Cinedigm Corp.
Q2 2014 Earnings Call Transcript

Published: 14 Nov 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Cinedigm Digital Cinema Corp. Second Quarter Fiscal 2014 Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Jill Calcaterra, Chief Marketing Officer. Ma'am, you may begin.

[Jill Newhouse Calcaterra:]

Good afternoon and thank you for joining today's conference call. Participating in today's call are Cinedigm's Chairman and Chief Executive Officer, Chris McGurk; and Chief Operating Officer and CFO, Adam Mizel. Before I hand the call over to management, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's periodic report filed with the SEC from time to time. All of the information discussed on this call is, as of today, November 13, 2013, and Cinedigm does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented in this call represents non-GAAP financial measures. And now I'd like to turn the call over to Chris McGurk. Chris?

[Christopher J. McGurk:]

Thanks, Jill, and thanks to everyone for joining us on today's call. Since we just had an investor call less than a month ago, our comments today will be brief. I will begin with an update on our very recent acquisition of Gaiam Inc.'s entertainment unit, referred to as GVE, including progress on our integration efforts. After that, Adam will review our financial results and guidance for the second half of the fiscal year. Then, we will answer any questions you might have. So let's get started. Cinedigm took a giant leap forward when we announced, subsequent to quarter one, our acquisition of GVE, which closed on October 21. This accretive, game-changing acquisition immediately provides Cinedigm with a vast array of premium branded content and increased leverage and scale across the entire entertainment value chain. The transaction significantly strengthened our position at the forefront of the digital revolution, creating tremendous upside value opportunities for our shareholders. The acquisition of GVE is expected to add, annually, approximately $49 million of GAAP revenues and $15 million in EBITDA, as well as increase our annual sales managed at retail to over $320 million, making us a powerhouse with every platform, retailer and supplier in the independent content distribution business. Additionally, the combined entity has a market position as the second largest distributor of non-theatrical DVDs and Blu-Ray discs in the U.S., larger than 5 of the major studios. An even stronger leadership position, as the largest digital aggregator and distributor of independent content in the world, managing far more digital transaction volume across all digital platforms and formats than any other studio. Exclusive multi-year relationships with a wide range of brand-name content suppliers, including the WWE, National Geographic, the NFL, Discovery Networks, Scholastic and The Jim Henson Company. A library of over 32,000 films and TV episodes. Direct relationships with almost all physical and digital retailers including Wal-Mart, Target, iTunes, Netflix and Amazon. A huge volume of business intelligence derived from all of these direct relationships, an enormous number of transactions, that provides yet another strong competitive advantage. And finally, the combined entity has strong experienced management, significantly bolstered with the addition of the GVE team. In addition to these strategic advantages, this transaction provides Cinedigm with the scale, cash flow and flexible debt structure and revolver necessary to support our current growth plans without further equity capital raises. And we spent the last few weeks integrating GVE into the Cinedigm fold, and we've already made significant progress. We are pleased to report that we have already achieved almost 95% of the roughly $3.4 million to $3.8 million in synergies we anticipated and we expect to create even more cost-saving opportunities, as we combine all elements of our organizations. Given the rapid progress we've made on cost savings in synergies, our focus, now, will also turn to growth in revenues. Our customers and suppliers have been universally enthusiastic about this acquisition and we expect to quickly tap new and/or enhanced revenue streams through both existing content supplier relationships, as well as new opportunities with additional brands and other film, TV and digital content suppliers. The broad strength of our distribution machine across all platforms, combined with our strong track record and maximizing the value of independent content in both physical and digital channels, as well as the breadth of all of our direct retail relationships, makes us one of the strongest distribution choices ever offered to independent content suppliers. We plan to immediately leverage that compelling business proposition to rapidly build our sales base. We're also laser-focused on our Digital Network business, which we launched with Docurama a few months ago on YouTube, Samsung, Roku, xBox and other platforms. GVE's strong brands and content relationships immediately strengthened our assets in this area and should allow us to quickly build out additional networks based on premium branded content targeted at easy-to-reach, narrowcast audiences. The Chernin Group's recent investment of nearly $100 million for 60% of the digital anime channel Crunchyroll, again, emphasizes the upside potential of this business, which we, at Cinedigm, are uniquely well-positioned to develop due to the enormous depth of our library, our digital assets and track record and our narrowcast marketing expertise In summary, the GVE acquisition was truly transformative for Cinedigm on every level and we expect to begin to reap the financial rewards of this transaction beginning with our third and fourth quarter results and continuing into fiscal 2015 and beyond. Before I turn things over to Adam, I would also like to mention that we are very pleased with the reception to Short Term 12, our award-winning drama that was released into theaters in late August. Approaching $1 million at the box office, the film is the best reviewed movie of the year and being mentioned as a year-end awards contender. We expect it to perform strongly in the ancillary markets as well, beginning in our fiscal fourth quarter. And with that, Adam will now review our financials.

[Adam M. Mizel:]

Thank you, Chris. Consolidated revenues, including deployment in the second quarter were $20.4 million, a 10% decrease from the prior year period. Deployment revenues declined by $700,000 in the quarter, due to reduction in releases by studios in the current fiscal quarter as compared to the prior year fiscal quarter, and longer hold periods of several blockbusters limiting screen space to accommodate the numerous other wide studio releases. Second quarter non-deployment revenues, were $7.8 million, a decrease of $1.6 million from the year ago period. The decrease was primarily due to, one, the expected reduction in service revenues as the termination of the North American deployment program resulted in no activation fee revenue recognized during the quarter, as compared to $1.4 million of activation fees in the prior year quarter; two, lower results in software license fees reflecting the successful in-process business model shift to a software-as-a-service revenue model; and three, timing delays of digital license fee recognition and physical goods shipments into the second half of the fiscal year. Revenue variance from our pre-announcement occurred because we were unable to recognize digital license fees related to a specific content supplier who would not completely clear the rights to certain titles before we were able to sell those titles for distribution. Had that revenue been recognized, we would have improved upon our pre-announcement EBITDA guidance range. Though consistent with our pre-announcement 3 weeks ago, consolidated adjusted EBITDA in the second quarter was $10.6 million, a decrease of $3.5 million versus the prior year quarter. Also in line with our pre-announcement, adjusted EBITDA from non-deployment businesses was a loss of $1.3 million during the quarter, declining from $1.2 million from the year ago period. These declines were predominantly due to, one, the previously discussed $700,000 reduction in VPF revenues, which all dropped to the bottom line; $2.9 million of upfront theatrical releasing, marketing and acquisition costs recognized in the quarter, our J-curve costs, as well as the additional theatrical releasing SG&A expenses supporting those releases; three, the previously disclosed timing delays in several digital licensing transactions to later this fiscal year, as well as the delay in a major DVD shipment into early October, from late September, at the request of the retailer. And four, the continued timing delays to later this fiscal year in our software unit installations and revenue recognition from several existing international exhibitors and domestic movie studio customers. Additionally, our non-recourse debt balance at September 30, has been reduced by approximately $20 million since the beginning of the fiscal year, and then as we have stated previously, we expect that balance to continue to rapidly decline going forward. Looking ahead, with GVE integrated, Cinedigm is expected to produce strong financial results right out of the box, with total second half consolidated revenues, including deployments and services of $84 million to $86 million and EBITDA of $41 million to $42 million. Non-deployment revenues are expected to be $59 million to $61 million, with EBITDA at $17 million to $18 million. Second half guidance for entertainment division is expected to be $52 million and $54 million of revenues, with $12.5 million to $13.5 million of EBITDA for the full 6 months. Please note that due to the timing of the closing of the GVE acquisition, our consolidated results for the remainder of fiscal 2014, will not include the first 3 weeks of GVE's October 2013 operations. Without a good read of the monthly timing of revenues at this juncture, I should point out that we do not yet know the expected modest impact this will have on total second half revenues and EBITDA. Of course, we will provide that information on our next earnings call. In summary, given the results of the first few weeks of the combined new Cinedigm entertainment group, we are confident about our prospects, in part, because our larger scale should help reduce the timing and earnings volatility that often impacted our past reporting. I'll now turn the call back to Chris for closing comments.

[Christopher J. McGurk:]

Thanks, Adam. Our efforts over the last 2.5 years to transform Cinedigm, including selling 2 non-core divisions, acquiring new video, completely refinancing our balance sheet and the very recent GVE acquisition, had put us in a very strong position to take full advantage of the digital entertainment revolution. Together with our digital cinema business, which continues to generate strong recurring revenues, Cinedigm now has a great array of premium branded content in broader scale and increased leverage across the entire entertainment value chain. We thank you for your time and attention today, and look forward to sharing our continuing progress with you on next quarter's call. And with that, we are now happy to answer any questions you might have.

[Operator:]

[Operator Instructions] Our first question comes from Eric Wold from B. Riley.

[Eric C. Wold:]

A few questions, I guess, first of all, one, you're, obviously, you're looking at the second quarter results, a lot of small things that are out of your control that impacted the quarter from DVD shipment moving from one month to the next, digital rights area control, talk about with the level of guidance you gave for the back half of the year, post GVE, what is your comfort in the visibility, kind of comfort in giving guidance going forward now that you have GVE rolled in the mix versus kind of where you were previous to that, how is that changing?

[Christopher J. McGurk:]

Well, I mean, as we've talked about on the call a few weeks ago, and I've mentioned today, and to think with the scale that we now have, we have more visibility and more predictability, and there still will be lots of examples like what we referred to today in another call, the difference is a business that's approaching $90 million of revenues in our content business, there are probably some more things that go the other direction to offset them and/or with a bigger library and more business. As management, we have the ability to influence, to try to offset things that go one direction, inappropriately, with something that we can move up to go in the right direction, to try to offset those. We didn't really have that capability as a much smaller company, so we feel more comfortable in our ability to both project and to meet those guidance projections.

[Eric C. Wold:]

Okay. And then on the indie film side, I guess, one, yes, I know it might still be early, but any sense of the level of kind of upfront J-curve costs, we could see a range, you could see in the current quarter versus the $2.9 million that we saw in this last quarter and, I guess, post GVE, any expectations about the emphasis placed on indie films going forward versus libraries of content like they got at GVE. Should we still expect something around 20 to 25 new films per year or could that business drop a little bit.

[Christopher J. McGurk:]

I think, in this quarter, we have a couple of releases set, the end of the month releasing a very interesting documentary about the music culture that surrounds the Mexican drug cartel, called Narco Cultura. And then. In December, we're releasing a movie called Penguin King -- the Adventures of the Penguin King, which is voiced by Tim Allen. So we have 2 releases, neither have them as large as Short Term 12 or Afternoon Delight, or some of our other summer releases, so those J-curve costs will be a lot lower this quarter. I don't know exactly what they'll be, but they'll be a lot lower. That's first. To your second question, Eric...

[Adam M. Mizel:]

I'll answer that. I think -- we're going to continue to release independent films, as in the past. And again, we're going to follow our very flexible releasing strategy, where -- none of the movies are ever in wide release, we either go in limited, traditional theatrical release, like we did with Short Term 12, or we'll go day-and-date VOD, like we did with the Journey documentary, or we go premium VOD, like we did with the Julianne Moore movie, The English Teacher, we're going to continue that. Will we do 20 to 25 films next year? Volume isn't our goal here. Our goal is to be in the theatrical releasing business in a smart way, in a very risk advantaged way and provide a steady flow of content into the ancillary markets that really ups our gain when selling our catalog to a Netflix, or to an Amazon or to a Wal-Mart. So I think you'll probably see the number of releases, as we focus on the integration of Gaiam, and really building that business and building our networks, may be steady state out in the mid-teens or so. We're not necessarily targeting to get to 20 or 25 releases going forward.

[Eric C. Wold:]

Okay. Then, final question. Adam, I know it's not going to hit or impact the EBITDA guidance you gave for the back half of the year, but post with the GVE consolidation, any consolidation charges, restructuring charges can blow the line of impact from that, that hits in this quarter or is that kind of all in the past?

[Adam M. Mizel:]

Yes. I mean, there'll be 2 sources of significant accounting charges in the quarter that we're in currently, number one is, we'll need to expense a lot of the transaction fees and expenses for acquiring Gaiam. We only amortize debt issuance fees and certain stock issuances fees on the balance sheet, so there'll be several -- couple of few million dollars of transaction costs that are expensed as we talked about when we closed the deal. There are about $5 million in change of expenses, so 1/2 of that gets expensed and 1/2 of that hits the balance sheet and is amortized. We'll also have a restructuring and transition charge related to severance, related to systems, related to lots of things, all of which were part of our budget for the transaction and, as we're going through that now, we're going to kind of be where we expect to be, I believe, and that's also going to be a couple of few million dollars of charges between all the stuff that you have to deal with between severance and writing off different pieces of assets and all kinds of stuff like that, so that will all happen, again, all factored into our analysis, factored into our loan structure and our cash flows and, as Chris said, we're ahead of where we expected to be in realizing synergies, so we feel pretty good about what we're doing but, yes, that will all happen in Q3.

[Operator:]

Our next question comes from Andrew D'Silva from Merriman Capital.

[Andrew D'Silva:]

I just got a couple of quick questions. First off, you mentioned you missed a timing of a contract in the last quarter, can we expect that to come into Q3? And then what would be the top line impact of that was well?

[Christopher J. McGurk:]

I was expecting either Q3 or Q4, I think one of the questions is what are the offshore rights clearances and that will impact timing and magnitude, and I can't get into individual things like that. But it's the nature of, sometimes, the beast. But we will definitely recognize that revenue before the fiscal year is out.

[Andrew D'Silva:]

Good, all right. And then, as far as GVE goes, I know you guys are saying things are running smoothly and you are happy with integration. Have you guys seen these synergies arise with your existing content being able to be distributed through some of the big box retail channels and then, vise versa, with their content being placed in some of your online networks?

[Christopher J. McGurk:]

Well, first of all, it's only been 3 weeks since we closed on the transaction. So there's only so much that can happen, number one. Number two, I mean, I think, each of us, we're doing a pretty good job of -- we're doing a very good job of getting our content to the right places, and one of the powers of partnership we created with Universal last summer with Cinedigm is it dramatically increased our access to and the volume of product that we were shipping and selling through the big box retailers, so there isn't a lot of change there. I think over the next 3 to 6 months, Chris, Bill Sondheim and I are going to be going to talk to all of our customers, personally and directly, if there are ways we can find revenue, like enhancements and synergies, we've had conversations with them, with everybody on the phone and a couple of people we're meeting with, as we speak.

[Adam M. Mizel:]

As well as targeting new customers that exist out there, that -- we think the power of our business proposition is extremely compelling, not just against the other independents, but against the major studios, at this point. So we're very hopeful that we're going to reel in a lot of new business in the next few months.

[Christopher J. McGurk:]

Although, a lot of that doesn't really kick in until -- those conversations won't really kick into high gear till next year because of the holidays. And if you are a retailer, you don't want to talk about anything other than maximizing and dealing with your Christmas sales. And if you're a content owner, you're not going to distract and think about new forms of distribution and new distribution partners, while you're working hard to make sure you have a good holiday. So we're laying the foundation, but I think a big focus in the first half of calendar 2014 is the revenue synergies. If it's likely, because the big focus in the last couple of months of this year are getting the integration, getting the expenses done right, getting the people under one culture and so, that's how we sort of staged it out.

[Andrew D'Silva:]

Good. Okay, that make sense. And then, kind of it backtracking your legacy business, or you mentioned you are releasing 2 films this quarter, theatrically, is your fourth quarter, your March quarter, expected to be a kind of the biggest quarter as far as releases go, since you're not really directly competing with a lot of the major studio releases?

[Christopher J. McGurk:]

Certainly, you are right. We target our releasing away from November, December and Memorial Day through July, other than maybe a counterprogramming, indeed, but more of it, certainly. And I think we have 4 releases in the fiscal fourth quarter, a couple of them are sort of service deals, where we're not actually doing any P&A, which is actually nice, those are generally quick profit contributors, a couple of them are traditional, where we're acquiring and releasing movies. So we have 4 at the moment and I could see a couple more potentially happening between January and March. But there's also just a limit on our own capacity. So 4, 5, 6 a quarter is about the most we could ever do, and do a good job on.

[Andrew D'Silva:]

Got it. It makes sense. I mean the major studios will only release about 20 films a year anyways, so you guys need not be...

[Christopher J. McGurk:]

Only one of them does, that's Warner Brothers. The rest of them are in the 10 to 15. So yes, I mean, they're doing a much different thing.

[Adam M. Mizel:]

They have 3,000 screen releases, and if we get up to 200 screens, that's wide for us.

[Andrew D'Silva:]

Absolutely. And then, I guess, kind of shifting gears a little bit, your Software business, you're transitioning to a SaaS model, is there any way we can think about modeling that out going forward and then, as far as the recurring revenue streams before, you're kind of looking at 20% of the total initial cost that backlogged, I mean, how can we model that going forward now that it's transferred into a SaaS business model?

[Christopher J. McGurk:]

Well, I think, we'll be able to give you a lot more color and clarity on that over the next several months because I think there are a lot of -- there's about 15 exhibitors who are in pilots and reviewing contracts to go live on the enterprise web product, it's a software as a service. There's a couple of big studios doing the same thing and looking at launching in early 20 -- calendar 2014, early to mid, their next version of the distributor product in a SaaS version. So as that happens, we'll be able to make that more clear to you. But effectively, generally speaking, when we price these things, we're looking to have 3-year revenues that are similar to a license and maintenance model and then these -- assumption is, they keep going beyond 3 years. So that's kind of how we and many others in the software industry think about SaaS business.

[Andrew D'Silva:]

Good. And then, how is the international opportunity with the Software business as well, is that still there? I mean you guys are still pursuing that in Australia and South America and what not.

[Christopher J. McGurk:]

Yes, all of that, on both the servicing and software side are going on, our installations in Australia and New Zealand have -- are almost done. We've probably got another 100, 200 to go and we're in a couple of deep conversations with exhibitor and partners in both Latin and South America, and parts of Europe and Asia that we hope to add to that pipeline over in the months ahead.

[Operator:]

Our next question comes from Kris Tuttle from SoundView Technology.

[Kris Tuttle:]

Chris, I guess this question is a little bit for you. The last year or so has been pretty intense, specifically, this is a big transaction, I know, there's still a lot of work to do in the next couple of months. But as you start thinking about kind of calendar 2014, my question's really, what are your kind of calendar priorities, as you think about next year, with this acquisition behind you? You've talked a little bit about this already with -- in terms of visiting the customers and all that, and that make sense. But strategically, what's sort of your top priority kind of in putting your calendar together for next year and the things that you want to accomplish?

[Christopher J. McGurk:]

Okay. And I think I touched on this a little, Kris, in my comments. It's really -- we've transformed Cinedigm now and we've basically turned the company into this powerhouse independent distributor, okay? The next 12 months is really demonstrating that to the marketplace at every level, on an every aspect of what we do. From our theatrical distribution business to our traditional physical business, to our digital business in launching new networks, and really sort of prove the concept over the next 12 months. In a lot of ways, we always like to use Lionsgate, as a parallel. I think I said that on the last couple of calls. The real transforming event for them wasn't when they ultimately did the Hunger Games, and bought Summit. It was back in the mid 2000s when they acquired Artisan and became the 800-pound gorilla among independents and physical distribution, and that's -- we'd like to compare our acquisition of Gaiam to that. We think with that acquisition, that's our Artisan. We're now the biggest independent content distributor out there, with reach, everywhere in the business, with a phenomenal number of digital transactions and huge non-theatrical video volume. We've now got to take that position and we've got to demonstrate it and leverage it in the marketplace and grow our business over the next 12 months. Obviously, we've got to focus right now in completing the Gaiam integration and making sure that, that is done as efficiently and properly as possible, and our experience in the last 3 weeks has been very positive in that regard, as Adam mentioned. But again, my priority is sort of delivering on the promise of this combination and really growing every aspect of the business, and we're very confident with the management team we now have in place that we can do that.

[Operator:]

[Operator Instructions] And our next question comes from Ron Chez, [ph] private investor.

[Unknown Attendee:]

There is the, if you would address, please, there is the reality and perception that the physical business is in a state of decline. You're going much more heavily into the physical business as you expand the digital capability, so do you want to address what you think the strategic posture is, with regard to the physical business? And the degree to which it's either in decline on not?

[Adam M. Mizel:]

Well, couple of things. First of all, and as we talked a few weeks ago, it is -- the physical business is still a $14 billion to $15 billion a year revenue business, and to be a powerhouse distributor, digitally, you also have to be one physically and vice versa. Because your customers are looking for a partner who can service them effectively across all of the channels, that's why they're outsourcing to a distributor. And by combining our businesses, we are now the largest physical and the largest digital distributor, independently, in the space, that's number one. Number two, the digital business, absolutely, over the last few years has been declining, you know 6% as overall, a year. I note that last year in 2012, both Cinedigm and Gaiam grew their physical businesses. Cinedigm to like 55% and Gaiam by almost 10%, reflecting what I think are the trends that we deal with, which are different than the headlines, as I like to remind people, step back for a second. Most of the people who are on this call live in a city on the coast, most of the people on this call in addition to their big flat screen TV have put in their routers and wiring in their home, so they can have WiFi, most of them have an Apple box or a Roku box or an xBox, whatever they're using as a player to access over-the-top channels and most of the people on this phone, will spend a couple of hundred dollars a month on a cable bill, including wireless or Internet access at a high speed. Most people in the United States of America can afford to do that. Most people in the United States of America go buy DVDs and rent DVDs, because what I just described is a couple thousand dollar upfront investment and a couple of hundred dollar a month ongoing investment. So we all have to take a step back and remember that the market is different than the people that we are. Because it's absolutely true, I don't do anything with the DVD. My family lives on our Apple TV with Netflix and iTunes and everything else, but we are a huge minority. So that's one of the reasons we at Cinedigm and at Gaiam, too, have been growing their business, because if you look at the kinds of products that we're acquiring and distributing, it fits that market. If you are acquiring a WWE Summer Slam DVD, after you've seen that, either on TV or not, you're not going to iTunes to do that, you're going to Wal-Mart. Wal-Mart is increasing the size of their floor plan dedicated to DVDs right now, because, as the DVD vendors have exited, they're getting more and more business and they're selling more. The same at Target, the same at Best Buy. So that physical business has a lot of legs and that's why we've been growing it, overall. Absolutely, if you compare the number of DVDs that Disney would have sold on Iron Man 1 versus Iron Man 3, you see a big decline. They're selling many more electronic sales than digital rentals, and all that happens. So it's a different business and it's a business that has a lot more legs than I think the headlines people address. Also, in that space, we're seeing this -- Gaiam in the last 12 months added 4 new customers, whether it's E.W. Scripps or Discovery, different pieces of Discovery and so, as if we've added lots and lots of new customers because that business consolidates. And when you are at the scale we're at, with the lowest costs, the highest quality distribution, meaning you can get shelf space and marketing support, which drives sales and revenue, you acquire the rights to more and more business, because there aren't many who can do that. So we look at the physical business, and we see both of those elements contributing to our growth, both the type of content, the fact that more of it's bought than people realize, the ability to add customers and we have the largest digital business, and we manage that transition. And so, when we add all that up, that's part of what we see as some of the accretion and revenue synergies we haven't factored in to our analysis in buying Gaiam and then, putting it together in one company. That's why we're excited about the prospects over of the next 12 months to grow the business.

[Unknown Attendee:]

Well, this should be different to your point than the headline numbers and there is the prospect that, by virtue of your position, you will be able, actually, to grow that business?

[Christopher J. McGurk:]

Correct.

[Unknown Attendee:]

And would you speculate as to -- or too early to speculate on goals with regard to expansion of that business, some percentage increase?

[Christopher J. McGurk:]

It's early on one level, in that we haven't gone out and driven hard on the new sales front. But we expect to be able to produce double-digit growth across our home entertainment distribution business over the next 12 to 24 months, and we'll give guidance as we get closer to the -- as we do our budgets and we get through the sales process with lots of customers and new customers, but we feel pretty good about what our opportunity is, and that's what -- part of what we based our acquisition on.

[Unknown Attendee:]

I gather that, that has not been factored into these second half guidance that you just gave.

[Christopher J. McGurk:]

Our second half guidance does not include new sales and new customers because they would have really no impact at this point, if we were to sign up a new piece of business tomorrow. It will be almost impossible to put any of that business, whether in physical or digital form, into the marketplace before the end of the fiscal year. The lead times are too long. The business that we're pitching and working on now is really driven for our next fiscal year, and so that's how we look at that question.

[Unknown Attendee:]

And back to -- well, partly the physical business, so if you don't live on the coast and we are in the Midwest, we're just -- you're stuck with us as DVD customers, right?

[Christopher J. McGurk:]

Ron, I'm pretty sure you're a digital customer.

[Unknown Attendee:]

I'm just kidding.

[Adam M. Mizel:]

If you want to buy DVDs, we won't complain.

[Unknown Attendee:]

We will buy DVDs, okay. You talked about achieving 90%, 95% of the synergy goals now, do you have some expectation guidance idea about what more you might be able to achieve?

[Christopher J. McGurk:]

We certainly think there's an opportunity to exceed our targets and synergies. I mean, and we have -- we know there's more to come. I think, first of all, we have a set of integrations that are going on within the company in the unit level and vendors, there's all kinds of things that we expect to be able to achieve, to probably exceed what our initial targets were. And then, over the next 6 months to 9 months, we've got to look at how we reengineer all pieces of the business, we have the opportunity to consolidate some of our back and physical good distribution vendors, so we think there's more opportunity. This is how we closed 3 weeks ago, we're pretty happy with where we are, but that just means we get to raise the bar.

[Unknown Attendee:]

And in the network capability, besides Docurama, you are working on other opportunities there?

[Christopher J. McGurk:]

Yes. We have 1 or 2 opportunities that we hope to be announcing in the few months ahead and then we've had some interesting conversations with some of our new customers on the GVE acquisition about digital channels, and we have a pretty robust pipeline of opportunities and we are going to scale up to roll out of those over the next 6 to 12 months as we've been talking about.

[Unknown Attendee:]

And one more question, you addressed -- or as you talked about synergies, what management did you inherit -- senior management did you inherent at Gaiam?

[Adam M. Mizel:]

Yes. I think, as we mentioned on the last call, we felt that the management at Gaiam was a really great asset and we're very pleased that, first and foremost, we inherited Bill Sondheim, who was the President of Gaiam Entertainment, who I've known for 15 years and who actually worked for me when I was at Universal and he was running Polygram Home Entertainment, which we acquired. So we knew Bill was the guy and he's now the president of our entire entertainment group, and he brought some extremely strong senior executives with him. We have a new head of marketing that worked with Gaiam, who we think is a real powerhouse executive. A head of sales and several others who came with him that Bill did a great job of attracting or retaining there at Gaiam, and now had moved them to even bigger positions in the joint company. So I think there are probably, all told, at least 6 or 7 really key strong executives at the level below Bill, that came with him and we feel great about the quality of our organization. We have a powerhouse distribution company and we think we have a powerhouse executive team now.

[Operator:]

Thank you. I show no further questions at this time and would like to turn the conference back to management for closing remarks.

[Christopher J. McGurk:]

This is Chris. I'd just like to quickly thank you all for your support and your interest in the company and we're really looking forward to reporting our results on our next call with you that will include the impact of GVE.

[Adam M. Mizel:]

And one thing, if you people are aware, we will be presenting on December 3 at the LD Micro Conference here in L.A., if anyone's going to be there, look forward to seeing you in person as well.

[Christopher J. McGurk:]

Great. Thank you, all, and we'll talk to you again soon.

[Adam M. Mizel:]

Thanks.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.