Starz Entertainment Corp (STRZ) 2010 Q3 法說會逐字稿

Welcome to the Lions Gate fiscal 2010 Q3 earnings conference call. At this time all participants are in a listen-only mode. Later there will be an opportunity for questions and answer with instructions being given at that time. (Operator Instructions).

I would now turn the conference over to our host, Senior Vice President of Investor Relations and Corporate Communications, Mr. Peter Wilkes. Please go ahead.

Thank you for joining us this morning. John Feltheimer, our CEO, will give some remarks this morning, the rest of the management team will join for the Q&A, and that will include Michael Burns, our Vice Chairman; and Steve Beeks, our President and Co-COO; Joe Drake, President of our Motion Picture Group and Co-COO; Jim Keegan, our CFO; and [Rick Prell], our Chief Accounting Officer.

The matters discussed on this call include forward-looking statements. They are subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including risk factors as set forth in Lions Gate's annual report on Form 10-K filed with the SEC on June 1, 2009, and in exhibit 99-1 to our current report on Form 8-K filed with the SEC on October 13, 2009. The Company undertakes no obligation to publicly release the results of any revisions and forward-looking statements that may be made to reflect any future events or circumstances.

John?

Good morning everyone. Thank you for joining us on the call today. We had a solid quarter with strong revenue recognition and strong free cash flow. Our television business generated $92 million in the quarter, taking us to $267 million for the first nine months. In spite of lots of discussion about the maturing DVD marketplace, we had our best library quarter in our history, with $91 million in catalog revenues. This was driven by a very strong performance from package media and a growing contribution from OnDemand, digital, and Blu-Ray, which I will address in a few minutes. Our EBITDA was affected by an unusual amount of P&A expense in this quarter for pictures that will be released next quarter. However, we are still on track to exceed our adjusted EBITDA guidance of $75 million.

These numbers tell only part of the story. Today I'd like to look at the number trends within the industry that we believe will be favorable going forward. These trends we are seeing were expected and informed a number of decisions we made. Let's look at a few of them. The first trend I'd like to discuss is the recent growth of theatrical box office. Box office revenues were up, admissions are up, and studio and independent film output is down. In fiscal 2010 we decided to wait out the cynics of the ranks and cut back our slate for a year. Now there are fewer players and less product competing for a larger industry revenue pie, obviously a better formula. This has been working to our advantage in most of our recent releases, and it will work to our advantage as we bring a more muscular and diversified slate to the marketplace in fiscal 2011. In fact, our last ten wide releases have grossed $387 million at the North American box office, an average of nearly $40 million per film. This compares favorably to $30 million per wide release for our previous ten wide releases.

Four of our last five domestic releases have been profitable, including Precious, Brothers, Daybreakers and The Spy Next Door. In fact, seven of our last 11 wide releases have been profitable at the box office, approaching our historical success rate of about 70%. Obviously even with the success rate of 70%, not every film will work. Yes, we were disappointed by the opening From Paris with Love last weekend, but From Paris with Love does more to underscore the strength of our model than its weaknesses. It was a $52 million picture in which we invested only $12 million for domestic theatrical rights. While we wrote off $7 million this quarter to be conservative, we break-even at approximately $24 million of total box office, which is doable with an strong up coming four day week. Parenthetically, Monday and Tuesday's numbers were quite strong. Obviously our job is to make money, but with a portfolio approached to our slate of films, mitigating losses is part of that discipline. Our solid success rate should continue next year, with a slate led by Kick-Ass, The Expendables, and Killers. The marketing materials for these three films are achieving a positive response of over 90% from their target audiences. If you want to share their excitement, please take a moment to go to our website to look at these materials. They will lead slate of 14 films, which we project to generate $500 million in box office and play to our strengths.

Precious is a good example of films in our wheel house. It's approaching $50 million at the box office and has been nominated for six Academy Awards. Obviously, we are proud of this quality movie, but please be assured, Precious will be very profitable. By anticipating its award success, we were able to position it in over 600 theaters this is past weekend, up from 220, giving it momentum into its DVD launch on March 9. Our Maple Pictures affiliate in Canada and Lions Gate UK also distributed independent third party films, and this year in addition to our own films, they distributed The Hurt Locker, which earned nine Academy Award nominations. Combined with the six Oscar nominations for Precious and another Academy Award nomination for Roadside Attraction's documentary The Cove, we had a total of 16 Oscar nominations within the Lions Gate family this year. Oscar nominations are of course very prestigious but the key is they help create ultimate value for our content. For example, The Hurt Locker will convert between 200% and 300% on DVD in the UK and Canada. I should note, both Maple Pictures and Lions Gate UK are contributing strong positive EBITDA to our results this year. Just as we did last year at the Sundance Film Festival with Precious, we acquired this year's commercial and critical cream of the crop with Buried, starring Ryan Reynolds. You'll be hearing a lot more about this powerful and remarkable film. Our sister company, Roadside Attractions, followed a similar pattern. They acquired The Cove at Sundance last year and picked up another prestige title, Winter's Bone this year. In both cases, we were able to take advantage of less competition as third party financing exits our industry.

We like the trends in our television business as well. The advertising market is on the rebound, coupled with very strong industry growth in the cable and niche markets, where we have demonstrated remarkable consistency over the years. Eight of our last ten shows have worked, including our most recent success Blue Mountain State. It debuted to solid ratings last month, and Spike is making their highest rated franchise [the USC's lead-in]. We expect the second season pick up to be announced shortly. In the wake of Blue Mountain State's success, Spike has order a new pilot from the Lion's Gate team. We also have a new pilot for FX, another network that likes edgy, distinctive programming. The advertising rebound will be leading a come back in the syndication market as well. We can take advantage of this ad growth in this three separate areas of our business where Debmar-Mercury is driving our momentum. Distribution and syndication of third party shows, like True Hollywood Stories, syndication of our own Lion Gate shows like Weeds, and creation of significant new cash generating shows, like Tyler Perry's House of Payne and Meet the Browns, a category that now includes such Lions Gate's produced and syndicated shows as Wendy Williams and the John Heder sitcom for Comedy Central. Wendy Williams have been picked up by FOX through 2012 and spurred by a stronger ad market has poised her break through Oprah Winfrey-type success that we hope will keep it on the air for a long time.

The next show Debmar is working on launching in the same fashion as Wendy William is the Jeremy Kyle Show, the most viewed daytime program in the UK. Just as we did with Wendy Williams, we expect that after a limited multi-week on-air preview, Jeremy Kyle would roll out in full national syndication in 2011. In the meantime, the success of our two Tyler Perry hit sitcoms, House of Payne and Meet the Browns, continues to grow, with our additional 40 episodes of House of Payne and 60 episodes of Meet the Browns. These two shows will generate revenue approaching $400 million over their lifetime, with a margin of between 15% and 20%.

Two years ago we decided to significantly expand our channel initiative in order to complete our visions of a fully integrated Company, and our channel business is gaining great momentum. In the years since we bought TV Guide Network, with One Equity Partners, it has begun its evolution into a successful, branded general entertainment channel. The key to our success is a growing roster of programming that we have acquired opportunistically and in typical Lions Gate fashion from a diverse array of suppliers. By October, we will have three strips on the air, Ugly Betty, Curb Your Enthusiasm, and a third show to be announced shortly. We are going to air Curb as no one basic cable network has done before -- uncut and in a 45 minute format. And Larry David is coming in to create new material to play at the end of every episode. In December, TV Guide Network's ratings were up 20% in prime time and up 32% among our target female demographic, driven by the Susan Boyle special, Ugly Betty and two Dirty Dancing movies from our library. Susan Boyle was our highest rated program of the year among women ages 25 to 54 and the number one special in TV Guide Network's history.

We continue to see explosive growth of tvguide.com as well. Our TV Guide online business has grown from 5 million to 21 million unique monthly visitors in the past three years. On the distribution side, we expanded our footprint by reaching new long term agreements with Comcast and Charter. The momentum is equally evident for Epix. Last week we signed another carriage deal with Charter, the fourth largest cable company, reaching 5.9 million homes, and this week we signed a deal with NCTC, the National Cable Television Cooperative, an influential group of mostly smaller cable operators. The NCTC deal marks the fifth carriage deal Epix and the fourth MSO to come on board in just the past four weeks. It grants a hunting license to approach the NCTC members, representing millions of homes. We are adding distribution partners large and small, with more to follow. Our patient, disciplined approach is working. With five distribution partners in place, Epix will be available to consumers in nearly 20 million homes by spring, and with a combination of minimum guarantees, a la cart pricing and packaging, we can also say our deals are consistent with our business plans. We continue to build a game-changing network with our partners Viacom and MGM that will allow us to control our existing content and build the slate of original programming that complements one of the potent movie line ups that can be found on television, PC, or portable screen. We've invested $51 million in Epix to date. Make no mistake, our path to full distribution is clear, our momentum is strong, and Epix is working.

I would also like to highlight a few encouraging trends on the home entertainment front. Our packaged media results remain solid. Our digital growth is promising, and the continued strength of our library is very encouraging. We continue to believe when you look at package media, OnDemand, and digital as a whole, home entertainment remains a vibrant business. You just can't keep operating the same way if you want to maximize the performance of your content. Last year, we made a call that went against the grain on Redbox, and it is working for our products. Gamer was our second theatrical title under the Redbox deal, and like Crank 2, it worked everywhere. We projected to convert at 145% of box. It rented well at Redbox, with no discernible impact on sell through, and it performed well at other rental outlets. It was also our first title to go day on date on DOD concurrent with its DVD release. Gamer's VOD revenue is expected to convert to close to 20% of box. Two years ago our VOD titles converted at under 4% of box and last year at around 8% to 10%. In other words, VOD revenues on Gamer will be about $3 million higher than they would have been two years ago, and we believe this is largely incremental revenue. We expect to see other innovative and accretive windowing of product responsive to our consumers' taste and preferences later this year.

Overall, our revenues from OnDemand platforms, digital and VOD combined, are projected to be $68 million this year, at far higher margins in the package media business. This is a 17% increase on a normalized basis from last year. Certainly not digital pennies by any stretch of the imagination. Streaming and downloading our movies and television series to iPods, iPads, iPhones, X box, PS3 and innumerable other devices will be generating new business and new customers for our content. Another favorable trend for our home entertainment business is our ongoing success with the television products on DVD. As we've noted on previous calls, Weeds is expected to generate more than $100 million on home entertainment during its lifetime. Based on its first two seasons, which are tracking 20% to 30% better than Weeds, we now expect Mad Men to generate even more than that.

We are seeing favorable financial trends as well. The strong free cash flow we generated this quarter was driven by cash flow generated from operations. Although it may continue to fluctuate from quarter to quarter, we anticipate a more consistent and positive trend towards the end of our next fiscal year with positive free cash flow generated for the full fiscal 2012. Our momentum isn't random. For the past few years our strategy has been very simple -- grow our television businesses, build the channel business, and expand our international distribution in English speaking territories. These strategies were meant to diversify our revenues and provide more margins for our businesses. Our next strategic thrust will be equally focused. While I'm not going to respond specifically to any of the talk on the street about possible MGM or Miramax bids, I am happy to refer to both our strategic rational for any potential transaction, as well as remind you all of our history in regard to strategic moves. Our criteria are simple. Our acquisitions need to be immediately accretive, provide a value added strategic component to one or more of our operating companies, provide immediate infrastructure benefit through reduced cost or superior manpower and fit into our macro integrated media strategy. We don't over pay, and we are not in a hurry. Any transaction we make goes through this filter.

Looking back at a snapshot of recent transactions will provide solid foundation for these thoughts. This year, [Mandate] will contribute a projected $14 million before overhead on forecast revenues of over $100 million. Debmar-Mercury, which we bought for $27 million continues to achieve success with our own and third party products. It will contribute $13 million on projected revenues of $100 million. Lions Gate UK will contribute about $7 million on projected revenues of over $70 million this year, and based upon its ratings, increased traffic to tvguide.com, and expanded distribution, we believe that TV Guide Network and tvguide.com are already worth twice what we paid just a year ago. We continue to believe in our long term view of the value of professionally produced content. We remain agnostic to platform, believing that content will be an impulse item in so many emerging platforms and devices that it will continue its historical trend towards becoming an ever increasing value proposition.

I'd now like to open the call to your questions.

(Operator Instructions). Our first question will come from the line of David Miller. Please go ahead.

Hi. Good morning. Congratulations on the outstanding revenue and free cash flow numbers. I have three questions. The first is on Epix, you guys have obviously made tremendous progress as you alluded to fell five deals in place, but correct me if I'm wrong. I still don't think you have a satellite deal,l and is this going to be one of the situations where once you get an [Echo Star] or DirecTV deal pretty much the other big cajones, Comcast, Time Warner Cable, fall into place and if you can comment on that, that would be great.

Secondly on Miramax, I know you can only flush this out so much. It's somewhat of a fluid situation, but if you can comment on any sort of EBITDA or free cash flow statistics that you are willing to share with us, that would be great, and whether or not you think this is a two part transaction, whereby you buy the library and buy the brand name, but maybe sell back some of the titles to the [Winestein].

And then finally, on the TV Guide, I think a lot of us on the call are confused about the scroll. I know there are some MSO contacts where the scroll is already off. There are some MSO contracts where the scroll is still there. For those where the scroll is still there, can you comment on when the scroll finally disappears? Thank you very much.

TV Guide is pretty simple, David. On the satellite and [Teleco] we have a full screen product already. On the cable MSO, we are transitioning to a full screen product. In some places we might be providing a full screen scroll product as well as a full screen entertainment product, but the key thing is really digital penetration, and as the cable MSOs goes to fully digital penetration, obviously, we believe we will be full screen product everywhere. Michael, do you want to comment on Miramax?

On Miramax, David, let me say this. We are certainly not known to over pay. Obviously it's an asset that would fit into the other criteria that John mentioned earlier, but again, our key for any acquisition is whether it would be accretive from a multiple standpoint. We can't talk about that kind of deal specifically, but again it would be something that we would certainly look at.

Yes. I would say, however, that we would never look at a library deal like that if we thought we were going to sell a whole lot of titles to one of our competitors. That scenario probably wouldn't work in terms of Epix. My simple answer, David, was -- I mentioned in my statement that we are moving toward its full distribution. We have great momentum, picking up four new distributors in the last four weeks, and I would say actually any of the big cajones would be good, and I don't really care which one comes first. We are talking to a number of them, and again, I think we have a great product, and we believe we will get there.

Wonderful. Thank you.

Thank you. Our next question will come from the line of James Marsh. Please go ahead.

Good morning, guys. Two quick questions. One, just a clarification on the 14 theatrical releases coming up. You mentioned that they might do about $500 million plus. I assume that is all domestic box and that would average about $36 million, which is 20% or so ahead of your $30 million average?

Our target is $500 million or better. I didn't understand the $36 million.

What I used for the math on that. It would be about $36 million per or so.

Correct. That's correct. We built a balanced portfolio of films. It's a mix of a few bigger production as well as lower cost acquisitions. The acquisitions really fall into two categories, main stream movies like Buried, which we just acquired, Expendables, Kick-Ass, and then sort of targeting the stuff like Precious. Buried is an example of a movie that we can go out on a platform basis and grow as well as service deals. We got that through a relativity relationship.

James, it's Michael. I will say this. We never in our budgeting process budget for a hit. It is encouraging if you take a look at some of the early tracking for, for example (inaudible) for Expendables and Kick-Ass. We have never had a triple digit $100 million dollars plus number on a hollywood package and we actually do for Kick-Ass.

One quick follow up here on Epix. Can you explain better how the responsibilities for funding the partnership work? If certain partners elect not to fund, et cetera. Secondly, if you can you just break down the cash versus non-cash element to the investment? It seems like a substantial portion of that is still irrigation, so if you can just talk about the funding responsibilities and then just the break down between the investment.

I'll start with the amortization. What's happening is the product, because it hasn't launched it had a backlog of investment of films. Now that the channel has launched, it is now beginning to amortize its film cost.

Non-cash.

The amortization of film cost is non-cash.

And obviously we have no outside investors currently in Epix. We believe we are moving towards a cash break-even to obviously positive cash flow channel. The assumptions that I've seen and read in some of the analyst reports that MGM isn't going to fund going forward are not necessarily correct, but obviously this is a partnership I really can't speak to the other partners. But it is the intention of the partners to fund ourselves on a pro rata basis.

Thanks.

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

Hi. Thanks for taking the call. I wanted to talk first about library. You talked about strong library numbers in the quarter. When we look at the contracted backlog that was down to $433 million, from $500 million at year end, can you help us reconcile those two trends if you will?

The backlog has gone down, backlog will flow into -- primarily the backlog will flow into the television product is where that was going. So you will see that backlog becoming more television revenue and that is what happened. Library revenue?

The backlog in the library really goes to the overall health of the home entertainment business. It speaks to the opportunities that are still out there, retail as well as the work that our team has done and which is what we are really known for, which is working that product, repackaging, repromoting and finding opportunities.

Steve, maybe you can talk about that. When you look at stripping out titles that came in the quarter that were library titles for the first time, titles that were release six or nine months ago in the theaters, just in terms of an organic or apples-to-apples library basis, are you seeing, can you talk about some trends, genre trends or distribution trends that would give us a sense of what you are seeing, just sort of curious?

The truth is I don't think that there's been any dramatic shift. The beauty of our library, which has 12,000 titles, is that we tend to have something for every assortment whether it's classic product, recent films, whether fitness or it's family, we actually had an upturn in the family business. We found some opportunities there. I think it really has to do with library as a whole, and there really hasn't been a dramatic shift either way.

You distribution contract in terms of duplication (inaudible) is that correct?

Yes.

We've obviously seen more leasing ram. We've seen Paramount do a new deal with Technicolor. Do you have -- and obviously both of these deals are beneficial to the studio. Do you have some room, or do you have any expirations coming with that deal that will give you cost relief?

We've been talking to [Sinram] for the last several months, and just as last year we went through a cost reduction initiative, and we were able to actually lower our replication cost as well as our distribution cost which will be reflected in our numbers going forward. There is always to opportunity for that. Sinram has been a tremendous partner. We had breakfast with their CEO this past week. Obviously after the Warner announcements. I think they are pretty well positioned to remain healthy over the next couple of years. They've been a tremendous supportive partner and obviously one of the reasons that our distribution works so well.

I would add one more thing about library that hasn't really been written. There's been a lot of discussion lately about at least two libraries that people are saying lost value, therefore that means library product is losing value, and it's really simple to pinpoint why those libraries are losing value, it's because they haven't been getting any new investment. And it's pretty clear, when you invest in new product that turns into library, you have all kinds of benefit. You have packaging possibilities. You are creating a different kind of relationship with the retailer and end tailer and frankly a different relationship with the customer, and so I really don't think it's making a statement about the entire industry as a whole or library as a whole. It's very specific to those libraries, and again clearly our numbers suggest a whole entirely different story.

John, is it not fair to say of the two libraries you're talking about, for sure your answer is totally applicable to one of them, but one is owned by a pretty large studio which continues to crank out new product and continues to bundle that new product with the library of the subsidiary they own?

I'm sure I don't know which libraries you are talking about. I actually don't believe that is the case for a number of reasons.

Okay. Let me switch gears and then I'll pass queue on to someone else. On Epix, Jim I think you recorded $26 million of revenue since Epix started with you guys. What's the payable amount, and then I think in the past you talked a lot about what the cap is or how much you would invest in Epix . I guess we are at $51 million now. Do you have a cap contractually, or in mind if you

Currently Epix at the end of December we had $7.9 million in accounts receivable, but the account was fully current and fully paid out. That $7.9 million represents -- they pay in installments. There is an Epix installment that is due in December and even right now, Epix is completely current with all payments to us.

Great. On the investment side, in the past you talked mid 40s was the cap. Clearly we are past that now. Can you talk about -- do you have a contractual cap or are we just going along?

Yes. Before we were talking about not a cap. It was more of a contractual minimum. I can't really discuss where we are, but as I've said, I think we are moving very quickly towards a break-even or positive situation in terms of cash flow with a couple of more deals in place. Other than that, I don't want to give you a number.

Fair enough. Let me let someone else get on the call. Thanks guys.

Thank you. Our next question will come from the line of Doug Creutz. Please go ahead.

Thanks. Can you give an update where you are expecting your theatrical PA to come in for fiscal 2010 and how much of that is no risk, and then if you can give an indication of where you are thinking theatrical PA will come in for fiscal 2011? Thanks.

The P&A is going to be -- we are looking for the numbers exactly. The P&A for fiscal 2011 would be up for a couple of reasons. It's up because we are going into 14 pictures and we have some and our service deals requires certain levels of P&A levels. On a risk adjusted basis, the P&A in fiscal 2011 will be down, P%A in fiscal 2011 on a risk adjusted basis will be right within our historical norms largely because of the service deals and our relativity relationship, which as you know, has a risk protection component. In 2010 the P&A will be at $165 million. (Multiple speakers). It's $215 million reduced into $165 million due to the risk mitigation.

Okay. Thank you.

Thank you. (Operator Instructions). Our next question will come from the line of David Gober. Please go ahead.

Good morning. Thanks for taking my questions. Two if I could. First on the TV business, obviously that's grown into -- has continued some very strong top-line growth. We were a little bit surprised to see EBITDA losses this quarter. I wonder if you can walk through the increase in amortization and residuals as a percentage of revenue and maybe as a result of mix or something. And then secondly, on the international side, John, you talked a little bit before about the success of the Maple Films and Lions Gate UK business. Is there any interest in going into further areas and potentially some non-English speaking regions in order to leverage the portfolio, particularly as international box as a percentage of total has grown so much in recent years?

I'll take the first one. If you look in the Q, we did take a couple of write-downs of about $4 million. It was some product, some series that had failed. We had some international that had been lowered. That is really what impacted the quarter. You will find for the full year, you will see it on aggregate doing well.

Okay.

And the only other territory that we have looked at and actually began a hybrid effort, as I've mentioned before, is Australia. We like English speaking. The difficulty in expanding distribution internationally is whether you have enough titles where you have enough international rights, which requires a larger risk factor, if you will. A number of our films on our domestic slate we don't have the international rights. But the UK and Canada have done extremely well. I mentioned The Hurt Locker. They've been very opportunistic in terms of third party product, and again, are contributing nicely this year. So it's possible we could take another look at Australia, but other than that I don't see making significant investment in other territories.

Okay. Great. Thanks.

Thank you. And next we'll go to the line of Vasily Karasyov. Please go ahead.

Good morning. Thank you. I have two follow-up questions. One on TV Guide one on Epix. On Epix, can you give us more color on what kind of carriage the channel is getting. Is it basic tie,r is a paid tier, that would be appreciated, and also on TV Guide, given what is going on with the retransmission fees and FOX pushing hard and Time Warner Cable deal that was concluded recently, are you having different conversations with MSOs about affiliate fees than you were let's say a year ago? Thank you.

Well, on TV Guide, the deals that we made so far were both good deals, and the fees were both adjusted upward. But we are at the beginning of the phase, and obviously as the ratings continues to grow, the next set of conversations we are going to have hopefully -- we'll have us in a better position to make better deal. That is part of the process. These are essentially long-term propositions. However, given we've only been one year into it and seen growth in TV Guide ratings as well tvguide.com, really extraordinary traffic, we are actually ahead of schedule in terms of where we thought we would be. In terms of Epix, it is a combination. We are trying to create tremendous flexibility for our MSO partners, so as I've said before, it will be a combination of a la cart, a combination of tiering and a combination of guarantees. But as I've said, based upon all of the above and all of our projections, we are on our plan. So that's the best answer I can give you.

Thank you.

Thank you. At this time, there are no further questions coming from the phone line. Ladies and gentlemen, this conference will be made available for replay after 8 AM today through February 17 at Midnight. You may access the executive playback service at any time by dialing 1(800)475-6701 and entering the access code of 143850. Again, this conference will be available for replay. You can dial 1(800)475-6701 and enter the access code of 143850. That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconferencing Service. You may now disconnect.