Digital Domain Media Group's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Digital Domain Media Group Inc. (DDMG)

Q2 2012 Earnings Call

August 15, 2012 11:00 AM ET

Executives

John Textor – Chairman and CEO

Shannon Burns – Head, IR

John Nichols – CFO

Analysts

Koji Ikeda – ROTH

Tony Wible – Janney

Doug Creutz – Cowen & Co

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2012 Digital Domain Media Group, Inc. Earnings Conference Call. My name is Chenée and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of today’s conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today, Mr. John Textor, CEO. Please proceed, sir.

John Textor

Hi. Thank you very much and thank you, everyone, for being on this morning’s call as we report our second quarter revenues and discuss the achievements and milestones of this last quarter and specific plans going forward. Before I get started this morning, I’m going to turn it over to Shannon Burns, Head of Investor Relations here at Digital Domain, for a reading of the Safe Harbor statement. Shannon?

Shannon Burns

Thank you. Good morning. Certain statements made during this call will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include comments about the company’s plans, prospects, strategies, and future performance. They are made on the basis of our management’s current expectations and beliefs, as well as a number of assumptions regarding the future business performance as of the time the statements are made.

Such forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other important factors, including those identified in the Safe Harbor statement that is part of today’s earnings press release that is the subject of the conference call and webcast. Many of these are outside of the company’s control. These could cause actual results to differ from results expressed or implied in the forward-looking statements. Such differences may result from actions taken by the company as well as developments beyond the company’s control.

Further information on factors and risks that could affect our business is included in the filings we make with the Securities and Exchange Commission from time to time including under the heading Risk Factors in our Form 10-K filed March 30. These documents are available in our website at www.ddmg.co. This conference call and webcast also contain non-GAAP financial measures. A reconciliation of the non-GAAP measures to GAAP measures is provided in today’s earnings release.

All information provided in this call is as of August 15, 2012, and the company undertakes no obligation to publicly update the information contained in this call or any forward-looking statements to reflect new information, events or circumstances, or to reflect the occurrence of unanticipated events. As a last note, please remember that members of the media present on the call are in listen-only mode.

Now, I’ll turn it back to John.

John Textor

Great. Thank you, Shannon. I’m going to provide a quick overview of what we’re going to discuss on the call before we get to the numbers with John Nichols. The call is going to be a discussion about revenue growth. We’re pleased to report significant revenue growth in the second quarter continuing through the end of the year as expected with comparable growth in our revenue backlog.

We’re going to talk about our margins, our last six months, and the strengthening margin of our projects going forward. The substantial elimination of unutilized labor as we’ve rationalized our cost, the cash flows; I want to help you better understand what we spent our money on in the first half, I think it’s important to segregate investments we’ve made versus a much smaller number related to cash burn from operations. We want you to fully understand where we’re in cash flow in the last six months and going forward.

We’re going to talk about our capitalization and some nice plans we have to make accretive improvements to our capitalization structure. We’re going to go into detail on our strategic process, why we felt obligated to enter an evaluation process and what we think will come out of it and what the goals would be of that?

As far as the quarter itself, it was an extremely productive quarter. When you write these press releases and you have to sort of lay out what actually happened in the quarter, I think in this particular quarter, we’re really surprised that everything we put into the earnings release actually happened within a short three-month period. So it was highly productive quarter. It included the launch of our Tupac inspired virtual performance business back in April 14 on stage at the Coachella Film Festival that created an all-new business for us, a new set of customers in our visual effects business.

We announced our partnership with Apollo’s Core Media to launch Elvis Presley as the first virtual performer, so that’s not just a meet new concept, but that’s a big opening contract and opportunity, a $100 million grant from Abu Dhabi, which allows us to further broaden our global participation in other film markets while building the highest quality animation footprint with lowest possible cost. $100 million grant from Abu Dhabi occurred this quarter.

Our 3D patent portfolio licensing program saw several sort of major milestones with successful outcomes to litigation, the execution of license agreements connected with litigation and also other partnerships that we stepped into, again, the reduction of unutilized labor, which we’re going to drill down into.

We have substantially eliminated extraordinary unutilized labor, that’s labor related to the training of people and the launch of new facilities. It’s what we told the market we’re going to do to build out these new facilities and opportunities. It’s what we promised to the communities that we would do in training these people as we accepted those grants and the success of that is before those grants run out, if you’ve trained your people and positioned them to work on revenue projects and you’ve done that ahead of schedule and that’s a good thing and that occurred at the end of the second quarter and going into the third quarter, we’ve announced that rationalization of our cost.

The China visual effects partnership and film distribution agreement with Galloping Horse also occurred in the second quarter. The company completed principal photography of its first co-owned, co-produced live-action feature film that is co-produced with OddLot Entertainment and Summit/Lionsgate called Ender’s Game. So now we’ve moved into the, moved away from the investment period in that film, which challenged cash flow and now we’ve moved into visual effects production where the film is paying off as a visual effects vendor and we are moving into delivery of that film into 2013. And we also announced, as I mentioned a moment ago, our pursuit of strategic alternatives and we will lay that out further.

So an extremely busy quarter, strong revenue growth, rationalization of expenses and a whole lot of achievements and milestones during the quarter, which I will drill down on, but first to John Nichols, our Chief Financial Officer, he is going to discuss in more detail the financial result of the quarter.

John Nichols

Thank you for joining us today for our update call to discuss recent events and our second quarter results. Some of you may have already seen the financials we’ve released in the 10-Q and the press release this morning. So I’ll just quickly recap the main results and then discuss a few key metrics.

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