BARCELONA, Spain — Private Media Group, Inc.(Nasdaq: PRVT) a worldwide leader in premium-quality adult entertainment products today announced its results for the year ended December 31, 2009.
For the year ended December 31, 2009, we reported net sales of EUR 23.1 million compared to EUR 19.7 million for the year ended 2008, an increase of EUR 3.4 million, or 17%. The increase was the result of increased Internet sales offset by decreases in sales of DVD & magazines, broadcasting and wireless. Internet sales increased EUR 8.9 million to EUR 13.1 million, which represents an increase of 211% compared to the same period last year.
The increase in Internet sales was the result of the acquisition of GameLink and Sureflix which contributed EUR 10.2 million and was offset by a decrease of EUR 1.3 million in our prior Internet business. The decrease in the prior Internet business was the result of a complete reorganization of this business as a result of the rebuilding of the Private websites. Broadcasting sales decreased EUR 1.3 million, or 23%, to EUR 4.5 million primarily as a result of a decrease in cabin royalties and title sales, offset by increases in TV-channel and video on demand sales via IPTV and cable. Wireless sales in the period decreased EUR 0.4 million, or 18%, to EUR 1.6 million as a result of a reduced share in the consumer spend provided to aggregators and content providers by the telcos in general in this business.
DVD & magazine sales decreased EUR 3.8 million, or 50%, to EUR 3.8 million. The reduction in DVD & magazine sales was primarily attributable to an industry wide decrease in DVD sales.
Overall, net sales and margins were affected by the current state of the world economy and the impact of free adult content on the Internet. Going forward, we expect Internet, wireless and Broadcasting sales to increase.
Our cost of sales was EUR 16.9 million for the year ended December 31, 2009 compared to EUR 13.5 million for the year ended 2008, an increase of EUR 3.4 million, or 25%. Included in cost of sales is Internet, broadcasting and wireless, printing, processing and duplication and amortization of library. Internet cost was EUR 7.3 million for the year ended December 31, 2009 compared to EUR 1.2 million for the year ended December 31, 2008.
Internet cost as a percentage of related sales in the period was 55% compared to 28% in the same period last year. The increase of EUR 6.1 million was primarily the result of the acquisition of GameLink and Sureflix which contributed EUR 5.4 million. In addition, we are rebuilding our private. com membership site and as a result of this we have incurred increased costs, including accelerated amortization of EUR 0.2 million of the old site which is being decommissioned in May 2010. Broadcasting and wireless cost was EUR 0.6 million for the year ended December 31, 2009 compared to EUR 0.6 million for the year ended December 31, 2008.
Broadcasting and wireless cost as a percentage of related sales in the period was 10% compared to 8% in the same period last year. Printing, processing and duplication cost was EUR 3.1 million for the year ended December 31, 2009 compared to EUR 5.4 million for the year ended December 31, 2008, a decrease of EUR 2.3 million, or 42%. The decrease was primarily a reflection of the decrease in sales offset by the write-down of our magazine inventory by 50%. Printing, processing and duplication cost as a percentage of DVD & magazine sales was 81% for the year ended December 31, 2009 compared to 70% in the same period last year.
Amortization of library was EUR 5.8 million for the year ended December 31, 2009 compared to EUR 6.3 million for the year ended December 31, 2008, which represents a decrease of EUR 0.5 million. Amortization of library does not vary with sales since it reflects the amortization of our investments in content which has been available for sale for a period of three to five years.
In the year ended December 31, 2009, we realized a gross profit of EUR 6.2 million, or 27% of net sales compared to EUR 6.2 million, or 31% of net sales for the year ended December 31, 2008. GameLink and Sureflix contributed EUR 4.8 million which was offset by EUR 4.8 million in reduced gross profit from our other lines of business.
Our selling, general and administrative expenses were EUR 24.8 million for the year ended December 31, 2009 compared to EUR 13.1 million for the year ended December 31, 2008, an increase of EUR 11.8 million, or 90%. The increase was primarily the result of the non-recurring expense of EUR 7.3 million associated with the full provision against related party receivable, see Note 13 to the consolidated financial statements, and the acquisition of GameLink and Sureflix which added EUR 5.2 million.
The total of EUR 12.5 million was offset by EUR 0.7 million net in reduced selling, general and administrative expenses in all other areas. The net EUR 0.7 million consisted of a reduction in payroll and general expenses of EUR 1.1 million and EUR 2.0 million, respectively, offset by an increase of EUR 0.3 million in bad debt provision, EUR 0.2 million in depreciation and other non-recurring expenses of EUR 1.9 million, including investment write-off, expense related to closing down subsidiary and acquisition expenses.
Discounting the effect of newly acquired companies and non-recurring expenses, the company reduced selling, general and administrative expenses by EUR 2.6 million. Overall, selling, general and administrative expenses included EUR 9.5 million of non-recurring expenses made up of: provision against related party receivable of EUR 7.3 million, investment write-off of EUR 1.0 million, expense related to closing down subsidiary of EUR 0.6 million and acquisition related expenses of EUR 0.6 million.
We reported an operating loss of EUR 18.6 million for the year ended December 31, 2009 compared to an operating loss of EUR 6.9 million for the year ended December 31, 2008. The increase of EUR 11.7 million in operating loss was the result of the increase in selling, general and administrative expenses.
We reported a net loss of EUR 20.5 million for the year ended December 31, 2009, compared to EUR 5.2 million for the year ended December 31, 2008. The increase of EUR 15.3 million was primarily the result of increased selling, general and administrative expenses, including EUR 9.5 million of non-recurring expenses and a difference in deferred tax of EUR 3.5 million.
In contrast to the 2009 loss, the Company reported EUR 3.3 million in net cash provided by operating activities for the same period.
Liquidity
In each of the past three years we have experienced losses from operations. As a result of our operating losses our independent registered public accounting firm has concluded that there is substantial doubt as to our ability to continue as a going concern, and have modified their 2009 report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty. Our ability to continue as a going concern is based on our ability to generate or obtain sufficient cash to meet our obligations on a timely basis and ultimately to attain profitable operations. We currently expect future growth and to return to profitability provided we are successful with the following objectives:
* rolling out our Internet platforms, including: a) our newly built signature property and membership platform private. com, b) our cutting edge mobile platform for Smartphones and c) our multinational eCommerce VOD platform;
* restructuring our affiliate programs on all properties to compete aggressively for, and attract, affiliate traffic;
* continuing the rollout of our content on cable and IPTV video-on demand platforms;
* completing the integration of businesses acquired in 2009;
* consolidating and restructuring our operations into an efficient new media business;
* outsourcing of non-cost effective parts of our operations; and
* identifying and exploring new online business opportunities which are less content oriented.
Restructuring
During 2009 we have faced several organizational challenges as a result of the acquisitions and integration of the online businesses GameLink and Sureflix into the group. Parallel with the integration, we have been rebuilding our signature property, private. com, and restructuring our affiliate programs in all properties to compete aggressively for affiliate traffic.
In addition, we have restructured our departments with resources highly skilled in affiliate traffic development and shifted our emphasis from account management towards sales. We have also developed solutions for critical new markets: gay, international and mobile. Furthermore, as a response to decreased margins in the adult entertainment industry, we have reviewed, analyzed and continued to restructure the operations of the non-online part of the business in order to become more cost effective. All the aforementioned processes have had impact both in terms of lost sales and additional selling, general and administrative expenses. However, discounting non-recurring expenses and the addition of our newly acquired on-line companies, we reduced selling, general and administrative expenses by EUR 2.6 million in 2009 compared to 2008.
Furthermore, as a result of a new content strategy established in response to declining sales and margins from our traditional DVD business, we reduced our investment in library by EUR 2.0 million, or 46%, compared to 2008. As part of the strategy, we also reduced the number of titles released by 17% compared to 2008. With respect to revising content requirements and related investment we analyzed sales statistics for newly produced content vs. compilations, reviewed demand for newly produced content from digital new media distribution vs. traditional physical delivery and analyzed sales statistics with respect to our content mix. Results indicated that a revised content strategy based on fewer releases and a different mix would have the desired effect on margins since unlike our traditional business digital new media distribution is mainly dependent on our expansive library and not on new releases.
In reducing our investment in library, we also renegotiated content acquisition and post-production agreements with third parties on favorable conditions to us. We expect to maintain our revised content strategy going forward.
During 2010, we expect to benefit from the restructuring and reduce costs and increase sales as we implement and launch new initiatives, such as fully combining our Internet assets, outsourcing major parts of our non-online operations and launching our new Internet platforms.
Commenting on some important factors relating to the business going forward, Private Media Group, Inc., CFO, Johan Gillborg stated: “We have been transitioning our business model from linear to digital content production and distribution over the past two years and this has affected our margins. As DVD and magazines sales have rapidly declined, we have made substantial progress moving to a digital business model with significant new media distribution deals and the monetization of our expansive library of content.
We are now a leading adult content provider on the Internet and on all major digital platforms in Europe, and as we continue to build out and get larger, we project significant growth in both sales and net income. Specifically, we project the biggest gains to be achieved through: Internet, broadcasting and wireless. During the twelve-month period ending December 31, 2009, these platforms were responsible for 83% percent of our sales compared to 61% for the same period last year and 57% in 2007. Following is a discussion highlighting some of the important factors of our business going forward.
In January 2009, we expanded our Internet operations through the acquisition of Game Link LLC and its affiliates, companies engaged in digital distribution of adult content over the Internet and eCommerce development. GameLink is a leading US adult entertainment VOD and eCommerce platform through its GameLink. com website. The site’s installed user base represents over one million domestic and international customers and it serves over 100,000 users daily.
Including 70,000 video titles, GameLink has the largest library of digital and physical adult media and novelties in the United States. The Company offers VOD in multiple media formats including streaming and downloads to computers and iPhones. GameLink’s infrastructure is the most robust in the industry and is highly flexible, customizable and scalable designed to support multiple retail strategies and products simultaneously. Additionally, through its related companies, GameLink offers third-party and white-label ecommerce solutions and development.
In October 2009, we continued the ongoing expansion of our global digital media platform through the acquisition of Sureflix Digital Distribution and its affiliates, companies engaged in the business of digital distribution of premium gay adult content. Sureflix is a leading global supplier of adult programming. The company operates a vast network of more than 100 pay-per-view VOD websites and has a North American broadcast presence. It represents premium production studios in global television broadcast (cable, satellite), mobile, IPTV and Internet VOD markets. Sureflix has not only in-depth knowledge of adult programming, but also significant VOD technology and affiliate program marketing expertise.
The acquisitions of GameLink and Sureflix are a significant development that will substantially contribute to our growth, while creating economies of scale.
As part of our digital strategy, we have established that the combination of Private with major online retailers and accomplished platform developers is the approach to achieving our goals in the rapidly changing business landscape.
The combined content assets of Private and core competencies of GameLink and Sureflix offer a compelling new business model. We will be expanding our joint Internet strategies globally with new formats and applications to be launched in 2010. In May this year we are launching our new private .com membership platform which we have been building since mid 2009. The new platform will feature a number of proprietary sites and it will also be available as a white label version which we expect will attract adult content providers and affiliates worldwide.
The new platform is forecasted to improve conversion rates and receive 20 times more traffic compared to our existing membership platform. In addition, the new platform has been built to be substantially less labor intensive to operate compared to the existing one. Following the rollout of the new membership platform, we will launch a new video-on-demand platform following the same concept. Both of the new platforms will be available in localized versions with respect to language and payment options.
Additionally, we will be developing improved interactive functionality for new media platforms such as IPTV and mobile, and maximizing our content monetization with the existing vast Private library as well as aggregation of select international studios offering a wide range of content and genres for all platform needs. In April this year, GameLink launched a proprietary mobile solution enabling users to instantly stream over 15,000 movies. The platform is initially available on Smartphones such as the iPhone and Android phones at the url: www.gamelink. com. The mobile Internet platform is an extension of GameLink’s leading Video-on-Demand e-commerce platform, allowing consumers to purchase and consume content instantly.
All content is available for future viewing in the customer’s virtual media center, stored in the company’s ‘cloud’. The platform has been optimized to work with Apple devices including the iPhone, iPod, the iPad as well as Android devices.
In addition to streaming, consumers can choose to download their movies or purchase DVDs and novelties from the globally accessible platform. A white label version of the mobile platform is available and is being marketed to adult studios and affiliates worldwide. Our objective is to become the main provider of an off-portal mobile platform solution to all major content providers in our industry. In contrast to Private’s existing mobile content business, which is based on an on-portal model going through content aggregators and carriers, this new business is off-portal and provides substantially improved margins as content is sold directly by Private to the consumer.
We are continuing to implement our new media strategy for growth of VOD (Video-on-Demand) via IPTV and to date we have contracted with 38 major platform operators in 24 countries in Europe, as the leading supplier of adult content. Currently we have gained more than 75% coverage of the European IPTV market and across all platforms.
Going forward, we expect to increase our market coverage in this expanding market. Furthermore, the introduction of IPTV in Europe has challenged the Cable-TV industry and subsequently cable operators are rapidly upgrading their systems to provide the same functionality as IPTV. In 2009 we have contracted with two leading cable operators in Western Europe and going forward we expect to add further Cable/VOD platforms to our portfolio.
In relation to Private branded TV channels carrying our content in Europe and Latin America our partners Playboy TV Latin America and Playboy TV International continue to improve distribution. During the 2009, Playboy TV Latin America increased its distribution significantly and we expect to see positive impact from this going forward,” Mr. Gillborg concluded.