Starz Entertainment Corp (STRZ) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Lions Gate fiscal 2009 Q3 earnings call. Now, 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, today's call is being recorded. And your hosting speaker, Senior Vice President of Investor Relations, Peter Wilkes. Please go ahead, sir.

Thank you for joining us on our third quarter call this morning. We will open the call with remarks from our CEO, Jon Feltheimer; our Vice Chairman, Michael Burns; our Co-Chief Operating Officer, Steve Beeks; and Joe Drake, Co-Chief Operating Officer and President of the Motion Picture Group. Also on the call this morning are Jim Keegan, our CFO, and Rick Prell, our Chief Accounting Officer. After these opening remarks, 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 risk factors set forth in Lions Gate's quarterly reports on Form 10-Q filed with the SEC on February 9, 2009. 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. Jon?

Good morning. Thank you all for joining us. As you can see from our numbers, our performance this quarter was very disappointing, and that performance will ultimately cause a significant miss in our yearly numbers, as well.

In addition to our lack of performance, there is no question that we are suffering from some of the same broad economic environment-related causes discussed by many recent reporting companies. As a result, we've taken a critical view of all of our businesses and in looking forward, we've taken $47 million in reserves and charges, all of which we've expensed in the current quarter.

More than $20 million of these charges stem from a large reserve we've taken on our Hit Entertainment distribution deal for several reasons, including the softness in the retail market for preschool children's non-theatrical titles and unusually high returns when we first took over the business. Steve will provide more color on this reserve and the rest of our Home Entertainment operations later.

Other than these charges, the primary contributor to this quarter's loss, as well as the shortfall for the year, is the significant underperformance of our feature film business. Joe will discuss this in detail, as well as describe what we are doing to avoid repeating this performance next year, but I would like to run through a high-level review of factors contributing to the loss right now.

From an ultimate basis, we began the year projecting $550 million in US box office, and we expected that our margins would be in their historical range of about 15%. In fact, assuming our last two films of the fiscal year perform as expected, we will only end the fiscal year with about $400 million at the US box office, with approximately a 5% margin. The gap in box office performance and margins had a dramatic impact on both EBITDA and free cash flow. Michael will discuss these specifics in a few minutes.

We've continued to protect our downside with production and marketing efficiencies, financing partners and targeted films. But as a Company that has historically achieved profitability on more than 75% of its films, breaking even or taking losses, even small ones, on so many films this year is totally unacceptable and makes a much smaller contribution to overhead than is needed. We must do better, and we will.

Our theatrical slate for fiscal 2010 is a little leaner, takes fewer risks, and we believe is now better positioned for profitability in the current environment. Next year, we will invest approximately $100 million less in production, and our share of the slate's theatrical marketing costs are more than $100 million less, as well. This is consistent with our current lack of a slate financing partner in place for next year. It is also consistent with the financial imperatives of a rigorous economy in which we believe it is more important to focus on bottom-line profitability than top-line growth. And it is consistent with our sharpened focus on overhead that is clearly targeted towards those businesses capable of more immediate profitability and revenue generation.

For the past several years, our overhead growth has supported new businesses like Debmar-Mercury, Mandate Pictures, Maple Pictures, Lionsgate UK and our new channels. These businesses are hitting their stride and are poised to make increasingly meaningful contributions to our bottom line. Therefore, where we have businesses that are distracting from our focus on core assets or have inherent overhead that will not be covered for a period of time, we are sharpening our pencils and making some hard decisions. We will also continue to identify areas within our core businesses where we need to improve our returns.

Turning now to one of our growing core assets, our television business, led by Kevin Beggs and Sandra Stern on the production side and Debmar-Mercury's Ira Bernstein and Mort Marcus on the distribution side, is performing very well. Other than one disappointment, Fear Itself, which while not profitable, was a cross-branding success for our FEARnet Horror Channel, our television slates are strong.

Weeds and Mad Men are premier properties with enormous potential long-term value. Weeds continues to track towards a syndication launch that will positively impact fiscal 2011. Mad Men continues to generate critical acclaim. Winning several major awards and led by showrunner Matt Weiner, it is positioned for a strong third season on its way towards syndication in a few years.

Nurse Jackie, a half-hour comedy starring the Sopranos' Edie Falco premieres on Showtime June 8. We are in discussions for the second season renewal of our television series, Crash, which grew its ratings and critical reviews towards the back half of its first season. Paris Hilton's new series for MTV has been renewed for a second season. It also just premiered on ITV in the UK to very strong numbers. Our joint venture partner, Ish Entertainment, will earn back its overhead and be profitable in its first year.

Kevin and his team are not resting on their laurels. Our new and upcoming pilots include Sincerely, Ted L. Nancy, a comedy for Fox, executive produced by Jerry Seinfeld, and based on his "Letters from a Nut" books; the comedy Blue Mountain State, directed and executive produced by One Tree Hill and Smallville's Brian Robbins for Spike TV; Ronna and Beverly, a half-hour comedy for Showtime; the two-hour backdoor pilot, Anita Blake, Vampire Hunter, for IFC; and Tough Trade, a provocative one-hour drama about a three-generation Nashville music dynasty, executive produced by Jenji Kohan, the creator and showrunner of Weeds, and written by two-time Pulitzer finalist, Chris Offutt. This is being announced today as our first original series for our Epix premium channel.

On the distribution side, after a successful Turner Broadcasting test of the House of Payne spinoff, Meet the Browns, CBS has ordered a total of 80 episodes. Meet the Browns will premiere on TBS this summer and in syndication on stations across the US in the fall of 2010. Tyler's previous series, House of Payne, is this season's number one new syndicated show and is sold in syndication through the 2012/2013 season.

Both shows reflect an unprecedented syndication launch in terms of the level of initial orders and their duel window on TBS Cable and in Fox station group led syndication. Given the purchase accounting treatment of House of Payne, as well as the initial marketing cost for syndication, which frontload expenses, we have recorded very little profit from the show to date. But we expect House of Payne and Meet the Browns to ultimately generate a combined total of approximately $300 million in revenue, with solid margins.

Debmar-Mercury will also launch the Wendy Williams Show nationwide in July, after a very successful test last summer on several Fox TV stations. Debmar's model of testing programming before committing to a year or more of production is a way for us to work with the television stations to reduce risk and share the benefit of the upside in success, and it's consistent with our risk mitigation strategy going forward.

During the quarter, we announced plans to acquire the TV Guide Network and TVGuide.com, and expect the deal to close by fiscal year-end. Some might ask why in this recessionary ad-challenged market we would make this investment now. Here is the opportunity we saw. TV Guide Network is one of the 20 most widely-distributed networks in the country, reaching 83 million households. Its target demographic of multicultural women aged 30 to 50 fits well with much of our television slate, and is very consistent with our television brand.

We've been looking at these assets for several months, and when the price came down to a place with which we were comfortable, we moved quickly and opportunistically over the Christmas holiday, and finalized the transaction on January 5. The purchase price translates into about $3 for every household reached, which is substantially less than most comparable transactions.

It is important to note that this is the first distribution platform where we have a full infrastructure, giving us the opportunity, working with our distribution, marketing and advertising partners, to bring the full weight of our content creation and marketing strength to upgrade the channel.

If you look at branded channels like Bravo and AMC, you can see how a combination of good product and strong marketing support has taken smaller niche networks and turn them into multi-billion-dollar franchises. The TVGuide.com portion of the acquisition has gotten less attention, but it is a leader in its online space. Online advertising is holding up better than other areas of the ad sales market.

TVGuide.com's revenues have grown nearly 30% a year during the past three years, and the site has grown from 5 million to 16 million unique monthly visitors. TVGuide.com is becoming a trusted navigational tool in the fast-growing world of online television programming, as well as a leading source of programming information and immersive online entertainment for users interested in the offerings of digital television platforms like Hulu. Going back to what I said earlier, TV Guide Network is already generating positive returns, and TVGuide.com is heading in that direction.

A few years ago, we began a diversification strategy that included Lionsgate UK, Debmar-Mercury, Break.com, FEARnet, Mandate Pictures and our new premium channel, Epix. With the TV Guide Network and TVGuide.com transaction, we will now have invested more than $420 million in new businesses and new platforms over the past three years, or the equivalent of about $3.50 a share. Depending on how we consolidate TV Guide Network, we will finally start seeing a significant bottom-line contribution from these businesses next year between $30 million and $50 million.

In spite of the fact that we will get less rollover from our fiscal 2009 film slate, this diversification, coupled with the strength in most of our new businesses and continued solid performance in our television, library and DVD core assets, still gives us confidence that we will hit our EBITDA target in fiscal 2010.

I will now turn the call over to Joe Drake.

Thanks, Jon. In fiscal 2009, our Theatrical division dramatically underperformed. Macroeconomic factors aside, we clearly made some mistakes this year that were magnified by a crowded marketplace and the loss of our slate financing, which Michael will address later on the call.

I want to address some of these strategic and operational misses, discuss the adjustments we have made, which are already reflected in our fiscal 2010 slate, and tell you what you can expect from us going forward. First, we underestimated the crowding effect of the record levels of film product in the marketplace, which was driven by easy access to capital, and we failed to adapt our release schedule sufficiently. During the last half of 2008, we dated several pictures, including Spirit and Punisher, where we believed we could be a compelling counterprogramming choice. We were proven wrong.

Although we see the excess inventory burning off over time, the market for the next 12 months will remain intensely competitive. As a result, we have taken the proactive step, as Jon discussed, of rightsizing our slate for fiscal 2010, with a target of around 12 films, and limiting our releases to dates when each picture can be competitive.

As an example of this, we've moved Haunting in Connecticut to late March, where there is comparatively less pressure on marketing expense and a great window to win with this kind of picture. Second, when we revisit our production and acquisition decisions for the fiscal 2009 slate, on a few pictures, we can point to a distinct disconnect between the film's targeting concept going in and the actual film itself.

For example, in concept, My Best Friend's Girl showed the promise of not only strong appeal to an audience that likes raunchy comedy, but was cast with the idea of expanding the audience to fans of romantic comedy. Unfortunately, rather than bridging the gap, the movie fell somewhere in between, and failed to find a significant audience in either segment of the theatrical marketplace. The upside here is that My Best Friend's Girl is overconverting on video and will be a long-term asset in our library.

You will see in our upcoming slates decisions that we made six to eight months ago that already begin to reflect responses to these issues and ensure that on all of our films, the concept and audience are clearly defined. In fiscal 2010 and beyond, you can expect a balanced slate mix that on one hand offers recognizable Lionsgate releases and on the other incorporates pictures we feel have the right economic model, the right brand, play to our core competencies and have the chance to compete for a broader audience in today's market.

In specific terms, what does this mean? In addition to our Saw and Tyler Perry franchises, it means acquisitions like the recently-announced Push, which won the grand jury prize at Sundance. Like Monster's Ball and Crash, this critically acclaimed picture allows us to release on a platform basis and increase our marketing expense and success. We've married that model with two powerful brands, Tyler Perry and Oprah Winfrey, who have both pledged to use the full reach of their organizations to help us maximize the opportunity.

It also means pictures like More than a Game, a documentary highlighting the days before Lebron James rose to superstar status. Lebron has become a worldwide brand unto himself, and our release will be supported by key partners including Nike, the NBA, Target, State Farm and others.

It means acquisitions like The Expendables, which stars many of the biggest brand names in action, including Sylvester Stallone, Jet Li and Jason Statham, as well as Oscar-nominated Mickey Rourke, Oscar winner Forest Whitaker and others. As we have with pictures like Rambo, we have identified a clear demographic and matched it with a project that delivers for them. We picked this up for a fixed cost for North America without additional production risk.

In terms of productions, it means more pictures like My Bloody Valentine 3-D. Much like Saw, here we started with a big concept and executed it on a reasonable budget and successfully created a true horror event with a clear audience.

It means movies that we feel can reach wider audiences with significant brand appeal, like our remake of the iconic Conan the Barbarian or the picture Warrior, which fits directly into our core competency with genre fare. Warrior is the inspirational story of two brothers who meet face-to-face in the world's biggest mixed martial arts tournament. It is being directed by Gavin O'Connor, who delivered the equally inspirational Miracle for Disney. We think this picture can be a Rocky for a new generation.

Aside from the specific films themselves, we are acutely focused on improving the margins and ROI from each of the motion picture businesses in fiscal 2010 and beyond. In the domestic theatrical business, as Jon noted, we've reduced our investment in film and P&A to reflect the current potential of the marketplace. And given the rigors of our current operating environment, we've set financial targets for this slate that we believe are realistically attainable.

We are now well into the work of putting together a strong fiscal 2011 slate, as well, where we see the opportunity to readdress investment levels as the market clears up.

In addition to the core theatrical business, at Mandate Pictures we've just green lit Baster, a comedy starring Jennifer Aniston and Jason Bateman, which is being directed by Will Speck and Josh Gordon from Blades of Glory, and comes from the producers of Little Miss Sunshine. As with all Mandate Pictures, it is being made on a very disciplined budget, is already selling well international and is likely to be in profit before it is released in theaters.

At Mandate International, this business is proving again to be much more than just a risk mitigant to the theatrical business. With Relativity and Gold Circle projects, as well as pictures from Mandate and Lionsgate, we are not only gaining market share, but this service business is making a significant contribution to overhead.

Lastly, as always, you can expect us to continue to leverage our domestic infrastructure and mitigate risk by aggressively pursuing co-financing and supplier relationships. Our theatrical business remains an important catalyst for our home entertainment, pay television, library and international businesses, a critical component of our brand and one of our most important calling cards in the creative community. As managers of this Company, you can expect us to adapt to the marketplace and embrace our challenge ahead. Steve?

Thanks, Joe. In spite of the current economic climate, with the exception of our preschool DVD business, which Jon mentioned, our home entertainment results for the year are up in every category -- new release, library and to non-theatrical. For calendar 2008, our overall DVD marketshare hit a record 6.7%, up from 5.6% in 2007. Our conversion rate of box office to DVD revenue declined last year, but it still remains over 100% and continues to lead the industry at 23% above the industry average.

As you know, we focus on distributing wide theatrical releases on DVD in our fiscal fourth quarter, rather than competing head-to-head with other major releases over the Christmas holidays. And as you've heard from some of the other studios, the market environment is very challenging. In addition, competitors have caught onto our post-holiday releasing strategy, and the marketplace in January of this year was more crowded than in the past.

Having said that, our early results for January are solid, and not only did we end calendar year 2008 with a record market share, but our home entertainment revenues for our fiscal 2009 will be up from last year. The market is still responding to specific film genres when presented well. Bangkok Dangerous and My Best Friend's Girl will both overconvert their box office performance, and Saw V is performing in line with our expectations for the fifth film in a healthy franchises still showing great legs.

We realize there is widespread concern about the state of the DVD business, exacerbated by last week's comments from at least two studio heads. Consumer buying patterns are changing, and there has some degradation in overall conversion rates for the industry as a whole, driven by the recession. But these conversion rates are still primarily dependent on relative box office performance, film genre and, particularly, rating.

As Jon mentioned, we are taking a significant reserve against our distribution agreement with Hit Entertainment, due to a number of factors, including the arrangement with Hit itself, a softness in the preschool DVD market and unusually high returns we received from the field when we took over distribution of the line. We are not satisfied with these results, and we are discussing ways to potentially improve our arrangement with Hit, both operationally and financially.

We are on track to generate approximately $273 million in library revenue this year from television, international and domestic home entertainment. This is somewhat off our initial guidance of $300 million at the start of the year, but up from $264 million last year. Given the difficult market environment, we are pleased with the continued growth in library sales and what this says about the continued strength of our films entertainment library. And we have achieved this growth while keeping average wholesale prices for deep catalog this year equal to where they were at the same time last year.

Digital delivery on Blu-ray continued to grow as contributors to our home entertainment business, both at significantly higher margins. Digital will double annually for us both in fiscal '09 and 2010. Blue-ray now represents over 10% of revenue from our new theatrical releases, and we expect that percentage to continue growing as overall consumer revenue from Blu-ray is projected to still grow significantly this year.

One example of the tremendous upside in the digital marketplace is a special promotion we performed with Apple during the quarter in which we temporarily marketed a number of older library titles at a lower price for one week. These five titles experienced tremendous sales growth during the promotion, much as you would expect with a conventional retail promotion. Total sales for the group of pictures grew from 190 units the week prior to over 17,000 units during the week of the promotion.

This promotion not only shows the power of a retail partner like iTunes, but it also shows what can be achieved by the combination of great titles, a fair proposition for consumers and an exciting new digital delivery platform. The big news here is that consumers actually paid for every one of those downloads. As the digital marketplace grows, we will continue to apply many of the same sales, marketing and promotional concepts that we use at conventional retail.

We remain confident about our ability to deliver results at the high end of the home entertainment industry. After four consecutive years of double-digit growth, we do believe that our home entertainment business could be down a bit next year, possibly by as much as 10% to 12%. But it's important to note that this will not be caused by the broader industry trends, but is instead attributable to a combination of the underperformance of our fiscal 2009 theatrical slate and the reduced box office target of a leaner fiscal 2010 slate. It also doesn't factor in the strong possibility that we will add new titles to our brand management portfolio, which is something we have consistently been able to do.

The steepness of the recession has created a bit of a lag in the speed at which digital revenues are enhancing packaged media revenues. But we still like the overall trajectory of the growth we see ahead of us, and during this transition phase, we are pleased to see Blu-ray achieving 10% to 15% of box office revenues and our digital revenues doubling every year. Longer-term, we believe that the digital revenues will ultimately not be replacement for packaged media, but will instead be an important and growing source of high-margin incremental revenue for us.

I will now turn the call over to Michael.

Thank you, Steve. As Jon and Joe have said, our theatrical slate performed poorly this year, especially in the second and third quarters. As disappointing as this performance has been, we actually expect to have ultimate profitability in the fiscal '09 slate of approximately $35 million. But that is nearly $100 million less ultimate profitability that we generated from our fiscal 2008 slate. And it's a full $140 million less in ultimate profitability than we expected to achieve by this year's slate.

With the addition of Haunting in Connecticut, the '09 slate in fiscal '09 will lose $70 million more than planned. To repeat what you heard earlier on this call, based upon our size, our P&A expenditures and our expectations, a miss that large and a margin that small is obviously unacceptable.

The biggest variance in terms of our free cash flow expectation comes from the position that Pride's senior facility has taken that they are no longer obligated to purchase or fund pictures for the rest of fiscal '09, beginning with The Spirit. This gave us substantially greater funding obligation than anticipated for both the production and P&A of our remaining fiscal '09 releases.

Quite frankly, at the time of our last analyst call in November, our underperformance had not approached a level of magnitude where this seemed a possibility. Therefore, we didn't know until just a few weeks ago that we wouldn't have Pride funding for the last three films on our fiscal '09 slate. That negatively impacts us by another $65 million of free cash flow this year. Add to that our current-quarter reserves and charges of $47 million, and you can see that our financial results were impacted by a combination of theatrical underperformance, a bad economic environment and the loss of our Pride Pictures funding.

Additionally, in respect to Joe's comment regarding adjusting our film release schedule for the current environment, we have moved the Haunting in Connecticut from the crowded summer play period to March 27, which will obviously negatively affect the current fiscal year.

We began the fiscal year with a free cash flow target of $100 million and an EBITDA target approaching breakeven. We now expect to end the year with free cash flow and EBITDA both in the -$135 million range. Our top-line revenue for fiscal '09 now looks to be approximately $1.4 billion, down $100 million from our $1.5 billion guidance on our last call. That is a big miss. It speaks not only to the underperformance of our film business, but to our use of forecasting assumptions that in retrospect clearly have proven to be unrealistic for both our rapidly changing circumstances and the current market environment. We need to do better on all fronts, and we will.

Looking at fiscal 2010, the reduced rollover effect of this year's slate will also negatively impact next year's free cash flow. However, we expect those of our businesses that are doing well to continue doing well. We believe that our underperforming theatrical business will benefit from a reduced number of releases, reduced production and marketing costs and enhanced focus on each release, and as a result, return to an acceptable level of contribution. And we expect that many of our newer businesses, as Jon discussed, will begin a longer-term trend of making more meaningful contributions.

So with all that said, we are reaffirming our fiscal 2010 EBITDA projection in excess of $50 million, without yet factoring in TV Guide Network's anticipated positive contribution. In today's challenging market, we believe we must also do more in terms of giving our shareholders and analysts visibility on our performance. Beginning next quarter on each earnings call, we will give an ultimate profitability projection of the previous quarter's theatrically released films. In addition to the quarter's specific financial metrics, we believe that this quarterly look back at our theatrical slate will give each of you a clearer view of how this core part of our business is truly performing.

We are also going to look for ways to increase the financial visibility of our individual businesses, going broader, as well as longer. The hundreds of millions of dollars in value that we've created for our shareholders by diversifying into newer businesses such as Debmar-Mercury, Mandate Pictures, TV Guide Network and our other channel platforms is an integral part of the value proposition that we believe we are offering to our investors. We want you to be in a better position to evaluate these component parts in their entirety.

Again, we are very disappointed in not delivering our forecast numbers that we traditionally have in the past. We pride ourselves on setting clear, measurable targets and achieving them. But our shortfall in achieving our numbers for this quarter and this year does not reflect on our progress in the longer-term mission of creating value for our shareholders. The growth of one of the strongest and most valuable film entertainment libraries in the industry, a vibrant television business, a strong portfolio of channel platforms, custom tailored to the digital marketplace, and an attractive worldwide distribution infrastructure remains very much on track.

As Jon mentioned, when you look at the contributions we expect from each of these businesses in fiscal 2010, it should confirm for you a sense of how valuable the sum of these parts is becoming, regardless of the short-term swings in our economy and our theatrical business. That is the bigger picture on which we also ask you to remain focused.

Thank you for your attention this morning. We would like to now open the call up to questions.

(Operator Instructions) David Miller, Caris & Company.

Good morning. I actually have a number of questions. First of all, on TV Guide, as I understand it you guys have the option here of taking on partners for investment spending and/or a consolidated position in the asset. And I'm just wondering what will make you determine whether or not you take on partners and when will you make that determination? Then I have some follow-ups. Thanks.

David, we are already talking to a number of financial and strategic partners. And in addition, I think our concept going in was this was a leverageable asset. But I think you shouldn't be surprised if, indeed, we end up taking on some partners in this transaction.

Okay. And then how quickly -- once you do that, how quickly can you reprogram this channel, and what would have to happen for you to raise subfees to, say, $0.08 per sub per month?

I think the impact of us bringing our content and marketing and cross promotion to the channel will happen immediately. We are already having conversations with them, although we haven't taken over the asset; we won't close until three to six weeks from now. But I think the impact of our involvement will be almost instantaneous.

And other than that, I really can't talk about how our dealings with the MSOs will be. I think certainly the more immediate impact will be on ratings, and therefore on the CPMs attached to the network.

Right, okay. And then Steve Beeks, if you are on the call, the home video number declining 11%, it sounds like rhetorically what you were saying is the reasons for that is not really necessarily because of all these secular changes and behavioral changes that a lot of other studio heads are talking about on previous calls, but just because there really wasn't a lot of product in the December quarter. Is that fair to say?

David, definitely, especially when you look at our Q3. If you compare it to last year, it really has a lot more to do with timing. Last year, we had one theatrical title, which was the Bratz theatrical movie that was released on DVD; this year, we had no theatrical titles. That actually accounts for virtually all of the difference between the quarters.

Okay. And finally, Michael, on the guidance, I assume that the $50 million plus in EBITDA obviously excludes the effects of TV Guide. So let's just say for sake of argument that you decide not to take on partners. Trailing EBITDA on TV Guide, I believe, was something like $37 million. Let's be conservative and assume $30 million. Would it be fair to say the guidance -- you would be comfortable rejiggering that guidance to say $80 million in EBITDA, assuming you do not take on any partners?

Assuming that we didn't have a partner, that's correct.

Okay, wonderful. Thank you.

Alan Gould, Natixis.

Could we go over some of the balance sheet issues here? Cash was 131, I believe, at December 31. I'm assuming it is probably less right now after the P&A costs and My Bloody Valentine and Madea. Also, how much of your credit line are you allowed to use for acquisitions? What is the borrowing base right now?

I'll take that. Borrowing base right now is currently $771 million. I'm available to use my facility for acquisitions basically to the full amount. There are some limits to 75% of the borrowing base, which is nowhere near -- I am more than covered on that. Cash positions, I have paid some down, but we are anticipating a large Fox payment [boat] in a few days. So cash is strong.

Jim, so it's receivables plus the value of the library and stuff like that that gets you the $771 million?

That's correct.

Okay. So no problem tapping that whole $340 million or everything that hasn't been used for letters of credit?

Not at all.

Okay. Then, Felt, why do you want to take on partners for TV Guide Network if you think it is such a good deal and you've got this kind of financial flexibility?

Well, I think that as we are looking at the environment right now, I think being conservative about the use of cash and how we spend it is, I think, a wise place to be. I think clearly in a couple of the strategic conversations we are having, we would do because we think they bring great value in terms of programming and cross marketing possibilities.

But at the end of the day, I think it is a really good question and something we have wrestled with a little bit. But if we are going to keep investing in some of the other businesses, it just might make sense, if it is the right kind of a deal and the right kind of financial partner, to do that.

I would assume a partner would come in with similar terms to what you are paying.

At least --.

At least as good.

Certainly not better terms.

Okay. And one follow-up on that network. When Gemstar owned the TV Guide Network, historically a lot of its revenue was tied to -- it was like three quarters advertising and a lot of the ad revenue was tied to direct response marketing. Now, the direct response business I understand has been hit pretty severely. Are the numbers -- is it still pacing at $135 million of revenue and $30 million to $35 million of EBITDA? Or given what we've seen in the advertising market, are those numbers down materially?

Well, they certainly are down a little bit at this point, and we certainly also anticipated them to be down further going forward and factored that into our business plan and our thoughts on this. I would also say, though, that CPMs on this channel are about $2 right now, and we really think that we can significantly increase those. If you look at comparable kinds of channels, they are significantly more. So I think the overall ad market will definitely be soft and be a challenge, but I think that we can bring some immediate value, as I said, to an earlier question, and boost those CPMs pretty significantly.

One last question on the core film business. You said the results are unacceptable. There are going to be changes. But besides just going smaller, I guess fewer films, less cost per film, are there any management changes? I think you had layoffs you announced after the prior call. Are there going to be fewer people as you are releasing fewer films, and is there a different green light process that you were going to be going through?

Yes, I'll take that. We are continuing to look at overhead very closely, and the structure of all of our businesses. At the moment, we don't have any immediate plans for any further layoffs. We have a very tight organization for the release of 12 versus, I think, it is 15 or 16 films this year. So we are -- we don't have any major overhead changes at the moment.

In terms of processes, I talked about it a little bit on the call. We've put a very rigorous process in place to ensure that the conceit, the plan of execution and the marketing approach for each film are directly in line with the intended audience before we green light it.

The other thing that we are doing, because the marketplace is -- we do need to be a little bit more conservative in the marketplace -- is on every one of our films, we are sharpening our pencils on both sales and performance estimates and then making our production budget or acquisition decisions accordingly.

Let me follow up a little bit as well. I think one of the things we did, maybe we were, as Joe said, a little expensive in thinking that we could expand our audiences on things that we knew we could capture one large niche audience, but tried to go a little broader. And moving Haunting in Connecticut from the summer play period to this year, while we are taking some additional losses on it in this year, I think is another example of just really not reaching too far.

Expanding the answer to your overhead question, I think the point I was trying to make in my remarks is there a number of businesses where we've brought on some overhead to look at some new businesses. And I think that you will see, and I would hope to announce, the next quarter some things that we've done to reposition some of our assets, and frankly, reposition some of our overhead where if the overhead is not supporting more immediate productivity, if you will, we will be cutting it.

Ben Mogil, Thomas Weisel.

Good morning. A couple different questions. First of all, Michael, I wanted to know if you could talk a little bit more about the Pride's slate and what allowed them to sort of stop funding? Do you guys have any remedies for it? And whether the three films you were mentioning, does that include Spirit and Bloody Valentine or is that not including them?

Well, the fund itself stopped funding, Ben, before The Spirit. So The Spirit is not currently in the Pride facility, nor will Bloody Valentine nor will Tyler's new movie. And that was the position, that with the senior lenders in that facility, that the borrowing base was not sufficient to continue funding forward.

And that is something that you, I guess, are not disputing. Is that correct?

Well, the mezzanine and the equity have not yet weighed in on that, Ben.

Okay. How much longer do they have -- do the mezzanine and equity have to sort of respond one way or the other? Or better yet, did they fund -- did the mezzanine and equity fund their share of The Spirit and Bloody Valentine, as well?

No, as I said, The Spirit was not funded by the fund, and the equity and the mezz are evaluating their options at the moment.

Okay. In terms of -- I think you know -- and this may be a Jim question. In the quarter, you talked about $19.1 million write-down for unreleased films. Is that films that have not yet at all been released, or is that films that have been released theatrically but not yet on DVD, and sort of readjusting the ultimates because of weaker theatrical performance?

They have not been released at all.

Okay. What sort of led you guys to take that size of a write-down?

Because we looked at the current environment and just analyzed the films and took an exceedingly conservative approach to how we thought those films would perform.

Is a combination of write-downs in library, unreleased direct-to-DVD product, as well as theatrical. So it is really a combination of all of those, Ben.

Okay, fair enough. And then I think -- you know, this week we obviously saw DreamWorks go to Disney, a lot of that being driven by the Starz output deal that Disney had with [Sound] Limited. What is your take on sort of does that change how you guys see Epix coming along? I realize you can't give carriage discussions, but is there anything that we can read through on how the landscape is changing here?

I don't know that that deal has been made yet or finished. And I noticed that the pay slots were mentioned in it, but I think really it was a much more a factor of the financing that they were looking to change. In terms of Epix, we do have a number of a traditional and nontraditional solid offers right now, which we hope certainly to close imminently. And we are planning on going, as we said, on demand, online, starting in May with EpixHD.com.

And obviously, we are confident that with the package that we have, with the new original programming, first of which we announced today, and the kind of slate we have, that we are going to get this done in time for our launch in October.

If I remember correctly, you have to fund up to $30 million for your share and up to $42 million if certain performance targets are met. Based on where you see the world right now, is it more likely that you'll be at the 30 number or the 42 number?

I'm guessing that it will be the 42 number.

Okay. And then I think lastly, you bought back some converts in the quarter. Is this something that we should be looking for on a regular basis, sort of buying back some of the convertibles where appropriate, or is that sort of a one-off liquidity situation?

I think we have to be opportunistic, Ben, and take a look at both our equity and our convertibles at specific times. We thought that that trade of the 3 5/8 at the levels that we bought it, we thought that was a good trade.

Great. I think that's it for me. Thanks, guys.

Douglas Creutz, Cowen and Company.

Thanks. You talked about the fact that the ending of the Pride deal impacts your free cash flow by about $65 million, I think, in the quarter. Could you talk about what this is going to mean for fiscal '10, given that -- presuming none of those films are going to be covered by that as well, how is that going to impact your free cash flow next year? Thanks.

We are not guiding to free cash flow for next year. It is too early for that, Doug. But we did talk about obviously we do not have a fund in place for next year. Does that mean that we won't ultimately have a fund? No. But we will always look for partners and mitigate risk, as Jon has talked about. So the only guidance we are giving at this time is EBITDA in excess of $50 million without our ultimate contribution coming from TV Guide.

Okay, thanks.

James Marsh, Piper Jaffray.

Two quick questions. Just to get back on the slate financing side, obviously Pride is going away, but what is going on with the SGF fund? And if that is still in place, could you just review what the collateral related to that facility is? Then I have a follow-up.

We have used the SGF fund for certain of our releases. The collateral that we have to use for the SGF fund, we put it into a restricted bank account. We collateralize it about at 105% of what we get from them. Still available total from them is approximately $140 million, and we can still use it in the future.

We are having conversations with other people for similar slate financing, as well as the fact on the picture that we just green lit, we already have a number of potential investors in this. So co-financing is an option that is still going to be available to us. I think the point we were making earlier is that we do not have a full slate financing deal in place right now.

And that collateral -- the collateralized (inaudible) is not from the SGF fund. I just want to clarify that. It's another facility.

And just to rewind on the whole Pride situation, if we go to back up and we look at how when Pride was first implemented, obviously you had more releases, the releases were wider. P&A was higher. Lionsgate paid some of the P&A upfront for Pride. So all that led to kind of a compression of EBITDA. And the thinking was at some stage, that would reverse.

And obviously, with Pride going away, the slate being smaller next year, would you expect that to reverse, or do you think that the theatrical underperformance and the home-video underperformance of those movies is so poor that there will be no reversal?

I'm not sure -- what are you asking about what is reversing?

Okay. Well, you pay a lot of P&A upfront, right, during the theatrical channel, that is not very profitable. Then those movies eventually move through other windows that are more profitable. So you have EBITDA that is effectively compressed early on when you are ramping up your slate.

Then when your slate starts to go the other direction, you would think that as those movies started to move through more profitable channels and the P&A is lower on the new films that it would actually help EBITDA.

Got you. Here is the macro view of that, is that that certainly is happening. We are going to have, unfortunately, less of a beneficial rollover year to year than we would have liked, but it definitely will be positive. That is kind of how we are going to swing from significant negative EBITDA this year to positive EBITDA next year. The investment in the new slate actually will help a little bit, really more in terms of the marketing -- less incremental or actually reduction in our share of the marketing spend. So yes, that is what is happening. That is how we are getting the swing in EBITDA.

Okay, great. Thanks.

(Inaudible), JPMorgan.

Thank you. My first question is about The Spirit. Do I understand correctly that you funded 100% of the P&A? And then the second question is about your TV licensing revenue streams. To what degree is pricing locked in at this point? If TV advertising keeps deteriorating, is it possible that your clients will come back and try to renegotiate current contracts? Thank you.

Let me take The Spirit question first. Spirit was not in the Pride Pictures fund. But we did have a partner in the fund, Oddlot Entertainment, who participated in both the production and the P&A on that picture.

The second part is no, I don't anticipate any of our customers, who are all AAA customers -- or almost all AAA customers -- going back on any deals. The international TV market, interestingly enough, is very strong right now, because I think in the international market the clients are going away from producing expensive series for themselves and are buying library and US television shows, and I think that is going to be a very strong market.

And domestically, the only place I see it really affecting us is a barter. That would affect things like the Debmar-Mercury. As a matter of fact, my $300 [million] estimate on revenue for Meet the Browns and House of Payne is really down pretty significantly from where we thought it would be. We have taken a conservative look at it based upon the soft ad market and reduced our barter estimates on that.

Thank you.

David Joyce, Miller Tabak.

Thank you. Just wanted to see what kind of color you had -- incremental color you had on the fourth-quarter DVD business. Are you seeing any slowdown in cash payments on the product going out the door?

Other than the Circuit City problem that we encountered last quarter -- in our Q3, when they went into liquidation, no one else is currently slow. There are a couple of retailers on which we have our eyes, at least we have our eyes on domestically. But we are definitely keeping a close eye on our credit line. We are not inclined to increase the credit line for payment terms.

We also, since we operate in the UK, we look at that market very closely as well. We obviously had a very large retailer go into liquidation during the quarter as well. So there was a charge during the quarter for them as well, and we are doing the same thing in the UK.

Thank you.

Robert Routh, Wedge Partners.

Good morning, guys. Just a few quick questions. First, given what we've seen in the industry, obviously, there is a slowdown in the home-video market everywhere. You guys have one of the best distribution -- home video distribution infrastructures out there, because obviously a few other companies that are trading at dirt that you could probably get for free. And given your balance sheet and what is going on, obviously there are a few accretive things you could look at.

I'm just curious as to whether or not, in addition to TV Guide, there are other things that you are looking at, both on the content side, given the Image Entertainment deal appears to be broken, and I know you guys went after that a few years ago. Now you could probably get it for half of what you were looking at before, if not significantly less. Genius Products are still out there trading at a couple pennies; they've got a great home-video distribution with a lot of SKUs.

It seems like there's a lot of opportunities out there. I'm just curious, while you are digesting TV Guide, are there other accretive deals where you have all the leverage that you might be able to put together to continue generating both internal growth as well as accretive growth through acquisitions?

I think -- we definitely want to continue to leverage our infrastructure, Rob, but I think at this point, our main focus is on actually streamlining, looking at the businesses that really can provide real incremental margin. And you can see what happened here from a pure distribution function, when you've got the write-down that we took on Hit, it really ate up so much of our profit from the distribution of our other home entertainment businesses.

And so I think that we really have to be careful, and my guess is that without putting up any money, or certainly without buying companies, we will be able to take advantage of companies out in the market place that are looking for efficient distribution at a fair price. So again, I think the key thing for us right now is to focus on those businesses that can be more profitable.

Okay. And second, it seems as though the fourth quarter, you guys have done substantially better than in Q2 and 3, given My Bloody Valentine's results compared to The Spirit and The Punisher, as well as some of the Tyler Perry home video releases that were top of the charts.

I'm wondering if you can comment a little bit on what you are seeing so far this quarter, in the current quarter, in terms of your performance relative to the quarter you are reporting now, and whether or not you expect that to continue going forward as a result of some of the initiatives you are taking in the reduced spending and marketing, etc.

Well, Rob, yes, we've had some -- as I think Jon mentioned in his comments, or Joe did -- you are seeing even a bad theatrical run where we ultimately didn't perform well -- movies like Best Friend's Girl seems to be sort of at least gaining back some of its losses in the home-video area. The fourth quarter has been typically a good quarter for us. We've released pictures in January and stayed away from the Christmas releases.

But again, the theatrical business is -- it important to note, just sort of laying it out there, is that our theatrical slate putting out profits of $35 million, when if you compare that to last year, it is $100 million or so less than that. Our theatrical business drives much of our video business. It hits in the fourth quarter, so you get whacked a little bit. You get a double whack, not only on theatrical but also in the home entertainment space.

Okay, fair enough. Then just last question is kind of a follow-on to one of the other questions asked about your repurchases and all of that. Obviously, you've been opportunistic and made some great acquisitions getting some dilutive overhangs off the stock. But looking at it today where you are down 18% and you do still have a buyback authorization in place, has management considered either tendering for a large block of stock the Dutch auction like John Malone would do; saying hey, our stock is too cheap here, $50 million; you pick the price and just reduce the equity cap. Because it seems like that is probably the best use of your capital right now in this environment, and you do have a solid balance sheet and access to a lot of funds. Or even potentially privatizing the Company, because being the only independent standalone publicly-traded film entertainment company, it is very hard for anybody to come up with comps in terms of what are you worth vis-a-vis someone else. Everyone else is part of these larger conglomerates.

I'm just curious as your stock drifts to these levels whether or not that thought process has entered management's mind.

Rob, as we all know, we've always had volatility about our earnings announcements. But we obviously can't telegraph whether we are in the market to buy stock or in the market to buy converts. We are restricted over a period of time post a release and when we have inside information from purchasing our own securities, as you know.

But we are very cognizant, even in this brutal economic environment, we are paying attention to our stock price. We pay attention to trying to increase our visibility, as we talked about. And so we are going to be opportunistic both in acquisitions that we look to be accretive, and that could ultimately lead to our own securities, as well.

Great. Thank you very much.

At this time, we have time remaining for two questions. David Bank, RBC.

Thanks very much. A couple of questions. The first is, can you clarify what the duration of the average affiliate carriage agreements are with the existing TV Guide agreement? And can you talk a little bit about whether or not there are restrictions on the content, and do you ultimately have to keep the scroll on the screen? And just qualitatively, how do you think about that? How long does the scroll have to be on the screen?

Two more questions. The second one is -- or the first of those two is, Steve, you talked about your performance in conversion and index versus the box office being about 23% above average. For what time period is that, and can you actually give that conversion ratio?

And last on My Bloody Valentine, can you talk about ticket pricing on the 3-D theatrical run, and how that compared with what your expectations were, and generally, guys, what you think of 3-D ticket pricing? Thanks and sorry for so many questions.

The way we look at the scroll is, number one, the scroll doesn't exist in any of the satellite and telco homes. It's a full-screen offering, just like any other channel. In terms of cable, I think certainly the scroll will be phased out as we move to all digital. But right now, the scroll is a value to the cable subscribers, and we will work together with the cable MSOs to figure out the proper timeframe to phase it out.

It is kind of interesting, when you think about a TiVo world, the fact that, for the advertiser, a lot of commercials obviously are missed by people who are TiVo-ing. And at least those commercials, while it is two-thirds of the screen instead of a full screen, when people are all on that scroll, they are certainly paying attention. They are not zapping those commercials. So I think it is not as significant as one might think.

The carriage agreements, obviously, I can't really talk about them, other than to say that they are all over the board; some are long-term, some are short-term. Those are the discussions that we will start having with the operators immediately after taking over the asset.

And the description of the channel, I think what you see on the channel is pretty much what it is. It's an entertainment-focused channel, and that is what it is going to remain. I think we've got a lot of ideas on what we can bring to that channel. We like that demo, as I said earlier, 30- to 50-year-old multicultural women. It's an audience that we speak to a lot. And I think, again, we can improve the programming, we can improve the marketing and we can improve the CPMs pretty significantly.

David, I'll take your question on the conversion rate. The conversion rate is calculated for all calendar 2008 live-action pictures. And the calculated rates that we throw from publicly-available information is 1.01 for that period. We are the only studio above 100%. Our internal number that we calculate internally is actually higher than that, but for the purposes of comparing us to the other studios, we use apples-to-apples comparison using publicly-available information.

And does that include Blu-ray and rental as well?

Yes, that is all consumer; it's basically all consumer revenue for purchases and rental compared to box office.

Has the conversion ratio trend changed at all as you've cycled through the year? Because that is a total '08 year. So -- I mean, I am just trying -- actually, I think a lot of us are trying to get to has the conversion ratio slipped sequentially or has it stayed pretty steady?

I think over the year, it is definitely slipped downward from 2007. We don't really look at it periodically. We tend to just look at it for the year, and we are mostly concerned with how our individual films performed. And our goal is always to overperform box office, and depending on the picture, we overperform by a wide margin. And in some cases we don't.

The conversion rates for pictures with -- it depends on rating dramatically. As a matter of fact, the conversion rates for G-rated films, for instance, dropped the most last year. They dropped by 31%. Whereas conversion rates for R-rated pictures only dropped 3%, which kind of speaks to the sweet spot of our release slate.

Great. And then just on the -- My Bloody Valentine.

On the 3-D ticket prices, I don't have the detailed breakdown yet. The ticket prices were higher. We -- it looks like they were higher enough to actually cover the cost of the glasses, because there is a significant cost in actually putting 3-D glasses out there that we bear. It appears to cover that. We are not clear yet whether there is a margin there in it.

The thing that we are focusing on is really just the general demand for 3-D and the ratio of 3-D versus 2-D in terms of the box office, which in this case was about five-to-one, which is very favorable and exciting, and we are going to continue to focus in this space.

Thanks very much for all the questions.

Matthew Harrigan, Wunderlich.

On the 3-D side, I think you said the conversion cost of that algorithm were only a couple million dollars, and obviously you get a pretty powerful kick, the five-to-one that you cited. Is there anything specific you can say project-wise? And I know you were pretty closed kimono on Valentine until shortly -- somewhat shortly before it was released. So that would be my principle question -- and also, is there any franchise potential for Valentine?

The answer is we are working hard to find the next one. The trick, the thing that we have to focus on as much as the project is actually release date. Because with all of the particular -- major studio, 3-D animated stuff out there, one of the keys is just finding a window where you can get three weeks of clear playability, because there is still a limited number of screens. And with the financial situation out there, it has slowed down the buildout of that infrastructure.

So we are very focused on it. We would like to have one out next year. We do see some franchise ability in Bloody Valentine. We are focused on really what that conceit is that will take that franchise forward. We did a lot of research. We did a lot of research on the exit polls in that movie -- more than normal -- to really try to understand what drove people to it. I think we have a decent idea.

Beyond that, I don't want to get into specifics about exactly where we are going to go with the franchise. But we do see potential in it.

Thank you.

Thank you all. We will see you next quarter.

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