Starz Entertainment Corp (STRZ) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Lions Gate fiscal 2009 Q4 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given to you at that time.

(Operator Instructions). And as a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Mr. Peter Wilkes, Senior Vice President of Investor Relations. Please go ahead.

Thank you for joining us on our Q4 call. We'll open with remarks from Jon Feltheimer, our CEO, Michael Burns, our Vice Chairman, Joe Drake, Co-COO, and President of the Motion Picture Group and Co-COO, Steve Beeks. Also on the call are Jim Keegan, our CFO, and Rick Prell, our Chief Accounting Officer. After their remarks, we will open the call to Q&A's.

The matters discussed on this call include forward-looking statements. The statements are subject to a number of risks and uncertainties. Actual results on 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 Lionsgate's annual report on form 10K filed with the SEC on June 1, 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?

Thank you, Peter, and thanks for joining us this morning.

We finished fiscal 2009 on a strong note, with our second biggest revenue quarter. And as you've read in the press the past few days, we've carried this momentum into fiscal 2010.

In the first part of this year, we've reaffirmed the value of our unique film model, arranged an improved balance sheet, executed an M&A transaction to finance a new business, extended a distribution deal with an important international partner, and continued to grow our library, our television and our DVD businesses. In fact, this quarter is a reminder of why you invest in our stock.

Let me go through some details. Our partnership with One Equity Partners, the private equity investment arm of JPMorgan, completes our plan for adding the TV Guide Network and TV Guide.com to our growing array of assets, combining our growth and diversification strategy with financial discipline.

OEP and Alan Shapiro bring to the channel strong resources from two partners who know the asset well and share our vision for building it into an industry leader. We are targeting a January 1, 2010, redesign of the channel, with new branding and upgraded programming.

Not only have we started the year strong from an M&A perspective, but we're off to a solid start operationally across all of our businesses. We achieved our best box office quarter during Q4, with $190 million at the domestic box office, giving our film business strong momentum, entering fiscal 2010 with a slate that focuses on areas where we know we can win.

We strengthened our film business with the recent completion of our distribution deal with Relativity Media. The Relativity deal adds three to five quality titles a year, from the same company that brought us 3:10 to Yuma, The Bank Job and Forbidden Kingdom. It allows us to expand our slate, with no additional production costs or P&A exposure.

We strengthened our library and home entertainment businesses by extending our library deal with Studio Canal, while at the same time strengthening one of our key international relationships. Studio Canal is a great partner in our UK DVD joint venture, helping us to achieve new performance bests.

And we've closed a deal with their German subsidiary for the distribution of five pictures, including Five Killers and My Bloody Valentine. We expect to do more business with their outstanding German management team and with Studio Canal itself in the future.

Our home entertainment revenues are up year-over-year, and we continue to capture market share from our competitors in a very challenging marketplace. Our market share through the first four months of calendar '09 is a major studio level 8.2%. Our home entertainment business grew more than 5% last year, holding steady margins in the process, and our library revenues grew 6% to a record $279 million, underscoring the resilience of our catalog, even in a down economy.

Our television business is achieving rapid growth in all four segments, production, syndication, reality programming and channel assets. Before the contribution from our channels, we expect the TV group to generate over $300 million in revenue this year, up from our record $220 million last year. We expect our TV production and distribution businesses to combine for a $35 million contribution to overhead this year.

So what's working so well for us in television? We focus from the beginning on our approach, targeting cable and pay television for our scripted content. We focused on reality programming as a means to exploit no-deficit profitable shows. We focused on being the only independent syndicator because we saw an opportunity to create new models for syndication, and to distribute third party content efficiently.

And our strategy is working. Let me mention a few highlights. By the end of this year, the Awesome Tyler Perry will have delivered 226 episodes of his two ground breaking series, House of Payne and Meet the Browns, which we expect to generate more than $300 million in total revenue. House of Payne is the number one new syndicated show of the season, and we expect Meet the Browns to follow in its footsteps.

Madmen creator and show runner, Matt Weiner, has signed a deal with us for two additional seasons, and his television development projects will be exclusive to us for the next two years. He joins Weeds creator and show runner, Jenji Kohan, as two gifted creators of some of the most iconic programming in television today.

Nurse Jackie, starring the Sopranos' Edie Falco, premieres next Monday on Showtime right after Weeds, coming off very strong critical reviews and a terrific Showtime promotion. Within a few weeks, we believe that everyone will begin referring to her as Nurse Jackie's Edie Falco.

Wendy Williams, which I should remind everyone is a show that we own and not just distribute, giving us tremendous upside, launches nationwide this summer, and joins E! True Hollywood Stories, House of Payne, Meet the Browns, Family Feud, South Park, American Choppers, Deadliest Catch and the Surreal Life, as shows handled by Debmar-Mercury.

Not only is Paris Hilton's New BFF from Ish Entertainment beginning its second season on MTV this Thursday, but if you'll pardon the geographical tongue twister, Paris has taken her show and is doing additional episodes in London and now Dubai. All told, our television business has nearly 20 series on 11 different networks in production, in distribution through Debmar-Mercury or through our Ish joint venture.

Our core businesses are off to a strong start this year, and after approximately $420 million in new investments over the past three years, our newer businesses are also beginning to make meaningful contributions to our growth and anticipated profitability. This year, we expect Mandate Pictures to contribute approximately $14.5 million before overhead, Debmar-Mercury's titles to contribute $15 million, Maple Pictures about $7.5 million, Lionsgate UK another $4 million, our television production business nearly $20 million, and TV Guide Network to contribute between $20 million to $25 million to EBITDA after overhead and before minority interests. There is every reason to believe these contributions will continue to increase in the future.

As Joe and Steve take you through the performance of our different businesses in the quarter, keep in mind the value of each of the component parts of the business they are describing. Almost every investment we've made has not only turned profitable and begun making a contribution to the bottom line, but has shown its strategic value as well, and we believe that all of these assets will continue to grow.

Now I would like to turn the call over to Joe.

Thank you, Jon. As Jon highlighted in his opening remarks, the performance of the film group in Q4 is just one reminder of why you invest in Lionsgate. We released four films in the quarter, and the results underscore exactly why this business is so valuable.

On the surface, a warm hearted comedy like Medea Goes to Jail and a cutting edge 3D horror film like My Bloody Valentine, may appear to have little in common. But if you look deeper at our Q4 releases, they all share the same familiar Lionsgate DNA, content made for the right price, targeted to a very specific audience, with execution in core areas where Lionsgate expects to win. The result is over $55 million in ultimate profitability, generated from the slate in that quarter, with three of the four films averaging well over 20% margins.

We're particularly pleased with the performance of Haunting In Connecticut, a film we moved into late March because we saw a window of opportunity, a move that paid off. Also during Q4, we closed a multi-year distribution services arrangement with Relativity Media. In the process, we secured a core supplier of proven hits to Lionsgate, further added a degree of risk mitigation and balance to each annual slate, and enhanced our ability to create value by improving the caliber of our third party releases and further leveraging our infrastructure.

As we look ahead to fiscal 2010 and beyond, our approach is simple. Continue to strengthen the areas where we excel today, and steadily take territory in areas where we know we can compete and win, given our personnel and market position.

On our last call, we told you we were reducing our slate in fiscal 2010 to about 12 films. The size of the slate is partly a reflection of a crowded marketplace, but equally a reflection of the fact that we prudently pull the trigger less often while we work through a shifting business. We purposely took the time to analyze our market position, examine our unique strengths, and focus our strategic plan around those strengths.

You can see these principles emerge in components of our fiscal 2010 slate, including I Can Do Bad All By Myself, the next film in our continued partnership with Tyler Perry, underscoring our intention to lead the branded African American marketplace. We like this space for the extraordinary ability to drive box office with limited P&A. As an example, we spent a little over $20 million in P&A on Medea Goes to Jail, to drive more than $90 million in box office, a very rare dynamic in today's business.

Precious, like Monster's Ball and Crash, is exactly the kind of film on which Lionsgate has proven that our particular brand of focus can add value like no other studio can. Monster's Ball and Crash are not only among our most prestigious films, they are also among our most profitable. And with the help of our partners Tyler Perry and Oprah Winfrey, we expect great things from Precious this fall.

Paris With Love, starring John Travolta and Jonathan Reese Myers, is another example of our team landing an edgy, character driven action film, a genre we know we can dominate. And of course, our work horse franchise Saw is back in its October slot.

With a renewed focus on our core strengths, we plan to release a minimum of 14 films in fiscal 2011. That slate will more fully reflect how we think about our normalized business. The overhead for the film business is a little less than $60 million on an allocated basis, meaning year in and year out, we have a $60 million hurdle to profitability as a division.

We've built a very achievable plan for 2011. Our baseline projection is $100 million in ultimate profitability, with room for significant upside with any breakout hits. We are already well into the work of building the fiscal 2011 slate with films like Tyler Perry's, Why Did I Get Married 2, Expendables, Warrior and Five Killers, as well as the titles we expect from Relativity Media.

From time to time if a particular value proposition emerges, we may pursue a model that calls for a higher production cost than a typical Lionsgate film. But we will do so only if the package offers a unique combination of financial elements, such as strong international sales potential, significant domestic upside, and can serve as a meaningful value driver in packaging our other businesses. Such is the case with Five Killers.

By executing on a programming strategy anchored in our core strengths, every one of our 14 or more annual releases has the potential to become a breakout hit, launch a franchise, and have a transformative effect on valuation.

I look forward to speaking about our fiscal 2010 and 2011 slates in more detail in upcoming calls. Steve?

Thanks, Joe. We had a strong Q4 at home entertainment. We capped the year with record DVD and library revenue. We achieved this growth in a difficult marketplace by focusing on our core strengths.

Our home entertainment revenue grew to $676 million in the year, up 5% from $645 million in fiscal '08. Our DVD market share grew to a high of nearly 7% for calendar '08, and climbed to 8.2% in our fiscal Q4. Library revenue grew to a record $279 million last year, and average DVD wholesale prices for our deep catalog were at approximately the same level as fiscal '08. We've taken significant steps to ensure the long-term strength and vibrancy of a library that we expect to continue contributing at least $80 million to $100 million in annual free cash flow.

We have just extended our distribution agreement with Studio Canal for up to four years, extending it until the end of 2015 based on continuing to hit the performance targets we're already exceeding. This library contains 2,400 titles, including Terminator 2, Total Recall, Basic Instinct, Highlander and three Rambo pictures. As Jon mentioned, this continues to solidify our important and growing relationship with our partners at Studio Canal.

Many studios have begun to move away from representing third party brands and libraries, especially in this economic environment. But what others see as a distraction, we see as an opportunity. Our strategy is to pursue this business as incremental volume for our various distribution platforms, and incremental bottom line margin.

We continue to lead the industry in DVD to box office revenue conversion, and in fiscal Q4, Bangkok Dangerous, Transporter 3 and Punisher 2 all converted at over 150%, and were the industry's top three converting titles in the quarter. Revenue from Blu-ray sales was 8% of our total package media revenue for the year, all at higher margins than standard def DVD. During fiscal Q4, approximately 30% of our Blu-ray revenue was generated by our library titles, an important sign that Blu-ray is now a medium for catalog product, as well as new release.

Our digital revenue grew about 144% over the prior fiscal year, outpacing the overall industry growth of approximately 74% for calendar '08. Better news is that partially because we have been aggressively uploading library titles to our various digital retail partners, 30% of our digital revenue was generated by our library.

Through our previously announced relationship with Zed, the largest provider of mobile content in the world, we are working to bring their hit interactive mobile and television format, Instantly Rich, to the US, Canada, Australia and New Zealand. And we're also working with them on other ideas to monetize our existing asset base through mobile platforms, a worldwide market of over four billion customers.

Our previously announced deal with YouTube to monetize clips of our movies being shared to their site, is starting to see some traffic and is starting to generate revenue. During the past month alone, there were over 6.5 million views of Lionsgate's clips on their site. While this may seem small, we have just gotten started, and it demonstrates the potential to monetize our assets in both short and long form through our broadband partners.

During the quarter, we continued to experience challenges with our HIT Entertainment distribution deal, and we took an additional reserve of $16 million against that deal. This was due to a number of factors, including as we mentioned during our last call, the arrangement with HIT itself and a shift in retail shelf space available to the preschool DVD business during this quarter. We believe the reserve is now sufficient to cover the final two years of the deal. And we've actually seen some strengthening in the sales level of the key HIT brands over the past few weeks.

It is important to keep the packaged media business in context of the overall economy. While industry-wide package media revenue is expected to drop this year, we believe that if the economy picks up, whether late this year or next, packaged media sales will steady. Also, we have long said that within a few years, digital will provide replacement revenue and at substantially higher margins to any decline in packaged media.

We're starting to see that happen now. Digital is already making up for 25% to 30% of the decline in packaged media, and some analysts are projecting that by 2010, digital should be able to mitigate most of any further decline in DVD.

Our goal is to continue to perform at the top end of the industry, and we measure our performance by being able to do so. We will continue to keep our library revenue strong to over-convert box office to DVD norms, to execute on our brand management and distribution focus, and to aggressively pursue opportunities to monetize our assets on alternative distribution platforms.

Now I would like to turn the call over to Michael.

Thanks, Steve. I would like to take a minute to talk about our balance sheet and guidance.

We currently have approximately $230 million in cash and cash availability. Additionally, it is important to note that when we closed our current five-year bank facility last July, we created the ability to redirect up to $150 million of receivables for other potential financing, if and when that window opened up at reasonable pricing.

Although those cost of funds will likely be priced above our current LIBOR plus 2.25, we are currently in discussion to put an additional production facility in place. If we go to market, JPMorgan and Union Bank will be our joint leads.

Ironically, when talking about the strength of our balance sheet, I'm compelled to speak about a $500 million owed to us that is not accounted for in our receivable reporting section. These dollars are not added to our balance sheet until each contract's respective window opens. For instance, if we have a signed contract and have already made full delivery to a cable channel, and the air date for that movie delivered is July 2010, we would not list that contract as a current receivable.

To be more specific, in regards to our backlog of our current $500 million backlog, approximately 82% will be collected in fiscal 2010 and 2011, and it is important to note that these funds are owed to us by terrific long-term partners and credits, such as Showtime, USA, Turner, Starz, AMC and Universal. We continue to believe that the sum of the parts is the right metric, and the best way to value what we've been successfully building over the last decade.

By remaining the only true pure content and distribution play in our business, we find ourselves in the unique position of making the right long-term moves at the same time expensing $300 million to $400 million of yearly marketing costs. Or to put things in perspective, we are literally writing off 25% of our top line revenue every year as we build the business and our core library assets.

If one were to break out each of those respective businesses and put a fair multiple on the EBITDA generated from each, we believe a sum of the parts analysis would clearly show the significant value we are building with every piece of content that we touch.

I would like to close with 2010 guidance. Going forward, our adjusted EBITDA forecast will now be defined by adding back the following items. P&A, which could be provided by a third party or, like the Relatively deal, backed up by them, non-cash compensation and non-recurring expenses such as severance and corporate defense advisors.

Additionally, although we anticipate consolidating all of TV Guide revenue in EBITDA, we will be reducing our adjusted EBITDA in the minority interest line by the amount of OEP's equity participation. We believe this adjusted EBITDA definition, often referred to as [OIBITDA] by others in our industry, will give you a better indication of both our operating income and the overall health of our businesses. We are currently guiding to $75 million of adjusted EBITDA for fiscal 2010.

I would like to now turn the call over to Jon for Q&A.

Thank you, Michael. The floor is open for questions.

(Operator Instructions). Our first question will come from the line of Alan Gould with Natixis. Please go ahead.

Thank you. I'm going to start off with a bit of a general question. To go from EBITDA of a loss of $140-ish million or so to $75 million, that's a $215 million swing in the year. Can you give -- can you break that down a little bit? I mean how much did you lose on the '09 schedule as a starting point?

And the second thing is, the industry's very concerned about the growth rate of home video. As Steve addressed it to some degree, but if home video is flat, how does Lionsgate stay a growth story? Is that all the new investments that you were talking about?

Well, Alan, the '09 slate in '09 lost approximately $130 million, where going to the next slate, we would anticipate the 2010 slate, in 2010, we'll have nowhere near a loss of that magnitude. And the rollover effect from the $130 million loss from the '09 will be a positive $140 million in 2010.

Okay, Jim, what's the normal, what's the slate normally -- if you look back the last five years, on average, what does a slate normally lose in its initial year?

'09 was 130, the '08 was about 52, in that range, so $50 million is probably a more normalized loss, if not a little bit less.

Okay.

Alan, this is Steve. I'll answer your question kind of based on home entertainment.

We've obviously managed to grow our home entertainment revenue in what has been a difficult market. As we mentioned on the last call, with the reduced theatrical slate this year, home entertainment will most likely come down this year 10% to 12%.

However, as we've said before, with digital picking up and you're seeing digital become a substantial part of our revenue, we think that within the next two or three years, you are going to see the home entertainment pie solidify, you are actually starting to see retail or consumer transactions overall but with rental and sell-through increase. More people are watching more movies than ever, so we actually feel pretty bullish about the home entertainment business over the long-term.

And the other thing we mentioned before is, the initial results indicate that the growth in digital is not really cannibalizing packaged media, that these are really new consumers. So, again, I think the future over the medium and long-term for home entertainment is actually pretty positive.

I think you're kind of mixing apples and oranges a little bit, Alan. Your questions really linking our DVD business to the growth of our Company. DVD really is a service business at the end of the day. It goes down in years where it's driver product, meaning film and television projects go down, and this year particularly, as we've discussed last year and this year, the results from our film business have been down. As Joe mentioned, we are looking definitely for an uptick in '11.

But where the growth of our Company needs to come from is from the driver business. It needs to come from our television business. It's going from, as we said, $220 million to $320 million. It's going to come from our channel business. It's going to come from new digital businesses.

Even in the DVD business what we see is, as Steve mentioned, the idea that even though they may be lower margin businesses, we're going to use the infrastructure that we've built to look at other third party projects, content that other studios may not want to target. And where we'll see incremental margin, again, not high margin, but incremental margin that is a contribution to overhead. I think really that's probably the better answer.

Okay. Thank you very much.

Thank you. Our next question comes from the line of David Miller from Caris & Company. Please go ahead.

Yes, hi, good morning. A few questions. Felt, on the January 1, 2010, relaunch of the, let's just call it the Lionsgate channel on the analog tier, does that imply that it's going to take you guys, I guess the next seven months to reprogram the channel, and then once there's this full launch, it will be fully reprogrammed? Or do you see sort of tweaking it further after the relaunch on January 1, 2010?

And then within that, at what point do you ask for higher CPNs? Is it six months later, nine months later? How does that work? Then I have a couple follow-ups, thanks.

Okay, good questions. You know, like any channel, it's not going to be a one-time refurbishing. What we are pointing at is in terms of what indicative look at what the channel's going to look like in the future, potentially new names, certainly new branding, is going to be targeted for January 1. The process of putting new shows on and continuing to upgrade, that's going to go on for a long, long time.

So, I think that's basically what's going on. I think you will see before January, you're going to see some new shows. You're going to see some new content on the channel. You'll see some new initiatives in terms of marketing. You'll see the input of Lionsgate resources into the process.

But again, I'm kind of pointing and telling people, start looking at this really significantly in January to understand that. In terms of CPM's, as you know, CPM's are very much a product of performance, and again, I think that while you'll start seeing that this year, I think really again we're pointing towards next calendar year to say, this is again, indicative of what this channel is going to start to be.

Okay. So, since the relaunch is going to take place, basically mid-season, call it, are you planning on doing anything for the cable upfront coming up basically in the next week or so, or is that just not an option? Should we look for you guys to be a participant in next year's cable upfront?

Yes, sure. You'll see us participate. We're meeting with every major agency. Historically the upfront has not been the most significant portion of our ad sales. I think this year will be the same.

I think what you're going to probably see in the marketplace in general is that there's actually more money out there than people think. But I think that if they can't get the right pricing, I think the advertisers are going to just hold off more of their inventory for scatter, and I think that will be good for us.

Right, right. And then Michael, on the new credit facility, should you decide to exercise the option there, what pricing do you see, given the current environment?

Sort of looking at the crystal ball, I think it will be about 100 basis points more than our current facility. LIBOR plus 3.25 will be my guess.

Okay, thank you very much.

You're welcome.

Thank you. Our next question comes from the line of Ben Mogil from Thomas Weisel. Please go ahead.

Hi, guys, good morning.

Good morning.

Good morning.

So couple questions. I'm not sure who the first one's for, so I'll put it out there and whoever answers, answers. Let's sort of talk a little bit about ethics. You know, what sort of carriage -- if you sort of use whatever subscriber penetration you think is realistic, how many households do you think you need to be in at a minimum in order to generate sufficient revenue to meet your pay TV grid obligations for either third party productions or even sort of what you would basically will have left at Showtime? I just want to get a sense of how widespread or not widespread carriage needs to be to sort of get yourself back to what you were say in '07 and '08.

I'm not sure I can really answer the question the way you asked it, Ben, because, again, anticipating Showtime, are we anticipating the old deal we had or the new deal, which I think the three CEO's have gone on record as we are being offered about 50% of our license fees.

I think at the end of the day, you know, we also -- we don't look at this as we're going to have all of our carriage on launch in October, and so it's kind of a rolling process for us. So, I think that's a difficult question to answer other than to say we're all very confident.

You've seen the results recently from the Paramount slate. It's been fantastic. We've ordered a couple of original shows and are developing more.

I think the three studios are confident of where we're going. We're confident that on an opportunity cost basis, this was the right move for us, and we're confident not only will we cover more of our license fees than we would have had under a Showtime deal, but that we will be building asset value as well.

Without getting into specifics about your partners, and I realize that you obviously want to be respectful of them, any concerns of some of the issues at MGM will have an impact on (inaudible) in terms of reduced output from MGM or just general sort of capital call liquidity issues?

I'm really not seeing that. I'm very confident that what they are doing right now is to strengthen their balance sheet. I've seen their slate of programming, including an original mini series that they are doing in a co-production with a UK partner. They have been very active. Their packages are filled with stars and big production value, and again, in conversation with them, I'm quite confident that they will fulfill their obligation as a tremendous partner in the venture.

Okay. Fair enough. I appreciate the questions are sort of somewhat sensitive, so I appreciate that.

Maybe flipping over to something else, on the TV Guide channel, you talk a lot in the 10K about migration to digital and the impact on the channel. Can you talk about -- are you at the stage, or is the channel at the stage with some of the MSO's, where their digital subscriber penetration is sort of at a stage where they have got the right or the ability to actually drop the channel from their slate? Or maybe you could talk more about that in general.

Well, I think it's kind of the opposite, Ben. In other words, I think clearly the world is going to digital, and that's going to provide us both with an opportunity and a short-term problem, meaning that we will most likely, we're already full screen product on Direct, Dish and Verizon, and we are already moving that way with one or two of the cable operators.

In doing so, and ultimately that will, over the next two to four years, that's what's going to happen. In doing so, as we move from an analog to a digital tier, you are going to naturally lose some subscribers in the interim period before their analog subscribers move all fully to digital.

For example, with Comcast, that could be 30% or so. I think Comcast right now is about 70% digital. So you might lose in a short period of time some subscribers.

But at the end of the day, our ultimate goal obviously down the road is going to be a full-fledged entertainment channel, and so we think that's definitely held us back with some advertisers who were bothered by the scroll product. Ultimately, I think we're going to be able to provide for our cable operators, our analog scroll service, and ultimately be migrating as well to a full screen digital product.

Was Equity One's plan for the channel, because they were obviously the other bidder, was Equity One's plan for the channel relatively similar to yours? Is your -- is the vision you kind of outlaid for all of us on the last conference call for TV Guide channel, is that tweaking at all with Equity One as a partner now?

I think Equity One basically saw the value of what this channel could be, and always intended to have a strategic partner, and I think they find in us the right strategic partner. They share our vision for the channel. They are excited about the Lionsgate resources that we bring to bear. This partnership couldn't have happened in such a quick time if it weren't for the fact that we basically shared similar philosophy.

Okay. Fair enough.

Then flipping over, I guess this question's for Steve. Steve, are the distribution fees from the Studio Canal, are they the same as what the old fees were like? I was a little bit interested in your comment that you're seeing lots of opportunity for third party distribution, which I certainly agree with, but when talking to the studios, they themselves are seeing similar opportunities. Sony has a number of pictures this year during major release dates that they are just acting as a third party distributor on.

So, wanted to get your sense on how competitive you find the market right now for third party distribution, and Weinstein obviously trying to do the same as they have got some capital issues as well.

Sure. The Studio Canal deal, there is essentially no change in the economics of that deal with the extension.

Okay.

So expect that to be the same.

In terms of third party distribution, one of the things that we've done, we've been able to go out after libraries, which is one of the things we've got a very deep library, which gives us a lot of power in the marketplace, and we continue to do that. We've done a great job obviously, the fact that Studio Canal decided to go ahead and extend with us now in our library indicates they are pretty pleased with what they have been able to do with their library.

Also we've got a particular expertise in building brands, whether it be in fitness or representing third party products. I think that the ability to, also going back to the library answer, the ability to keep library going, also the ability to represent their products if the electronics sell-through. We've been pretty successful with that.

I think that the ability to focus on those brands gives us the ability to compete effectively to bring those brands in-house versus some of the larger competitors, which have bigger fish to fry.

But have you seen the market for third party distribution certainly heat up over the last couple months?

I think it's been, it hasn't changed dramatically over the last couple of months. It's something that's been brewing for the last two years, obviously. As John mentioned, we have studio level market share. We're more than twice the size of our next largest competitor, so we have, a lot of those guys are having some difficulty in the marketplace, and I think that some of those, the brands and product owners are fleeing to safety, and I think that's what we represent.

Okay, great. Thanks. And then last question, and I'll let someone else get on the queue. I know that you gave guidance for television production business of $300 million. Have you given overall revenue guidance, or is that the only segment of guidance that we're going to get today?

I think that we would be willing to say that including TV Guide, our revenues will be up a bit this year, maybe about $1.5 billion, a little bit more.

Okay. That's great. Thank you very much, guys.

Thank you. Our next question comes from the line of Jeff Logsdon from Bank of Montreal. Please go ahead.

Thank you. First question, how much was spent in fiscal 2009 on M&A, legal-related expenses to issues that were going on last quarter?

Probably the $5 million range on that.

Okay. Secondly, in fiscal '09, receivable write-offs from the Circuit City's and others who went out of business, can you put a number on that one?

We basically took some reserves, well reserves at the end of the year for about $3 million. You see some bad debt expense, we took some for some companies in Canada, and we reserved some domestic and internationals for another couple million. So the total's probably about $3 million is what you see in my 10K.

And then lastly, the total number from HIT this past year, because obviously that's part of the big swing from a loss of $140 million to hopefully 75, what were the HIT reserves this past year total?

The total hit reserve was $36 million. Plus embedded in the year, also we had some losses from that in the year, so actually there's $10 million of additional losses just on the product. So at the end of the year, my fiscal 2009 had about $45 million of losses associated with HIT.

And obviously you feel like that won't be the case this year?

Yes, yes, Jeff. We do. We took the original reserve in Q3 because the preschool market had softened. But also because the information on which we based initial projections, on which the actual deal was based, we do not believe were indicative of the actual state of the business when we took over distribution of the brands. This is something we're continuing to discuss.

And this quarter, given the state of the economy, combined with the fact there's additional shift in the shelf space, we took another look at the deal, given the current state of the market, we decided that perhaps it would be prudent to be a bit more conservative and take another cut at the value of the deal. And we anticipate that we are now covered for the final two years of the deal.

Great. Lastly, how many episodes of Nurse Jackie will you guys deliver this fiscal year?

Well, we're doing 13. I actually don't know how many are in the fiscal year. I think -- my sense is all of them.

My belief is all of them also.

Yes, I think it's all of them, Jeff. 13.

Okay, great. Thank you, guys.

Thank you. Our next question comes from the line of Vasily Karasyov from JPMorgan. Please go ahead.

Good morning, thank you for taking the question. Could you please give us an idea of what kind of revenue expectations you have for fiscal 2010 for TV Guide Network, and what the split would be between advertising and (inaudible) revenue?

About $100 million of revenue, and call it 80-plus percent advertising.

Okay, and just to clarify, $75 million in adjusted EBITDA, that includes only roughly half of TV Guide EBITDA?

That's correct. We're backing out the minority interests.

Okay, and then about Relativity titles, what kind of revenue or average box office would you expect, and would it be fair to assume that your distribution fee is around 8%?

I don't think it would be appropriate to talk about forecasting there, either their box office projections or talk about their arrangement that we have with them.

I would tend to say that in all deals that are similar to service deals, which I think you could say about this, the margins are typically lower than when we either own the product or have paid for production. But I -- they are higher than what you mentioned.

And when you say that your guidance excludes P&A expense, that's P&A expense associated with this deal?

Yes, I mean typically, this is sort of the big issue I think that all of you have with valuing our Company in the sense that we are pure play content company.

This year I think we are expensing $550 million of marketing expense for our film and television business. That's well more than 25% of our entire revenue compared to the studios who are, what, 5%, their marketing up 5% to 10% of their overall revenues. So already there's really no comp for us there.

In this particular case, the arrangement's a little peculiar. It doesn't fall directly into the realm of service deals, but actually, given the back stop arrangement, it essentially plays out like a service deal. So we felt it was appropriate to adjust EBITDA accordingly.

Okay. Thank you very much.

You're welcome.

Thank you. Our next question comes from the line of David Gober from Morgan Stanley. Please go ahead.

Good morning, guys. Thanks for taking my question. On the TV business, it looked like revenues came in a little bit lower than the $250 million that you guys had been guiding towards. I was just curious what was going on there, and if there were any timing issues that might have been shifted out of the fourth quarter and into 2010?

Actually it's all timing issues. We had anticipated some Nurse Jackie revenue coming in. In fact, we have no Nurse Jackie revenue in this year. It's all going into next year.

Then we had some Tyler Perry revenues that's going to off shift to next year, timing ads and international revenues, basically [Fairtell] and Crash moving to next year. So basically the shift is all timing from this year to next year, the $30 million shift. And part of the $300 million next year.

Okay, and just a housekeeping item, on the new basis for EBITDA guidance, what would EBITDA have been in fiscal 2009?

We didn't compute that, but if you -- on a separate call want to go through the component parts, I think we can be helpful.

Okay, and just one final question on the obligation of pride, how -- over what period do you guys anticipate that unwinding, and how much of a drag on actual cash outflow is that for the next few years?

Okay. We currently have about $83 million due at the end of this year, and we anticipate paying out a little over $50 million next year. So the big drag next year, that kind of will slow down, but that's what we anticipate.

Okay, great. Thanks.

At the end of 2009, March 31, is $83 million, we'll pay $51 million in our fiscal 2010 cash back to the pride.

So we'll almost be done at the end of this fiscal year.

Okay, great. Thank you.

Thank you. Our next question comes from the line of David Joyce from Miller Tabak. Please go ahead.

Thanks. Questions were kind of answered, but on the TV business, you do have the shift coming in this year, but is that kind of seasonality going to be typical where we see spikes in second and third quarter?

I think Jim can take you through how lumpy it is.

It is, it is lumpy. Just looking through my projections, you can see, I would anticipate fairly strong first, stronger second, winding down third and light Q4. I mean, it's based on the deliveries and air dates.

Okay, and also on pride, how has -- in this fourth quarter, how did the funds shift, and did they more come into revenue because of your full ownership of those films?

No, revenue is not impacted by the pride facility at all. Basically it's treated as a participation, so revenue remained exactly the same with or without pride participation.

Okay, thank you.

Thank you. Our next question comes from the line of David Bank from RBC Capital Markets. Please go ahead.

Thank you. Couple of questions.

First, I guess on the DVD issue, it really seems like, seems kind of encouraging in a lot of senses. The only real category softness you guys are highlighting is in the preschool market, and I'm not sure if it's a demand or a shelf space issue. What is so different about that market? And I guess honestly, what gives you comfort that whatever's going on there doesn't kind of spread to the rest of the business?

And three other questions, the next one is, you've given us a pretty good road map to what you think baseline profitability can be. I know you never know how many tickets a movie's going to sell, but can you give us the assumptions for, on average, knowing that every movie is different, pure negative cost production and P&A for that 12-slate, 12-film slate and the 14-film slate in 2011? I guess -- I hate to hit you with this on that apples to apples 2009 EBITDA, what would it have looked like on the same basis as the $75 million guidance. But can you give us some order of magnitude, like would it have been a, not a loss or some order magnitude?

And then, thank you for taking so many questions. I'm sorry, the last one is, I'm a little confused on the P&A issue. Can you, on that adjusted EBITDA number, where I guess you don't record the P&A paid for partners, do you record all the revenue associated with the movie? And what exactly is the rationale for not recording the P&A. I know you said it, but if you could just walk me through it one more time, thank you so much for taking so many questions.

Okay. The answer -- we've had sort of the same question twice. So we are not taking the position -- we are not, we're not basically adjusting as if we were back in the year 2000, and (inaudible) to what happened, we are not adding back in, if you will, or amortizing a P&A in any different way.

The uniqueness of this year is that we have a deal that is brand-new, the Relativity deal that, as I suggested plays out very much like what a service deal, which is that Relativity is an operating company, and they are back stopping their P&A and paying the bulk of the production costs.

Therefore, in a typical service deal, we would not be expensing, but because of the unique nature of this deal, we are required to expense it. Therefore it is an unusual item, and therefore we are taking it out in the adjustment.

That's it. There's nothing unique. We're not changing the way, again, that we account for our P&A.

And again, we are actually still at an extreme disadvantage, even taking out just the Relativity part. We are at extreme disadvantage in the sense that our P&A percentage against overall, our overall revenues is so much higher than every major studio, given that we're mostly a pure play. We're not changing anything, and there's really no analogy back to 2009 or '08 or anything else like that.

But would you -- so you think the comparable revenues would be sort of comparable to a service deal, but you would be getting hit by 100% of the P&A, is that a good way to think about it?

That's exactly right.

And that's how you're adjusting for it?

That's exactly right.

Okay.

So there's no, there's no sort of look back that is asynchronous, if you will, so I really can't answer that question. And I'm not really sure what your other question -- what you're really looking for, if you're looking for, what's our average budget for films, what's our average negative -- what's our average P&A. It's really virtually all over the map.

As Joe said, Tyler Perry did $90 million on $20 million of P&A. I think we have talked before on sort of a larger action picture like 3:10 to Yuma, Rambo, we averaged probably around $27 million I would say going in, in terms of a P&A budget. Some of our either urban or genre pictures, I would say we typically would go in at $18 million to $20 million of P&A or 18 to 22. So it's really all over the map.

I think the way we look at our production budgets is very much about what the net amount, what we call minimum guarantee, our MG is against the domestic territory. So we don't think as much of what the gross budget is. We think about the net budget after tax credits, after investment by third parties and particularly after international sales.

What's our exposure going into the domestic marketplace? So we could have a film like, even Five Killers, where the net budget could be $50 million, but if we're getting more than $30 million of international sales, as well as driving probably $10 million or $15 million of incremental business beyond it in packaging, you know, we're looking at that spread of, call it $10 million to $20 million a minimum guarantee. Again, that's a complicated answer, but that's how we look at our business.

Okay.

Hope that's helpful.

Just on the DVD question?

David, on the DVD issue, particularly in the preschool market, for this quarter, what we did, what we experienced with HIT, among other things, was mostly a shift in shelf space away from preschool to other categories. Not necessarily an overall reduction, and while it's always a challenge, and there's always a chance that a retailer may change their focus, and we've seen a little bit of that, not a huge ground swell.

Overall, we see the home entertainment business as continuing strong, as I mentioned, rental is strong, digital is growing and strong. We see that retail market more related to the downturn in the economy than anything else, and while you can always be surprised, we pride ourselves on being able to find something in our bag, in our library, in our brands for every assortment at retail.

Okay. Thank you very much.

Two more questions.

And that will come from the line of David Miller with Caris & Company. Please go ahead.

Yes, hi. Just a follow up question on the guidance. Just running a few numbers here on the model, the adjusted EBITDA guidance of $75 million for fiscal 2010 admittedly looks awfully, awfully conservative, considering that you guys are excising I think $100 million of costs out of the overall model in terms of P&A and direct operating expenses, and given what's happening with TV Guide and also your stellar TV production business, which continues to hockey stick higher.

Are you guys -- just because of what happened in fiscal '09 with the free cash flow guidance, Michael, are you guys just -- can you shed some color around this? Are you just explicitly issuing just ultra conservative guidance here, or is something else going on, the film line in terms of number of releases that you feel you have to guide to the $75 million level? Thanks.

We think that's the right number, David, to focus on EBITDA. We do believe that 2010 is a little bit of an anomaly. We think that 2011, from the theatrical slate standpoint, will be a more normalized year for us.

Yes, and speaking of television, David, don't forget that we don't put bigger back end ultimates on these shows until we're well down the road. So for example, we're carrying right now as an ultimate on Mad Men of $150,000, and I think that you would agree that when we get to years four, five and put a larger ultimate on, it's going to significantly move up the TV back end. So, TV typically will add -- the growth of TV will add to the bottom line a little bit slower, given that we're not allowed to put a higher ultimate until we have kind of a syndicatable amount of episodes.

Okay, thank you.

Thank you very much. Our final question will come from the line of Matthew Harrington from Wunderlich Securities. Please go ahead.

Good enough. Two questions, I guess this is another iteration of a similar question, but can you give us just an approximate collar on what the amount of the third party P&A adjustment off Relativity would be that would flow into EBITDA? And then secondly, you had very good success with My Bloody Valentine in 3D, and obviously were hitting an inflection point now as far as 3D goes. I'm just curious what you have in the pipe to further develop that angle.

The add-back number right now from Relativity is around $35 million. And I'll let Joe answer the second question.

On the 3D front, we are -- we're developing -- on the 3D front, we have actually four targeted films in development. We think it's a space we can really, we can win and dominate in, so we're going to play aggressively in the space.

Great, thank you.

Thank you, Matt. Again, we're off to a great start here in fiscal 2010. Look forward to the next call.

Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.