索尼 (SONY) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Metro-Goldwyn-Mayer third quarter 2002 conference call.

During the conference call all participants will be in a listen-only mode.

Afterwards we will conduct a question and answer session.

Press the one followed by the four on your telephone.

This conference is being recorded Tuesday, October 22 of 2002.I would now turn the conference over to Mr. Joe Fitzgerald, executive vice-president, investor relations and corporate communications.

Joe Fitzgerald, Executive Vice President Investor Relations and Corporation Communications, MGM: Hello, everyone.

As advertised we have Alex Yemenidjian, Chris McGurk and Dan Taylor with us this morning.

They have comments for you and we will take your questions.

I want to point you to our safe harbor statements in our press release.

That also applies to our conference call today.

Alex?

Yes,.

It's also being Web cast on the MGM Web site.

There is a replay number we will provide you with later.

Alex Yemenidjian (?) : By now you should have seen our third quarter earnings release which far exceeded everyone's expectations.

Dan will give you more texture on the quarter.

I want to point out our success for the quarter was as a result of the contributions of all our divisions in addition to the outstanding performance of Barber Shop which exceeded our 13 percent target.

Our film library, TV division, our channels are all profitable and growing.

Chris is going to talk about our TV business in a moment.

Let me jump to MGM networks.

Since the last quarterly conference call we launched two new channels in Africa.

The first channel is100 percent owned by us and covers English speaking Africa with 80,000 subscribers to start with.

The second channel covers Portuguese speaking Africa with 20,000 subscribers at launch.

We are using the feed from Brazil.

The profits go to Latin America, MGM which we share with Liberty Media.

The distribution agreement for both channels is for a four year term, and provides for 20 cents per subscriber per month.

Both channels will be profitable.

There is no deficit financing.

Recently we also a announced we plan to launch an MGM branded channel in Germany and Austria in the second quarter of 2003.

Our partner in the venture is Premiere, a leading digital TV platform in Germany and Austria.

The channel will be carried on the Premiere plus tier and will start with 1.1 million subscribers.

Again this channel also will be profitable from day one.

As far as the entire company goes, MGM is at an inflection point right now.

We don't have to ramp up production anymore.

We have done that.

Our first run revenue pipeline is getting filled from the theatrical window to the free TV window.

We are making more movies with less capital.

As a result, we expect to be free cash flow positive beginning in 2003.We are working on our 2003 budget right now, but our preliminary estimate for calendar '03 is that we expect to generate between 100 and $200 million in free cash flow after interest expense.

Now, at the same time our balance sheet has never been stronger or more conservative as you'll see when Dan gives you some numbers in a moment.

Given the current market conditions, our stock is trading at what we consider to be a significant discount to the value of our assets.

It is interesting that our stock is at its lowest point when the company's current performance and near term outlook are at their best.

Deals (ph) like these don't come very often.

On July 26 we announced a10 million share stock buy back program.

To date 2 million 548 (ph) thousand shares at an average price of $11.19 a share.

Now, over to Chris.

Thank you Alex, and good morning.

We believe our third quarter performance is indicative of MGM's future.

First, in the feature film area we are thrilled with Barber Shop's success.

It opened to a gross of over $20 million and some of the best reviews of any film released this year.

It held number one position the following weekend on its way to approximately$75 million at the domestic box office.

Like Legally Blond, Barber Shop is a low cost, high concept film with a clearly defined target audience that crossed over to the general audience after initial release.

It now has definite franchise (ph) potential.

This film will be one of MGM's most profitable releases ever.

We have already put a sequel and spin off idea into development an are fielding four network proposals for a TV series.

And very importantly, our film slate has been carefully developed starting 18 to 24 months ago, with several films designed with the same economic and commercial parameters as Legally Blond and Barber Shop.$75 million of domestic box office.

Like Legally We believe this up coming roster of new films that Blonde, Barber Shop say low cost high concept film includes titles such as Bullet proof Monk, Agent Cody Banks, I Molly Banks (ph) and Good Boy, has thepotential in success to generate more of these franchise properties for evolution we have four see sequels in the release slate that we believe have up side potential.

Our other MGM release during the quarter, Crocodile Hunter Collision Course also performed well and will deliver a nice profit.

Barber shop and Croc Hunter underscore the go forward economic profile of our feature film business, Both films cost under $15 million to produce and offer attractive risk reward profiles.

Going forward, our average investment in non sequel MGM films through the first half of 2003 is anticipated to be under $20 million.

And, as our film development strategy has begun to reach its full evolution, we have four sequels in the release slate over the next 15 months that we believe have great up side potential.

The first is die another day, the 20th installment in James Bond franchise starring Pierce Brosnan and Halle Berry.

This film will be backed by the biggest promotional cam pain in MGM's history including I the support of 24 blue chip marketing partners who are contributing very significant media presence.

We have seen the completed film and we are confident that it will it is the biggest Bond ever.

Madonna performs the films title song and has a cameo role in the movie.

Her single is the highest debut song on the hot 100 chart over one year and it's been the number one greatest gainer in radio air play expanse for two weeks.

Already it is surpassed every other Bond song on the charts since 1985.fourth quarter of 2003.

Our other sequels are Jeepers Creepers 2 for next March, the follow-up to a very profitable Labor Day 2001 release which was one of our highest ROI films ever, and Legally Blonde, 2, red white blonde starring Reese Witherspoon which will be released for the July 4th holiday next summer. still is.

Reese's last film which was released a few weeks ago was the biggest September opening in films in movie history, we expect great things from her next starring roll in our sequel to one of the most profitable MGM releases ever, Legally Blonde.

We are targeting our fourth sequel Barber Shop 2 for the fourth quarter of 2003.

Overall, Alex and I are very confident about the future of MGM's entire current release schedule in general and our four sequels in particular.

We told you last quarter that United Artists on a roll.

It still is.

UA recently premiered two limited release films.

Igby (ph) goes down opened to strong critical acclaim in September and was very profitable for us.

Bowling for Columbine, Michael Moore's provocative documentary about the culture of gun violence in America premiered October 11th to some of the best reviews of the year.

We are very excited about that film's strong performance so far and the prospects for it's roll out over the next few weeks.

Also premiering in the fourth quarter are four UA films, All or Nothing, Personal Velocity, Evelyn starring Pierce Brosnan and Nicholas Nicholby with an all star cast.

One final note regarding our new film releases.

Many of you have asked about our participation in Universal's recent release red drag on and we have an agreement with universal whereby MGM receives a significant participation in the gross receipts of Red Dragon.

We are very pleased with the film's performance as well as our profit outlook from both the film's release and from our DVD repromotion of Hannibal and Silence of the Lambs which we scheduled in October to take full advantage of the Red Dragon theatrical release.

Additionally, apart from the Red Dragon agreement, MGM has the option to co-produce with Universal any future releases related to Silence of the Lambs, Red Dragon or Hannibal.

In the home entertainment area, we had another outstanding quarter.

Despite very difficult sales. comparisons due to the release of Hannibal and Silence of the Lambs and last year's third quarter, worldwide DVD shipments increased 20 percent and domestic DVD shipments increased 18 percent in the third quarter of 2002.

Through the first nine months of this year, our worldwide DVD shipments increased 70 percent and domestic DVD shipments increased 72 percent.

Of the total units shipped, DVD and VHS combined, D V D's represents approximately 66 percent of the worldwide total.

And here is the most spectacular statistic of all.

We now have a 17 percent share of library titles, up from 12 percent at the start of this year.

That is almost a 50 percent increase in market share.

This dramatic increase in our library market share has occurred for two reasons.

First, the depth and breadth of our library gives us unlimited options to create promotional opportunities at key retail outlets.

And second, the explosive growth in DVD player sales continues to create a strong revenue growth environment for example.

Let me give you two that illustrate this success.

In its initial 1999 release, the Usual Suspects, generated almost $1 million in DVD revenue.

In 2000, that revenue almost quadrupled to $3.9 million.

In 2001 revenues on the title were 2.8 million dollars.

Now, in 2002 we released a special edition version of the Usual Suspects and expect DVD revenues will exceed $8 million this year which will be more revenue generated than in all previous years combined.

The Good, the Bad and the Ugly is another great example.

It was initially released on DVD in 1998 and generated $1.1 million in revenue that year.

In the subsequent four years, we have generated $9.7 million in DVD revenues on this title, a multiple of over 8 times the initial release year revenues.

Clearly, like so many of our other library titles, the usual suspects and the Good the Bad and the Ugly have become evergreen generators of DVD revenues for MGM.

The point here is that overall DVD revenues are growing year after year, not just from additional new releases of titles, but even more importantly from innovative marketing campaigns and repromotions of previously released titles.

And our home enter statement division does just as great a job in maximizing revenues on our new film releases.

In the last 18 months we performed at an average of 10 percent higher than the industry in video and DVD sales for new films with performance standardized at similar box office levels.

In the TV production area MGM launched C spies in 90 percent of the U.S. starting September 23rd.

The show has averaged over a 2.0 national rating since launched.

It has proved to be very popular in the late night and early fringe day parts.

Especially on Saturday and Sunday nights. ever.

The number one shows in syndication this season.

We are also very pleased that our experiment with NBC to air the three episodes of She Spies on the NBC was a success in creating strong awareness for the show before its syndicated launch.

Jeremiah (ph), our SciFi series on Showtime began production yesterday for its second season beginning in March.

This recent second season renewal has increased the profit outlook in risk reward profile of the show.

Stargate S G 1 in its sixth season now has set ratings record on the sci-fi network, including the highest one hour rating ever.

It's also the number one rated syndicated hour this season.

The pilot episode for Carrie, a new series based on our classic film library title, will air on NBC November 4, and in addition to our discussions with several networks about Barber Shop as a new TV series we extended our option on Legally Blonde as a potential ABC series until after the release of next summer's theatrical sequel Legally Blonde 2 red white and blonde.

We believe the sequel will help optimize the TV opportunity for the franchise.

Overall, our TV business is in a very strong position including Stargate Infinity, our animated series Joe Venture with Key entertainment in the Fox network, we now have five TV shows on the air, three active pilots and two franchise properties in development based on recent film successes.

In conclusion, MGM is in excellent operational shape at this point.

We are very confident about our upcoming slate of films, their economics, marketability and commercial potential.

Our MGM UA release slate over the next 12 months is has evolved to the point where it now fully reflects the strategy we put in place two years ago.

Our TV business is cash flow positive and nicely augments the franchise building approach that is now working so well in our film business.

Our home entertainment and TV distribution divisions continue to brilliantly maximize the value of our great library and current product.

And Alex and I believe they are the best operations in the business.

This quarter is a strong indication of things to come.

Dan?

Thank you, Chris.

Good morning, everyone.

I just want to add a few points before we take your questions.

Equity and net earnings of investees were $7.1 million in the quarter.

Virtually all of it coming from our 20 percent interest in the four Rainbow Channels.

Our share of these channels net income is reported on a three month lag basis I'm sure you recall.

Net data at the end of the quarter was approximately $900 million.

Out net debt to capital ratio was a very strong 24 percent.

At year end 2002, 23 expect net debt to be just slightly in excess of $900 million.

In addition to having $347 million in cash on hand, our $600 revolving credit facility remains untouched.

As Alex mentioned we are now in a position to generate significant free cash flow starting in 2003.

We told you three years ago of our plans to ramp up production.

We have now achieved steady state in our theatrical production and release schedule for both MGM and United Artists.

The films released over the last couple of years are now flowing through every stage of distribution pipeline.

All windows from theatrical release, through home video, pay per view, paid TV and free TV are now generating significant revenue from our recent releases.

As Chris pointed out, to highlight the evolution in the economics of our current release business other than sequels, our investment in MGM's first six pictures for 2003 is less than $20 million per film.

Now, this does not mean we are only making $20 million films.

It just that MGM's investment per picture is less than $20 million.

Through carefully planned financial strategies, we are allocating capital across a broad array of projects to maximize the cash flow generated by our film slate. for instance, we are in post production on a movie called Bullet Proof Monk, a film with a total negative cost in excess of $45 million where we have North American rights capped at less than $15 million.

What is important to note is that we're not smaller, we're just being smarter.

Operator we'd like to open up the call for questions now, please.

Thank you.

Ladies and gentlemen, if you would like to register a question, press the 1 followed by the 4 on your telephone.

You will hear a three tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3.

If you are using a speakerphone please lift your handset before entering your request.

One moment, please, before the first question.

Christopher Dixon with] with UBS Warburg.

Please go ahead.

Christopher Dixon, UBS Warburg: Thank you very much.

Alex in the first six months of the year you reported a contribution of over $210 million from the home entertainment area.

As you're going through the year obviously DVD's continues to fuelbusiness.

Where do you see that this year terms of your overall library product?

And secondarily perhaps you could review for us what you're seeing in terms of advertising and marketing expenses for on a probation basis?

I'm not quite sure which $210 million you're referring to when it comes to home video.

Certainly we don't see any slowing down at all.

But whether it comes to the growth in the home video department in general, and DVD sales in particular.

As we mentioned before, the growth in that department is fueled by these DVD players and as you know very well, Chris, DVD players are the fastest selling consumer products in history.

They have reached 30 million units in five years which is faster than any other product.

We have now gotten some preliminary reports of shipments of DVD players for Christmas and the number is just astronomical.

So there is no reason for that growth to stop in the near term from what we can see.

With respect to specific numbers, I'm not quite sure I follow

(inaudible)-

Alex Yemenidjian-Oh, yes.

Well, again, there's no reason for that contribution not to continue to go up.

In fact, recently you will notice that sales prices for DVD's have stayed stable and actual production costs for DVD's have come down.

So we expected to experience some pressure on the profit margins and actually they're going up in the near term for DVD's.

In terms of marketing costs which I think was the second part of your question, Chris.

That's correct.

The way that we're really I think combatting the inflation of media rates really two ways.

If you look at the release slate as I - the bulk of the slate going forward is really made up of these lower cost higher concept films that have a very clearly defined target audience like Barber Shop.

In that case you can really limit your marketing spend because it's a rifle shot as opposed to a shotgun.

And Barber Shop for instance, our marketing spend was significantly below the industry average.

So that's going to help us going forward in terms of limiting our total marketing cost per movie.

Of course, on the biggest picture that we have on the radar screen which is bond, as I mentioned we're going to be helped very significantly by the fact we have 24 promotional partners around the world We are amping up in excess of $100,000,000 in media support behind the worldwide launch of the movie.

Thank you very much.

Your next question comes from the line of Tim Wallace from Bank of America Securities.

Tim Wallace, Bank of American Securities: Thank you very much.

I had a question a couple of questions on the Bond film in the fourth quarter.

First, could you give me some guidance on what percentage of its box office revenues you anticipate earning in the fourth the quarter?

I guess the real question is do you anticipate being EBITDA positive in the fourth quarter or should we anticipate a loss and turning positive sometime next year?

Thanks.

Hi, Tim, this is Dan.

Since the movie is going to be released on November 22nd, virtually all of our box office will be recognized prior to year-end.

The film rentals that we earn off of that box office.

As you know, the only expense -- the expenses in the quarter do not you include just marketing, but also include amortization of the films' negative costs and the other costs.

So as with any new release per any studio in our industry, you're not profitable in the quarter of release barring the one in a million shot.

So we do not expect to EBITDA positive on the Bond film in the fourth quarter.

And then, just for clarification, this is a worldwide release on that date ; is that correct?

That's correct.

But wait a minutes.

We're opening in most of the major markets in Europe within two weeks of the U.S. release.

A couple of territories will go out to the first of the year.

Japan is the biggest example which I believe is going to go in February.

Okay. and can you give us any kind of guidance as on how much you are planning on spending for marketing?

No.

We generally don't comment on the specific marketing plan.

I do want to point out, though, that remember, quarter does not obviously depend on one film.

Even with the performance of Bond in our plan, we will be profitable in the fourth quarter.

All of our businesses are going to be contributing to very strong results in the fourth quarter.

Okay.

Fair enough.

Thanks.

Your next question comes from the Jeff Logsdon with Gerard Klauer & Mattison.

Please go ahead, sir.

Thank you.

Alex, perhaps you could take a minute, or Chris, and talk about what may happen with Rainbow if the reported GE, NBC transaction occurs.

You're referring to the reported sale of Bravo only to NBC.

As you may know, we have a tag along right in that transaction and cable vision has a drag along right.

So based on the reported sales price, if the transaction goes through, we would be receiving 20 percent of the consideration in that transaction in cash directly from NBC.

And if one were to use the price reported in the press as the template, what would that result to MGM, and what might be the tax implications of that, if any?

Well, we would get a check for approximately 240 to $250 million, and we would have - all of that cash would have all of that cash would remain with us because we would have no tax ramifications for that because of our preexisting tax structure., so there's no tax liability, and so we plan on starting calendar '03 with about $300 million of cash in the bank where I think 347 at the end of the quarter as Dan mentioned.

So if this transaction closes, that puts us at about $550 million of cash and if we hit our target and generate our $200 million in cash flow next year, we'll probably finish barring the other transactions, of course, we'll probably finish calendar '03 with about $750 million of cash which is about $3 a share.

Great.

Thank you.

Thank you.

Your next question comes from Jill Krutick from Salomon Smith Barney.

Thank you very much.

I'm curious how the up side on the quarter may change your outlook for the year in terms of your financial target for the DVD business and what kind of install base you're anticipating this year in your overall outlook for the holiday sales of DVD's?

And when you anticipate the growth in that industry to start to slow and how much of your library have you exploited in that area so far?

Thank you.

Hi, Jill, this is Dan.

In terms of the fourth quarter and the year, we're still standing by our previous guidance about being profitable in the fourth quarter.

Clearly with the strong performance we had here in the third quarter, I'm sure all of you will be adjusting your full year results to reflect that.

In terms of the DVD install base, as you know, Chris already talked about the evergreen nature of our library and how we're continuing to participate in the explosive growth in households.

We're going to be at somewhere in the low to mid 30 million households that have DVD hardware units installed as of the end of the year.

That's still only one-third of the potential household installed base that's available to us to continue to exploit our library.

By 2006, we expect to be in excess of two-thirds -- have in excess of two-thirds of U.S. households owning DVD hardware.

So clearly this explosive growth continues very strongly for the next few years. and even then we're not fully penetrated.

So we see this going on for the foreseeable future.

I might also point ort that internationally the consumers are starting to catch up domestically.

We expect strong things from our international home video business next year and particularly in light of the fact that we are taking over self distribution in France and Germany to complement our U.K. operation already.

Fox will continue to provide back office services, but we will now have full control of our marketing and sales function with the DVD hardware and the direct relation with retailers.

Similarly in North America, we've already announced that we're taking over Canada from Warner.

We're doing in Canada.

Marketing and sales as well as the back office functions.

So we think 2003 is going to be an even stronger year for our home video group.

And how much of the library have you exploited so far in this process?

By the end of next year we expect to have about a thousand titles available on DVD out of our library.

But again, it's not the total number of titles.

It's how we're able to mix all these titles together, do direct promotions with our retailers and take advantage of these new consumers as they buy their DVD hardware players.

These titles continue to act like new releases and we believe that will be an absolute truth for the foreseeable future as consumers continue to buy DVD hardware.

Great.

Thanks, Dan.

Your next question comes from the line of Spencer Wang from J.P. Morgan.

Spencer Wang, JP Morgan: Hi, good morning.

Just a follow-up on some of the other home entertainment questions.

You gave us the shipment numbers for DVD.

I was wondering if you had comparable shipment numbers for VHS.

I'm just curious to see if you're seeing any sort of meaningful cannibalization of the VHS business from DVD.

And secondly, with respect to your free cash flow guidance for 2003, does that include your cash spending on new films?

And if so, if you could just give us a sense of how big that could be, that would be great.

I know it's early in the budgeting process.

Thank you.

I'm going to take your last question first, Spencer.

In terms of free cash flow, as Alex mentioned, that's net free cash flow date for 2002.to the company even after debt service.

So it does take into account our production spend.

We're anticipating our production spend on a net basis to be consistent with prior years, having a big Bond film in the middle of the production process.

So, you know, we expect - we continue to expect, you know, 15 or so films between the MGM and UA labels with a variety of financial investments.

With regard to your first question, VHS sales are down slightly, less than about 10 percent, maybe a little less than 10 percent on a worldwide basis, complemented by the fact, though, that DVD is up 70 percent, and that's really the huge factor.

That's on year to date for 2002.

The other thing to keep in mind is the DVDs have a much higher profit margin to us than VHS so we're more than making up for the slight cannibalization in the marketplace.

And Dan, is that units or is it dollars?

That's units.

Has there been significant price deflation on the VHS side?

On the VHS side?

No, prices on VHS had actually come down a couple years ago and settled into their current price ranges.

It's not a significant price issue any more.

Great.

Thank you.

The next question comes from the line of Robert Routh from Arnhold and S. Bleichroeder.

Please go ahead.

Yes, good morning.

A few quick questions.

First I was wondering given the situation with Rainbow and the possibility of a Bravo sale, what would your intentions be if any with respect to AMC that considering that to my calculations they run out of their library in 2004 and there are only two companies with a library that fits American movie classics, you being one of them, and Columbia Tristar being the other.

Seems something could happen there.

Second, you repurchased shares in average price of $11.19 It seems that you still have a lot of availability.

Is it safe to assume that from an analysts perspective management still plans to aggressive use its available capacity in buy back?

Or are we going to see a slow down if the shares remain at this level compared to last quarter?

This is Alex.

I think that how aggressively we continue our stock buy back obviously will depends on market conditions at that particular given time, so it's either Friday or Monday.

I don't know which.

But Either way, it will really depend on market conditions.

And as I said before, we continue to think that the price of our stock is significantly under valued.

With respect to your question about AMC, I think you know that we've always felt that AMC is a great asset and a great fit with MGM.

At the right price, we're willing buyers and if the price is not right for us and it's sold to somebody else, as I mentioned before, we have the right to tag along.

Now, keep in mind that if we sell our interest in Rainbow in the four channels, either individually or collectively, we become a debt free company with a billion 750 of cash and unused credit.

So either way, whether we are buyers or sellers, we like our position.

The underlying asset is great and growing, so we believe that we're going to make a lot of money for our shareholders on this transaction.

Great. and one follow-up.

Turning to Bond, could you give us what the average worldwide box office growth has been historically for Bond features just so we can get a sense as to what to expect?

I have a number of about 350 million.

It's actually a little higher than that.

It's been 355 or 360 for the last three of average worldwide.

Great.

Thank you very much.

Your next question comes from the line of Michael Gallant from CIBC World Markets.

Michael Gallant, CIBC World Markets: Yes.

If you could clarify on the negative cost comment, what is going to be your net budget in '02 and based on the guidance of free cash flow what's going to be your net budget for '03?

I was a little bit confused by the bond comment there.

And then also, actually let me just start with that one.

Hi, Mike, this is Dan again.

What I was saying was is that obviously a Bond movie costs in excess of $100 million and so we've, spent a little bit more than normal on production in 2002 as we completed that movie for release in the fourth quarter versus what you know, what we've been spending historically. the numbers will be down a little bit next year.

Based on that, so we'll be spending on a net around $250 million on production money.

Okay.

Okay. and as far as amortization of film costs, when you think about the three disappointing movies I guess of '02 and Hearts Warn Windtalkers and Rollerball, how aggressively have those been kind of amortized?

How much is kind of left?

Well, those movies, you know, under the new accounting rules we have to really look forward, take a discounted cash flow as opposed to a nominal cash flow in the calculating the amount of value we're we're going to attribute to those films, write off the balance and on top of that the marketing costs are treated as period costs.

As a result all those movies will be acting as profitable movies for us on a go forward basis.

And remember in addition to that that's only the ten year accounting life.

We will also have the evergreen value of those films in the library.

So far we think our ultimating (ph) process, always seems to be true with us, it's been conservative because DVD for instance on Windtalkers which just got released earlier this month, is performing well in excess of our expectations.

So again, we will be generating profits in the very near term associated with these movies.

Okay.

That was my third question.

You've answered it.

Great.

Thank you.

The next question comes from the line horizon.

Particularly when you consider the of Jessica Reif-Cohen from Merrill Lynch.

Jessica Reif-Cohen, Merrill Lynch: Thanks.

Another question about the free cash flow.

You said included still in production spending.

Does it also include all of the spending on P and A?

Jessica, this is Dan.

Yes, it does.

Absolutely.

And then how sustainable is that number beyond '03?

Is '03 largely going to reflect Bond?

Jessica, this is Dan again.

We are still as Alex mentioned we are working on five year plan, but our preliminary plan as we develop these numbers indicates that these type of cash flow numbers should be obtainable and increasing over the next four to five year horizon.

Particularly when you consider the success of some recent movies like Barber Shop which haven't even been factored in yet we'll get out of the ancillary markets.

Then we have some strong as Chris mentioned we have good line up of movies including sequels and franchise he that we believe will give us better movie performance than we've seen recently which gives us comfort in developing those free cash flow numbers.

And then since you are building up so much cash, it is pretty wide range if it happened or that happens.

Could you talk about some of the uses of cash?

Alex already discussed the possibility of buying back stock, another possibly, the cable network acquisition.

Is there any other targets?

You know, Jessica, for the past three and a half years we've been continuously looking and analyzing and negotiating for acquisitions.

Sometimes it's for individual assets, sometimes it's for entire companies.

But I think it's fair to say it was always for value;

I think we've both seen way too many transactions in our industry which were driven by ambition and not by reason.

So the significantly over pay because they fall into this trap of thinking they've got to have it thing, has gotten a lot of people in trouble.

So making the deal becomes more important than the reasonableness of the price.

And when you over pay by 40, 50 or 60 percent, you have to work hard for several years just to pay for the overpayment. and we don't want to do that to our shareholders.

I think that diversification and scale, which is what we have been seeking all this time, are important competitive advantages for any business, not just for us.

But size for the sake of size is the fool's game.

So we continue to analyze, we continue to negotiate, but we will not digress from our discipline and we will not over pay.

Right now our company has the strongest balance sheet it's ever had and we are transitioning into a period where we expect to generate significant free cash flow.

So, you know, we can continue to maintain our financial discipline. and it will continue to run our business and generate in the meaningful cash flow numbers Dan was talking about.

I think the financial market will reward our shareholders.

And if the financial markets don't reward our shareholders, then we will reward them with our cash balances.

We have the options of paying back paying down debt, we have the option of buying back stock, we have the option of tendering for our stock, we have option of looking to companies or assets to acquire that are accretive to our shareholders.

SoI don't think we would rule anything out at this point.

I

Thank you.

Your next question comes from the line of Ray Katz from Bear Stearns.

Please go ahead, sir.

Ray Katz, Bear Stearns: Yes, good morning.

Alex, wonder if you can comment on VOD (ph), especially your plans on getting involved in them at a distribution and how you manage that relative to the DVD business.

Hi, Ray, this is Dan.

I'll go ahead and comment on that.

As you know, VOD (ph) is being pushed very strongly now.

Several of the studios, including us, have some V O D (ph) deals and opportunities out there that we're taking advantage of.

We've made deals within demand and a few others we have tests going out, Comcast is launching in the I think later this month or they might have just launched actually with the David Miller with the largest single V O D (ph) test in excess of 700,000 subscribers.

So the V O D (ph) movement is starting to was significant profit expected from red dragon. move forward very rapidly.

We are also continue to be involved with movie (ph) length.

There's doing beta test right now and they're still planning on a launch in the fourth quarter for the Internet based V O D (ph) opportunity for consumers.

Again, we think that there's opportunities both on a subscription base and on a pay per view base, and we plan on taking advantage of those.

Thank you.

Ladies and gentlemen, if there are any additional questions, please press the 1 followed by the 4 at this time.

David Miller with Morris Sanders Harris, please go ahead.

David Miller, Morris Sanders Harris: Yes, good morning, guys.

Congratulations.

You had mentioned that there was a significant profit participation expected from Red Dragon.

Chris, I'd be curious to know if that's bench marked off a profit participation or a percentage of the gross. and then also on She Spies, it looks like you guys are doing around of 2.0 rating in the syndication window.

I'd be curious also how that compares rather where it was guaranteed in the syndication up front.

Thanks very much.

In regard to red drag on, I don't want to get into too much detail but I will tell you our participation is based on a percentage of gross receipts.

In terms of the She (ph) spies, David, we allow ourselves enough room in the barter market to make sure that we can earn some up side on the show if it proves successful.

At a 2.0 rating we're doing a little bit better than we had planned so we left room in the up fronts to make sure in the barter market to make sure that we would be able to share in that up side.

Okay.

Thanks very much.

That's all the time I show for questions at this time.

Please continue with your presentation or any closing remarks.

Ladies and gentlemen, nice to talk to you.

I'll be around should you have any follow-up questions.

We'll speak to you soon.

Thank you.

Ladies and gentlemen, that does conclude your conference for today.

You may all disconnect and thank you for participating.

END