National CineMedia, Inc. (NCMI) Q3 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the National CineMedia Incorporated Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Oddo, SVP of Finance for National CineMedia Incorporated. Thank you, sir, please begin.

Good afternoon. I'd like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the securities act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. All statements, other than the statements of historical fact, communicated during this conference call may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the company's expectations are disclosed in the risk factors contained in the company's filings with the SEC. All forward-looking statements are expressly qualified in their entirety by such factors. Now, I'll turn the call over to Kurt Hall, CEO of National CineMedia.

Thanks, David. Good afternoon, everyone. Welcome, and thanks for joining us for our Q3 earnings call. Today, I'll provide a brief overview of our Q3 2013 results and comment on our outlook for the remainder of the year and our progress against our longer-term operating strategy. David will then provide a little more detail about our Q3 financial results and full year guidance. And then, as always, we'll open the line for questions. Our Q3 revenue came in near the upper end of our guidance range, while adjusted OIBDA came in at the midpoint of our range. The slightly lower adjusted OIBDA margin reflected lower-than-projected ad revenue and higher Fathom revenue. While we were comfortably within our guidance range, the current quarter could have been much better if it were not for some shifts in the -- from Q3 to Q4 of some regional revenue, and a portion of our 4 -- of 4 national campaigns that had created delays. We also were forced to reduce the size of 1 national campaign due to exclusivity conflicts. This national ad revenue decline was partially offset by the continued growth of our local and regional revenue and the continued expansion of our network and a strong September box office. Our network expansion in box office -- our strong box office resulted in a 9.6% increase in our salable impressions. Despite the lower third quarter national ad revenue, with first half adjusted OIBDA of 22% versus 2012, 9-month adjusted OIBDA grew 6% to $172 million, which is a record first 9 months for our company. Our 13% Q3 national revenue decline was driven by a 19 percentage point decrease in national on-screen inventory utilization and 5% lower CPMs, while offset by the higher network attendance. The decrease in utilization reflects the tough 2012 comp and included the record $20 million Q3 2012 campaign by one of our advertising clients that launched a new product with a 2-minute made for cinema ad. While this client was one of our larger Q3 2013 spenders, this year, they only represented approximately 7% of our Q3 national ad revenue, versus 19% in Q3 2012. Excluding this client in both 2012 and 2013, our 2013 Q3 utilization would have been up over 3 percentage points. Lower CPMs are a trend that we expect to continue over the next several quarters as we expand our client mix in the categories that have lower pricing expectations, and we continue to seek new theater circuit affiliates to expand our salable impressions. Having said this, our year-to-date CPMs are only down 3.3%. These more aggressive pricing strategies, our upfront strategy and our focus on developing unique integrated marketing campaigns, contributed to the addition of 25 new clients in 2013 that had never spent with us or have not spent since 2006. 5 of these clients were added during the third quarter, and 11 were included in Q3 2013 revenue. The new national clients added so far this year included businesses in computer hardware, personal care, liquor, cable TV, import auto, apparel, Prepared Foods, telecom, software and insurance categories. These new clients helped drive a 9-month utilization increase to 3.5 percentage points on 2.8% more attendees, despite decline in Q3 versus the record Q3 2012 national revenue. While we're currently behind last year's upfront bookings at the same time, we are continuing to work on several 2014 campaigns and have recently formed new long-term cellphone courtesy PSA partnerships with Geico and M&M/Mars, and a new content partner deal with NBC Sports and other select Comcast cable networks. As noted, our local advertising sales team had another strong quarter of growth, with Q3 2013 revenue up 8% versus Q3 2012, as a number of the Q3 contracts booked increased as smaller businesses began to spend again with the improving economy. And we've benefited from the continued expansion of our network through additional markets and better geographic coverage across existing markets. These smaller contract increases were partially offset by a Q3 decline in a number of contracts over $100,000. This appears to be simply timing, as our larger contract dollar value is up 8% through the first 9 months of 2013 and one of the primary drivers of our 14% local revenue growth for the first 9 months of 2013 versus 2012. With over 1,000 screens added since 2011, now fully integrated into our digital network and sales process and more new theaters continuing to be added to our network, we expect continued growth from our local and regional part of our business. In fact, while it's still very early in our 2014 sales process, our 2014 local and regional bookings are already 37% ahead of 2013 bookings at the same time last year. With online and mobile video marketing platforms becoming an increasingly important part of national and local marketing campaigns, our various online and mobile initiatives are beginning -- are becoming an increasingly important part of our integrated bundling strategy. We continue to expand our network of online and mobile entertainment publishers that now are generating over 51 million unique visitors per month, including our Movie Night Out online site and Movie Night Out and FirstLook Sync apps, that now have over 2 million downloads. While the FirstLook Sync app was only recently launched as a way to connect movie patrons' smartphones to our FirstLook preshow, its response rates have been significantly higher than the market norms, providing a new unique cinema marketing tool for brands. As mentioned earlier, the competitive positioning of our ad business continues to benefit from our strategy to expand and improve the technical capabilities of our national theater network. During 2013, we have signed 5 new affiliates with theater circuits -- theater circuits. And Southern, one of our existing network affiliates, acquired a regional circuit that will join our network in mid 2014. These affiliate additions have 408 screens with over 12 million annual attendees. Our business has also benefited from the recent founding member acquisitions of the Great Escape rave in Hollywood theater circuits. Net of required dispositions, these acquisitions have expanded our network by 12 theaters, with 192 screens and approximately 9 million annual attendees, and an additional 223 of these acquired theaters with approximately 10 million annual attendees will join our network when their contract expires with Screenvision over the next few years. We currently expect to receive approximately 3 million of integration payments annually as compensation for the NCM LLC units that have been issued until these screens shift from the Screenvision network to our network. While 97 of the new theaters with 1,245 screens acquired by our founding members were already part of our network, the shift to the higher margin theater access fee structure will increase our annual adjusted OIBDA and adjusted OIBDA margins. While we've made good progress expanding our network, there's still more potential as we continue to have promising discussions with several regional circuits that are coming out of contract with Screenvision over the next few years. This more aggressive affiliate strategy is designed to allow us to keep our future impression base and balance with the growth of our client base and increasing inventory utilization. Also, with this expanded reach and broader impression base, we will be more competitive with other regional and national video advertising networks. Our Fathom Events business had its best Q3 ever, as many of our higher-quality events happened in Q3 this year. As a result, Q3 consumer revenue grew 53%, with the number of Q3 events increasing to 17% from 13%, and the average revenue per event increasing 17%. Successful events during the third quarter included Bruce Springsteen and the Grateful Dead concert events, Mayweather-Canelo fight, and the record-breaking Kirk Cameron Unstoppable event that played to nearly 170,000 people in 1 night. The higher Fathom consumer revenue, combined with lower programming cost percentages, contributed to a 59% increase in Fathom's Q3 operating income versus Q3 2012. The 2013 Fathom operating income for the 9-month period decreased 17% versus the same period in '12 due to the wind down of the business meetings division, and a 10% decrease in consumer revenue for the current 9-month period versus 2012. These strong Q3 operating results illustrate how Fathom's quarterly revenue continues to be very inconsistent due to the lack of a consistent supply of high-quality programming. We believe that the spin-off and new ownership and business structure with our founding members discussed on the last call will allow the Fathom business to attract a more consistent supply of high-quality programming by more effectively leveraging its national network and theater owner operational support. Most importantly, it will let NCM management focus its full attention on our growing and much higher margin score advertising business. With the final documentation nearly complete, we now expect to close this transaction at the end of November. Looking ahead, while October 2013 advertising and Fathom revenue track ahead of October 12, and we are well booked for December, the November national scatter market has been very soft. So while we have a number of national scatter proposals working, we believe that the street consensus at the upper end of our revenue and adjusted OIBDA guidance range is too high. We now expect our revenues and adjusted OIBDA to be at the lower end of our existing annual guidance range. This guidance reflects another strong quarter of our local and regional advertising business against the difficult Q4 2012 comp, offset by the impact on our revenue and adjusted OIBDA of the Fathom restructuring and an assumption that we only closed approximately 5 million or approximately 80% of the dollar value of scatter proposals that are pending. And a continuous strong box office keeps make-goods low. As you know, due to our high incremental margins, the loss of only 1 or 2 national advertising deals can impact our near-term adjusted OIBDA meaningfully. Consistent with our longer-term strategy and our recent 9-month results, we expect our Q4 national utilization to be up, but our CPMs to be meaningfully lower due to a shift in our client mix, lower content partner spending versus Q4 2012 and a more competitive marketplace. While my view of the remainder of 2013 is a bit cautious, I continue to believe that over the longer-term, we will benefit from our unique and engaging theater environment where ads can't be skipped and our ability to deliver increasing national reach versus other video advertising platforms that are losing viewership to multiple new online and mobile video entertainment platforms. That is all I had for now and I'll now turn the call over to David, our interim CFO, to give you some more details concerning our Q3 2013 financial performance and annual guidance.

Thanks, Kurt. For the third quarter, our total revenue decreased 6% versus Q3 2012, driven by a 7.5% decrease in total advertising revenue including beverage, partially offset by a 31.6% increase in Fathom Events revenue. Total Q3 2013 adjusted OIBDA decreased 9.9%, and adjusted OIBDA margin decreased 240 basis points to 56.8%, reflecting the decrease in our high margin advertising revenue to 94% of our total revenue versus 96% in Q3 of 2012. Our margin decrease was partially offset by acquisitions by our founding members of certain of our network affiliates and the resulting shift from the affiliate revenue share cost structure to the higher margin founding member theater access fee cost structure. We also recorded 1 million of AMC Rave and Cinemark Rave integration payments for the third quarter versus none in Q3 2012, and thus adjusted OIBDA, including integration payments, only decreased 8.7% for the quarter. You should note that these integration payments are added to adjusted OIBDA for debt compliance purposes and included in the quarterly available cash distributions to our partners, but are not included in the reported revenue and adjusted OIBDA as they are recorded as a reduction to net intangible assets on the balance sheet. Our Q3 2013 advertising revenue mix shifted to 71% national, 20% local and 9% beverage versus Q3 2012, which was 76%, 17% and 7% respectively. Q3 2013 national ad revenue, excluding beverage, decreased 13.1% and reflected a decrease in utilization of 117.6% compared to 136.1% in 2012. Primarily due to the absence of the 2-minute ad that Kurt mentioned, and 5% decrease in Q3 CPMs. The utilization decrease was partially offset by a 9.6% increase in our Q3 2013 network attendance versus Q3 2012, related to the stronger industry box office versus the third quarter of 2012, and the continued addition of new network affiliates. The strong box office for the last few weeks of the quarter resulted in a $500,000 make-good balance, which approximated the make-good balance at the end of Q2 2013 and was lower than the $1.8 million make-good balance at the end of Q3 2012. Our Q3 2013 local revenue increased 7.8%, with same screen sales increasing approximately 5.6%. This was driven by an increase in total contract volume of 13.9%, partially offset by a decrease in average contract value of 4.7% versus Q3 2012. The average dollar value of contracts under $100,000 increased 2.9% and a number of these smaller contracts increased 14.1%, while the average dollar value of contracts over $100,000 decreased 5.6% and a number of these larger contracts decreased to 28 contracts from 30 contracts, or 6.7%. Looking briefly at diluted earnings per share. For the third quarter, we reported GAAP EPS of $0.24 compared to $0.30 in Q3 2012. This decrease was primarily due to a $10.7 million decrease in operating income and a 2.9% increase in weighted average shares outstanding that was due primarily to the $2.3 million share secondary sale by Regal during the third quarter. For the first 9 months 2013, we reported GAAP EPS of $0.40 compared to $0.25 in 2012. Excluding charges for derivative related items, swap terminations and write-offs of debt issuance costs, 2013 9-month EPS would have been $0.44 versus $0.42 for the comparable period in 2012. As I noted, our income statement does not include integration payments, which provide an offset to increases in minority interest expense that negatively impacts our EPS. For the first 9 months of 2013, total revenue increased 2.2% to $340.1 million, from $332.9 million in the comparable 2012 period. This included a 4.1% increase in advertising revenue to $318.2 million versus $305.6 million in the first 9 months of 2012. 9-month adjusted OIBDA increased 5.6% to $172 million versus $162.9 million in the 2012 9-month period. Adjusted OIBDA margin increased to 50.6% versus 48.9% in the first 9 months of 2012. We also recorded $2.1 million of AMC Rave and Cinemark Rave integration payments for the first 9 months of 2013, versus none in 2012. Thus, adjusted OIBDA, including integration payments for the first 9 months of 2013, increased 6.9% over the comparable 2012 period. Our capital expenditures were $2 million or 1% of total revenue for the third quarter, compared to $2.9 million or 2% of total revenue in Q3 2012. We currently estimate that 2013 CapEx will be in the range of $10 million to $12 million or approximately 2% of total annual revenue. While there are ongoing discussions with several regional circuits that could increase our future impression base, our current capital expenditure projection assumes that no additional network affiliates are connected to our network this year. Moving on to our balance sheet. Our total debt outstanding at the end of Q3 2013 increased to $884 million from $850 million at the end of Q3 2012, primarily due to the term loan fundings of approximately $23 million in swap termination payments, and approximately $13 million of cash to our balance sheet. The increase to our term loan was a result of a November 2012 refinancing, as well as a May 2013 repricing. Both transactions allowed us to capitalize in favorable debt market conditions that lowered our projected 2013 annual cash interest expense by approximately $5 million. We had a $14 million revolver balance and a $23 million of NCM LLC cash at the end of Q3 2013, versus a $25 million revolver balance and $8 million of NCM LLC cash at the end of Q3 2012. Our current average interest rate on all debt is approximately 5.5%, including our $270 million floating-rate term loan bank debt and revolver balances at approximately 3%. Our total debt outstanding is approximately 70% fixed. Our consolidated cash and investment balances at the end of Q3 2013 increased by approximately $45 million to $127 million for the end of Q3 2012, with the NCM LLC balance increasing $15 million and the NCM Inc. balance increasing $30 million. Approximately $30 million of the $104 million of cash held by NCM, Inc. is reserved for income tax payments and tax receivable agreement payments to the founding members. Thus, excluding these tax associated reserves and after payment of the $0.22 per share Q3 dividend that we announced earlier this afternoon, we would be able to pay approximately 5 additional quarters of dividends, even if no cash were distributed up to NCM, Inc. from NCM LLC. Our Q3 2013 dividend that will be paid on November 27, 2013 to shareholders of record on November 13, 2013 represents an annual yield of approximately 4.7% based on yesterday's closing share price of $18.91. Our pro forma net senior secured leverage at NCM LLC as of the end of Q3 2013 was approximately 2.9x, trailing fourth quarter adjusted OIBDA, which is well below our senior secured leverage maintenance covenant of 6.5x. You should also note that while we have no NCM LLC total leverage or NCM, Inc. consolidated maintenance covenant, our total leverage at NCM LLC net of NCM LLC cash balances, was approximately 3.8x at the end of Q3 2013, approximating total leverage as of the end of Q3 2012. And our consolidated leverage, net of NCM, Inc. and NCM LLC cash balances, was 3.3x at the end of Q3 2013, down from 3.4x at the end of Q3 2012. Looking ahead to the remainder of the year, we continue to expect total revenue for the full year to be in the range of $455 million to $465 million, and adjusted OIBDA to be in the range of $230 million to $240 million. As Kurt mentioned, we expect to be in the lower end of these ranges to provide some downside protection and adjust for the impact of the Fathom restructure. You should note that the bottom end of our adjusted OIBDA guidance reflects an assumption that we booked approximately 80% of the national revenue that was booked from this point forward in 2012. Our local advertising has performed well all year, and while comps become more difficult beginning in Q4, we currently expect mid single digit Q4 local revenue growth and low double-digit full year 2013 local revenue growth. We will provide Q1 and full year 2014 guidance when we release our 2013 results in late February. Although, you should note that our 2014 fiscal year will have an extra 53rd week between Christmas and New Year's, a traditionally big week at the box office. That concludes our prepared remarks. And we'll now open up the line for any questions you might have.

[Operator Instructions] Our first question comes from the line of Ben Mogil with Stifel, Nicolaus. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: A couple of questions. So Kurt and David, I think, I want to make sure -- I think I heard you right, but I just want to sort of make sure I got it right. In your guidance, you're basically assuming that you will basically sell 80% of whatever national you sold from today to the end of the year compared to last year, and that number is $5 million as opposed to something like $6 million last year, is that the correct way of looking at it?

Yes. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then -- and just sort of staying on that topic, where are you this year on total sales as a percentage of midpoint of guidance compared to where you were this time last year against the final results? And I think historically, you've given us the percentage, and then of course, we've just figured out the ad dollar difference.

Last year was a little -- or a little different than this year because, as you recall, we brought our guidance down. In our Q3 or August call, we brought it down considerably. This year, we actually took our guidance up in that call, so a little bit of apples to oranges comparisons. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: I mean, can you then give us, say, where you are against this year's midpoint?

Where we are in this year's midpoint. I think we -- I was pretty specific on that. I think we're at the lower end of the range. So I guess, that would -- the answer then would be below the midpoint. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: No, no, no sorry, what I meant is, what is -- how much have you sold so far as of like last week or something, against as a percentage of your, let's call it, 445 [ph], or something like that?

It was only -- yes, I can't back into the number, but you can. I mean, we've basically told you that we only have $5 million left to sell to get to the lower end of our range. So you can kind of back into the number. We could probably figure it out while we're on this call but... Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: Yes, okay. No, I see -- okay, so just maybe a better question I mean how okay, so you've got -- you've given a pretty -- you've given a sense of where you are in national. How much, like at this point going forward, how likely do you see to have any material more national scatter contracts come up to you, have availability that's still relevant, like have you -- are there like a decent number of low-hanging fruit, or is it if you can get that extra million to get to that equal 100% base, that's probably digging as deep as you could go with that?

Yes. I think the caution that we're giving is because as we said, we're very well sold in December. So that inventory is obviously farther away from where we are today, and not as well sold as we'd like to be in November. So obviously, there's more risk of filling that November inventory because you've got less time, right? So we've had, as we said in our comments, good October, good December, and we've got this hole in the middle of November. So that's kind of where we're coming from. So it's not an inventory constraint issue. Clearly, if stock popped up in the marketplace in excess of the 5 million that we've talked about, we could clearly handle it.

Our next question comes from the line of Townsend Buckles of JPMorgan. Townsend Buckles - JP Morgan Chase & Co, Research Division: Kurt, just another on the Q4 trends. Anything notable about the November softness you're seeing in terms of whether this is broad-based or more specific to certain clients or categories. And you mentioned that December was pacing well, so is this sort of an air pocket in November and you're seeing the rebound in December, as we think about the risk of maybe these softer trends continuing?

Yes. Look, and then you never know why something's happening. I could easily sit here and point to the government shutdown and all that baloney, but I just, we continue to point at all these various things and I just don't think it's helpful. The only thing I will tell you is that we've heard from a lot of other networks that we compete against, TV in particular, that they're a little softer than they like in Q4. So I don't know why that is specifically could it be the government shutdown? Who knows, I'm not going to go there. What we have heard that the digital guys seem to be doing pretty well now. They're much smaller revenue bases, so it's a little hard to tell what the real meaning of that is, it's easy to grow, some of these smaller businesses during short periods of time. But I don't think from what we're hearing that we're too inconsistent with what we're hearing in TV. We'd often get out in front of these trends and maybe, there's a little bit of that now. But clearly, December we continue to do okay there. So I don't view it as necessarily a long-term trend. Clearly, the marketplace is pretty competitive right now on the CPM, because a lot of cable networks aren't sold out in the fourth quarter, and a lot of other networks. So there's a lot of people looking for money out there right now, and that puts pressure on the CPMs, as we noted. Townsend Buckles - JP Morgan Chase & Co, Research Division: And Screenvision's been out, sort of saying that they've seen good success with bringing their CPMs down to kind of broadcast TV levels, and making audience demo guarantees. So basically, trying to be just like TV, has that been a challenge at all?

Well, look, we'd rather CPMs not decline, but as we've said for several quarters, I think the reality is, if you're going to compete for cable money and even brought lower price broadcast money, you've got to lower your CPMs during certain time periods. A lot of people are becoming video agnostic, if you will, and they're looking across all video platforms and making decisions about where they want to spend their money. So if you want to move money out of, in lower price categories, out of cable into cinema, you're going to have to lower the price. And I think from everything I've read, same stuff you've read, that seems to be the approach. And I think at year end, you'll see market share movement positive to cinema. I think you'll see growth this year in cinema overall because there has been some lower-priced money moving. When that money moves, and when you decide to lower your CPMs in certain plates versus other plates, to me it's the more important question or strategic question. Townsend Buckles - JP Morgan Chase & Co, Research Division: Right. But that's not a strategy that you're so much going to pursue in terms of very aggressive pricing, right?

Yes. Look, we're going to be aggressive when we've got the inventory. For instance, would we be aggressive in November right now? Yes, because the flight's starting in a few days. So of course, we would be more aggressive in November where we have inventory availability. Are we going to be more aggressive in January through April, in months like October, where traditionally the utilizations have been lower? Of course, we are. That's been our whole strategy. It's really, a supply-demand focused strategy. And I think that's the prudent way to grow this business. Screenvision may have different inventory utilization issues that they're dealing with and so on.

Our next question comes from the line of James Dix with Wedbush.

Two things. I guess, any more color you can give on the outlook for 2014. It sounds initially encouraging. You talked a little bit about local versus national. Local and regional, I didn't hear quite as much on national. So I don't know whether you have any qualitative or quantitative color, as to where you stand on 2014 bookings at this point. And then I just...

The national bookings, as we mentioned, on an upfront basis, are down a little bit versus last year. And some of that could be timing, we're working on a number of deals. The number of deals we're working on right now is more than the dollar value of the deals we're working on at this time last year. So some of this could be timing. We've still got some content partner inventory that we're trying to move into new contact [ph] partnerships, so that could be something that's beneficial. We've also lost a little bit of upfront money associated with our PSA. Our PSA with Sprint had ended at the end of September, we've replaced it as we mentioned with Geico and M&M/Mars. There's not as much of an upfront commitment associated with those deals, although the dollars associated with the PSA have actually gone up, so that was a pretty good trade, for us actually. So I don't think there's anything there that's all that concerning. The one other thing that I have noted is, last year's money was driven by a smaller number of clients. There were 2 or 3 big deals, sort of in the $5 million-plus range. This year, the number of clients that we're talking to about upfront deal, either talking to or have actually done deals with, has increased. The dollar values in some of them are a little bit lower, so I actually like that. Obviously, the idea is to get people onboard and then try to build the amount of revenue that they're going to spend. And there has been some new clients that have come into the upfront marketplace. And clearly, there's been 2 upfront voices in the marketplace this year, not just us. Screenvision has also been out there trying to bring money into the upfront place for cinema. So it's always better to have 2 voices rather than 1. So I think that's been a benefit. As we said, the local is up considerably. I know that part of that is because we have more screens. It appears as though some of our regional business is really kicking up because our digital network is penetrating markets better than it has in the past, and we're in more markets. Obviously, all those are good things. So I think that's the extent of the color that we can give you right now.

Okay. No, that's actually very helpful. And then just in terms of your -- the growth of the network, either through picking up new affiliates or through what your founding members are doing. Do you think how much you've gotten this year from both of those sources and then what looks to be on the horizon over next year, I mean, is that better than what you are expecting 1 year or so ago, kind of in line? I'm just trying to get a sense of just strategically how that's -- how it's playing out until the next round of Screenvision's rumors pop up.

Yes. Look, if you add up the number of affiliates we've added, either directly, through acquisitions by our founding members, or in the case of the one I mentioned, by 1 of our affiliates, we've added about 21 million attendees that are coming online, either just come online or will be coming online next year, on around 600 screens. So I don't know how you want to look at that. That's, give or take, 5% of Screenvision's base, that's a good thing. I know as time goes on, there will be an increasing number of deals that come up for renewal. As I mentioned, we are going to get more aggressive in that area. Given what I see in the marketplace, any time we can improve our reach and our overall impression base, given how quickly other networks are being fragmented, and programming is now being spread across many, many more networks than it has in the past, if you look at all the online networks that are popping up, whether it's on YouTube, or others, programming is fragmenting, and reach, if you will, and rating points are fragmenting across several more networks now than it ever used to. So from my standpoint, I think our competitive positioning gets very much improved by continuing to expand our network. And you mentioned the Screenvision deal, there's always that out there, and it's still something that makes a lot of sense obviously, from an expense synergy standpoint for us, but we can't control that. So our approach is going to be look, there's going to be plenty of impressions out there that we can go out and get. And as we -- as I said, the idea is to try to match the growth in your -- in the demand in the marketplace with your impression base. And if you can keep those 2 things in balance, then pricing should stay in balance. Obviously, to the extent that you have more impressions than demand in the marketplace, that generally puts downward pressure on pricing and obviously, vice versa. So through time since we've gone public, we've always tried to keep those 2 things in line, and we continue to see new clients. As we mentioned, we added 25 clients this year. We continue to see a lot of new clients come into the market. So it's our job to continue to supply the impression base to satisfy that demand.

Our next question comes from the line of Eric Handler with MKM Partners.

Two questions for you guys. First, I was a little bit surprised when you were talking about that you had a greater number of lower CPM-paying customers in the fourth quarter when usually, the fourth quarter, particularly in December, it's a very crowded time for you guys, so therefore, you get higher CPMs. Is that just because November is weighing things down, or is there anything going on with the client mix shift? Obviously, you do have some fewer content partner spending, but aside from that.

Yes. It's a number of things, Eric. Clearly, there's a client mix issue so as you bring some of these people in, you're going to do it at lower CPMs. Generally, some of these guys, you're never going to get to come on to the cinema network unless you go lower. So there's clearly some of that going on, that's been part of our strategy for several quarters now. And the hole in November doesn't help, obviously, because November is usually, especially as you get near the end of November, which does pick up a little bit for us, because that's when the attendance starts flowing. That does hurt a little bit. And look, it's still a little early to tell where our growth, change in CPMs are going to come in in fourth quarter. As we said there's a number of deals we're still working on that could impact the CPM. But we've been pretty clear, I think for quite some time now, that you should expect CPM declines. And from my standpoint, what I look for is if we're continuing to offset that CPM decline, or more than offset, hopefully, that CPM decline with increasing utilization and obviously, higher cash flow, that's the focus that we're really looking at.

Okay. And then secondly, when you think about returning capital, you said you have, after this upcoming dividend payment, you've got 5 additional quarters of cash on hand, you're going to get -- and if you could refresh us with the amount of cash that you're going to get for the Fathom transaction. It's been a while since you've seen a dividend bump with cash accumulating. Is there any reason why it wouldn't possibly go towards a higher dividend?

Well, look, as we've said before, we're always going to look at our dividends relative to our free cash flow, if you will, or available cash distribution increases. Fathom is going to come in over, as we talked about before, it's a debt instrument that we're getting that gets paid over 6 years. So that will come in over a 6-year period. And give or take, the effect on our cash flow is basically a wash, whether you own the business and get operating cash flow, or whether you get payments from the debt instrument, it's give or take somewhere in the neighborhood of the same number. So it doesn't really impact our cash flow and our distributions all that much. So right now, if you look at our numbers, we're somewhere sort of in the mid-ish 90s percent of our free cash flow that we're distributing. As I've said before, our plan is as that number approaches 90%, we'll start to look at potentially adjusting the dividend. Your point on the amount of cash that is accumulating is a good one, and we have been looking and we have $70 million sitting at the public company earning basis points, 30 or whatever basis points. So that is becoming a big enough number that we should be looking at it. Is there a way that we can start generating more return from that? Our structure is a little limiting, as you know, on what we can do with that cash because it is, in effect, that cash has already been distributed out to the operating company, and it's effectively the public's cash. And so I'm not sure a buyback of shares makes a lot of sense, because it does constrict our float so that's something, while it's out there, it's not a high consideration. You bleed off some of this over time with some sort of special -- I've never been a big fan of that quite honestly, Eric. And I don't think you get a lot of credit for that. So we are looking at a lot of different possibilities in trying to earn a bigger return on that $70 million that's sitting there. It does, our structure is a little odd in that respect. We just can't reinvest that in our business because it's actually been already distributed to the public in some ways.

Our next question comes from the line of James Marsh of Piper Jaffray.

A lot of my questions have been asked already, but the one thing I'm just thinking of is we just listened to your remarks, it sounded like the smallest advertisers were getting more bullish and growing, and the biggest seem to be cutting back. It almost reminded me of the Odd Lot theory on Wall Street, where you have the smallest investors kind of driving the stock up, it's contrary an indicator. And I just wanted to get a sense, is there any reason to believe that this is the beginning of a trend, or do you think it's just short-term? I'm just -- all the things that you're seeing, heard initially, with national advertisers, whether they were delaying or downsizing or canceling campaigns, it all sounds just pretty negative, I guess.

Yes. Look, I don't think there's any long-term trends here. I think the big thing that's trying to get sorted out in the marketplace right now, is as all the media, all the agencies and various buyers of media out there start to think about being video-agnostic, I think you're going to see a trend towards that. And there are various video platforms, including online and mobile, obviously TV and cinema and other video platforms. And I think as that gets itself sorted out, I think you're going to see these ups and downs quarter-to-quarter. If you look at the gross numbers right now, the question I keep asking is, everybody says they're growing. Where the heck is it coming from? Video is growing, TV is growing, cinema is going to grow this year, where is the money coming from to fuel all the growth? I mean, who's being hurt by this? I think the answer may be print, maybe it's other promotional dollars. There's obviously a lot of marketing dollars sloshing around in the marketplace. So I think we're going through a transition period right now, where a lot of this thing will get worked out. When I look at our company, I think some of the trends that I'm seeing, as some of this gets worked out, are pretty positive in our favor. I think the issue of how your ad is being seen on other video networks including obviously, most notably, TV. We've noted some data recently where, if you include the C3 ratings, certain programs are getting as much as a 40% bump in ratings, if you include the 3 days after the broadcast. That tells me that 40%, at least for that show, 40% of the people time-shifted. How many of those ads were really being seen? And so that whole trend is impacting the marketplace, I think is a positive one for us because our strongest selling proposition is, we know they can't skip the ads. I mean, you're sitting in the audience, it's there, you can't really -- it's very hard to get away from it. And so I think that trend of technology -- and by the way, online is not immune to that. Either, there are skip buttons obviously out there, most notably with YouTube. And there's also been some data recently that's come out that as high as 70% of the ads online aren't being seen at all. And so I think there's a lot of people trying to work out exactly where they should put their money, and I think that's going to impact the business over the next several quarters. And I like the fact that our network is getting bigger. As I mentioned before, I think fragmentation of programming across all these networks is reducing the amount of impressions that any one network has and the rating points associated with that. That's a good thing for us. And so I think we're in a bit of a transition period right now, where media buyers are trying to sort that out.

Our next question comes from the line of Barton Crockett with FBR Capital Markets. Barton E. Crockett - FBR Capital Markets & Co., Research Division: Could you update us on where you are this year for the transition at this point?

Sure. We continue to talk to some candidates out there, but clearly, time has gone on. David and Jeff, our 2 co-CFOs have done a fantastic job in the urgency to place, to replace the position, is really not there. If we do find somebody that is the perfect candidate for us, we may move on it. Or time goes on long enough, maybe we do something internally. So I think with the experience base we have, between myself and David and Jeff, I think we're pretty well covered, and we really haven't missed a beat. Barton E. Crockett - FBR Capital Markets & Co., Research Division: Okay I mean, that's great to hear. And then if I could get a little bit more color on what you mentioned at the beginning, which is that on national advertising, you said there were some creative delays and conflicts that reduced the national ad campaign. I was wondering if you could elaborate on what exactly is going on there?

Sure. As we've talked, we've talked about this in the past. We just never had a quarter where some of the campaigns, the creative was late and slid into the previous or the next quarter. It's one of the reasons we mentioned October was doing okay. That obviously has helped us in a little bit in the beginning of the fourth quarter, so it's really just purely creative delays. The other one I mentioned, was a situation where one of our clients couldn't -- where we couldn't run as much media as we wanted to, just because of exclusivity issues. They didn't want to run alongside other ads that were in the same category as them. And in some cases, had messaging they didn't like very much. So that was -- that's really the color behind that.

Our question comes from the line of Mike Hickey with Benchmark Company.

Kurt, just a clarification. Sorry, to do this but for November, was that being negatively impacted by cancellations and/or just a weak scatter? I missed that, sorry.

No, it wasn't cancellations. What we said is that scatter was just very soft.

And then obviously, I'm guessing you're still going through your budget for '14 here. But any thoughts on Olympics and World Cup and potentially, how disruptive that could be?

Yes. Look, clearly, there's going to be more money, I think, sucked up in '14 by sports. Where that money comes from, some of it will be increased budgets because some people do have commitments to the Olympics, for instance, and they do, in Olympic years increase their budgets, GM, for instance, and there are others. The funny thing for us, if you look at our biggest quarter ever in the history of our business, was last third quarter, and you had the Olympics right in the middle of it. So I'm not going to say the Olympics are that punishing. I do think you are seeing some shift in GRPs and in dollars to sports which, by the way, to me, is perfectly consistent with what's going on with the DVR and time-shifting and ad-skipping and so on. There's clearly a view out there that sports is more resistant to that, and so I think it's natural you're going to see money move towards sports. And the beneficiaries of that are going to be pretty obvious. Obviously, NBC's going to benefit next year from their Olympic broadcast, and ESPN is going to benefit. And then we always have competition in the first quarter from the football playoffs and then, of course, the Super Bowl. So I think the only new trend that we're kind of watching for next year, is how much money is shifting into sports and the only good news for us, I think, I guess, in that respect is, most of the money placed in sports and Olympics and others all have pretty sizable CPMs associated with them. So it obviously puts in a bigger floor underneath, some of the pricing out there in the marketplace that we compete for. So that -- I guess, that's good news. And how the market sorts that out over time, I think, will basically follow what the data starts to suggest about, is that skipping really having a big impact? And to other technologies, how are they impacting the way people view programming and the way they view ads?

The last question, just I mean Gravity was phenomenal at the box office over October, and just curious, if you can kind of reset [ph] with us what's happening on the 3D ad side within your network, and has that kind of encouraged you to look at that as a potential medium?

Clearly, woke -- I think it woke the medium up a little bit. I think for a while, the bloom, I think, has been off the rose a little bit of the 3D in cinema. I think the numbers are something like 84%, or something like that, of tickets have been 3D for Gravity, which is sort of unheard of. So clearly, there's been a little more buzz about that. One of the things that happened for us, is that a lot of the TV, in fact, all of the TV networks that were doing 3D broadcast have now shut down. And so I think our -- any significant growth for us in the 3D sector is going to be tied to television's ability to relaunch 3D as a medium in the home. And I think when that happens, I think that could be a good thing for us because now there's more than 1 medium or 1 platform, being cinema, to run 3D ads. And we're still going to get the occasional deal from films that are 3D films, or from products like 3D cameras, or potentially televisions in the future, that people start to rollout. But as you all know, the whole in-home distribution of 3D was kind of botched by manufacturers, in my view. And everybody has now backed off from the distribution, because there's just aren't enough homes that can receive it. ESPN and others have pulled back their broadcast of 3D signals. So we're really the only game in town, and we still get a few deals, and there are premium CPMs, so that's good. But this was never going to be a huge growth prospect for us. It's good for the cinema business, it's good for our underlying impression base because obviously, it generates more interest and more attendance. Gravity is just 1 example of that. So don't get me wrong, 3D is a good thing for our business, from a big picture standpoint. Just the interest of advertisers to do something special with the 3D ad has always been somewhat limited, and it will be, I think in my view, until TV gets its act together.

[Operator Instructions] Our next question comes from the line of Liang Feng with Morningstar.

I guess, could you talk some more about the steps you've been taken -- taking to attract some nontraditional cinema advertisers? Are you offering any of them introductory rates, for instance, to hook them into the system or did they sign up largely on the same terms as your -- as everybody else?

I don't think there's any rule of thumb. Clearly, that's one of the strategies, is to try to get people on board with a smaller buy, usually at a lower CPM, so they can test the medium. We also generally provide some research for them. They will verify, if you will, or validate some of our metrics that we sell. The value proposition metrics are obviously sold pretty hard. And really, look, we're selling ourselves as a very high-quality alternative to other video networks. And as I've said before, I think that selling proposition continues to get stronger, given what's going on in other places like TV. So like I said previously, we've added 25 new clients this year that have never advertised, or at least haven't advertised since before our IPO. So we are making some good progress on that.

Are you seeing some of your traditional customers that may be used to paying more for the higher CPM rates migrating to the lower priced time slots, or is it still primarily the newer guys?

Yes. No, you have a little bit of both. And clearly, as I've said before, there's been some pricing pressure in the marketplace that we're reacting to in some cases. So it's a mixture of both. But overall, our strategy has been very clear for quite some time now, is that the trade-off between rate and utilization is a favorable trade-off for us, as long as we can continue to expand our client base, and continue to expand the breadth of that, which hopefully, over the long-term, leads to less volatility quarter to quarter revenue. That's the ultimate goal.

There are no further questions at this time. I would like to turn the floor back over for closing comments.

Okay. Thank you, everyone. We will talk to you all early next year after we have the results for the year and we'll obviously give you a lot more background on what we're expecting for '14. So thanks for all your support and we'll talk soon.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.