Starz Entertainment Corp (STRZ) 2011 Q3 法說會逐字稿

Welcome to the Lions Gate's fiscal 2011 third quarter earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I'd now like to turn the conference over to Peter Wilkes. Please go ahead.

Thank you for joining us on the call this morning. Jon Feltheimer, our CEO, will have opening remarks. Following his remarks, we'll open the call to Q&A and you'll be joined in the Q&A by Michael Burns, our Vice Chairman; Steve Beeks, President and Co-Chief Operating Officer; 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. 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 annual report on Form 10-K filed with the SEC on June 1, 2010. 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 circumstance. Jon?

Thanks, Peter. Thank you all for joining us this morning. I'd like to talk about some of the things that are working well for us, as well as some of the areas in which we're adapting to changes in our industry, and then Michael, Steve, Joe, and Jim will join me to Q&As.

We had strong EBITDA and revenue performance in the third quarter driven by contributions from our television and home entertainment operations. With solid contributions from the full range of our diversified business, we continue tracking towards achieving our financial targets for the year. Our library continues to be one of our star performers and is heading for another year of revenue in excess of $300 million and cash flow in excess of $110 million.

As we continue to keep it robust through a combination of organic replenishments, third-party distribution deals, and the securing of new digital and VOD rights for our titles, it achieved more than $90 million in revenue during the third quarter, comparable to last year's third quarter, and representing more than 20% our overall corporate revenue.

While we were pleased to see home entertainment revenues as a whole grow by 63% in the quarter, we were particularly pleased to see the top-line growth was bolstered by traditional and digital on-demand revenue of $31 million, up 84% from the prior year's third quarter. We're also pleased that our focus on genre pictures and our sweet spot, not only continues our industrial leadership in DVD to box office conversion rates, but gives us a VOD to box office conversion rate that is 62% higher than the industry average.

Two years ago, VOD revenue typically averaged 5% to 10% of box office on our theatrical titles. Today, it ranges from 15% to 25% of box office. Although on-demand revenues don't yet make up the gap from the decline in package media conversion, they are heading in the right direction. While one of the challenges we're facing is that electronic-sell-through isn't taking off as many anticipated, and there's concern that digital growth might be creating a number of rental customers who are previously retail customers, the fact is that the growth of Blu-Ray, coupled with our on-demand conversion rates, enables us to have a higher operating margin in our home entertainment business for our theatrical products than we did a year ago.

Television continues to be another area that is working for us. WEEDS has been ordered for a seventh season, making it the longest-running comedies on cable television and bringing it to 89 total episodes. It continues to generate solid ratings in syndication on TV Guide Network and continues to sell well on digital and DVD. And we continue our negotiations with AMC to extend MAD MEN for multiple seasons. NURSE JACKIE, fresh off a best actress Emmy win for Edie Falco, and BLUE MOUNTAIN STATE, which achieved record ratings on Spike in it's second season finale, are both gaining momentum.

We also have three new projects entering our TV pipeline. Our political drama BOSS was academy award-nominee, Gus Van Sant, directing and Kelsey Grammer starring, has received an eight-episode order from Starz. Production begins in April for an October premiere. THE RABBIT FACTORY is a one-hour cop drama starring Steven Webber and D.L. Hughley from writer/creator Allen Loeb, and the pilot will be delivered to TNT this month. PLAYING WITH GUNS, a single camera comedy for Comedy Central from producer/director Brian Robbins, began shooting in North Carolina this week.

And in a good example of Company synergy, we're beginning to shop an animated TV series of Mandate Pictures franchise, HAROLD & KUMAR, which has already attracted interest from several networks. HAROLD & KUMAR 3D is scheduled for release by Warner Bros. later this year. On the distribution side, Debmar-Mercury's hit series, TYLER PERRY'S HOUSE OF PAYNE, MEET THE BROWNS, and ARE WE THERE YET, have accumulated nearly 500 total episodes for distribution and syndication, and that number continues to grow. We project that these three shows alone will generate more than $80 million in net positive cash flow that we haven't yet begun to receive.

We also expect to have another Debmar series ordered and announced shortly. Now, Debmar is expanding its second line of business, the talk show genre, to follow-up the success of the Wendy Williams Show. Wendy has been renewed for a third and fourth season by the Fox Station Group, and is within striking distance of the ratings success that creates Evergreen status in the talk show universe, especially in the vacuum left by the departure of Oprah.

We believe that our ratings will be further bolstered by a major promotional opportunity that will be announced in the next few weeks, so stay tuned. Debmar recently unveiled two new talk shows to join Wendy. The Jeremy Kyle Talk Show has cleared more than 80% of the major markets in country, led by most of the top Fox stations and it begins production this summer for a fall launch. This young talent has been the top talk show host in the UK for the past five years.

We believe his brand is highly reliable in the US and Debmar has formed an innovative financing partnership with ITV that reflects risk mitigation during the launch process. We're also excited to be launching a talk show with Father Albert, sometimes referred to as "Father Oprah." We've joined with Fox to create a talk show designed to extend his appeal throughout the fast-growing Hispanic community in the US, as well as to a much broader audience. Debmar will begin testing the show this summer for a fall 2012 launch.

Our channel business is another area that's on plan and gaining momentum. TV Guide Network will be available as a full-screen product in nearly 80% of its households by the end of this calendar year, as we continue the channels transition from a utility service to a fully distributed full-screen network with original programming devoted to pop culture and the celebration of entertainment. We see satellite viewership as a proxy for full-screen households, so our 33% year-over-year increase in satellite viewership is an encouraging sign for future viewership growth as we reach more households on a full-screen basis.

We're also encouraged by ad sales that are running higher than anticipated, as the network continues its transition and the ad market strengthens. With WEEDS leading the way among the network's current programming with strong ratings, a June air date for NAIL FILES from the creator of JERSEY SHORE, and three new pilots in development are new original programming for TV Guide Network, is well on its way.

FEARnet has already secured almost three million Verizon subscribers since its launch as a linear channel a few months ago, and discussions are underway on several additional carriage deals as we continue to leverage a great brand and content niche in which we and Sony are dominate into a multi-platform offering. We are also pleased that next quarter, we'll report our first positive contribution from Epic, a little more than a year after its launch.

On the digital front, it's interesting to note the nearly $2 billion market cap of demand media, which just launched its IPO a few weeks ago. One of or own assets, Break Media, is a leader in this same space. Break continues to achieve extraordinary year-over-year revenue growth, and its metrics aren't that far behind demand with 81 million monthly unique visitors worldwide compared to Demand's 105 million, and a comp score ranking as the 29th largest online property in the US, compared to Demand's ranking at 16th.

Our channels are TV business and our online properties are all areas that are proceeding on plan, generating or poised to generate significant positive EBITDA and free cash flow, strengthening our brand and building our asset value moving forward. As pleased as we are with our continued strong conversion rates on DVD and VOD, there's no question that the motion picture environment is facing headwinds.

Here's how we're responding to this challenge and allocating our resources accordingly. We recently launched our microbudget movie initiative, designed to produce up to 10 films a year with budgets of under $2 million. We're focusing the program on comedy and horror, two genres we know well that have historically been driven by concept and execution rather than budget. We will also include an urban component within these two genres, a space from which we also have a strong track record.

While the upside for these film is the low budget film that bleaks out theatrically, we will back up all of these films from our home entertainment, international and digital distribution businesses, and will leverage our library by using some of our own brands for these films. If you're skeptical about movies made for a $1 million budget, let me remind you of SAW, PARANORMAL ACTIVITY, and THE BLAIR WITCH PROJECT, two of which were Lions Gate movies.

We're also responding by taking advantage of the new capital in the marketplace for PNA Production deals, and we've already brought in investors on a number of our movies already produced around the horizon. Even for acquisitions, we use third-party funds to mitigate risk. We're partnering with Herrick Entertainment, for example, a new player in the media and entertainment space, on our Sundance acquisition, THE DEVIL'S DOUBLE, for both PNA and equity financing.

We're partnering with [Mimiron Shuron], Warrior, an inspirational sports drama from the director of MIRACLE. We're partnering with Lakeshore on LINCOLN LAWYER starring Matthew McConaughey and ONE FOR THE MONEY starring Katherine Heigl. And we're limiting exposure with PNA-only deals on the upcoming film SAFE, starring Jason Statham, DREAD, starring Star Trek's Karl Urban, and PROTECTION, starring The Rock, all from Reliance Entertainment and IM Global.

Another example of our approach and paradigm for the current industry environment is Pantelion Films, our joint venture with Televisa targeted at the Latino audience. Pantelion debuted its first film FROM PRADA TO NADA two weeks ago. Their full slate of films for Hispanic moviegoers in the US will continue to roll out with films such as an English language film starring Eva Mendez and Mexican star, Eugenio Derbez, for which we have high expectations. And we'll continue to look for third-party money on these films, as well, as we did FROM PRADA TO NADA.

Looking at both ends of the cost spectrum, part of our (inaudible) filter in this more challenging environment is not only allocating some of our resources to lower budget films and using third-party financing, but sharpening our focus on the drivers of our slate, as well. If you look at the pictures that could be considered our bigger budget films, you'll see a picture that's a brand, is in our sweet spot, and, in many cases, is a potential franchise.

By now, I'm sure all of you have heard of the HUNGER GAMES because of the enormous success of the trilogy of books for young adults. Academy award-winning filmmaker, Gary Ross, will direct the HUNGER GAMES for release early next year,and we think it's a monster. The more we roll it out, the more it's demonstrating the same kind of momentum that TWILIGHT showed in a similar stage, and we believe it will emerge as a break-away hit for next year.

Some of our other major upcoming releases include CONAN THE BARBARIAN, currently wrapping production for an August 19th release in 3D, ABDUCTION, the thriller directed by Academy award-winning director John Singleton and starring TWILIGHT's, Taylor Lautner, the horror film, DIBBUK BOX, opening at Halloween produced by superstar producer/director, Sam Raimi, WARRIOR on September 9th, and the next offering from Tyler Perry, MADEA'S BIG HAPPY FAMILY, based on one of his most popular plays. We're also completing plans for the THE EXPENDABLE 2, reprising Sly and his summer blockbuster gang.

Again, we're assembling the slate in a challenging industry environment that requires us to continue to use a more effective filter, utilize third-party financing to mitigate risk, and focus on films at both the lower and higher end of our budget spectrum. Our sister company, Roadside Attractions, is particularly adept at executing on the lower budget films, and we applaud their continuing success in this specialty arena.

Following up last year's success with Academy award-winning documentary, THE CODE, Roadside is back in the thick of the Oscar fight this year with the riveting drama WINTER'S BONE, which earned four Oscar nominations, and BEAUTIFUL, which was nominated for best foreign language film, as well as a best actor nomination for Javier Bardem. But the key to Roadside's success story from a Lions Gate perspective, in addition to our 43% stake in the company, is the fact that we can funnel projects for them to handle with limited overhead, while we retain rights in nearly all of the ancillary markets for all of their products; a win-win for both companies.

Another way we diversify our film business, create valuable rights, and generate cash flow with minimal risk is through Mandate Pictures. As you know, the Mandate business model to produce and own its films, typically retaining international rights with PNA costs covered by third-party major studios. Mandate currently has five films in production, all for release early this year, including three files for other studios. Mandate is reteaming Diablo Cody and Jason Reitman in the comedy, YOUNG ADULT; their first collaboration since the Academy award-winning blockbuster, JUNO, to be released by Paramount worldwide later this year. Seth Rogen and Evan Goldberg, the creators of SUPERBAD and KNOCKED UP, are producing a new comedy titled 50/50 for domestic release later this year through Summit.

As I mentioned earlier, the third installment of HAROLD & KUMAR, HAROLD & KUMAR 3D, is slated for a fall release by Warner Bros. Mandate and Lions Gate are collaborating on two additional films, DIBBUK BOX through Mandate's partnership with Ghost House Pictures, slated for Halloween release in the SAW slot and a coming of age comedy, LOL, starring Miley Cyrus. Finally, Mandate just announced this week that they will reteam director David Frankel and Meryl Streep in the comedy GREAT HOPE SPRINGS, their first collaboration since the hit THE DEVIL WEARS PRADA.

In closing, I'd like to emphasize that our focus on the most efficient allocation of our capital isn't limited to our feature film slate. In an industry that's changing rapidly among uncertainty on how product will be windowed and priced, we're rigorously evaluating all areas of our business to determine which assets are generating strong or increasing EBITDA and income, or dynamic growth that will keep us on our long-term growth trajectory.

At the same time, we're looking at which noncore assets don't meet these criteria and to be monetized to strengthen our balance sheet and support investment in higher growth segments of the business. This analysis will be critical in our ongoing efforts to refine our long range of plans in order to focus on our priorities, our balance sheet, cash flow, earnings, and long-term value creation. We'll update you on this initiative on future calls.

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

(Operator Instructions). And our first question comes from the line of James Marsh from Piper Jaffray. Please go ahead.

Thank you very much. I've got two questions here. First, on home entertainment, then one on international. I guess, Jon, you mentioned some of the sell-through weakness and I guess share shift towards rental. Could you talk a little bit about Ultraviolet, that initiative and how it might bring back consumers to sell through and away from rental.

I'll let Steve answer that, since he's been very involved in the Ultraviolet initiative.

James, one of the things that we've always said that is needed to really stir growth in digital, beyond what we're seeing today, to make the ownership experience more attractive to the consumers and we've always said one of the things is really interoperability of the various devices and given the consumers comfort when they buy a movie in any format, that they're going to be able to watch it in any other format. And we think Ultraviolet is a perfect step in that direction. It gives consumers the ability to know that they can -- if they buy it on DVD or if they buy a digital version from certain digital stores, that they'll be able to access that movie at any time on any device. And I don't know if that's the total answer, but it's definitely a step in the right direction.

No. I agree. I just had a follow-up question on Asia. Last spring, you announced the Tiger Gate partnership, and then recently the press was talking about a new 3D dance movie you're doing with C.J. over in Asia. I was hoping if you could give us your current thoughts on the broader film business in Asia, give give us an update on the Tiger Gate venture, how that's progressing, and when you expect that slate of movies from that venture to start hitting theatres.

Well, they're two separate questions, I think. You know, we do believe that being on the ground with channels in Asia is going to benefit all of our businesses and get us closer to both the customer, as well as other potential investors, filmmakers and distributors. Tiger Gate itself -- actually, we just got this week some very encouraging ratings reports from Indonesia. It's actually doing well in all markets. We're in the middle of final discussions in two or three other countries to expand Tiger Gate, and we and [Sevan] are very pleased with the progress on that. Joe, I don't know if you want to talk about the co-production opportunities.

On the motion picture side, we're spending a lot of time in Asia, really forward looking, particularly India and China, solidifying our partnerships there. We talked about the movies that we're releasing here for Reliance and certainly talked with them about reciprocating there as that market grows. In terms of distribution of those territories, it's still a pretty small piece of the pie, but we see a lot of long-term growth there. And yet, we're starting to find more opportunities together.

You spoke of the 3-D dance movie. There's an example where international division actually. It's not our movie domestically international division run by [inaudible] Kim. They sought us out through our relationship with C.J. to handle the sales; they're doing that in Berlin as we speak. But it does position us very well to get an early look at that sort of -- at that content here for distribution in the states.

Great. Thanks very much.

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

Yeah. Hey, guys. Good morning. Jon or Michael, if you're on, if I look at your balance sheet and I take the senior revolving credit facility and add in the secured second priority notes, plus the film obligations, plus the subnotes and other financing obligations, and I offset that with receivables, which I guess that just cancels that out, and I subtract cash, I'll even give you the benefit of your restricted cash, which is $19 million, I still come up with a net debt to EBITDA ratio around 4.7 times.

Michael, I'm sure I don't have to remind you that pre-2007, you know, you could lever up to five times and no one even blinked an eye on it. Now, we're sort of still in the environment where anything over three and a half times is cause for some concern. I'm wondering what you guys can say to sort of assuage concerned shareholders out there who might be a little bit concerned with the debt balance. I gathered from your prepared remarks, Jon, that there's initiative to sell some noncore assets, but I'm wondering what else you can say to shareholders who might be concerned about this net debt to EBITDA ratio. Thank you.

Yeah, a couple things. Again, David, Jon did mentioned as you said, that we're taking a look at what we consider to be noncore assets that we believe are quite valuable. We pay attention to our balance sheet. We believe that that's a priority for us. So don't be surprised to see us to sell some noncore assets and pay down debt. And you're right. We take a look at the entire balance sheet and we are very cognisant of the fact that we don't ever want to be in a position to be overlevered. If we did ever raise additional money, for example, on the debt side, we would use the vast majority to pay down existing debt.

Do you have a target ratio that you would like to kind of have in your back pocket, say over the next couple years that you think is more capital efficient than where you stand right now?

Well, again, as Jon also mentioned, we talked about film funds, we talked about PNA funds. We think that there's a lot of ways for us to mitigate what anybody would perceive as too much leverage. So but my sense is that all of those levers we can pull will put us in, as you would say, a better leveraged position, less leverage.

Got it. Thank you very much.

Thank you. And our next question comes from the line of Doug Creutz from Cowen & Company. Please go ahead.

Hi. Yeah. Thanks. You had a pretty large negative free cash flow in Q3. It looked like you had a pretty big working capital swing. Just wondering if you could confirm you still expect positive free cash flow in the fiscal year. And if you could give an update on what you expect to spend on investment and films for the year and also theatrical PNA.

Okay. Well, yes, there were some changes in the quarter. Actually an interesting change in the working capital component was a big increase in accounts receivable in Q3. What that means, if you look at my balance sheet at the end of my Q3, I had $400 million in receivables.

If you look at that same balance sheet at December a year ago, I had $237 million in receivables. That's a swing of $160 million that you should see flowing into free cash flow in my Q4. As to investment in film, my investment in film through the end of my third quarter was $496 million, I'm only going to put another $30 million, actually $26 million into my next quarter, bringing me to about $522 million so very little [inaudible],

Yeah. I think to refine that for the macro perspective in terms of your questions about essentially guidance, I would say absence the higher than anticipated corporate defense costs, where we are overall is we're tracking ahead on revenue, tracking ahead on EBITDA and adjusted EBITDA and tracking towards break-even free cash flow.

Okay. Thank you.

Thank you. And next we'll go to the line of Ben Mogil from Stifel Nicolaus. Please go ahead.

Hi. Good morning. Thanks for taking the call. You know, windowing has obviously been pretty topical, be it previewing VOD window or be it through the impact of Netflix on the cable windows. Can you talk a little bit how you guys see windowing and sort of what you see changing and how, you know, what works for you and what you think your best challenges are?

Sure, Ben. This is Steve. We've been looking at that a lot. We've talked to you a lot about that in the past. The industry over the past many years has really found a way to kind of increase the size of the revenue pie by carefully exploiting sequential windows.

We believe that -- you mentioned the premium VOD window,we think that's a really smart opportunity to generate some additional revenue. And we're looking at that closely, as I'm sure you read Warner Bros. mentioned they may be the first out in Q2 next year. And we're going to be looking at that closely.

We've been talking to our own, our exhibitors and our retailers, to find a plan that will work for us, work for them, not damage anyone. We've got a couple of ideas of films that we might go with once we see where the industry is going. So, you know, we think that's really smart opportunity to create an additional window.

When you look at something like say Netflix, how is that -- with Epics going to Netflix, how does that sort of change your conversations with your potential MSO and satellite carriers? Is there being much pushback from them or are they readily accepting it?

Well, as I've said before, Ben, we think actually we did what Steve mentioned and what the industry does best is, you know, we created sequential windows. So we created a premium window for our traditional MSO carriers and a second window, if you will, 90 days later for the Netflix customer. So we signed up, you know, this quarter -- we signed up Sudden Link, which is one of the top ten MSOs, and they are new Epics partner.

Obviously, we're still having discussions and very much focused on getting the top three that we don't have, Warner, Comcast and Direct. And, of course, nobody likes competition. That's been the history of the business. But frankly every time that there's been a new competitor in the pay television business, that's made everybody more focused and stronger. We think we will ultimately be in very good shape with everybody.

Okay. And then last question. Jon, you referenced earlier that you're seeing VOD range from you know 15% to 25% of box office. Is that sort of DBO or is that your film rental share that you're benchmarking against?

We benchmark against box office.

Okay. Great. Thanks again, guys.

Thank you. And next we go to the line of Matthew Harrington from Wunderlich Securities. Please go ahead.

Good morning. Thanks for taking my questions. I had a couple. Firstly, you and Carl Icahn haven't made any secret of your continued interest in MGM. I mean, there are a few things going on there right now, possibly a distribution deal with Sony on some pretty advantageous terms. As that evolves, is that likely to block you from looking at it again, if Carl and some other people come onboard?

Then a second question would be on HUNGER GAMES. With it being a trilogy, what's different in terms of the marketing process and the production process, and the waterfall financial commitments on that? And then, thirdly, this is probably really lame idea for Steve, but did you ever think about trying to bundle the premium VOD with digital access over a period of time, in order to get people to pay that type of a premium, you know price point. I mean specifically Ultraviolet?

Are you referring to, in a sense, some kind of a -- you pay a subscription fee to be on the Cloud and -- I'm not really sure.

I'm sorry. I sort of had a mental block for a second. What I really meant to say was given the premium VOD price point, it's probably going to be a pretty fancy price point. Is there any way that you could try to kill two birds in a certain sense, with coupling some of the Ultraviolet initiative on the digital locker side with the premium VOD. In other words, I buy HUNGER GAMES three years from now on premium VOD, and I also get the Ultraviolet angle for it, and that way I'm willing to pay $40 out of the blocks. I mean it's just my lame idea at the moment. But I thought I would toss it out there and see what Steve's reactions was.

Well, Matt, I think there have been a lot of ideas bantered about. That one in particular, I don't think anyone's really planning on doing that, but we have talked about a lot of ideas about how you get a consumer to accept the $20 to $30 price point for a one-night rental.

And that's not the first time we've heard of that idea of, you know, maybe you then get a copy of the film, whether it's digital through Ultraviolet or a DVD. Some of the cable operators have brought that up as a potential idea. We've talked about them; I don't think we've settled on anything. We're actually anxious to see how the market develops on just the premium VOD aspect first before we go down that road. Joe, do you want to take a crack on the HUNGER GAMES?

On the HUNGER GAMES, put very simply, we just have a lot more tools in the bagto work with and we're into the game much earlier on our marketing efforts. You know, we started with Scholastic more than a year ago as they're launching out their books, using every one of those -- using every one of their release dates, the second book, the third book, the paperback is an opportunity to start seating our brand.

We're doing a lot of co-marketing with them and they've been a great partner. Even the production process and opportunity to market, you know, we just opened up the casting office a few weeks ago. And that became a story that created enormous interest and thousands of submissions the first day. And so we're using every step in the process as an opportunity to market. We're already putting our consumer products relationships in place.

If you look at TWILIGHT as an example, the consumer -- that broke new ground on the consumer products level, which was both an enormous new revenue stream, as well as a great way to market. And we're also looking at this as a trilogy, we're marketing this movie from a year ago, over the next five years. We're not just looking at what happens when we -- how we're going to get the first one open. So we just have more tools in the bag. And we're working very closely with the publisher to grow the brand.

And, Matt, on the MGM issue, the few guys running MGM, Gary Barber and Roger Birnbaum, are very smart guys. We don't expect them to exit the distribution business. We look at JAMES BOND, whether they do that with somebody or someone else, we look at that as a very unique property.

Thanks for taking my questions.

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

Thank you. Good morning. First, just wanted to confirm, you said you're tracking above guidance on EBITDA. Is that above the $75 million we spoke about before?

I'm sorry. Say that once more.

Guidance on EBITDA, you said you are pacing ahead of the guidance.

Yes.

So is that the guidance of $75 million or more that we spoke about earlier in the year?

That's correct. And then one question about TV Guide, if you don't mind.

It seems like the revenue declined 3% in the quarter. Can you give us an idea of is it a [inaudible] declines or advertising?

I'm sorry again. Your question is on TV guide is --

The total revenue that you disclosed in 10-Q, seems like it declined 3% in the quarter year on year. I was wondering if you could give us some color on if it's a [inaudible] revenue or advertising revenue declining? What is the composition of the decline?

No. Jim can get back to you on the detail. Overall, I can tell you we're tracking a little ahead of budget for the year on TV Guide.

All right. Thank you very much.

Thank you. And next we'll go to the line of Marla Backer from Hudson Square. Please go ahead.

Thank you. A couple questions. First, the distribution on marketing costs appeared to have trended down nicely, relative to theatrical revenue versus last year, but you do have a couple of pretty big films coming up, should we expect to see a little bit of a hike relative to the revenue line over the next couple of quarters?

Well, Q4 we have very little. My theatrical marketing in my Q4 may be in the $6 million range, because we basically just have a service deal for LINCOLN LAWYERS, so no PNA really there. So very limited PNA in my Q4.

And we're in the planning process for fiscal 2012, but when we look at -- when you go to some of the initiatives Jon talked about, some of these lower budget films, something that we've spent a lot of time on next year is what we're calling PNA efficient films, which are movies like ABDUCTION, where we're speaking to a singular audience. So we can be more efficient in being the low to mid-20s versus at the higher levels. As well as bringing in partners across our slate, both in PNA and investment in film. And so on a similar sized slate of 12 films, yes, we expect the overall investment in PNA and investment in film to go down.

Does that also extend to HUNGER GAMES, because that's a somewhat unique property for you.

Still in the planning process. I mean, you know the good news about HUNGER GAMES is that there's greater awareness, so we don't have tospend as much money up front to get people to know about it. It's early days to really lay a target on exactly what the opening PNA levels for that film are going to be, however.

Okay. And then last question on TV Guide. With some of the spending for original content there, are you thinking that the kind of content that you will position on TV Guide, will that be eligible or even commercially viable for syndication deals down the road.

You know, that's actually a good question. One of the things that we do with TV Guide, even though it's a partnership, but we're sort of the lead strategic partner on it and the same thing that we will do with hopefully all of our properties, is cross-over the value to our other businesses. And in almost all of the original content that we do for TV Guide, Lions Gate will retain distribution of the ancillary businesses, international, domestic, syndication, whatever. So, yeah, we hope that, any of the properties that are exploited on TV Guide would have incremental value.

Thank you.

You're welcome.

Thank you. And, ladies and gentlemen, we have time for two more questions. And our next question comes from the line of David Banks from RBC Capital Markets.

Hey. Good morning. A couple questions. Thanks for all of the disclosure on the home video kind of revenues and what slate it's coming off. I was wondering if you kind of look at the almost 50% that's coming from call it the last seven quarters versus the remainder, which is -- first, would that be kind of a good definition of library, that you know older than two years. What is your general definition of library?And then second, do you see any differences in consumption or the way indexes are tracking off box office, both on a consumer package goods and an electronics sell-through basis. You know for those kind of different eras of production. That's the first question. Sorry for making it so long.

And the second question is, and this may just be sort of coincidence, but if you look at the fiscal third quarter 2010, 2009, as well as the nine months 2010, 2009, the direct operating expenses are basically flat year-over-year, a little bit of variance. But have we sort of hit a steady state given the amount you're producing you think in direct ops, more or less, as we think about next year and the rest of the year? Thanks.

I'll take the direct operating. That's basically your -- you should see direct operating actually in the television division getting better and better with the advent of WEEDS and MAD MEN, and bigger ultimates on those. So a slight decline in that. I mean running from maybe as high as 90% to 80%, 70%. Your motion picture DOE probably pretty flat, 40% to 42%. That's probably a pretty steady state.

David, this is Steve. I'll take a stab at answering your compound question.

Right.

As to the way that Jim broke out home entertainment in the Q versus library, I'm not really sure that that's a great guide. I think we've said before we define library as basically six months after a picture enters a particular media. So as to home entertainment, it's easy. The beginning of the quarter, which follows six months after the picture is originally released, it becomes library.

One of the things that we've said is, obviously. library continues to be incredibly strong for us. We mentioned we're still on track to do over $300 million this year, which is great. And not only that, but you know Blu-Ray, which is almost doubling in size, from $1.1 to $2 billion dollars, 40% of the growth is coming from library and we're mining that hard with our own library. You mentioned the conversion rates, the indexing off box office for both packaged media and VOD.

And even though conversion rates are down somewhat for the industry, our conversion rate -- not only is it highest in packaged media, but as Jon mentioned, is by far highest in VOD, and I think that has a lot to do with the kinds of pictures we produce. And the interesting thing you're seeing now, because of the high conversion rates, particularly in VOD and on-demand and the growth in Blu-Ray, our -- I think Jon mentioned this, our operating margins in home entertainment as a percentage is now quite a bit higher this year than it was just one year ago.

So we've been hitting on effect that these are all higher margin media, and it's really -- I think the tide has turned to the point where we're actually making more money as a percentage in home entertainment than we were even a year or two ago.

I guess if I could just ask one follow-up to that. I guess, sir, what I was trying to get at, a little bit deeper was, are you seeing any differences on a year-over-year basis or year versus two years on the age of the title, right, where you're seeing -- maybe you're seeing greater resilience or even increasing strength on the newer titles. But are you seeing a weakening or the same kind of strengthening on the older titles?

I think what he was trying to say in giving you, David, the percentage of that Blu-Ray growth in libraries. I think you could assume that probably more of that is older library titles that had not been mined previously.

Got it.

Obviously new titles are coming out, typically and immediately on Blu-Ray. So I think that was probably, you know, that part of it was the answer to your question.

Terrific. Thank you very much, guys.

Thank you and our final question comes from the line of David Joyce from Miller Tabak & Company. Please go ahead.

Thank you. Just two little things. One, for free cash flow modeling purposes, I was wondering over the next year, if you're going to still be in that reducer in your production obligations because you did pay down a little more than we expected in this quarter. And then secondly, just wanted to know if the Epic deals have all been pretty uniform in terms of how you're getting paid. Are you getting paid on the total potential subscriber base of the distributors. Thanks.

Yeah. In terms of -- we it haven't fully done our budget for next year,so I'm not really comfortable indicating how much we're going to, you know -- what goes in and what by pays down because we haven't put all the films in yet. So I'll defer that to the next call.

The only indication on that, as Joe said, it looks like we'll be putting less money into PNA for our theatrical slate next year and less money into investment and film. On Epics, as I've said previously, we actually are customizing each deal, depending on the carrier and the unique nature of Epics is how flexible we are making it for each MSO in terms of its ability to play it on a tier, to play it a la carte, to bundle it, to package it. And so, no, it's actually -- each deal is quite customized for the carrier.

Great. Thank you.

Okay. Thank you, everybody. We'll see you on the next call.

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