Starz Entertainment Corp (STRZ) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fiscal 2008 second-quarter earnings and analyst conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, 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 your host, Senior Vice President of Investor Relations, Mr. Peter Wilkes. Please go ahead.

Thank you for joining us. Jon Feltheimer, our CEO, and the rest of the management team will have opening remarks, then we will open the call to your questions. 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, including the risk factors as set forth in Lions Gate's quarterly report on Form 10-Q filed with the SEC on November 9, 2007 and Lions Gate's annual report on Form 10-K filed with the SEC May 30, 2007. The Company undertakes no obligation to publicly release the results of any revisions in these forward-looking statements that may be made to reflect any future events or circumstances. Jon?

Good morning, everyone. I'm joined here this morning by Michael Burns, our Vice Chairman; Steve Beeks, our President and co-Chief Operating Officer; Jim Keegan, our Chief Financial Officer and Rick Prell, our Chief Accounting Officer. I would also like to welcome Joe Drake, who has joined Lions Gate as President of our Motion Picture Group and co-Chief Operating Officer, and who is joining our call from New York this morning. Good morning, Joe.

Good morning, everyone.

Joe will have some comments later on in the call.

Operationally, this was a very strong quarter for all of our businesses. We not only had the strong theatrical run we forecast, but our DVD overperformance in the quarter on films that underperformed in theaters earlier in the year has made up a lot of lost ground. On our last analyst call, we projected that in order to stay on track for our financial targets, we would meet our next five wide releases to collectively gross $175 million at the box office. With the strong performances of War, 3:10 to Yuma, Good Luck, Chuck; Tyler Perry's Why Did I Get Married and Saw 4, these films will gross about $230 million at the box office in aggregate.

Over the past two months Lions Gate has been the number one studio at the domestic box office with an 18% market share and three of our last four films have debuted at number one. But in terms of our financials, the price of success is sometimes inverse. Our marketing spend on 3:10 To Yuma, for example, will increase from $27.5 million to $38 million in success, including our Oscar campaigns. As a result, it will have a greater negative impact in the current fiscal year, but it will be more profitable for us on an ultimate basis.

Ultimate profitability is obviously a key benchmark of success for us. Here's how we look at the financial contribution from our film business. In order to achieve our target of more than $100 million in free cash flow every year, we expect our motion picture slate to contribute a minimum of $100 million in ultimate profit each year. If our films for the rest of the year perform as anticipated, this year's slate should contribute approximately $120 million in ultimate profit, 10% to 20% more than last year's slate. Over the long-term, this positions us well for our goals of continued revenue growth, consistent free cash flow and increasing long-term shareholder value. Over the short-term, it made for the strongest revenue quarter in Lions Gate's history. We reported more than $343 million at the top line in the second quarter, on our way to over $1.1 billion in overall revenue, and this growth was achieved according to the Lions Gate business model -- all singles and doubles without swinging for the fences.

With the continued expansion of our slate, we also had and expensed our largest quarterly theatrical P&A spend ever, approximately $120 million, even though we had a partner, Pride Pictures, who shared $84 million of that on a 50-50 basis. Our P&A spend covered our four wide releases in the quarter as well as some of the advanced P&A on Tyler Perry's Why Did I Get Married? and Saw 4. Over the next two quarters, our marketing spend will even out and our earnings performance will swing to positive as is typically the case with our backloaded fiscal years. We expect to finish our fiscal year in strong fashion, overperforming our key metrics of free cash flow and revenue with our balance sheet in its strongest position ever at fiscal year end.

Michael will no give you more color on our films in the last quarter and into fiscal '09.

Thank you, Felt. Before I get into the strength of our recent and upcoming slate, I would like to update you on our investment and recent results at Break.com. Break has proven itself an invaluable platform for integrating Lions Gate content and advertising, attracting a record-breaking 18.4 million unique monthly of visitors and attaching new advertisers to the site, Break has achieved impressive third-quarter growth of 90% over Q2. We have also recently enjoyed similar success with the investment we made in Roadside Attractions, which just had a solid success with the platform release of Bella, which had a stellar opening weekend, earning $1.3 million at the box office in just 165 theaters. As Jon noted, the five films that constituted the core of our release schedule -- 3:10 To Yuma, Way, Good Luck, Chuck, and Why Did I Get Married?, as well as Saw 4, performed well relative to our expectation. Even as we ramp up our award campaign for the acclaimed 3:10 To Yuma, there is more to come.

As we told you a few months ago, our theatrical slate financing has helped allow us to spread our release schedule over the full 12-month calendar year, allowing us to capitalize on competitive opportunities and release dates that crop up throughout the year, including the January to March quarter. In fact for the first time in our history, we have a minimum of three wide releases slated for our fiscal fourth quarter.

Felt already noted that this year's slate is expected to contribute approximately $120 million un ultimate profitability. Our box office after two quarters currently stands at slightly over $300 million, meaning that with an additional cumulative $100 million from our three upcoming wide releases, we will reach our goal of $400 million in North American box office for the full year. That said, we certainly anticipate doing better than a $33 million average box office for the following three upcoming films. In January, Rambo is back with a vengeance. Starring and directed by Sylvester Stallone, we expect Rambo to join our growing roster of recent hit action films. The initial reaction to the Rambo trailer, playing in theaters in front of Saw and all over the Web, including Break.com, has been terrific.

After starring for us in Good Luck, Chuck, Jessica Alba returns as a lead in the thriller The Eye, slated for a February 1 release. We have a great marketing campaign for the film launching as we speak and we're delighted to have Jessica back again in the Lions Gate family. Coming on the heels of his $55 million North American box office hit Why Did I Get Married?, we will release Tyler Perry's Meet the Browns on March 21. Tyler continues to be credibly prolific, generating two feature films ever year for us. Fiscal '09 is shaping up to be equally exciting. As an example of our continuing commitment to deliver diverse product offerings, I'm happy to report that were thrilled with our first look at the action-packed adventure movie, Forbidden Kingdom, featuring the formidable pairing of Jet Li and Jackie Chan. On the comedy front, we will be releasing My Best Friend's Girl in fiscal '09 as well. The lovely Kate Hudson stars in this very edgy comedy with Dane Cook, who as you know, has a great history with our Company with a string of very profitable pictures. We have already staked out a January 2009 release date for The Spirit from director Frank Miller of Sin City fame. The Spirit has a truly star-studded ensemble of players, including Samuel Jackson, Gabriel Macht, Eva Mendez and Scarlett Johansson. We're pleased to announce that we have two more films from Tyler Perry in fiscal '09 after Meet the Browns, including the film based on his most popular Madea play of all, Madea Goes to Jail.

The next Punisher film from the Lions Gate-Marvel partnership is currently shooting in Montreal, and The Game, an intense action film that is a Lakeshore co-production with us starring 300's Gerry Butler is now shooting in New Mexico and is being directed by the team that gave us the hit Crank last year. Both the new Punisher and The Game should prove to be an important fiscal '09 release for us, while continuing our momentum in the action arena.

Finally, what late October would be complete without another bloodletting from Lions Gate, so look forward to Saw 5 arriving again at Halloween.

For those of you concerned about the impact of the writer's strike, I hope you can see now in the words of our head motion pictures, motion picture production, Mike Pasternak, we are locked and loaded with the vast majority of our fiscal '09 theatrical release slate already in place. Besides the strong portfolio [comes wrapped] or currently in production in the event of a prolonged strike, we remain in a competitively strong position because of our nearly 12,000-title library throwing off significant evergreen income, our filmed entertainment backlog nears an all-time high at $340 million and an extremely robust and unlevered balance sheet. We're not changing our game plan and continue to stick closely to our model of mitigating risk, efficient production, targeted marketing, repeat [account] relationships and teaming with strong, creative and financial partners. Jon?

Thank you, Michael. We not only see substantial growth in our North American motion picture business, but in all of our other businesses as well, including international. We've just opened an office in Australia where we have established motion picture, television and home entertainment businesses operating under the Lions Gate brand in conjunction with three very strong strategic partners -- Hoyts, Sony and The Movie Network.

We kicked off our new distribution alliance with the release of Saw 4 a few weeks ago, marking the second-highest opening for our partner Hoyts, which has been serving the Australian market for more than 30 years. We're also distributing video product under the Lions Gate brand with Sony as our partner and we have just formed a pay television deal with The Movie Network for our films and several of our television series.

Our entry into Australia, coupled with our successfully growing Lions Gate UK operations and our alliance with Maple Pictures in Canada gives us a strong presence in the world's four largest English-speaking territories. The films that we self-distribute through Lions Gate UK continue to over-index their North American box office performance by nearly 2 to 1 on a per capita basis. Just like Good Luck, Chuck, which is number one at the UK box office this weekend, we have focused our self-distribution initiative there on our strength in action, team comedy and genre movies. The films that we have been releasing have been significantly more profitable than when we sold our films to third-party competitors.

In addition to our strength and presence in English-speaking territories worldwide, we are also building on our momentum in the English and Spanish-language marketplace with our new strategic relationship with Televisa, the largest Spanish-language media company in the world. We will co-produce feature films and television programming with Televisa, both here and in Mexico, always taking into account Televisa's prior contractual commitments. We are delighted that they've chosen Lions Gate to help them access the English language U.S. market, just as they are helping to open the Latin American market to us. You will be hearing more about this partnership from us in the months to come.

Mandate is yet another example of our international growth strategy. We acquired Mandate in part because they operate one of the strongest third-party feature film businesses in the international marketplace. But like Lions Gate, they also operate with an entrepreneurial business model that has made them a profitable and consistent supplier of films to all the studios. We believe that their addition to the Lions Gate family brings a whole new dimension of growth potential to our motion picture business and a new profit center to our Company.

I would like to ask Joe, who has returned to the Lions Gate as the President of our Motion Picture Group and co-Chief Operating Officer, to briefly describe the strategic potential of the Lions Gate-Mandate combination. Joe?

Thank you, Jon. It's a pleasure to be a part of the Lions Gate family again. My decision to join Lions Gate was made with a specific view towards the potential synergies that could be achieved and the value that could be unlocked through an alignment of Mandate Pictures and Lions Gate. Now that I have been aboard for eight weeks and have the opportunity to see Lions Gate in action, I'm even more excited about the growth we can create together. I would like to touch briefly this morning on the Mandate business model, how we operate and fit into Lions Gate, as well as to share a few thoughts on some of the areas of focus and growth going forward.

Mandate does two things. It acquires, develops, packages and licenses broad appeal commercial films for worldwide consumption, and it is one of the premier international sales organizations in the business today. The fundamental difference between Lions Gate and Mandate is that Mandate does not self-distribute the films it makes. Its primary customers in North America are the major studios, and internationally it licenses its films on a territory-by-territory basis to the major studios and major independent distributors.

Although at first glance it may appear counterintuitive, post-acquisition Mandate is continuing to develop and produce its movies not for Lions Gate, but for its studio partners such as Sony, Fox, New Line and others. The idea is simple. In addition to Lions Gate's 18 to 20 films a year, we're adding four to six and Mandate pictures per year to the combined business. By distributing these through third-party major studios instead of Lions Gate, we are effectively expanding Lions Gate's distribution reach to as many as 24 films annually without adding infrastructure, overhead or P&A exposure.

This innovative approach is a win-win for everybody. We are also of course adding three -- we are also of course adding four to six pictures each year to the Mandate library which already holds more than 20 titles -- I'm sorry -- 200 titles. Mandate has two branded production operations -- Mandate Pictures and Ghost House pictures. Ghost House is a 50-50 joint venture between Mandate and Sam Raimi, the Highway acclaimed director of the Spider Man movies, and his partner, Rob Tappert. This Company was formed solely for the creation and distribution of horror content and to date has achieved five consecutive number-one box office releases with the [Gretsch] franchise, [Bogey] Man, Messengers, and most recently, 30 Days of Night, which opened October 19 of this year. Then there's the Mandate brand, which has been responsible for Marc Forster's Stranger Than Fiction, starring Will Ferrell; Harold and Kumar go to White Castle, and an exciting upcoming slate, which includes Mr. Magorium's Wonder Emporium starring Natalie Portman and Dustin Hoffman, which will be released by Fox Walden this coming Friday; Juno, starring Michael Cera of Super Bad and acclaimed young actress Ellen Page, which is slated for December 15 release through Fox Searchlight; the Passenger, starring the Devil Wears Prada's Anne Hathaway, to be released by Columbia Pictures in 2008, and the eagerly anticipated sequel to Harold and Kumar, which will be released on February 8 of next year.

To date, the combined Mandate-Ghost House slate has achieved a worldwide box office of more than $0.5 billion with a lot more to come.

In addition to its production operations, Mandate is one of the top international sales organizations in the business. The international sales business, and in particular the third-party representation business, is one of a number of areas where we felt we could unlock significant value by combining operations with Lions Gate, and in this area specifically we've already seen results. Upon closing the acquisition, we immediately consolidated the Lions Gate and Mandate international sales businesses under the Mandate name and appointed an exceptional executive, [Helen Lee Kim], to run the operation. In just six weeks of working together, this new team was able to attract three new high-profile properties for third-party representation -- a broad romantic comedy starring Renee Zellweger, a supernatural thriller starring Kevin Costner and a big-budget adventure fantasy starring Heath Ledger. One week ago, we took these three new films to the American Film Market, along with two films from Lions Gate's slate -- Brothers, starring Jake Gyllenhaal, Tobey Maguire and Natalie Portman; a romantic comedy, My Best Friend's Girl, starring Kate Hudson and Dane Cook. The results were fantastic.

Our newly combined effort resulted in the single-biggest market the either Lions Gate or Mandate has ever achieved with gross sales of just under $60 million.

With time and focus, we believe that there is still significant growth to be had from this third-party representation business.

Another area where we believe there will be value creation is through the sharing of our broad of largely distinct set of creative and business relationships. We're already working to monetize the expanded palette of relationships available to both our companies. As an example, Lions Gate Television, run by Kevin [Beggs], is currently recognized by the creative community as one of the most interesting and innovative places to create television content, largely due and such cutting-edge series as Weeds and Mad Men. The ability to offer a Lions Gate television opportunity to our Mandate talent relationships is a blue-chip calling card for the Mandate team and should result in opportunity for Lions Gate television as well.

We believe the same opportunity exists to drive value through Mandate relationships to the Lions Gate Home Entertainment Business. Although Lions Gate and Mandate are running their respective feature businesses as separate entities with separate business models, we suspect that we will be able to pool our talent relationships in this area as well.

Finally, I would like to touch on Lions Gate's theatrical acquisition production and distribution operations. At Mandate, we had the opportunity to work very closely with all of the major studios and to gain an in-depth view of how each of them operates. In the short time that I have been at Lions Gate, I have been able to watch the domestic theatrical operation release three number one box office hits, stand as a market leader for two months in a row and at any given time occupy as many as 20% of the quality screens in the country. Frankly, I have been amazed at the real capability this Company has to compete head to head with the major studios on any given weekend with a fraction of the overhead.

The Company's domestic theatrical business was already performing well before I arrived, so I see my primary job in this area as enhancing rather than changing our operations. What we need to do now is focus rigorously on the product mix and the deal mix. With this theatrical team, I'm sure that we will find ways to unlock even more value for each theatrical slot without taking on undue risk or increasing our P&A exposure.

Now that we've completed our heavy fall release schedule, we are planning an on-site strategy session for early December so that we can have the opportunity to get more granular about the fiscal 2009 slate. I look forward to updating you on our thinking on the next call. Jon?

Thank you, Joe. As usual, our Home Entertainment Group has continued to perform extremely well with its full array of product, including new releases, catalog exploitation and direct to video. Steve Beeks will take you through the quarter and provide a view of the current video and digital marketplace. Steve?

Thanks, Jon. This was a strong quarter for the Home Entertainment division for both packaged media and digital delivery, driven by new releases that continue to over-index on DVD, and our ability to generate revenue and margin from our library better than any company in the business. We are again on track to generate approximately $250 million of library revenue, translating into $90 million in free cash flow with steady wholesale prices and strong, stable margins.

In our new release business, the Q2 results are a good example of what we consider to be our core strengths, which is extracting maximum value from our product. All of the theatrical releases we released on DVD during the quarter over-indexed at box office performance, and three pictures -- Pride, Delta Farce and The Condemned -- had extraordinary results. We told you on our last analyst call that the underperforming films in the first quarter would ultimately lose approximately $15 million in aggregate, but the DVD results in those pictures were so good that we now expect that our underperforming Q1 films will lose an aggregate less than $5 million, and may even reach profitability on an ultimate basis.

Not only is our business strong, but we are operating in a more stable market environment than expected as recently as a year or two ago. Even though consumer spend for packaged media in the first half of the calendar year was down about 4%, it was mostly a function of the product coming to market, not broader industry trends, and we remain confident that the full year for the industry will end up essentially even with last year. We have already seen significant improvement in calendar Q3 which was flat compared to last year and the total box office of releases coming to the DVD market in calendar Q4 is 17% greater than in Q4 last year, which we expect to translate into Q4 growth in DVD revenue.

This performance reflects only the first revenues from high-definition DVD, which is a market that will be large, will operate at higher margins and will serve as a big growth driver in the future.

While we still don't have one unified format for the industry, all the available trends seem to confirm that we've made the right choice in selecting Blu-ray. In addition to offering superior content capacity and copy protection, a major benefit in an environment where digital piracy has become such a concern, it is still outselling HD DVD 2 to 1, despite the defection of one of the other studios. We expect to see Blu-ray hardware prices coming down soon, which should further boost growth in the market and substantially higher margins than standard DVD.

Strength and stability in our packaged media business is complemented by the long anticipated spike upwards in accretive digital revenues. Digital delivery is becoming a much more important and profitable part of our business. To give you an example of how much the conventional VOD and pay-per-view business is changing for us, we would have budgeted 3 to 4% of box office for our anticipated VOD and pay-per-view revenue for a particular title in the recent past. Today, releases such as Employee of The Month, Larry the Cable Guy and American Haunting and Crank are generating between 12 and 16% of box office in their VOD and pay-per-view windows.

Overall, VOD revenues climbed from $12 million in fiscal '06 to $24 million last year, and we have already achieved $20 million in VOD revenue in the first six months of fiscal '08. Our broadband electronic sell-through revenue also continues to grow. We've had over 2.5 million downloads of our films and television shows to date with that business expanding in virtually every quarter and generating significant revenue from our library. It is worth noting that all of our digital delivery business is done with no supply chain and very little overhead support.

The new high-definition DVD format, coupled with digital delivery, will stimulate continued growth for our home entertainment businesses least as far out as 2011, the longest time frame from which we can project with a reasonably high level of confidence. Every aspect of our business is solid -- catalog exploitation, new theatrical titles on DVD, direct-to-video product and digital delivery. As we leverage our content into new entertainment technologies, distribution platforms and market niches, we expect our home entertainment revenues and cash flow to continue to grow and blended margins from our mix of packaged media and exciting new digital applications to increase over time.

Now back to Jon.

Thank you, Steve. Our television business also performed very well in the second quarter, generating revenues of $109 million and keeping us on track for our anticipated television production revenue of approximately $200 million for the year. Weeds has been renewed for a fourth season, bringing our total to 52 episodes and keeping it well positioned for syndication next year or the year after. AMC has picked up a second season of Mad Men, which will release on video May 2008. Just like Weeds, we expect it to do very well on DVD and bring fresh eyeballs to this critical favorite. We recently sold 13 episodes of our new horror anthology series, Fear Itself, to NBC. Concurrent with its network airing, the show will also be available as fresh programming for FearNet, strengthening both the Lions Gate and FearNet brands. Fear Itself is a prime example of our ability to cross-promote new content on our recently launched digital media distribution platforms.

We are also launching 26 episodes of our Speed Racer television series on Nickelodeon's Nicktunes with movies culled from the television episode showing on Nickelodeon itself. Our series will debut one week before the major Warner Bros. motion picture produced by Joel Silver. And Speed Racer is already turning out to be a licensing bonanza. We have over 25 licenses covering all categories of merchandise with the latest being a deal with Toys 'R' Us for a retail exclusive to launch the brand.

We are seeing increasing contributions from our Debmar-Mercury syndication business. Ira Bernstein and Mort Marcus have assembled a powerful and diverse portfolio of product for syndication, including House of Payne, Family Feud, South Park, The Surreal Life; and six seasons of our own paranormal thriller, The Dead Zone. Debmar also recently announced the syndication launch of two series off Discovery Channel -- American Chopper and Deadliest Catch -- as well as acquiring worldwide rights to Trivial Pursuit, America Plays for syndication cable and perhaps network distribution. We believe that this is another important property and Debmar will distribute it worldwide through their newly created international arm.

Another of our recent investments, FearNet Channel, has just completed a very successful first year. It has emerged as the number one horror website in America for both uniques and registered users and has streamed over 100 million on Web and VOD since its Halloween 2006 launch, including 10 million views on VOD this past month. With the addition of original programming, such as the Fear Itself television series, we expect that both its viewership and cross-promotional opportunities will continue to grow.

We are pleased especially to announce that as of today, Cox Broadcasting has become the latest major cable operator to carry FearNet. With a growing roster of carriage agreements with Cox, Comcast, Bresnan and Verizon, FearNet is now available in over 16 million VOD-enabled homes and we believe that it is well on its way to becoming a fully distributed digital network.

We have already told you about recent initiatives on the Break, Debmar, Mandate, Lions Gate UK and Lions Gate Australia fronts. Viewed together, these initiatives show that we're doing exactly what we should be doing as a growth company -- significantly growing our topline, reinvesting our generated cash into new businesses, maintaining a healthy balance sheet, emphasizing long-term value creation and capitalizing on all of the opportunities provided by new technologies, new platforms and new audiences.

I will now open up for questions.

(OPERATOR INSTRUCTIONS). Michael Savner, Banc of America.

I have a few, if that's alright, one kind of just broad strategic and then a couple of quick ones on the quarter. First, can you maybe complete (inaudible) at the bridge to what you talked about for the majority of this call, which is kind of highlighting the deals you've done over the last couple of years, back from Redbus to Debmar, and now Mandate, all of which seem strategically right in your wheelhouse and seem to be delivering? But you're still kind of a little bit vague on your longer-term financial implications, saying that you'll be above the plan you gave for this year, but you didn't give much more granularity. So can you take us through the bridge of where you think the financial upside is going to be, both in fiscal '08, and then probably more importantly over the next one or two years to really move you far away from this kind of a run rate you've been in at around $100 million of free cash flow to something meaningfully more? It seems to be from your commentary, you feel comfortable that's where you're going, but if you can maybe just give us a little more granularity, that would be helpful.

That's a pretty broad question, Michael. I will try to be helpful. We certainly, as you know, we always point everybody to revenue, free cash flow. And I would say for the year, we are probably looking at 10% plus over achievement on both of those majors. That's with very little contribution from any of those businesses. A little bit from Mandate, probably about $30 million on the revenue side, very small contribution operating cash flow. And obviously FearNet, definitely negative, at least for another 1.5 years, something like that I would say. In terms of Redbus Australia, we'll start to see some positive contribution almost immediately I think from Australia, given again that the way we have set up, we definitely believe that we will be doing better off in that area in terms of contribution from our titles. The way we have it set up, we don't have to expense our P&A spend there. So that's a pretty unique setup.

In the UK of course, I think we're going to start definitely seeing positive revenue and free cash flow, but again, there we are expensing the P&A. So when you look at titles like Saw 4, Saw 3, Good Luck, Chuck, very significantly more ultimately contribution than when we were selling to third parties. But as we grow that business, you will definitely see some expensing from the P&A side.

I would say, overall, this was a growth year for us, and the reason it was is we planned it based around our Pride Pictures partnership. So this year, we will probably expense close to 375, $380 million of marketing expense in film and video, and we had a partner for probably close to $100 million of that. And, clearly, that is a year where the lines between free cash flow and operating cash flow would diverge. Next year, it should swing back fairly heavily in the other direction, if that's helpful.

Overall, we definitely feel that, even with the lines crossing a little bit more, we're definitely heading yet again to another year over $100 million in free cash flow, but it's still too early to tell you what kind of growth we might expect for next year.

Okay, thanks. And maybe one follow-up and I will save the rest for off-line. But you had hinted I think on the last earnings call that you were expecting a nice pop in television revenue this quarter, and it still far exceeded what we were looking for. Can you give us a sense -- was any of that timing unexpected to you? And if not, maybe more granularity on how I think about the next two quarters, because I would assume you're just giving very conservative guidance because for the next two quarters your revenue in television would have to be down about 25% to be at that $200 million level. So I guess that's a two-part question.

I will take that one. It was actually on track. I think I had indicated that that would be a large quarter, Q2, and I would anticipate you will see a ramp-down, You can do the math, but Q4 will probably be smaller than Q3. So it was definitely ramping down, but all within plan and anticipation.

I do think that what you will start seeing again next year, and I've said this before, is Debmar-Mercury will definitely start contributing more higher margin revenue in fiscal '09.

David Miller, SMH Capital Markets.

Congratulations on stellar results. Just a couple of housekeeping items. Felt, investment spending in film was huge at $247 million. If you could quickly detail what portion of that was within TV spending, that would be helpful. And then, Michael, just another housekeeping item here. Correct me if I'm wrong, but I think in your corporate cash, you do have some exposure to adjustable-rate preferreds. And within that body, is there any exposure to this sort of sub-prime CDO imbroglio? I have a feeling the answer is no, but I just want to make sure, I just wanted to hear it from your guys.

Last quarter, we had about $80 million spend on TV. This quarter, it's about $30 million. I kind of indicated that there was going to be a ramp-down on how much we would spend on the TV product, so from 80 Q1 to 30 Q2.

And Michael?

And the answer is no, David, to your second question. We don't have exposure. We moved out of the adjustable-rate preferreds over the last eight months. So I'm happy to report that all of our money, all of our cash and cash equivalents, is sitting in money market funds.

Outstanding. Thank you.

Doug Creutz, Cowen & Company.

Could you talk about maybe, and (inaudible) alluded to it a little bit earlier, you had about a single-digit television gross margin in the first half of the year versus I think around 10% last year. Could you talk about where you think it could wind up for the full year? And then over the longer-term, where do you see that ramping to and over what time period?

Last year, the mix of product was -- I will be candid -- it was primarily revenue from the Weeds series. Because it's doing so well, it's a high margin. So it was kind of disproportionately higher last year. I think I was running like 79% DOE last year. This year, I'm running close to a 10% margin. 10% margin is more in-line as to where the television business is. However, as Debmar-Mercury ramps up, we expect that margin to grow.

Typically -- we're still a reasonably young television business. Typically what happens, because we cannot put ultimates on the back end of TV shows until they're well into their third, fourth, fifth year, for an early company or a young company, those margins will stay low. Debmar is actually a little bit differently. Being mostly a syndication or a distribution business, those margins are higher immediately. So both as the mix changes and as the series mature, you will see those margins definitely head up.

Lloyd Walmsley, Thomas Weisel Partners.

I was wondering if you could talk a little bit more about the licensing opportunity on Speed Racer and how that might flow through your financials?

Well, licensing will flow through the financials the same way any revenue stream would. It's still really early to tell, but this does look like one of those kinds of properties that should succeed and stay on the air, that it will be -- the margins will be considerably higher because that is an alternative revenue source that typically we have not had on most of our series.

Alan Gould, Natixis Bleichroeder.

I have a couple of questions. First with respect to the timing of your film releases, you seem to be very successful when you're throwing up sort of the off-season for the majors. And I noticed there's no big Christmas type releases. Is that what we should forward -- look at going forward, expect that you're going to avoid the Thanksgiving to Christmas and the Memorial Day, the Fourth of July type periods?

I think that it's definitely typically our game plan, but that doesn't mean it will always be that way. I think the key thing is to be -- for our Company -- to be opportunistic, and almost every one of the titles that we [addressed] were successful with the last five releases. We actually moved the release date on each one of those at least one time. A lot of people, for example on 3:10 to Yuma, felt that that September 7 date was really going to be a soft weekend, and I don't think there are soft weekends any more actually. I think there's an audience out there that is always available to see movies, if they're moves that look interesting to them that are well marketed. And certainly, that's what we found. We got 3:10 out of a difficult area where there were a tremendous amount of releases later in October, moved it up really significantly, almost four weeks. So I think -- you could say never, but I will say, again, it's the old Ty Cobb philosophy of hitting them where they ain't. So more or less, I would agree with you.

And Felt, your unreleased -- your completed but not released film cluster, up to $81 million, up from $19 million six months ago, I assume this is just preparing for the strike?

No, those are the films that we have coming out in the current quarter. We have some large releases coming out, so that's just the big releases of 3:10, the Saw 4's, things that were occurring. Those were somewhat high budget films.

Jim, I would've thought all those would have been released. I'm talking about completed but not released films. The only one that would have been completed and not released at September 30 I would have thought would have been Saw 4, which is not the most expensive film in the world.

While Jim looks that up, Alan, Michael. What I was going to say is, to your point, however, as I mentioned, we certainly have either in production or in the can the vast majority of our 2009 release slate.

Just to answer that question -- Why Did I Get Married, clearly significant, large amount -- and we have a lot of Mandate product that's geared up, getting ready to release. Those two items -- I don't want to be too specific -- totaled $65 million. And a big chunk -- and I will be a little more specific -- if you look at the Mandate, you can see that Mandate product when we bought them was $62 million of film costs coming in, a lot of that completed, not released.

I would say most of it is the Mandate product actually.

And last thing, Felt. Who's playing the [Lou] (inaudible) for Hollywood this time?

(MULTIPLE SPEAKERS) Maybe it's Arnold. I think it's a team effort. We're not really that involved, we're not a signatory. It's probably good news, and the bad news -- we're not in the room is the bad news. The good news is, we have a little more flexibility than all of the major studios. But I could even predict what's going to happen at this point, other than, as Michael said, we're pretty much locked and loaded, particularly in our film business, to prepare for a long strike.

Tom Eagan, Oppenheimer.

Fiscal '08 certainly has been a growth year with a lot of acquisitions. Should we expect more of the same in fiscal '09, or should we expect more focus on just other parts of the business? And I guess as part of that question, what are your thoughts on what you may do with the increasing cash balance? And then I have a follow-up.

In terms of the second part of your question, which refers back to the first part of acquisitions, we expect to finish this year quarter well over $300 million. Absent what Michael may choose to do in terms of stock buyback, we certainly know that there is some pressure from our shareholders in terms of not carrying too much cash. And so we're going to continue to look at acquisitions on an opportunistic basis. So I certainly could push those out of the picture.

In terms of the overall economics, again, next year, we should definitely narrow the lines between free cash flow and operating cash flow. For example, this year's slate, I think we will take a loss for the fiscal year of about $80 million, should swing well into a positive, over $100 million for next year. I don't expect -- and Joe, you can jump in if you would like -- I don't expect an increase in investment and film, nor in marketing. Actually I would not be surprised if we pushed it down a little bit next year. So I think you are definitely looking for -- even though it's not a key metric, I think -- my guess is, you're looking at positive net and operating cash flow for next year. Joe, do you want to comment on that at all?

I think you've covered if off pretty well. I don't really see, based -- again, I have been here eight weeks, but looking at the slate for next year, I don't really see a need to increase investment in film. And in fact, as you had indicated, our goal is to actually bring P&A down a little bit.

I'm going to add one thing about the cash. As you can see from our Q, we bought back just a little over $10 million worth of stock. There is an advantage in turbulent markets like we have certainly seen that have an unlevered balance sheet as, for example, private equity firms recycle out of investments that they've made, multiples come down in some of those transactions and it's nice to have kept our powder dry, particularly in times like this.

Just a quick follow-up. In fiscal '09, should we expect the same number of wide releases not in the Pride [fund] -- Saw, Tyler Perry, and then maybe one other?

I'm sorry -- say that again Tom.

Should we expect the same number of wide releases not part of the Pride Film Fund?

The only thing exempted from that Fund are some of our franchise pictures, and the way that fund was structured was 23 releases that are coming through. So outside of the franchises, that we will just go according to that schedule.

Yes, most of the pictures will be under the Pride Picture partnership.

Barton Crockett, J.P. Morgan.

Thanks you for taking the question. I just wanted to be clear on one thing, really a nit-picking thing. Just with the strike, you indicated that you're locked and loaded on the film side. I was wondering up you could update us where you are on the TV production side for this year and for fiscal '09.

I thought I left that hole pretty wide open, Barton. The answer is -- in a short strike, we're not affected at all. In a longer strike, some of the renewals, particularly Weeds, Mad Men and Crash, our new order from Starz, could be affected. Of course, in television, again, given the fact that we're budgeting for other shows, new shows and pilots which could be potentially deficit shows, meaning negative cash flow, it's very possible in television that even the long-term, our overall financials, might not be significantly affected. Probably even in the short-term, it could go positive for us. But certainly in the long run, it could hurt the economics from -- the short-term economics -- from Weeds and Mad Men.

Okay. And just to understand on Weeds and Mad Men, are you basically done for -- have you delivered all you need to for this television season, and is it the next television season that we'd be thinking about, or is it part of this season?

That's right.

And then when you talk about the narrowing of the free cash flow and operating cash flow, again, just to make sure what I am hearing there, when you say operating cash flow, are you talking about the income statement and not the statement of cash flows as basically like an operating income or EBITDA type proxy. Is that correct?

It is -- basically, it's EBITDA. Obviously, as we say that, this year wherever we are guidance-wise coming to positive free cash flow of $100 million, as we swing to profitability next year, and we've said free cash flow basically similar, $100 million, obviously the two lines are coming together.

Alright. And then on library, are you prepared to give us some type of disclosure of what it was this quarter and what the year-to-year change in that was, in library revenues?

We are basically on track with last year, essentially flat, and we anticipate the same performance we had -- essentially the same range and performance we had last year.

And that was like $0.25 billion in revenue, it was approximately $90 million in free cash flow, Barton.

Alright. And then the final thing here is, could you just walk us through -- now that Pride is hitting the statement of cash flows on the P&L, just give us a big sense of exactly how that affected accounting for things like P&A both in the income statement and in the statement of cash flows?

Sure. As we talked about the call, we basically had $84 million of expense [pouring] through on the P&L, yet they have me $42 million in cash. So my P&L got hit by $84 million, but it's really cash flow. My net impact is only about 42 of money that I have spent.

So that cash flow came in, what, the film obligations line, or --?

It shows up on the participation and liability line item.

Alright. And then is that money that will be paid back out of earnings from the film over the life of the film?

It will be paid back out of cash receipts over the life of the film. And we talked about this year, our slate whatever being negative 80. Again, it's more than just Pride, it will be over 100 next year. So as cash comes in, we'll pay them back.

And Barton, you know this, but obviously the waterfalls work on a film fund. We would take our distribution fee off the top of gross revenues.

Andy Nasr, Raymond James.

Wondering if Mandate's film library encompasses domestic and international rates. And I will just ask all the questions now. But when you look internationally, are there any other areas that you're looking to expand in by acquiring distribution assets? And on the Home Entertainment side, distribution and marketing cost, looks like they were up 19% year-over-year. So I'm just wondering how to think of that in the context of the library [emergence], which I think you said would still be robust. And the last question is -- do you anticipate that the outcome of the strike would have a significant impact on your margin by potentially having to carve out some of additional profit participations?

Can you clarify that last -- third question?

The last one? The outcome of the strike? If you guys have to carve out some profit participations to -- well, just related to the emerging distribution channels. I'm wondering how that might affect the first cycle profits going forward.

I would answer that one. It's very de minimus. Obviously I cannot anticipate the result, but just would be very, very de minimus, if anything at all.

Video marketing, do you want to address that, Steve?

Yes, Andy. Primarily video -- the increase in video marketing has a lot more to do with timing of releases. Obviously, the new releases carry with them more significant marketing campaigns, consumer marketing campaigns. And as to library margins in general, they are pretty much in the same range as they were last year. And as a matter of fact, we would also point out, our average wholesale prices on our new product, while the library's remaining constant, new product actually has improved margins and improved average wholesale prices versus last year.

Joe, do you want to take the question about Mandate?

Yes. The Mandate library, all of the first release films, the bigger titles in the library that were created over the last short-term here the last three to four years are all worldwide rights. So the library is both domestic. Those rights tend to come back from the major studios in anywhere from 12 to 15 years from first release. And internationally, they come back to the library anywhere from seven to 15 years. And then there is a group of -- then there is a group of titles, a little over 200 titles, that are largely domestic with some smattering of international rights in them that we acquired.

Great. And the last question, just international expansion opportunities after Australia?

I think as I've described before, Andy, the fact is that where we saw the biggest opportunity for self distribution was English-speaking. It makes a lot more sense for us. We create typically one set of materials, not that they're not customized by our various other distribution outlets. But at the end of the day, that is where we really saw the opportunity to self-distribute and be willing to take on. Although I said in Australia, we don't take on the P&A risk at the end of the day where we were willing to take on the P&A expensing as ion Lions Gate UK. So we are not abandoning the -- we are not abandoning the model that we have in our film business of pre-selling the international marketplace to reduce our risk. I could see maybe one or two other territories over the next two or three years if we had the right partner in that territory. But, again, we have mostly fulfilled what we set out to do, which is the opportunity in the English-speaking marketplace. I will say, however, in terms of expanding FearNet as a channel and looking at other channel opportunities internationally, looking at perhaps India and China in terms of perhaps a some funds that we believe we could raise and grow some interesting indigenous opportunities in those places. We're definitely looking at those opportunities and working on a couple of plans right now.

Matthew Harrigan, Ferris Baker Watts.

Congratulations on the results, firstly. Two questions. I think Televisa has been in the movie business for awhile, and it has been a fairly peripheral business. Can you say if they're expanding fairly aggressively, and is that going to be a significant business for you domestically as well as down in Latin America? And then, secondly, could you just update us on where you are on the Atlas Shrugged situation?

I will take the second one first, Matthew. We have just received on October 31, right before the strike, we reserved a draft from Vadim Perelman that we have read and love. But we're in the process of -- again, it was 161 pages and we want that script to be down to about 135 pages. So all I can say is that, so far so good, and we keep trying to make a step forward there.

In terms of Televisa, I cannot speak to them in terms of what their interest and how they're going to expand their various businesses. I can tell you that the partnership that we contemplate with them involves lots of different areas -- video, distribution of some of their library, TV format exploitation, co-production of television shows, English-speaking and Spanish-language and co-producing feature films together with them. So we are really excited about the relationship. And as we develop it, we'll certainly let everyone know what we're doing.

David Joyce, Miller Tabak & Co.

I just wanted to see if the big volume in TV, if that was more an acceleration ahead of writer's strike, or was that scheduled that way, or are the financials there going to be kind of decelerating for the second half?

Yes. I think, as Jim said, the TV deliveries were exactly as we forecast and budgeted. It will slow down a little bit. And again, we're on track for about $200 million.

Everything else was answered, thanks.

David Bank, RBC Capital Markets.

Thanks very much. I have a handful, sort of last but not least, hopefully.

We'll answer at least one of them.

So just first to clarify something you said. I think you said that the current year's slate would lose something like $100 million, and you expected that to swing to a positive next year. Can you clarify -- did you mean on the net operating -- in the sort of income statement line versus the free cash flow line? And was that just the Pride slate, or was that your overall release slate? And is there going to be a $100 million swing in net income contribution next year? I guess first to clarify.

The second one was -- just in terms of the stock buyback, good to see you coming in for the 10 million buyback, but the stock touched below 9 at one point in September, and just kind of curious why you didn't get more aggressive on the buyback. And then last question, on the home video side, a lot of really interesting color on how the VOD revenues are growing. I was wondering, given that there are only so many hours in the day and sort of so much content we can consume, when do you think the shift occurs into the dominant media consumption moving from people going out and buying DVDs versus the primary consumption method being watching video on demand on the VOD side?

I will answer the home entertainment question first. Obviously, digital delivery is growing dramatically, and our view is that overall it's going to increase the size of the pie as more than it being a replacement for DVD purchases. As to the impact on the DVD purchase, it's really difficult to project when certain consumers start -- because some consumers will make the shift. It's difficult to predict when some consumers will make the shift. The packaged media business, our view is packaged media is going to be extremely healthy, at least for the next four or five years. So I would -- not before then.

Thanks.

I will probably be considered a bad parent for saying this, but over the weekend, I noticed that I took my kids to a movie, then I saw my younger kids watching something on a DVD. They watched a bunch of television, and my 15-year-old actually watched a movie on her computer with her friends. So what's exciting for us about our business is the array of platforms that the consumer is starting to watch content on. Michael, do you want to talk about the stock buyback?

One is, it's important for you guys to know that we are subject to blackouts and we are subject to trading our stock -- be restricted in trading our stock in certain scenarios, like for example when an acquisition i.e. Mandate is in the works. And then lastly, we are subject to our average daily trading volume, the percentage of stock that we can buy. For example, this week, we are -- the average daily trading volumes, [we did] 130,795 shares, and that means that we can buy a percentage of that on a daily basis or buy a -- one block. So we were in the market looking for blocks at certain times, couldn't find a lot of them. But it is important to note that, as you can see from the Q, the average price paid, we tried to be opportunistic [where] the average price paid was about $9.14 for the shares that we bought.

And on your first question, David, what I was talking about was our entire slate, whether it included Pride Pictures partnership or not, would lose date from an operating cash flow or EBITDA contribution, about $80 million this year would swing to a positive -- probably looks like over $100 million next year, which means a swing not of $100 million, but a swing actually of about $180 million. And therein, if indeed we do as Joe suggested keep our marketing expense and our investment in film [stead], if you will, it certainly does look like we can avoid being profitable for next year. Does that help?

Any more questions?

No, there are no further questions.

Thank you all look, we look forward to seeing you on the next call.

Ladies and gentlemen, this conference will be available for replay after 12:30 Eastern time today through November 19. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 891844. International participants dial 320-365-3844. (OPERATOR INSTRUCTIONS).

That does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.