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Image Quarterly Sales and Losses Grow

12 Aug, 2006 By: Erik Gruenwedel

A 5% drop in gross margins and litigation expenses associated with its second-largest shareholder, Lionsgate, helped widen Image Entertainment's first-quarter (ended June 30) loss to $2.3 million, compared to $1.7 million during the same period last year.

Strong sales from the Criterion Collection and DVD releases of Taylor Hackford's Chuck Berry: Hail! Hail! Rock 'n' Roll, Korn: Live on the Other Side, Dazed and Confused and Jeff Dunham: Arguing With Myself, helped Chatsworth, Calif.-based Image increase revenue almost 20% to $22.3 million, compared to $18.6 million last year.

In a conference call with analysts, Image executives said the company would have a major distribution announcement Aug. 14 that did not involve the sale of the company or acquisition of a third-party.

COO David Borshell said the “below expectations” in gross margins on product sold in the quarter was due to a higher volume of exclusively distributed revenues, which typically generate lower gross margins compared with licensed product.

He said the mix between licensed and exclusive product typically varies between titles and for the past two quarters ran about 60% licensed and 40% exclusive.This quarter, however, just the opposite occurred, driven in part by recently acquired Criterion Collection, which generated 31% of quarterly revenues (up from 14%), but was exclusively distributed — thereby generating reduced gross margins.

“Every deal is a negotiation, every deal has its own nuances,” Borshell said. “It just so happens that the bulk of the titles [in the first quarter] turned out to be distributed deals.”

Separately, Borshell, who has commented on financially troubled retailer Tower Records & Video in the press, said Image would have a “several hundred thousand dollar hit” should the West Sacramento, Calif.-based music chain declare bankruptcy.

“We are really hoping that doesn't happen and we are giving them the benefit of the doubt that they do have a potential buyer and will be able to work out some sort of arrange with them,” Borshell said.

Image CEO Martin Greenwald reiterated the current retail environment has become a “really challenging time for brick and mortal retailers” with flat DVD sales.

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