Starz Entertainment Corp (STRZ) 2011 Q1 法說會逐字稿

Ladies and gentlemen, we'd like to thank you for standing by, and welcome to the Lions Gate fiscal 2011 first-quarter earnings teleconference call. (Operator Instructions). As a reminder, today's conference call will be recorded.

I would now like to turn the conference over to your host and facilitator as well as Senior Vice President of Investor Relations, Mr. Peter Wilkes.

Thank you for joining the call this morning. Jon Feltheimer, our CEO, will give opening remarks, and we will then turn the call over to Q&A. Joining the Q&A will be Michael Burns, our Vice Chairman; Steve Beeks, President and Co-COO; Joe Drake, Co-COO and President of our Motion Picture Group; Jim Keegan, our CFO; and Rick Prell, our Chief Accounting Officer.

The matters discussed on this call include forward-looking statements, including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the risk factors as set forth in Lions Gate's annual report on Form 10-K filed with the SEC on June 1, 2010, which risk factors are incorporated.

The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.

Thank you all for joining us this morning. After a brief review of our quarterly numbers, I will update you on our operating lines and talk about a few key development in our business.

Revenue in the quarter was lighter than the prior year, but factoring in the effect of the deconsolidation of TV Guide Network, we remain on track for our 11th consecutive year of topline revenue growth, as all of our diversified businesses continue to make strong contributions.

EBITDA and net income were negative compared to the prior year's. The three wide releases in the quarter generated higher theatrical P&A costs compared to one release in the first quarter last year. Theatrical P&A in the quarter was up $71 million compared to the prior-year quarter.

Stock-based compensation also increased due to accelerated vesting of RSUs, stock options and stock appreciation rights triggered by the change of control provisions of senior management contracts.

Our Q1 library revenues were again strong, and we are poised to equal or surpass last year's record revenue of $323 million and cash flow of approximately $110 million. In addition, we just received our outside third-party bank valuation of our unsold library rights, and although we can't disclose the specific number, it was up 12% based on a combination of performance and increased value assigned specifically to our digital rights.

Looking beyond the numbers, I would like to talk about significant milestones in our traditional businesses, recent examples of how Lions Gate executes its business model a little differently from other major studios, and recent and political changes on the digital landscape as we look to translate our leadership in DVD-to-box office conversion into a similar competitive advantage in the digital marketplace.

Looking first at our traditional businesses, our TV operations are poised to exceed last year's revenue of $351 million and contribution before overhead of $39.5 million. This year's slate earned a studio record 26 Emmy nominations last month.

And we were particularly pleased to see the growing acclaim for Nurse Jackie, which earned eight Emmy nominations. Nurse Jackie's performance on DVD is off to a strong start. And as it's critical recognition continues to build, we believe it will join Mad Men and Weeds as a show generating some of the strongest home entertainment revenues in the business.

It is another example of how we are building a critical mass of premium negatives that will have a tremendous long-term value.

Mad Men Season 4 premiere last month was the highest debut in the show's history, [cumming] nearly 4 million viewers. And this will continue to drive it's remarkable home entertainment sales, as well as international and significant backend profits.

Another title doing extremely well in home entertainment is Kick Ass, which debuted strongly on DVD last week. But the important news that reflects a very positive catalyst in our home entertainment business is its performance on Blu-ray. Approximately 36% of the title's first week sales will come from Blu-ray. And we are pleased to see the continued growth of this higher-margin, highly creative Blu-ray revenue.

I would like to look at just a few of the most recent examples of how we're operating our business differently than most other major studios. The Expendables opening on over 4,000 screens this week is a big-budget film with an all-star cast. By partnering with Nu Image we were able to secure North American and UK distribution rights, as well as a significant piece of the backend for a very cost-effective price.

The Expendables is tracking well for this Friday's release. It will be a great title for EPIX, and it is already sold its spike for its free television window.

The Last Exorcism, which we are releasing two weeks after the The Expendables, is one of the scariest movies you'll see this year. It is a typically disciplined acquisition, and we believe that it has lots of upside for us and our partners, StudioCanal.

Our thriller, Buried, starting starting Ryan Reynolds, another lower-cost acquisition, was a sensation at Comic-Con and has all the earmarks of an exciting provocative box office success.

The three major releases, which comprise almost one-third of our budgeted box office for the fiscal year cost us only $21 million to acquire in aggregate, an average of $7 million per film. It is through this kind of cost effective model that we achieve a slate for the fiscal year that averages only $14 million in production and acquisition capital at risk before our marketing spend.

We are also doing some things differently in our television business. We just announced that SGF is coming in again for a $5 million investment in the second season of Blue Mountain State for Spike TV, mitigating our risk.

We have mentioned before one element of Debmar-Mercury's unique business model, which accelerates the order pattern of a series to get to 100 episodes in a two-year period based upon hitting hurdles in a 10 episode test. That has translated into orders totaling 172 episodes for Tyler Perry's House of Payne, and 140 episodes for Meet The Browns.

In that light, while I can't confirm it, the media is reporting that we are on the cusp of a 90 episode backend order from (technical difficulty).

The Will Ferrell produced comedy, Big League, debuts next week on Comedy Central. So we hope it will follow the same trajectory.

On October 1 FEARNet will launch as a linear high-definition channel. And we just named former Lions Gate's executive, Peter Block, one of the most accomplished industry executives in the horror thriller space, to be its CEO.

Peter will pick up the torch from Diane Robina, who is devoting her attention full-time to heading up our programming at TV Guide Network, as we continue to set in place an experienced and talented team of executives at our growing suite of channels.

Peter, as you may know, is one of the architects of our Saw franchise and many of our other biggest suspense and horror hits at Lions Gate. His appointment, backed by the programming resources of Sony and Lions Gate, signals the creative community that we expect FEARNet to succeed in the horror thriller space.

We have been getting very good reaction on the MSL community. And we hope that by the end of its first calendar year FEARNet will have 10 million to 20 million linear subs to complement our successful online and VOD business.

Finally, I would like to touch on a few recent developments on the digital landscape. Kick Ass not only debuted strongly on Blu-ray and standard definition DVD, but it had our biggest day ever on iTunes last Tuesday. And it is poised to become the biggest broadband delivered digital week ever achieved by a Lions Gate's title. This follows the biggest digital and on-demand quarter in the Company's history in Q1.

Fueled by such diverse titles as Precious, Tyler Perry's, I Can Do Bad All by Myself, Gamer and Brothers, revenue from digital delivery and conventional VOD relative to box office was up 33% in Q1 over the prior-year quarter.

It is particularly noteworthy that our entire portfolio of product is performing well on digital and on-demand platforms, spanning such diverse categories as action, prestige and African-American dramas, to show that our strategy of operating in certain genres is proving as successful in the on-demand world as it is in packaged media.

With three of the industry's top six over converting DVD titles in the quarter, Daybreakers, From Paris With Love, and The Spy Next Door, it appears that not only are digital revenues not cannibalizing our packaged media sales, but our decision to supply films to Redbox and Netflix on street days was the right one for our films and is contributing to their over performance.

It is interesting to note the contrast between Crash and Precious, two of our Oscar titles released about four years apart if you compare their digital and on-demand revenues. In 2006 VOD and digital accounted for approximately $3.4 million or about 5% of the overall home entertainment revenue from Crash. This year VOD and digital have combined for approximately $8 million or about 22% of the overall home entertainment revenue of Precious. So that is 22% versus 5%.

We expect this trend to continue. One reason for digital revenue growth is that more and more major distributors are entering the digital space, providing easy access for more and more consumers. Wal-Mart has recently bought Vudu. Best Buy has partnered with CinemaNow, and Amazon is combining a digital service with their packaged media sales. Published reports indicate that Redbox is contemplating a streaming video offering, and iTunes, Xbox and PlayStation all continue to grow.

We continue to believe that this digital growth reinforces the long tail value of our library by creating unlimited virtual shelf space for titles that would not otherwise be available. For example, last month alone we had approximately $0.25 million in revenue from Vudu for a small list of deep catalog titles.

The message is clear, the growing digital marketplace is creating new revenue for multiple buyers looking to satisfy the demand for content.

Lions Gate has been set up from its inception to capitalize on these opportunities. As I have said previously, our EPIX partnership with Viacom, Paramount and MGM was structured not only to protect our paid television revenues, but to create important new digital revenue streams, as well as build significant asset value.

In that light, I am pleased to announce this morning that we are welcoming Netflix into the EPIX family. Our original business plan always called for a broadband complement, and we are delighted to add such a significant force in the digital world.

By creating this groundbreaking new window for their streaming service, we both protect our traditional MSL customers and create a significant and guaranteed new revenue stream for our service.

Coupled with our other carriage deals, this makes EPIX immediately profitable and reaffirms the previous statements that [Felix Orman] and I have made that EPIX will be cash flow positive by next year.

EPIX is providing a great service with premier first-run product, deep libraries, early windows, advanced technologies, and a lot of choice for the consumer.

The same momentum is evident throughout our business. It is early in the year, but we are excited about our film and television slates going forward and the exploitation of all of our content rights in our channels and other distribution platforms.

We are pleased with our continued progress in assembling a powerful foundation of valuable brands and franchises under one roof. We believe they are well-positioned to deliver them to consumers through both traditional and exciting new delivery systems.

I would like to open the call now to your questions. However, this is an earnings call, we will not be commenting on the Icahn tender offer or other issues related to Mr. Icahn. Thank you.

(Operator Instructions). (technical difficulty). James Marsh, your line is open. Please proceed with your question.

Thank you. I just wanted to follow up on the EPIX deal of Netflix. I was hoping you could elaborate on some of the key terms there for the deal. Just when titles will be available; what the term is, and also how it impacts negotiations for other pay-TV deals? And then I've got a follow-up.

Okay, I'm not going to comment on the specific numbers at this time. I think there has been a lot of press out there about this. I think it is mostly in the ball park, but the deal is very substantial and the titles will become available on September 1.

Then just how are you guys windowing that relative to pay?

I'm sorry?

How are you going to be -- when do these titles become available relative to the pay-TV window?

There is going to be -- I believe as reported there will be a 90-day window. This was really important to us. In any of the deals we have made so far with traditional MSOs the deals were made contemplating this with a 90-day window. Again, this was very important for us in terms of protecting our traditional MSO partners, and so we really see this as a win-win for everybody. It creates a new revenue stream, but it continues to protect that 90-day window for the MSOs.

This is really excellent news. Then just to follow up on the comments regarding FEARNet going linear, could you talk about some of the ad-based opportunities you guys will be exploring areas as you kind of move from the current VOD offering to a linear channel?

I think you have hit on it. There was definitely a lot of discussion when we launched FEARNet about having a linear component, but I think there was a sense that the VOD would be very vibrant, and that potentially a dynamic ad insertion came into the markets it would be valuable for the advertisers. And really without dynamic ad insertion it has really taken way too long to get that.

It is just not as strong of an offering for the advertisers. So we think the complement of a linear service, together with the broadband and the online, will make this a very strong offering.

If you look at the traffic that we've had, the uses usage of the service, and if you look at frankly the content, which is really excellent, not only in terms of the library product that we are supplying, but some of the original product, you can see that for this incredibly attractive genre, which is people don't realize is attractive for women as it is for men, we really believe that we can create a very valuable multiplatform offering here once we have a linear component.

Okay, great. Just one last follow-up for Jim on P&A. Jim, as we think about modeling P&A for the full year, I know there is some timing differences early in the year, but just broadly with fewer releases do you expect P&A to be broadly flat with last year, or could you give us some directional guidance on where P&A should be going for the full year?

Okay, theatrical P&A for the full year should be in the (inaudible) [80 to 90] full year and compares to -- it was probably like 220 last year. That is all in.

Okay, excellent. Thanks very much guys.

David Miller, Caris & Company.

A couple of questions. Michael Burns, so I have your share count going forward moving from around 118 million to around 133 million due to the conversion from debt to equity on that recent transaction with Mark Rachesky. Is that correct?

I think it is a little higher than that. Jim, do you have -- I think it is 135 million. Jim, do you have it in front of you?

I have it as outstanding (inaudible) for 136 million, 244 million, 246 million. It is at the bottom of the opening page on the 10-Q.

Okay, wonderful. Then could you guys just thematically maybe just talk about the shape of the year? It looks like just at first glance that fiscal '11 is going to look pretty similar to fiscal '08, sort of operating income and aggregate EBITDA losses in the first and second quarters, followed by free cash flow positivity in the third and fourth quarters, just given the timing of your television episodic delivery and home video and so on and so forth. Is that the way we should shape out the year, or is it going to be more lumpy than that?

Actually, I just pulled my '08. It will be similar to '08. You're going to see the positive -- both cash flow and income strong second-half of -- and the income. Yes, so it is backloaded. Yes.

Okay, wonderful. Thank you.

Doug Creutz, Cowen and Company.

Jon, you talked on the call about the fact that you have so many digital -- different kinds of digital offerings that are proliferating, helping you grow that side of the business. Do you think over the long term having so many different options for consumers diludes the growth of that? Do you think we are going to eventually going to head to a solution like there has been in the music industry where you have a couple of main providers?

And how do you look at that from what would you like to see as far as do you think having fewer providers is better or more providers is better?

It is Steve Beeks. I think, actually, contrary to what happened in the music business, I think that given the fact that studios were able to then watch what happened there, we have been a lot more careful about how we price the offerings. And I think that is the key, is really to price everything appropriately, to be careful about protecting our conventional retail partners side.

The way we look at it, I think that net net you're going to end up with growth in the overall business. Obviously, you might [see case] some portion of the business, but I think overall we are expecting growth, particularly after this next year or two. I think that the results overall in home entertainment show in Q2 we're only going to be down 1% to 2%, so as we have all been saying, the industry is stabilizing, and that these new platforms are going to be able to provide growth definitely when we get out in the next year or two.

Yes, I think to answer that, I think what is interesting about it going for it is that each of these potential digital partners going forward does something a little differently. So you've got some doing subscription VOD, some doing transaction; some doing advertiser-supported subscription VOD. I think that is what is interesting is we going to be able to create all kinds of different kinds of revenue streams. When you couple that with much more variable pricing in terms of the new windows, I think this really is going to give us, as we have said before, some really accretive revenue as opposed to just replacement revenue.

Okay, thanks guys.

Marla Backer, Hudson Square.

I just wanted to get a little bit of color from you in terms of your franchise strategy. Because I think in the past you have been a little -- you have been somewhat optimistic about Expendables. Are you thinking potentially that could lead to a new franchise?

This is Joe. I mean, Expendables could; the tracking is exceptional. It is certainly well above what we -- the analytics on the tracking today show well above what we had in plan.

As it relates to franchise, we have always talked about being very cognizant of making sure we are putting titles in the lineup that can replenish those franchises, and I think Expendables looks like it could be one of those.

We've got Conan coming up next year. Additionally, when you look to our development strategy we have titles like the Hunger Games, which is an absolute publishing juggernaut today. It is a trilogy of books. What to Expect When You're Expecting, so we feel very strongly that we have the lineup that will birth those new franchises.

As well as you can't discount the Tyler Perry business. His next title is a movie called For Colored Girls. It is a seminal brand for African-American women that we have married with Tyler and his big brand that comes out earlier in the year, followed up by another Madea. So we feel like we are -- we feel like we have an excellent franchise strategy and are going to be in a good position going forward.

What about the Halloween slot? Traditionally you have owned it.

We've got -- we have saw Saw in 3D this year. We feel very good about it. We don't think it is time to rest that franchise, but we have a number of -- we love that horror business. We are not moving away from it. There are actually four titles that we have in development right now, any of which can be in that slot. We have a title called Pride and Prejudice and Zombies, a very successful book in the genre space that we are about to go out to casting on.

We acquired the Texas Chainsaw Massacre rights a year ago, and that is closed to being green lit, as well as a movie that we are putting together with Ghost House Pictures, a brand that we brought over from the Mandate transaction. So I think you'll continue to see us with a genre title in that space.

Thanks, one last question on Redbox. My sense has always been that Redbox was going to be, and has in fact been, incremental for you, because to a certain extent many of your titles have been impulse rentals or impulse purchases. But with some higher profile titles like perhaps The Expendables, would you see a reason for maybe holding it back from a day and date release to Redbox, and do you have the flexibility to do so with that agreement?

This is Steve. I think, as you said, the Redbox deal is working really well for us. I think that our view the titles where impulse buys has proven out. I think it remains to be seen. I think Expendables perhaps is not -- will not be -- even though it looks like it is going to do well, it probably won't be the size and scope or the kind of title that we would pull back from that. Right now we are planning on selling it to Redbox, but we do have some flexibility in that deal if we choose -- if things look differently in the future.

Matthew Harrigan, Wunderlich Securities.

When you look at the conversion ratio, you talked about Kick Ass doing exceptionally well on Blu-ray. Behaviorally when you look at the ratio of digital plus your traditional home entertainment to box office rentals, do you see that skewing even more toward the new product and the more successful titles?

You certainly have some anomalies in some of your categories where you really tend to over-index. Do you think that is going to be further heightened as the market develops further, or do you think there is some possibility that the library value could be a little bit denuded relative to the new releases?

This is Steve. If I understand what you're saying, I think what the digital world is showing that, as Jon said, we are seeing performance across all genres. We are still seeing over conversion in our conventional package media business on our pictures, and that is really the beauty of the genre business in which we operate that -- so our titles are continuing to operate.

But I don't think that the library performance necessarily is going to be denuded. As Jon mentioned, there is a proliferation of avenues. You are starting to see real library revenue from across-the-board, not just iTunes and Xbox, for instance, but players like Hulu, and I think that is going to continue.

Vasily Karasyov, JPMorgan.

First, I wanted to clarify, the 90-day window for the Netflix deal, that is 90 days from the beginning of the pay-TV window? Is that correct?

Yes, I think that is the right -- that is the exactly the right way to look at it.

And you're saying -- did you get any feedback from your distribution partners, existing and potential, do they feel that protects their window enough?

As I said, we have worked closely with both the MSOs that have already signed on to EPIX, as well as the discussions we have had with those that haven't about creating this window. I think everyone is aware of it. And I think at the end of the day, as I said, we have structured it in a way that gives them a clear path.

The other thing is that Netflix will not be running this ad, and EPIX product, if you will, will not be an EPIX logo. So really in a sense the traditional MSOs have the product earlier by 90 days. They will be selling it as an EPIX product, as a very specifically branded offering. So it is -- it is quite a different deal, and again, I think it both protect the traditional relationships as well as creates a new revenue stream.

All right, thank you. And then a quick question on TV Guide. Can you tell us how pricing is looking and ratings? And is the new programming meeting your expectations that you had before you started the turnaround? Thank you.

I think we are really looking at October when we have all of our new programming, Weeds, Curb, Ugly Betty, all on as essentially strips or block programming as the critical time to start looking at our ratings. At this point the upfront, we had a very successful upfront, up significantly from a CPM basis, as well as from a gross revenue perspective.

I think at this point our ratings are little softer with Curb Your Enthusiasm than we would have liked, but again, we haven't protected it yet with the rest of our programming, and so again we will be looking at October as a critical time to start really judging the success of the new programming.

Ben Mogil, Stifel Nicolaus.

On the Netflix deal, yesterday on Starz' call they talked about the fact that Disney had certain bonus payments that get met at a certain number of subscribers view or download the programming. Is there a similar deal with the EPIX partners here, where -- or the EPIX in totality, whereby if a certain number of operational streaming numbers are met, you guys get some incremental fees?

No, no. It is a very different -- a very, very different deal.

Then on the modeling front, Jim, when we look at non-P&A distribution and marketing expenses, should they be flat with last year?

Looking package media marketing -- a little actually from last year.

So is like a number of say around -- I think you were at 280 last year, is a number around 300 a reasonable number to use?

Yes, 300, 310, that range, yes.

On the G&A front, excluding all of the non-cash comp issues and the defense fees, do you still expect to be down about $40 million just because of the deconsolidation from TV Guide?

Yes, you take out from the G&A -- you obviously have your stock op -- but, yes, absolutely, TV Guide ran about $40 million last year, so yes.

Then, I think, lastly when you look at the way the year is going to progress do you expect debt to end -- do you expect debt, one, to end the year higher or lower than where you ended last year? And do you expect debt to have peaked this quarter or the next quarter just based on the timing you talked about in regards to someone else's questions about how the year shapes out in terms of the quarters?

So I would anticipate by actually next quarter (inaudible) there is going to be some additional payments of cash out as P&A is going up for some of the films for the last quarter. But by the end of the year, you know, Jon talked about hitting targets and hopefully should be up cash which was negative $113 million. For the first Q, hopefully, we are getting close to to breakeven, so pick up $100 million there. And we have the exchange transaction, which is $100 million that happened in July, so at the end of the year everything is neutral, there'll be about $100 million better at the end of the year.

$100 million a bit -- largely because of the exchange, so like sort of flat on the free cash flow front and the exchange giving you another $100 million dollars of debt reduction. Is that the way to look at it?

$100 million by the end of the year compared to the prior year.

Okay, great. Thanks.

Due to time constraints we will have time for two more questions. David Joyce, Miller Tabak.

I was wondering if you could update us on the number of films for the next year that you're acquiring versus producing or coproducing? I was wondering how the Pride payments will be trailing off? I saw there was another $21 million that is still expected.

Jim.

Pride, basically there is $21.9 million basically left. You'll probably see that get paid down by $15 million this year. Last year we pay down Pride by $16 million, so it is going down greatly -- $16 million last year, $15 million this year.

In terms of the number of films, we have talked a lot about reaching steady-state in fiscal '12 with 13 to 14 films, and that feels like we're on plan to be there. This year we are at 12 films, a nice move towards that steady-state. With a very diverse mix of product from -- with a very diverse mix of products from things like Expendables, and then Jon highlighted some of our lower budget acquisitions.

We don't ultimately can show how many acquisitions, because it it somewhat has to do with third-party supply available to us, but it tends to be about 60% production, 40% of those titles and acquisition. I think this year -- if I look real quick, I think that it is 50-50. We are going to have six acquisitions and six productions that will fill the slate.

Thank you. On the digital rights front, as far as the TV Everywhere or authenication is concerned, do you have any say in that? You obviously just have the TV Guide Network, but is there anything that you're contributing to the discussions of how that business model evolves?

Obviously, we are supportive of TV Everywhere for our product, whether it would be for EPIX or TV Guide, any of the transactions -- FEARNet, obviously. We are supportive of the concept for the traditional MSOs.

When do you think that would start coming to fruition from your viewpoint?

Well, I think it is coming to fruition very quickly. I think they are just getting the technology and the authentication together, but I think it will be happening very shortly.

David Gober, Morgan Stanley.

Two, if I could. First, for Steve, just looking at the industry data points, it looks like, at least in the physical DVD world that the [tie] ratios for the industry continued to decline. I was just curious if you could update us on what you are seeing in the marketplace in terms of -- I think we are clearly seeing consumer spending still somewhat constrained. Are we still seeing the cyclical impact on DVD sales, and what does it take to turn around overall tie ratios?

Secondly, probably for Jon, thinking about you mentioned some of the new business models that digital allows, and one that has been talked about a lot has been the idea of premium VOD and potentially compressing the exclusivity of the theatrical window.

I am just curious how you guys are thinking about that potential opportunity. What you're thinking in terms of how that would shake out in terms of timing windows, pricing, etc., anything that you could share there? I guess, just overall if there is anything that is interesting there for you guys.

This is Steve. On the conversion question, I think year-to-date conversion rates have continued to drop, although it looked like in the second quarter we saw some stabilization, actually, a little bit of an increase in the first part of the quarter. And as we have mentioned, our titles continue to convert pretty much as they would have over the last year or two. So I think it is very genre and picture specific.

The good news is overall we are seeing so much more revenue coming from the on-demand world, which comes at incredibly higher margins. There is reason to believe that is going to stabilize and then actually, as I said, grow over the next couple of years.

I think in terms of the windows, again, if you look at how we structured the EPIX deal, you would see us doing exactly what we have talked about, which is figuring out a way to protect our traditional partners and our traditional revenue streams and create new ones. We have had numerous conversations about creating some earlier, higher priced windows. In those conversations we have continued to have the exact same conversation, which is how do we protect the traditional partners and traditional revenue streams.

We have talked about a 30-day before DVD release where we actually push back our DVD 30 days, again, to protect our theatrical partners as well as our package media partners. We have certainly heard talk of a much earlier, much more -- much higher priced window for home cinema, if you will. I think all of these things are going to happen. I think they will be carefully constructed in the way that I have just described. I think they will be highly accretive. And I think what we keep talking about is really what is studying starting to happen is an explosion of high-margin, digital revenue.

Just a follow-up for Steve, and I apologize if you guys gave this earlier and I missed it. But just thinking about the traditional VOD business, and I think you mentioned that has been very, very strong recently, but I'm not sure if you're including other forms of digital rental in there.

Has the traditional cable VOD revenues and conversion grown? And any specificity you can give around there as the MSOs have promoted VOD more and maybe improved the user interface a bit?

We are definitely seeing growth in the conventional VOD area. And all the MSOs are realizing that is an important factor for them in terms of attracting and retaining customers. They all talk about improving the customer interface, improving the server capacity. We are seeing growth across the Board, not only through conventional VOD, all the digital platforms. I think all the news is good there, pointing in the right direction.

Yes, I think, again, my comparison in my remarks on Crash and Precious pretty much tell it all, doesn't it? It is 5% versus 22% conversion VOD and digital, respectively. I think that is what we are looking at.

We are budgeting right now -- almost on all of our theatrical budgets we are budgeting 8% to 10% on VOD, as before we were budgeting something like 3%. So we think it is a significant change and it is going to continue.

Great, thank you very much guys.

Jeff Logsdon, Bank of Montreal.

Two questions. Number one, relative to MGM, can you just go through your guys' thinking once again about the value creation opportunity with MGM?

Then, secondly, are you seeing the cost basis of acquired films moderate or even come down some now that a number of the major studios are really curtailing their independent film acquisitions, and Miramax is more in a dormant stage?

On the acquisition side, yes, we are. We have actually -- Jon highlighted two of our acquisitions, Last Exorcism and Buried, which are very, very, very low budget, cost effective acquisitions that have as much potential as any of the historical genre movies that we have acquired.

What we are finding is that when we are in those negotiations we are competing against fewer, and sometimes we are the only buyer in this space and therefore prices are coming down, as well as the way we are able to structure the deals and capture back end seems to be improving. As well as with the major studios focusing on bigger budget, tentpole movies, we have -- we see a real advantage and opportunity as a result of the changing landscape.

On MGM, obviously, we're not going to -- we are going not talk specifically about that or any acquisition. I would say, one, in general whatever we look at a similar kind of transaction we would be looking at two things. We would be looking at the assets that are there, and whether those assets are strategic and accretive. And we would be looking at the synergies, potential savings in G&A by combining two similar kinds of organizations.

The only thing I would say specific to MGM would be that it is pretty obvious it has got a great library. It has got a great brand. It has got some significant franchises and some channels, including a portion of EPIX that we think are very valuable.

It is obvious that you can talk about the value of library in a vacuum; it is all price dependent. So we obviously look at any opportunities on the horizon that we think would be accretive and build shareholder value.

It is Michael. The one thing I would add to that is that it is obviously has -- MGM obviously has a troubled capital structure with a tremendous amount of debt, but our sense is that will one way or the other be rectified or cleaned up. But just so everybody is comfortable, if we ever did a transaction like that, or any other deal, we would never bet the ranch on a transaction. It would be not a highly leveraged transaction. That wouldn't be interesting to us nor our shareholders.

Great, hang in there guys.

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