Starz Entertainment Corp (STRZ) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Lions Gate fiscal 2010 Q1 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Peter Wilkes, Head of Investor Relations. Please go ahead.

Thank you for joining us on our first quarter call. We'll be beginning with opening remarks by Jon Feltheimer, our CEO who is joining from New York today; Michael Burns, our Vice Chairman; Steve Beeks, our Co-COO; and Joe Drake, Co-COO and President of Motion Picture Group. Also joining the call are Jim Keegan, our CFO; and Rick Prell, our Chief Accounting Officer. Following their remarks, we'll open the call to Q&A.

The matters discussed on this call include forward-looking statements. Such statements are subject to risk and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the risk factors as set forth in Lions Gate's annual report on Form 10-K filed with the SEC on June 1st, 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 and thank you for joining us on today's call. We've had a strong quarter with solid numbers and favorable quarter-to-quarter comps. Rather than reviewing our numbers in detail today, I would like to look beyond them at the value we're creating within our businesses -- in particular, the value we're building within our television segment. Joe will then take a look at our feature film business; Steve, home entertainment; and Michael will talk a little bit about our recent growth and our valuation.

We have been building a television business that is unique, profitable, and diversified. One might also say it's non-replicable because it's built on special repeat relationships with talent, innovative arrangements with various states for production and tax incentives, and creative new formulas for working with the network, and it's run by a group of executives with a special skillset designed to execute a distinctive and different business model. You can see again in this quarter's results that it's delivering the performance we anticipated, as we patiently have grown this business over the past 9.5 years. The value we've created is definitely not being fully reflected in our stock price. In fact, based upon our recent review of private market valuations, and using reasonably conservative projections, we believe that the value of our TV business alone currently exceeds the equity value of our entire company.

Let me spend the next few minutes just reviewing these TV operations. Our television business is divided into four areas -- production; the Debmar-Mercury production distribution and syndication company; our television partnerships, including our joint ventures with ISH Entertainment and Lost Marbles; and our fast growing suite of linear, on demand, and internet based channels, including TV Guide Network, EPIX and FEARnet. They also now include the KIX action channel and the Thrill horror suspense channel in Asia that we announced last week as well as our Break Media and TVGuide.com online businesses. Collectively, these businesses achieved revenues of about $115 million in the first quarter, including new revenue from TV Guide and ISH. Within the television segment, production revenues were $51 million, up 88% from the prior year's quarter, and revenues from Debmar-Mercury were $21.4 million in the quarter, up 59% from the prior year first quarter. As we look at all of these businesses together, it is a remarkably diverse portfolio. We have eight television series in production with seven different networks. We have another five first run syndications series in production on three different networks. And we have over 15 additional shows that we syndicate for third parties.

Our strategy of fitting together the pieces of a highly diversified business is working. To give just a few examples, our television division has created another compelling documentary, Facing Ali, for release by our theatrical business. Our television production team has been asked to produce the new Will Ferrell and Adam McKay sitcom starring Jon Heder that Debmar-Mercury will distribute for Comedy Central. Next month, our TV Guide Network Insanity TV show will provide an exclusive behind the scenes look at our television series Crash, Mad Men, and the Wendy Williams Show. And our television division has new shows like Tough Trade and the miniseries Atlas Shrugged in development for EPIX as we speak.

On the production front, Mad Men and Weeds continue to distinguish themselves as two of the top shows on television. Weeds just wrapped season five, and as it prepared for a sixth season next year, it is the highest rated series on Showtime. Including on demand and DVR viewing numbers, nearly 4 million viewers watched its premiere week last month on a network that is only in 16 million homes. As our TV executives say, Weeds just keeps on growing. With six seasons ordered and a seventh anticipated, we now expect home entertainment revenues from packaged media and digital sales of Weeds to be nearly $100 million over its first seven seasons. If that's any indication of ultimate demand for this show, this will be a very valuable long-term property.

Mad Men has become a premier television brand for both audiences and advertisers. It just picked up its second straight Television Critics Best Drama Award and has 16 Emmy nominations heading into the September 20th award show. Home entertainment sales for its second season on DVD are tracking two to one better than the first season's already strong sales. Nurse Jackie's premiere week in July had the highest delivery ever for a new Showtime series and repeated that strong performance the following week, and Showtime has already picked it up for a second season. And production of the second season of Crash is underway with a September 18th premiere on Starz. We believe that these four signature series are an important calling card for our television business and our brands. We also believe that these shows give us a potent lineup of products that can be syndicated in the years to come.

As they say in our business, what have you done for us lately? Well, our filming of the first 13 episodes of Blue Mountain State is almost completed and we have been given the plum time spot right after Entourage, when Spike launches the show next January. It's shooting in Montreal and taking advantage of the strong subsidies provided by the local government and our ongoing SGF relationship. Our upcoming Ford modeling docuseries has just been ordered to presentation pilot by CW network. Our partnership with ISH Entertainment, profitable in its first year, is quickly building value with six shows on the air or in the pipeline, including MTV's highly promoted series Gone Too Far and shows with Paris Hilton, Antonio Sabato, 50 Cent, and TI. We're creating similar partnerships with Marty Adelstein and Jon Kroll of Lost Marble productions, Wall Street 2 writer Allan Loeb and Steven Pearl of Scarlet Fire, as well as with Mad Men creator Matt Weiner, Weeds creator Jenji Kohan, and Weeds executive producer Matthew Salsberg. These executives and talents share our entrepreneurial culture and our passion for thinking outside the box, and they're all working in well defined targeted niches.

Another of these entrepreneurial companies, of course, is Debmar-Mercury. As I said before, Debmar continues to knock the cover off the ball in every area. With 46 more episodes ordered from TBS, Tyler Perry's House of Payne will deliver 172 episodes, rivaling some of the biggest sitcom syndication numbers in history. House of Payne and its spinoff Tyler Perry's Meet the Browns, already ordered for 80 episodes, rank as two of the top series on cable television and deliver more African-American viewers than any other TV shows. With the additional episodes just ordered, we now expect House of Payne alone to generate nearly $200 million in total revenue at margins of almost 20%, with Meet The Browns expected to soon follow in its footsteps.

Now Debmar has applied the same business model to two new shows. As I mentioned earlier, Comedy Central has ordered an initial run of 10 episodes of the new Jon Heder sitcom, with an additional 90 episodes to be ordered if ratings goals are met. Debmar is following a similar formula with a new sitcom from Ice Cube and entrepreneur Joe Roth, Are We There Yet, starring Terry Cruz from Everybody Hates Chris and based on Ice Cube's hit movie. TBS has ordered 10 episodes of the new sitcom, slated to premiere in June 2010, again with a success based follow-up order. In comparable success to the Tyler Perry shows, we have tremendous incremental upside and backend participation on both of these shows.

As I anticipated the Wendy Williams Show launched well in nationwide syndication last month, led by strong results in its two largest markets. In New York, Wendy is now the number one program from 9 AM to 5 PM, and in Los Angeles, Wendy's two-week average ranked number one in the time period and leads with young women.

Now, let me update you with developments on our two flagship channels. TV Guide, our partnership with JPMorgan's One Equity Partners has been very actively recently. On July 22nd, we announced our first major programming acquisition, Ugly Betty. The following week, TV Guide network signed Dancing With The Stars' Carrie Ann Inaba and The Bachelor's Chris Harrison to anchor its signature live red carpet specials beginning with next month's Emmy awards. We believe that combining what the network already does well with the unique cutting edge programming that distinguishes the Lions Gate brand is the key to successful future growth. In the past two weeks, our ratings have been significantly higher, indicating that as important entertainment news develops and is covered by our channel and new programming is added, the viewers will come.

EPIX is also gaining momentum as it approaches its October launch. We signed a carriage deal with Verizon two weeks ago to deliver the channel's movies and original programming in HD to Verizon's millions of (inaudible) customers, as well as on broadband and mobile. With our first deal in place, discussions are heating up across the spectrum of potential partners and we remain confident that we will have a number of carriage deals in place at the time of our launch.

Finally, let's take a quick look at our digital assets, FEARnet, Break Media and TVGuide.com. We're committed to monetizing digital distribution both as a replacement revenue stream and to create new high margin revenue. Growing assets like these support net strategy is also consistent with our strategy of extending our brands and our content into equity opportunities. Lake Media Network has emerged as one of the premier online platforms for young males, one of Lions Gate's most important audiences. Powered by Break.com and affiliated site such as Chickapedia, Cage Potato, Holy Taco, and Wall Street Fighter, it generates more than 400 million page views monthly. The last quarter saw strong audience growth in both their owned and operated properties as well as the Break Media network. Break's own sites grew 28% in the prior year's quarter and now reach over 30 million unique visitors monthly. Revenue has been growing accordingly and was up 97% in the first quarter over the prior year quarter. FEARnet, our partnership with Comcast and Sony, is available in more than 20 million homes and all the top 20 markets, and it is consistently ranked as a top 10 VOD network since its launch. Its key indices for both the VOD and dot com sides of the business continue to grow.

To sum up, there are not many television operations out there with the diversity of assets, content creation capabilities, full pipelines of product, and growth potential that our television business has shown. And I'm quite confident that these strengths will ultimately be reflected in its value trajectory. Now I'll turn the call over to Joe.

Thanks, Jon. While the quarter was relatively quiet from a theatrical release perspective, we've been gearing up for a busy schedule that begins with Gamer in September and doesn't let up from there. We've also been actively assembling our fiscal 2011 to fiscal 2012 slates and believe they offer some of our best opportunities yet. In a minute, I'll talk a bit about longer term targets for our film slates and walk you through a few of our upcoming titles that we see as potential catalysts for growth.

But first I want to briefly look at the business at large. On the revenue side, the theatrical business is as vibrant as ever, with industry-wide box office up almost 6% year-to-date. Though Crank 2 came in below our expectations, in the first three months of this year hits like Madea Goes To Jail, My Bloody Valentine, and Haunting in Connecticut combined to deliver the company's strongest box office quarter ever. Our home entertainment group continues to lead the industry in conversion from box office to DVD. As we design and build our annual slates, we're working closely with them to target our investments for those specific genres that we think have great theatrical upside and can maximize our return out of the home entertainment marketplace.

With respect to TV, it may surprise you to know that many studios not only have their content locked up for 36 months during their existing pay TV windows, but they're also meaningfully constrained as to what they can do in between these windows, particularly in terms of digital distribution. Conversely, our pay TV platform EPIX will provide Lions Gate maximum control over our own content during this valuable 36-month period, allowing us to fully monetize new digital windows as they emerge. It's still early days, but we believe this distinct advantage will deliver significant incremental value to each of our movies, and therefore value to our shareholders.

As we keep a close watch on top line trends, we're equally focused on the cost side of the ledger, and it's here we believe we have the kind of sustainable cost advantages that truly separate us from the pack. Where the major studios have imbedded operational and production cost structures to overcome, our overhead remains comparatively lean and we have a demonstrated track record of simply doing more with less. When fully allocated, we carry about $55 million in overhead against our division, which is a fraction of our studio counterparts. In addition to lean overhead levels, Lions Gate has a distinct advantage in terms of production budgeting. In other industries, the dominant players receive volume discounts, but in the film business it's the smaller players who enjoy more favorable pricing structures than the major studios. Lions Gate capitalizes on this dynamic and further enhances it through innovative deal structure with talent and aggressive line by line cost management.

When reading box office reports, the absolute numbers rarely tell our story. A film that makes $35 million at the box office will likely lose money for a studio, but will generally turn a solid profit for Lions Gate. And a film that sees even modest success by studio standards, say $60 million to $70 million in box office, can generate $30 million to $50 million or more in profits for us. So our lower overhead threshold means we face a lower hurdle to profitability as a division and our ability to generate commercial content at a price means a lower hurdle to profitability on a per-film basis.

How do we quantify that? With at least 14 releases on our theatrical slates going forward we expect the ultimate profitability from each slate to exceed $150 million a year by fiscal 2012, with the potential for significant upside from there in single picture breakout success. While the studios compete with one another on tent poles that require multi hundred million dollar investments, we're poised to reaffirm our position as the dominant player on the other end of that spectrum.

Let me take you through a few of the films we believe are catalysts for this growth. First up, Precious. With Precious we started with a fundamentally compelling film and then infused it with the marketing reach and brand appeal of both Tyler Perry and Oprah Winfrey to create an event we believe is like nothing else out there. At a studio, this picture would be released by its specialty label. Yet the same people at Lions Gate that released the Saw franchise have crafted the intricate marketing and release pattern for this picture. Our ability to release a Monster's Ball, a Crash, or a Precious as well as My Bloody Valentine with no separate division and no additional overhead is a testament to the versatility of our team and underscores the kind of value we drive from our organization.

Daybreakers, due out in January 2010, is a perfect illustration of what we mean when we talk about playing where we can win. Since the trailer debuted in June, it's gotten rave reviews from the horror community. Nobody does this genre better than Lions Gate, and we love the fact that our core audience is already engaged. Best of all, the picture's modestly budgeted, sold well internationally, and was built right financially from the start to drive outsized returns in even modest success. The Killers, due out in June of 2010, unites Ashton Kutcher and Katherine Heigl fresh off the summer hit The Ugly Truth. It's a fun, sexy, action-packed thrill ride that not only has the potential to launch a franchise for us, but has already proven to be a driver across several of our other distribution segments. Looking at the Ugly Truth, which could gross as much as $80 million in the US alone, we feel great about our chances to sell this cast and this concept to the marketplace.

The Next Three Days, the next film by Oscar winning writer-director Paul Haggis, lands right in Lions Gate's sweet spot as a an edgier, more daring version of a traditional genre. Based on the original French film Pour Elle, the movie couples suspense and action with exceptionally realized characters and asks the question -- What is an ordinary man capable of in extraordinary circumstances? It's also a great example of our commitment to a model of building right priced films with top creators, allowing both Lions Gate and our partners to share the rewards and success.

The last film I'll highlight is Hunger Games. Hunger Games is a juggernaut branded franchise in the publishing world. It's the first of three books in a trilogy by best selling novelist Suzanne Collins that we're adapting for a fiscal 2012 release. It spent 43 weeks on the same New York Times Bestseller list that has featured the likes of Harry Potter and Twilight. Hunger Games is the perfect fit for Lions Gate and gives us the rare opportunity to take an existing brand with a built in frequent filmgoing audience and construct it from the ground up into a potential franchise.

These are just a few examples. We have many more films in our lineup, each one with the potential to have a transformative effect on our valuation. I look forward to updating you with we speak next time. Steve.

Thanks, Joe. Our headline for the packaged media business is that our films, television series, and library have continued to perform relatively well what is a challenging packaged media environment. Overall for the industry, packaged media is down about 8% for the year, but digital is up more than 50%. And combining the two with the home entertainment business, industrywide is down approximately 5% for the first six months -- a pretty good performance given the economy. There are still plenty of opportunities to perform in this business and I want to highlight several bright spots in the first half of calendar 2009 that demonstrate both the breadth and resiliency of our product line and our capabilities.

First off, our packaged media market share reached 7.4% during the first six months of the year. Our titles continue to overconvert the industry average by a wide margin. In fact, we have five of the top six box office to DVD revenue converting titles in the industry -- Bangkok Dangerous, Transporter 3, Punisher War Zone, The Spirit, and New in Town all converted at well over 100%. I give a lot of credit to our theatrical group for focusing on the types of films that tend to overconvert in the home entertainment market. It makes our job a lot easier.

Mad Men and Weeds DVD and Blu-ray sales continue to rock. We released season four of Weeds on DVD in June, and the series is doing so well that we estimate that it will ultimately reach nearly $100 million in home entertainment revenue from its first seven seasons. And we are projecting Mad Men to bring in $20 million from DVD and Blu-ray sales from just its two seasons, and we like its growth curve with season two of Mad Men already matching the performance of season four of Weeds.

There are other very encouraging signs both for our business and a broader industry, and we see a better underlying product mix for the industry as a whole during the rest of year. And while digital revenues for the industry are up a healthy 50% so far this year, our own Q1 digital revenues are up 68% over Q1 of last year. In addition, although we don't include VOD in our digital numbers, VOD revenues have now increased from about 5% of box office a few years ago to more than 10% of box office today, and that number also continues to grow. We believe that there will continue to be opportunities to take advantage of market openings and to generate incremental margin and contribution to overhead by leveraging our distribution equities and capabilities and by putting additional product through our system.

We will also, of course, remain focused on renewing and extending our current distribution agreements. We mentioned in the last call that we had extended our distribution of the 2,400 title Studio Canal library, most of it including digital and VOD rights. And we just reached an agreement to distribute the library of the Jim Henson Company, including some of their classic properties like Fraggle Rock, with a very small advance commitment. We think that there will be other opportunities such as this, and we are also looking at a number of subdistribution agreements, continuing the same theme of pumping more volume through our infrastructure and squeezing more margins from our overhead.

We have spent a lot of time analyzing the potential impact of Redbox in our business during the past few months. Some of the recent commentary in the press and on the street has shed more heat than light on this issue. We believe that the Redbox model will ultimately expand the business by increasing the number of impulse rentals and by putting packaged media rental opportunities in places where non-existent previously, and it should accomplish this without a dramatic impact on sellthrough. We just entered into an agreement with Redbox under which we have secured placement for our product in the biggest growth engine in the industry today. This agreement also eliminates the problem of low priced previously viewed DVDs being sold into the market, which we saw as a growing issue. The agreement should generate over $200 million in revenue over its lifetime, and we think it's a smart opportunity for Lions Gate in the current environment.

Turning to the corporate side, our focus on costs is paying off. Our overhead for the quarter, excluding TV Guide, was $30.4 million, down nearly $8 million from Q1 of last year. Even with TV Guide included, our combined overhead for the quarter was up only $3 million from Q1 of last year, which is pretty impressive which you consider that TV Guide adds approximately 300 employees to our headcount. Of course, we will continue our efforts to reduce cost.

We're also paying close attention to the other side of the equation, generating more revenue and profitability per person by putting more product through our sales and distribution system. To this end, we are currently looking at a number of additional output deals that will leverage our existing infrastructure, add margin and capitalize on the library, management, and home entertainment marketing and distribution strengths that have contributed to our industry leadership.

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

Thank you, Steve. This past weekend, we celebrated our fifth anniversary with the New York Stock Exchange. Obviously Lions Gate has changed a lot in the past five years as we have steadily built our portfolio of assets and positioned ourselves as the next generation major in the world marketplace. Back in August of 2004, neither Saw nor our Tyler Perry franchises existed. We released the first Saw film in October 2004, and Diary of a Mad Black Woman in February of 2005. Five Saws later, we have the most popular long-running horror franchise in history, with the sixth and seventh Saw on the way. We have done seven Tyler Perry films the last five years, with two more upcoming Tyler theatrical titles opening over the last 12 months. We've also had great success distributing Tyler's entire catalog of plays on DVD and his two incredibly successful TV sitcoms House of Payne and Meet The Browns, which are establishing new milestones in distributions for Debmar-Mercury, a company that didn't exist within the Lions Gate family five years ago.

Five years ago we hadn't bought Redbox and turned it into Lions Gate UK. We weren't in the channel business. This is before we launched FEARnet, long before we bought TV Guide Network, with the idea of our multi-platform EPIX channel. Obviously we didn't have action in horror platforms in Asia like KIX and Thrills. We had made our inroads into the digital marketplace with minority interest in CinemaNow, but we didn't have Break Media, TVGuide.com, or the Google/YouTube channel partnership as we continue to grow our online businesses. Our film business was taking shape, but still consisted primarily of indie flavored movies like Confidence, Cabin Fever, and House of 1000 Corpses, as well as movies we released for other people like Fahrenheit 9/11.

Back then, we really were a boutique indie film studio to which some media still insist on referring to us to this day. We were so small, in fact, that we were often asked which studio did our distribution. This was before our Best Picture Crash or 89 Oscar, Emmy, and Golden Globe nominations we have garnered over the last five years -- before we had grown our movie franchises, when we were only generating 1% market share at the box office, not the 5% we consistently achieve today. It was before we started to acquire, produce, and distribute a major studio size slate of [wide] releases each year. This was also before we leveraged our film business into a diversified $600 million a year home entertainment operation, with major studio level market share of approximately 8%.

It was certainly before we had extended our movie brand into full verticals FEARnet and the recently launched KIX and Thrill channels. Our Weeds and Mad Men brands had yet to be created. We now have 76 episodes of Weeds producer-ordered on its way to syndication next year, with 39 episodes of Mad Men in the [can]. Our television division consisted of the shows Dead Zone, Missing, and some made for television movies, not a diversified business with 20 shows on ten different networks and a strong presence in production, distribution, syndication, reality programming, and cable. We just completed our first deal with Marvel. Today we have partnership with Studio Canal in the UK, Televisio in Latin America, Sony and Comcast and FEARnet in Viacom and MGM and EPIX.

When we listed on the big board five years ago, our annual revenues were approximately $350 million. Today they are $1.5 billion, reflecting an average yearly growth rate of 25% over the last nine years. Our capital structure was very different as well. We had a borrowing base of $200 million versus $800 million today. Our backlog was approximately $150 million, while today it is more than $0.5 billion. We didn't have an SGF slate financing or production agreements with New Mexico, Pennsylvania, or Alberta.

For all that has changed, some things remain the same. Our business plan has evolved with our continued growth, but many of its core tenets remain the same. We remain committed to growing Lions Gate with a diversified portfolio of businesses built to weather the cyclicality of individual lines of business and to create companies whose synergies continually add values to both the individual and sum of the parts. We have always been focused on large niches avoided by others, niches to which we can apply our unique strength and constantly win. This approach has positioned us to succeed in the highly fragmented digital marketplace. We continue to create content using a very different business model in the majors in all of our core businesses, marketing with a targeted focus to audience we know very well. We focus on distributing and/or owning every piece of content we touch, eventually cycling it into our vast library. We remain committed to throwing out sufficient evergreen income from our library each year, which covers the majority of our overhead and serves as the foundation of our future growth.

There are a few things that remain the same as well. The Lions Gate culture being entrepreneurial, innovative, and agile has not changed. We continue to align ourselves with entrepreneurial businesses and talented partners who think like we do. We are still housed in our offices in Santa Monica. There are simply a few more of us, representing more entrepreneurial companies and people with whom we've invested -- companies like Mandate, ISH and FEARnet. I'm particularly pleased to note that many of our major shareholders and on this call today have remained with us year in and year out. You have shared our vision of growth in asset building in both good and challenging markets. We firmly believe that regardless of fluctuating markets, our value creation will ultimately be recognized. Remarkably, one of the other things that hasn't changed of late is our market cap. It remains nearly identical to the first day we closed on the big board five years ago, showing us we still have much to do in assisting the Street to recognize the significant value of that which we are building every day at Lions Gate.

The purpose of these remarks is not to stroll down memory lane. We simply wanted to take a moment to highlight the pace of change we have achieved. As we look at our full-fledged worldwide channel business, a large and diversified television company, full product pipelines in every one of our core businesses in a growing array of Lions Gate brands, it is obvious today that Lions Gate is a very different company than it was five years ago, and we will likely be a different company five years from now as we continue to grow the company by remaining opportunistic in our current and newly emerging markets. Throughout this process, you can expect us to remain true to the roots of our financial discipline, focusing on areas within our wheelhouse, and cultivating existing brands while finding and building new franchises in all media.

We would now like to open the call to questions.

Thank you. (Operator Instructions) Our first question is from Alan Gould. Please go ahead.

Thank you. I have a few questions. First, Jim, can you give us some idea how much of the profit from the quarter came from Mandate?

Sure. Mandate in the quarter generated $5.6 million of profit.

Okay. Second, I guess for Michael, excluding the $50 million of the Pride slate that you'll be paying down this year, do you expect the company will be free cash flow positive for the year?

We certainly expect that our free cash will be significantly positive for the first -- for the rest of the year compared to $110 million of negative Q1 of last year. We typically have negative free cash flow in Q1 due to the participation rolling off of a heavy Q4 theatrical slate the preceding year. As I mentioned, we'll be making up a large portion of that Q1 during the balance of the year. But, Alan, I want to point out that we believe very strongly, as we said before, and only thing we're guiding to is adjusted EBITDA for this fiscal year.

And you said House of Payne will do nearly $200,000 of revenue. Can you give us how much of that has been recognized so far and how much of that is still to come?

Jim probably could. I don't think we've recognized too much of the profit because we've had marketing cost. But, Jim, do you have the number?

The profit so far has been impacted by two things, both the upfront marketing cost and there's a 5% margin burden placed on House of Payne due to the purchase accounting. So I'm going to estimate current profit to date -- a few million. It hasn't been big. But on a cash flow basis, it will be more cash flow positive than it appears from the earnings. And that profit will come later on, because we won't have the market costs associated with it upfront.

And the last thing. If I look at trying to value -- you said the TV area is worth more than the entire company. Excluding the channels, just look at the shows we know are going to be going through syndication, can you walk through some of those to try to give us an ideas how you come up with that kind of number.

Well, I started with, Alan, when I thought about this, I started with just looking at the growth rate of the two core businesses, TV production and Debmar-Mercury. I think I mentioned the remarks, CAGR in TV production of over 50%. If you look at Debmar, revenues in 2008 were about 50% to 60% last year. In year we've actually budgeted 100%, and looking at another incremental 30% to 40% for next year. Again, based upon all of these shows that we're creating tails and ongoing shows with Tyler Perry and some of these other shows. So you're talking about really very significant growth. And I think typically the multiples you would put on those businesses would be on very high end of the range because of that growth rate.

And so when I thought about TV production, I thought about it from a multiple perspective. Last year, we did $16 million of EBITDA after direct overhead. And that didn't include -- it included zero, no cash return from the back ends of Weeds, Mad Men, or anything, and a very small portion of the EBITDA. So I thought about it as a 10 times multiple and then added back -- our entire library value only $100 million. That gives you sort of a sense of how I look at TV production. And Debmar I look at a little bit more -- given it's a little earlier and we're still expensing marketing cost, I looked at it more from a sum of the parts valuation, and I've already given you the margin we're expecting from Tyler's [One] show. And if you look at one of these shows, if you look at Wendy, if you look at their core business, I believe we're looking at a value of over $150 million for Debmar.

So that plus the value we see -- particularly TV Guide, we bought that at the bottom of the recessionary period. And I've recently looked at some valuations of both what people are looking for for channels or where the private market valuations would be on something like [Aqua] TV One or current TV. I look at the Hasbro transaction. I also looked at TVGuide.com growing in just the time we've owned it from $14 million to $19 million uniques. And I think it really would be easy to put a valuation of over $400 million on that channel. Obviously we've said before that we're looking at this as $1 billion entity. But I think that all of the developments we've had plus what we and JPMorgan are bringing to this take you to that valuation. So that, coupled with the channels, gets us to at least where we were yesterday before the stock move.

Okay. Thank you very much.

All right.

Your next question comes from the line of David Miller. Please go ahead.

Hey, guys. Congratulations on such a stellar print. A few questions here. Michael, the $517 million in backlog, does that include EPIX commitments? And then I have a couple follow-ups?

It does include EPIX commitments. How much is it, Jim?

About $40 million.

About $40 million of the $500 million, David.

Okay. Wonderful. And then there seems to just be some confusion, I think, with some select clients on when the scroll disappears, depending on who the distributor is for TV Guide. Correct me if I'm wrong, I believe the scroll is off the satellite guide EchoStar,, DirecTV, et cetera, but I think it's still on the digital tier on Comcast and Cox. Could you guys just give us a sense of the contractual platform with the cable MSOs and when the scroll would disappear based on the various contracts?

Yes. I'll take that one, David. You're absolutely right. On satellite and telco, we have a full screen product. What was actually exciting for us, as I mentioned, the ratings having gone up the last couple of weeks, was where we saw particular ratings growth and strength was on our full screen product. And we think that's a very good sign for the future. In terms of where the scroll exists right now, that's really going to be on a not only a distributor by distributor basis in terms of both the deals we have and the deals that we're currently negotiating, but also as it rolls out in the different systems on those distributors. So there is no specific answer for that. It's going to be, again, across all of the different regions. But obviously we're excited about moving towards the full screen product. But at same time, continue to provide for the distributors that need it -- our navigational product as well, our guidance product as well.

So Felt, for a full screen product or a cable MSO where you have to keep the scroll beyond January 1st when you rebrand channel to whatever you guys call it, the Lions Gate channel, will you roll out with the full screen product even with the cable MSO that has to keep the scroll?

It's going to be different everywhere. There may be some areas where we'll provide a full screen scroll product as well as a full screen entertainment product.

Got you.

So, again, it's going to be a bit of a potpourri. But as I say, we are a full screen with a number of our distributors, and heading that way when it's appropriate both for us and for our distribution partners.

Okay. Great. And then Jim Keegan, if you're on, why didn't the proceeds from the sale of the 49% of the TV Guide accrete up to the balance sheet? Why is that still in the cash flow statement or does the cash balance include that?

It flows through as an investing activity. If you look at the cash flow statement -- it's the financing activity, excuse me -- proceeds from the sale of the TV Guide.

Right.

Go to financing activity, you see $122,355 on the cash flow statement.

Okay. All right. Got you. Thank you.

Our next question will come from the line of Ben Mogil. Please go ahead.

Good morning and thanks for taking the call. A couple of questions. So so far you put in, I guess, $24 million to $25 million into EPIX and you've got to put up to $31 million. As you sit right now, do you think you'll end up putting up to $42 million. You've envisioned the milestones that you need to do will eventually put you up to the $42 million commitment level?

Yes, we do.

When you look at EPIX, am I right that the only studio that delivered films to the channel right now that's paid for it right now has been Paramount, is that correct?

Jim, I think we've delivered one or two now or beginning to deliver one or two -- by the end of the year, we'll have a couple that have been delivered and we will be being paid for.

Do you anticipate getting full payment or is everyone who has delivered to the EPIX window -- yourselves, MGM, Viacom -- has everyone gotten full payment or is there partial payments going on?

No, no. Everyone is getting paid what their deal calls for.

Okay. On the 10-Q, I didn't see library revenue. Did you disclose that somewhere?

Oh, no. Ben, it's Steve. We don't generally disclose revenue in the Q. As far as library goes, we are essentially -- we're on plan and expect to be essentially even for the full fiscal year.

Okay. And then on the TV Guide channel, are there any major MSO deals that are up this year?

Major deals that are up? Other than some deals have what we call a look -- or in often cases a mutual option. But officially there are no deals that are up.

Okay. Fair enough. And then I think last may be a Steve question. Steve, when you look at everything going on in the home entertainment window, from a VOD perspective you're now setting [attempts] in a box office. Can you talk a little bit about from a VOD perspective what's working for you -- not for you, but just generally what genres or what films from a box office performance are working well, which ones aren't working as well? And then just curious what you're seeing in terms of mass merchant shelf space trends.

In VOD in particular, the slightly softer films tend to work better on VOD currently. Product such as romantic comedies work very well. Haunting in Connecticut is going to do incredibly well since it's a PG-13 horror film. Those types of films tend to work very well, and we're seeing numbers well above that 10% number that I gave you for those particular films. In terms of space of retail obviously, the one retailer in which -- at which we've seen some changes is Wal-Mart, and that's been well publicized as they go to the new store concept. And we're working through with them some alternatives for the front of the store opportunities, et cetera. So we're working through that. Other than that, most of the other retailers are pretty much on par with where they were before.

Okay. Fair enough. And then I think one last question for Jim and then I'll open up the cue. In terms of -- I think Alan mentioned earlier you were looking to pay about $50 million of Pride's participation during the year. What do you estimate based -- for the full year the full participation residual payments will be for the year?

Well, Pride will be about $51 million. We paid $6 million in Q1. There's an evident flow in participations. I'll pay literally hundreds of millions in participations this year, offset by the inflow. But I anticipate by the end of the year the participation liability bills may be down by about -- I'm going to guess $80 million to $100 million, $51 million of that coming from Pride. So that is a use of cash of coming from a decrease in the participation liability.

Okay. That's what I thought. And, Jim, I think is $50 million still the guidance you gave last quarter -- is that still in the ballpark of what we should be looking for?

It's Michael and we said $75 million of adjusted EBITDA.

And is $75 million -- am I right that $75 million is $50 million on just a normal like on a standard accounting basis. Is that correct?

Jim is shaking his head.

There's going to be some adjustments, as we discussed on the last call. We're going have to adjust with a no risk P&A associated with the Relativity deal. That adjustment should be in the range of $50 million. We've got another Relativity picture at the end of the year.

Okay. Fair enough. I think I remember that from last call. Thanks, guys.

Thank you. Our next question comes from James Marsh. Please go ahead.

Just a couple quick questions. One, on the Henson content deal, I was wondering if you would give us some rough idea what that structure looks like or maybe compare and contrast to the HIT entertainment deal? And then the second question relates to film production, tax incentives, and what you're seeing out there from the states. Are they expanding that to create jobs or are they cutting it because they're trying to balance budgets? What's the view out there?

It's Steve. The Henson deal is a slight fraction of the size of the HIT deal. So it's much, much, much smaller and we actually have some experience with these titles. This library was, in fact, part of the HIT library. That expired. Henson chose not to renew directly with HIT and chose to renew with us. So they're all titles, especially Fraggle Rock, that are in release with us, and we've had a lot of experience, so we feel very comfortable with that transaction.

James, was your second question about state subsidies for shooting pictures?

Yes.

We certainly are paying close attention to that. But we're seeing that a lot of states stepping up, some new states and some existing states continuing to do that because employment is so crucial at this moment. So we still are taking advantage of subsidies, whether it be in Michigan or New Mexico or New York. So we think -- we don't think that's going to go away.

Okay. Great. Thanks, guys.

Thank you. Our next question is from the line of David Gober. Please go ahead.

Good morning, guys. Thanks for taking the question. We talked a lot about the home video market. And clearly the sellthrough market is down slightly year to date, but the rental markets seems to be essentially flat and maybe up a little bit year-to-date. Do you guys have any sense of if this is a cyclical impact, or do you think there is more of a secular shift going on? Any early read that you guys can see on the trends in digital there, and just share with us if there is any way you guys can take advantage of that and explore the profitability there? Do you guys have any content output deals with NetFlix or any other types of deals like that?

David, obviously rentals are up across the board. The good news is consumer transactions are up. So there's more -- consumers are viewing more product than ever before. I think it's a combination of factors. I think it is -- part of it's due to where we are in the economy. And I think that you may see that turnaround slightly. But also given the availability of product, and we've always said that when you make product available, the demand increases for that product. Particularly stuff like Redbox, which we discussed, and others -- and the same thing is true with digital, which is why we're so aggressive with all of the digital retailers and we've seen dramatic growth, especially when we apply basic sales, marketing, and brand management techniques that we use in packaged media to the digital space. So I think you're going to see a lot of growth there as well in the future.

And just a follow-up on Redbox, without disclosing any of the details revealed, can you guys talk a little bit about the structure and whether or not -- is that a rev share deal or are you guys just selling DVDs wholesale and there is that component where they can't sell used DVDs?

Well, David, it's -- most of the other economic terms other than what I've disclosed, I really can't talk about there. Obviously, as I said, it was important to us to eliminate the previously viewed product problem. Beyond that, there's not much more I can say.

Okay. Thanks very much.

Thank you. Our next question is from Vasily Karasyov. Please go ahead.

Good morning. Thank you for taking the question. First question is a housekeeping question. Can you please help me understand the reconciliation for TV Guide from the 10-Q segment profit to the adjustment you're making when you arrived at the adjusted EBITDA? It seems to be formula and segment profit and then you're adding back $0.5 million only for EBITDA controlling interest.

What happened with EBITDA, we only have to adjust for one month of activity of EBITDA, so we basically have three months in the quarter. Two of the three months are 100% EBITDA. One month we then share 49%/51% with OEP.

Okay. Thank you very much. And then another question is about Mandate. The revenue this quarter was really strong. It's almost in the ballpark of the annual revenue in the previous years. How should we think about the revenue for the rest of the year for Mandate?

Sure. Mandate revenue for the year will be -- you've got the bulk of it counted in Q1, so you probably assume -- it will be about another $50 million between the rest of the year balanced out. The big bulk -- we delivered Drag Me To Hell, which was the bulk of the $50 million in Q1.

All right. Thank you very much.

Our next question will come from the line of David Joyce. Please go ahead.

Thank you. I was wondering if you could sense check on the TV production side of the business now that you're so diversified. Have you really smoothed out the seasonality now? What deliveries should we consider by quarter in terms of driving revenue?

I'll take that. No. It is -- it does vary by what's delivering. You're seeing Q1 and Q2 will be fairly strong, and then Q3 will be down just a little, and then Q4 will be pretty light based on whatever deliveries. And actually Q4 was about $22 million last year. It will be about the same amount this year in Q4.

And that fourth quarter has typically been light, but it seems like there is some more in the first three quarters of the year. Could you give us -- shed some light on the TV Guide revenue, how much is coming from advertising versus affiliate fees?

I think generally there's advertising versus affiliate fees. The affiliate tends to be in the 20% range. Something like that.

It's about -- last year, $100 million advertising.

80% advertising, 20% affiliate.

Okay. Thank you.

Thank you. And we have time for one final question and that will come from David Bank. Please go ahead.

Thanks. Good morning. Two questions. I guess first, thanks for giving such a great overview of where you think you've gone to business over the past couple of years, particularly in the TV side. I guess my question is how do you think about the synergies between all of these businesses that you've put together and that are actually performing pretty well with both the core business on the film side and with each other? And the second question, I guess, just real quick on the home video side, can you talk about the duration of the Redbox deal at least? How long do you think it will last, and, second, does it include all of your output or just select output? Thanks.

Steve, why don't you take the Redbox question first?

Dave, it's a multi-year deal. It could last up to five years, and obviously we've secured placement for most of our product. And beyond that, I don't think I can really comment. We have agreed with Redbox not to reveal a lot of the economic terms, but we think it will secure placement for our products in the future which is one of the reasons we decided to do it.

Do you think the industry is going to follow you?

It's hard to say. Obviously there have been some lines drawn. You saw Fox's announcement last week. I think that on this issue, the industry is very divided.

Let me jump in. I tried in my remarks -- Joe mentioned as well some of the things that we're doing. I think one of the advantages of our size right now and the way we're built in our culture is that all of the pieces of our company work together. And I think, again, I gave a number of examples. The key thing is I think in the world that we're in right now with so much vertical integration, if you look at many of these conglomerates and the way they're approaching, I think NBC -- is a Universal television division primarily supplying for NBC. And if you look across the board, I think that's happening more and more.

So our position is we've got such a vibrant and vital TV production and syndication business between Lions Gate and Debmar-Mercury that having channels like TV Guide gives us an opportunity to supply great content to them and frankly to protect our own content creation capabilities at the same time. And so I think that's what's going to happen. The stronger we make TV Guide, the stronger we make EPIX. Joe was talking about EPIX being so important about way we think about windowing and pricing going forward with digital distribution becoming so important.

I think it's critical for us to have this really balanced set of assets. One protects the other, one cross promotes and cross pollinates the other. Really very exciting. It really is -- we were pretty patient getting into the channel portion. But it's really exciting. I think it's what our future is. And we're very confident that it's going to work.

But your first major programming acquisition for TV Guide -- not being a Lions Gate production, I guess, I'm trying to reconcile what timeframe do you think it will be before the TV Guide Lions Gate channel will be viewed as a mechanism for Lions Gate produced content?

I think that's a smart question. And the answer is it will probably never be solely. Because I think the key thing from a production and distribution standpoint for our content is it should go typically to the place that it will work the best and bring the highest returns. And I think for TV Guide Network and TVGuide.com, the key thing for them is to get the content that will work best for them and be marketed best for them and fit best with the brand they're building.

I think the key thing is because there is so much communication between all of our divisions that we can really react very quickly to those decisions. And where it's appropriate, you'll see Lions Gate content on TV Guide Network. I wouldn't be surprised in the near future. And there is numerous other touchpoints. There is our ability to between both Lions Gate and OEP to use our advertising relationship and frankly our advertising dollars to be supportive.

So, again, it's not going to happen every time. Every Lions Gate show is not going to be on TV Guide. Every TV Guide show is not going to come from Lions Gate. But, again, the key thing is to do the right shows, and for our production group, Kevin Beggs's area, and Debmar-Mercury to find just exactly the right shows that are going to build TV Guide Network.

Thank you very much.

That was our final question. Ladies and gentlemen, this conference will be made available for replay after 8 today through August 18th. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 108177. International participants can dial 320-365-3844. Again, those numbers are 1-800-475-6701 and 320-365-3844 with the access code 108177. That does conclude our conference today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.