Starz Entertainment Corp (STRZ) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Lionsgate fiscal 2012 second 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).

And as a reminder, this conference is being recorded. I would now like to turn the conference to our host, Mr. Peter Wilkes. Please go ahead.

Thank you. Thank you for joining us this morning. Jon Feltheimer, our CEO will have opening remarks, and then we will open the call to Q&A. He will be joined on the call by Vice Chairman, Michael Burns, Steve Beeks, President and Co-COO and 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 statement, as a result of various important factors including the risk factors set forth in Lionsgate's annual report on Form 10-K filed with the SEC on May 31, 2011. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements, that may be made to reflect any future events or circumstances. Jon?

Thank you, Peter. Hello, everybody. Thanks for joining us this morning. We had a very busy quarter with significant developments in all of our core businesses. To highlight a few of these, we found a great home at FX for our Charlie Sheen show, Anger Management. We believe that this show is in terrific hands with veteran show runner, Bruce Helford, and acclaimed producer, Joe Roth, and the first episodes begin production in early 2012. We are officially confirming today a new deal with NetFlix for the pay television window for our feature film slate in the United Kingdom. This new agreement puts us on equal playing field with all of the other major studios, and it will generate millions of dollars of incremental EBITDA annually, beginning this year. We acquired another potential new franchise film property for young adults, Chaos Walking, Patrick Ness's trilogy of award winning books. We expect to greenlight the first film, The Knife of Never Letting Go, next year for calendar 2013 release.

Turning to our financial results in the quarter, as part of our recent stock offering, we indicated that we might have a potentially significant loss in the quarter. I'm pleased to note that our EBITDA is approximately $25 million higher than what we anticipated in September. This increase is attributable to a number of factors including timing variances within the year, an uptick in digitally delivered content in VOD, and higher than expected packaged media revenue from last year's theatrical slate. We also created savings in distribution and manufacturing expenses that had a direct impact on the quarter's results.

In this quarter, I'm pleased to note that we had record television revenue of $139 million, driven by the first four seasons of Mad Men's syndication. Our TV business continues to make increasingly important contributions to our bottom line. The quarter was strong, both in terms of the performance of our existing shows, and the addition of exciting new properties to our pipeline.

We are also announcing today that we have completed a deal with Showtime networks, for an eighth season of Weeds, and we've also made a new deal with it's star, Mary-Louise Parker. The new season will expand Weeds to well over a 100 total episodes, and will have very positive ramifications for it's continued strong performance in home entertainment and syndication. This past quarter also saw Mad Men join an elite company, shared only with Hill Street Blues, L.A. Law, and The West Wing, when it won it's fourth straight best drama Emmy.

On the distribution side, Turner ordered another 42 episodes of Tyler Perry's House of Payne, bringing the show and it's spin-off, Meet the Browns, to nearly 400 total episodes for syndication. Tyler's third sitcom, For Better or Worse, premiers on Turner later this month, and we have high hopes that it will continue Tyler's track record of hit shows.

Boss, starring Kelsey Grammer, debuted to strong critical reviews on October 21, and was ordered for a second season, even before it aired. We have a great package with Anger Management, a commercially powerful star in Charlie Sheen, the perfect vehicle to showcase his talents, a proven show runner in Bruce Helford, the creator of the Drew Carey show, and an ideal partner in FX. It's success will be an extremely profitable show, due to it's unique business model. Our successful track record has positioned us as an important supplier to all of the networks, and we were having a very successful selling season with 19 scripts already ordered at 13 different networks.

Our digital business also continued to gain momentum in the quarter. Digital and on-demand revenues increased 123% from the prior year, to $65 million in the quarter. We will become the first studio to launch a branded channel on YouTube when our Lionsgate Fitness channel launches in January. And this will allow us to leverage many of our leading fitness brands to a new online audience, as well as to showcase new brands and properties before taking them out to market. Our Dirty Dancing and Weeds social games continue to gain traction on the Facebook platform. There have been over 1 million combined users of the game apps to date, and we continue to fine tune the games as they grow. Our goal is to ensure that we are capitalizing on the full long-term potential of digital, as well as traditional platforms for current and upcoming franchises, and we expect to have news about Hunger Games in this area in the coming weeks.

We became one of the first studios to rent films on Facebook, and we're currently offering 11 new and cataloged titles including Lincoln Lawyer, Rambo, Saw and Leprechaun. You might laugh at that last title, but the emergence of niche audience is being served by the digital marketplace will continue to breathe fresh life into content whose commercial appeal would have been considered exhausted just a few years ago. We were creating new content for digital platforms. We are about to begin production of a new online show with Machinima, one of the top game and content platforms on YouTube. We are capitalizing on synergies within the Lionsgate family by licensing the show to FEARnet as well, where the episodes will air simultaneously with the online series.

We continue to be aggressive about exploring new windows and pricing strategies for our content in the premium VOD space. We released Margin Call theatrically through our sister company, Roadside Attractions and day-and-date on VOD. The film expanded to 170 screens this past weekend, and has already grossed $2.5 million at the box office. However, Margin Call has also generated near a 0.25 million VOD buys, and we expect the consumer on-demand revenue will at least equal it's theatrical box office take. This will be a very profitable movie for us, due to its low marketing expense and the multiple day-and-date revenue sources we've created. We are also pleased with the results of our Labor Day weekend release of Kevin Smith's Red State on premium VOD, 30 days in advance of it's theatrical release. And we will have previously announced two-week VOD window for Abduction over the Christmas holidays, approximately a month ahead of it's DVD release. You can expect us to continue to explore premium VOD windows, custom-tailored to our films.

As you know our theatrical business under performed during the quarter. However, we continue our disciplined portfolio approach that emphasizes a blend of in-house productions, acquisitions and service deals, and we'll continue to mitigate our risk by forging strong financial partnerships to reduce our exposure. In this context, we are delighted to partner with the producers of the Blind Side and Dolphin Tale, Alcon Entertainment on What to Expect When You are Expecting. We are also diversifying our film business into areas with which you may not be as familiar, such as Mandate Pictures, our 43% equity investment in Roadside Attractions and Pantelion Films, our partnership with Televisa. We were pleased with the performance of Mandate's comedy, 50/50, a lower budget film that's riding strong critical acclaim to a domestic box office performance of approximately $35 million.

This past weekend also saw Warner Brothers open the third installment of Harold & Kumar. The film has been profitable for Lionsgate, and we're developing a Harold & Kumar television series that has already attracted a lot of interest from the networks. Young Adults, starring Charlize Theron and directed by Jason Reitman will be released in December, rounding out a busy quarter for Mandate. We're partnering on another 4 films with Roadside including Everything Must Go, starring Will Ferrell, and as we've mentioned Margin Call, starring Kevin Spacey, Demi Moore and Jeremy Irons, which is benefiting from the time limits of it's Wall Street theme, and is emerging as contender for year-end awards. Upcoming releases include director Jennifer Westfeldt's Friends with Kids, starring Westfeldt, Mad Men's John Hamm and Megan Fox, with another significant title to be announced shortly.

So our motion picture business this year encompasses a total of 24 films, including 10 from Lionsgate, 4 from Mandate, 4 in partnership with Roadside, and another 6 from Pantelion. Our smaller film business may often fly under the radar, but we expect next year's films from these smaller businesses alone to contribute approximately $25 million in ultimate profitability, with very little risk capital attached. Hunger Games continues it's trajectory towards a March 23 release, with more than 16 million books of the Hunger Games trilogy now in circulation, an increase of more than 4 million since our last call. We will sneak preview the trailer next Monday morning on Good Morning America, in advance of it's launch next weekend on Breaking Dawn, the latest film in the Twilight franchise. You can also see it on the jumbotron in Times Square on Monday.

We've deepened the bench strength of our motion picture team, with the addition of Chris LeRoy, a 10 year veteran of Disney to our theatrical distribution team, and the addition of Terry Press, a long time Disney and DreamWorks veteran, who was instrumental in social network marketing campaign last year, as consultant to our marketing team. These additions give us an all-star team, positioned to capitalize on the upside afforded by Hunger Games and other potential franchises, such as What to Expect, the Expendables 2, Dirty Dancing, The Last Stand starring Arnold Schwarzenegger, and the Reversal, the second Lincoln Lawyer film in our partnership with Lakeshore Entertainment. Tyler Perry's next film, Good Deeds, opens on February 24, and we just announced his 13th film for Lionsgate, The Marriage Counselor for release later next year.

To wrap up, we are very pleased with our momentum in the 4 areas that we consider most critical to our long term strategy (inaudible) and our franchise is poised to bring greater consistency and profitability to our business. We are adding new shows like Anger Management and Boss to a television roster that is already demonstrating strong and growing profitability. Our digital operations are gaining momentum, and positioned to deliver significant incremental revenue and EBITDA. And we continue to pioneer exciting new platforms like EPIX and FEARnet, in conjunction with our partners to meet the needs of today's consumers, and capitalize on the opportunities that the digital marketplace offers content creators and distributors like Lionsgate. As Michael Burns and I often say, this is the right time and right place to be in the content business.

Now I would like to open the call to your questions.

Thank you.

(Operator Instructions).

And our first question comes from James Marsh with Piper Jaffray. Please go ahead.

Good morning. This is Stan Meyers on behalf of James. Can you give us an update on your views on premium VOD? It seems that other studios are struggling to find a product. You guys are having some success with Abduction. What are you doing differently, and how do you see this developing?

Well, Stan, hi, this is Steve Beeks. I'll take that. And yes, you have seen the studios out there experimenting with various windows, and we have been experimenting with different windows, price points, and our premium VOD releases. And I don't think that it's a situation where any -- where one size fits all. We -- and even with us, we experiment with 3 different models. As we mentioned with Red State going out to premium VOD 30 days pre-theatrical, Margin Call was just released, day-and-date with theatrical, Abduction, (inaudible) a bigger theatrical film going with 91 days post-theatrical, 30 days prior to DVD. I think -- and I think you will see us do more of that. But we are also going to tailor the window, the availability, the opportunity to the film. So I understand what the studios are trying to do. I don't necessarily think -- that that's -- that they have found that's a bad model, and I don't know that we found the Holy Grail. It's a matter of tailoring your approach to the specific film, and what's available to you.

Okay. That's helpful. And also on Hunger Games. As you know Twilight did close to a $1 billion dollars in licensing and merchandising. Have you guys started to explore that market yet?

We have actually. We put in place very early on, probably a year ago, Striker as an agent rep for us, and [NECA] the actually the same -- the same group that handled the Twilight merchandising program. We learned a lot from them. As you just indicated, it's one of the most successful license and merchandising programs ever, certainly in the young adult space. We have the same A-team on board. The idea here is that, and certainly with their guidance, that we are going to be very, very strong in specialty stores, Hot Topic and the like, leading up to the theatrical release, so as to be very present, but not over do or over push merchandise going into theatrical release. Because it's -- history shows that it's very critical to establish a theatrical brand, and then we'll grow out from there, into major retailers, the big box retailers. As well as, we have a music deal with the Universal Music group, that is an exceptional deal. Our teams actually in Nashville right now, locking up what we expect to be a big announcement for the lead act on that record. It's one of the better deals -- it's one of the bigger deals ever done, to match our brand. So we are covering all sides of it. And Jon mentioned that in the social gaming space, we hope to have an announcement soon. So we've --we have been very strategic about a plan we started quite a long time ago, and think we were positioned for real success.

That was Joe Drake, by the way.

All right. Thank you.

Thank you. Our next question comes from Doug Creutz from Cowen and Company. Please go ahead.

Thanks. A couple questions. First, I just wondered if you could talk about where you are, in terms of expanding your distribution of EPIX? And then secondly, there was a pretty large sequential drop in revenue in TV Guide in the quarter, and I was wondering if you could talk about what happened there? Thanks.

Yes, I think TV Guide continues to go along the path we expected, which is a transition to a full screen digital entertainment channel. Along the way we will, as I've mentioned a number of times, we will lose some audience before we pick up new audience, with some of the new shows and some of the programming. I think these quarters have been typically soft quarters, and we are pretty much on track for the full-year in terms of our numbers. And we are continuing to do as we said, which is to get more distribution, to improve the distribution, to improve the real estate. So I think we will be fine. It is -- I would say for, some of the smaller channels, it is a -- choppy. I wouldn't say bad, but I would say a choppy advertising market, and I think we are seeing a lot of that as well. And in terms of EPIX, I can't really comment on distribution, other than to say all 3 partners are focused on it, and channel management is focused on it. And I think you will see some positive developments in that this year.

Great. Thanks.

Thank you. We will go to the line of Ben Mogil with -- please go ahead.

Hi. Good morning, and thanks for taking the question. So two questions. First of all, on Hunger Games, any major international markets that you haven't yet sold?

No. We actually -- we've actually licensed the entire world. And in fact, we -- one of the things that we think is that -- the independents when they do it right, they can do it better than anybody. We -- about a year ago, put together our distribution network. In Cannes, we held a distribution summit with all of our partners. We just had the second summit a few days ago, during the American Film Market attended by everybody. It was very, very exciting. You got, what I think the best distributors in the world, put together in a very nimble network, that can operate realtime. We previewed the trailer. They were absolutely ecstatic. And when you look at where is growth in the motion picture business, the answer is overseas, overseas and overseas. And we in talking to our partners, the -- their expectation -- we have very, very high hopes for the movie here. Their expectation, which has been a decent trend as of late, is that they should outperform the domestic by a nice margin.

Joe --

As well I would say that, I do want you to know that we have put together an essential, other than a territory or two a week later, a day-and-date global release pattern to capitalize on all of the media at once.

Sure. Joe, do you expect movie to play in China?

We do. We are -- we are just wrapping up a deal there, in fact.

Okay. So you will be one of the 20 approved films a year kind of thing?

We will be released in China, yes.

And on the IMAX side, I forget, right now it's not an IMAX, but you'd like -- but you are sort of in that discussion period, if you will? Is that fair to say?

Here it will be on large screen formats, because many of the distribution -- many exhibition chains have their own large screen format. It will not be on IMAX here, due to pre-existing agreement they have with another studio.

Okay. Fair enough. And then last question, I think, probably I'm guessing for Jon. Talk a little bit more if you can, about the NetFlix deal in the UK? Does it -- it basically gives you similar economics to what the majors have on Skye, is that sort of a correct interpretation?

That's correct.

And are you getting paid -- is it again is it again, sort of similar to the US where it's a grid-based on box office? Or is this just a per flat fee number, regardless of box office performance?

No, it's similar to a typical pay television deal, and I think I alluded to it a couple of calls ago. But we are looking at -- my guess is double digit millions of dollars a year, assuming sort of similar sized slate based upon that deal. So it really is a game changer for our UK -- for our overall combined business, but for our UK business as well, because it puts them in a competitive position with other studios, in terms of pick up and production, economics, for things that they might want to quarterback.

Sure. And then the last just sort of question on that as well, or sort of on the DVD. So obviously, you saw lower distribution costs reflecting the shift from physical to digital. Even on the physical itself, are you -- do you now have a new DVD contract that we are starting to see lower distribution costs? Or was this all just a mix change?

Hi, Ben, it's both, as you mentioned. We've been aggressively driving down the cost of our package media business, both in terms of physical cost. We continued to drive down the cost of replication and distribution, as well as we spend a lot of time analyzing our marketing cost, and we kind of peeled a little bit out of cost out of there as well.

Great. Thank you very much, guys.

Our next question comes from Matthew Harrigan from Wunderlich Securities. Please go ahead.

Thank you. Until a couple years ago, you pretty much owned the Halloween window. Now you've got a number of other things that are starting or in development, the Frankenstein feature, Dead Island, the video game adaptation, Xoxo. Could you talk about that? And could you talk about FEARnet, which I think has maybe gone a little bit slower in the linear side than some people would have liked, but it looks like it has a lot of potential. And then secondly, with so much noise on the tech blogs and all of that about a full-blown DMSO, with a lot more in traditional content on a linear basis, albeit some new features, maybe even [SIRI]. Could you talk about how that -- how you see that happening with possible Google and Apple and others, whether it's really a step function change, and how it affects Lionsgate? I know that that's conjectural, but you certainly are a leader on the digital side, and I'd love to know what you think from broad view?

I'll take a shot at the first one. I think your question, if I understood it, was really asking about what we are doing in the genre space.

Exactly.

And your reference to Halloween. So we didn't have the right film for this Halloween. However, we are still very, very much in that space, and aggressive. We have a couple of great films that could be franchises coming up. We got a movie called the Possession, which is our joint venture with Ghost House Pictures, Sam Raimi branded. We seen the picture. It's fantastic. We have a great campaign on that, as well as Cabin in the Woods which was created by Joss Whedon, who directed the Avengers coming up that we are releasing in April here, very, very high concept, brilliantly executed piece of content. So we -- we're -- we stay aggressive in that space, want to continue to have two or three movies a year, coming out of that space. We think we were great at it, and we're going to continue to do that.

And then, I, Frankenstein with Lakeshore?

I, Frankenstein is a big genre movie actually, because it's a big concept movie that also has a considerable action component. So it's a bit of a blended two genres, broadening our audience a little bit.

In terms of fear net, we have a new deal with one MSO, a renewed deal with another, both will call for a linear rollout. As matter as fact, I think I mentioned this before, but our new deal with Time Warner, there has already begun a linear rollout. And we do expect linear to continue to roll out fairly consistently, particularly as I mentioned because the MSOs don't pay incremental license fees for the linear. So couple of the larger distributors that are already paying for it, I think it works in their favor, to roll us out linear as well, and I do expect that to continue to happen all year. I, Matthew, I missed that last question, in terms of digital and what --

Yes, it -- and obviously everyone is aware of everything that you are doing right now, NetFlix and all of that. And it is conjectural, because there is just a lot of speculation on the blogs, as to what Apple might try to do on the next incarnation of the product. If the engineer that did the iPod working on it, and then all of the stories about Google, just something that has a much richer channel line up, something that's comparable to traditional MSO, on an over the top basis, and how you see that affecting the playing field, how it affects Lionsgate? And again, I know this is a little speculation at this point, but I'd love to hear your thoughts.

It's not a question of speculation. I just hate to answer in the general way that I will. But I think that the simple answer is, if you seen what we've done in every aspect of a digital progression, if you will, whether it be in terms of syndication, whether it would be in terms of windows for our theatrical product that we referenced today, the UK, obviously, syndication we were talking about, Mad Men and Weeds in terms of NetFlix. If you are talking about original content as we brought up today in terms of Machinima. If you talking about channels, as we brought up today, in terms of YouTube and our fitness channel, I think the advantage we have is two-fold.

One, is we are massive content creators. We own a massive library. We create a really massive amount of new content between all of our businesses, particularly theatrical and television. And I think no matter which technology you are talking about, whether it's connected to televisions, whatever the new platform is, everywhere in the world, you are basically talking about delivering content to a consumer. So clearly, we think that, that gives us at least a level playing field with all of the major studios, and obviously a very, very strong position with all of the new players. I think the second thing that people realize with us, is we are not afraid to be first. We are not afraid to make a mistake. We are not afraid to try new forms, new ways of doing business.

And so, I think that also puts us in very good stead with all of the new digital players who are trying different things, that we are really a good partner for them. So we are excited. I think you can see just in terms of the calculus of the film business. You could see that right now, the packaged media business seems to be leveling off, BluRay starting to really work well. I think sell-through from the point of view, of the Ultraviolet, is going to be strong. And you also see exactly what we have been predicting for a couple of years now, you are starting to see the digital revenues from on-demand coming to fruition and really growing. And so I think going forward, that calculus is going to look quite strong for our film business. And so we are very pleased with the trajectory of those new revenues.

Well, thanks for your tolerance on the question, Jon.

You got it.

We have time for one more question and that will come from Marla Backer from Hudson Square.

Thank you. A question on Hunger Games, you may have already said this, but in the -- when you met with your international partners last week, they have expectations for this that are pretty significant. Does this follow your traditional model, or did you retain a higher percentage of overaging, in case the movie really knocks it out of the park?

We, because of the -- because, A, we were one of the stronger -- we are probably the leading international sales company out there -- but as well as the strength of the brand, we were able to carve very favorable deals for the Company that allows us to capitalize -- not only did we sell the title very well and to help mitigate some risk, but we have enormous upside in success. And in fact, I won't give you numbers, but it was interesting -- people were so enthusiastic about the title that our French distributor came up, our Canadian partner came up to us, and they said, you know how much money we payed in overages on title X and Y? The idea being that, they see this title as a game changer for them, as well as one where, in success, we can expect significant overages. So we have got very good deals on the title across the board.

Okay. Thank you very much.

Thank you. Ladies and gentlemen, this conference will be made available for replay after 8 AM today Pacific time through November 17, 2011 at midnight. You may access the AT&T executive replay system at any time by dialing 1-800-475-6701, and entering the access code 221713. International participants may dial 320-365-3844. Those numbers again, 1-800-475-6701 and 320-365-3844 with the access code 221713. That does conclude our conference for today. Thank you for your participation, and for using AT&T executive teleconference. You may now disconnect.