Outdoor Channel Holdings, Inc. (OUTD)

Q3 2008 Earnings Call Transcript

October 30, 2008, 5:00 pm ET

Executives

Brad Edwards – IR, Brainerd Communicators, Inc.

Roger Werner – President and CEO

Shad Burke – CFO and Chief Accounting Officer

Tom Hornish – COO, EVP of Corporate Development, General Counsel and Secretary

Analysts

Michael Kupinski – Noble Financial

Bryan Goldberg – JP Morgan

Zack McAdoo – Zanett Group

Andrew Cowen – Tricadia

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Outdoor Channel Holdings, Inc. earnings conference call. My name is Amity, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of this conference.

(Operator instructions) I would now like to turn the presentation over to your host for today's call, Mr. Brad Edwards. Please proceed sir.

Brad Edwards

Thank you, operator, and good afternoon everyone. Before we begin, please recognize that certain statements on this conference call are not historical fact. They may be deemed, therefore, to be forward-looking statements under the Private Securities Litigation Reform Act of 1995.

In particular, statements about future results expected to be obtained from the company's current strategic initiatives are forward-looking statements. Many important factors may cause the company's actual results to differ materially from those discussed in any such forward-looking statements.

These risks and uncertainties are described in further detail in the company's filings with the SEC. You are directed to these filings for more detailed information. Outdoor Channel Holdings undertakes no obligation to publicly update or revise its forwardlooking statements.

Please also note that we will be discussing non-GAAP financial measures within the meaning of the SEC rules. The company believes that earnings before interest, taxes, depreciation, and amortization or EBITDA, adjusted for the effects of discontinued operations and share-based compensation expense provide a greater comparability regarding its ongoing operating performance. This information is not intended to be considered in isolation or as a substitute for net income or loss calculated in accordance with U.S. GAAP. A reconciliation of the company's U.S. GAAP information to EBITDA, adjusted for the effects of discontinued operations and share-based compensation expense is provided in the table attached to the company's 2008 third quarter earnings release, distributed earlier today and available on the Investor Relations section of the company's website at www.outdoorchannel.com.

Outdoor Channel is Nielsen-rated. Nielsen Media Research is the leading provider of television audience measurements and advertising information services worldwide. Please note that Nielsen estimates regarding Outdoor Channel's subscriber base are made by Nielsen Media Research and are theirs alone and does not represent opinions, forecasts or predictions of Outdoor Channel Holdings or its management. The company does not, by its reference today, imply its endorsement of or concurrence with such information.

Finally, we have allotted one hour for today's call. Outdoor Channel's President and CEO, Roger Werner, will begin with a brief overview of the ongoing progress being made with strategic initiatives being implemented at Outdoor Channel. Shad Burke, Outdoor Channel's Chief Financial Officer, will then provide an overview of the financial results for the 2008 third quarter. Then we will open up the call to for a Q&A session. As usual, Outdoor Channel's Chief Operating Officer, Tom Hornish, is also here with us and will participate in the Q&A. With that said, I will now turn the call over to Roger Werner. Roger?

Roger Werner

Thank you, Brad, and welcome everybody. Results for the third quarter end and for the nine-month period year-to-date are pretty good. Shad is going to detail in a minute or two during the quarter we continue to demonstrate improving fundamentals across the business, we continue to report strong top line growth, we are controlling our cost pretty well, and that net improved our profitability.

Top line performance was driven by continued growth in the advertising sales revenue line as we capitalized on fairly dramatic ratings improvements and our ability to generally deliver a highly targeted male audience to our advertiser. Despite the economic slowdown that we are all experiencing and a generally weak advertising market across most of the traditional media, we continue to enjoy double-digit growth in ad sales. And in fact, have now generated eight or nine consecutive quarters of double digit year-over-year ad sales growth.

At the core of the success, as I mentioned on the consorted efforts, we have taken over the last two years to strengthen the brand and improve our product offering, and that has led to significant increases in our viewing audience. And during the third quarter, I am happy to say that household delivery is up 39% year-over-year with primetime up 20%. So as we seek to monetize that growing audience, we have also got to continue to focus on controlling cost. And as I said, I think we have done a reasonably good job there. We remain committed to driving growing profitability for our shareholders by exploiting the inherent operating leverage in our model.

Looking ahead, we remain focused on executing a growth plan which will include securing and building on the relationships that we have with our distribution partners; expanding the advertiser base, a number of companies actually doing advertising with us; further strengthening our programming menu and hopefully growing audience share in a meaningful way; and finally, continuing to build and monetize our digital presence, principally, the online broadband companion channels that we have. We also remain committed to maintaining a strong balance sheet, in addition to controlling cost. Needless to say, we believe our healthy current financial position is a key asset in this kind of environment and while we continue to review potential acquisitions, the growth strategy, it is important to know is not dependent on making acquisitions. So this is an area where we are moving ahead but we are moving cautiously.

In the current quarter, our ad sales remain robust, the fourth quarter I’m talking about, although we are seeing some impact from the difficult advertising environment nationally and particularly, the fourth quarter scatter market is weaker and weakening, I think, it is fair to say. So while we are on the pace to generate double-digit ad sale growth in the fourth quarter and for the year, the rate of growth is moderated somewhat as advertisers are taking a much more conservative approach to planning and buying ad time. And, I think, it is also fair to say that the visibility on 2009 is really not good. So I cannot really provide much in a way of guidance today for ‘09. We are taking it a month at a time and have not actually finalized the budget for ‘09 ad sales. However, while the rate of growth may slow from recent historical levels, we still have room to grow the ad sales line with regards to the advertiser base and expanding the number of advertisers buying on the channel.

Finally, also worth noting, we are in continued discussions with key distributors regarding renewing carriage contracts and we are taking steps to expand our distribution to more of their subscribers. Approximately, 60%-65% of our distribution is now currently under contract, that is a big progress from a year ago. And as we recently demonstrated with an upgrade on Comcast Colorado Systems, we are also focused on working at the regional level right at the grassroots level to expand our presence on more broadly distributed tiers with those customers who are currently carrying us.

I would hate some to add, however, that as more of our customers make the move from digital to analog, we may see some shrinkage in the subscriber base on a markettomarket basis as some of our MSO customers reformulate various tiers of service. But I think all in all, we are in pretty good shape in terms of having the right programming, the right marketing, and the right people working in the field at the moment.

So, in summary; we continue to execute on the strategic plan, we continue to build a leadership position as the largest and most viewed network in our editorial segment and we are pretty pleased with trends for the third quarter, particularly, given all of the turbulence in the overall economic environment. Now, I’m going to turn the call over to Shad. And, Shad, would you please review the third quarter results for us.

Shad Burke

You bet, Roger. Thanks. As Roger noted, we are very pleased with the overall financial and operating progress we achieved during the third quarter. As we execute our plan, grow our top line, and control our cost; we are seeing consistent improvement in the operating fundamentals. We are improving our margins and increasingly converting our revenue growth in the operating profits.

During the quarter, our total revenues increased 18.2% over the prior year period. Driving our growth, our advertising revenues, once again, posted robust gains of 32.3% over the third quarter of 2007. The increase resulted largely from our ability to drive price increases for short form advertising as we capitalized on our position as the nation’s leader in outdoor content.

As anticipated, subscriber fees continue to trend lower year-over-year as a result of the renewed carriage agreement with Outdoor Channel’s service operators. Third quarter sub-fees were down 5.4% year-over-year. Notwithstanding the potential impact of the economic recession on consumer behavior and our subsequent organic sub-growth, we remain optimistic about our ability to grow our overall base and ultimately began to generate increases in our affiliate fees. I believe we are nearing a point where we will begin to see a drop level with regards to affiliate fee decreases. At any rate, we are taking a cautious view given the economy and we are focusing on execution.

As expected, our total cost of services trended slightly higher year-over-year and was up 2.5% over the 2007 third quarter. However, given our robust revenue growth, cost of services as the percentage of total revenues declined to 22.6% from 26.1% in the prior year period.

Production and operation cost for the current third quarter rose 32.1% over the comparable 2007 period and is due to $150,000 increase in expenses associated with our broadband channel that was launched in July of ’07 and a $200,000 increase in compensation related expenses attributed to the strengthening of our operational and production personnel. Offsetting these increases was a 37.5% year-over-year decline in satellite transmission fees in the 2008 third quarter.

Advertising expenses for the third quarter also decline by 63.6% from the year ago period. This decline was due to nonrecurring activities that took place in 2007 that did not reoccur in 2008, specifically, our re-branding initiatives that happened back in the third quarter of ‘07.

SG&A expenses were flat compared to the year ago period and declined as a percentage of total revenue to 44.1%. This compares with nearly 51.5% a year earlier and 54.7% in the preceding second quarter.

For the third quarter, the company recognized net income of $2.4 million or $0.09 per diluted share; and EBITDA, adjusted for the effects of discontinued operations and sharebased compensation expense, was $5.4 million. In the year ago period, the company recognized net income of $1.5 million or $0.06 per diluted share; and EBITDA, adjusted for the effects of discontinued operations and share-based compensation expense, was $3.1 million.

During the 2008 third quarter, we generated $3.8 million of cash from operating activities versus $3 million in the year ago period. We also continue to maintain a very strong debtfree balance sheet. As of September 30, 2008, the company had cash and investments in available per sale securities totaling $64 million, working capital of $67.1 million, and total shareholders equity was $136.5 million.

On the side note, just this month in October, we completed our 15 million share repurchase program. We repurchased approximately 2 million shares since initiating the stock buyback program back in April of this year.

That concludes our formal remarks. And now Roger, Tom, and myself will be happy to answer and take any questions that may be there. Operator?

Question-and-Answer Session

Operator

(Operator instructions) The first question comes from the line of Michael Kupinski with Noble Financial. Please proceed.

Michael Kupinski – Noble Financial

Thanks for taking the question. Congratulations, those numbers are nothing short of spectacular. I was just wondering in terms of the advertising environment, I was wondering, Roger, if you can add a little bit more color on what you are seeing out there, particularly, as it relates to the September 15. Is that when you started to see things kind of weakened a little bit? If you can add a little bit more color maybe in terms of pacing, what the market is looking like in terms of scatter, particularly. And then, as a part of that question, what are you seeing in terms of third party advertisers? Are you seeing any pullback from some of your long form advertising or is that seem to be holding up pretty well at this point?

Roger Werner

Okay. Thank you, Mike. I appreciate your kind congratulations there. We are, as I mentioned in my remarks, looking at the fourth quarter which is not going to be as healthy as we would have forecast it two or three months ago. For obvious reasons, the country is sort of sliding into a recession. Everybody believes it will be a fairly sharp, somewhat painful recession. Advertisers are making adjustments. And where we’ve first seen it is in sort of November-December scatter market. We are seeing some weakness there. I cannot really give a whole lot of guidance except to say that we have booked a fair bit of the budget for fourth quarter but there are still a potential that we could miss our internal budget. I think with the kind of misses that we expect, we still should have a pretty good year overall. But as I said providing guidance in the first quarter ‘09 or for full year ‘09 would be really foolish at this point. I have very low visibility on that. And I frankly think, anybody who gives you a forecast for ‘09 is – they are not being honest.

Anyhow, to answer the second part of your question, how are the third party producers seeing this or what are we seeing from them? We are actually seeing some guys looking at next year and coming back to us saying they maybe have less ability to sell out all their ad inventory and maybe like to renegotiate terms some of those deals. It is a little early to say how big an issue or small an issue that might be, but there are clearly some people hurting out there, and we happen to be in the fortunate position of having a really substantial number of third party producers with a very broad array of sponsors supporting them. So although we might expect some fallout next year, I think we’ll still be well-positioned to deliver a very rich menu of programming with a lot of good sponsorship behind it. But I think this economy is going to hit everybody in some way, shape, or form.

Michael Kupinski – Noble Financial

And just secondly, on your internet advertising in the quarter, I was just wondering how significant that was? I know that it has been ramping there a little bit. Can you give me a little color on the internet advertising?

Shad Burke

Yes, Michael. It’s a continuous ramping and we are seeing some progress in the fourth quarter as well. But from a disclosure standpoint, we are not talking anything material to the company, but we continue to see an upward trend in that. Overall, I don’t expect to see anything more than say $0.5 million dollars or so for the year.

Michael Kupinski – Noble Financial

Okay. And I know that you guys are just been really watching the cost. I’m surprised that the costs were as low as they were in the third quarter. Do you have any color in terms of programming expenses? Should we use what you reported in the third quarter as a run rate for the fourth quarter? And maybe you can talk a little about the advertising line as well, a little bit lighter than I was looking for. But mostly programming, I suppose is the key one that seemed to be much lower than I expected.

Tom Hornish

Mike, it’s Tom. I think a better way of probably projecting is to look a little bit more over the nine months and look at it on an average over those nine months for both of those blind [ph] items, more so, than just taking this quarter. This quarter is a little bit aberrational in both of those, so a better way of loosing that would probably look at it on a year-to-date basis.

Michael Kupinski – Noble Financial

Okay. Well, I will let some others ask question so I’ll wait. Thanks.

Operator

Your next question comes from the line of Bryan Goldberg with JP Morgan. Please proceed.

Bryan Goldberg – JP Morgan

Hi thanks. I was just wondering, the Nielsen sub-number looks touch lower than it has been trending for the year. I’m just wondering, is that reflective of the internal trends you guys are seeing with your billable subscribers?

Roger Werner

Bryan, it’s Roger, and Tom feel free to elaborate on this but the simple answer is no. Our internal sub-numbers are growing, Bryan, but the Nielsen number historically goes up, down, sideways, for reasons only Nielsen could explain to you. Nielsen recently announced that they were taking a sharper look at their estimates for DBS households and how various tiers affected their client’s distribution estimates. So there maybe some continued movements in that Nielsen number up, down, or sideways, I can honestly tell you. But our internal paid subscriber number is going up.

Bryan Goldberg – JP Morgan

Okay.

Roger Werner

Anything else you want to say about that?

Tom Hornish

No. I just want to highlight that we don’t know what their process was nor was the Nielsen process is going to be. So it’s like Roger said, it is unknown to us. And unfortunately, we cannot really give you any help in that regard.

Bryan Goldberg – JP Morgan

Okay. Thanks, that is fair. With regards to I think, Roger, you mentioned one of the initiatives you have for the business is to strengthen the programming menu. Is that something that is going be possible if we are expecting the programming expense line item to be reflective of what the nine months year-to-date number is or is there potential for that thing to come up as you guys potentially bring more programming in house?

Roger Werner

Yes, Bryan, There is – just so you understand a long term trend. There is no really dramatic shift anticipated in the mix of programming, either the type of programming that we do or the source of that programming’s production. We are not trying necessarily to bring a lot of production in house. We have a great network of third party producers and independent producers that make shows to our specs and generally the model for program production won’t change too much nor do we expect to see a dramatic inflation in the total cost of programming. We are being very selective when I say ongoing programming improvements. We can do a fair amount with the same size budget that this company has had for the last several years. We are effectively just producing higher quality shows and fewer episodes of each of those higher quality series programs. And to some extent, promoting them, scheduling them more judiciously, and I guess more inline with the industry practice than what the company had seen in the past. So what that means better programming, fewer episodes, probably higher repeat factor, better scheduling, and better promotions. So we are getting more yields out of a dollar programming and we don’t expect to see the programming budget inflate dramatically going forward.

Bryan Goldberg – JP Morgan

Okay. And in terms of yield, I guess, they can shift over to advertising side. I know it is very difficult to have visibility on pricing on that part of your business. But can you tell us, I mean, how much – what is the differential rate now between as an advertiser wanted to come directly to you to buy advertising short form as opposed to one of your peer channels sports outdoor themes delivers same type of audience delivery? I mean, how much of a differential is there in the cost per spot? Would you estimate, I guess, is there room for that differential to narrow going forward?

Roger Werner

Well, and guys, please feel to – Tom and Shad jump in, if you would like to highlight additional aspects of this. But in general, Bryan, we operate under a price umbrella that is really set by ESPN and Versus, our two big competitors who are part-time competitors, they are not full time, but they both continue to deliver some outdoor programming, mainly on Saturday and Sunday mornings.

Because they are bigger in terms of their subscriber footprint and because they typically have a menu of programming around the outdoor stuff which generates higher ratings, they set that price that ceiling or umbrella, generally, pretty far above where we are. So the general answer to your question is, “Yes, I think we still have some headroom which will allow us to grow our prices overtime.” I will, however, caution you and anyone else on the call that in this kind of recessionary environment, we are going to have to take our customers needs into account and not make a mistake being too aggressive with pricing. We operate under umbrella set by bigger guys and we believe the delta between their CPMs and their total out-of-pocket cost for a 30-second spot. That delta is going to remain substantial. We are going to continue to trade at a discount as part of our competitive advantage but it is still allows us some room to grow our prices.

Tom Hornish

Yes, I think, another point on that is that we are starting to see all those – it is way too early to really give any prediction, but some of the people in the downturn are thinking maybe they need to focus more on real customers which as a niche market, we can offer which would presumably be a little bit more valuable to them than we are currently charging but probably still far less from the umbrella like Roger talked about.

Roger Werner

So, I think, we’re competitively well-positioned. And ironically, Bryan, being a 30million subscriber network but reaching exactly who the outdoor sporting goods manufacturer wants to reach, makes us pretty efficient and pretty attractive. If we were bigger, if we had 40 million or 50 million or 60 million subscriber homes, we wouldn’t be trading with the same kind of pricing and efficiency advantage.

Bryan Goldberg – JP Morgan

One last question with regards to your size, I guess the Comcast deal that you announced recently in Colorado. I’m just wondering, can you tell us what do you attribute – what helps you get this done? Was it just the new rate card structure in place? Was it higher ratings in a market that really appreciates the content? Is there something else to play and are there other negotiations in the Comcast’s footprint where you might be able to come out of the sports-tiering and get more favorable distribution?

Roger Werner

Tom, you want to take a crack at that?

Tom Hornish

Yes. I’d say all of the above, Bryan. It’s not one thing in particular. It’s having the right people that we put in place, having the people in the field talking to the systems. To answer the latter part of your question, “Yes, there are still ongoing discussions with Comcast system as well as other systems, not just the Comcast.” As we talked about, the rate card is an incentive type of card in a stick to help that going, but just the improved ratings, the viewership they were showing, and the improved quality when you look at what we have now to offer our viewers versus where we were a couple of years ago. I don’t think it’s any one thing that we can point to. It’s just the whole package that seems to be working right now.

Bryan Goldberg – JP Morgan

Okay, thank you.

Operator

Your next question comes from the line of Zack McAdoo with Zanett Group. Please proceed.

Zack McAdoo – Zanett Group

Hi, guys, great quarter. I just wanted to put a couple of things into context. The first one is you mentioned that you don’t have any visibility for ‘09. What kind of visibility did you have last year at this time? Do you ever have visibility at this time of year?

Roger Werner

Well, yes, we do on part of our business. The spot sales piece, we don’t have a lot of visibility on. That tends to be fairly fluid and can change month-to-month. The third party producer business tends to be longer lead time and so we tend to have a little more visibility on that. But as you know, we’ve got – on the ad sale side, a mix of revenue. Some from the third party business and some from spot sales, so to give you visibility on the total ad sales, budget, or projection is just not something we would feel comfortable doing at this point. We’ve got some bits and pieces but they don’t add up to the whole puzzle. As we get closer to year-end, we’ll probably have a better fix on first quarter and have enough business booked that we’ll have a sense of the range we might fall in.

Zack McAdoo – Zanett Group

I’m just trying to remember, though. Did you give us visibility or rate this time last year?

Roger Werner

No, we typically don’t. We don’t provide guidance or try to be very specific in terms of visibility quarter-to-quarter or year-to-year.

Zack McAdoo – Zanett Group

So in a normal year, it would be difficult but this year it’s just unusual circumstances makes it even less predictable.

Roger Werner

Yes. In a typical year, we could give you a pretty good sort of a general estimate for the third party business, looking 90 days out. But the spot sales would be harder, less visibility. In this year, I think we’d be crazy to try to give you any kind of guidance on first quarter or next year.

Zack McAdoo – Zanett Group

Yes. And then I think I missed it, but what did you say the ratings increases worth for primetime and weekends this quarter.

Roger Werner

We we’re up – total audience is up about 39% year-over-year and primetime up 20%.

Zack McAdoo – Zanett Group

So total audience is prime plus weekend?

Roger Werner

No. Total audience – I think the statistic we’re referring to is just total household viewership on a 24-hour day, I believe. Tom, is that where that number came from?

Tom Hornish

Minus the overnight.

Roger Werner

Minus the overnight stuff? Yes, okay.

Zach McAdoo – Zanett Group

Because I have in my model – I have primetime and weekends.

Roger Werner

Well, that’s where most of it comes from. You also got weekday daytime and fringe – early in late fringe. But most of the viewership in this channel comes from seven to midnight, seven days a week, and 7 a.m. to 7 p.m. on the weekends.

Tom Hornish

Yes. And we typically refer to that all as prime.

Roger Werner

Right.

Zach McAdoo – Zanett Group

So what was it up in the second quarter?

Roger Werner

I can’t remember. It was up – it was substantially up in double digits. I want to say prime was up 25% or 30% but I may be wrong. That’s kind of a guess.

Tom Hornish

Yes. And unfortunately, it’s Tom, I don’t have that at my fingertips. If you would go on our website with some earlier press releases and I can try to get that for you then.

Zach McAdoo – Zanett Group

No. I’m just trying to understand if you’re seeing – I don’t know exactly when you put in the new programming but I imagine with some dramatic changes in programming, you might get a full year of big increases and then once that’s annualized then it might slow down a bit.

Roger Werner

Yes. You’re absolutely right. And I think, we have suggested in past earnings call that that is what we expect. The fourth quarter will be the first quarter where we will have a year-over-year comparison between a kind of normalized number and current number, right? Because fourth quarter last year, we were already feeling the effects of the improvements and we’re way up in double digits in terms of viewership. So for this quarter – for this fourth quarter, I expect you’ll see the year-over-year growth will be significantly less than what it was last year of even this quarter.

Zach McAdoo – Zanett Group

‘Cause I have for last year – I think you said on the call it was plus 33% for primetime and plus 88% for weekends.

Roger Werner

It was very big – very big improvements but as I’ve said repeatedly a lot of that is sort of one time, a one-time effect of doing the fundamental fixes that we had to do in the business.

Zach McAdoo – Zanett Group

Right. So the fourth part will be the first year, I mean the first quarter where that lapse and so we should expect to lower?

Roger Werner

Yes. I think you should expect the lower year-over-year growth going forward.

Tom Hornish

Yes. I think the way to look at it is we’ve gotten up to where we feel like – roughly a channel such as ours should be on the ratings. And that just came from the blocking, programming, and grooving, as well as the improved quality that we’re going to continue going forward for that shift to move out on a year-over-year basis that will now start in the fourth quarter of 2008.

Zach McAdoo – Zanett Group

Yes. Okay. Great, thanks very much.

Tom Hornish

You’re welcome.

Operator

(Operator instructions) And your next question comes from the line of Andrew Cowen with Tricadia. Please proceed.

Andrew Cowen – Tricadia

Hi guys. Thanks for taking my question. I’d like to echo Mike’s line, a really great quarter. You said something on sort of year-to-date numbers that we should take those going forward and your gross profit margin was really terrific this quarter, but yeartodate, you’re around 71%. Is that more in line of what we should expect going forward?

Roger Werner

Shad, why don’t you?

Shad Burke

Yes. I think the comment, talking about annualizing the number, is more related specifically to the programming line.

Andrew Cowen – Tricadia

Okay.

Shad Burke

And the advertising side of the house but – so I think this is clarification on that.

Andrew Cowen – Tricadia

Okay. So what kind of – I mean, I hate to pin you down but is it something like – is there a gross profit margin that you’re targeting or is it just too hard in this environment to figure that out?

Shad Burke

We had some significant challenges, obviously, because of the economy right now.

Andrew Cowen – Tricadia

Yes.

Shad Burke

It’s trying to know where that is going to go.

Andrew Cowen – Tricadia

Okay. And apologies, I actually – I don’t get the channel so I haven’t been able to ever see it. But the growth in advertising really seems spectacular and clearly it’s not only it’s a better management in rate card but obviously, the rating they’re showing that is better programming. Have you been able to do it with any one-star personality or it has just been signing up better producers.

Roger Werner

It’s generally some better producers and raising the bar and effectively managing the other producers, some of whom have been with the network for quite a while. But in past times, there was really very little editorial supervision provided by the network. We’ve added some costs, some additional headcount to effectively be able to provide the sort of quality control that most competing networks would just take as a given. So I hope that answers your question. It’s not one personality or one hit show. It is substantial improvements sort of across the board on the shows we produced and on the shows that are produced for us by others.

Tom Hornish

And Andrew, it’s Tom, the other piece of that is the blocking of the programming, similar programming together we think has helped the ratings and the audience flow as well which was something we started doing a little bit over a year ago as well.

Andrew Cowen – Tricadia

Got it. And I’m sorry I had to jump on the call a little late. You’re generating a really nice cash flow now. What are your thoughts on what you’re going to do with it?

Roger Werner

Well, I think, what we said in the earlier remarks was that we’re looking at some possible acquisitions.

Andrew Cowen – Tricadia

Okay.

Roger Werner

And we continue to – we are in discussions with several potential players at very early stages. I don’t know whether anything will happen but we’re taking – we’re looking at deals that could be accretive to the company, but we’re moving cautiously and carefully. I think our stock has held up pretty well the last few weeks, maybe in large part just due to the pristine balance sheet that we’ve got. And so, we really don’t want to – we’re not, at this point in time, going to do anything too aggressive or too crazy.

Andrew Cowen – Tricadia

Okay. Fair enough. I do give credit for having pretty much only the only small caps in the universe that’s up this year.

Roger Werner

Yes. That’s interesting.

Andrew Cowen – Tricadia

And I appreciate that Roger.

Roger Werner

I’m happy about that too.

Andrew Cowen – Tricadia

All right. Great quarter, guys. Thanks a lot.

Roger Werner

Thank you.

Tom Hornish

Thanks, Andrew.

Operator

Your next question is a follow-up question from the line of Michael Kupinski, Noble Financial. Please proceed.

Michael Kupinski – Noble Financial

Thank you. Just a couple of follow-up questions here. In the past, you’ve kind of talked a little bit about how your negotiations have gone or going along with your distributors and I was just wondering if you can just add a little color on your negotiations with Time Warner and EchoStar and what stage and where you at with those negotiations?

Roger Werner

Mike, it’s Roger. I really can’t. Honestly, I can’t do that without prejudicing those discussions. I can’t give you predictions or color on that. Those are very sensitive conversations. They’re moving along. We value both of those companies very highly and we’re working towards conventional extensions of our relationship.

Michael Kupinski – Noble Financial

I think in the past, Roger, are these – would you consider to be in the late stage of discussions or you’re still working through some issues with those or, I mean, I was just wondering if you’re – what stage do you feel like you are in? Do you feel like you’re in the very late stage of the discussions?

Roger Werner

Well, yes. Let’s say that we’ve been in discussions with both parties for a substantial period of time, over a year.

Michael Kupinski – Noble Financial

Okay. In terms of going back to the Comcast deal, congratulations on that by the way, it seems like Colorado was in the actual for your programming and I was just wondering if there’s any other low-hanging fruit like Colorado that we could look for anything the size that might be able to add $500,000 or $1 million that you feel might be kind of lowhanging fruit at this point.

Roger Werner

Well, Tom, I don’t know or Shad, maybe you guys would like to answer that again. I’m hesitant to provide specifics on that, Mike, because in effect, we are in discussions with some customers about areas of opportunity, and I really don’t want to prejudice any of those discussions or shoot myself in the foot by making a guess about something.

Tom Hornish

I think, you’d certainly rest assure that where we see the opportunities and everywhere else as well, but we’re out there beating the bushes and without being able to predict. It’s hard to predict given the level of interest or the diversion of interest for some of the systems as well as the corporate headquarters that the MSOs have. So it’s very hard to predict whether or not there will actually be something more to come.

Michael Kupinski – Noble Financial

Roger, if you can just refresh my memory. Did you add staff to go out and do some of the field work to increase these types of distribution agreements with deals that you’ve already had done in terms of the company-wide contracts and distribution agreements?

Roger Werner

Well, yes, Mike. If I understand the question, yes, we essentially replaced most if not all of the affiliate marketing staff with more experienced people including bringing in a senior executive level person, Randy Brown, who had worked with me at ESPN in affiliate marketing and who had headed up the Tennis Channel’s effort prior to his joining us. So, I guess, that was part of your question. Yes, we have added some people. The net additional headcount is not huge, but we have returned over and replaced most of the staff that was doing that job with new people in the last two years.

Michael Kupinski – Noble Financial

Okay. And then most of their job duty is just to focus on going after this context?

Roger Werner

Yes, these people are focused at the regional and local level. Tom and I and Shad and Randy continue to focus at the headquarters level of a Comcast or a Time Warner. But the people in the field that I am referring to, tend to be operating with their counterparts at the regional and local management level within those companies.

Tom Hornish

And it was basically an initiative year and a half, two years ago, by the time Roger joined that we put more people in the local area. We have an East Coast, Central Division and a West Coast that was a new a concept to the company and that concept until a couple of years ago.

Michael Kupinski – Noble Financial

Are they incentivized to get a distribution – I mean, do they get a specific bonus tied to adding a certain number of subscribers for instance?

Roger Werner

Well, generally, Mike, yes, we managed by MBOs. I guess, like most public companies nowadays. So, yes, they have specific goals and the achievement of which impacts their compensation.

Michael Kupinski – Noble Financial

Okay. And then if you could just tell me, what was the mix of advertising in a quarter spot versus third party infomercials and so forth? I think you have done that in the past.

Tom Hornish

Well, I think, we have kind of said in the past that the long form infomercials is kind of flat which used to run about 20% as the total goes up and it remained flat, obviously, our percentage is going down and then I think we have already said that the remainder is about half and half. So, I think those numbers still are roughly accurate.

Michael Kupinski – Noble Financial

You’re not – you won’t be able to provide color on what was – how much infomercial in terms of the 32% increase in advertising, what they contributed versus the others?

Tom Hornish

Mike, we don’t get that level of detail. We only look it that way, frankly.

Michael Kupinski – Noble Financial

All right. And then, one final question, any thoughts on further stock repurchases, authorizations, and so forth?

Roger Werner

None at the moment. Given the array of options that this company has in the fortunate sort of position that we are in with no debt and lots of cash, we are thinking very carefully about how we deploy it in the future.

Michael Kupinski – Noble Financial

All right, thanks very much for taking the questions guys.

Tom Hornish

Thank you, Mike.

Roger Werner

You’re welcome, Mike. Thanks for your interest.

Operator

The next question is a follow-up question from the line of Bryan Goldberg with JP Morgan. Please proceed.

Bryan Goldberg – JP Morgan

Hi, thanks. Your comments about potential acquisition, I’m just wondering, I mean, are these targets that you guys were seeking out or given the current environment, have people been coming to you?

Roger Werner

That is an interesting question, Bryan. It’s a little of both. And at the moment, the stuff we are looking at, I guess, you could characterized as kind of tuck-in acquisitions where in part, because of the current economic situation, we might be able to do some deals that might be pretty attractive on assets that could be pretty depressed in value. So, beyond that, I cannot tell you too much but it is a mix of things we have looked at, and people that have come to us and I can’t tell you that we will announce anything soon. We’ll tell you again, a very methodical and cautious approach on that front.

Tom Hornish

Well, let me just add a little bit, Roger, on that. Bryan, I mean, some of the things that we have talked about in past that would make sense is the vertical integration of maybe some production companies for the linear. But, I mean, we continue to look at and have opportunities on the website too with looking at the smaller companies and those are not material acquisitions that we are going to use up any significant portion of the cash anytime soon, but there is plenty of opportunities out there that keeps us busy. And looking at those things and if it make sense and we see it as accretive or should be accretive in a relative future. There are lots of opportunities out there right now.

Bryan Goldberg – JP Morgan

Okay. And then, I guess for Shad, you mentioned that – you’ve thought you might see a drop level on the subscriber growth. Is that basically, I mean, what drives your outlook on that? Is that just the anniversary of the NCTC deal?

Shad Burke

Well, yes. I would characterize it like that. Also, to the extent, we’ve got two more deals that we’re working on that Roger diluted to – in relation to the existing under contract MSOs, in relation to the existing rate card that’s there. We have some level of understanding as far as where we think that drop maybe leading so.

Roger Werner

And, Bryan, just to put it in an overall prospective, one way to think about it anyway is say the more successful we are in a negotiation that is, the more incremental distribution we’re able to generate, the more depressing the effect on revenue per subscriber from that account in the short run, okay? So, the deals that we do, provide pricing incentives for broader distribution, so if we’re successful in broadening distribution, we will take a near-term revenue decrease. Well, not necessarily decrease overall, but with that account, we would expect perhaps near-term negative impact on the revenue per sub associated with that account. So that’s why we’re not having those deals done yet, it’s a little hard to say what – whether we’re up or bottom of that trough or partway through it or where?

Tom Hornish

Well, and I guess, let me step in, Roger. I mean, I think, kind of what we’re looking at with the renewal, with the tiered rate card, Bryan, for the two that are still out there and looking at what this current flat rate is and looking at what their distribution is, we’re not seeing a real significant drop-off for those additional two renewals with the new rate card – on the rate. Does that make sense?

Bryan Goldberg – JP Morgan

So does that mean that there wouldn’t – no, can you explain a little bit more actually?

Tom Hornish

With the tiered rate card, you get a blended rate because of the weighted average, correct? Depending on the distributions and the tiers. When we look at that and assuming, and Roger was talking about, if we can get some additional subs, it might go down. But assuming status quo with the current subs, we don’t expect to see a huge drop in the aggregate revenue from those other distributors that we still need to renew because of the distribution and the weighted average overall rate from those two distributors.

Bryan Goldberg – JP Morgan

Okay. I get it. And, I guess, just a followup on the Colorado deal for example, and if you guys were in a sports tier there that got presumably thinner penetration, maybe 10% to 20% of the digital basic customer base, and now you just went across the entire digital basic phase, I mean, was that – I understand that might depress the per sub seed [ph], but was that incremental to you on an aggregate revenue basis?

Tom Hornish

Generally, without any additional incentives, it’s pretty much a watch because you get a lower rate but you get more subs that you paid on. The two, generally, watch out with our new rate card in place.

Roger Werner

But it’s fair to say, Bryan, that over time there is some inflation in that rate built-in so over the next four years assuming those subscribers should stay on those tiers, we should see some growth.

Bryan Goldberg – JP Morgan

Okay. Thank you very much.

Roger Werner

Thank you.

Operator

I’ll now turn the call back over to management for closing remarks.

Roger Werner

Thank you guys for attending the call and for your interest in the company, and please feel free to follow up with any of us at any time and we’ll do our best to provide as much info as we can. That’s it.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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