Starz Entertainment Corp (STRZ) 2006 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by, and welcome to the fiscal 2006 first quarter earnings analysts’ conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to our host, the Vice Chairman of Lions Gate, Mr. Michael Burns. Please go ahead.

Thank you very much. Good morning, and welcome to our first quarter analysts call. Jon Feltheimer, our CEO, will make the opening remarks and then turn it over to me for some comments, and then we’ll turn over the call for Q&A, first from our analysts and then from a few investors, if we have time.

The matters discussed in this call include forward-looking statements. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors. Now I’d like to turn the call over to Jon Feltheimer, CEO of Lions Gate.

Good morning. Thank you all for joining us. With me today to discuss Q1’s results are Lions Gate President Steve Beeks, Chief Financial Officer Jim Keegan, Chief Compliance Officer Rick Pell, and as you’ve heard, Michael Burns.

It’s only been six weeks since our year end call, but it’s been a very busy period for Lions Gate. So it’s a good time to go over not only the quarter’s results, but to discuss our plans for the year, and especially our theatrical slate.

A lot of good things have happened this quarter, and we’ve had a few disappointments as well. Overall our performance translates into a quarter where we outperformed our internal projections for revenue and free cash, but fell behind our EBITDA and net income expectations for our new releases.

Let me go through some of the highlights. Crash continues to perform and has recently gone over $50 million at the box office. We’ll be adding 150 screens in August as part of our launch strategy for our September 6 home video campaign. Rob Zombie’s the Devil’s Rejects continues this weekend in over 478 screens. While it will end up a little short of our estimates, it has done better than Rob’s first picture, House of 1000 Corpses, and will do well in ancillary markets, including DVD.

Speaking of home entertainment, our business continues its strong performance. Diary and the rest of the Tyler Perry catalog are selling well, and they have already sold through over 4 million units. Much of this revenue will come in during the second quarter as higher margin rev share.

As I mentioned, Crash will be released on DVD on September 6, also in the second quarter, and initial retailer response has been very, very positive. The strength of our DVD business continues to attract third party product. We recently announced a three year deal with Sphinx Film for the distribution of their theatrical title to mass merchant accounts in the US home video market, beginning with the academy award winning Born to Brothels, and including Murder Ball and current theatrical release The Aristocrats, which opened very big in limited release.

In view of recent industry developments, I believe it’s especially important to note that our strategy of shipping conservatively continues to pay off. Our return rate on new releases is holding steady at 22%, while our returns on library product is up only slightly to 24%. We are looking forward to the resolution of the high definition format war, and we’re close to making a decision on which format to support. But we are already aggressively taking advantage of the new Universal mini disc format for the Sony PSP. We’ve released six titles in June, we’ll release another six in September including Crash, and plan to release 50 to 60 in calendar 2006.

We also continue to acquire and clarify our video on demand rights, as our deal with MTG for 332 titles this month indicates. Being entrepreneurial and creative in terms of exploiting our library and new release product in conjunction with new platforms, Telco, cell phone, broadband and other new media players, continues to be an important part of our strategy.

As we mentioned in our press release yesterday, our family entertainment properties will be a significant driver of our EBITDA and earnings performance throughout the rest of fiscal 2006. the first of our next three Barbie movies, Barbie and the Magic of Pegasus, will be released September 20, and will be the first Barbie 3D movie. We will release the first Inspector Gadget animated full length movie, featuring the voice of Bernie Mac, on September 6; an all new CGI animated Care Bears movie on October 18; and Pinocchio 3000, which features a cast led by Whoopi Goldberg, on November 1.

On the theatrical side of our family entertainment business, we are continuing to make excellent progress on Foodfight, scheduled for fall 2006. we’ve added Wayne Brady to a cast that also stars Charlie Sheen, Hillary and Hailey Duff, and Eva Longoria, and we’re in discussions with Kroger and Wal-Mart to join our roster of promotional patterns that already includes Proctor & Gamble, Star-Kist and IBM.

Our television business continued its rapid growth, and is becoming a major source of strength, with $45.9 million in production revenue in the first quarter alone, it’s well on its way to meeting, and probably exceeding, our ambitious revenue target for the year. Aside from The Cut, which will be a profitable show for us, our other series are all proving to be ratings successes. The Dead Zone continues to generate some of the highest ratings in its four seasons on the air, remaining one of USA Network’s highest rated shows. This is particularly timely as we prepare our plans for the second cycle sales.

Wildfire has more than doubled ABC Family’s ratings, and demo numbers in the timeslot for five weeks running. We’re hoping for an early season two pick up, and believe Wildfire is likely to join The Dead Zone and Missing as the third mainstay of Lions Gate television’s roster.

Our new Showtime series, Weeds, has received great reviews, has garnered more critical acclaim than any other project in Lions Gate television’s history. It’s Sunday and Monday night ratings were strong, and we’re looking at a potentially terrific first week [inaudible] after we get the Wednesday and Friday repeats. Missing, by the way, has just received a season three backorder of six episodes, bringing its total to 55 episodes, and in addition our Christmas comedy, Three Wise Guys, has just wrapped in New Mexico for USA Network.

It’s important to note that in our television business we continue to find efficient financing as well as beneficial locations to produce our television series profitably on a current basis. For example, we continue to shoot projects in Louisiana and New Mexico, in both taking advantage of significant local support and subsidies. As a matter of fact, on one of our products, in addition to our subsidies, we have a $15 million interest free five year loan, for which, due to reporting regulations, we can’t recognize the interest gain as part of our television division’s profitability, but whose benefits will inure significantly to our bottom line.

Getting back to our slate after Crash, High Tension, Rides and Happy Endings have all underperformed. The unique nature of our industry’s financial reporting requirements caused us, in the quarter, to expend $22 million of losses for these three pictures, which is about twice their ultimate loss. In other words, we’ll have over $10 million of positive EBITDA coming back to us in subsequent quarters in the future. As a matter of fact, if we over perform in the video and ancillary markets, Rides and Happy Endings will be close to break even pictures for us. However, High Tension was too aggressively marketed, and we will pay for that mistake by putting pressure on our remaining theatrical schedule to perform better than our conservative estimates in order to reach or exceed our guidance.

Michael will take you through the details of our slate, as well as some color on our key development and production activities. Michael.

Thanks Jon. We released five movies since the beginning of May; Crash, Rides, Happy Endings, High Tension and The Devil’s Rejects. Crash was obviously a great success, and will be very profitable. The Devil’s Rejects will be a nice single, while well reviewed Happy Endings and Rides and currently expected to lose money for us. High Tension however cost us a lot of money. The majority of our loss in the quarter came from that picture. When you have a significant loser like High Tension, obviously that does put pressure, as Jon said, on the remaining slate, especially our remaining wide releases for the year.

This means our year end results will be determined, for the most part, by the following seven pictures; Grizzly Man, Undiscovered, Lord of War, Waiting, Saw II, Madea’s Family Reunion and Usher’s currently titles All Caught Up. Of those seven releases, Grizzly Man is a prestigious platform documentary release, about voracious grizzly bears. We’re hoping our grizzly bears end up having something in common with those waddling, marching penguins, but we’re not banking on it.

Undiscovered, starring Ashlee Simpson and Sky High’s Steven Strait is a hybrid for us, middling between and wide and platform release. The remaining five pictures, Lord of War, Waiting, Saw II, All Caught Up, and Madea’s Family Reunion, are all going wide and represent our tent poles. Getting as specific as we can without giving away any state secrets, we will be spending approximately $100 million in print and marketing costs for these seven releases, and have internally budgeted approximately $140 million of cumulative, total box office for them. Obviously we are hoping for more.

We believe our internal sales projections are conservative enough that we remain comfortable with our yearly guidance. That being said, we are in the sale and television business with box office predictions being both an art and a science.

In the production and development arena, led by Super Human, Life Patterns, and [inaudible] we had based our slate on two criteria; first making movies that target a specific, and where possible, underserved audience; and second, producing films where success isn’t dependent on the size of the budget, by striking a chord with a core audience. Remember our films are typically in the $2 million to $20 million range, and we do have a dynamic slate.

In the urban area we are targeting the family and female audience, both inter-related, and both underserved. Tyler Perry’s follow up to The Diary of a Mad Black Woman, Madea’s Family Reunion, wraps production on August 25. our stellar African American cast includes Tyler, Boris Kodjoe, Blair Underwood, Henry Simmons, Lynn Whitfield, and the legendary actor Maya Angelou.

We are in post production on Akeelah and the Bee, the inspirational story of a girl from Compton who ultimately competes in the national spelling bee; starring Angela Bassett and Laurence Fishburne, aka Morpheus. We have completed a deal with heartthrob L.L. Cool J to produce and appear in a series of movies directed by African American females, including an urban version of a Fatal Attraction-esque thriller. We’ve also fast tracked the development of Kidnapped, our urban Home Alone; and American Radio, an urban version of American Graffiti, being directed by Jerry Harlick [ph] to directed The Brothers and Deliver Us From Eva.

On the genre process, it’s all about giving the core audience the content they want, and our budgets typically range from $1 million to $6 million. Here we’re all about branding and franchises. We’re in post production on Saw II, as you know coming out Halloween, which should do big numbers for us.

We have fast tracked [inaudible], Cabin Fever II, and the remake of David Cornberg’s classic, Scanners. We are on prep on Skin Walkers, a werewolf film, with effects by the legendary Stan Winston, who designed The Terminator and the dinosaurs in Jurassic Park.

As previously mentioned, on the teen front we are in post production on a romantic comedy starring music superstar Usher, and have fast tracked development on two modestly budgeted products, The Prop [ph] to be produced by Neil Moritz who produced The Fast and Furious and Cool Intentions, and Slut, a mean girl style movie to be directed by Jim Fall, who made Lizzy McGuire. We believe all of these to be potential direct hits with the teenaged girl audience.

In the comedy arena we are fast tracking a co-production with 29/29 called Basket Case, and are in the early prep on an exciting action comedy with Lake Shore called Clack [ph]. We’ll be announcing casting on both of these shortly.

In the art house arena we will typically buy specialty films for little or no advance at festivals, but now and again we come across one like Monster’s Ball, that we just have to make ourselves. Bun [ph] directed by academy award winner Billy Friedkin, and starring Ashley Judd, fits that description. We wrapped production today on that, and based on the dailies we believe that this potentially could be an award contender.

Finally, with Marvel Comics, we have two products, we are planning on shooting Punisher II at the end of this year, and are developing Black Widow with David Hader, who wrote X Men I and II. So that’s the fast track slate, all highly targeted at a specific audience with a very disciplined approach to production. Jon.

To further reinforce what Michael said, in terms of the way we internally budgeted our theatrical slate for the year, the current box office estimates we’re using for budgeting purposes for Saw II, as well as our Tyler Perry follow up to Diary, Madea’s Family Reunion, are 30% less than the $50 million plus box we attained for those two pictures. So clearly we’re leaving a lot of room for upside.

Of course, as always, we retain the flexibility to move a picture into and out of the schedule if the opportunity presents itself. I also want to mention that the initial testing we have done with our marketing materials for Usher’s film have gone through the roof, testing even better than the tests we did for Diary.

So to wrap up, we have confidence that our film slate will perform for the rest of the year; have confidence in television continuing to knock the cover off the ball, and we have more direct to video and family entertainment product coming down the pipeline than ever before. We will begin to recognize our substantial backlog of $138 million as our windows open, and continue to emphasize the generation of cash in all of our businesses. We might miss every now and then, since we’re swinging at a lot of pitches, but we have a great batting average, and we’re very confident in our ability to continue to find opportunities to grow value for our shareholders. I welcome all of your questions.

[OPERATOR INSTRUCTIONS]

Lowell Singer with S G Cowen, please go ahead.

Can you talk a little bit about High Tension, I mean you have historically been very conservative on the spending side, and I can’t think of a miss you’ve had that large over the last couple of years. Where did that film go wrong from a budgeting point of view? And as you talk about the importance of the five wide releases for the remainder of the year, can you talk a little bit more about Lord of War and Waiting, which are clearly two of the big bets you’re making, and what gives you confidence in those two films? Thanks.

High Tension was a picture that we paid very little, we paid about $.5 million for the picture. We thought it had a unique sell to it, obviously we were wrong. But we felt to leverage the low price with a significant marketing spend was the best way to maximize that picture. We went in a crowded play period, in the summer, and obviously it was a bet that we missed on. Michael would you like to give a little more color on that?

We really agonized over that release pattern, and we had done our research and there had been several examples, both Black Mass and Hero, the same genre, foreign language films that actually worked. As Jon said, our release data originally was up against Lords of Dogtown, which would have been great, but we had to eventually move the picture, because frankly of the strong play of Crash, and it ended up in a very crowded marketplace, and going head to head against Mr. and Mrs. Smith, which was about as much fun as we could stand.

So we learned that we had to think through the process, and we missed on that one, Lowell.

In terms of Lord of War, we’ve got very strong material, the movie is a terrific picture with a star that has had a great history of success. We like our date a lot, and we’re very confident. In terms of Waiting, again our testing has been very strong, both materials and the picture, we have a star, Ryan Reynolds, who has done a great job for us in Van Wilder, a picture that both scored in terms of the box office as well as a huge performer in terms of home video. While we’re still playing with that date a little bit, we’re very confident in its playability.

OK thanks a lot.

I’d also encourage everybody to go to the LGF.com website and you can certainly watch the trailers for some of our upcoming releases, they just recently went up there.

Robert Routh of Jefferies & Company, please go ahead.

First I was wondering if you could quantify how many DVD units you did sell during the quarter, and if you could give us kind of a trend in terms of what we’ve seen over prior quarters, in terms of total unit volumes, as well as in terms of pricing. Are you guys seeing any pricing pressure on your DVD units? Also I was wondering if you could comment a little bit on the percentage of library DVDs versus the percentage of new release DVDs that you’re currently selling. And finally I was wondering if it’s safe to assume that there’s no change in your fiscal 2006 financial guidance that you had previously given.

In terms of pricing pressure I’ll knock that one out first. Over the last couple of years there has been some pricing pressure, primarily on catalog business, as you’ve seen the low price offerings show up, first at Wal-Mart, now at Target, and every studio has really followed suit in terms of coming down into that area. But it seems to have stabilized a little bit recently.

In terms of new product there really hasn’t been any pricing pressure as of yet. It’s possible it might happen in the future, but our prices for our top line new releases have actually gone up slightly, and we haven’t seen any related decrease in the amount of sales over that.

I don’t know if we have the numbers in terms of the units sold in the last quarter. I can get that for you after the call if you want that.

Rob your question about forecasts, as I laid out in the comments, is that we budgeted our seven releases that I talked about, $100 million in T&A which would lead to, at least in our projections, $140 million of total box office. We said before that our internal projections are conservative enough that we remain comfortable with our yearly guidance.

OK great, then just two quick follow ups. I’m wondering if you’d comment a little bit on any movement you’ve made on the channel business and the potential to form a horror channel. Is that something we could see this year, or is that farther off? And if you’d give any update on the status of Cinema Now and the CineGroup [ph] situation.

Well CineGroup is no longer on our books, Rob, Cinema Now I think is making great progress, I think they’re in very good shape, but again we continue to carry it as a zero on our balance sheet. We think there’s great upside there and I think clearly it’s obvious that broadband delivery of content as well as content on demand is going to be a very effective revenue generator in the future. So I think that’s moving along very well. What was the first part of the question?

Just any update on the channel formation.

We are in very active conversations with three potential strategic partners, as I’ve said. We don’t want to do this channel differently, I think the world is not sitting out there waiting for the next linear channel. Any channel or channels that we do I think are going to have significant overlap into other areas, creating unique content for other platforms with that branded content as well as just a linear channel. But we’re in very active conversations with three strategic partners, and if we should conclude those conversations I think we could move very quickly and definitely have a channel up for calendar 2006.

Great. Thank you very much.

Gordon Hodge with Thomas Weisel, please go ahead.

Good morning. I’m just curious, the backlog was up 38%, pretty strong, I’m just curious if you could comment on what the timing of it looks like. How much of that we can expect this fiscal year and what the profitability there is. I assume that’s pretty high margin revenue. Then in addition, there’s been obviously a well publicized slump at the theatrical level, for the box office over all. I’m just wondering if that’s giving you more opportunities on the distribution side in terms of getting access to more screens, or is that something you haven’t been able to take advantage of? Thanks.

The ability to get screens, I think that where the business is right now, we’ll see what happens obviously with this Dream Works deal. But I think we are certainly becoming one of the only independents, about the only independent that can actually to wide releases. I think that’s going to certainly help our ability to do deals with some unique financing opportunities, where other people will be paying for, not only the negative cost of pictures, but even the P&A on some pictures.

But getting screens is not the problem. I would say however the amount of product in the marketplace, I think particularly that may have affected High Tension. I think there have been a significant amount of horror or genre product in the marketplace at the time. I think again that was part of our miscalculation on that particular picture, and I think we have to continue to be really smart about what dates we pick for our product, and the way that we market them.

But I think certainly we’re able to get the screens right now, and we’re certainly in good shape in that regard.

As far as the backlog, Gordon, why don’t we ask Jim to sort of walk you through just some of the bigger titles that are in there, that account for that $138 million.

Some of the biggest items are Saw, which is primarily, it will be high margin pay television revenue, based on our pay television output agreement, so that will be high margin. From our TV series’, Wildfire, Missing and Dead Zone are in there also, so we believe we’ll be in line with the television margins, not quite as high, but then we’ll have Saw II in there, based on international pre-sales until we get more television revenue on The Cookout. So there is some definitely high margin product coming through that.

So it will come through, obviously some of it, as Jim mentioned, will come through this year. I think it’s a mix of margins and then probably a more significant amount of it will come through next year.

But Crash wouldn’t be in there, for instance.

Well there’s no backlog with that title really yet.

OK. I didn’t know, because I know you have, I think there’s a formula on pay TV, but I didn’t know if you included that or not. Thanks.

David Miller of Sanders Morris Harris, please go ahead.

Felt, you guys are just clearly knocking the cover off the ball on the TV side. Can you talk about the timing of Crash as a TV series, and what the per-up sort of licensing fee might be, and how we should model that? That would be helpful. Also on the film side, Michael, any details regarding negative costs and budgeted P&A for Saw II come this Halloween. Then I have a follow up, thanks.

Crash would be, if it goes the right way, would be for my guess is next June. So it would certainly fall out of this fiscal year. In terms of licensing I’d rather answer that question going back to the margins in TV overall. I think probably it would be more elucidating for everybody, which is that when you look at a business that’s growing like television the margins tend to be much lower. I’d make two comments about that; one is that the way we do television, our return on capital is actually significantly higher than the margins. I mentioned the one loan, and by the way, before the $15 million loan for this particular series we actually had about $4 million, again interest free loan, on the pilot. So you’re talking about almost $20 million of interest free money, which certainly inured our net income line, but not our EBITDA line, and certainly doesn’t inure to the benefit of the margins as well.

The second thing that happens in the television business is we put very, very low ultimates on our back end of our television series until we’re well into 50 or 60 episodes, meaning a strippable amount of episodes. Actually even at that point we wait until, for example on Dead Zone, we have a very low ultimate on the second cycle sales until we get out there and actually start making those sales. so television business as it grows you will see those margins improve.

David, in regard to your question about what we’re going to spend on the production on Saw II on the P&A, as I said before on our five wide releases, our tent poles, which are Lord of War, Waiting, Saw II, Madea’s Family Reunion and the Usher picture, it’s fair to assume that our P&A budgets for those will be between $16 million and $25 million. On Saw II we did not break the model. It certainly was a little bit more expensive than the first one, but certainly less than $10 million.

So to follow up on that, when Michael says it was more expensive, the production cost was more expensive on Saw, production values frankly will be better. But all of the production costs plus profit was paid for by the international pre-sales. what’s interesting about both Saw II as well as Madea’s Family Reunion, is that we are actually not going to be spending more money than we spent on the first ones. In other words they have both now been branded. Tyler and his audience have a very intimate relationship, and Saw we believe, for Halloween, has a brand. So actually we are budgeting about the same amount of money as we spent on the first one. As I said, our budget includes a 30% reduction in box office, which we think is very, very conservative.

OK and then also, approximately three weeks ago there was news out that the Fox Studios has sided with the Blue Ray camp. Sony, of course, underwrites the Blue Ray consortium, they of course have dibs on the MGM library, which I guess is the second largest in the world. Does that force you guys to side with Blue Ray, and if so, what is the timing with regard to when you would announce what your choice is with regard to Blue Ray or HD DVD? Thanks.

I think, no, I wouldn’t say anything forces us to make a decision. But I would say that we have a strong feeling that we will, perhaps within a week, announce our decision in that regard.

OK, thanks very much.

Thank you, and our next question comes from the line of Alan Gould, of Natexis Bleichroeder.

Alan, did we lose you?

Hello, I’m here. I’ve got three questions here. The first two are for Jim. Jim, what was the library revenue in the quarter? Second, why was there a $7 million reduction in the reserve for video returns? And the third question, for Jon or Michael, on Disney’s call yesterday, Eiger talked about changes occurring in the film industry. We see Morvel [ph] doing an interesting film financing deal. Do you have any potential changes that you see, changing and benefiting your business model?

OK, I’ll answer your question. Library revenue for the quarter is about $31 million, $32 million. The reduction in the return reserve is due to the fact, as you’ll notice, that we received a [inaudible] lot of receivables. And my basic outstanding receivable balance is down by about $40 million. That caused that to come down. Jon?

And, yes, I think, if you’re referring to Bob’s mentioning that perhaps we should be shortening the windows between film and home video, is that what you’re talking about?

He mentioned that there are a lot of things; shortening the window there, it sounds like getting TV products out before six months repeat, [inaudible] TiVos. There’s just--the overall industry business model seems to need some change right now.

Well, there’s no question that a lot of changes in that regard are going to happen. I think digital cinema is one. We, as everyone knows, released a picture last year with AMC on digital cinema. I think, clearly when the financing of digital cinemas gets done, I think that’s going to be really important. It’s going to change both the financing, obviously, in terms of making prints as well as the ability to move, I think, a little faster in the marketplace.

Moving the windows around is something I think you can certainly see that we will be in the forefront of looking at those windows and playing with various kinds of day and date scenarios. I’m not sure I agree with Bob in terms of shortening that video window. Because, it feels to me a little bit like we need to make the theatrical exposure a little bit more important. And so, I’m not sure that’s helping either the television or the video exhibition windows, if you will. But, I think certainly making some more sense out of all of the windows is going to be very important.

In terms of the film fund, we always spend a lot of our time looking at various kinds of financing. I think you can be assured that in terms of the various kinds of film funds that are out there right now that we’re well into discussions about how to customize those funds in order to benefit our company and our shareholders.

And Alan, we’re all about cost of capital. We’ve been called financial mercenaries before, but we’re about cost of capital. That’s why, frankly, a year or two ago we locked in our fixed costs on our convert, which is a blended rate of less than 4%, because originally when we did our JC Morgan facility it was LIVOR + 2-3/4, that’s why, when LIVOR was one. LIVOR is now, I think, 3.8%. So, we’re always looking for the cheapest money out there.

OK, thanks a lot.

Thank you. And our next question comes from the line of Michael Savner, of Banc of America Securities. Please go ahead.

Hi, this is Mike Lee, sitting in for Mike Savner. I just have a couple of questions. Tom, what are the drivers of the strong films in television? And, I was wondering if any syndication rights have been sold yet? And, I was wondering about the status of the discussions are for the Dead Zone syndication?

And the second question was if you could give any more color on the source of the higher than expected direct operating expenses? And, any rational as to why it was so much larger at the percentage of revenue for this quarter? Thanks.

Direct operating expenses, as a percentage of revenue, I guess, if you’ll look at it, not overly high. But we have a lot of titles that are now in what’s overages, and if you look at my direct operating footnote, you’ll see the participation extent is higher. That is really because, to the success of our titles for instance, [inaudible] was a bit success. And there there's large participations associated with that; [inaudible], even larger, it went out on video; large participations on that.

Alone in the dark was basically an almost service deal [ph]. Basically, we paid nothing for it, however large participations on that as video comes through. The Crash[inaudible] exceedingly strong. However, we have participations on that. Those are the driving forces for the increase in direct operating expenses.

In television, I think this was in our announcement; it’s basically deliveries of all of our series. We had deliveries of the Cut Wildfire Missing, Dead Zone and Weeds in the period. So that’s where the revenue is coming from. And in terms of Dead Zone, we are putting our plans together for the syndication right now, as well as waiting to hear about a pick up for actually what would be, I guess, the fifth season from USA. And that pick up will partly affect our strategy, going out.

All right, thanks.

Thank you. And our next question comes from the line of Matthew Harrigan of Janco Partners.

Notwithstanding your comments on the theatrical window, do you think that the Lions Gate, at least the growth factor curve for the direct-to-video side is going to be a little steeper than for your traditional business? It looks like you’ve got a lot of accelerated activity there, not just [inaudible] Avengers, but Barbie and all that. And I was curious as to whether you could give us any indication on the type of revenues and EBITDA, or free cash flow at least, that you were budgeting for that business, you know, for this fiscal year?

Sure. Matt, we have a lot of—obviously, we’re expecting a lot of growth in our family entertainment business. Most of that product is direct to video. We’ve got more direct to video family product this year than in the past.

In terms of the non-family product, our direct to video business, we expect to remain pretty constant, year-on-year. And we may have some bigger pictures there, but we don’t anticipate having any more output in the direct to video business. I don’t think we have any particular earnings or EBITDA expectations of numbers that we’re presenting related to that business in particular.

Do you regard that business, the risk of a miss in that business, as being fairly minimal given its characteristics relative to theatrical?

Yes. Going in, obviously it’s a little bit easier of a business. It’s more of a science than an art, especially when you compare it to the theatrical business. You know what you’re dealing with. We tend to stick with pictures that are known franchises that have already an existing market. But it’s a lot easier of a business to control your risks than the theatrical business.

But, you know, I think as well when you continue to see third-party suppliers, like in this case, Sphinx [ph], turn over their best product to us. I think it speaks clearly to the fact that the way that we approach that business is very retail oriented, very brand and consumer oriented, and I think that continues to work for us, and adds to the predictability of our business.

Thank you.

Thank you. And our next question comes of the line of Barton Crockett, of JP Morgan. Please go ahead.

OK, good. Let me see, there are two questions I wanted to ask here off the top. First, you guys spent $69 million, you know, close to $70 million on investment in film and TV in the quarter, which if we annualize that, that’s like $280 million, which is up from, like, the $170 million or so that you spent last year. So, I’m just wondering, was the first quarter unusually high? Does that trend back down? Or, are we looking at kind of a big increase there, year-over-year?

Secondly, following up on the library number that you quoted, $31 million to $32 million for the quarter, you know, again if we annualize that, that’s looking a lot lower than the $211 million you guys did last year. And, I think you quoted a $47 million number in the year-ago quarter, so, you know, is there something unusual there? Does it pick back up, or is that kind of the new run rate in the library line? Thank you.

OK, good question. Jim?

OK, regarding the spend, it was an unusually high quarter in spend. A lot of that spend was coming out of the investment and television product. We said about $42 million of the $69 million in television products. So, that’s a little front loaded. And so the other items, motion picture acquisition, our production was only about $27 million. So yes, a front loaded quarter. I’d anticipate a more normalized rate similar to last year.

And secondarily, on our library revenue, it is lighter this quarter than last year. But as we’ve looked into our projections, we’re still comfortable that we should see a pick up of different promotions occur throughout the year to achieve a similar library revenue a last year.

We’re still comfortable with our library projections.

OK, so why was it down then? I mean, was it a difficult environment?

Just the timing of the releases. I know we have a lot of new promotions coming out later in the year, primarily in the home video area.

OK, and then I guess a final question here, you know, you guys had guided for $187 million of P&A [ph] for this year. You said you’ll spend about $100 million over the back part of the year on these wide releases. You spent $50 million in the first quarter. Is the delta there, the $37 million delta between $150 million and the $187 million guidance, is that spending on small releases? Or, is that just kind of a cushion? Or, you know, should we be assuming kind of a lower P&A than what you said initially?

I think it’s definitely some of the smaller releases as well as we do leave a little cushion up and down. We spent this quarter about $5 million, $4 million or $5 million more, on Crash, for example. So there definitely is a little cushion there as we play with release dates and move pictures in and out, and of course, account for success on pictures.

OK. And then one final question, your G&A in the quarter was about 8.9% of sales. You guys have talked about a normalized model near 7%. Was it unusually high in this quarter, maybe you know, similar that the Sarb-Ox expense? Or, is this kind of the run rate we should expect for the balance of the year?

No, it was unusually high in the quarter. Actually, in terms of the unusual costs that we had, we had external audit fees and consulting fees of $2 million that impact it, dollar for dollar to the bottom line; 100% associated with Sarbanes-Oxley, testing and documentation, $2 million this quarter.

We’re proud of keeping our overhead cost as a percentage of our revenues down well below that. And we will be there for the year.

OK, great. Thanks a lot.

Thank you. And our next question comes from the line of Greg Spiegel, of Pilot Advisors. Please go ahead.

Hey, good morning, guys. I had a couple of quick questions, and I apologize if you mentioned this already. What was the magnitude of the hit in the quarter from High Tension?

The magnitude of the hit in the quarter for High Tension was almost $13 million.

And then, just in terms of bigger picture, can you give us any insight into potential for alternative sources of demand for content? You know, we’ve heard anecdotal evidence that the telecom companies are signing up deals with other studios and I want to hear your thoughts on, you know, whether that’s real, timing and then, you know, PSP, just any other sources of demand that you guys have identified?

Well, as I said, we were early adopters, if you will, or suppliers of PSP. We’ll do 60 or 70 titles this year. I think, I believe that SONY PS3 is going to be a significant user, if you will, of DVDs as well as video games. And then, as soon as we get that high-def format situation resolved, as I say, I think that really can move forward.

In terms of other areas, we’re having significant conversations with everyone from hard drive manufacturers to users of video on demand, both Broadband cable satellite and as well as significant conversations with telcos. And, I think that there’s going to be significant incremental revenue from new buyers of content. I do not think that’s far into the future. I think that’s now. As a matter of fact, we are having a lot of offers for VOD content. And, what we’re trying to do is make sure what our channel strategy is right now before we make short-term decisions.

But, I think there are significant opportunities right now for new ancillary markets.

And Jon mentioned telephone companies, but obviously the global stage is heating up for content as well.

And at what point, do you think, I mean, you guys are generating, you know, a significant amount of excess cash. At what point do you, or will you be willing to commit from that capital [ph] for repurchasing stocks?

That would be, I think, a decision that would be made looking at two different things. One would be how under valued our stock is, and two, looking at alternative uses of that capital. We think there are significant opportunities for us to use our free cash to expand our core business, which is the main strategy that we have. But, of course, we reserve the right to look and jump into our stock if we think it’s extremely under valued.

Does that suggest that those are mutually exclusive things? You can’t execute both at the same time?

No. Right now, if you take a look at our capacity, you have to look at a couple things. One is that we’ve drawn down zero on our bank facility. We have substantial cash in the bank. The other issue is, when you talk about stock purchase, we have to be opportunistic there. We have to look at, for example, other potential transactions, and which is more accretive, whether buying back our stock or, for example, buying another film library?

The other thing that’s fairly restrictive for us, Greg, is the windows in which we’re allowed to buy, because of, frankly, the information that we have available to ourselves. So, it’s really a timing issue for us and it’s being opportunistic.

Yes, I think again, I would emphasize that you only, everyone, only has a limited amount of capital. And I would say that right now, there are tremendous opportunities for us to expand our core businesses. There’s on-going consolidation in our space, and as of this point, we are really the only true independent distributor that’s left out there. The opportunities for international expansion, the opportunities for buying additional rights that are going to be very, very important for us in the future, I think that we need to be positioned to take advantage of the great opportunities that we’re seeing in the marketplace.

OK, thanks.

Thank you, and our next question comes from the line of Berna Barsay [ph], of Ingleside Investments. Please go ahead.

Hi, I was just wondering if you could elaborate on a comment that you made on the opening, about $22 million of expense losses, translating into $11 million of real losses. Is that based on what you expect from later windows, or how does that work?

Well, it’s just the vagaries unfortunately of the reporting requirements that started in 2001, where if we perceive something to be a lost picture, we actually have to take all of the expenses of that picture in the current quarter, and take any benefits of that further on. So, it’s really just as simple as that.

Our current expectation was that in this period, we took almost $23 million worth of losses for these pictures, and would expect to get over $10 million back in subsequent quarters.

So, basically, you take that accelerated amortization on the production costs, or the acquisition costs of those films and then later on, when you recoup something, through DVD or TV, then some revenue comes in? Is that the way it works?

That’s exactly right. We take not only accelerated amortization on the negative costs, but we take all of the P&A expense on the picture, and then, as the revenue comes in, we recognize that revenue as profitable.

So, though you’re not taking any marketing costs associated with the DVD launch, or something, [inaudible] that wouldn’t be now, that would come later, right?

That’s exactly right.

OK, thank you.

Thank you.

I think we’ll take one more question.

Our final question comes from line of Errol Rudman, of Rudman Capital Management. Please go ahead.

Hello. I want to know, in terms of the--why were the accounts receivable, why were collections so high in the quarter?

That’s easy. If you look at our sales at the end of the prior quarter, you know, we had Saw [ph] was huge. You see, the home video sales were about $140 million, even in that quarter, compared to, like, $100 million this quarter. So, huge Saw receivables, of literally $46 million of cash came in for Saw.

Thank you.

Thank you all, we look forward to talking with you next quarter.

Thank you and ladies and gentlemen, this conference will be available for replay after 11:30 a.m. today. [OPERATOR INSTRUCTIONS] And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.