Starz Entertainment Corp (STRZ) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the fiscal 2009 Q2 earnings conference call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given to you at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host, Mr. Peter Wilkes, please go ahead.

Thank you for joining us on today's call. Before we begin our regular call, we would like to share with you an exclusive world premiere of a piece of our content.

If you'll go to your computer and log on to www.lionsgate.com/christmas, you will be able to watch the clip. We will pause for two minutes to let you view the clip and then we'll begin the regular call. Let me repeat the link, www.lionsgate.com/christmas. You can pull up that link now. Please come right back because we will conduct the regular portion of the call in two minutes sharp.

We will now return to the conference. Mr. Wilkes?

We hope you enjoyed that sneak preview. We will begin the call with remarks from our CEO, John Feltheimer; Vice Chairman, Michael Burns; co-COO, Steve Beeks; and Motion Picture Group President and co-COO, Joe Drake. Our Chief Financial Officer, Jim Keegan; and Chief Accounting Officer, Rick Prell, are also on the call.

After the remarks, we'llopen the call for 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 annual report on Form 10-K filed with the SEC on May 30, 2008. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. John?

Good morning, everybody. Thank you for joining us this morning. I wanted to start off today's call with a little show and tell because while it's a little early for Christmas, you can tell we are really getting into the Christmas spirit. This film is one reason why we are confident of our upcoming slate.

Joe will talk about the slate in a few minutes and Steve will discuss continued growth in our home entertainment, library and digital businesses. Michael will then discuss current financial position, stock performance and guidance. First, I'd like to offer a few broad thoughts about the current state of our Company and our industry. As you know, we are coming off another strong quarter, in which we continued our top line growth, up 8% for the quarter, and up 23% for the fiscal year to date.

We also had strong free cash flow in the quarter, and our EBITDA improved $17 million from last year's Q2. Our EBITDA for the fiscal year to date is currently $81 million ahead of where we stood at this time last year. Before Michael gets into the factors driving our numbers, I would like to touch on a few key points regarding the broader market environment. The slowing economy has implications both good and bad for all areas of our Company, from our stock price to our individual businesses.

I want to run through a few quick examples of areas where the economy may be adversely affecting the broader industry, but where we actually see opportunities for our own businesses. As I'm sure you've all heard from recent broadcaster analyst calls, both national and local ad buys are soft. A weaker national ad market could potentially put some pressure on broadcast and cable sales for our new film releases and our library product in the free television window.

The softer local ad market is putting some pressure on "South Park" and other [Debmar] Mercury shows in or going into syndication, although our television guidance remains unchanged. This add market also creates more opportunities for us as a media buyer, likely enabling us to achieve reductions in our media spend. We expense almost $400 million in annual theatrical and home entertainment marketing costs. To reduce even a small percentage of this would be a significant cost saving.

I would also like to note the strong performance reported recently by National CineMedia on in-theater advertising. This speaks to the continued strength of the theatrical business in recessionary times.

A second area of opportunity is M&A activity. While we are reluctant to use our stock as currency at its current levels, we believe that our overall M&A position is stronger than ever. We had nearly $250 million in cash at the end of the quarter, an untapped $340 million credit facility and no corporate bank debt.

As multiples come down on some of the more attractive assets in the marketplace we are in a good position to capitalize on their availability at reduced prices. There is also opportunity in the international marketplace. The weaker economy worldwide is making our buyers more selective in terms of the product they acquire. But with our strong Lions Gate slate and significant product added from mandate and output deals with Relativity and Gold Circle our international sales continue robust and comparatively unaffected. We see an opportunity to improve an already strong market share.

In fact, as Joe will mention, we are looking at another strong foreign film market at AFM this week. In addition, we built a highly scalable global distribution infrastructure that is difficult to replicate and increasingly attractive for third parties to use. We expect this infrastructure to grow in importance as third parties such as Relativity, Miramax, Gold Circle, StudioCanal, and Televisa increasingly want to put their lines of business through a strong distribution pipeline already in place rather than buying building, or expanding their own especially in a challenging market that discourages new investment.

This is one of the many assets that has given no meaningful value on our balance sheet. We may see a similar phenomenon domestically with opportunities to scale an equally vibrant DVD distribution infrastructure that already includes the product of companies such as Marvel, ABC and Hit Entertainment.

Finally, we are seeing less investment in feature film product as major studios cut back their slates and less financing is available to independents. As we discussed on the last call this is a net plus for us. With a full pipeline backed by strong financial reserves already in place, we are well positioned to capitalize on a reduction in the recent glut of film product and we are increasingly finding creative ways to access premiere A list talent.

In these and numerous other areas, our challenge is to remain sufficiently nimble to capitalize on changes in the marketplace. The current environment has given additional impetus to some cost saving steps that were already in the works. Last Friday we reduced our overall head count by 8% as part of our commitment to continue growing the Company with the leanest infrastructure in the business.

This has more to do with our longstanding commitment to disciplined growth and our desire to keep our overhead to revenue percentage in the 8% to 9% range rather than with any impact of the macroeconomic environment. Our challenging economy simply underscored the wisdom of doing the right thing to keep our business lean and agile.

We will not cut back on our investments in new businesses that continue to drive our growth. I'd also like to say a few words about our television company. Television started off as small adjunct to our film business eight years ago. But as people are beginning to notice, it's becoming a full partner to our feature film company. We have a target to double our current $250 million business in the next two to three years, and along the way generate high value long-term assets like Madmen, Weeds and House of Pain, in addition to creating new shows as such personalities as Paris Hilton and Wendy Williams.

Madmen's recent Emmy award for best drama series serves as a exclamation point to this growth. Although we've given it no net value on our balance sheet, Madmen is a hit show that has already demonstrated its long-term worth. It just finished its second season with its highest rated episode yet, nearly doubling its previous year's ratings.

Weeds is moving towards a syndication launch next year, and Showtime has already picked it up for a fifth and sixth season. Both series figured prominently in the success of our home entertainment business in the second quarter as they generated strong DVD sales and hundreds of thousands of digital downloads. Our new drama series, Crash, had a strong debut on Starz. Scream Queens got off to a solid start on VH1, and our 50/50 joint venture with Ish Entertainment now has six shows positioned to launch into the reality space this year and next, including Paris Hilton's My New BSF which is already rolling out internationally as it airs on MTV here in the U.S.

Nurse Jackie, starring the Sopranos Edie Falco, began production this month of the first season for Showtime. We are also prepping a two-hour backdoor pilot for IFC, marking IFC's first foray into scripted series continuing our trend of identifying premier content for cable networks. In the past two years, we have made shows for 10 different networks including Showtime, USA, TBS, AMC, Lifetime, Spike, MTV, VH1 and now IFC.

Debmar-Mercury is another example of third parties putting their lines of business through our distribution infrastructure. Debmar syndicates or distributes Hasbro's Trivial Pursuit, Paramount's South Park, Tyler Perry's House of Pain and Meet the Browns, and Discovery Channel's American Choppers and Deadliest Catch. And this week E Entertainment announced their True Hollywood Stories brand will be syndicated through Debmar's worldwide distribution infrastructure.

Debmar-Mercury has emerged as the dominant player in the independent television syndication space with nearly a dozen major brands and Ira Bernstein and Mort Markus are adding new content to their distribution pipeline all the time. Mandate is another piece of the more than $170 million we've invested in new businesses in the past two years. We have not only been able to efficiently consolidate our international businesses under the Mandate banner, but in the past year have emerged as the top international theatrical sales organization.

On the domestic side, Mandate has three hits so far this year, Juno, Nick and Nora and Harold and Kumar II and has a number of other films already in production or ready to be greenlit. As you saw, Mandate added another $20 million to our top line this past quarter. One of our most exciting areas of growth is the creation of new channels. Fear Net with partners Sony and Comcast has more than doubled the subscriber base to $30 million in the two years since its launch, and has emerged as the number one On Demand channel on Comcast.

We see opportunities for replicating the Fear Net model in key markets around the world. As a matter of fact, we have already announced our plan to launch two branded channels in Asia in the future. We're excited about our premium channel with MGM and Viacom. We feel it's imperative for all content providers to look for ways to control their destiny through packaging, windowing, pricing and programming their own product. If you listen to [Philippe Delmond] on his last analysts call you heard him say we are well along in a number of distribution conversations.

We are planning to announce the new channel's name soon and we look forward to launch next October that will feature 17 films from the James Bond library, the Indiana Jones franchise, this year's blockbuster hits Ironman and Cloverfield, Rocky, the Pink Panther, the Godfather, our own Saw and Tyler Perry franchises and down the road, the new Star Trek. I just saw that trailer recently at a programming meeting and it looks terrific.

In the digital space, we see the Break.com Network as an important online channel. We're very pleased with the recent emergence as the number one online destination site targeted at targeted at young males 18 to 34. In fact, we've already been offered more than twice the amount of our original investment.

For all of our excitement, these investments share one common property, their value is not reflected and meaningfully anywhere on the income statement or balance sheet. I would therefore remind you that even as we continue to sustain our double-digit top line growth, generate positive free cash flow and move steadily towards the significant positive earnings that Michael will discuss for next year you should be equally focused on some of the less visible assets we are continuing to build as part of our unique value proposition.

These assets include the number one international sales organization, the number one branded VOD channel, the number one young adult male oriented site in the digital space, Mandate, the number one independent film unit with three hits so far this year, a premier home entertainment business, a world class global distribution infrastructure and one of the biggest film and television libraries in the world. Added together, these assets give us a scale and market position that translates into enormous value in a marketplace hungry for entertainment. I'd now like to turn the call over to Joe Drake.

Thank you, Jon. I'm getting back from the AFM where the team is turning in an outstanding performance in a very challenging global market. The group, led by [Hanway Kim] is on its way to closing $70 million in sales on Lions Gate and third party pictures. This outcome is important because it demonstrates the scalability of the Mandate sales organization and affirms our position as a dominant leader in the international film licensing space.

As I discussed on the last call our fiscal 2009 theatrical release calendar is more back loaded than usual. During this past quarter, we kicked off a schedule that will see us release one movie every two weeks from September through the end of the fiscal year. Looking at the highlights of the quarter, the Tyler Perry franchise continues to show remarkable strength with Tyler's The Family That Prays delivering solid results for us.

Three of the quarter's other wide releases, My Best Friend's Girl, Bangkok Dangerous and Disaster Movie came in with softer than expected box office results. To put it plainly, I'm disappointed with this performance. But consistent with the Lions Gate model on each picture we either had partners with whom we shared financial risk or as in the case of Disaster Movie our risk was limited to a minimal production outlay and the P&A.

With our proficiency at over indexing relative to box on DVD, our strong execution on television and digital distribution platforms these three films will combine to lose less than $15 million. Before moving on, I want to address concerns some have expressed regarding a perceived shift away from our core theatrical model towards bigger films. Let me be very clear, our model has not changed.

I believe this misconception is born out of an understandable, but incorrect assumption that a given film's budget equates roughly to our risk position. I want to take a moment to highlight the often considerable difference between a film's budget and Lions Gate's net risk position on that film. Let me give you two quick examples. 3:10 to Yuma, which was released last fall, is often cited as a picture with a budget range far outside our traditional model.

But Lions Gate paid a small fraction of the budget for international rights and did not pay in advance for the distribution rights in the domestic market. With more than $50 million in domestic box office, and exceptional DVD performance Lions Gate will make what Michael likes to call a fair New England return without sacrificing our model.

Transporter 3, hitting theaters November 26, provides another good case study. This is a great looking film with huge production value and a budget comparable to 3:10 to Yuma, but Jason Constantine, our President of Acquisitions, was able to secure the picture for the domestic market for a small portion of the overall budget very much in line with our historical model.

Looking forward our mantra of risk mitigation remains unchanged. We are committed to a product mix in each slate that contains both right priced acquisitions like the ones we just discussed, and wholly owned productions such as My Bloody Valentine that carried lower intrinsic production costs and offer breakout potential. Above all, we are committed to maximizing the value of each of our distribution slots.

Let me walk you through the Q3 and Q4 releases. In October, we released Religulous and Saw V, both of which are already out performing our estimates. Religulous has grossed more than $13 million at the box office and will become the seventh highest grossing documentary of all time. Saw V is seeing very similar box office results as Saw IV which is an amazing testament to the continued strength and vitality of the franchise as well as the creativity of the minds at Twisted Pictures. With just five releases, Saw has now passed Friday the 13th, Halloween and the Nightmare On Elm Street franchises as the highest grossing serial horror franchise of all time.

Transporter 3 and Marvel's Punisher War Zone have both achieved consistently strong test results. We expect (inaudible) to theatrical audiences and will look great on Blu-ray DVD. On Christmas, we release Frank Miller's The Spirit. As you saw firsthand at the opening of the call, Frank has delivered a thrilling and visually stunning film that is timed perfectly for the holiday season.

Then on January 16, we release My Bloody Valentine and we expect it to be a pivotal 3-D event. With My Bloody Valentine we have positioned ourselves at the cutting edge of a new digital technology that promises greater excitement for our audiences and higher margins for our motion picture business. We continue to grow the Tyler Perry franchise with release of Madea Goes To Jail in February. This film is based on Tyler's most popular play ever. We expect Madea to be one of the strongest box office performers to date.

I will take a more detailed look at our 2010 slate next quarter but I want to note we have decided to move two key releases up to April. Crank 2, starring Jason Statham, and The Haunting In Connecticut, a true story of terrifying of The Exorcist will open wide to audiences in April.

Michael will talk about the impact of the current year, but this move is important because I believe these dates give each picture the absolute best chance to break out and find their audience. Just as important, the decision underscores our commitment to a strategy of releasing in play periods where we can get the most out of our P&A spends. In looking at our year end we believe our fiscal 2009 film slate will be one of our stronger slates and expect it to generate the largest rollover contribution in history preparing us well for fiscal 2010.

Over the next 24 to 36 months we see a competitive distribution landscape whose ranks have thinned and we expect to see a burn off of the glut of motion picture inventory created by third party financing. The number of companies capable of financing a movie or a slate is dropping dramatically and will continue to shrink. Studios are generally downsizing their slates and moving towards a 10-pole framework.

Led by Lions Gate, the international sales landscape is consolidating between a handful of companies responsible for majority of the business. Simultaneously, the real cost to market a movie is dropping as advertising gets meaningfully cheaper. As available capital dwindles from the marketplace and overall distribution real estate contracts our capacity to finance films and offer proven studio level distribution strengthens our ability to attract premier content and A list talent. This is the perfect time for us to be opportunistic. We have the talent and resources to execute in the market environment and believe we are well positioned to command significant additional market share. I would like to turn the call over to Steve.

Thank you, Joe. I will pick up where Joe left off. The theme continues. Lions Gate Home Entertainment has positioned itself as the premier brand management and sales company in the industry, and has established distribution relationships with the best brands and franchises in the business.

ABC Television, E Entertainment, NBC, Televisa, StudioCanal and Paramount Studios are among the brands driving our library and television to DVD business. Marvel Hit Entertainment, which includes Thomas the Tank Engine, Barney and Bob the Builder, join with Speed Racer, the Doodle Bops, the Brats franchise and Clifford the Big Red Dog to expand our presence to over 15% market share in non-theatrical family entertainment.

And with Denise Austin, Kathy Smith, The Biggest Loser and Dancing With the Stars, we have the best fitness brand names. The list goes on and on and continues to grow. We have always been proud of the fact we have a different skill set than other home entertainment distributors, including we work our theatrical genre mix and over convert the industry average in terms of box office to DVD revenue by a wide margin.

The way we market our library, our approach to sales and marketing, attention to distribution logistics and as I mentioned a moment ago, excellent brand management. Because of that, Lions Gate continues to grow and take share. Our market share through calendar Q3 is over 7.5%, by far the highest market share we have ever attained. We are on track for approximately $700 million in overall home entertainment revenue.

And our library revenue, comprised of a mix of home entertainment, international and television, will approach $300 million this year. Our ability to outperform the market is paying off with continued growth in home entertainment, both in packaged media and in digital delivery. We remain excited about the potential for Blu-ray to inject growth into packaged media. Several retailers have announced sub $200 Blu-ray players during Q4, getting the machines into the price range for mass adoption.

We expect there to be 10 million Blu-ray capable devices in the market by year end, up from only 3 million, at the end of 2007. Wal-mart announced they are expanding the self space for Blu-ray with that space coming not from standard def DVD but from music CDs. In other words, it is a net expansion of the home entertainment space. Consumer purchases of Blu-ray disks are accelerating.

If you've been watching football you can't have missed the huge amount of advertising from the industry and retailers promoting Blu-ray. This is going to be a big holiday season for Blu-ray. Digital delivery is becoming a substantial revenue source generated by growing array of electronic retailers such as iTunes, xBox, Sony PS3, Amazon, Voodoo, NetFlix and more. Our digital delivery revenue will more than double this year with much more growth expected in the future.

This continued expansion in next generation package media and digital delivery will spur growth for the next several years. Being at the cutting edge of technology, whether it's 3-D movies as you heard from Joe, or Blu-ray or Fear Net where the break.com network or our partnership with YouTube will not only be an important driver of growth but will drive higher margins in home entertainment.

In terms of recent comments from other studios about the current state of the DVD marketplace, we see any recent softness to have been mostly limited to G, PG and non-genre PG-13 rated films that are not strong brand names and especially in films over $100 million in box office. Conversion rates for genre PG-13 and R rated pictures have been impacted the least. We feel confident we will maintain our ability to over convert with our production strategy and with the slate ahead of us.

We have a big January coming with seven theatrical pictures being released on DVD. We are confident that as a group, with films such as Bangkok Dangerous, My Best Friend's Girl and Saw V they will over index in that we will have a very successful Q4.

I would like to move to production and distribution partnerships in North America, which are truly thriving. The first Spanish language picture that we produced with our partner, Televisa, the romantic comedy, Amor Letra Por Letra, has been theatrically released in Mexico to very good results. We are making plans to release it in the United States as well. The picture is expected to generate a moderate profit, a very good start to our growing relationship with Televisa. We are now in production on the fourth picture together, a three-party effort along with Panamax.

We expect there will be much more coming from this valuable partnership, for our ever expanding relationship with the growing Spanish speaking audience here in America. Our partner in Canada, Maple Pictures, is continuing its growth trajectory. Jim Sherry, a veteran of the Canadian film distribution industry, has joined executives Laurie May and Brad Pelman, as co-president, and brings with him tremendous film distribution and management expertise.

Jim was instrumental in Maple reaching a distribution output deal with Miramax. Combining this product flow with the output arrangement with Goal Circle Films and the Lions Gate pictures and library will continue to Maple becoming an even stronger force in the Canadian entertainment industry. We currently consolidate the Maple results into our reporting and the addition of the Miramax and Gold Circle pictures in Canada as well as expansion of Lions Gate UK, will require additional P&A expenditure, and inherent short-term EBITDA impact as they grow.

But we feel strongly that this financial investment in future growth will be richly rewarded as those two entities become even more valuable assets. I will now turn the call over to Michael.

Thank you, Steve. Obviously we are pleased to face the challenge in the current marketplace in a very strong cash position. With our available cash, credit facility, slate financings in place and an additional $150 million in potential availability carved outside of our credit facility we have total capacity approaching $1 billion. Nearly all of our cash is in short-term government instruments and although the yields might not be optimal it is secure.

Cash and cash availability seem to become more valuable each day in the current environment. I would like to point out we haven't lost a penny on any of our cash investment holding accounts. We are pleased that our key metrics point to future stability as well. Our filmed entertainment backlog grows towards a $0.5 billion reaching a record $456 million at the end of the second quarter

Our stock price has declined 30% for the year-to-date in a market that has seen even steeper drops for all the broader indices, but that doesn't make us any happier. As the markets eventually calm, we believe investors will see the performance of our businesses remain strong, our financial position secure and our long-term view towards profitability correct. We will be aggressive about communicating the strength of our story at investment conferences this year and we well be significantly ramping up our public profile and outreach in the investment community.

Our upcoming theatrical release slate is very well positioned. People are still going to the movies, watching television and viewing DVDs as our entertainment offerings continue to give consumers a terrific value proposition. As you can see from yesterday's 8-K filing our Board of Directors recently increased total buyback authorization to $150 million with $65 million of stock bought back to date.

Looking at the remainder of this fiscal year, we are continuing our double-digit top line growth, and as you heard John mention, we are currently running $81 million ahead of last year's EBITDA. Even with that comparable the heavy back loaded nature of the P&A for this year's slate puts much more pressure than usual on both EBITDA and free cash flow for the second half of the year. Additionally, as Joe mentioned, we are releasing Crank 2 and Haunting In Connecticut next April which adds $15 million more P&A expense to this year's Q4.

However, it is the right thing to do for those two films and the right thing to do on building the longer term profitability for our shareholders. The underperformance of the three pictures Joe mentioned looks to have created a negative swing of approximately $25 million in both EBITDA and free cash flow between what we planned for the year and actual performance.

Despite all these factors we are trending toward a much improved EBITDA for the year subject to the box office performance of the rest of is this year's slate. While our target has been approaching break even EBITDA, it will require cumulative overperformance of our pictures for the rest of the year to overcome the hole created from box office underperformance of the films in the second quarter and the incremental invest in the P&A for our two new April wide releases.

The shame challenges apply to reaching what was already a difficult $100 million free cash flow target. By slotting the Renee Zellweger romantic comedy and Transporter where we have, coupled with disappointing second quarter releases we've put a lot of pressure on the overperformance of our already heavily back loaded slate. We bit the bullet and moved two wide releases up to April to maximize each of those films' ultimate profitability making the conscious decision of focusing on picking the right release dates for all of our pictures regardless of how it affects a particular fiscal quarter.

With that said, we want to assure all of you that we take our directional guidance very seriously and we remain confident that our top line revenue number for this fiscal year will come in between $1.5 billion and $1.6 billion. And that because of the continually improving EBITDA trends we are seeing, we are confident that our fiscal 2010 EBITDA, starting this April, will exceed $50 million. I would like the turn the call back over to [Felt].

Thanks, Michael. Michael always quotes Walter Wriston who said that capital slows where it is treated well. That thought is even more appreciated in difficult times. Lions Gate will continue to treat your capital well, will continue to cut costs, produce and market efficiently, run our Company with discipline and focus, and build long-term value for our shareholders. Given the current environment, we are tasking all of our divisions and companies to be even more diligent about their investments and expenses and even more innovative in their operations and thinking. We welcome and appreciate your support, and I would now like to open up the line for your questions.

(OPERATOR INSTRUCTIONS) We do have a question from Alan Gould with Natixis. Please go ahead.

Thank you. I've got three questions. First, a bigger picture question for Jon or Michael. Is fiscal '09 your peak year in terms of film investment, the number of films and price per film you're going to be at. In other words, are we at sort of steady state from fiscal '09, or even possibly go down in fiscal 2010? For Steve, I was wondering if you could give us what the library revenue was for the quarter and six months. For Jim, I see film costs are up to, unamortized film costs on the balance sheet are up to about $745 million. How much are production costs going to be this year and how much are film amortization will be, more importantly production costs which is more predictable I think?

I guess I will start with the first question on total production costs on the last call I believe I told you we would have total production cost at $472 million for the year, $125 million of that was going to be TV. With the adjunct of Ish Entertainment and some new shows like Nurse Jackie coming in, we now anticipate about $525 million to be the total investment in film for the year and probably $160 million of that will be from TV.

Bigger picture, Alan, you know that as we continue to expand television business to invest in the film and television line is going to grow. In terms of films it's hard to say given the kinds of equity [co-fis] that we are looking at right now I would say the size of the slate certainly kind of reflects somewhat of a steady state case. In terms of marketing expense I think probably what we are looking at for next year is pretty close to steady space.

Again down the road that could ramp up a little. I think we are being helped by, as I said, helped by the fact that I think we are going to get good value for our media buys right now. So I think that's about what you could expect.

I mean, Jon, just to follow up on that. Is it fair to assume once we hit steady state we start getting close to that conversion between EBITDA and free cash flow and EBITDA should be a little bit more positive once you hit the steady state because you don't have the big [PEE], you got the back end offsetting new investment in new films?

I think that's right. I think you're going to start, as Michael said, you're going to see that with significant positive EBITDA for next year. But I would say that you've also got to remember as we have expanded our business into the UK, Canada we have only been consolidating for about a year, a little bit more than a year, and Australia, every time we do that we are sacrificing some short-term profitability for long-term value.

When we are putting our movies out through our own self distribution of those territories, we believe our overall ultimate margins are significantly higher. But again in those territories we're expensing P&A and those expenses, those marketing costs definitely are hitting our EBITDA this year.

Okay.

Alan, this is Steve. Responding to your library question. As I mention we are on track to increase library revenue this year, getting close to $300 million and in the first six months we are up 17% over where we were last year, we are at just over $140 million of library revenue for the first six months.

Okay. Thank you very much.

Our next question comes from David Miller with Caris and Company.

Yes, hi, a couple questions. On the expense issues, total expenses were, roughly let's call it $12 million higher than last year's quarter. I mean, Jon, the whole idea of a lower CPM, various sort of advertising windows is nothing new. I realize you guys had more films released in the second quarter, I'm wondering why the P&A expense number and some of these other expenses were so high and I have a follow-up, thanks.

I will jump on that, your theatrical expenses in the Q2 this year were $109 million. And that's down from $128 million last year. The offset is home entertainment expenses, because of the additional revenues, it's 62 compared to 50, home entertainment expenses are up.

Okay. Then I believe you guys have sub-guidance out there suggesting that the revenue bogie that you reiterated this morning is somewhat contingent upon the slate grossing $500 million in domestic box office. I believe there was an adjunct to that guidance that you issued last quarter suggesting there were two more fee deals yet to be announced. I was wondering if you were prepared to announce those fee deals this morning?

Service deals?

Yes, correct.

I don't know if we announced the Relativity deal at the cast last call. That may have been what is in the works. There's noting else to announce at this point.

We don't have anything new to announce from last quarter.

Okay, fair enough. Thank you.

Our next question comes from Ben Mogil with Thomas Weisel Partners.

Hi, guys. Good morning. I want to make sure, Michael, the $1.5 billion to $1.6 billion revenue you were talking about that was for fiscal '09, the year that we are currently in. Is that correct?

That's correct.

Wanted to get a sense from you guys, when do you see Prides being finished and going forward should we be looking for you guys to put up more of your own money into films or are you actively looking for a co-financing partner even under a different structure, be it a P&A structure or different participation structure?

It's Michael. The first thing I'll tell you is that we'll always be looking for partners where that makes fiscal sense for us. We have several partners including (inaudible) odd lot with The Spirit, which is coming out on Christmas. The film, the Pride itself was for 23 pictures. It has, we think that will go through the beginning of calendar 2009. We also have obviously facilities still in place in Montreal, the SGF facility that we are leveraging when appropriate.

In terms of sort of in terms of the retail environment we saw Circuit City file yesterday, can you talk about any meaningful exposure there in general what you are seeing from retailers?

Ben, this is Steve. As to Circuit City, our net exposure is less than $500,000. With Circuit we have been watching them very closely, and had worked their receivable down.

That's the good news. They are 3% of our business, while we want them to restructure and succeed we think if there is further issues that the other retailers will have tho problem picking up that slack. Other than Circuit City, we don't see any other retailers that give us concern right now.

Okay. I think flipping over to the, sort of flipping to the balance sheet and the cash flow statement. Jim was talking about the 525 of investment for fiscal '09 on the film and TV side. What should we look for in 2010?

That goes back to Felt's question, the question to Felt, I would anticipate that's a fairly -- it's about same level, I would anticipate it about the same.

Okay, fair enough. In terms of sort of the reductions that you guys did last week, you talked about keeping G&A in the 8% to 9% range, was there any particular area where the G&A cuts were a little bit more meaningful, any area that was materially under performing or going forward you had hesitations about how that business would look going forward?

No, the cuts were across the board. As we said on the call, we have been planning them for quite sometime, it is not just a reaction to the market condition, it's just we are always looking at expenses, and we are always trying to stay lean and agile, and this was just a great impetus to get it all done.

Okay, and then last thing and I'll turn it over to someone else, in terms of the M&A environment, obviously you're not going to telegraph what you're looking at, just generally can you give us the kind of things you're seeing deal flow interest you other geographically or by segment if you will?

It's Michael. There are some obviously some geographic areas that are interesting, particularly as the dollar has strengthened in some territories and we're also looking at for the first time in a long time not competing a private equity on some of these transactions.

On top of that, everything we are doing, looking to do has to be accretive but it's all about leveraging our infrastructure, television, the feature film business, libraries, et cetera, things we think we can bolt on to what we have here, this incredible infrastructure and cut out a lot of costs.

Okay, great. Thanks a lot, guys.

Our next question comes from Douglas Creutz with Cowen and Company.

Hi, thanks. If I could follow up on the G&A issue, you're G&A was down about $8 million sequentially, wondering if you can give color on why that was, it was before the impact of the recent cuts you may have had and what kind of level will it be for the rest of the year?

G&A is coming down. We saved a little bit just being cost conscious in professional fees. There is a swing in SARs, we actually got a benefit from them this quarter and they were a cost last quarter. That picked up about 1.6. Ish Entertainment, last quarter we were not capitalizing any of the costs of that overhead because they still had (inaudible.) This quarter they put so much into production that we're now able to capitalize those costs and that gives about another million dollars of pick up.

And the answer to your long-term, probably we are going to come through 8% or 9% on average for this year's overhead of the function of revenue, a little under 9% of revenue for the year.

Next question comes from Jeff Logsdon with Bank of Montreal.

Thank you. First question for Steve. Steve, can you tell us what is going pricing wise, gross wholesale for front line titles, DVD, Blu-ray, any real changes or are those prices holding up fairly well?

So far there is no change in the pricing. I think as we go forward you might see Blu-ray library titles come down only slightly as the machines start increasing as we get in to the mass adoption range. They will still be quire a bit higher than previous library titles, but so far no move in terms of top line titles in terms of pricing at all.

For the Blu-ray kind of 20 to 24 gross wholesale for front line titles?

Yes.

And catalog -- go ahead I'm sorry.

I was just saying in some cases higher, so far pretty solid.

And for catalog titles, pricing points, are they -- there is this graduated stair step down of 10, 8, 6, whatever. Is the demand still there even as pricing points come down a little bit?

If you look at our library revenue, since we are up and that's all driven by catalog,it is still doing very well, pricing is still pretty steady. There are always two particular studios which are out there, which tend to have a shorter term view on their library value than we do. So far I don't think they will necessarily be trend setters. We watch it very carefully, and so far I don't see any reason for concern, but that doesn't mean that next quarter that might not change.

Then for Jon or Michael, it seems that because the liquidity you guys have put together for film finance, it would seem that with private equity hedge funds, banks, et cetera, moving out of the picture, you would seemingly be in a terrific position for independent film stuff the next couple of years.

Steve just wanted to make one more comment about the Blu-ray.

Jeff, the other thing we got to keep in mind, the penetration of Blu-ray players is accelerating, as I mentioned, and I think with the sub $200 machines you're going to see a lot of mass adoption, see -- with retailers such as Wal-Mart increasing the Blu-ray space. There is going to be more room for library titles, you'll see library revenue not only continue to tick up but at those higher margins. So tremendously good news ahead of us in that regard.

In regards to the shrinking market place in terms of additional money coming in and distributors, it's a great place to be right now and to be able to leverage our infrastructure. It's a great opportunity where Joe would tell you whether it's a acquisition or a movie that comes in to us like Transporter or whether it comes a new production looking for domestic distribution, there is a very small universe of players.

As you plan out into fiscal 2010, what do you see the ratio between home grown versus acquired?

I thought it would be heavily home grown, and yet it's a little early to say, what we are seeing is as the market shrunk, as the studios have slimmed down their slots, as they have taken their independent units and crushed them down to fewer titles a year, we are seeing, at least at American Film Market, significantly more high quality acquisition opportunities. We, as you know, we have reorganized the production operation in two units and that's creating a lot more focus and giving us a lot more opportunity on the production side and yet the acquisition side is showing a lot of promise right now because of the lack of competition. It's early to tell. It may be evenly distributed than originally expected.

Finally, a lot of your very successful television production series seem to have 12 to 13 episode commitments per year. Is that optimal for you, would it be better if there were more episodes or are the guys buying the products going to stick with those kind of numbers?

Yes. There is no question about it that the accumulation of episodes for typically for cable is slower than it what is broadcast. We've pinpointed cable because if you looked at broadcast recently you see not only the ratings significantly down, you're seeing, and this has happened for a long, long time, you see the broadcasters just don't give these shows a chance, maybe they can't. But you're seeing a series pulled after one or two episodes.

What we like about cable is that typically after cable network invests, they keep these shows on the air and they build them. So it's the good news and the bad news, we are becomeing somewhat dominant in terms of the scripted area for cable networks, with very strong leadership position in that area. And I think that's the good news is we are successful there with Mad Men and Weeds, Weeds just got a two year pick up, that will help.

But it takes a long time at series orders of 13 to get to the promised land. Fortunately, we are getting there.

Thank you, you guys are doing a great job.

Our next question comes from James Marsh with Piper Jaffray.

Good morning, gentlemen. I was hoping you could elaborate on your 3-D strategy. Talk a little bit about what the incremental costs are, how many screens you need out there to recoup those costs and what type of ticket pricing do you expect for My Bloody Valentine?

We are very, very focused on the strategy, as you know, we'll be the first company to have a horror movie released in the space. We just showed some footage at Show East and the exhibitors were absolutely beside themselves with excitement because somebody is doing something other than kids programming in 3-D and they think it has enormous growth. We hoped there would be more screens up.

That build out has been slowed a bit by the financial situation in the market. When you look at something like Journey To the Center of the Earth 3-D, which had a ratio on 3-D screens of three to four to one relative to 2-D screens , there is already enough screens in the marketplace if you can get the date which we have been very careful to do. If you can get a window to have extraordinary results relative to just traditional 2-D releases.

There, as long as you're the only one in the marketplace, at least on this film we've found that slot and we're looking at another one right now that will fit a date where there is no competition, there is enough screens at a base level. In order to get multiple films in the marketplace you need to get two to three times those screens. We will start to see that build

What generally are the incremental costs you are looking for to --

At the moment, the incremental costs on a production side they are a few million dollars. At least on the first movie, I suspect, depending on the size of the movie, that could grow a bit. It's relatively incremental, it is not significant relative to an overall budget and there is a cost to the glasses. We hope that will come down. That's between, depending on how well the movie works and how long it stays in theaters, I believe it's between $1.5 million to $2 million. In terms of earning that out, if you look at Journey to the Center of the Earth, I think it earned out on opening weekend.

Okay, excellent. Thank you.

Thank you, and our next question come from Barton Crockett with JPMorgan.

Just want to make sure I understand what you're saying about the free cash flow and EBITDA guidance for '09. Is that now reduced by the extent to which the $15 million you moved out into April and the $25 million under performance or are you maintaining it even with those headwinds?

As we said, Barton, earlier this year, this year's free cash flow target was always a difficult target. It hasn't gotten any easier when we talk about the under performance of a few of our Q2 titles that we've beaten to death.

The slotting of the Renee Zellweger picture, two new wide release in April and also the timing on the license repayment of several of our new series. It has gotten more difficult and we are focusing on 2010. Although we believe that as Jon mentioned and I think I did as well, that EBITDA for this fiscal year is certainly trending the right way towards break even.

We moved some pictures around and took a look at long-term profitability and doing the right thing as far as timing of releasing our pictures.

Before where we had a specific number now it's more general for fiscal '09 in terms of guidance. I was wondering if you could talk about the driver of the home video revenue growth in the quarter, which was exceptionally robust. What was responsible for that, how sustainable is that over the next couple of quarters do you think?

As far as it's obviously -- it's a function of the product that's coming to the marketplace. And the various opportunities when it comes to libraries. I mentioned in response to Alan's question, library is up, which is general market and opportunities out there. As to the other revenue on top line on the new release titles it depends on what is happening in the quarter and our biggest quarter is Q4 this year as it was last year.

Okay. But I mean, were there particular new releases that out performed this quarter that drove it?

Not really. We didn't have that many theatrical release that released during the quarter. Forbidden Kingdom came out. We started distributing the hit product that although that added to it it wasn't a particular driver. We had a couple of successful non-theatrical releases, Mad Men came out on DVD. Weeds had a very good DVD quarter as well. It is across the board. Nothing in particular driving it.

If you look out to the next quarter, is there a mix of product you think that might keep the growth rate up to something like the level we saw here in this recent quarter?

In Q3, Q3 we will have some growth but won't be as high as Q4. Q4 is going to be the big quarter like last year, just because that's when all the pictures will fall into that quarter. Again it's the same thing.

It's going to be library, the pictures that come to DVD during the quarter. But again I think it's going to be across the board. Nothing particularly driving it. It's all a function of timing, function of opportunity, how well we are at marketing our library and making the best of opportunities that are presented to us at retail.

One final question, on the '10 guidance you gave, $50 million EBITDA, are you putting a number out there for free cash flow at at this point or even directionally on free cash flow what '10 should look like versus '09?

Only guiding to EBITDA at this point, it's way too early to talk about free cash flow.

Okay, I'll leave it there. Thanks a lot.

Our next question comes from David Joyce with Miller Tabak & Co.

Thanks. I was wondering if you could give a little bit more color on the breakdown of the home entertainment between motion picture and television?

We really haven't broken it out in the past like that. I think later on if you want to follow up we can maybe give you some follow up on that. But it's not something we have broken out.

Okay. If you could just remind us how you're accounting for the investment in the premium channel?

It is equity method accounting, you see it go into as an investment, equity method, you'll find that in my other assets column and sitting on the balance sheet (inaudible).

Thank you.

Our next question comes from from Matthew Harrigan with Wunderlich Securities. Please go ahead.

I still have one sort of fuzzy conceptual question probably for Steve Beeks. At CES last year, there were a few companies, I think Samsung and Spectrum IQ, they were talking about 3-D in the home, obviously, that's a pretty small business for awhile. Do you see any progress in that direction to complement what is going on in the theater as the consumer becomes incentivized to look at 3-D product?

Absolutely. We have been talking to Panasonic and Samsung about those products and the higher capacity of Blu-ray is going to give us the opportunity to do some cool things in terms of 3-D in the home as you saw at CES. There is a couple of 3-D sets out there, it's going to take time to get penetration there.

For the time being we are going to be stuck with the older technology in terms of delivering 3-D on DVD but that's a pretty exciting opportunity. I'm planning on going to Panasonic to see their demonstration on their 3-D offering, sometime in the future that's going to definitely be an opportunity for further growth in home entertainment.

Thanks, Steve.

We do have time for two more questions. Our next question goes to David Bank with RBC Capital Markets.

Thanks. First, a follow-up on the home entertainment stuff and then another question. I know historically you haven't broken out TV versus theatrical, can you give a number for sales from Weeds and Mad Men during the quarter if you can? Then the second question is, the beauty of the facilities is that they kind of cap your downside when things don't sell as well as the box office as strong as expected.

Can you quantify what you think you saved, the write-offs are less than $15 million, what could they have been had you done them all by yourself and was there anything about the movies, anything that -- any change in philosophy going forward as a result of the experience from those movies?

I'll take the first part of the question, David, this is Steve. During the quarter, on DVD alone, we generated little over $6 million in revenue from Weeds, and just right around $5 million from Mad Men.

Great. Thank you.

There is no question on the three picture, your referring to the three pictures there, the ultimate loss on those pictures, which Joe was talking about, is $15 million. It's obviously reflected differently for the Q and for the year. But the answer there is I hate to say it, make better pictures.

I think the -- we talked before about the fact that on My Best Friend's Girl we probably didn't think that thoroughly through in terms of how we were casting, how much we were spending on the picture. But at the end of the day, I don't think we make particularly different decisions when we have partners. I think we are still putting out the best films we can. We think we have been pretty consistent all along the way.

Our 70% or so average for profitable films and we have done pretty well to on the three pictures that were disappointing to only lose cumulatively $15 million. I don't think that will change going forward.

We do see outside of the Pride Fund a lot of people who want to co-finance our movies and our P&A. I think you will see a lot of that going forward and I think because they feel we are the best chance they have of making money on those pictures.

I'm sorry, Jon, just to follow-up can you give us a sense of if that ultimate loss was $15 million, by having partners what do you think you saved or is it impossible to know?

I don't have the numbers in front of me, you can drill down a little bit more on that with Jim.

Thank you.

Our next question comes from [Robert Roth] with [Ritz Partners]. Please go ahead.

Good morning, guys, a few quick questions. First, given your balance sheet and what's happened in the industry, a lot of people think libraries are worth a fraction of what they were worth at the top of the DVD cycle when in reality with the new digital distribution technologies at the higher margins are going to come with that and the recycling of all the content, I can make the argument they are worth multiples of what they were worth back then.

I'm looking at the other publicly traded names -- I know you went after Image Entertainment disk that hit $4 a share a few years ago, now its $73, First Look Pictures, Genius products has tremendous problems. You had a great distribution network, Peace Arts, Lakeshore, Echo Bridge, it seemed as though the world is your candy store when it comes to making acquisitions and these guys can't get financing going forward to do anything.

I know you can't talk about specific targets, but if you can talk about what opportunities you really do see out there both on the library side and the distribution side especially given the current financial position a lot of these companies are in, it seems as they don't have a choice but to partner with someone who is a much stronger than they are and right now you seem to be one of the only companies out there that has the balance sheet with the capability to capitalize on this and actually really have an accretive transaction for Lions Gate and shareholders' equity.

Second question I have is a follow-up, as you mentioned the distribution network you built over the years, it has incredible value, yet it gets no value in the current stock price, I wonder if you can quantify just a ballpark estimate, obviously, you're not going to sell it or anything like that, but what you think that actually would be worth if somebody was to buy it in the private market transaction or recreate what you have created from the ground up in today's environment with all the distribution partnerships and relationships globally that you have?

Robert, nice to have you back in business.

Thank you.

Couple of things that I will mention. One is it's difficult for us to put a value on the infrastructure, but we do believe that as we continue to grow the business that the sum of the parts, including our distribution mechanism, is certainly a good way to look at the valuation of the Company.

The other thing you mentioned the price of libraries or the value of libraries, we would actually agree with you for the first time ever content has become an impulse item. Whether it is pay per view or video on demand or iTunes or DVD or Blu-ray, we are finding consumers have many ways to purchase us and it is turning into an impulse as opposed to a planned purchase. So that's terrific for a content library or new content that's coming out.

As far as acquisitions in this marketplace, sure we've watched the prices of those stocks, we've looked at the difficulty in getting credit, we closed our -- we were fortunate in the timing that we closed our bank facility a few months at what we now would say was terrific pricing, it was $340 million, it was LIBOR plus 2.25%. LIBOR seems to have come down to a stable place at this moment in time. It was bouncing around, as we all know, a lot.

We are trying to be opportunistic, we're looking at bigger deals than some of the deals you mentioned. We are looking at everything if we think it can be accretive and we can leverage infrastructure.

I would try to go back to give you some sense of how I would look at the value of building that infrastructure. If you were starting a Company and you wanted to call it 10 to 12 films a year you want to be at a box office range of about $250 million which would mean total revenues of, our rule of thumb two times, about $500 million. If you did a service deal with any company for a slate that big you would pay at least 10%.

Basically you would be paying about $50 million a year of distribution costs, I guess you could put a multiple on that. If you look at a couple of the new companies out there, I won't mention names, if you were to look at new larger companies now, in terms of what their infrastructure costs are to run slates of that same size you would find their overhead costs are at least $50 million.

Those numbers are pretty much in sync. As a rule of thumb, I would take $45 million or $50 million put a multiple on it.

Okay. Can you give us any sense as to, exact number isn't feasible but what do you estimate over the years it has cost you to build this infrastructure in addition to the recurring cost savings, et cetera, and revenue generation that it does, because I would think the value is not only what you paid to build it, and have it built out, but also the income stream coming from it similar to like a bond.

Yes. You know, --

$100 million, $200 million?

Couple of hundred million dollars, yes. Take our, I guess more than that really when you think about the size of our worldwide infrastructure, the investment in library not only in the U.S. but obviously in the UK and Canada as well. I couldn't put a number on that.

Great. Two follow-up questions, you mentioned your $150 million buyback you used $65 million of it so far. Could you tell us the average price you paid for your shares has been. Is the Company looking to be more aggressive on that realm? Using, thinking your stock is the best use of your cash or do you think some other acquisition activity because of how far down other entities has gone in the public markets that's a more creative use of money at this point in time given the current price of the market?

I had lunch with a big shareholder a few weeks and I said in this economic calamity going on in the world, something must be getting more valuable every day, his comment was, yes, your cash. Sadly, that's turned out to be true. We don't like our stocks obviously in the 6's.

We are looking at -- or the 7s for that matter, but we are looking at trying to figure out a way to again do the right things from accretive standpoint, whether that is buying back stock, we've increase our buyback to $150 million, or to look at opportunistic companies that are out there that we think that are going to be wildly accretive. The answer really, Robert, is we are looking at both and trying to do the right thing with our cash. We are not in any hurry to issue stock at these levels.

Okay, great. I guess final two questions, I think I read that Carl Icahn has taken a very large stake in your Company, almost doubling what we had before because he saw the value, according to our filing as being ridiculously low relative to where it was.

I'm curious has there been talk about him looking to get a board seat at Lions Gate and to help grow the Company given the asset value and the value according to the article I saw? It said he perceives, and then second, if management could give investors, I know at MGM we look at that as a multiple of library free cash flow and backing everything else out because EBITDA as well as multiples of revenues, it's not a fair way because of accounting rules to value this Company. How to you look at yourselves, how do you think we should look at you and value your Company?

We mentioned some of the parts. I also think we talked about a lot of different metrics, as far as Carl Icahn, Robert, he was a buyer of the stock two or three years ago, he is a buyer of the stock recently, we're happy to have him on board. We had no discussions about board seats. He is a strong believer in the value of content.

I think you, Robert, you guys all, most of you do really good job in terms of sum of the parts analyses and DCF analysis of our Company. For sure, we always said that the best way to value the tangible and intangible assets of our Company.

Okay, great. Thank you very much.

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