Image Entertainment, Inc. (OTC:DISK) F1Q09 Earnings Call August 12, 2008 4:30 PM ET
David A. Borshell - President
Jeff M. Framer - Chief Financial Officer
Rick Eiberg - Executive Vice President, Operations and Chief Technology Officer
Burgess Wilson - Senior Vice president of Digital Operations
Michael Bayer - Associate General Counsel and Vice President of Business and Legal Affairs.
Welcome to the Image Entertainment’s first quarter 2009 results conference call. (Operator Instructions) At this time, I’d like to turn the conference over to Michael Bayer, the company’s Associate General Counsel, to read the Safe Harbor.
This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to among other things, our goals, plans, and projections regarding our financial position, results of operations, market position, product development, and business strategy. These statements may be identified by the use of words such as, “will”, “may”, “estimate”, “expect”, “intend”, “plan”, “believe”, and other similar terms meaning in connection with any discussion of future operating or financial performance.
All forward-looking statements are based on management’s current expectations and involve inherent risks and uncertainties, involving factors that could delay, divert, or change any of them and could cause actual outcomes and results to differ materially from current expectations. These factors include among other things our inability to raise additional working capital, changes in debt and equity markets, increased competitive pressures, changes in our business plan, and changes in the retail DVD and entertainment industries. For further details and a discussion of these and other risks and uncertainties, please see Forward-Looking Statements and Risk Factors in our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q. Unless otherwise required by law, we undertake no obligation to publicly update any forward-looking statement whether as a result of new information, future events, or otherwise.
And now we’ll turn it over to the company’s President, David Borshell.
David A. Borshell
We appreciate everyone joining us this afternoon. Participating on today’s call with me is Jeff Framer, our Chief Financial Officer, Rick Eiberg, our Executive Vice President of Operations and Chief Technology Officer; Burgess Wilson, our Senior Vice President of Digital Operations; and of course, Michael Bayer, our Associate General Counsel and Vice President of Business and Legal Affairs.
Before I turn the call over to Jeff for a detailed review of the financials, I will provide my own remarks about the quarter. We embarked on extensive turnaround plans a few short months ago and our fiscal 2009 first quarter results showed the significant improvements we’ve made across the board, as well as, giving up strong starts in the new year. Revenues exceeded our internal projections, coming in at $32.6 million, up 56% over last year. And of most important, it’s nice to see Image to drive net income for the quarter.
We still have some work to do on controlling our general and administrative expense, as well as, keeping our selling expenses in line at the percentage of revenue. We will continue to reveal all this on a quarter-to-quarter basis and make adjustments as necessary.
As we expected, the distribution of feature films across all formats and platforms, like DVD, television, digital and non-theatrical propelled our quarterly revenues with the highest level since in terms of December 2005 quarter. The new releases films, primarily responsible for driving this quarter’s revenue growth were Before the Devil Knows You’re Dead, The Air I Breathe, Numb and The Color of Freedom.
In addition to feature films, new titles under Mariah Carey, The Adventures of Mimi; Criterion‘s The Red Balloon, and Discovery’s Man vs. Wild, as well as previously released titles are Jeff Dunham’s Spark of Insanity and Short Circuit, contributed nicely to our quarter’s revenue growth.
As many of you know, we entered the quarter with an assortment of legal proceedings that needed to be addressed immediately and ultimately sort it out. From April, May and June we dedicated a significant portion of our time to dealing with these lawsuits. Knowing that this year’s success or not will be tied to these near-term instances. We are very pleased to report that Image was successful in bringing closure to the major disputes which included the dismissal of all claims and counter claims between the respective parties. But unfortunately, due to confidentiality clauses and body of these agreements we are not at liberty to discuss the specifics of these matters in any detail on this call. It is for this very same confidentiality issue why we have not put out a certain press release, even though we realize many of you have been expecting one for quite some time now. Do know, however, that in all Image is pleased with the outcome and ridding ourselves of the legal overhangs and an accomplishment that should not be overlooked.
We’re often aptly inclined to take a particular film out theatrically. I thought now will be a good opportunity to address the theatrical questions. While the theatrically side of the film business is not preferably a main focus for Image, primarily due to the financial risks associated with funding P&A, which stands for Print and Advertising, we do currently have one of our recent film acquisition in select theatres across the country. The film is entitled The Encounter at the End of the World, as directed and narrated by award-winning filmmaker, Werner Herzog. The film follows the lives of scientists and volunteers while they work, play and struggle to survive in the harsh landscapes of Antarctica. I bring this up for a couple of reasons. First up to make everyone aware that although releasing a film theatrically has its financial risks, in certain circumstances Image will commit offering filmmakers a theatrically. But through our internal forecast we determine the money spent on marketing and advertising the film should enhance the other revenue streams I mentioned a short time ago. Basically, theatrical is a promotional tool used to breed consumer awareness to a film. Should the film generate enough box office revenue to cover your expenses and actually generate a profit, then that’s an added benefit. Encounter is performing well in the theatres and our efforts will certainly enhance our home video and digital sales.
Second, almost every filmmaker believes their film is worthy of theatrical release. The reality is that most films are not and any money spent promoting the film in theatres would have been better spent promoting the films on video release. Having said that, in order for Image to truly compete in the independent studio space for frontline films, our ability to offer a meaningful theatrical is not only necessary but essential. From the balance of our fiscal year and in addition to building upon Image’s core business, we will continue to focus our feature film efforts primarily on direct-to-video acquisitions but will certainly take on limited theatrical commitments when we believe it’s beneficially to the overall deal.
Lastly, in calendar 2009 we will strive to begin putting in place the pieces needed to enhance our theatrical capabilities and allow us to be more competitive in the marketplace. While DVD remains the primary driver for the company, we are seeing positive results from our expended revenue stream. Our blu-ray high definition releases are performing very well as the market embraces a single high definition disc format. Digital distribution was up approximately 53% compared to last year at this time and our television sales were up approximately 62% compared to last year at this time.
Our second quarter which began July 1 had several strong new releases that should help drive us forward as we move through the remainder of the year. On the feature film side, we’re releasing Autumn Hearts starring Susan Sarandon, The Secret starring David Duchovny, Then She Found Me starring Helen Hunt and Matthew Broderick, and the academy award-winning Taxi Driver: Taxi to the Dark Side. On the non-feature side, we have the stand-up comedy special film Earl, Why Do I Do This? and Discover Channel’s When We Left the Earth and Shark Week, as well as a varied collection of new releases in catalog blu-ray releases.
Needless to say, we’ve been extremely busy over the past few months riding the ship, so to speak. We’re focusing the company in energizing our efforts to stand upon our leadership role in the independent licensing and distribution of entertainment programs. We got through the hardship we experienced during fiscal 2008, put together a strong first quarter of our fiscal 2009, and remained very optimistic about our growth prospects for the remainder of the year.
In closing, we believe we have a very compelling story to tell. So, during the next few months and for the remainder of the year we will be aggressive with our marketing efforts and in telling Wall Street about the improved Image Entertainment and what we see as an extremely exciting future for our company. I’ll now turn the call over to Jeff.
Jeff M. Framer
I’m pleased to report that we experienced significant revenue growth for the quarter as David had mentioned. It’s a record quarter for us. We had an extremely strong new release schedule of feature films this quarter, which complimented our non-feature film business nicely. I’m going to spend a few minutes reviewing our consolidated financial results for our first quarter in more detail.
David noted our revenues were up 56% to $32.6 million as compared to $20.9 million for last year’s first quarter. Again, primarily on the strength of our feature films release schedule. Digital distribution revenues continue to grow nicely, increasing $756,000 which is a 53% increase over $495,000 for last year’s first quarter. Our gross profit margin in the first quarter was 22.5%. Selling expenses were 11.4% of net revenue, up from 9.8% of net revenue for last year’s first quarter, primarily a result of increased advertising and promotional expenses associated with our new and emerging feature film business. General administrative expenses decreased 16.8% to $3,988,000 compared to $4,794,000 for last year’s first quarter, as a result of lower legal fees of $624,000 which included legal expenses totaling $282,000 related to the resolution of our legal disputes starting in the quarter. Lowered depreciation expenses of $409,000 also resulted in the lower G&A expenses and that’s a result of closing our distribution facility last year.
Importantly, our loss from operations was down 78.6% to $381,000. That’s from a loss of operations of $1,784,000 for last year’s first quarter. Other income was $2,970,000, a significant portion of which was the receipt of $2 million from our settlement with BTP.
Interest expense was $875,000 compared $793,000 from last year’s first quarter. It’s important to note that we have $393,000 in non-cash interest expense which represents 45% of the total interest expense number. And that’s a result of amortization of our debt discounts under first financing clause.
Net earnings for the quarter was $1,696,000, or $0.08 per diluted share. This is compared to a net loss last year of $2,599,000, or $0.12 per diluted share. With regards to our balance sheet if June 30th, 2008, we had cash of $1.4 million. We had outstanding borrowings under our $20 million revolving line of credit of $7.2 million. We had borrowing availability of $5.9 million. During the quarter, we paid down our loan. We paid it down to $5.9 million from $6.8 million at March 31, 2008.
Looking forward as David stated, we remain very excited about the fiscal year and we reiterate our annual revenue guidance. We continue to expect revenues of between $115-125 million and expect that we will be profitable at the higher end of the revenue range. I’m now going to turn the call back over to the operator for any questions.
Question and Answer Session
(Operator Instructions) And at this time, there are no questions in the queue.
David A. Borshell
Well, we appreciate everyone joining us. Obviously, the call is available on the website, the webcast, for a period of time. And we will keep everyone informed as we move along through press releases on all the events of the company in the near future. And again, thank you for joining us this afternoon.
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