Point.360's (PTSX) CEO Haig Bagerdjian on Q2 2017 Results - Earnings Call Transcript

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Point.360 (NASDAQ:PTSX) Q2 2017 Results Earnings Conference Call February 9, 2017 1:00 PM ET

Executives

Haig Bagerdjian - Chairman, President and CEO

Alan Steel - CFO

Analysts

Operator

Good day, everyone, and welcome to today’s program, the Quarterly Shareholder Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note, this call may be recorded. I’ll be standing by if you should need any assistance.

It is now my pleasure to turn the conference over to Mr. Haig Bagerdjian, President, Chairman and CEO.

Haig Bagerdjian

Thank you. Good morning, and thanks for joining us today. With me is Alan Steel, our Chief Financial Officer. Before we answer any questions you may have regarding the press release, I will ask Alan to discuss forward-looking statements and briefly review numbers that were released this morning. Then, I will make few comments and will open the lines for questions. Alan?

Alan Steel

Yes. Thanks, Haig. Certain statements in this conference call may contain forward-looking statements concerning the Company’s projected revenues, earnings, and cash flow, the planned focus on internal and external growth, new markets, sales initiatives, steps to reduce costs, improving customer service, and new business. Such statements are inherently subject to known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from those expected or anticipated in the forward-looking statements.

In addition to the factors described in the Company’s SEC filings, the following among others could cause actual results to differ materially from those expressed in this conference: Lower than expected new sales, operating income and earnings; less than expected growth; actions of competitors including business combinations, technological breakthroughs, new product offerings and promotional successes; the risks that anticipated new business may not occur or will be delayed; and general economic conditions that may adversely impact our business.

Now, hopefully, you have all seen the press release, so I’ll cover only a few items. Sales for the second quarter were $6.6 million compared to $9.7 million in the same period last year. Sales for the first six months of fiscal 2017 were $14.6 million, down from $20.5 million in the prior year. Now, Haig will talk a little bit more about the revenue and cost variations in a minute.

Now, from a financial reporting perspective, in the first half of last year, the purchase of Modern’s assets were treated as a bargain purchase. The difference between the appraised value of the acquired assets and the fair value of the stock and warrants paid for the assets was treated as a gain. Now, this is explained more fully in the press release and in the Form 10-Q to be filed with the SEC tomorrow. Haig?

Haig Bagerdjian

Thank you, Alan. As in the past, I’ll keep my comments brief, to allow more time to answer your questions. As Alan mentioned, our revenues were $6.6 million in the second quarter of fiscal 2017 compared to $9.7 million in last year’s second quarter.

During the quarter, we experienced lower than expected revenues. Some of the customers are taking work in-house. We have also lost some future work due to competition. Our new initiatives for growth are taking hold but not as fast as expected. Those factors have caused pressure on our cash resources.

During the quarter, we continued to adjust our cost structure. In response to lower revenues, operating costs have been reduced from $24.5 million in the first six months of fiscal 2016 to $20.6 million in the first half of the current fiscal year. On a more finite basis, operating costs in February 2017 are expected to be about 20% less than in the same month last year.

We have more recently consolidated services among our three facilities to attract additional business. We believe those moves will further contribute to the bottom line. We’re now entering key pilot season, which begins the push for new network shows. Our renovated Hollywood Way location has been well-received by the customers, and we are looking forward to a successful season.

Operator, I would now like to address the questions. Please open the lines.

Question-and-Answer Session

Operator

Certainly. [Operator Instructions] And we’ll go first to the line of Steven Lovell. [Ph] Please go ahead.

Unidentified Analyst

Hello. Good morning, Haig and Alan. I guess I’ve got a few questions. There was a Chinese investor that’s taken a big position in Point.360 several years ago, I think three years ago. Is he still an investor in the Company?

Haig Bagerdjian

We never could track that individual. We saw the filing as you all did. We tried to identify who the person or the entity was. We couldn’t find an individual or an entity representing those shares. So, to us, it’s a mystery investor we’ve been unable to identify. And we have not seen any further filings, either upwards or downwards to the holdings that was reported in that filing.

Unidentified Analyst

Okay, thank you. Do you have any updates on Movie Q?

Haig Bagerdjian

Movie Quarter, we have -- if you remember, we had three pilot sites, and we closed one of them down. However, we sold one of our more compact, robust in a new location. The business is not getting as much traction as we hoped for. However, technology is still functioning as was hoped for. So, issue is not a matter of technology or software. The issue is, as you know, the DVD business, even when we entered we knew it’s going to be a sunset business. The aim was geared more trying to take advantage of the situation at the time and then use that technology for other inventory management applications. Because of the integration issues with Modern and priorities, we have put Movie Q on a kind of a backburner. We have not invested money in that effort. We are just maintaining what we have. And having conversations with potential, either disposition of that IP or the business or talking to the chains, trying to see if they can utilize the asset to optimize their inventory management. So that’s the state of Movie Q operations.

Unidentified Analyst

Okay, thank you. You have bought lots and lots of shares in the open market, and following the acquisition of Modern, you also bought gain lots of shares. But now, as many of investors look at the top line and the bottom line, the bottom line is very -- suffering since the Modern acquisition. I’m trying to understand rationale for buying the shares, so many shares. And I’m just trying to get a sense of the valuation for the Company because now the business seems to be honestly softening quite a lot. So, where do you value the Company?

Haig Bagerdjian

A great question and not an easy one to answer, but I’ll try to do my best. Buying Modern was to expand our service offering, better align what the market is going to be instead of what it was. By doing so, we have added certain capabilities that Point.360 of old did not have., i.e., we are now player in a television new programming post production domain. We spend a considerable amount of time and energy optimizing the location, utilizing existing equipment, adding to it and so forth. Now, I think we are poised to take advantage [Technical Difficulty] business units. It gave also capabilities in high-end QC. As you know, a lot of new formats are entering into, that be home theater or otherwise, mobile devices and so forth. And we are a leader in that domain. Not only we have preferred status with Netflix, but we also have preferred status with other platforms. So that capabilities, we were doing in the past and Modern was doing it, combining those capabilities have given us a tremendous opportunity. Localization, we have seen a tremendous growth from as low as $20,000 a month; we now are increased that revenue 10-folds on the monthly basis, and we see localization as another good growth opportunity. That’s on the positive side of the equation.

On the negative side of it, unfortunately Modern was mismanaged; that’s the least I can say. As far as going through a transition and the difficulties that business unit was suffering, basically three fundamentals were affecting that business unit. A, there was no permanent leadership. Number two, there was a tremendous poaching by competitors, actually a big portion of the business basically either was out of the Modern’s facilities before we acquired it or they exited soon thereafter. So, the challenge was, and we are looking to get out of that because a lot of work has been done, and we believe that we are at the end of that cycle. But the difficulty was to stabilize the labor force, stabilize the customer base, understand what was missing, what needs to be replenished, and then, we have to make some tough decisions, what sector of the business to emphasize and what sector of the business to deemphasize. All those efforts, especially when there is not a tremendous cash reservoir, requires maneuvering through difficulties and so forth. And meantime, we have a trend because of acquisitions in our customer base, they are trying to consolidate their businesses. They’re trying to in-source some of the services that used to be outsourced to us and player like us. So, all these forces have been incredibly negative to top-line and consequently that has impacted the bottom line.

We believe that as I stated, November and December were slow months, unusually slow months, comparatively speaking. And those months put a tremendous pressure on our cash resources. We are doing better than December or November in January. And it looks like the improvements are moving forward in and in February.

Now, why am I still a believer? There are two answers, right, either I am a fool or…

Unidentified Analyst

Yes, I don’t think so.

Haig Bagerdjian

That all this effort is going to yield. I am still of a belief that the things that we’re doing to reposition combined entities are the right ones. We are concentrating on the efforts that promising most positive growth in the future. As I indicated, localization will continue to be a great emphasis for us, because as we platforms, penetrating issue of foreign countries, they require content in a different languages, and then television has been growth engine for the industry for last few years, and we believe it will continue to be. So, we are emphasizing television in two aspects, A, original content post production; and also re-mastering and distributing throughout the world and doing things to that content that our customers require. And those are basically two big categories. One is localization; second is to package it to the platforms that they are going to send to work stations or countries.

So, I think those two big areas are areas of interest for us. And I do believe that even though we are going through, like I said, cash difficulties, I do believe that we have a chance to turn this thing into a different story than it has been for last couple of years. I do believe that we should be able to be a player in the marketplace that provides valuable service and its value for that. And I think if we do that, provide -- complete the turnaround, get over this cash crunch, I think we will see a positive bottom line. So, those are regions why I invested. I’m still committed to the business and doing everything so that my enthusiasm is translated into results and those results are visible to the shareholders and hopefully then we can attract more liquidity by people wanting to buy our shares.

Unidentified Analyst

I wish you all the best, Haig. In the past, you have sold some assets to raise some cash from properties in the other state. Do you think you have assets that you can sell, if needed to raise some cash and fix [ph] over the next few months?

Haig Bagerdjian

We are doing two things. As the consolidation of locations has gone in a way that we hoped for, there are few more things that still are in the planning board that we will implement, further optimizing our operational capabilities.

With acquisition of Modern, we acquired lots of gear. And as we are consolidating our operations, some of those equipment become available for us to sell it. And we have conducted one small auction where we sold some of the extra equipment; we’ll be doing more of that. We believe that we can raise cash that way. As indicated, we have substantially reduced our operating cost. So, we believe we should be in positive cash in February and -- I’m sorry, in March. We will lose some still from a cash perspective in February.

So, I do believe that we are looking at the realities with attention that it requires. We have approached our bankers trying to see if we can get additional liquidity from them, if we need it. So, those are -- we are making steps. As far as other assets, I’m not in a position, we are looking at other things, other than what is obvious, as I indicated, other things that we can look at, disposing it. Earlier question was about the Movie Q. Obviously, there is an IP that in our belief is worth something and is useful, it’s functional. Obviously if we get a right valuation for that, we would be able to either license it or enter into a royalty deal or even dispose that. So, those are the immediate actions that we are taking.

Unidentified Analyst

Thank you, Haig. One final question, this is regarding the valuation. Currently, the market cap is about 4 million. Where do you think -- honestly [ph] based on your experience, where do you the Company should be valued at, couple of years or maybe one year down the road?

Haig Bagerdjian

I think it all depends how effective and successful we are bottoming down the uncertainties, as we’ve talked about it. The key is getting out of the cash crunch that we are facing and then implementing the strategies. And hoping is maybe too weak of a word but if not big moves happen in the marketplace, if the trends stay as we see them developing, we should have a nice growth in television business and we should be able to also provide additional services and be preferred vendor for our customers. And I think if we do those things, it all comes down to showing shareholders positive results. I think if we do that, then we see our valuation reflecting our efforts.

Unidentified Analyst

That’s all. Haig and Alan, thanks a lot for answers. And I wish you all the best for the coming year. Thank you.

Haig Bagerdjian

Thank you.

Operator

[Operator Instructions] It appears we have no further questions at this time. I would like to turn it back over to our speakers for any closing remarks.

Haig Bagerdjian

Thank you very much, operator. Thank you all. Wish you all a great weekend ahead. And we’ll keep you informed as the events develop, until next time so long.

Operator

We’d like to thank everybody for their participation on today’s conference call. Please feel free to disconnect your line at anytime.

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