Starz Entertainment Corp (STRZ) 2006 Q4 法說會逐字稿

Welcome to the 2006 fiscal year-end earnings call. [OPERATOR INSTRUCTIONS] We'll now turn the call over to the head of Investor Relations, Mr. Peter Wilkes. Please, go ahead.

Good morning, thank you for joining us on our fiscal year-end call. We'll begin with remarks by our CEO, Jon Feltheimer; Vice Chairman, Michael Burns; and President, Steve Beeks. And then we'll turn the call over to questions from our analysts. The matters discussed on 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 the result of various important factors, including risk factors set forth in Lionsgate Form 10-K, filed with the SEC on June 14, 2006. Now, I'll turn the call over to Jon.

Good morning, everybody. Joining me this morning are Michael Burns our Vice Chairman; President, Steve Beeks; Jim Keegan, our Chief Financial Officer; and Rick Prell, our Chief Accounting and Compliance Officer.

Fiscal 2006 was a strong growth year for Lionsgate. We achieved new creative bests, with "Crash" winning our first ever "Best Picture" Academy Award. And we achieved many but not all of our financial targets as we approached $1 billion in revenues and exceeded $100 million in free cash flow. Demonstrating that we can continue to invest in the growth of our business while throwing off significant cash.

And our cash generation continues to strengthen our balance sheet. By the end of this week, we anticipate having a cash balance of more than 240 million, in addition to our untapped credit facility of 215 million. That gives us over $450 million in cash and availability. This despite the fact that we've already paid out $32 million in cash for the acquisitions of Red Bus and the Modern library in the past year. Interestingly, Red Bus, now renamed Lionsgate's UK, will throw off 40% of our international revenue in fiscal '07.

And in addition to our $951 million in revenues, we had at the March 31 close, one of the largest film and entertainment backlogs in our history. $144 million in unrecorded revenues from motion pictures and television programming already under contract and not included on our balance sheet. Our growth momentum has occurred across the board. Let's look at our overall trajectory. Revenues have grown from 376 million in fiscal 2004, to 843 million in fiscal '05 and to 951 million in '06. Free cash flow has increased from -117 in '04, to 93 million in fiscal '05 and to 103 million in '06.

Our domestic box office performance has gone from 84 million in '04, to 344 million in fiscal '06. And today we're going to talk about our fiscal 2007 theatrical slate. And when we do, keep in mind that we are already investing in motion picture acquisitions and productions that will continue that trajectory into fiscal '08 and '09. Our home entertainment business has grown from 223 million in fiscal '04, to 465 in fiscal 2005, to 527 million in fiscal '06. Television production revenues have grown from 60 million in fiscal '04, 83 million in fiscal '05 and 133 million in fiscal '06.

What these numbers show is a Company on the move. We have growth at the top line and free cash flow at the box office, in home video and television. And we're also positioned for an earnings trajectory that should mirror and continue that growth trend. We have the ability to continue expanding our production and distribution capabilities, invest in new product, build a library that increases in value every year, and make strategic acquisitions. While at the same time strengthen our balance sheet, draw up substantial free cash and continue to build up our cash balance.

Beyond our own organic growth, let's look at what's going on in the broader industry itself. It's true that packaged media is maturing but in the face of that, we still had our biggest year ever in home entertainment. That's the result of a number of factors; Our proficiency in packaging and repackaging our library. Our ability not to only have a growing theatrical business distributed in home entertainment, but to have a box office to DVD conversion rate higher than anybody else in the industry. And the efforts we make year after year to improve efficiency in our home entertainment business.

But let's look beyond that at content and the way it's delivered today. Look at Warner Music and EMI and how digital delivery is beginning to drive their financial results. Warner Music's revenue from digital delivery is up 157% during the past year, now represents 11% of their overall revenue base. EMI Group's digital sales are up 140% and approaching $200 million. Look at our own results with the television series "Weeds" on iTunes. Just one television series, that appears in 14 million homes, recently achieved 10 of the top 50 downloads on iTunes. Competing head to head successfully with series such as "Lost" and "Desperate Housewives."

"Weeds" has already generated around $600,000 in incremental revenue on iTunes, just one device. And with strong orders for the DVD box set coming out next month, there's absolutely no indication that its digital performance cannibalizes packaged media potential. In addition to "Weeds," we are or will be receiving revenue from "Dead Zone" and "Wildfire" on iTunes. As well as from the first mobile episodes we are creating with "Wildfire" and ABC Family. We've begun receiving revenues from our download-to-own agreement with Cinema Now and Movielink. And are about to announce agreements with two other major electronics sell-through retailers. We've been culturally, strategically and operationally positioned, from the inception of our business plan, to capitalize on the higher margin revenue streams now emerging in a fragmented digital world of niche audiences clamoring for content.

As a result, we believe that the new digital revenue sources coming onstream will not only replace existing revenue streams from traditional media, as they begin to slacken; but will soon prove incremental to them as our business plan has anticipated from day one. As we move into fiscal '07, our objectives are; To maintain strong free cash flow, while continuing to build our library. Improve our bottom line profitability. Continue to dominant in spaces where we have a sustainable competitive advantage. Leverage our content into incremental, digital media opportunities.

And against this backdrop, Michael is going to take you through what this year's film slate looks like.

Thanks Jon. We believe that our theatrical slate for fiscal '07 reflects the portfolio of films that we've been building upon for the last six years. We are looking at a slate of 18 releases this year, with approximately a dozen of our films going worldwide. Every single release epitomizes the Lionsgate model in its financial discipline, creative boldness and diversity. We are sticking to our plan. Our '07 slate is anchored by franchises, such as "Saw 3," which is again shaping up as our Halloween tent pole. And despite our conservative budget assumptions, currently shows every indication of replication the performance of its precessors..

We continue to build on our leadership position in the horror genre and "Saw 3" is surrounded by such other potent horror films as the terrifying "Descent," the next entry in our potential "Hostel" franchise with "Bug" from acclaimed "Exorcist" William Friedkin and "Skinwalkers," for which we've partnered for special effects master Stan Winston. "The Descent," which is already an international box office smash and the best reviews horror film of the year, is our next big nationwide release on August 4. It is the kind of edgy, R-rated horror film that fits right into our reel house.

We have several strong action films on our upcoming slate as well. With the wide release "Crank," starring "Transporter's" Jason Statham and "Rogue," which just shooting in Vancouver with international action star Jet Li. "Rogue" has the look and feel of a major studio action franchise, yet it was produced in the sweet spot of the Lionsgate economic model. Both "Crank" and "Rogue" captured very robust foreign presales.

We also continue to strengthen our foothold in the teen comedy segment with "Employee of the Month," Starring a sensational comic, Dane Cook with Jessica Simpson, in September. We expect to build on the young audience we began to cultivate with "Waiting". We continue our powerful presence in the African-American, family and faith-based films, following on the heels of the first two films in the Tyler Perry franchise. Next up we have Tyler's "Daddy's Little Girl." We are planning a Martin Luther King Holiday weekend wide release for "PDR," "Philadelphia Department of Recreation," starring Terrence Howard and Bernie Mac, which just completed shooting in New Orleans. Everybody seems to be asking us what we plan to do for an encore after "Crash." Our upcoming drama, "Trade," starring Kevin Kline and produced by Roland Emmerich, is a powerful drama about human trafficking and sex slavery from Eastern Europe and Mexico into the United States. "Trade" is slated for release on October 13.

Fresh off the success of last year's award winning "Grizzly Man," we have two strong documentaries on this year's slate; "Leonard Cohen, I'm Your Man" and "The U.S. Versus John Lennon," which we will release in September. We believe that "The U.S. Versus John Lennon" will have broad appeal for the baby boomer generation, featuring both John Lennon and the Beatles' songs.

2007 is a year we will continue to build on our core competencies; African-American families, award contenders, teen comedy, horror, genre and documentary segments that we serve uniquely and efficiently. It underscores the continued organic growth of our motion picture business. And at the same time, reflects our continued efforts to mitigate P&A risks with several pure service deals and two other films primarily produced with third party financing. We conservatively believe that this year's slate will generate approximately $250 to $300 million at the domestic box office in fiscal '07. A number that becomes noteworthy, when you consider at least two of our biggest future productions are actually scheduled for release in early fiscal '08, representing what we expect to be terrific box office potential.

Of course, our theatrical slates box office will greatly influence the performance of our home entertainment business, which Steve Beeks will now discuss.

Thanks, Mike. The DVD industry has exhibited a great deal of resiliency during the first half of this calendar year. And contrary to what you might have read in the New York Times this week, the gist of what was actually said at the conference referenced in the article, by the home entertainment presidents of each of the studios, is that the results of the first half of the year indicate we should expect the current DVD format business to grow this year. And even probably into next year, just as high definition technology gets a foothold. Because of that, we anticipate the home entertainment industry will actually show growth for many years to come.

We are releasing our first five titles in Blu-ray DVD format at the end of this month. Those include "Terminator 2," "Lord of War," "The Punisher," "Saw," and "Crash". We're planning for 10 more releases by the end of the year, coinciding with the launch of additional Blu-ray machines and for what we think will be a strong fourth calendar quarter for the format. The projections of growth for the home entertainment industry don't take into account avenues beyond new DVD formats. We're just looking at the very beginning of electronic sell-through. And the results coming in from both Cinema Now and Movielink show increasing interest from consumers. As Jon mentioned, we are closing deals with at least two other substantial Internet-based electronic retailers who services will be launching in the next few months. And that we think will spur the market even more for electronic download.

Another point neglected in this week's Times article, is the fact that all of these electronic sell-through transactions between the studio and the electronic retailer are essentially conducted at the same price as the DVD wholesale price. Therefore, our operating margins on these transactions are actually above the margin of our DVD business. If we can draw any parallel from the music business, in which electronic downloads currently account for 20% of single sales and 5% of album sales, in the next few years this is going to be a significant contributor of revenue and margin.

Our DVD business grew at a robust 13% this past year to nearly $530 million. Fueled by strong performance of our theatrical to DVD releases, as well as continued strong performance from our library. Our DVD market share grew to 7% in the fiscal fourth quarter, only 2 percentage points below that of Paramount. And that market share growth was the highest among all of the studios. We continue to have the highest conversion rate of box office revenue to DVD revenue in the entire industry. It's actually 20% above the industry average.

And our Q4 theatrical titles released on DVD; "Waiting," "Lord of War," and "Saw 2," all performed above industry average in terms of sales and with very low return rates. And "Madea's Family Reunion" is being released on DVD at the end of the month. And the advanced retailer commitments position it to perform even better than "Diary of a Mad Black Woman" did at the same time last year. Our library sales for the year were $209 million. Only 2 million off the figure for 2005, even as the rights to the public library were winding down.

We anticipate that next year we will also generate approximately $200 million or more from our library sales. In the past, we have discussed the contribution margin generated by our library. While the contribution margin is still around 21%, although we anticipate that will increase over the next few months, some of the questions we have been getting on this have led us to believe that perhaps we've not been clear. And I'll make sure that you do not misunderstand what we mean when we discuss the margins generated by our library.

That margin number that we've discussed is a P&L margin, which is significantly impacted by amortization. The free cash flow margin from our library is estimated to be around 35%, meaning that our library is estimated to throw off approximately $70 million in free cash flow this year. And that is actually up from our estimated free cash flow of approximately 60 million in 2006.

We have ongoing and future library promotions at every major retailer. And our shelf presence for new and especially library products is up. We have several library re-releases and special editions planned for this year. Only a couple of examples of this; The 20th anniversary re-release of "Dirty Dancing" will be in Q4. And for the first time, because of a very creative deal that we struck with two other studios, the three "Terminator" films will be repackaged and sold as a set. Lionsgate will be the studio selling that product. And our supply chain management is running very efficiently. We now have a fill rate at major retail of over 98%, which is contributing to our ability to maximize the value that's generated in our library.

We continue to grow that library. We recently acquired the home entertainment and television rights to the 2,000 films in the Studio Canal library, which we will begin to release later in the year. This catalog includes television rights for films such as; "Crimes of the Heart," "Tender Mercies" and "Maximum Overdrive." As well as DVD rights to titles like; "Bedroom Window," "From the Hip" and some of the greatest classic French films including many of the Jean Renoir classics. This agreement further strengthens our relationship with Studio Canal, who also owned the Coralco library, which we also distribute for them.

We also have verbal agreements to acquire two other substantial libraries. Those agreements are in the latter stages of drafting and we hope to have them executed within the next 35 to 40 days. The fact that owners of these libraries are coming to us for distribution and that we can continue to add titles to our catalog, speaks volumes about our strength and capabilities as a manager of libraries. We will continue to be aggressive in our quest to acquire additional, adding to our position as a premier content provider.

Our TV to DVD business also continues to be strong. The "Biggest Loser Workout" is the top-selling fitness DVD in the industry. And the sequel will be shot in July, after the next season is wrapped, for release in January. And the DVD set of "Weeds" Season 1 will be released in July, just in time for the premier of the second season on Showtime. These television series, in addition to "Wildfire," "Missing," and "Dead Zone," also contribute to our growing library of content. And we look forward to getting our other new television productions released on DVD. With that, I'll throw it back to Jon to continue with our television.

Thanks, Steve. With nine prime time series scheduled to air in fiscal 2007, we're poised for continued growth this year and beyond in our television business. These series include; Golden Globe winner "Weeds," which has demonstrated its global appeal in the growing cloud of our distribution infrastructure, with sales to more than 130 territories worldwide. "Wildfire," which continues to show our strength in reaching out to teen audiences, in its third season on ABC Family. And the "Dead Zone," which as you know, entered syndication this Fall with 67 episodes.

Our six new television series show the portfolio approach we've taken in our TV business with our first dramatic series for the broadcast networks, "Hidden Palms" with CW from Kevin Williamson, the creator of "Dawson's Creek" and the "Scream" franchise. Full 13 episode orders for "Lovespring International" on Lifetime and Dresden" Files" on the Sci Fi Network. Production beginning on "Motel Man" in New Mexico for an eight hour limited series that we expect to parlay ultimately into a regular season series on Sci Fi. "I Pity the Fool," starring Mr. T, for TV Land. And the eight episode television reality series "Dirty Dancing," which we just finished shooting for WE and which we'll air in conjunction with our 20th anniversary theatrical and DVD re-release of the Lionsgate franchise film.

In spite of the fact that we keep our ultimates very low for the initial years of television series, TV will make a significant contribution this year to our earnings and an even more significant contribution to our free cash flow. As the tax credits we have earned in previous years are collected and we maintain our efficient production and financing on all of these shows, we're able to keep negative cash flow for new television product very low. We also have a new deal to leverage our television content in the distribution space. And although it has been signed, we probably won't be ready to discuss it until next month.

Now, I would like to talk about our forecast for the year and our key assumptions. As Michael said, we are projecting 250 to 300 million in domestic box office for our fiscal 2007 guidance. We're theatrical P&A of approximately 150 million, compared to fiscal 2006's 170 million. And we're assuming that our fiscal 2007 slate will contribute a loss of $20 million for fiscal '07 in its first year of theatrical release.

We had similar assumptions last year for our motion picture slate, in terms of revenues and operating loss, and outperformed on both, turning a profit of $10 million. So, we certainly see some room for up side. Our box office assumptions flow through to equally conservative assumptions on the home entertainment side of under $500 million. We're projecting 140 million in television revenues, which is also conservative because we have no TBA's in our TV budget.

In other words, all of our revenue is accounted for by sold shows. So, any new sales will provide a lift to revenues. And as Steve said, we see library sales holding steady at $200 million. In spite of these conservative assumptions, we expect that we will again deliver over $900 million in revenues in fiscal 2007 and more than $85 million in free cash flow. We are also anticipating a meaningful earnings growth in fiscal 2007 and are projecting pretax income of approximately $32 million. Between four and five times the level of this year's pretax income of 7.5 million, and better than our previous high water mark of 29 million in pretax income in fiscal 2005.

So, we're projecting a strong year in fiscal 2007. But even more importantly, we're starting what we believe will be a very strong long-term earnings trajectory. We don't see our free cash flow coming down to earnings. As these lines begin to converge, we see earnings rising to meet free cash flow. The elements for that earnings trajectory are in place. Our TV shows are heading towards syndication and higher margin revenues. Expected incremental revenues from newly acquired libraries. Revenues from the digital exploitation of our content and new platforms and formats. Higher margin international revenues through self distribution in certain territories.

And in terms of our theatrical business, a number of our largest titles already slated for fiscal 2008 including; "Rogue," that Michael mentioned, "Stopping Power" from director Jan De Bont, director of "Speed" and "Twister." "Foodfight!" our first CGI animated movie and "Good Luck Chuck", starring Dane Cook and Jessica Alba. So our model is working. We're generating current cash and earnings, while at the same time we're investing in growth for new libraries, new distribution and new film and television content. Now, I'd like to open the floor to questions.

[OPERATOR INSTRUCTIONS] Our first question will come from the line of Lowell Singer. He's with Cowen & Company, please go ahead. Thanks, good morning.

A couple questions. Can you talk a little bit about your output deal with Showtime? There have been some comments recently about potential for the longer trend in those output deals to be decidedly less favorable for the studios. And I'm wondering if you could address that? And second, on the television business, can you give us some idea of what you expect to come in from the "Dead Zone" syndication deal? And the program you're doing for the CW, has your economic model changed on that or are you still not deficit financing with regard to that series? Thanks.

First question is, our paid deal extends through all of our releases in '08, calendar '08. I think overall, my sense of the business is that the paid television business is a strong business, will remain strong. I think the key to their business is movies. That's what it's always been and they're going to continue to need movies. I think we're the best deal in town in terms of those movies. And frankly we're already in discussions about either extending or continuing our paid business well beyond 2008.

In terms of "Dead Zone," always hard to know how you're going to do in syndication. But you'll see a combination of a broadcast station syndication, as well as a cable sale. We carry, we think, a pretty conservative ultimate on that. And we think we'll have good revenue and incremental marginal revenue there.

In terms of the CW, I do think our model has been much more in the cable space and definitely a short order for a series. It's hard to make the economics work but I do believe we're going to be pretty efficient, as we always are in terms, of the way we produce it, where we produce it and the kind of overall financing that we use. I can tell you that international sales have been incredibly strong, approaching $650 to $700,000 an episode. Again, showing the strength of our distribution, as well as the kind of show that it is. So, I think the model will end up being very successful.

Okay. Thank you.

Thank you. We'll next go to the line of [Yolanta Matahara] with Credit Suisse. Please go ahead.

Thanks very much. Could you please expand on the drivers of your free cash flow estimation, in terms of which components of your cash flow statement will be driving that? And secondly, can you talk about your expectation of corporate costs going forward now that you're Sarbanes compliant?

Sure. I'll take -- the drivers of the free cash flow components on a go-forward basis. If you look at my receivable balances, they're fairly -- they're very significant. So, you'll see a lot of cash coming in from the receivables. And in addition, as Jon mentioned on the call, you'll also see the EBITDA, or the cash from earnings, net earnings increasing, which is causing the free cash flow from that to come and drive up. So collection of receivables, we have -- as Jon mentioned $143 million of off balance sheet receivables that will also be coming in. Increased receivables and additional earnings throughout the year will drive free free cash flow next year.

Talk about the Sarbanes-Oxley costs.

Well, we certainly have invested in our finance department and in our IS area in order to become compliant. And we are certainly hoping that we can take down next year and the years beyond; our professional fees, our consultant fees, and frankly some of our overhead in the finance area, as we prove more and more efficient at that.

Thanks.

We'll next go to the line of Michael Savner with Bank of America, please go ahead.

Hi, good morning, thanks. Two questions. First, obviously you're not going to give guidance on EBITDA in '07, which seems reasonable. But I think, it might be useful if at least directionally you can give us a sense of what the moving pieces are that are going to compress that spread between EBITDA and free cash flow in the next fiscal year. I assume that this year you probably accrued some participations in the back half of the year, which explains a portion of the increase. But maybe some more granularity on what your expectations between the relationship between those two items is? And then the second question, maybe Steve could talk a little bit about the library margin, specifically related to the ""Barbie"" distribution deal that you're no longer carrying, which had some pros and cons to it? And then how you may up the revenue given that that's obviously a high volume product but a low margin product. Maybe just some color on that would be good too.

All right, Mike. This is Steve. I'll answer the second question first in terms of the library margin. Specifically dealing with your question about ""Barbie"". As you heard, we won't be distributing anymore new "Barbies" going into the future, although we will be distributing the seven ""Barbie"" titles that we have in our library. We'll continue to distribute those until those deals expire.

As you mentioned, the margin on the library business -- on the ""Barbie"" business was getting to the point where it really wasn't paying for us to continue our commitment to that line. So, it was a relatively low margin business. So, I don't anticipate there was going to be any detriment gong forward. And I think the revenue is something that we'll easily make up with some of the other things that we're doing. Particularly in the family area, we're focused now on a couple rather than -- rather than a number of productions, we're focusing on a couple high level franchises, such as "Doodlebop," which is airing on the Disney Channel.

Obviously, we're focusing on the Marvel animated series, which as we mentioned on the last call, launched with huge success with the "Avengers." We'll now have two or three of those films a year. And we have a couple of other things that we're working on. I don't think we'll have any trouble replacing that revenue.

Can you tell what percentage of the revenue it was in '06?

Less than 5%.

Terrific.

Okay. And Jim?

On free cash flow, you exactly picked up on it. Part of our over-performance in our fourth quarter caused us to have an increase in our film participation liability, which will indeed be paid next year. One of the reasons why free cash flow exceeded our guidance from 85 to over 100, and then next -- and now back to the 85, so we're paying back some of the extra we got next year. That's really some of the drivers. And in addition, free cash flow next year, driven through earnings, the collection of receivables. And one thing I'd like to just have everybody note on my free cash flow, this current year I invested $284 million in investment in films and this compares to $171 million last year. So please note, everybody's looking at free cash flow, look how much we invested in free cash flow in this current year, which will again will help drive our current cash flow in the upcoming year.

So, given all of the other assumptions you've laid out in your outlook, is it fair to assume that in that is a significant EBITDA increase from '06?

Yes.

Thank you, Mr. Burns.

Yes.

Thanks very much.

We'll next go to the line of David Miller with Sanders and Morris.

Hi, guys, congratulations on the stellar results in the fourth quarter. Michael, a couple questions for you. Are you still planning on forcing conversion on the traunch of converts that's in the money? I forget what the strike price is but that's obviously going to structurally change your share count. Can you talk about the timing of that and what your feelings are about that? And also with your cash position being so flush right now, I take it that if the DISK situation does not go hostile, and you've given the opportunity to save face, with let's just theoretically say, another $4 per share, all cash offer, you certainly don't want to give away your stock at these levels. You'll be paying for that asset in cash, if it goes that way. And then I just have a couple follow-ups, thanks.

Okay. The first question with regards to the $60 million convert. David, it depends on where the price of the stock trades. The way it works is 175%; if it trades at 20 out of 30 days at 175% of the 540 strike price, then we have the right to force conversion, which would be later in this calendar year.

As far as DISK -- by the way and one thing I'll say about that, obviously, that would save us about $3 million in interest costs. As far as DISK, as you saw from the recent court results in Delaware, we have -- we are approaching that to put up our own slate of potential directors that -- I believe DISK announced that they had hired an investment banker to explore strategic alternatives. So, we're obviously interested in seeing how that process moves along and interested in participating in that.

As far as giving away stock at these levels, my guess is you're probably right. With our significant cash balance, it would be more interesting to us to pay cash at the moment than to do a stock transaction.

And then just a couple of follow-ups. If you guys could just update us on what's going on structurally with a launch of the Horror Channel, that would be great? And also Steve, in your DVD -- or excuse me in your box office to DVD conversion assumptions, did that ratio assume DVD rental income, as well? Or is that just a box office to DVD sales figure? Thanks very much.

Thank you. I'll take care of your second question first, David, the -- that conversion ratio essentially includes all consumer revenue, both rental and sell-through. So we're comparing consumer revenue DVD's, the consumer revenue and box office.

Okay. Great.

In terms of Horror platform, I would say that we're in discussion and negotiation. And I would hope you might see an announcement of something in the next eight to 10 weeks.

Wonderful. Thanks very much.

Thank you, we'll next go to the line of Gordon Hodge with Thomas partners, please go ahead.

Good morning, just a couple questions. Just on the TV guidance, I gather that was TV production for the network shows as opposed to TV revenues that you would enjoy on theatrical releases? I just wanted to clarify that.

That's correct.

Okay and then on the -- I think Steve you mentioned that you acquired the Studio Canal, or at least distribution rights to some of the Studio Canal library. What -- and you have a couple of other libraries, perhaps in the hopper coming your way. Is it -- are those significant in terms of cash outlay, or those primarily distribution deals that we should be looking forward to?

Neither of those deals will be significant in terms of the cash outlay. But I think they'll be nice additions to our library.

Terrific. And then last question, as you think about the Showtime output deal, just to follow-up on that, I think it's restricted your ability to offer, I think digital downloads or electronic distribution on a subscription basis. Is that something you might think to unbundle when you renew or extend that agreement, as you think about distribution on iTunes or Amazon or what have you?

I think you're asking a really interesting question. I really should have included that in my answer to Lowell earlier. Which is, I think what's going to be interesting about the new negotiations that everyone is going to have in terms of their paid television business is it's really all going to be about rights. And what rights that the paid networks want included the next round, rights that they don't currently have. What rights we may want? And I think that's where the interesting, if you will, battleground will be. But I think that's what's going to make it interesting. Again, I do believe the pay networks, it's all about movies for them. I don't believe it's realistic to run their whole business based upon a movie to movie buying. I just don't think that's realistic at all.

As I say, I think, we have a little more flexibility, perhaps than the other studios. We've had a great opportunity to look at the subscription model in terms of broadband with Cinema Now and look at new ways of distributing a theatrical product; download-to-own, download-to-burn. And so, I think that's what's going to be interesting about the next round of paid television deals.

Great, thank you.

Thank you. Next we'll go to the line of Barton Crockett with J.P. Morgan. Please go ahead.

Okay, thank you very much. I was wondering if you could break down for us in more detail the difference between your pretax income guidance and your free cash flow guidance, which is a little bit above 50 million? How much of that is film amortization perhaps bigger than investment? Can you give us some sense there of the delta? How much of it is a contribution from working capital? How much of it is other items? If you could break that down, that would help us to understand really what's happening under the covers. Thank you.

Well, again, because we've read a lot of your notes and talking about the quality of earnings. I would say, Barton, I'll give you two easy examples to look at, which is I would say approximately last year; and this is why Steve made his point in the remarks about the difference between contribution margin from our library as opposed to free cash flow, I think it's a point that's been missed really by everybody up until now. The detail between the two of those is about $32 million alone. The delta this year, probably, in free cash flow in our television business between contribution and free cash flow is probably over $10 million because of tax credits that we'll be receiving.

So, if you just took the two of them, assume that kind of delta continues, you've got $40 million right there. So as a matter of fact, I think as we've looked at our budget, as Jim has mentioned because of the large participations we took in fourth quarter or that we accrued; I think that we're certainly looking at going the other way and paying back that working capital margin from participations in the next couple of quarters. So, I think you're looking at really a very strong quality of free cash flow in terms of this next fiscal year.

Okay. So, just to be clear, you guys had a large contribution this year from growth and film obligations. Next year, do you not expect that?

I would next year -- I would not foresee next year the same growth that we've had from film obligations.

Is it going to be negative or flat or positive do you think? A big number or small number?

I would anticipate it almost neutral from your standpoint. Because as I've always said, you want that number to grow but I don't like to budget or plan for an increase in that number.

All right. That's helpful, thank you very much.

We'll next go to the line of Andy [Master] with Raymond James. Please go ahead.

Good morning. I was hoping you could update us on just some film fund initiatives or element like output agreements? And also, I was wondering specifically, you said you're producing nine series this year compared to four last year. I would have expected more of a sequential increase in TV revenues in fiscal 2007. So, I was hoping you could comment on that, as well?

In terms of film fund, we are definitely in negotiation with at least two partners. Two different kinds of funds. And anticipate at least one of those deals closing. It could positively impact a free cash flow. And I don't really have a sense yet as to when they would start and whether it would affect earnings, as well. In terms of television, as I said I'm giving a conservative projection because I have no TBA's in there. But I would say, as well, a couple of those series are -- the CW series "Hidden Palms" is a short order. The reality shows have much smaller license fees and probably a little bit lower international sales, as well. So again, that's for the current status of the business and anything that we sell through the rest of the year and produce would be incremental.

Okay. Thank you.

Thank you. And our next questions will come from the line of Eric Handler with Lehman Brothers. Please go ahead.

Thank you. Just in terms of your film slate, can you give us a sense of which films are just distribution only deals? And then also with regard to P&A spending, are you sparring any other types deals along the lines of the Starbucks deal with "Akeelah and the Bee"?

Well, in terms of promotional kind of tie-ins, we certainly -- we're trying to do them on virtually everything. The Starbucks deal was obviously reported more extensively. And certainly, was a very wide promotion. But we try to do them on every picture. I think certainly on "Foodfight!" we've lined up three or four major advertisers to come in and major consumer product companies to come in with us. And it's -- so far the movie is looking great. And that will be a big one for us.

In terms of the service deals, none of the movies, I believe that Michael has mentioned or that I've mentioned today are service deals. There are a number of them but since we haven't calendared them, I'm reluctant to actually give you the names. But nothing that we've talked about today.

Thank you.

Thank you, our next question will come from the line of Alan Gould with Bleichroeder. Please go ahead.

Thank you, I've got three questions. First for Steve, the fourth quarter video revenue was huge. I know you had some good titles going through there but was there anything else occuring in there? Was there any other big video sales or video output type deals in there? Second for Jim, what is this line item "unpresented bank check" in the cash flow statement and how is it different than an account payable? Why was it taken out of free cash flow in '06? And doesn't that automatically give you $15 million in free cash flow to start '07? And thirdly for Jon, I was wondering if you could give us any information on Carl Icahn, his filing, if you've met with him and what you think his intentions might be with the Company?

All right Alan, speaking to your question on the fourth quarter video. We just had a great fourth quarter. Obviously, we had several theatrical films hitting the market. They all did well, "Waiting," "Saw 2" released during the quarter. Obviously, the Academy Award for "Crash" impacted sales on that dramatically. And we had a director's cut that had already been planned to come out right before the end of the quarter. And we had a great fourth quarter on library. And I think in general, as I mentioned and as, I think, every studio mentioned last week, the first calendar quarter, our fourth fiscal quarter was a great quarter for home entertainment for library products, as well as new release products.

And Jim, about the bank draft item.

Sure, the unpresented bank draft. The reason it's a new line, we've been focusing on managing our cash very effectively. We've been heavily investing in the auction rate preferreds, as you've seen in our notes. And what occurred is kind of a -- in the accounting rules, we basically cleared the cash out of our Union Bank account, specific. And therefore we didn't have the cash in the Union Bank account but we had it in Merrill Lynch type accounts but it didn't cover it. The accounting rules forced us at the end of the year to "increase cash and increase this liability".

So, we did not want to do anything that may look like -- our free cash flow, had we done that would have been $117 million. Had I had that cash at the Union Bank, I wouldn't have had to do the entry. So, we said, let's be very transparent, not -- break out so that you can see, in my humble opinion, my true cash flow was 102 not 117. And for the next year guidance, I at the end of the day, starting with the 102, you will have at the end of the year $85 million more in free cash flow from pure raw cash coming in.

Okay.

We have had a number of conversations with the Icahns. And I think our sense is they believe our Company is undervalued. I think they put a lot of value on the library. And we agree with them. As we've said often, our P&L statements only include ultimate -- seven year ultimates, put no terminal value on our product. We think, again, as a 100% pure play content Company, we're greatly disadvantaged in terms of looking at comps from an EBITDA and even from an earnings point of view. And again, I think that Mr. Icahn believes, as we do, that if we can continue to throwing off cash and increasing our cash balance and building our library, as you do just comps based upon library value, I think it does show that our stock is significantly undervalued.

Okay. Thank you, Jon.

Thank you, the next questions will come from the line of Michael Kelman with Susquehanna Financial Group. Please go ahead.

Thanks. A little earlier you touched on the investment and programming, how it increased about $100 million to $285 million. Should we expect a similar level of spending in fiscal 2007 or should that number trend back down to something closer to 200 million as you've spent in the next couple of years?

Yes, it will trend down a little bit and I think your ballpark is about right.

Thanks.

Thank you. And the next questions will come from the line of David Banks with RBC. Please go ahead.

Thank you, good morning. I'm sorry for four or five questions. The first one is just, when you were were talking about the library and the difference between free cash flow and EBITDA, maybe the Street was looking at it incorrectly. Isn't the library the ultimate kind of steady state business? I realize you have new titles coming in every year but you have -- for the most part, it really represents the closest thing to a steady state business. So why is there such a huge difference between free cash flow and EBITDA? Let me run through them and if you can hit them afterwards.

The second question is, aside from the gain on the sale of the studio facility, unless there's something interesting going on in the capital structure. You've given us pretax income, the only real difference in pretax income and EBITDA guidance would be in depreciation and interest, essentially. Is there anything interesting going on there? Why not just give us a sense of EBITDA?

The third thing is on the -- and this is maybe my own misunderstanding. But on the theatrical box office, I think you said 250 million was about the expectation domestically. And if I take your usual kind of 45% cut of that, I get to $113 million, which is kind of below where you are this year. So, I think I'm probably missing something. And the last question is could you clarify, I think you answered it before, or kind of a little bit north of 200 million cash investment that's in your programming. What kind of amortization -- can you give us a sense of amortization that we can expect? Thanks and sorry for all of the questions.

Can you give me that last question again?

I think you gave us a sense that cash in programming investment this year would be kind of north of -- a little bit north of 200 million, if I heard the last question right. Can you give us a sense of the amortization side of the equation?

All right. David, this is Steve. I'll talk about your question with regard to the library first. Yes, the library is in general a steady state business. Although, it is within that, a shifting mix and blend of products. And you can see a little bit of that just from the fact that the cash flow from the library was 60 million in fiscal '06, projected to go to 70 million in fiscal '07. A lot of that has to do with the shifting mix of product and what we're working at the time. So, it's relatively steady state. But the big difference, as we said, between free cash flow and the P&L is primarily amortization. Issues surrounding amortization, primarily from the libraries that we've acquired over time. And that's a very significant amount.

Okay your second question is, we've pointed the Street away from EBITDA as not a good means of comparison for us. We're giving the pretax number because it's a GAAP measure and we have to give a GAAP measure. So, we've pointed the Street towards free tax. And again, we've determined the pretax number is the best GAAP measure that we can give.

Is there anything we should expect different in terms of interest and depreciation next year?

No, I don't think so. In terms of -- I'm not quite sure -- your question -- if your question; do we feel we're being conservative about our slate? That's because your numbers are about right on that. Again, I mentioned in my remarks, we overperformed fairly significantly. If we for example, didn't have any changes in timing, meaning moving a heavy P&A movie into fourth quarter and we did the $344 million that we did this year with the same slate, yes it would. And probably our revenues overall would go up about $50 million. But again, we're forecasting to the best of our knowledge right now.

Okay.

And in terms of amortization, Jim?

Sure, amortization is going to fall in line with the revenues. You should see -- actually I hoped that you might see a slight benefit in the motion picture amortization, as we've had a couple movies that didn't perform last year. And hopeful and anticipating we won't have those two movies underperform next year. So a slight uplift in the motion picture amortization. But TV production amortization may be slightly better as we start to be able to realize some of the syndication revenue, not materially, but slightly better.

So Jim, does the Delta narrow? That's where I'm really getting, it's about a $30 million delta in terms of amortization versus cash investment in fiscal '06. Should we expect something meaningfully narrower than that next year?

You know what? I don't think it will be narrower.

Okay.

About the same.

Thank you.

And our -- we have time for one more question. And those questions will come from the line of Tom Eagan with Oppenheimer Funds. Please go ahead.

Great, thanks. And that with Tom Eagan with Oppenheimer & Company, not Oppenheimer Funds. I guess two questions. One on amortization, also. For Mike and Jim, on amortization, how much in amortization in fiscal '07 do you think is going to be from the titles in fiscal '06?

And secondly, how much of the amortization in '06 do you think was over-amortized because of the losses on titles, whether it be in the mix or high tension? Meaning, that -- how much might the amortization be lower in fiscal '07 because you aren't going to have those losses? Is it $20 million, is it $30 million?

And then on participations, maybe this is for Jon or Mike. I'm wondering, as you negotiate with a film firm partner, how much ability to do you have to shift a participation expense over to a production cost? Meaning, if a film fund is going to be say spending or taking the brunt of the production cost, could you shift the participation to actors or directors or whatever; to production costs? And therefore, have the film fund pick it up and then therefore not have to expense? Thanks.

I'll take a crack at the last one if you want.

Sure. I'll start with your first one. Your participation -- the anticipated amortization of the '06 product in '07 is approximately $53 million.

Okay.

That addresses that. So, you can see that's what is occuring there.

As far as our participation, Tom, it's Michael, is that the vast majority deals that we make with talent in our motion picture business are back-end loaded. Meaning that only on success do we have significant participation.

Yes.

Okay. So, what happens is -- your question is interesting in whether we could offset that with a film fund. It depends on the structuring of the film funds. A couple of them we're looking at would include P&A, only some could be part production and part P&A.

Right.

So, we could take a look at that but again --

But that's not the main reason to do the funds. The main reason to do the funds is, frankly, is to shift risk. That's the bottom line. We would only do it if we see, ultimately, that it's improving our risk/reward profile without hurting our margins significantly.

Right. I was just trying to find a way to increase the margins by lowering the participation percentage. And if you could do that by shifting it towards an up front cost. And I understand it's difficult. Regarding amortization, I was just wondering on -- looking at fiscal '06 versus fiscal '07, how much do you think the fiscal '06 titles were over-amortized? Is that 20 million, is it 25 million because of the loss of uncertain titles?

When you say over-amortized, Tom, what you really mean is; how much the accelerated amortization over time will we will carving back and end up being earnings? I don't know Jim, do you have that broken out?

I'll give you the -- what we refer to as the NRV's and net realizable write-down. These 15 million of NRV's in my fiscal '06 numbers. So that's -- we just wrote down the film costs because we took the values of the upcoming revenues and costs is not enough to support the carrying value. So, that was $15 million. In '07 we do not anticipate -- I hope there isn't much that happens again.

And how much of that may come back to us in '07?

It's about $6 million -- sorry $6 million and we think we may have some NRV's next year -- the amount that will come back to us next year, I'm going to say it's 15 to 20 million, it's big. Because we took the NRV's then. And then the high tension and the in-the-mixes perform next year on the pay TV revenues and the additional video sales, it's 15 plus million.

Right.

Tom, offline you can certainly talk Jim specifically about it.

Okay. Thank you.

Okay. Tom, any other questions?

That's it.

All right. Well, thank you all very much for joining us.

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