Earnings Call Transcript - NCMI Q2 2025

Operator, Operator

Good afternoon, and welcome to the National CineMedia Second Quarter 2025 Earnings Conference Call. This event is being recorded. I would now like to turn the conference over to Chan Park, Vice President of Finance. Please go ahead.

Chan Park, Vice President of Finance

Thank you, operator. Good afternoon. I'm joined today by our Chief Executive Officer, Tom Lesinski; and our Chief Financial Officer, Ronnie Ng. I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of 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 statements of historical facts 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 qualified in their entirety by such factors. Further, our discussion today includes some non-GAAP measures. In accordance with Regulation G, we have reconciled these amounts back to the closest GAAP basis measurement. These reconciliations can be found at the end of today's earnings release or on the Investor Relations page of our website at ncm.com. Now I'll turn the call over to Tom.

Tom Lesinski, CEO

Thank you, Chan. Hello, everyone, and thank you for joining our fiscal 2025 second quarter earnings call. As we begin today's call, I want to take a moment to thank our team for their resilience and dedication to what has been a particularly demanding quarter. In the face of a challenging economic and advertising environment, their commitment and strength are what continue to drive our progress and position NCM for what's ahead. At the time of our last earnings call, we were encouraged by strong second quarter pacing while recognizing the ongoing uncertainty in the advertising market. Over the balance of the second quarter, we faced a more challenging operating environment than anticipated. Caution among advertisers, especially in key categories like government, consumer packaged goods, and automotive, deepened in response to broader tariff-related market uncertainty and evolving government spending priorities. Further, this quarter's box office performance was driven by a handful of unexpected though welcome breakout hits, including a Minecraft movie, Lilo & Stitch, and Sinners. While the success of these films demonstrates the ongoing recovery of the box office and audience enthusiasm for cinema, their overperformance took place during a seasonally slower advertising period, limiting our ability to fully monetize those impressions. As a result of these headwinds, our second quarter performance did not meet our expectations. NCM's second quarter 2025 total revenue was $51.8 million with adjusted OIBDA of $0.7 million. While this wasn't the quarter we set out to deliver, we're approaching the back half of the year with optimism. We are actively taking steps to better capitalize on box office momentum and deliver against our strategic priorities, positioning the company for stronger performance and long-term growth. We're encouraged by our third quarter momentum. Ad sales commitments are pacing ahead of last year's levels and improved visibility into the pipeline gives us confidence in our ability to deliver a stronger start to the second half. To better position NCM to compete for growing premium video advertising budgets, we are continuing to scale our programmatic and self-serve offerings. These capabilities are core to our strategy of delivering a more responsive and nimble advertising platform as the industry shifts towards flexible, closer to campaign date solutions. In the second quarter, we continued to expand our programmatic distribution through new partnerships with two leading programmatic platforms, providing advertisers with additional efficient paths to purchase NCM's premier inventory. Notably, programmatic advertiser volume grew by more than 50% quarter-over-quarter with approximately 70% of second quarter programmatic advertisers new to NCM, underscoring the growing appeal of our platform to performance-focused buyers. Looking ahead, we expect to build on this momentum and triple our programmatic footprint by year-end, positioning us to accelerate further into 2026. Additionally, our self-serve platform is also gaining traction with second quarter revenue up more than 30% year-over-year, signaling strong adoption heading into the second half of 2025. On the local front, enhancing our sales capability remains a top priority. We are focused on onboarding new talent and taking a targeted approach to engage high-value advertisers at the local and regional level. While we recognize this effort will take time, we are confident that a strategic rebuild in local will strengthen our market position and help maximize the local advertising recovery over the long term. We are also continuing to demonstrate the effectiveness of cinema as a performance advertising channel. To share one example, in the second quarter, a national telecom brand executed a campaign using our new bull's eye product, which featured 253 hyper-localized AI-generated ads. Powered by our NCMX data platform, the campaign successfully delivered double-digit gains in foot traffic to the locally promoted stores within the first two weeks of the campaign launch. Following this success, the advertiser renewed their commitment with NCM, a powerful signal that when advertisers engage with our platform, we deliver impactful measurable results. Our premium Platinum ad spot also continues to generate strong demand from advertisers who recognize the value of cinema's high-attention environment and NCM's performance measurement capabilities. Our new agreement with AMC, which we announced last quarter, went into effect in the second quarter and standardized our show format across our exhibitor network, improving our ability to meet demand for both Platinum and post-show ad inventory. To further drive utilization, we've also introduced added creative flexibility within the Platinum offering at select theaters, enabling more dynamic use of the available ad window. As we continue to invest in the business, we are also committed to accelerating new client acquisition with more targeted outreach and a more agile go-to-market approach. In the second quarter, NCM welcomed 12 new advertisers that placed major cinema campaigns for the first time since the pandemic. As we continue to demonstrate the unique value of cinema as a high-impact advertising channel, we will deepen existing advertiser relationships and strategically expand our client base. Driven by the successful box office, NCM reached over 115 million individuals across our network in the second quarter, up 24% compared with the second quarter of '24. As cinema continues to reclaim its prominent cultural relevance, we're not just seeing rising attendance, but also a deeper connection between audiences and content. This reinforces our confidence in the continued momentum of the theatrical ecosystem and positions NCM to benefit from the strong content pipeline heading back into the second half of the year. Looking ahead, early indicators from the third quarter are encouraging. Supported by a strong slate, booked sales are pacing ahead of the same period last year, with demand normalizing across key categories, including auto, wireless, retail, and travel. Importantly, the third quarter is historically front-weighted with the majority of revenue realized in July and August. This dynamic, combined with the strength we are already seeing in the marketplace, gives us meaningful greater visibility into third quarter performance than we've had at the same point last quarter. With a more robust sales pipeline and stabilization in the advertising market compared to the second quarter, we have increased confidence in our ability to deliver on our third quarter outlook, which Ronnie will share in a few moments. Overall, we're expecting continued box office momentum for the full year 2025. While the third quarter box office is expected to be down year-over-year due to tough comparisons to last year's third quarter, which included hits such as Deadpool, Wolverine, and Despicable Me 4, we expect the strong and well-paced theatrical slate to reaccelerate the box office during the critical fourth quarter holiday season. Highly anticipated tentpoles such as Wicked for Good, Avatar: Fire & Ash, Zootopia, and Tron Ares are positioned to drive box office reacceleration as we close out the year. Combined with standout performances from this summer's blockbusters, including Jurassic World Rebirth and Superman, this consistent cadence of high-profile releases drives ongoing recovery in cinema attendance and reinforces cinema's appeal as a premium high-impact advertising environment, supporting increased interest from both national and local advertisers as we close out the year. NCM remains uniquely positioned to capture and convert this momentum. The fundamental differentiators of our offering, broad reach among highly desirable audiences and immersive premium video format and unmatched national scale continue to resonate with advertisers seeking performance, impact, and efficiency. As brands look to engage consumers at moments of peak attention and emotional resonance, NCM remains a trusted and proven partner. With a healthy slate of tentpole movies, improving visibility, and a strong start to the third quarter already underway, we are confident in our ability to perform. We're optimistic about the remainder of fiscal 2025 and the steps we're taking to deliver sustainable value for partners, clients, and shareholders. With that, I'll now turn it over to Ronnie.

Ronnie Ng, CFO

Thank you, Tom, and good afternoon, everyone. As Tom outlined, the second quarter presented a number of headwinds that impacted our results, most notably during the month of May. May saw heightened volatility in advertiser budgets across key verticals such as automotive, consumer packaged goods, and government, driven by broader economic uncertainty and shifting public sector spending priorities. In addition, ongoing tariff-related uncertainties have fueled further hesitation, evidenced by several submitted budgets being withdrawn as advertisers reassessed market conditions. While June showed early signs of stabilization in a more consistent inventory environment, the softness mid-quarter had a meaningful impact on our overall second quarter results. As a result of these factors, total revenue for the second quarter came in at $51.8 million, below our guidance range of $56 million to $61 million and down 5% versus the prior year period. The scatter market continues to represent an increasing percentage of NCM's revenue mix, equating to 40% of national on-screen revenue in the second quarter. Inventory utilization was up 12%, partially offset by a decline in CPMs. National advertising revenue for the quarter was $41.2 million compared with $41.7 million in the second quarter of 2024. National ad revenue per attendee was $0.36 for the second quarter compared with $0.45 in the same period last year, reflecting the 24% increase in quarterly attendance. Local and regional advertising revenue totaled $6.4 million in the second quarter, down from $9.8 million in the second quarter of 2024, reflecting the cautious advertiser sentiment we've seen across the broader marketplace. Consistent with first quarter trends, we experienced reduced contract volume and smaller deal sizes, particularly across categories such as dining, automotive, wireless, and healthcare; sectors that have remained sensitive to shifting economic signals. The year-over-year decrease also reflects the recategorization of certain clients from local to national, which excluding that change, would have resulted in a less pronounced decline. These headwinds were partially offset by growth in the travel and professional services categories, demonstrating that when aligned with the right audience and value proposition, local markets continue to present meaningful opportunities. We are encouraged by early signs of stabilization across the advertising market as brands adapt to ongoing tariff uncertainty, regain confidence, and begin to normalize their advertising budgets. Additionally, a robust slate of highly anticipated blockbusters is set to debut over the balance of the year with advertiser demand already materializing. These tentpole releases are expected to be significant drivers of growth in the second half. Turning to our expenses. Second quarter operating expenses were $63.8 million, down slightly compared with the prior year. Operating income was negative $12 million compared to negative $9.3 million in the same period last year. Excluding one-time items, depreciation, amortization, and noncash share-based compensation, our adjusted operating expenses were $51.1 million, an increase of $4 million or 8% compared to the prior year. This increase was primarily attributable to higher attendance-driven costs with exhibitor fees rising $4.2 million or 16%, while SG&A expenses declined slightly versus the prior year, reflecting our continued cost management efforts. Second quarter adjusted OIBDA, excluding noncash charges and one-time items, was $0.7 million compared to $7.6 million in the prior year, driven primarily by the weaker top line results. Total unlevered free cash flow for the quarter, as defined by cash flow from operations less capital expenditures was negative $6.8 million. As a reminder, our fourth quarter 2024 results included approximately $13 million in advanced payments from clients for advertising scheduled to run throughout 2025, of which $4 million is attributable to the second quarter. As a result, these upfront payments will affect year-over-year comparability of free cash flow generation in 2025. Year-to-date, NCM has generated total revenue of $86.6 million compared to $92.1 million in the same period last year. National and local advertising revenues declined 4% and 25%, respectively, primarily reflecting softer advertiser demand amid ongoing economic uncertainty. Total adjusted OIBDA for the period was negative $8.3 million compared to $1.9 million in the prior year, driven by the revenue shortfall resulting from the weaker ad market. Turning to our consolidated balance sheet. At the end of the second quarter, NCM had $40.3 million of cash, cash equivalents, restricted cash, and marketable securities and zero outstanding debt. We remain committed to a capital allocation strategy that delivers value by balancing investment in the future of NCM and returning capital to shareholders through our share repurchase and dividend programs. Under the dividend program we reinstated this year, we announced a quarterly dividend of $0.03 per share today, amounting to $2.8 million. This quarter's dividend will be paid on August 29, 2025, to stockholders of record on August 15, 2025. To provide an update on our $100 million share repurchase program, year-to-date, NCM has repurchased 3.3 million shares at an average price per share of $5.78 for a total of approximately $18.8 million. This brings our total shares repurchased under this program to 5.9 million shares at an average price of $5.51 for a total of approximately $32.5 million. We are encouraged by the momentum we've seen so far in the third quarter. The first two months, which historically accounted for the majority of third quarter revenue due to the summer box office slate and seasonal audience upticks, are driving strong performance with book sales commitments pacing ahead of last year's third quarter results. We also continue to invest in our inventory forecasting capabilities to enable us to price and package our inventory more dynamically, delivering greater value to advertisers while helping us drive higher utilization. With improved planning tools, increased visibility into advertiser pacing and category demand, and continued investment in our strategic priorities, we are confident in our ability to deliver a stronger third quarter. With that said, we expect third quarter revenue to be between $62 million and $67 million, reflecting improved advertiser commitment and sustained theatrical strength. We anticipate adjusted OIBDA in the range of $7.5 million to $11.5 million, supported by higher utilization, disciplined expense management, and improving market dynamics. As we look ahead, we are focused on disciplined execution of our strategic priorities from accelerating investment in programmatic and self-serve to deepening advertiser relationships at both the national and local level. With a robust film slate on deck and signs of strengthening advertiser demand, we believe we are well positioned to drive improved performance in the back half of the year and lay the foundation for sustainable long-term growth. Operator, please open the line for questions.

Operator, Operator

Our first question is from Eric Wold with Texas Capital Securities.

Eric Wold, Analyst

A couple of questions. I guess, first off, the midpoint of the revenue guidance for Q3 indicates an increase year-over-year even with an expectation for box office and attendance to be down with a tough comp against last year, which clearly demonstrates your ability to drive ad share even in a tough environment. I know you're not giving full year guidance or Q4 guidance, but any reason to think this shouldn't continue through year-end when this ad demand would be combined with a strong film slate and any potential for kind of year-end ad budget flushes? And kind of on that last point, what are your thoughts around as you kind of dollars that kind of weren't spent maybe in the first part of the year in the second quarter around kind of uncertainty with tariffs and kind of where the economy was? What are you kind of hearing your thoughts and kind of historically how this kind of played out as you kind of move through the year and kind of how those dollars have kind of loosened up?

Chan Park, Vice President of Finance

Well, it's a good question, and it's exactly what should be focusing on. I think what we're seeing is a more relaxed amount of budgeting, which we didn't see in the middle of the tariff debate. And the pacing that we're seeing in the third quarter is very, very good compared to last year. So in my view, we've gotten at least a significant amount of confidence back related to what seemed to be a little bit of an issue in the second quarter. And granted, it was in very limited categories in the second quarter where that was happening. It was mostly government and automotive and CPG. But the third quarter doesn't seem to have had any impact for that. It's a little hard to say right now how the fourth quarter is shaping up. We know that there's obviously some great movies, and we've got a lot of traction already in our pipeline on Wicked for Good and Avatar and some of the others. So I think barring any major tariff issues or economic ones related to the tariffs, we're feeling pretty optimistic, obviously, about the third quarter and that momentum continuing into the fourth quarter.

Eric Wold, Analyst

Got it. And then just last question. I know at the start of the year, I guess, on the fourth quarter call, you noted an expectation for strategic investing this year around the sales team, marketing, but so far in the first quarter and the second quarter, selling, marketing, and administrative expenses have been flat to down and we really haven't seen that play out. Should we expect that to be more back half weighted? Has that kind of been pushed out? What are your thoughts on how we should think about that for this year now?

Ronnie Ng, CFO

So Eric, that's a great observation about how we're managing our expenses versus how the business is trending throughout the year. With that said, it's something that our team really focuses on is how we are monitoring our operating expenses, how we're investing into our team versus kind of what we're seeing in the current market. And we are investing in certain things that we called out earlier this year. Obviously, we're also trimming some parts of the business that we find more efficiencies on, and we're continuing to do that. So there are some offsets versus some of the investment, and that's how we're continuing to invest in sales in the current environment.

Eric Wold, Analyst

Got it. So we should expect if things do improve in the back half of the year that maybe some of the stuff that wasn't spent in the first half of the year, maybe play out a little bit more in the back half?

Ronnie Ng, CFO

Yes. I would say that we need to monitor the pace of improvement to make that determination. We do have a plan in place, but we may adjust it as circumstances evolve. Therefore, I can't guarantee that we will keep investing; we will need to see how the remainder of the year unfolds.

Operator, Operator

The next question is from Mike Hickey with the Benchmark Company.

Mike Hickey, Analyst

Just the first one on the 3Q guide. Nice to see strength there, especially in a difficult box. Just curious, Ronnie, if any of that is sort of a spillover from 2Q, maybe some deals that got paused just because of the economic uncertainty or the loss in the tariff wash or if that's sort of a clean Q3 in terms of what you're seeing in terms of demand that we could extrapolate into Q4 and beyond?

Ronnie Ng, CFO

Yes, I believe that our guidance reflects the fact that the third quarter is heavily weighted towards the first half. The majority of our revenues were generated in July and August, with less in September. So far, what we've observed in the business is primarily new business for the third quarter. The most encouraging aspect is that these are not just delayed budgets rushing in; rather, we are seeing a significant number of new businesses that were specifically secured in the third quarter.

Mike Hickey, Analyst

Great to hear. Also nice to hear your programmatic looks like it's starting to get some traction here. Just curious, I think last quarter maybe it was 2% of your business. You look at the broader digital landscape, thinking back to your Analyst Day, Tom, I think it was sort of like a normal 25% to 30% spend from the buyers. So it's an important piece of the puzzle that hadn't quite been polished and ready, and now it seems like it is. Just checking if that's true, why it's working now and sort of what feedback you're hearing from your media buyer partners in terms of utilizing programmatic moving forward?

Tom Lesinski, CEO

At the most basic level, the programmatic sector can account for 50% to 70% of an advertiser's available budget, depending on the database. Therefore, our decision to invest in programmatic two years ago and to implement it quickly across all platforms was a wise choice. Notably, the proportion of new buyers or advertisers coming from programmatic is quite significant, even exceeding our initial forecasts. Although we can't share a precise figure regarding our current programmatic status, all the metrics we're examining, especially the influx of new advertisers, the quarter-over-quarter growth, and the strong uptake of the platform by our advertisers, are very promising. This development is likely to enhance our self-serve capabilities in the local market as well. We have discussed programmatic in our calls for over two years, and it appears to be yielding the results we anticipated. Looking ahead to next year, I believe its significance will only increase.

Mike Hickey, Analyst

And last question, can you sort of talk to us about maybe ways that you can think about increasing your visibility? I mean, Tom, when you look back on your business, you used to have a big upfront and that would add, if I remember correctly, maybe 60% to 70% of your revenue. And now just as digital is, I think, in general, you're seeing a larger mix to scatter. And then you have disruptions on tariffs and the economy. It just seems like it must be much more challenging for you guys to sort of guide your business in that environment, where buyers can sort of move in and out very quickly. So are there ways that you see Catherine and your team in terms of trying to build better visibility with your media buyer partners in steering the street and obviously, your business as well?

Tom Lesinski, CEO

Yes. I think that's a really important topic. And clearly, when the upfront was a bigger part, not just of our business, but of everybody's business, there was, I would say, less face time involved because so much of the percentage of your buy was coming in advance and getting committed. What we've done is created an entire new business group in our sales team that's now exclusively charged with finding new business with new clients. And this team, which is growing literally every quarter, their sole job is to get out and make sure that the new advertisers are aware of our platform. Our current team is much more responsible for going after our existing customers as well as for the advertisers. And we do a lot of big events. We sponsored the Cannes Lions fairly recently. Prior to that, we had a big event at Sundance. So I think the awareness levels are actually quite good. And I think the trust in the platform and the data metrics around it are very well known, and we're obviously reinforcing those. And I think that's why we're having such a nice bounce back in Q3 as the pacing goes. So I can tell you, we're all advocates for this industry. It's what I spend a lot of my time on personally. And there isn't a week that goes by where we're not advocating either directly to new clients or existing clients, making sure that cinema stays at the top of mind, particularly in light of the streaming guys becoming more and more significant.

Operator, Operator

The next question is from Alicia Reese with Wedbush Securities.

Alicia Reese, Analyst

I have a few actually. So I wanted to start by asking regarding third quarter guidance, what is baked into that in terms of CPMs, either year-over-year or sequential decline flat versus utilization expectations? Can you share that with us?

Ronnie Ng, CFO

Yes, sure. So for the third quarter, obviously, you look at the middle of the guide, we are pointing to a year-on-year improvement versus last year in terms of total revenue. The attendance, I think if you look at estimates out there, it looks to be down for the third quarter. So we are expecting improved utilization on a year-on-year basis and also CPMs to be relatively stable on a year-on-year basis. We've seen definitely better utilization thus far for the quarter, in particular, obviously, here in the July month that's passed. So that's what's baked into the guide in terms of the KPIs.

Alicia Reese, Analyst

And the inventory forecasting capabilities you're talking about seeking to improve, is that going to require a significant investment? Or is that relatively light investment? And the result of that presumably is just better utilization such that when CPMs eventually improve coming out of the current tariff situation, we would assume that that could drive some nice revenue gains perhaps. Can you give us a little more color on those statements?

Ronnie Ng, CFO

Yes. That tool is part of the various initiatives we discussed at our Investor Day and at the beginning of the year regarding capital expenditures. We are still in the process of integrating that system into our existing operations, which is somewhat complex. Therefore, we are not fully reaping the benefits just yet. However, once we implement it, the focus will be on enhancing utilization during traditionally slower months, which is quite challenging. I believe that this initiative will primarily aim to improve utilization and increase ad loads throughout the year, which is our main objective.

Alicia Reese, Analyst

I wanted to ask about the opportunity for local market expansion with the Bullseye AI technology. Your prepared remarks hinted that further investment could be made for this expansion or maybe just a significant effort in that direction. I'm curious if you need to enhance the technology, increase the sales team, or if it's simply about intensifying sales efforts across the addressable market to boost its growth.

Tom Lesinski, CEO

So it's a combination of all those things. It's not a direct heavy investment really. We have found resources that have allowed us to do this kind of personalization at a very efficient rate. There is clearly an education involved with our sales team that we have the capability of doing significant personalization of advertising and localizing it, pushing out nearly 300 ads in a very short time period for our clients who had given us the order a week before, was something we couldn't have done without technology and without the help of AI. So it is a transition and a change for our sales team, particularly locally, to be able to have the skill set and the understanding of what we're capable of. But there's nothing like having a case study. And in this case study, we executed on that, something we hadn't done before. And then the client was so pleased they renewed literally the following week. So that type of program is getting literally pushed out to all of our local people, and they're excited about it, and I'm sure we'll get more business out of it from our local advertisers.

Alicia Reese, Analyst

It seems like you're really in the early innings on a pretty exciting opportunity there.

Tom Lesinski, CEO

Yes, we're really pleased about it. We are definitely ahead of the curve, especially compared to traditional media companies. What we are doing—innovating at scale in a movie theater environment with a level of personalization using automation—is truly unique. We take pride in that, and it's a testament to our team, especially the sales team and our analytics and strategic work group, who have been dedicated to this effort, and it has paid off. So we're quite happy about it.

Operator, Operator

The next question is from Patrick Sholl with Barrington Research.

Patrick Sholl, Analyst

Following up on your comment about being mindful of CTV, I’m curious about the impact of ad-supported plans. To what extent do you see this affecting your utilization or CPMs, considering the challenges in reaching younger audiences?

Tom Lesinski, CEO

Are you talking about CTV at the beginning? It kind of broke up for a second, Pat. Is that what you were referencing? Is that what you said at the top of it?

Patrick Sholl, Analyst

Yes. I'm sorry. Yes, just maybe can you talk about just as the ad-supported plans for the CTV services have increased popularity, what you're sort of seeing just in terms of your CPMs and utilization in the marketplace?

Tom Lesinski, CEO

Yes. So I think CTV is only one competitive bucket that we're competing in. And obviously, we're focused on that as one that's a growing bucket. And it's a relatively younger demo, but it's not as young as our demo. So we're more than anything looking at watching and participating in that transition. And we're building out another programmatic platform that specifically addresses our ability to deliver within that CTV world. So far, it's hard, honestly, to measure a specific category impacting our platform. But more than anything, we've had our eye on CTV. We want to be able to compete programmatically in the CTV space. So we are going to be on those kinds of platforms in the very near future.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Lesinski for any closing remarks.

Tom Lesinski, CEO

Okay. Thank you for joining us today. We appreciate it. We are continuing to take decisive steps to adapt to this changing marketplace, including investing in our operations, deepening our client relationships, and strengthening, of course, the overall core business. Box office is showing real signs of vitality, and we're now seeing that momentum reflected in increased advertiser engagement. What gives us confidence is not just where we're headed, but how we're getting there with discipline, agility, and a clear strategy for future growth. So we're grateful for your ongoing support, and we look forward to seeing you again soon at the movies. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.