with Enliven sets the stage for a very prudent move into a new growing and potentially massive market of online video advertising. The growing online media distribution marketplace is important to our customers and therefore to all of us as shareholders.

Enliven is one of the several digital ad technology companies including names that you’re going to know for sure, Microsoft’s aQuantive division, Google’s DoubleClick division, Gannett’s PointRoll division, a company known as Eyeblaster, which has recently filed for its S1 to go public and a private company in Atlanta known as EyeWonder.

It is one of seven, five, six or seven platforms that are now used and are certified across thousands of publishing sites and capable of delivering advertising to the new media Internet and mobile platforms.

So, we think that this will put us fully in a position to leverage our relationships with our customers and that we currently have and to be able to get them a unitary platform, through which they are able to distribute advertising across platform and distribute advertising through traditional media as well as to new media outlets.

Let me give you a little Vyvx transaction update, we expect to close our pending Vyvx transaction sometime during the end of second quarter 2008 pending certain regulatory and customary closing conditions. Both Level 3 and DG FastChannel have responded to all second request data required of us and we do have our finance in place to conclude that transaction.

On the high def front, we are seeing increased demand for our services. We are working with most of our customers for their HD plans for the balance of this year and next year. And as you saw in 2008 first quarter, we reported $3.6 million of revenues, up from approximately $1 million of revenues the year before.

A strong demand by a broad spectrum of our customers for HD advertising and as such we are very well prepared for what’s going on. We are upgrading our regional facilities. We are deploying a new HD Xtreme Spot Boxes in every facility. And we’ll have that done well within the timeframe that’s necessary. And we are upgrading our data centers to handle the expanded and more robust files that come with HD advertising.

So our financial models will realize a very positive benefit from the ongoing shift to HD commercials and as you recall we’ve estimated that each 1% transition from FD to HD could result in approximately $5 million of incremental revenues for the company and our recent results indicates that this correlation is valid.

On a technology update, we continue to upgrade our order management systems SpotCentral and we are working to now make that order management system accommodate new media as well as our traditional media. We have, as I mentioned rolled out our new Spot Boxes and are deploying them in conjunction with Dell, who is our provider at this time for our new ad servers. And we continue to make significant upgrades to our IT, IS and software development groups so that we can be well prepared for the HD, the data center and now the Enliven transaction.

As in outlook in 2008, we would like to reconfirm and put some numbers out there today so that we don’t fail to do that. We believe that 2008 revenues for our business as it is before either Enliven or Vyvx, but on behalf of everything else we’ve closed would approximate $126 to $130 million for 2008 with the EBITDA expected to be in the range for $44 to $48 million.

Now that is a base line for us and it tells you that we believe that at a minimum that we can reach these goals. We look forward to continuing growth in 2008 with the upcoming presidential campaigns and the growing HD revenue opportunities, we think that those numbers are minimum performance numbers and very realistic for purposes of modeling.

With that I’d like to introduce Patrick Vogt the CEO of Enliven and ask him to join us for the Q&A.

Patrick Vogt

Scott, we are delighted to structure the transaction in a manner which will allow Enliven shareholders to participate in the company’s future growth as we join forces with DG. We will issue our earnings press release tomorrow before market opens. However in light of the announcement today we will not be holding an earnings call.

So with that we are really excited about it and I will hand it back to you for questions.

Scott K. Ginsburg

We are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jason Helfstein - Oppenheimer.

Jason Helfstein - Oppenheimer

Omar, if you can just go over those ‘08 figures you gave for guidance. Just on this quarter, could you see any impact of the strike, did that result in less commercial volume, it didn’t seem like it, but I just wanted to ask that.

Scott, taking a look at third-party data it suggests that Unicast, that’s the ad serving segment piece, has lost market share for a several years, most likely just due to the aggressiveness of Google and DART. Can you talk about steps that you think you can take to increase the value of that business when you coupled with your existing business?

It was in the early prepared remarks and not the existing guidance, which I know you’ve reiterated the guidance excluding Enliven and Vyvx but I think there was an additional number you gave earlier in the call that we included.

Omar A. Choucair

But let’s just be clear the guidance that Scott had mentioned was the $126 to $130, that’s just on the company itself with the close transaction. So that’s bucket one, so now let’s go to bucket number two and that is what we talked about with Enliven. And I’m just going to replay that.

So for 2007, the pro forma revenue and these are publicly available numbers in the 10-K for Enliven was about $23.3 million of revenue, and that was in 2007 on a pro forma basis. So what we’re looking at is on a standalone business Enliven, a separate public company, is about $25 to $26 million operated under the same stance that it is today.

What we are saying is as it comes into the fold towards the end of the year that there is going to be additional scope, additional breadth. All the customers that we currently have they are going to be just a little bit easier to touch as opposed to the concept that we have today, but that $25 to $26 will be elevated to a number closer to $28 to $30 on a run rate. That’s for 2008, let’s just call it revenue synergies and I don’t even use the word synergies but that’s really what it is, that’s for 2008.

Additionally, what I said looking into 2009 because really that’s the year we have to look at because it is just going to close toward the end of the third quarter, is that we expect 20% plus revenue growth on top of that $28 to $30 million, organic revenue growth. So that’s the top line.

Now, what I really did mention earlier and I am glad that you bought the question up Jason, that we’ve estimated approximately $3 million of operating cost synergies which would also be factored in to that model. So, that’s the high level to you and hopefully that addresses the question that you had.

And I think the next question was the strike and I can just mention, I can say something then I’ll let Scott finish that and then he can talk about unit cash a bit. We know that the strike got resolved. I think it was maybe February something like that in Q1 and we can’t put a finger on exactly what that might have meant to us. We think it might have, could have hurt us a little bit, but it’s very difficult based on the breath of all the customers to really answer that question. So where the reason, because of the strike it was there.

Scott K. Ginsburg

And in fairness, although we talked a little bit about where we think Enliven is a little bit about Vyvx, Vyvx had a strong first quarter. Year-over-year they had a very strong first quarter that was extremely healthy on a year-over-year basis and they seem to hit their stride as well. So that business appears to be doing extremely well. So, I don’t see anything that indicates that the writer strike or the lack of first-run primetime TV impacted the TV distribution business.

Now, let’s get to your third and perhaps, the most important question you asked is what is it that we’re going to do differently? Why is it that we think that by combining these two companies, we have proved the prospects of each company as opposed to the cooperative arrangement we have today. For the last year, Enliven and at the time was going to Viewpoint and DG FastChannel have been spending at a good deal of time getting to know each others personnel, getting to know each others platforms and then beginning that whole long sales cycle of walking in and talking to customers.

And what we’ve seen is a ability to get us both in the room, but after we leave the room a difficulty as you can imagine with two public companies and all the Sarbanes-Oxley compliance and everything that entails, us being able to have a sales engagement that really leveraged the DG FastChannel relationship to the maximum extent.

Second, when I looked and Omar and I look at the possibilities in the Internet space and the new media space, it’s very exciting. In fact I haven’t seen anything this exciting since the mid 90s in the radio business where obviously, I got my lessons and my key cut in the business. And when we were able to see growth, I’ve never been in a business that has seen this kind of growth and I think that for purposes of this phone call, but for purposes of any discussions, when we put in our press release that this growth is taking the world by storm.

We had a very careful editors wanted to take those words out and start measuring what that means. But we left in the words “taking the world by storm”. And the reason we said taking the world by storm, is that while the US phenomena has something we all can witness. This is a worldwide phenomena of watching the Internet grow and grow and grow. And with that and with the opportunity to be a digital media services company as we are for traditional media and expand our brand into the Internet. It was extremely inviting for us to look at that opportunity.

So, we weren’t kicking, dragging and screaming into this area. The fact the matter is our customers were asking us to use the standardized platform, the service models that we have on behalf of traditional media and to enter the field. We get these requests every day and with our sales engagement model that we had with Patrick, it wasn’t that it was bad. It’s just that Patrick has for the agency space about six people that are available based on his economic model.

Right now, DG FastChannel on its traditional media space has somewhere around 30 people in its sales-engagement model. So, to properly cover the Internet space, I would suggest to you that we have a world-wide platform that we believe will be bolted together y the time we close. That it will work well that we are pre-certified with some extremely engaging ad format that we can create ads. We can deliver those ads and then we can measure and analyze those ads on behalf of the exact same customers that trust us with their most valuable advertising asset and that’s the TV ad.

It’s the one they spend the most money to create. It’s the one they expend the most media weight on to advertise. We believe there is well over $30 billion once we close the Vyvx transaction, well over $30 billion of media spend inside of our network. And so with that, we think that this opportunity is one that we needed to take, we’re been asked to take. And that with the sales engagement model that again harkens back to our radio days of putting together an extremely talented, second to no one, take no prisoners.

We will be able to get our sales engagement model and go out there and tackle to the blocking and tackling at the agency level and bring that revenue into this platform. And we are doing it not as the new entry; we are doing it as the trusted provider to virtually every major advertiser in the world. So, I think if I’ve answered the question with a little bit of panache I’ll be glad to give you more details Jason, if that’s what you like.

Jason Helfstein - Oppenheimer

Do you want to go, so how many of the I don’t know top 200 advertisers you are hitting ex-percentages, just some additional statistics would be great? Or so as far as of the top, I don’t know 250 advertisers you are hitting, what percent of them might assume a very high percentage?

Scott K. Ginsburg

Yes. Well, right now of the top let’s just say the top 100 advertisers in the country, we would had involved in as the traditional media company assuming the close of the Vyvx transaction with virtually all of them.

Certainly every agency and every major agency as they’ve rolled up into basically five major holding companies, we would be doing business with every one of them. As far as their individual component agencies and their media buying services, again we would be doing business with virtually every one of them.

Jason Helfstein - Oppenheimer

So, without telling us who have you had conversations with any specific larger agencies of advertisers where you know they’re already doing a significant business with you on the media side that you’ll be able to start to run that through the Internet?

Scott K. Ginsburg

I wouldn’t go to that far. I wouldn’t go so far as to say that we’re holding some secret agreement that we’re not telling you about. And I would say to you that the discussions are at the highest levels of the agency. I will tell you they are with the Chief Marketing Officers, they’re with the Chief Procurement Officers, they’re with the Chief Financials Officers, they’re with the President and CEOs of the major agencies in the world, and certainly within the US.

But, let me also point out a couple of other things that once you do, everybody does the reading but realize, if you are to look at the Eyeblaster as one which gives probably more visibility to this field than anything I’ve seen to date. You would see that they’d have a tremendous growth rate based on a worldwide platform, based on a comprehensive incentive services on behalf of the Internet and new media. –I think they are extremely a well organized company. I think they have a good business plan.

What you would see in there is that a small fragment of the revenue, a minority of the revenue comes out of the US. A majority comes from outside of the US and I think the number is like 70% comes outside of the US. But they have a model that and then when we’d look at, that seems to work well and one which obviously we intend to emulate.

With respect to imitation being the sincerest form of flattery, we’re not above imitating the likes of aQuantive which was acquired by Microsoft in a $6 billion transaction earlier this year or was it late last year?

Omar A. Choucair

Early 2007.

Scott K. Ginsburg

Yes. It was announced last year and acquired. But as you can see they have, if you look at their plan, they have a technical technology services company known as Atlas and then they have a very successful interactive agency known as [Avenue Eight Ranger Fish]. And if you look at what we’ve done here with Enliven, we believe that the Unicast brand will do very well for us and bring us the technology necessary to fully create, distribute and measure and analyze advertising throughout the world.

And then on the other hand, the brand known as Springbox which is a fairly new brand inside of Enliven, but it certainly speaks volumes about where this is headed. This interactive agency is able to give advertising solutions to clients one-by-one and really build the adoption of the platform that we’re bringing to market. So I believe that those two brands are very similar to the aQuantive markets and would be similar.

I don’t think that there are five different kinds of business plans. We’ve studied Microsoft, we studied Google, we’ve studied Eyeblaster, we have studied PointRoll, we’ve studied EyeWonder and we certainly have studied Enliven. And all of us have the need to have feet on street we have the need that was the very best sales personnel forward.

And in the case of DG FastChannel, we have an obligation to ourselves and to our shareholders to engage now in this effort with a commitment to putting a sales force together and to put together the right people in our interactive division to drive the adoption of this platform. The advertisers are already using it. They already have been touched by us.

And they are, I would say, by and large very happy, satisfied customers. We always want to improve in what we do. But they are happy satisfied customers and we want to have the opportunity to extend our brand to the fastest growing media segment in the world.

Operator

Your next question comes from Richard Fetyko - Merriman Curhan Ford & Co.

Richard Fetyko - Merriman Curhan Ford & Co.

So we’ve been following Enliven for a few years and been always very impressive to technology, but certainly the short come has been on the sales distribution of that and you address that with the fact that you have 30 sales people on the DGIT side versus about six on the Enliven side. So, it sounds like that’s going to help fix the problem, but obviously, the sales people you have today are sales people who have been selling the offline solutions, ad solution, distribution solutions for DGIT.

I was just wondering do you plan on hiring more Internet specific or online sales people that have experienced with selling online ad distribution and marketing solutions. And then secondly curious about Patrick’s involvement going forward. I believe that Patrick is very instrumental on getting some of the major published deals in the past. I was just wondering what his involvement is going to be going forward. And do you expect to hire again Internet specific type of executives into your management?

Scott K. Ginsburg

The answer to your first question is in the press release, you will note that Enliven has been given two Board seats and Patrick will be one of those two Board members. Patrick will stay on in his role as CEO of Enliven through closing. And he is an instrumental part of our ability to have that seamless transaction that will be good for both of the shareholders and all the employees.

Patrick Vogt

Yes. I am very excited to, at the end of closing, join the Board. Naturally we’re going to ensure a seamless transition. And regarding our strategy, Richard, which Scott reiterated very nicely, is we’ve built great integrating technology. We’ve built the global platform. We serve global ads. We’ve just been a small public company and now we just have to pump as many impressions through that technology as possible.

And the scale that DG brings to the table to help us do that, not only from a sales perspective, but what customers are demanding from us as well is integrated solutions. So you do have this transition from traditional media to online media but I can tell you traditional media is not going away. In some ways traditional media will reinvent itself on an IP-based platform.

And I think the combination of these two companies are giving us the ability to extend our brand in the Internet space with the IP-based platform that we have today in the Unicast area. But also to leverage that platform as traditional media eventually reinvests itself potentially with IP from that standpoint.

So it’s not only a bleeding edge opportunity for the company in getting ahead of the curve here, there is also a significant factor that’s going to happen and happens in every one of the businesses. We have around 40% of the consumers adopting the medium of the web right now, and only 8% of the spend. And this combined company is going to be able to address that trend as well in the marketplace.

Scott K. Ginsburg

I would consider the number of sales people inside of these two companies to be the focus of our next twelve months. Bringing experienced people, people in cities throughout the US, in our office throughout US, as well as around the world, and to drive the adoption of this platform and of what we do and move it forward.

So for those of you who knew me back the radio days, I was very fortunate back in those days to be associated with, what I thought with, very, very best sales organization. It was very capably led by the Chief Operating Officer at the time [Jim de Cantrel]. And I think that when we were finished, you would see that we have maximized revenue opportunities in every market in the US that we operated in. And we did it with just the simplest and the easiest solutions and that is to get the best people, make them believe in your product and then make it easy for them to do business.

So, there’s people who enjoy selling, there’s people that would rather deal with technology. I tend to come from the line of loving to sell. And we have a wonderful company full of technologists as well.

Richard Fetyko - Merriman Curhan Ford & Co.

And with respect to any additional management are you intended to bring in with some Internet related experience?

Scott K. Ginsburg

I would suggest you that like all organizations that evolve, this one will evolve as well. And it would not surprise anybody on that. We would recruit from inside some of the people that have brought this technology, both on the traditional side as well as on the new media side would be given new opportunities and I don’t think that it would surprise anybody for us to be bringing in some other very, very significant names and leaders into our sales organization and perhaps in other places as well.

But as far as running the company we did also state in the press release that Omar would continue to be the Chief Financial Officer of the company and that I would continue as Chairman and CEO of the company. We don’t want to make this a personnel looking down the list, but the significant people in both companies who are responsible for these platforms and for the sales organizations, you can take it from these comments that they would be staying. But we’d also look for significant enhancements throughout the company.

Richard Fetyko - Merriman Curhan Ford & Co.

I think there was another shift for DG shareholders as well. Do you still anticipate launching the ad agency, rich media tools in May, that suite of tools that you had planned?

Patrick Vogt

I will take you through. for those of you who know me and DG shareholders as well. We had in our plan around building, refining and then scaling the platform, I communicated clearly, over the two and half years that I have been CEO that, we built it and then we started refining it and part of that refinement was completion of the agency tool set which we will be launching this month.

You also need more scale with agencies and that’s why this is very opportune for us to merge with DG at this time. If you look at our business last year, we were very much publisher centric and brand centric from a business standpoint and had very little agency business. The agency channel is the biggest channel, but we were strategic in building out our platform because we wanted to make sure we had a lot of publisher penetration. We penetrated about 95% of the publishers that have advertising based business models, where we’re certified with our platform.

We also launched and to be an international office in London there. So what the merger with DG FastChannel does for all shareholders is allows us to truly scale the agency channel with the new tool set, while integrating the tool set that DG has for an integrated platform that covers all medium.

And in addition help us scale the international business as Scott mentioned earlier. Most of our competitors have more international business than the U.S. where we tended to be U.S. centric with a very little international business, only in the last month of Q4 last year.

Operator

Your next question comes from Murray Arenson - Ferris, Baker Watts.

Murray Arenson - Ferris, Baker Watts

Omar you walked through what the revenue picture is going to look like for Enliven and how that’s going to contribute, can you give us some guidance on the EBITDA side of the equation there?

Omar A. Choucair

Well I can give some highlights as you can tell from looking at the financials in the past Enliven has always operated at a negative EBITDA level. And clearly that’s something that we have to focus on. And it’s our businesses that we’ve worked extremely hard to create a very positive EBITDA and margin, etc. So what we believe is within a couple of months after the close that entity will come in to our entity or merge into our entity at an EBITDA positive basis.

And we mentioned that there is about $3 million of synergies or synergies/redundant operating cost savings in terms of public company expenses, etc., and as everybody knows that it’s very expensive to be a public company. So we will be able to immediately extract those synergies and I think as we move forward in terms of integrating the companies that will be more.

So as it relates to specifically EBITDA, we think within a couple of months of bringing it in by say if we close in the end of third quarter, that by the end of the year we will be running at an EBITDA positive basis. And that’s really where we are now I think we have to work through the summer, get the S4 completed and then as we get closer to close we will have much more specific and refined terms in terms of how we think it’s going to impact the company for 2009.

Murray Arenson - Ferris, Baker Watts

Can you, is there any impact from trying to execute this transaction on the process or the timing of the Vyvx transaction, does this require additional submissions or anything like that that we need to be aware of?

Omar A. Choucair

We don’t think so, but we do believe that we will have we will need to make a filing with the HSR filing on behalf of the Enliven DGIT transaction and we’ll immediately start that process, but at this point we don’t see the Vyvx effort and the Enliven effort intersecting and impacting one or the other.

Murray Arenson - Ferris, Baker Watts

Can you update us a little bit on the build out on the HD side you provided in the past, where we’re at in terms of broadcast stations and cable systems that are HD upgraded and capable at this point?

Omar A. Choucair

I would like to. I didn’t actually bring that information with us. I can tell you that we continue to roll out and as the number of 40 weeks I think Scott mentioned continues to decline, there are more and more stations that are feeling the need and the pressure to make those changes. I just don’t have those with me, but I can circle back with you and give you a heads up. I can tell you that it’s just grown, it is basically grows every week. And I can tell you that there wasn’t a huge spike, but it just continues to grow. But I can circle back with you on that.

Murray Arenson - Ferris, Baker Watts

Are there significant capital expenditures, what were they for the quarter? What you’re looking at as far as deploying everything for the HD systems through that?

Omar A. Choucair

Yes. The company is always operated around $4 million of CapEx on a annual basis and this year that number is going to be probably double that and maybe a little more. And the reason is every four years, we need to upgrade the servers and this 2008 happens to be that year. So that will happen.

And in addition to that we felt the need to create a low balance redundant [knock] in Atlanta in a facility that we currently operate. So the combination of those two will cause the CapEx number to increase over what it has over the past, but I think what we’ll have to explain to everybody, that’s not a recurring item, that’s a non-recurring item.

As it relates to the Vyvx transaction, we don’t think there is significant CapEx associated with that, I would say it’s quite less than a $1 million to get that in. And in terms of Enliven there is not a lot of CapEx associated with that business. So I think this year will be an anomaly and then as we go into the next year, it will be more a normalized rate.

Operator

Your next question comes from David Cohen - Midwood.

David Cohen - Midwood

With respect to Vyvx, can you give us any more detail regarding the timetable so far specifically when the second request was asked for and when did you respond to it and how long are we since that point?

Omar A. Choucair

As you get appreciate, we have to be very careful in terms of what information we have and we are relatively sensitive to the process. But I can tell you that we received the second request, we responded to it over the last week or so. And we continue to expect that we can close the transaction towards the end of the second quarter. And that’s really all the information we really can share with you.

David Cohen - Midwood

Your response has been pretty recent for that second request? It’s not like the government has been sitting on this for weeks in another words.

Omar A. Choucair

No, both Level 3 and the company responded as we all agreed to in the proper timetable. And I think what we just need to focus on is getting the transaction closed by the end of the second quarter. And we believe we can do that.

David Cohen - Midwood

Can you quantify the amount of political advertising you had in the first quarter and compared it to last year’s first quarter?

Omar A. Choucair

In last year’s first quarter, I think there was very little political, and this year I don’t have the number directly in front of me. But it wasn’t a significant amount of money. We continue to expect the political avalanche that hit us in the third and fourth quarter. So, it really wasn’t a lot to speak of. I just don’t have it, I can check and get back to you, but it wasn’t a significant amount for Q1 though we do anticipate the number to be significant in Q3 and Q4 for that one month of October.

David Cohen - Midwood

And could you reiterate on your comments about Enliven EBITDA, looking at Bloomberg off of their database for reported 2007, I see a loss of $7.6 million on EBITDA, that’s before any potential non-recurring items. So I am just trying to understand and when you also talk about $3 million of savings, how did this business get to positive EBITDA over the timeframe you are talking about?

Omar A. Choucair

Actually the EBITDA number when you add back all the non-cash items was a number of around $5.5 million and you can go back and check that in some of the analyst numbers for 2007. What that did not include David was a pro forma effect of the acquisition that they made in November. So, I think, you have to factor that number in to the $23 million of revenue. And like I said, we believe with the cost synergies and the efforts that we’re going to take that it will be an EBITDA neutral to positive business within a couple of months after it comes in and that’s what we’re focused on.

David Cohen - Midwood

When you talk about the Vyvx acquisition, the BG put up basically $39.5 million of 2007 pro forma EBITDA. Vyvx, this is from your December press release, you highlighted $11 million of EBITDA and a potential for $7 to $9 million of synergies so that gets you to $57.5 to $59.5. And in today’s press release, I think, with the same language that is if all the business been combined plus synergies, you’re talking about $57.9, so that’s your, is that consistent with the neutral EBITDA stance that you were talking about?

Omar A. Choucair

You did the math correctly.

David Cohen - Midwood

So in other words nothing changed on the other pieces.

Omar A. Choucair

Nothing changed on the other ones. That’s correct.

David Cohen - Midwood

You had a great quarter. If you hadn’t made this announcement of this acquisition, I would have guessed your stock will be up 10% to 15% maybe more. And so investors are looking at it and clearly not seeing what you are seeing in terms of the value here, whereby you have given up 20% of your arguably cheap company in order to do this deal.

So, I want to understand why this is so value added from a strategic standpoint and if that’s impossible to do on the call I would certainly like to take it offline, but if you can try on this call I would appreciate it.

Scott K. Ginsburg

Well, let me just put it to you this way, because you see, it’s the best metaphor I can use here David, is that in 1990, from 1983 to 1998 I was an active participant in the radio business. And was one of the three or four key leaders in the roll-up of that industry and in 1998 when left Chancellor I think we had the largest radio enterprise. We had in any matrix; we had the most successful business.

What did I see in 1998 that said to me, it’s time to move on and it wasn’t that I didn’t like radio. And it certainly wasn’t that I didn’t like the people I worked with. What I saw was the possibility that this new technology called satellite and portable devices, at the time I looked at my telephone and said this is where audio services are going to end up. And there was a speech I made to the group of radio people within two weeks of leaving that job saying, the conversion of mobile devices and the satellite will take away the prize of radio.

So what I’m saying today is I am not, what you are saying to me today or you’re not really saying it, you are suggesting it. Why didn’t you go ahead and continue to watch all those golden eggs get laid and enjoy the fruit of that golden egg and that chicken laying the golden egg. Then from my perspective, there really were two choices.

One, find someone else to buy the company that didn’t see the future the way we saw it or number two, embrace the future that we see and understand what we’re hearing from all our clients and our customers and the agencies and the brands. Which are telling us that that they are going to be leaving the spend in traditional media pretty much where it is with not much enhancement, but they are moving their media spend significantly towards the Internet mobile and other digital devices going forward.

And then you look at the company, just to give you a little broader picture, like Focus Media over in China, where they enjoy a 3G and moving to a 4G network when the US only has the 2G network by and large. And we have to realize that a moving picture, which is an effect a commercial, will be displayed anywhere and everywhere in the future in the United States, but it already is throughout the world. And that we are really lagging. From our experience is we don’t really see what is going on throughout the world.

But if you travel around and or if you follow these companies the way we do and follow our customers who are asking us can you deliver ads throughout the world to other devices. And we realized that, we realize that this whole platform is an IT based delivery service whether it be in traditional media or new media. And that we are the company that is bringing that IT based delivery to traditional media. It tells us that either we move towards the future or we’ve be left behind.

And like I say I think that I talked to my friends in radio who are still there, who stayed on for the last 10 years and they have watched their equity move from the highest point it ever was, was the quarter in which I left and the lowest point it ever was is today. And I am just saying to you, I was not prepared to take my shareholders and my own equity holdings, which were significant, and the enterprise and the employees who are here and tell them that we would not move boldly into the future.

So I think there really was a decision that we move our technology and our platform towards where we needed to be. Or we needed to say; look we can harvest this HD, but once harvest there isn’t another, there wasn’t going to be another opportunity for us. So the question you are asking back to another question was it time for us to embrace the future or was it the time for us to milk a little bit more of this HD initiative and then run through the hills as fast as we could all of my exit from the radio industry 10 years ago.

And I didn’t believe and I don’t believe that that exit was the proper thing for us to do. And let me just leave it at that. We can all disagree with bad judgment and our Board’s judgment; our shareholders are welcome to vote with their fee. I believe that ultimately that we have now captured and embraced one of six platforms that were available for us to work towards a future enterprise that would be bigger with the accretive and would save us from extinction.

So I couldn’t put it anymore stark than that, but I would tell you that because we do have this HD which you are fully aware because we do have this HD technology, we have a very bright future for [inaudible] with our Internet and with our mobile and digital media entrée today and which we think can close over the next four months. I think we have doubled down and we have an even brighter and more significant future.

Operator

Your next question comes from Josh Colson - Millennium Partners.

Josh Colson - Millennium Partners

The more micro question is why you didn’t announce earnings and maybe the stock would have gone up 10% or 15% then you could have given away less of the company, but it’s a question for a different time. So I wonder in light of what your share price is actually, surprisingly to me, doing today if you spoken to some of your larger holders obviously you got a lot of stock on this.

I’m assuming your looking for the deal, just wondering if there’s been any contact there. And also I know you can’t talk much more about the Vyvx transaction. But if you could give maybe some thoughts just why you are so optimistic that it is going to get done.

Omar A. Choucair

Yes, I think as we went through the process, we had a list of to do’s. And as we got through the list of to do’s and responded along with our partners in Colorado, we feel like we’re in a position now to say that we’re going to close at the end of June. And as we talk before that’s really all that we can talk about. It’s just as the fact that we’ve gotten through the process and we’ve reached a milestone and that’s really why we are saying the things we are seeing today.

Scott K. Ginsburg

Just processing, why now, why not later, we’ve put offer well over a year what we believed was an important avenue for us to move down. And as we look at our ITIS infrastructure and the platform that we’ve been at for the last year or year and a half to build and put together, we determine that we just couldn’t wait any longer.

And that we needed to engage out ISIT infrastructure and the designing and the building and the software development and the opportunity to get it together so that, there is very major companies out here that are working with a lot more resources than we have. Certainly not with better customers they have, but with more resources than we have. Trying to come up with the answers that we think we have in our hand.

And I have heard Omar’s numbers. We are known for meeting our numbers. We are known for being able to suggest that these numbers growth are available to us and with that we had the fundamental belief that we can not only meet those numbers but we will exceed them significantly.

Omar A. Choucair

The only other thing I will add is, with two public companies I think our legal team would have had some adjunct about announcing a quarter and then shortly thereafter announcing a deal when we already know that the was happening. So it just happened to turnout this way, could have happened a month ago, could have happened a month from now, I guess so. But sometimes in business, it just doesn’t get choreographed that way.

Josh Colson - Millennium Partners

But as far as the shareholders go, have you spoken any of your larger holders?

Omar A. Choucair

We have, just very briefly, obviously just started early today. So really I haven’t had a chance to reach out or speak to anybody.

Josh Colson - Millennium Partners

Obviously this story is getting definitely more interesting, but clearly more and more complicated, as time goes on and you keep making these acquisitions. I think it’s not as arguable that your stock is cheap. I am wondering if there is any efforts either now or once you’re done with the Enliven transaction to really get the story out there in a clearer manner and be a little bit more responsive and open with investors in the Street in general.

Scott K. Ginsburg

I think that you are suggesting two things. One is that when can we lift the cloud of secrecy because of what’s been pending in front of us and move into a marketing mode and no one would like to do that more than Omar and myself and to tell a story to a wide audience in many different cities. Having said that I think there are several conferences coming up over the next 60 days and I think that there will be a number of opportunities for us to speak clearly as to where we are, what we see, and an investor presentation that discloses to the maximum extent we can disclose the information.

And I don’t think there is a whole lot more of information for instance that you are going to see, financial information than what you have heard today. But it might be put out in a longer forum, for example, to show the amount of time people are spending with TV and traditional media. And how much time they are spending with new media and the disparity in between the media spend and the traditional media versus new media to understand why this explosive growth is going to occur in new media. That would be the basis upon which you would have to say that we calculated why we are moving into this area.

Secondly, we would also be able to demonstrate in long forum how the platform we have and the customers we have lead us to believe that we can build that single integrated platform upon which they can execute their media plan and why we think we can do that and get that done in an efficient way.

So if you add one plus one and then you start looking at the sales engagement process and where we are in that and what it will take to get the adoption of our new media platform, having already got the adoption by many of our traditional platform. How we think that brand extension works and I think that’s the case we need to make and it can be made and we will make it.

Operator

Your next question comes from Jim Leahy - Morgan Joseph.

Jim Leahy - Morgan Joseph

Can you just talk about the overall halt in the outlook for your existing business? You gave us pretty good quarter in here keeping the guidance for ‘08 the same and Scott, you made some comment about needing to get into Internet business. Can you talk just about the core business, talk about the business scene without Vyvx say that deal does not get done even though you certainly think it does get done, so that the first one.

Second one, give us a look into where things are with each deed being done electronically versus using tapes today. And then third, Omar, if you can give us on housekeeping basis, give us sales and marketing, G&A and R&D.

Scott K. Ginsburg

The tone of our underlying business, our core business, so let’s call our core business DG FastChannel without Enliven and without Vyvx. Our business has been extremely healthy when we projected the year 2008, we did it understanding that we would have to realize all the synergies putting together two or three or four business last year. And at the end of first quarter 2008, we announced today that we had completed those synergies and had successfully integrated the businesses Point 360, GTN and Pathfire all in the last four quarters.

So, our ability to take these businesses and integrate them and work to bring those efficiencies to the market has been extremely successful. As far as what that means, it means that we’ve taken two or three large dub-and-ship businesses and turn them into electronic businesses and still been able to eke out EBITDA gains. Even though we may have taken some revenue that had a higher cost and brought it into a lower electronic cost inside of this DG FastChannel network.

So, I think we have been able to move our core business forward well. Today, we reiterated our belief that the numbers we gave, we can take as minimum performance standards. And to give you a little bit better view when we projected our HD revenue, we projected it I think very modestly for 2008 and we’ve had no reason to believe that modest outlook could not be enhanced over the next three quarters.

We also have the one in every four year opportunity to bring in the political advertising and we have represented and do represent all major presidential candidates, as well as the number of gubernatorial races, statewide races and congressional races.

And in addition interestingly enough, we also represent I believe the National Association of Broadcasters, as they are going to put out hundreds and hundreds of commercials to every TV station in the country and they will be using our network to distribute that to explain to the public the changeover from analog to digital. So, we’ve become the basis upon which many different businesses, many different entities relate to traditional media and we have seen no diminishment of that business at all.

Operator

There are no further questions at this time.

Scott K. Ginsburg

I think these questions had been extremely helpful. Appreciate the opportunity to talk. We believe our proposed merger with Enliven will significantly enhance our service offerings and allow us to participate in the large Internet video advertising marketplace.

We continue to expect our HD revenues to grow significantly. The presidential campaigns will drive our revenue. We expect the regulatory approval to close the Vyvx transaction towards the end of the second quarter and then we expect to close the Enliven merger during the third quarter. We continue to be driven to deliver growing cash flow, net income and EPS.

And we thank everybody today for the attention and look forward to talking to you again soon.

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Source: DG FastChannel, Inc. Q1 2008 Earnings Call Transcript
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