New Frontier Media Inc. F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

New Frontier Media Inc. (NOOF)

F1Q09 (Qtr End 06/30/08) Earnings Call

August 8, 2008 11:00 am ET

Executives

Michael Weiner - CEO

Ken Boenish - President

Ira Bahr - COO

Grant Williams - CFO

Analysts

Richard Ingrassia - Roth Capital Partners

Jamie Clement - Sidoti & Co.

Richard Linhart - Opus Capital

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the New Frontier Media First Quarter Fiscal 2009 Earnings Release Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Friday, August 8th, 2008.

I would now like to turn the conference over to Grant Williams, Chief Financial Officer. Please go ahead, Sir.

Grant Williams

Thanks Chris. Good morning and welcome to the New Frontier Media's fiscal 2009 first quarter results conference call. With me this morning is Michael Weiner, Chief Executive Officer of New Frontier Media; Ken Boenish, President of New Frontier Media; and Ira Bahr, Chief Operating Officer of New Frontier Media.

For the call this morning Michael will begin with summary remarks and after Michael's comments I'll spend some time discussing the first quarter financial results and other financial related information. We will then open up the conference call for questions.

A replay of this conference call will be available for seven days at 1-800-405-2236 using the pass code 11118157#. This call will be archived for 12 months on our website at noof.com under Investor Relations, webcast and events. This call is also being webcast. During the question-and-answer segment, those of you listening via the Internet will be able to ask questions. Please submit your question via email to [e-mail].

During this call we may make references to certain non-GAAP measures. This information, including reconciliation to the most directly comparable GAAP financial measures is available in today's earnings release. A copy of our earnings release is available at our website at noof.com under Investor Relations, news releases.

All information discussed during the conference call is as of today and the company assumes no obligation to update information discussed during this conference call. During this conference call management may make forward-looking statements, including statements regarding the company's expected financial position and operating results, its business strategy, its financing plans, and the outcome of contingencies.

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

With that being said I'd now like to turn the call over to New Frontier Media's Chief Executive Officer, Michael Weiner.

Michael Weiner

Thank you, Grant, and good morning everyone. I am just going to make a few brief comments and then turn the call over to Grant for an overview of the quarter.

New Frontier Media continues to operate its business both efficiently and profitably. In an ever more competitive environment and in an economy that seems no closer to recovery, our company is growing, we're maintain new margins and we're prudently investing in the future.

This quarter we delivered both top line growth, EBITDA growth and net of our new business investments stable EPS performance. As I indicated in the press release not withstanding competitive and economic issues we believe New Frontier will grow revenue in this fiscal year.

New Frontier has a strong balance sheet which is a real asset to this company as opportunities and companies straying for capital emerge at anytime. Right now we believe we are striking the right balance and attempting to unlock existing value and invest in new opportunities, all the while returning substantial amounts of capital to the shareholders.

Over the past year and half we returned $26 million to shareholders. At today's stock price that's roughly a third of our market capitalization. In addition last quarter we brought back nearly 400,000 shares of our stock. We expect to be back in the market for shares as opportunities present themselves and to complete the entirety of our existing buy back program which is roughly 750,000 shares remaining.

We are obviously in a very tough market for micro-cap securities. But in the world of micro-cap we believe New Frontier possess a uniquely strong and profitable operation. A powerful balance sheet and some excellent opportunities with strong growth over the long-term both with respect to our international business and our test of direct to consumer technologies. In short we are both delivering value today and make investments that we believe will keep the company profitable for years to come.

And now Grant will take you through the specifics of the quarter.

Grant Williams

Thank you, Michael. I'd like to begin my financial discussion by reviewing our consolidated quarterly results and then discuss the individual operating segment results. I'll wrap up the financial review with a discussion on liquidity position and some brief comments regarding our strategic outlook.

Our consolidated revenue was $13.1 million during the current quarter as compared to $12.9 million in the prior year quarter. When considering these results, keep in mind the prior year amounts include approximately $0.4 million of C-Band service revenue and we see (inaudible) offering that service in the third fiscal quarter of last year.

The growth in revenue was primarily the result of strong transactional TV VOD sales which increased by approximately $0.7 million as compared to the same prior year quarter. Cost of sales increased to $3.9 million from $3.8 million in the same prior year quarter and consolidated operating expenses has also increased to $7.1 million during the current quarter from $7 million in the same prior year quarter.

These increases in costs were primarily from incremental expenses incurred for the test IPTV business model. Our effective tax rate for the current quarter was 41% and was unusually high as a result of the one-time charge incurred in connection with the change in certain state tax legislations. For the current quarter our net income was $1.2 million or $0.05 per share as compared to $1.5 million or $0.06 per share in the same prior year quarter.

Moving to the more specific results of our operating segments. The Transactional TV segment revenue increased to $10.6 million, as compared to $10.4 million in the same prior year quarter. Again, this segment's results from the prior year quarter included $0.4 million in revenue from C-Band services, and because we ceased offering these services in the prior third fiscal quarter, our current year results have no C-Band revenue.

So we are pleased with the current quarter growth because the revenue for this segment was sufficient to surpass the $0.4 million shortfall from the C-Band revenue and still grow by an additional $0.2 million. The revenue growth was driven by strong VOD performance and overall category growth on the largest cable operator platform in the US.

Cost of sales for this segment declined to $2.6 million as compared to $2.8 million in the prior year quarter, because as we previously mentioned we ceased offering the C-Band services. Our gross operating margin percentage for this segment continues to be solid and was 75% in the current quarter as compared to 73% in the same prior year quarter.

Operating expenses during the current quarter were $2.4 million and was slightly down as compared to $2.5 million in expenses incurred in the same prior year quarter, and overall the Transactional TV operating income improved to $5.5 million as compared to $5.1 million in the same prior year quarter.

When comparing the Transactional TV segment results to the prior sequential quarter ended March 31, 2008. Sequential revenue and cost of sales were generally consistent with prior sequential quarter. Operating expenses at $2.4 million were higher as compared to the $2 million in costs incurred during the quarter ended March 31, 2008 due to additional mark in promotional activities, and the Transactional TV segment operating income declined to $5.5 million as compared to $6.1 million for the sequential quarter ended March 31, 2008.

For the Film Production segment revenue during the current quarter was $2 million and was down slightly as compared to the $2.1 million revenue generated during the same prior year quarter. Revenue during the current quarter benefited from an increase in own content revenue related to our delivery of six titles within a 13 episodes series.

The increase in revenue was offset by a decline in revenue from a large pay-per-view aggregator and the largest VDS provider in US. Cost of sales for the Film Production segment was $0.9 million in the current quarter and generally consistent with $0.8 million cost incurred in the prior year quarter.

Operating expenses for this segment declined to $1.3 million in the current quarters compared to $1.50 million in the same prior year quarter, primarily because the prior year quarter results included charges for the write-off of the customer receivable and certain un-recouped costs. The Film Production segment incurred a net loss of $0.1 million in current quarter as compared to a net loss of $0.2 million in the same prior year quarter.

For the sequential quarter results, the Film Production segment revenue increased as compared to the $1.4 million in prior sequential quarter ended March 31, 2008 and the previously mentioned delivery of six titles within a 13 episodes series.

Cost of sales also increased to $0.9 million from $0.6 million in the prior sequential quarter from higher film amortization costs related for the increase in own content revenue and operating expenses of $1.3 million were also higher as compared to the $1 million of expenses incurred in the sequential quarter ended March 31st, 2008 due to higher trade show costs.

The net loss for the Film Production segment improved to $0.1 million as compared to a net loss of $0.3 million in the sequential quarter ended March 31, 2008.

Moving to the Direct Consumer segment, revenue for the segment continues to be relatively consistent with prior periods. Cost of sales for the current quarter were $0.4 million and operating expenses were approximately $0.6 million. The current quarter results included approximately $0.5 million of incremental expenses incurred for the IPTV set top box test.

As we mentioned during the prior quarter call we are expecting the companies cost to increase during fiscal year 2009 from this growth initiative. The $0.5 million in expenses is from on going operating cost for the test business and we expect these expenses will increased during the next several quarters as we incurred additional operating, marketing and subscriber acquisition costs associated with the UK launch. The extent of this increase in expenses will be largely dependent on the rate at which we launch new marketing initiatives and add new subscribers.

Our corporate admin costs were $2.9 million during the current quarter and consistent with the $2.8 million cost reported in the same prior year quarter. The current quarter corporate admin cost were higher than $2.5 million recorded in the sequential quarter until March 31, 2008 and the increase is primarily due to additional costs associated with fees incurred for the completion of the company's fiscal year 2008 audit.

So the company's cash flows during the quarter, we generated approximately $4.5 million in cash from operations, which is one of the strongest quarterly results ever reported by the company. We have been actively managing our cash flows in areas where we can control the activity.

During the current quarter our operating cash flows were beneficially impacted by strong customer receivable collections a decline in cash used for film production and from a decline in cash used to pay fiscal year 2008 bonuses.

The company used approximately $1.9 million of cash flows from investing activities during the quarter primarily for Transactional TV segment capital expenditures related to certain electronic storage equipment. And we also used approximately $4.5 million of cash for financing activities, which included $3 million to pay dividend that was declared in the prior year fourth quarter and $1.5 million for the repurchase of approximately 383,000 shares of common stock in the open market at an average purchase price of $3.92 per share.

Before we move to the Q&A portion of the call, I'd like to spend some time on the company's strategic direction and specifically the progress at the international Transactional TV and IPTV growth initiatives.

We're executing well on our international Transactional TV growth strategy and are pleased with the company's progress today. We launched services with several Canadian customers and were also expecting to launch on platforms in Mexico and Europe sometime in the next two fiscal quarters.

We are optimistic the revenue from these international customers will become meaningful by the end of our fiscal year. Based on our current strategic goals it is possible the incremental revenue from these international customers could be in excess of $3 million for the fiscal year.

However, our ability to generate this level of revenue will be dependent on a variety of both controllable and non-controllable factors including the timing of when we execute international contracts, how quickly these customers launch our content their platform, the rate at which international customers buy our content and our ability to execute against our plan.

Moving to our IPTV set-top box test, the test business model in the UK was launched last week. We have acquired initial customers for this service and the technology is operating efficiently. Customers for this service will receive over 20 channels of content through the set-top box and the streaming content is provided 24 hours a day, seven days a week. We are currently servicing this business from the Netherlands, where we have co-location services in the set-top boxes.

We are pleased with the speed with which we have made this new product offering available. Remember that we originally acquired the IP for this technology in late January, 2008, and after just over two quarters we now have a new direct-to-consumer product offering.

We are now focusing our efforts on marketing initiatives to test our assumptions regarding the market acceptance of the new product in the targeted markets. We plan to engage third party affiliates to assist with a variety of marketing initiatives. We expect to have a better understanding of the success of this test business model by the end of the fiscal year.

We continue to be cautiously optimistic that if we continue to execute against our strategic goals for this product offering and the market responds favorably to our initiatives, this could result in meaningful revenue growth for the company later in fiscal 2009 and beyond.

To revisit the expense side of the test business model. The $0.5 million of cost incurred during the quarter were primarily operational in nature and included amounts for employee cost, travel, amortization and depreciation, and other operations related admin costs. For the next several fiscal quarters we are expecting the cost of this business to increase from additional operational and subscriber acquisition costs. And we are estimating that the total expenses for this initiative will be in the $750,000 range in each of the next several quarters.

However the increase in cost is expected to be primarily linked to the timing of our marketing and promotional activities as well as the rate at which we add new subscribers. So there could be some significant advantages in those estimates and to the extent our subscriber additions and revenue increase, so will our costs.

So overall, we are pleased with the progress of our growth initiatives and optimistic about the impact these initiatives will have in our business over the next several years.

Now let's open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Richard Ingrassia with Roth Capital Partners. Please go ahead, sir.

Richard Ingrassia - Roth Capital Partners

Thanks. Good morning everybody.

Grant Williams

Good morning, Rich.

Richard Ingrassia - Roth Capital Partners

Grant the $3 million just to be clear, the $3 million potential in national revenues you cited, that does not include the UK IPTV initiative, right.

Grant Williams

That's correct. Yeah, that is just for the Transactional TV segment business.

Richard Ingrassia - Roth Capital Partners

Okay. And so that will be the new carriage contracts in Europe and then the press release says it is Mexico. Can you a little more about the coverage there?

Ken Boenish

This is Ken, I can talk a little bit more about that. We are doing quite a bit in the area of adding new business on international levels and we've got some contracts signed, sealed and delivered out of Canada. Our content recently launched on those platforms. We have achieved a couple of launches in Mexico already and we are set to want content in Europe actually starting this month and we expect subsequent launches in the coming quarters.

So we are off to a pretty good start and we are pretty pleased with the direction of this business, the outlying factors as Grant mentioned was or continue to be in terms of timing when these new distribution partners come on board and when they actually load the content onto the platforms.

Richard Ingrassia - Roth Capital Partners

Okay, thanks Ken. Well I have got you, if you back C-Band out here obviously you have got some growth here year-over-year, but would you say that you are seeing the type of typical countercyclical strength that you see in the industry during a recessionary period or maybe a recession?

Ken Boenish

I actually don't think our growth has anything to do with necessarily the economy, the fact is that domestically our business partners continue to grow their digital subscriber base. In general our VOD products continue to outperform all of competition by material margin. And we expect to continue to add product on existing platforms and in both the pay-per-view and for video-on-demand.

In terms of pay-per-view, we think we'll add somewhere in the neighborhood of over five million new network homes to this year. We expect to add 12 to 20 hours of VOD programming on platforms that serve more than 13 million video-on-demand subscribers. And at the same time, we are continue to be frugal about our investments in the domestic business and finding ways to operate this business more efficiently by incorporating new processes and procedures that can increase our output and reduce our manpower.

Richard Ingrassia - Roth Capital Partners

I was just wondering if you had any read on consumer patterns, is really the purpose of the question and that this downturn feels a little bit different than '01and just a little closer to the consumer and if you are finding that buy rates or expect buy rates to decline overall if you factor out the increased size of the network?

Ken Boenish

Well, I think there is a lot of variables that affect our buys on an ongoing basis and certainly economy is one of those. We found however that one thing that could really help us out and we see happening out there in the field is that there is an excellent opportunity to increase awareness for our product in the marketplace. A lot of our distribution partners have not marketed our product in the past, and we are seeing some of our affiliates who have never marketed or dealt in or came in the past rolling out quite aggressive marketing programs that we think could have a really nice positive impact on the business.

Richard Ingrassia - Roth Capital Partners

Okay. Thanks, Ken. And just maybe one last question for Grant. Can you give us some sense for timing of releases on film projects in Q2, Q3, Q4 and any additional production commitments that you received since June?

Grant Williams

Yeah. The one I think I would like to specifically mention is with the film production segment over the past couple of years we've been successful executing a couple of 13 episodes series with a premium of our channel service provider. And we've been luck enough to get a third 13 episode series that we're going to be doing. We think production will probably begin late second fiscal quarter, but the majority of it probably will happen in our third fiscal quarter and we're going to be queuing up for delivery.

We're optimistic we'll get all 13 episodes delivered during the fourth fiscal quarter, but there is some uncertainty because that businesses as you all you know a little bit lumpy it could push into first quarter of the next fiscal year, but we are really excited about the fact that the film production segment continues to be able to ink these larger deals.

Richard Ingrassia - Roth Capital Partners

Okay. Thank you.

Grant Williams

Thank you, Rich.

Operator

Thank you. Our next question is with Jamie Clement with Sidoti & Co.

Jamie Clement - Sidoti & Co.

Hey, good morning gentlemen.

Grant Williams

Good morning.

Jamie Clement - Sidoti & Co.

Just a quick question clarification just on Canada and Mexico, was any Canadian revenue in the June quarter that you just recorded or is that something that more so started subsequent to the June quarter?

Grant Williams

Hey, Jamie this is Grant. I would say it's really going to be starting more in the next quarter. We have a little bit of revenue that came in from Canada on a few of the systems that we did launch. But it's just really the beginning, the revenue we expect to see for the full fiscal year. So it's just really starting to come on in Canada and then I think as Ken spoke about earlier, Mexico and Europe are coming on soon thereafter.

Ken Boenish

Right, to be a little more clear, the first month of our launch is in Canada. We loaded up just a very small amount of content and we should increase those hours by about tenfold overtime to a point where we think will occupy somewhere between 20 and 35% of the platform.

Operator

Jamie's line has disconnected. Our next question is with Richard Linhart with Opus Capital. Please go ahead.

Richard Linhart - Opus Capital

Good morning, thank you. Looks like you, just stepping back for a minute. MRG has not performed according to, like you guys thought it would do back in 06' when you bought it. I think and the cause might have been operating income at perhaps a million level pro forma, my recollection may not be correct. Could you help us on your stand, maybe taking step back, help us understand, give us an assessment of how you feel the self entertainments [then to] the business has performed. What has worked what hasn't worked and so you could learn from it in terms of future expansion?

Grant Williams

Michael, do you want to speak first your thoughts on just overall the Film Production results?

Michael Weiner

Well, to answer your question we think MRG was a good acquisition, revenues were good and it has thrown of a lot of cash flow the past two years. It's improved our client relationships, its moved us into new markets, while the film business has been a little tough in general right now. We think the long-term prospects are there.

Grant, what's the …

Grant Williams

Yeah, sure. I guess the other things I would add on to that is, we continue to view that to be a good business. Its really we've been able to leverage a lot of our relationships that we had with our cable operators. We bought that content and we're selling it through VOD and it also looks like it maybe opening some other potential positive things such as our ability to put some of the mainstream web content. So that segment represents up on the VOD platforms also.

The film markets has been a little bit tough, but again, we are continuing to execute the 13 episode series that we've got and we think its definitely a positive thing for this fiscal year and we continue to be optimistic with this, that we're going to have growth in this business.

Richard Linhart - Opus Capital

Why has the film market been tough?

Grant Williams

Well, I would say it's partially impacted by some of the more macroeconomic conditions that are out there.

Richard Linhart - Opus Capital

So, sort of it has an impact separate and apart from your core business, the VOD business or is it the other parts of the business?

Ira Bahr

Yeah, this is Ira. The company, actually trades in the independent film market and we do business largely at some of the large film shows including Cannes. We read an article this year just by way demonstration, there were 20% more films at Cannes than there were in previous years.

So it's just a little sluggish right now, it is little more competition. But you see some articles out there that say that where private equity was investing, in slates of movies that they are pulling back on some of those investments today. So we think its going to ebb and flow and we continue to be optimistic about the long-term prospects of the business, because the market position we are in we do think is unique. We have created some very good relationships with the right people, the right places with what we think is the right product.

So, yeah, there is things going on right now that are not as good as we wish them to be with respect to market conditions but as Grant and Michael both said we continue to be optimistic about the longer term.

Richard Linhart - Opus Capital

Okay, great. Thanks very much.

Operator

Thank you. Jamie Clement has rejoined. Please go ahead.

Jamie Clement - Sidoti & Co.

Hey, guys I am sorry I think there was a technical problem, but any way. Ken, just to kind of clarify or Grant I don't know if this question should be for you. Is your expectation in terms of the new internal distribution that you have, you think you will be able to realize $3 million this year or is the magnitude of the business $3 million on an annualized basis?

Grant Williams

Jamie this is Grant. I think what our comment was that, we think if we are able to meet some of our strategic goals we think in the current fiscal year, it could be as much as that $3 million mark. Again it's really going to be dependent on a lot of factors that are going to be outside of our control. For example the timing of when those platforms put our content, but we think it could be a little over $3 million for the fiscal year.

Jamie Clement - Sidoti & Co.

Just leaving timing and things out of your control and maybe you're leaving the IPTV set-top box product out of it. I mean just unlike in annualized basis like down the road forget about near-term timing, what's kind of magnitude they were kin of talking about at some point down the road?

Ken Boenish

We think that down the road that international distribution could comprise roughly half of our overall television revenues. We look at the competitive landscape and we see our largest competitor in the US drives about 50% of their revenue from international distribution, which is in the neighborhood of $60 million per year. And when we look at these various platforms in Europe, Latin America, Canada, its really the same people that we compete with in the US and so we have reason to believe that we will be any less successful competing against these companies internationally as we do domestically.

Jamie Clement - Sidoti & Co.

Okay, thank you very much. The other just in terms of the core domestic business that you had, is there any thing either from a trend perspective or competitively on the landscape they would cause you to think that over the next couple of quarters you wouldn't be able to sustain the rate that you showed this quarter which was pretty consistent with what you showed last quarter as well?

Grant Williams

All the metrics that we are looking at today are trending positively for us. We continue to increase our margin of superior performance, we continue to add new product to existing categories on video-on-demand and platforms on pay-per-view. So, we are very excited about the coming quarters for our core business.

Jamie Clement - Sidoti & Co.

And Ken last question I will let somebody else get on. I know you don't have a kind of distribution on this but what's the feedback like on the high def version of PenthouseTV?

Ken Boenish

HD has been very, very positive for us where have launched we have seen really positive take rates especially considering that a smaller percentage of consumers currently have HD set-top boxes in their home connected to HD television. So we think as that market segment grows clearly, these people are searching for content to watch on these TVs that they have gone out their way to create a niche high def experience. And so we think we are in a great position. We are the very first company in the space to bring high definition programming to video-on-demand. We've got a lot of this programming in our library and we are optimistic about the possibilities of possibly launching an HD linear channel in the future as well.

Ira Bahr

Also, this is Ira. Microscopically, people talk about and we're certainly interested in the extent to which internet delivered adult competes with our product. And to the extent we get HD out that reinforces the value proposition for multi-channel adult. So it's a much better product you get on the internet, it gives you the big screen and a high quality you bought that TV for. So we think it really adds materially to the value of our core product.

Jamie Clement - Sidoti & Co.

Okay. Guys thank you very for you time. I appreciate it.

Grant Williams

Thank you, Jamie.

Ken Boenish

Thank you, Jamie.

Operator

(Operator Instructions). Management I show no further questions at this time please continue.

Grant Williams

Thank you everybody for joining the call. We look forward to speaking to you on next call.

Michael Weiner

Thank you.

Operator

Ladies and gentlemen, this concludes the conference call for today. Once again we would like to thank you for your participation, you may now disconnect.

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