Starz Entertainment Corp (STRZ) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the fiscal 2007 year end analyst call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for your questions and comments. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Senior Vice President, Investor Relations, Mr. Peter Wilkes, please go ahead.

Thank you. We'll begin with remarks by our Chief Executive Officer, Jon Feltheimer, our Vice Chairman, Michael Burns, our President and new Chief Operating Officer, Steve Beeks. We are also joined on the call by CFO Jim Keegan, and Chief Accounting Officer, Rick Krous. After these remarks, we will turn the call over to Q&A. 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 a result of various important factors. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. Jon?

Thank you, Peter, and thank you all for joining us this morning's call. We're very pleased with Lions Gate's performance in fiscal 2007. It was a great year, not only because we significantly exceeded our guidance in terms of free cash flow and adjusted pre-tax earnings, but because we continued to develop our brand, broaden our audience, and invest in our business.

Before Michael, Steve, and I update you on our business operations, I would like to cover three areas. First, I want to talk about diversification, the multiple product line, multiplatform approach that we built into our business model and how it's serving as a catalyst for growth in our overall business, while protecting our downside from cyclicality in any one of those businesses. Secondly I would like to discuss our current operating environment and the opportunities afforded by new digital revenue streams. Finally, I would like to take a quick look at fiscal 2008.

The benefits of our diversification were particularly evident as we ended fiscal 2007. Even with the box office underperformance of "Pride" at the close of the year, on which we have a loss of $6 million in the period, we still had room to achieve our financial targets because of contributions from all of our other businesses; television, home entertainment, international and our library. The performance of home entertainment and our library was particularly significant. To briefly summarize the fiscal 2007 contributions from these other businesses, home entertainment generated nearly $530 million in North American revenues, actually exceeding last year's totals, despite the fact that our box office was down a little. This is a testament to strong library management, new and higher margin digital revenue streams and our ability to overindex the box office performance of our theatrical releases in other media.

The library, our greatest asset, continues to be a growth story. Our library sales grew by more than 20% to revenues of $256 million in fiscal 2007, far and away our best year. Our library has already demonstrated its consistency by achieving three straight years of revenues in excess of $200 million. We view the dramatic growth in revenues and concurrent increase in margins this past year as a very important indicator of our ability to continue generating strong free cash flow and to continue building value for our shareholders. As margins continue to grow, our library threw off approximately $90 million of free cash flow during the year. Steve will fill you in on some of our most recent initiatives to continue this growth.

In addition, we have continued our diversification with our recent investments in the UK, our Debmar-Mercury television syndication company and the "Dirty Dancing" stage plate, businesses that didn't make significant contributions in fiscal '07, but will in fiscal '08. We are also beginning to see tangible contributions from Blue-ray titles, VOD, and other digital revenue streams, which Steve will also describe in more detail in a few minutes.

This leads to my second point, which is that our environment is continuing to change in the direction we anticipated. We are seeing significant increase in demand for content of all types across myriad platforms. For example on-demand generated revenues, VOD and pay per view equalled nearly 10% of box office on better-performing titles such as "Crank" and "Employee of the Month." VOD revenues on "Employee of the Month" alone exceeded $3 million on a film that grossed about $27 million at the domestic box office. Our VOD revenues grew by approximately 50% in fiscal 2007 from the previous year. Additionally, our internet-delivered digital revenue grew by a multiple of 7 in fiscal '07 compared to the prior year, although obviously from a relatively small base.

By the end of this year, we will have released at least 50 titles on Blue-ray, and our Blue-ray market share of 11% significantly overindexes our overall home entertainment market share, which has grown to over 6%. We've nearly a dozen active agreements in place for digital delivery of our content with such major players as Apple, Amazon, Microsoft, Blockbuster, Best Buy and Wal-Mart, with more to follow. The first six months since the launch of our FEARnet branded VOD and internet channel, with partners Comcast and Sony, has been an unqualified success, and we are looking at other similar opportunities. In short, these are just a few examples showing that significant digital revenue streams are no longer a promise, but a reality, and every indication is that they will be incremental.

The niche audiences we serve in horror, teen, comedy and action are the early adopters and users of new technologies and formats, and our targeted approach to our content business model will allow us to capitalize as the digital marketplace grows. On the flip side, supply of content is also increasing, and this is evident in competition at the domestic box office. In their efforts to achieve large openings for films with production budgets of up to $250 million, the major studios are securing up to 10,000 screens, more than one third of the quality screens in North America, for the launch of their big franchise movies. This has generated some pressure on our smaller releases this spring. However, the strength of our fiscal 2008 theatrical release (inaudible) lies ahead, and it's edgy, distinctive and packs a bigger wallop than ever before, but it remains cost effectively acquired, produced and marketed within our business model. We're confident that it will cut through the clutter to generate our best theatrical box office year in history.

An important part of our theatrical strategy is the theatrical financing agreement, which as you know, we announced on Tuesday. The fund will cover 23 of our films over the next three years, beginning with the release of Bug last weekend. The fund will cover up to $400 million in financing and marketing costs on these films, with up to $200 million coming from a senior facility in mezzanine and equity financing, which will be matched by us on a prorata basis. The fund does not include "The Saw" and Tyler Perry franchises, on which we have preserved our full equity, but it does include other sequels.

The strategy is very simple. We made a decision to have significant continued investment and growth in our theatrical business, and we've created a partnership that will share the financing of this growth on a 50/50 basis. While this year's slate has a number of considerably larger budget pictures and significant marketing expenses in releasing them, we continue to acquire and produce them with the same creative, disciplined and risk-averse approach that we have always used. One nuance in the theatrical slate financing deal that may not be as apparent as the other benefits is that by using a fund to help grow the business, we are giving ourselves the opportunity to own more rights, more of the back end and more content and perpetuity on our films than if we were just doing negative pickups and acquisition. When Michael takes you through our upcoming theatrical slate, you'll see we not only have more films and more wide releases, but also more pictures produced in-house relative to acquisitions compared to previous years. This will (inaudible) to benefit of Lions Gate and our financing partners.

Finally, I would like to take a look at fiscal 2008. We've entered this fiscal year in our strongest cash position with new financing arrangements structured for growing the business. We will be investing significantly in our pipeline of theatrical product, both in production and marketing, and we will also maximize this investment by spreading the theatrical releases more evenly this year, particularly in our fiscal fourth quarter, a less competitive time. In fiscal '08, our marketing expenses for our expanded slate of feature films will grow from approximately $150 million to almost $290 million, with an additional marketing spend of $60 million for our home entertainment product.

As I stated earlier, we have partners who will share the financing of this growth. In other words, approximately $150 million of the more than $350 million in marketing expense will be coinvested by third parties. However, reporting rules require us to expense the entire $350 million plus ourselves. Given this, although we are targeting free cash flow again exceeding $100 million, the use of the film fund will actually increase the delta between cash flow and earnings, and we therefore anticipate reporting negative earnings of over $40 million of EBITDA and $50 million of net income in fiscal '08. Our growth momentum will be reflected at top line in fiscal '08, and we anticipate increased revenues of at least 10% to 15% to well over $1 billion.

As we have said for years, revenue and cash are the primary metrics to measure a pure content business in full growth mode. What's important to remember is that every single one of the past three years, we have invested significantly in building our product pipelines, acquiring new businesses, such as Lions Gate UK, Debmar-Mercury, and our FEARnet branded hard channel, as well as steadily growing our film entertainment backlog. Yet we have just as consistently thrown off on average more than $100 million in free cash flow and further strengthened our balance sheet during this period. As you look at the backlog that is currently over $320 million, the library cash flow of approximately $90 million, and the investment we're making in content in fiscal 2008, you can see that we're creating significant long-term value for our shareholders. Now, I would like to turn the floor over to Michael to take you through our upcoming release schedule, and then Steve and I will update you on growth in our other businesses. Michael?

Thank you, Felt. We view our fiscal 2008 theatrical slate as the bolus and most diverse in the history of the Company, and believe it is capable of generating North American box office of more than $400 million. As you know, our rule of thumb is that we generate roughly twice our box office numbers in overall revenues by exploiting all portions of the motion picture food chain, although obviously, not in a single 12-month period. Those windows include theatrical DVD, pay television, free television, and increasingly VOD.

As a result, if we can generate box office of $400 million in fiscal '08 compared to our $250 million box office this past year, that should translate into growing our revenues from all sources over the ultimate of these pictures from $550 million to $900 million, including international. This is a delta of approximately $350 million and even conservatively assuming margins at the 15% plus range, we would anticipate significant free cash growth in the years that follow. We, therefore, view our fiscal '08 slate as an important step towards the next level performance that you have been anticipating. We began the fiscal year with several modestly sized films on which we had relatively limited exposure in terms of both negative and P&A costs. We will recoup our money on at least two of these films, and we anticipate sustaining accumulative $10 million negative cash flow impact on the full year from these underperformers.

The core of our '08 slate obviously begins with "Hostel II" next weekend. "Hostel II" is a more psychologically shocking film than its predecessor, and as we have shown with "The Saw" franchise, we work very carefully on our sequels to do well at the box office. Three weeks later, we have "Sicko," the powerful and compelling documentary from Michael Moore from whom we distributed "Fahrenheit 9/11." In a summer of popcorn movies, it is a thoughtful, compelling, and provocative look at one of America's most important national issues, healthcare. We have two wide releases later this summer. We believe the live action film, "Bratz," capitalizes on one of the hottest franchises for young girls today. With more than 150 million Bratz dolls sold, this new franchise will strike a resounding cord with this audience. "Good Luck Chuck" is one of the funniest comedy offerings and has tremendous upside potential for us. This will be the movie that defines Jessica Alba's major motion picture star, thanks to a terrific physical comedy performance that is sexy, funny, and appealing. Her paring with comic star Dain Cook produces great chemistry and humor. We refer to the movie in-house as "There's Something About Jessica."

(Inaudible) I won't attempt the full Spanish title, but it means a thief who stole from the thief, is a second film in our Spanish language initiative where we continue to build leadership in a large niche that is a good fit for us. As Felt has noted before, we're not in the business of doing one-offs, so expect more films in other conscious initiatives in the Latino market that has 42 million strong and the fastest growing in the country. "War" is our second Jason Statham film, with a third on the way. Teaming him with international action star Jet Li in a movie that we have already pre-sold internationally for nearly $25 million, and look to continue Jason's run of hot September action films for Lions Gate ala "Crank." We think that "3:10 to Yuma" coming in October is one of those rare award contenders with great commercial appeal. Russell Crowe and Christian Bale both turn in brilliant performances directed by "Walk the Line's" James Mangold.

"Saw 4" and "Halloween" may not be contending for awards, but it will deliver big time for its core audience. "The Saw" franchise from Twisted Pictures and Lions Gate has quickly turned into one of the most successful franchises in the history of horror. On the topic of franchises, "Saw 4" will be followed in the fall by the next Tyler Perry film, "Why Did I Get Married?" We actually have four Tyler Perry films in the pipeline. "Why Did I Get Married" will be followed by "Meet the Browns," bringing back the popular Madea character most likely arriving in theaters February or early spring. We will have two additional Tyler Perry films next year, including "Madea Goes to Jail," Tyler's most popular and successful stage play.

Later in the fiscal year, we bring back Jessica Alba for "The Eye," a terrifying thriller based on the Japanese horror film. In December, we will also release Thomas Kincaid's, "The Christmas Cottage," a heart warming film for the holiday season, featuring a brilliant performance by Peter O'Toole. "Rambo 4" may not be quite as heart warming, but Sylvester Stallone looks terrific in a great action film that has come home to Lions Gate. As most of you know, we have the first three "Rambo" movies in our library. Stallone gives a performance as John Rambo that is every bit as compelling as his return as Rocky Balboa a few months ago.

We are continuing to put our money where our mouth is this year, investing in our core businesses and sticking to our disciplines. While we are increasing the P&A spend for our fiscal '08 slate with our expanded schedule, we want to make it clear that every film on our release schedule fits squarely within the classic Lions Gate risk profile. We are already filling a pipeline for fiscal '09 with films such as (inaudible) starring Angelina Jolie; "The Forbidden Kingdom," teaming Jet Li with Jackie Lee; "The Spirit," which will be the next film from legendary Frank Miller fresh on the heels of his blockbuster "300" and the acclaimed "Sin City," (inaudible) for which we're bringing back our Academy Award winner Halle Berry; "Punisher 2," two more Tyler Perry films on the way, and of course, stay tuned for future installments of our "Saw" and "Hostel" franchises. It's a great time to be a pure content player, and we now have a portfolio that is equal in size and scope to that of a major studio, but generated according to our own disciplined model. On that note, I will turn to Felt to discuss our other content businesses. Jon?

Thanks, Michael. On the television front, our business is growing just as rapidly and successfully. We've combined our creation of original programming for cable networks with one of the most powerful line-ups of independent syndicated product in the television industry today to generate steadily increasing momentum for our business. In fiscal 2008, with some of our growth coming from Debmar-Mercury's portfolio of syndicated content, such as Tyler Perry's "House of Pain," "Family Feud," "South Park," two film packages from Revolution, and our own drama series, "The Dead Zone," we expect our television revenues to climb towards $200 million. Our television approach is again focused, edgy, and different from our competitors. To give you some examples, our upcoming television slate includes the fun, scary, sometimes disturbing "Hidden Palms," which premiered on the CW Network last night.

Madmen, a darkly subversive and scathing look at 1960s Madison Avenue from "Sopranos" executive producer, Matt Wiener, which will become AMC's first premium scripted drama series when it debuts in August. "The Kill Point," a powerful hostage drama for Spike TV in the tradition of "Dog Day Afternoon," starring John Leguizamo and Donnie Wahlberg, "The Bernie Mac Comedy Roast" from David Letterman producer Robert Morton for Comedy Central, and of course, we're going into the third season of our acclaimed comedy "Weeds," another quintessentially Lions Gate franchise that highlights the fact that digital revenues can sit comfortably side by side with success in home entertainment and prime time programming. "Weeds" is already positioned to generate significant incremental revenues in syndication.

We've now formed long-term relationships with the state governments of Louisiana, New Mexico and Pennsylvania, and our ongoing efforts to capitalize on film entertainment-friendly production subsidies and tax incentives as part of the growth of our television business. Another factor in the success of our television business is the major contribution from Debmar-Mercury. As you know, Tyler Perry's "House of Pain" begins airing the first of its 100-episode order from Turner this month and will enter first run syndication next year. Our syndication arm is amassed one of the strongest portfolios of product in the industry and is continually building its supply of content. Mort Marcus and Ira Bernstein operate very entrepreneurially within our culture, and we continue to look for other entrepreneurs with whom we can partner and help build their businesses as we continue to build our own. Now, Steve will give you some more color on our home entertainment, digital and international businesses. Steve?

Thanks. As Jon said, our home entertainment business continues to show strength, vibrancy and growth. I would like to focus particularly on the extraordinary performance we achieved from our library this past year, as steps are taken to maintain this performance, as well as to leverage the success into the digital environment.

Our library revenue grew to $256 million in fiscal '07, up 21% from last year. Outperforming all expectations and again bucking industry trends in a mature DVD market. Our growth came from all areas of the library, with home entertainment alone exceeding $200 million in revenue, and we had significant growth in international sales and domestic television from our library as well. The library performance continued to gain momentum throughout the year, with $143 million in revenues generated during the last six months of the fiscal year.

It is particularly noteworthy that our strong performance did not come at the expense of pricing. The average wholesale price on our deep catalog remained constant from fiscal '06 to '07. And as Jon mentioned, our library generated approximately $90 million in free cash flow, which continues to pay for our entire overhead costs year after year.

As we said previously, as our newer titles drop into the library at higher prices than deep catalog, average wholesale prices have gone up and created higher gross margins for us. The ability of these new titles to serve as an important catalyst for revenue and margin growth is another factor confirming our strategy of investing in future growth of our theatrical slate. We continue to seek to increase our library, and we expect to announce in the next several weeks some additions and extensions. We cannot overemphasize how important our growing library is to maximizing our performance in the digital marketplace, a market that has emerged in a financially meaningful way for Lions Gate this past year and is beginning to deliver accretive results that are a reality, not a promise.

As Jon mentioned a few minutes ago, both conventional and broadband VOD are an important part of the future and are beginning to contribute significantly to the present. We are now achieving VOD revenues equalling 10% or more of box office results on our better performing theatrical titles, such as "Employee of the Month" and "Crank." Conventional VOD revenue grew almost 50% to $24 million in fiscal '07. We believe that these results will continue to be accretive going forward, rather than cannibalizing our package media business because we are entering an environment where any consumer with broadband can have instantaneous access to our content. We can foresee a day when every consumer with broadband will have instant access to virtually every film ever made. No matter how much space is available at major retailers, virtual shelf space in the digital environment is unlimited.

As an example of the incremental revenue potential from these new consumers, during the most recent week of results from iTunes, six of our top ten revenue-generating films are not currently on Wal-Mart shelves, demonstrating that virtual shelf space allows for very accretive revenue generation. More titles from our library generating more revenue, that is the promise of digital delivery. Digital delivery is showing extremely rapid growth. We have already generated approximately 1.4 million downloads with our digital partners and as (inaudible) technology is just establishing itself. Our momentum is going to grow. We got off to a fast start with "Weeds" on iTunes, which generated over 1 million downloads itself just in the last three months, and in just the last three months that we've been selling library titles, we've seen their surprising power.

To give just one illustrative example of the strength of our digital delivery of library films, a few weeks ago we uploaded "Van Wilder." In the first week it was offered on iTunes, it was the number one downloaded movie out of their entire selection, and it only dropped 10% in its second week. That's not bad for a five-year-old film that generated less than $20 million at the box office. More validation for the long tail theory. And since our electronic delivery deal with Xbox live became active in February, we have had 150,000 VOD downloads from just 15 films. This is an extremely promising sign for our entire library and the power of the virtual shelf space of digital delivery.

As we mentioned during our last call (inaudible) VOD tests with Comcast has shown promising results with little evidence of cannibalization of traditional rental and sell-through markets. We're expanding this test to include an additional market in the fall and will continue to monitor the results, but it does initially appear that this will prove to be a substantial accretive source of revenue.

Our traditional package media business continues to perform strongly, an essential prerequisite to the incremental nature of the digital revenue streams we are anticipating. As Jon noted, our home entertainment revenues grew year-over-year to nearly $530 million, although our domestic box office was down slightly over the same period. The average wholesale price for new releases increased by $0.70 per unit last year, reflecting the strength of our most recent titles, both in sell-through and rental. We have achieved DVD market share of more than 6% during the current calendar year. January was the best month in Lions Gate's history in terms of DVD sales, and the January to March period was also the second best home entertainment quarter we've ever achieved from a revenue perspective. Benefiting from a mix of very successful theatrical titles such as "Saw III," "Crank" and "Employee of the Month," as well as several strong family entertainment franchises, including the third in our series of ten Marvel direct-to-video release, 'The Invincible Iron Man" and the launch of our first animated "Bratz" home video title.

Our return rate is down, demonstrating both continued strong sell-through, as well as an excellent logistical supply chain. One of the catalysts of our home entertainment growth is our leadership as one of the premier content innovators in the business. We'll have released approximately 50 titles of Blue-ray DVD by the end of this year, and much higher gross margins than our traditional DVD titles. With 11% Blue-ray market share year-to-date, significantly overindexing our broader home video market share, we are currently well positioned to capitalize on the acceleration of the high-definition market when a single format is established. Blue-ray currently has almost two to one software advantage, and we still believe that it will ultimately emerge as the dominant format. Until then, however, Blue-ray will be a relatively small, but growing source of higher margin revenue.

International is also a significant and continuing area of growth. Last week Lions Gate UK entered into an agreement with our strategic partner, Studio Canal, with whom we have a steadily expanding relationship and their UK subsidiary, Optimum Releasing, to buy elevation sales, which is an independent home entertainment sales and distribution company. By virtue of this transaction, we will now have our own video sales marketing and distribution operation in the UK. This compliments our successful theatrical and library distribution there, which is consistent with our UK strategy of capturing additional margin. Our Lions Gate UK/Optimum Venture will also explore opportunities to distribute third party video product in the UK. Our current theatrical and library operations in the UK are achieving the results we anticipated when we bought Redbus a year and a half ago. "Employee of the Month," for example, generated approximately $7 million in the UK box office this past quarter and is illustrative of our strategy for capturing more margin.

Our library also performed strongly in the UK. For example, "Dirty Dancing" has already sold through 400,000 DVDs in the UK since we released it under the Lions Gate UK label last August. We are planning to establish a similar beach head in Australia, part of our worldwide strategy of identifying strategic markets that offer the greatest opportunities for growing our margins through self-distribution. We currently have an active offering in the marketplace there to acquire an independent distributor, much in the same way we acquired Redbus in the UK.

Some of you may not be familiar with another of our significant international initiatives. Our investment in the smash success stage play "Dirty Dancing." "Dirty Dancing" was very successful during its run in Australia, went on to break box office records in Hamburg, Germany, achieved record ticket sales in London, and recently set a new single-day record for advanced ticket sales in Toronto in anticipation of its November opening there. Our library, home entertainment, digital and international businesses are all showing the kind of strength we envisioned in our business plan, and we are eager to continue our investment in fresh content that will continue fueling this momentum. Now, I'll turn the floor back to Jon for a summary of our performance this past year and what it portends for the future.

Thank you, Steve. Lions Gate has completed the kind of successful year our business plan envisioned, exceeding our financial growth metrics and even more significantly, in terms of the larger picture, demonstrating continued innovation in leveraging our content into emerging platforms and markets that will sustain our future growth. Our balance sheet shows nearly $300 million in cash, no corporate debt, and sufficient capacity to continue making substantial investments in our business internally, and through acquisitions that build on our content leadership in a diverse portfolio of businesses.

It was a particularly important in a period of significant growth for us to construct a portfolio of financing arrangements that will hopefully allow us to not only invest significantly, but at the same time also deliver increasing financial metrics, and we will continue to add more of these arrangements as our ongoing growth warrants. It's always our aim to compliment the innovation of our strategies with the quality of our implementation. As Thomas Edison once said, "Vision without execution is hallucination," and we believe that we not only have the vision to continue identifying innovative ways to grow our business, but we have the execution to get there. We'll now open the floor to your questions.

(OPERATOR INSTRUCTIONS) Our first question today comes from the line of Gordon Hodge representing Thomas Weisel. Please go ahead.

Hi, good morning. Just a couple questions. One on the film front just to understand how that works, will you be -- from an accounting standpoint, will you absorb the P&A, obviously the full P&A, and presumably the full -- ultimate margin, I guess, running through the income statement, and then will you see reimbursements in the cash flow statement? Is that where that will show up from the free cash flow perspective?

The answer is yes. With the accounting, we'll work for that is we'll expense the P&A as whatever as incurred and we will record the funds we receive as an increase in cash and an increase in participations payable, therefore increasing the cash flow.

Got it, okay. And then it sounds like just directionally, you're focusing maybe a little less on pickups and a little more on your own productions under -- now that you have the fund available. Is that a correct interpretation, and would a lot of the investment that you're making this year both in terms of P&A and in terms of investing in the slate, is that for releases that we might expect to see the revenues in '09?

Yes, yes, exactly, particularly, as I said earlier, we're going to be releasing more pictures in fourth quarter than we previously had done in almost all the benefit of that, we'll take, as usual, take the marketing expense all in, all in the fiscal '08 year, and we'll see most of the benefits in '09 and '10. And in terms of those additional movies, they are both produced and cofinanced, but there were a number of great opportunities for us to get into some bigger budget pictures, pictures that are $50 to $70 million for very minimal up front, if any, investment. That's why the slate loose considerably bigger this year.

Great. Then last question. Just an update, if you can, on any negotiations in terms of reupping with Showtime on the (inaudible) deal?

We are definitely having ongoing conversations about our pay television window, either with just one service or a combination, and remain very confident that we will extend or replace that window.

Thank you.

Next we'll go to the line of David Miller, representing SMH Capital. Please go ahead.

Michael, your balance sheet just continues to look better and better every quarter sequentially, close to $3 per share in cash. I don't get the sense from you guys rhetorically that you're willing to acquire anything using your stock. I get the sense you think that that's sacred. So given the, just the stellar way the balance sheet looks, you only have converts on the balance sheet with regard to debt. There is no bank debt. What's your overall taste for some sort of return on capital to shareholders in the form of some sort of one-time divvy on the cash or some sort of traditional buyback? Thanks very much. And I have a follow-up.

The first part of your question, David, is that there are some deals that, that we would consider doing a stock deal with because on occasion, there are some, some transactions that they are looking to have our stock. So I would never -- that would never count that out.

Right.

But I will tell you that yesterday our Board authorized our first stock buyback program.

Wow, there you go, outstanding. Also, just a follow-up Jon, maybe this is more appropriate for you, the FEARnet channel, I think debuted as a VOD option on Comcast digital tier during Halloween weekend '06, but you guys at the time stated that there was sort of a loose promise from the consortium that a linear component would debut within six months. It's been six months. What's the update on that? Thanks.

The -- I would have to go back and look at those notes. We are continuing to talk, particularly to those folks who can't do VOD about linear, but we've been much more focused actually, David, on expanding the VOD offering to a number of other cable operators, and I think that we are very close to being able to announce a couple of other major carriers. And if you remember, the way the VOD works, it really, in terms of financial benefits to us, it works very much like a linear channel in the sense that after an upfront free period we were getting paid on a per subscriber basis. This is really the way television is going to be in the future, an on demand kind of business. And so we're less focused on whatever you might call a linear service as opposed to just universal carriage.

Okay. Thanks very much.

And we will go to the line of Tom Eagan with Oppenheimer. Please go ahead.

Obviously your strategy of gaining more TV windows through your theatricals is also working. Could you talk a little bit more about how you got more and better TV windows in fiscal '07, I guess the second half of '07, and how you plan to continue that into fiscal '08, and then if you could maybe give a little more detail on fiscal '08 EBITDA over and above what you already said and how much of that is driven by the fund? Thanks.

Hi, Tom. I think when you're referring to the television window, I assume you're referring to pay per view and conventional VOD, and I really think the growth is a factor of two things, not only the strength of our schedule, but also kind of the growth of VOD offerings by the, the operators, the cable operators around the country.

Okay.

I think as well, it continues to be the kind of product, as I said in my remarks, it's the kind of product that we're doing. So in other words, things like "Crank" and "Employee of the Month," the kind of product that typically before overindexed in home entertainment is going to and is already overindexing in the other ancillary media, and I think that's the great news for us because that's the product that we focus on. In terms of EBITDA, I'm not really sure, not really sure what your question is. As usual, in spite of the fact that we have significantly higher marketing expense, we have not budgeted for any hit movies, so I've given you a range in terms of EBITDA. It's pretty obvious again why this happens. We're not at risk for over $150 million of the P&A that is being invested in our slate, but given, and I'll use the word anomaly, given the anomaly of the reporting requirements, we are forced to expense all of that because we are the operating company. So given that, you see a huge delta between free cash flow and, and EBITDA. So I think I've gotten you pretty close to where we are on that.

Well, right. I guess as a follow-up, Steve, what I meant on TV, the $109 million for the TV revenue from theatrical, was that -- that's a pretty strong number. How much of that was -- was that driven by the VOD revenue, and then what I meant was if you could just I guess repeat what you were saying about EBITDA and how you -- how much of it being negative was driven by the fund. So I know it's kind of hard to say what it would be without it, but if you didn't have the film fund, increased participation of what that number might be. Thanks.

All right, Tom. I'll take the first part of the $109 million in television revenue you mentioned. $24 million of that was VOD, which is, as we mentioned, a huge increase, 50% increase over the prior year.

Right, okay.

Yes, and, again, I'm still having trouble with the second question. We constructed our slate this year and actually some movies will still be moving around, but we constructed the release schedule based upon having, having the fund. If we didn't have the fund, I wouldn't have the same release schedule. Again, we focus entirely on revenue and free cash flow, so when we constructed our schedule and looked at our business this year, that was the basis that we did it on. I actually only discuss and give you guidance, rough guidance on EBITDA net because we're forced to report it, but, again, we're focused on revenue and free cash flow.

Right, okay. Thank you.

And our next question today comes from the line of Alan Gould with Bleichroeder. Please go ahead.

Yes, thank you. I've got three questions. First, Michael, could you tell us the size of the buyback? Jim, can you tell us the interest expense on the "Pride," or your film fund, is that going to be consolidated, so is the interest expense going to flow through Europeanel on that fund? And then follow-up on Gordon's question for John regarding fiscal '09, this big increase in P&A and follow-through in box office and ancillary revenue,it seems like 85% or so of the profits from film come in the first 12 months, so shouldn't we see -- we see this negative swing in '08, shouldn't most of that all come back to us in '09?

Well, I'll take the, I'll take the last part. The answer is yes. That's exactly right. And in a period of, I would say, if we don't grow substantially our slate in '09, I think you will see a big, big net benefit that I would imagine would drive all of our metrics up well beyond this current year. Do you guys want to answer the other questions?

The answer to the stock buyback, the first stock buyback authorization was $50 million, Alan.

Okay.

And the answer to your other question, the way the fund is constructed, it won't appear as an interest charge in my books. We'll do a calculation that will do, determine a participation back to the fund itself, and it will flow through my participation expense line in my financials.

Flows through the participation expense. Okay, the fund is going to have, what, about $175 million or so of debt attached to it?

Yes. But -- I do not bring -- the fund is not consolidated into my financials. It is outside me.

Okay, so where does the cost of the capital, the fund come in when you calculate the profits of the pictures?

It comes through, as I calculate the back in participation that goes back to the fund and to all those, I determine how much money of the profit they will share in.

No, let us be clear. Is no cost of capital. The deal is very simple. We take our distribution fee, which as has been reported, is kind of a state of the art fee, and we report back to them as a 50/50 participant essentially on all the pictures. There is no cost of capital.

So it's irrelevant to you what they are paying on their interest.

Exactly correct.

Okay. Thank you.

You're welcome.

We'll go to the line of Barton Crockett with JPMogan. Your line is open.

Thank you very much. Let me see, you just answered one of my questions there in terms of this a (inaudible) participation as opposed to interest flowing through there. One of the -- I guess switching gears here a little bit, could you give us a sense of what you're looking for in terms of the profit impact of "Sicko," and just refresh us again of what we saw in "Fahrenheit 9/11" so it gives us a sense of the economics to you there? And then secondly, in terms of this discussion about the impact on the metrics in '09 after kind of the negative swing in '08, does that also apply to free cash flow in '09, or since you're building up this participation, and they are funding part of the marketing spend that you're expensing, isn't there some payback then in '09 and could that maybe deflate the growth in free cash flow relative to the other metrics? Thank you.

It's a good point, but I would say probably not. I think that we will see, as I said earlier, all of the overall, all of the metrics, don't forget this fund will run almost three years, so the benefit will be rolling, and as I say, I would think, if we look forward, which I hate to do, look forward into '09, I think you will have significant, significant positive results and growth in '09, even compared to this fiscal year.

Okay, and then for "Sicko," the margin impact there?

"Sicko," the margins will be very strong because we have no risk really attached to it, but the overall numbers, not that significant.

Okay, all right. And then also just -- did you give us a number in terms of the size of the share repurchase you guys authorized?

We said up to $50 million.

Up to $50 million, okay, great. Thanks a lot.

Thank you.

Our next question comes from the line of Eric Handler with Lehman Brothers. Please go ahead.

Thank you. Can you give us a sense what your television production margins might be for the year, and how you think your profit will look like, the film business versus television, and then secondly, can you give us a sense of when your syndication backlog is for your TV programs?

Margins, as I say, we see revenues approaching $200 million, margins 10% to 15%. I don't know if Jim has broken out for this call the specific elements of backlog. Can you pull that out?

Actually backlog as of the end of March 31 is about 152 million from TV and 167 from motion pictures.

Have you broken out syndications specifically?

Not broken out. Just combined with TV.

We can narrow down with you on that, Eric.

What, specifically, what titles do you have going into the off networks, syndication market in the next couple years?

Well, I'll tell you the big piece. If you look at the Debmar portion of that backlog is about 64 million, which is more of the TV syndication number you're looking for. As the south, the "South Parks" and the Tyler Perry franchise.

But, Eric, as you know, if I get your question, we don't put -- backlog doesn't refer to anything that is a potential syndication sale. We don't have, for example, any number in there for "Weeds" or any of our television series. We're not allowed to put that down until we've actually completed a sale. Backlog really means these are sales that have been made already, contracts that have been completed, but the window hasn't opened. So we don't have any of that television, those potential television revenues in our backlog.

Right. Actually what I'm trying to -- the question I'm trying to get at is when will shows like "Weeds," when will you begin pre-selling those for the, for the syndication market?

I'll have to look very specifically at what the availability of "Weeds" is, but we'll probably start selling it now. We're already talking to people, but when the window will open up is probably 2009 or 2010.

Okay, thank you.

Your next question today comes from the line of David Bank representing RBC Capital Markets. Please go ahead.

Thanks very much, guys. Good morning. First one, going to start with reconciliation for the fiscal year that just passed, cash flow and EBITDA. It actually looks like there wasn't a particularly big swing between investment in amortization of film, nor in terms of participations, but the big swings were in deferred revenue and kind of payables versus receivables with the big, big contribution coming from receivables. So could you give, could you give a little bit of color in terms of those swings and how they may or may not reverse in the following quarter. The second, is I'm sorry to do this to you, can you clarify that -- can you literally actually just repeat what you said on the revenue, P&A and EBITDA numbers? I'm sorry to give you this basic question, but what I don't quite understand is given that it's a 50/50 split, why you're increasing the, you're increasing the P&A spend, wouldn't your loss just sort of be prorata versus what it would have been if you didn't have a partner, and it sounds like maybe you're spending more money because you can make bigger movies or make more movies, because you have a partner, but the inherent profitability of them, how do they change because you're doing, because you're doing it with a coproduction partner? Thanks. Sorry for the long questions.

I guess I'll take your first. AR end of last year, this year we actually released some of the soft franchises. I think with had those earlier in the quarter so we basically received and collected those funds from our "Saw III" this year, which really is driving the decrease from AR last year to this year. AR will continue to grow as films come out. I guess I'll say that. Deferred revenue, big pickups this year. We received some advances from some people from the motion picture division, it's actually coming more out of the motion picture division than the television division this year, with about 49 million in motion pictures compared to about 30 million last year. And that's coming from just presales, also on some of our films that are coming up, some of the big ones, "The Rogues" and things of that nature.

So any big reversals expected in terms of first or second quarter?

We will see more things like we had some "Weeds" deferred revenue will roll in. Yes, you'll see that reverse and come in. But hopefully that will be increased by something else. To answer your question, I really don't know if I see deferred revenue coming down significantly this year from its current standpoint. Maybe a little, but not significantly.

Okay. In terms of your second question, David, I'm not quite sure I understand. If you're asking does it make sense that we should have to expense all of our partners share of P&A, the answer is it doesn't. In terms of the ultimate benefit, actually we constructed the slate with a pretty conservative model and actually didn't assume performance significantly higher, even with the additional P&A expense and the higher budgets. Again, the risk profile that we have in terms of the upfront equity on almost all of these pictures is really not at all dissimilar to the current movies that we have out. But I would assume actually going forward that we will get the benefit of those movies and that the performance will probably outperform what we've got in our targets.

Okay. I think I understand, Felt. So basically the issue is that you just have a kind of dramatic acceleration in terms of negative costs and P&A moving into a larger slate next year rather than those movies being kind of bigger bets and potentially less profitable.

That's the right way to say it. Again, you're not, you're not seeing the impact is not really because of the negative cost. The impact is solely because of the P&A impact. And that P&A impact is also in our home video. In other words, even in most of the -- for all of these pictures that the video comes out in this fiscal year, our partner, the fund is actually paying for half of the P&A expense as well, and, again, we are, we are expensing the entire 100% of it. So the, the positive benefit obviously will roll into '09, and then obviously into the library piece of it, which, again, I can't overemphasize enough all of these films that we're getting are essentially 20 to 25 years to perpetuity, so we're extending certainly significantly the value of our library.

David, it's Michael. The only thing that I want to make sure that we're clear on is that you use the term bigger bets. We are in fact doing more wide releases, but we're obviously sharing the risk with the fund.

Thanks, guys.

We will go to the line of Michael Kelman with Susquehanna Financial Group. Please go ahead.

Questions. First, can you talk about the accounting for the production costs under the film funds, particularly for films that you will share the negative costs for? I understand how the P&A, I think you've talked about that a few times, on how that will work, but will you be amortizing the net amount or the gross amount of the negative costs of the film, and the second question is with regard to TV production revenue. Next year obviously expecting significant growth. Can you maybe talk a little bit about your expectations for timing on the revenue recognition of that on a quarterly basis?

In answer to your first, we will be amortizing the negative costs of the film on the gross method. So that's -- the way I'll do a quick accounting on it, the way the rules are going to work quickly, we'll take revenue, the fee Jon discussed and then we'll do a calculation of the participation back to the film company and that will be amortized. When I get the cash from the film company, as I mentioned earlier, I'm just going to debit cash, credit participation liability. As I make payments to the film company, all I do is debit the liability, credit cash. In a nutshell, that's the accounting.

As you know, we don't guide quarter to quarter, but, Jim, can you give them any visibility on how that 200 million breaks down?

Sure. I would anticipate that the -- actually it's not as even. Q2 looks to spike a little. Then actually slows down in Q4. Still hitting about the approximately $200 million revenue, but you should see a spike in Q2.

Great. Thanks very much.

You're welcome.

Next we'll go to the line of David Joyce with Miller Tabak and Company. Please go ahead.

Thanks. It's sort of a conceptual question, but as you're getting more and more in TV production, can you generally talk about the economics that you're getting on those, on those programs?

Well, again, a lot of the growth in television is coming from Debmar-Mercury, which is really more of a syndication business. The TV business, the way it works and the way, again, we're forced to account is we can't really put any back end on our television product until we're well down the road. Typically the TV production business is a low margin business. Obviously when we start looking at some revenues from "Dead Zone" and then "Weeds" and some of the other shows, we're going to up those margins, but the syndication margin's considerably higher, closer to 20%, which is why we're talking about blended average 10% to 15%, and we're very excited about the growth of our syndication business. We really think it's a tremendous driver. We are really the only true independent syndication company of any size right now. We're the only alternative for talent out there when they are looking at deals to the major studios, and I think that this is going to be a real tremendous growth opportunity for us because Morton and Ira are just doing a tremendous job. The syndication area's what's going to drive the margins.

Yes, that's helpful. It's on the 20% range. And then just a housekeeping issue on the share count for the fourth quarter, is that related to the converts?

Yes.

Okay. Thanks.

We have time for two final questions today, and our first one comes from the line of William Kidd with Wedbush Morgan. Please go ahead.

Good morning. I had a question really about the library performance as it relates to Blue-ray. You were obviously doing really well at present. Other studios aren't as aggressive with Blue-ray as you've been. Do you think as other studios step up their Blue-ray performance and start to bring more titles more quickly into the marketplace that that's going to effect your ability to overindex, and if that is the case, when would you expect that to be more noticeable?

I think that logically, if every studio we're releasing on Blue-ray, our market share on Blue-ray would reflect our overall, broader -- not our margin, but our market share, would reflect our overall market share. I think that's still a ways off. We've still got other -- one studio that's exclusively HD/DVD, but I think that through the course of the year, you're going to see -- hopefully you're going to see Blue-ray build its advantage and become a bigger part of our revenue base.

And I guess on the VOD side, I think you gave a metric that your VOD revenues were up 50%. Could you give that together consolidated with your pay per view numbers and give us what a total pay per view gain was including the VOD?

That's the number.

That was it.

That includes pay per view and VOD are really in a way, we view that as the same kind of business.

Likewise. Thank you so much.

Thank you.

Our final question today comes from the line of David Miller is SMH Capital. Please go ahead.

Yes, guys, just a quick follow-up. Jim Keegan, I forgot to ask you, what were FEARnet losses in the quarter? I know you guys report that on a three-month lag, so I guess you would be reporting your December quarter losses on FEARnet. Thanks very much.

About $1.5 million.

Okay, thanks.

Please continue.

Well, thank you all. We appreciate you being on the call, and we will talk to you in the next quarter.

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