Starz Entertainment Corp (STRZ) 2014 Q1 法說會逐字稿

Welcome to the Lionsgate fiscal 2014 first quarter earnings conference call. At this time all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Peter Wilkes. Please go ahead.

Thank you for joining us for our Q1 analyst call. We will begin with opening remarks from Jon Feltheimer, our CEO. Following his remarks, we'll open the call to questions. Joining us on the call today are Vice Chairman, Michael Burns; Motion Picture Group Co-Chairs, Rob Friedman and Patrick Wachsberger; President of Lionsgate Television Group, Kevin Beggs; Steve Beeks, Co-COO and President of the Motion Picture Group; Brian Goldsmith, Co-COO; 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 set forth in Lionsgate's 10-K filed with the SEC on May 30. The company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.

Jon?

Good morning, everybody, and thanks for joining the call.

We're very pleased with our first-quarter results. They get us off to a good start for the year, which, as usual, will be back-roaded. As we continue building new franchises, diversifying our TV businesses, and strengthening our capital structure, the global environment for content owners is robust and continues to grow. The theatrical box office, though product-sensitive, rebounded over the summer, and home entertainment spending continues to increase, driven by strong growth in electronic sell-through. At the same time, demand for content is increasing internationally across multiple platforms in major markets like Russia, Latin America, China and the UK. Unencumbered by a large number of legacy deals, and possessing a unique international infrastructure and a film and TV portfolio that is deeper than ever before, we are well-positioned to meet this demand.

Looking inside this quarter's numbers provides a few examples. Lionsgate UK just completed its best year ever, with nearly $150 million in revenue and growing margins. With $32 million in revenue this quarter, it is off to another strong start, partially due to the emergence of strong digital buyers like Netflix and Amazon. If you recall, we formed an alpha deal with Netflix in the UK two years ago. Based on the strength of that deal, and increasing demand from a broad spectrum of digital and traditional buyers in the territory, we see new opportunities across the entire portfolio of our film and TV content. To take advantage of that demand, in addition to distributing our own films, our UK business has created robust in-house production and third-party acquisition businesses. As a matter of fact, 11 of its 18 theatrical releases last year and over 75% of its releases this year, will be UK productions, co-productions or third-party acquisitions, as Lionsgate UK continues to increase its contribution to our business.

We expect similar dynamics in other territories, as new digital buyers enter markets where little or no competition previously existed. We are positioned to capitalize on this growth, not only with a muscular film slate, but with the television business that has grown from 430 TV episodes distributed internationally in fiscal 2012 to more than 1,000 episodes this year. These television episodes, plus the strength of films like Now You See Me, Breaking Dawn Two, Warm Bodies, and The Impossible have contributed to the 71% growth in international revenue you see this quarter. And with big openings in France and Mexico last weekend, Now You See Me, the sleeper hit of the summer at the North American box office, has already achieved international box office, exceeding its domestic total of $115 million. With major territories like Australia, China and Japan still to open, it's poised to gross nearly $275 million at the worldwide box office. It is a perfect example how we are benefiting from the unique international infrastructure of output deals, joint ventures, and self distribution that we have set in place to maximize value and minimize risk.

For example, the film has performed well in territories in which we license to our output partners such as Russia, where it grossed more than $20 million at the box office. Russia is now consistently one of our top three or four territories reaping the advantages of steady market growth as well as output deals for Lionsgate and Summit product products, with two of the top independent distributors in the territory. In Latin America, where instead of licensing our films, we operate a 50/50 joint venture called IDC. The film will gross nearly $25 million at the box office and will generate a profit more than 3 times greater than had we sold it for a minimum guarantee. By eliminating the customary all right sale to Latin America, and instead monetizing the individual media and territories that comprise the Latin American market, we are enhancing our revenue and increasing our profit margins in one of the fastest growing markets in the world.

Our infrastructure also increases our flexibility to customize release strategies for individual films. Regardless of whether we license Now You See Me to third parties or distribute it through a joint venture, in every case we have worked with our distribution partners to carefully select the right release dates in one of the most competitive summers ever, resulting in a disciplined and extended rollout that enabled the film to maximize its potential and outperform some of the big summer tent poles. For Catching Fire, our international sales and distribution organization has both the reach and clout to ensure that we are going day and date with our domestic release in virtually every territory in the world. And I would like to emphasize that we are doing so with no significant new competition on that date.

Turning back to the financials, it is also interesting to note that our first quarter compared favorably to a first quarter of last year that included all but the first nine days of the theatrical release of the Hunger Games. So, with less than 1% of our revenue this quarter generated by Hunger Games, we still achieved strong quarter-over-quarter growth, highlighting the diversity of our business. Looking at the numbers, you can see that the growth came instead from areas like television production, where revenues more than doubled. TV contributions came not only from our roster of the cable shows, but from Anger Management, the broadcast series Nashville, the new Netflix series Orange is the New Black, and strong international TV sales. A big contributor to the quarter was home entertainment, with package media increasing due to strong theatrical titles and digital revenue growing more than 20%. Growth of digital revenue is reflected throughout our numbers. As a matter of fact, a strong contributor to the $0.18 of adjusted EPS in the quarter was an increase in the ultimate of a number of our TV shows, including Mad Men, partially due to increased international digital revenues. And with domestic electronic sell-through industry-wide in the first half of the year at almost $0.5 billion, we are now seeing digital home entertainment revenue become an incremental margin as opposed to replacement margin, as we've been predicting for a long time. The underlying point of all of these examples is that the story for content keeps getting better and better.

Next week, we start the official 100-day countdown for the November 22 worldwide opening of The Hunger Games Catching Fire. The film is amazing, and it brings to the screen tremendous scope and visual effects that elevate the franchise to a new level. And next month, we start production on the next two Hunger Game installments, Mockingjay 1 and 2. Divergent, which recently wrapped production in Chicago, is well-positioned to become our next young adult franchise. It has already garnered the first of what we hope will be many entertainment weekly covers. Book sales for the series are approaching 4 million, and both Divergent and Insurgent are on the New York Times bestseller list. Advance orders for the third book, Allegiant, which will be published in October, are the strongest yet. As you know, we will release Divergent in the original Hunger Games slot on March 21, 2014 and we're already working on the script for Insurgent, the second book in the franchise. Another of our young adult properties, Ender's Game, was particularly well-received at Comic-con last month, where more than 30,000 fans flocked to the interactive Ender's experience, and its large following is mobilizing for the film's November 1 release.

As I mentioned a moment ago, Now You See Me is headed for $275 million at the worldwide box office, and we have a sequel in the planning stages that we expect to begin shooting next year. We also counter-program the big summer tent poles by debuting Kevin Hart, Let Me Explain, on the Fourth of July weekend. The first film from our partnership with CodeBlack Films, Let Me Explain continues the growth of Kevin Hart's remarkable career. It grossed 4 times more than his last concert film, and has become one of the highest-grossing standup comedy films of all time. With a combined following of 15 million fans on Facebook and Twitter, Kevin is one of the hottest entertainers in the business, and we are pleased to be developing a second film with him. While Red 2 under-performed our expectations at the domestic box office, it will make a solid profit, and is off to a fast start internationally. And while not every film on our slate will be a hit, 22 of our last 24 films have been profitable, highlighting the value of a portfolio approach.

We are generating profits from a broad spectrum of our film portfolio. For example, we partner with our sister company, Roadside Attractions, to release 6 to 8 specialty films a year, in addition to the 14 to 16 commercial films we release under the Lionsgate and Summit labels. One of these films, Mud, generated more than $20 million at the domestic box office in the quarter, and is the highest-grossing independent film of the year. Both Mud and Robert Redford's upcoming tour de force, All is Lost, are also shaping up as contenders for year-end awards. These Lionsgate/Roadside titles have been significant contributors to our managed brand business that may operate under the radar, but generated almost $300 million in revenue in fiscal 2013, with anticipated growth of almost 20% this year. Our television slate is equally diverse, and this year, we will produce and distribute between 28 and 33 television series for more than 20 different networks, including an array of cable series, a number of shows in national syndication, and several series for digital platform. We will nearly double our in-house production this year, as we move to capitalize on the increased value we are seeing for our content, both domestically and internationally.

We have new shows in the pipeline for NBC, the History Channel, E, the cartoon network, FX, Amazon and Hulu, among others. As part of this growth, we continue to expand our roster of profitable 10/90 comedies. We have already completed nearly half of the 100 episode order of Anger Management in less than a year, and our partnership with FX has resulted in orders for two additional high-profile comedies. Saint George, which begins production later this month, features comedy superstar George Lopez heading an all-star cast of that includes Sons of Anarchy's Danny Trejo and Academy Award nominee Adriana Barraza. The second new show brings together the huge talent of Kelsey Grammer and Martin Lawrence. FX has ordered 10 episodes of both series, which will begin airing in early 2014. With these exciting new packages already assembled, we will have 3 10/90 series on the air by later next year.

Our initial foray into creating content for digital platforms is also off to a fast start, as Orange is the New Black debuted on Netflix to great reviews and the second season has already began filming in New York. Orange is also off to a strong start internationally. Outside of the Netflix footprint, we have already sold the show in Russia, Israel, and India, with Australia and a number of major European territories to follow. And in an exciting new development for our television business, our Celestial Tiger Entertainment partners in Asia licensed Orange to stream on YouTube in China the day after its Netflix premiere, the earliest that any US show has premiered on an international digital platform, and it has already generated nearly 7 million views in its first three weeks. Continuing our leadership in creating and delivering content for digital platforms, we also just completed a deal for a pilot script with Amazon and we are very close to an order for a series from Hulu as well. Our nonfiction business also continues to grow, with over 10 different series now ordered or airing in prime time, including TBS's new hidden camera reality hit, Deal With It, starring Howie Mandel, which attracted more than 3 million viewers last week. In its fourth season, the Wendy Williams syndicated talk show has become a long-term annuity for our Company. With ratings up 30% over last year, and an expanded production schedule, it has been renewed for the Fox station group for three more years through the 2016-2017 season.

Turning to our channel business, TVGN continues to gain momentum on the heels of our recently-announced partnership with CBS. Primetime ratings in July are up 33% over the prior year, and late-night ratings are up nearly 200% as the network continues to add fresh programming. Two new unscripted series, the Tequila Sisters from veteran reality producer Eli Frankel, and Mother of all Talent, featuring a mother-daughter duo running a kids talent agency, will premiere this fall, with new projects from Wendy Williams and singer-songwriter John Rich in development. It's interesting to note that, while our CBS partnership with -- with our CBS partnership in place, and execution of a little blocking and tackling, TVGN was the fastest-growing cable network in the country in July.

Even as we continue to grow our concept businesses, our committed to keeping cost down, reducing our debt, and lowering our cost of capital remain three of our highest priorities. We recently completed two offerings that allowed us to significantly reduce the cost of our debt, as well as extend our maturities. As a matter of fact, the refinancing of our debt, coupled with paying down our $500 million Summit term loan more than two years early, will enable the Company to reduce its cash interest payments from $75 million last year to an anticipated $37.5 million next year. These initiatives have significantly strengthened our balance sheet and led to recent credit upgrades from both Standard and Poor's and Moody's.

In closing, if you look at recent developments in our industry, three words dominate nearly every conversation. Scale, brand and innovation. These things play to our strengths as we continue to build a critical mass of content, to grow our current and emerging film brands, increase the scale of our diversified television business, expand the growth and scope of our international operations, and bring more of our resources to bear on emerging opportunities in the digital world every day. Our ultimate goal and overriding responsibility is returning value to our shareholders, so as we continue to operate with the content pipelines of a major studio, we also retain the innovative spirit and financial discipline of our independent roots and we will continue to focus on translating this unique blend of strengths into long-term profitable growth.

I will now open the call to your questions.

(Operator Instructions)

Alan Gould, Evercore.

Jon, when you mentioned scale, brand, and innovation, and I look at the financial position the Company is in, which is the best it has ever been in, or best it has been in a long time. How do you plan on growing that scale, brand and innovation? You looking more to buy or to build in that area? That would be my first question.

I think we have got a pretty -- a good record, Alan, of starting with our core businesses and building organically. But obviously, we've had some very good opportunities through the years to make some very accretive acquisitions. I think obviously our balance sheet is in very good shape right now. And so obviously we are always looking at those opportunities, particularly given that we've built such a strong platform right now. But we are going to concentrate, as always, on building organically our business, and we think there is a tremendous amount of opportunity there.

Okay. And the second one, I'm sure NES 5 player is talking to you. What do you think is the likelihood we see more SVAT or digital players coming into the US marketplace?

I think there is a very good possibility of that. Obviously we've got some very deep-pocketed digital players. I've mentioned before, we are continuing to have a number of conversations with them. And I think, again, particularly international. I think we see some very strong growth for our business and the other studios' business internationally. Because I think you're going to see really significant competition created by some of the digital distribution players going forward internationally.

Okay. And one question for Jim. Jim, the 10-Q this quarter didn't give the same disclosure you have given in the past with respect to the number of TV episodes delivered. It mentioned the shows, but not the number of episodes. Could you either on-line or off-line --

Sure. No, I will give it to you now, Alan. We delivered 11 episodes of Mad Men, 11 episodes of Anger Management, 6 episodes of Nashville, and 5 episodes of Orange is the New Black.

Okay.

Ben Mogil, Stifel.

I want to focus on TV Guide and EPIX. On TV Guide, you actually put some money back in the channel, I saw, during the quarter. You took some out by virtue of the dotcom sale. Was the putting money back in a capital call, or was there something else on that front?

I think it was a very normal capital call. Just timing.

Okay. And on that front, on TV Guide, are there any material affiliate deals up this year or next? When you talked about improving rating, so beyond the ad side, any way to monetize that in the near-term, say this year or next, on the calendar basis, on the affiliate side?

There are some affiliate conversations going on. I think there is nothing particularly imminent. But obviously, we are hoping that both with our partnership with CBS as well as the improved ratings, we will be able to improve on those distribution deals.

Are they not -- they -- I'm presuming that they are not the standard five-year deals and 20% come up every year for you, is that correct?

I don't think it's as straight line as that. They -- these deals have gone on pre our ownership, and obviously pre the CBS ownership. So they are all over the place. We can perhaps fill you in more over the next couple of quarters.

Okay. And on EPIX, first time you have gotten some capital back, which is great obviously. From an EPIX capital perspective, do you expect capital returns to be an annual thing, semiannual, or is it still up for debate, if you will?

I think EPIX is going to have another strong year, and I think you certainly could see continued ongoing return of capital.

Okay. That's great.

David Miller, B. Riley and Company.

Congratulations on the stellar results. This is kind of a stupid question, but I just want to make sure that have it right. So the senior secured second priory notes of $428.5 million, I would assume that is completely wiped out, right? Because you guys did that after June 30?

The answer is yes, we have completely -- there is no more high-yield notes outstanding (laughter).

(multiple speakers) Yes, I just wanted to make sure I have a right. And then on these other levels of debt here, the production loans, the sub notes, the balance sheet is just looking fantastic. But Jim or even Michael, if you want to chime in, are you guys happy with the pricing there? Or is there any room for improvement? Or should we expect that that pricing just stays constant over the next two or three years?

Michael?

I would say, David, that the pricing is very competitive and it's a -- we are in a good place there. Our single picture loans are priced very aggressively. We've got a group of bonds that we work with over time that have priced those down well for us as their client. On top of that, our -- obviously, our credit facility, I think we have over $0.5 billion of availability on that today, and that is LIBOR plus 2.5. So all of our rates have come down fairly dramatically, especially, as you mentioned, we saved 500 basis points on taking out the 10.25%s.

Okay, great. And then Jon, on Orange is the New Black, obviously it debuted on Netflix, I think it was July 11. Any other data you're willing to share in terms of audience response to the episodes that have aired? I guess they have not really aired, but run so far on Netflix? And how confident are you that Netflix is going to renew the series?

All of the information that we have had is extremely promising in terms of renewal. We have already started shooting the second season, so it is really early for a third season. But I think Netflix and the audience really perceive this as a hit show, and I think we are certainly looking at it that way.

Wonderful.

James marsh, Piper Jaffray.

I just wanted to talk about these two new 10/90 deals. And maybe you can compare and contrast those two, the Anger Management structure? Maybe we could get a sense for what the ratings threshold might be relative to Anger Management, is it lower, higher? Is the deal structured in a similar way with talent taking more on the back end. But just compare and contrast those deals to Anger Management Getting into all of the specifics, but just broadly.

Sure, I will let Kevin Beggs jump in here.

Generally, they are all very similar, particularly because we are at FX for all three of them. The two new shows have a lower above-the-line, fewer elements involved in the producing side, so they will be a little more affordable than Anger Management. And the thresholds are similar, each show on the ratings. But each show is calibrated specifically to the talent that is in it and their expectations. So we feel very comfortable and confident in the benchmarks that FX has laid out. They are very confident about the shows, and in a broad way, they're looking to program these together and create a block. Eventually, I think they want to have as many as four of these, and right now we have three of the -- have three, and maybe we will get a fourth as well. But nothing out of the ordinary with these, the two new deals compared to Anger Management.

Okay. I just had a quick follow-up, but this is a big picture discussion. But there's a lot of talk these days about studios taking more risk with their release dates, and I want to say highlight of some write-downs recently. Could you guys talk a little bit about your view of risk, and how that has emerged over time, as you become more successful in the film entertainment space?

I will let Rob take that.

I'm not sure I quite understand the question. Our risk strategy continues to be very robust. We operate all the time that way. As it relates to release dates, they are very important decision-making process that we go through very rigorously. And we are constantly reviewing our release dates and being very flexible in making sure that we are maximizing opportunity of all of our films.

I would answer it -- I would add to it. I think that you will continue to find a Lionsgate that operate a little bit against the grain, be perhaps a little bit more opportunistic. I think it is pretty clear that the big holiday seasons are extending longer. You are starting to see summer be the very beginning of May. You are starting to see the Christmas holiday starts virtually November 1, which is where we have Ender's Game. But I think that you are going to still continue to find us be very judicious, partly because we intend to continue to spend less money to release every picture than a traditional major studio.

Okay. All right.

Doug Creutz, Cowen and Company.

Obviously, you guys have done really well in producing TV content and selling it to other people. And we are now seeing opportunities begin to arise where content owners can actually go direct to consumers with their offerings, via either apps, the potential to set up OTT networks as we get more Internet-connected televisions. Where do you see opportunities in that for you to potentially start to directly own the relationship with the consumers of your content?

We have certainly been experimenting in that area break. Networks is certainly a good way, we've gone at BeFiT, which is our fitness channel on YouTube, is another one of those places. Obviously, when you look at electronic sell-through and any kind of on-demand rentals or sales, you're really talking about an ability to go through a wide array of traditional as well as new distributors. I think that is exciting. Again, as I mentioned earlier, I am seeing really great opportunity internationally. Again, if you recall, in the UK, there was one pay television provider, Sky, and ever since Netflix and Amazon got really significantly involved in the business, two things happened.

One is we were able to convert that opportunity into a paid television deal where we didn't have one before. We were just selling our product on a package basis to Sky. But not only that. What happened is that Amazon and Netflix emerged as a buyer for the second and third windows of the studio product off of Sky, opening opportunities for us with the broadcasters and other cable buyers. I see that opportunity happening all over the world, whether it is on-demand sales, which would be perhaps as you are suggesting and recognizing, might be more direct sales to the consumer. As well as an expansion of the array of buyers that we will have at our disposal in virtually every country in the world. So I am pretty bullish on those opportunities in both ways.

Great.

Alexia Quadrani, JPMorgan.

This is Caroline Anastasi for Alexia. Just a follow-up on the 10/90 series. You said before that international sales of Anger Management were very strong, in part due to the popularity of Charlie Sheen. So how do international sales on your two newer series compare? And are they also profitable in the first 10 episodes alone?

Yes, they will be profitable in the first 10. We haven't taken these out to the market yet. We think there will be somewhat lower than Anger Management, which is a little bit of an outlier, based on Charlie's success on Two and a Half Men. But the budgets are also lower as well, so the model will hold up very nicely. These are going to be profitable in the 10 in the will be very profitable should they go to 100.

Okay. And then can you just give us a bit more color on Ender's Game and how much capital you have at risk there? And what kind of box office performance we should look for to make that film profitable for you guys?

As we've said in the past, we are 25% of the equity investment in the film, and very low threshold, as it relates to domestic performance in order for our breakeven.

And we don't control for (inaudible).

Right.

Okay.

David Bank, RBC Capital Markets.

If I go back to the summer of 2011, this is about the time you could see on Hunger Games, you really had something special. It was like almost every week, there was more and more enthusiasm. We're on Wall Street. We can't really tell the progress of those sorts of things in the entertainment market. But could you parallel how you are feeling this summer on Divergent versus what you were seeing in the Hunger Games franchise? And the kinds of things you're doing from a marketing perspective, be it the social media side, and working with the book publishers? What are the parallels and how do you feel relative to where you were in the summer of '11?

The parallels are very strong and very similar. We just came off the advance cover of Entertainment Weekly declaring it the next future franchise. Book sales are well over 4 million at this date, and continuing to grow. We came off a very exciting and enthusiastic Comic-con appearance with our cast in Hall H. We showed some footage from the film, which had just completed photography two days earlier. We're feeling very good about the trajectory.

Do you think -- I know it is really difficult to project these things. But you think we are in a place where we could safely say that Divergent should be a franchise that is something in the range of Hunger Games, in terms of box office expectations?

I do not know that we would ever want to put that burden on any film going in. It is obviously an extraordinary level of performance, Hunger Games. But we feel very confident that the audience base is building very significantly on Divergent and we are excited about it. (multiple speakers) On a worldwide basis we're very excited about its possibilities.

(multiple speakers) I would add one more thing, which is that internally we budgeted this film like a traditional commercial release, not like a blockbuster or a franchise film.

Can't blame me for trying, guys.

We'll be everywhere in the world.

Matthew Harrigan, Wunderlich Securities.

You talked about getting 2.5 times better economics on IDC. I know you have gotten better in terms of some of the domestic exhibitors. Is there now the fact that a major with a better post [template], is there any low hanging fruit in terms of getting even better performance on a given film on a given level of performance? And then secondly, I know most of you on the management team are technophiles, and it's a little tangential. But can you talk about Xbox One and PS4 and any implications for your business and for the overall ecosystem on the entertainment side?

I will let Steve answer the second question.

Matt, this is Steve. The most -- the biggest element of the Xbox One launch is the fact that it has a BluRay drive. So I think that bodes well for the future of that format, as well as their becoming a viable marketplace in electronic sell-through in and VOD, which as Jon mentioned, is really becoming a business. I think we've hit the tipping point in that, and I think that the launch of this device is going to help that along even further.

To answer your first question, Matthew, in a number of the synergies that we have pointed out before that have come from scale, that the integration of our companies and the success that we are having in our portfolios. We are actually at this point just starting to recognize some of those synergies. For example, the savings from our new deal with our advertising agency, those deals really will start taking effect much more stemming from the upfront and going forward. We are, on the international front, continue to take advantage in terms of output deals as well as changing some of our distribution. If you recall, in our IDC partnership, we actually took back the distribution of our television product, both paid television, OnDemand and free television sales. And those numbers are starting to go up fairly dramatically. So I believe that we will continue to benefit from the scale and success of our business.

Great.

Jim Goss, Barrington Research.

I have got a couple of questions. Maybe I will start with international syndication. One of the comments you made was continuing to intend to spend less to release each picture, and part of that has been accomplished by selling off some of these syndication rights internationally. And I know you were also talking a little more about treatments -- different treatments in different markets. The UK, for example, where you might take a more active role in syndication. I am wondering how -- what direction you intend to take in terms of using those rights as a cost mitigation factor, versus attacking it as a new profit center? And how does that evolve?

If I understand what you are saying, to start with, I assume you are talking about our film slate, Jim?

Yes. And the film slate.

So I would use different terminology, if I understand the question. First of all, we never sell off our rights. Typically, what we say is, we license our rights and we license them for a particular term. And I think the big difference between our Company and any other company that actually licenses rights is, we are far more aggressive about our terms and far more aggressive about pursuing overages and far more aggressive about working together with our distributors in terms of release dates, T&A spend. And again, approach it very differently as a hybrid -- almost a hybrid self distribution business.

So as we expand our business, clearly, in the UK, the point I was making was that they are able to almost create, with the infrastructure that they have got, and starting with the basis of the films that we supply to them, they have actually turned into a full-service organization. A co-financing business, improving our margins in terms of the distribution of our product, and also as a freestanding business. It is possible, as we go forward, that we will mitigate risk less in one or two territories in order to increase our margins in that territory, but we would do that very carefully, and only if we were sure that there would be a supply of product in that territory in addition to what we could supply, and frankly, ancillary sources of sales to free television and pay television. That we could support that and so that we would mitigate at least a large portion of that expansion risk. I hope that answers your question.

I think that gets to where I was headed. It sounds like there could be occasion -- some other markets beside the UK where you might take a similar approach at some time. Is that possible?

We would absolutely look at those territories, but again, we are in no rush to do that. We like our model a whole lot.

Okay. And on the television side, I'm wondering if you can talk a little about the profit margin potential there, which is still, I think, just under development, and the balance of you might seek between television relative to theatrical, as time evolves?

Are you talking about TV margins?

Yes. TV margins and how big that business can be relative to the film business?

I said on the last call we will be approaching about $500 million of revenue this year, so you are looking at about 20% to 25% of the business. And I would like to see that be up closer to about 33% of the business. I think we have some tremendous opportunities for growth. Again, we are hoping we can be a dominant supplier to the new digital networks, as well as having been, obviously, a very serious player in terms of cable and pay television. We have got some partnerships with Televisa and with Frank Giusta's company in Canada. And feel like, with their contribution or investment in growth together with ours, we're going to continue to mitigate risk, but look at a lot of upside in that business. And so we are very bullish from a revenue perspective on the growth of our television business. And I would say that, as I have mentioned before, obviously margins in television are very dependent upon the success of the shows. Meaning at the beginning of the show, we recognize no margin and as they go forward, we increase it. So as we get to a position where hopefully we will have two or three 10/90 shows going into syndication, as Wendy Williams starts to contribute more margin, given her success in ratings have been pretty significantly lately. I think our margins should go up considerably as well.

All right. And last question. FX has been taking your 10/90 model programs. Are they almost getting a right of first refusal, or are there other networks who are interested in that model as well?

We actually have had significant attention being paid by another, I would say, eight other networks. And of course FX has been a great partner. We like doing business with them, and we particularly like that they are expanding from just FX to FXX as well. They're going to need good commercial content, but I think that this is a model that can work for a lot of other networks. Kevin, you want to add to that?

We have had a lot of interest when we take these shows to the market, from broadcasters and cable network. You may have noticed that NBC has announced doing something on their own with this model, and three or four networks have come to us specifically saying they would prefer that we don't take anything into the open market, they want to simply have us tailor something specifically for them. So the market feels very robust for us.

All right.

Tuna Amobi, Standard & Poor's.

I also have a few questions. Along the lines of your comments, Jon, in terms of your release strategy, I think you provided a lot of color there, but are you also -- you said something about being opportunistic and going against the grain. I'm just trying to ascertain if that explains why you pretty much choose to steer clear of the summer for some of your biggest releases? Is that something that we should expect going forward? And what you think about the whole issue about the summer being crowded, et cetera? But it seems to me that you guys can be a much more formidable player there, given your emergence in the last couple of years to compete with the major studios. Any color around your summer thinking would be helpful.

I will let Rob speak to the specific, but the one thing that I would emphasize about this Company. It just hasn't changed, and I hope never will, is we don't wake up in the morning on Saturday and think, isn't that great, we are number one in terms of box office gross. We are focused on the profitability of our pictures. We are not focused on getting the -- grabbing the attention of, we are number one at the box office. And so -- there is no great excitement for being in a slot just in order to be number one or to break the record for that date. We are very focused on maximizing the value proposition for each and every film, whether it is a wide release or whether it is a specialty release, and that is going to drive our strategy no matter what. I don't know, Rob, if you --

Yes. As you see by our summer so far, with Now You See Me and Kevin Hart, Let Me Explain, and Red 2 all performing very well. Red 2 a little less than we would like, but still very profitable for us. We do look at all year as an opportunity, and we weigh every single decision as to where we put our films. We look at the summer and we look at the Christmas as very competitive, obviously, with the major studios and their tent pole strategies, but we always try to counter-program and flip to the opportunity as demonstrated by our Madea's Christmas title coming in this coming Christmas as well. We are always looking at opportunity, and looking at the most effective and efficient way to market and distribute our films.

Okay. And next, I think Jon, towards the end of your prepared remarks, you actually did use the word, returning capital to shareholders. I do not know if you meant, creating value for shareholders is what I thought you were referring to. I am not trying to split hairs here, but I was getting some ideas from that comment (laughter). Am I just getting ahead of myself, or --

You never know. Michael, do you want to jump in here?

Yes. We are all about -- we believe that actually a fact it's appreciating is actually returning money to shareholders. But at the same time, as we've said before, we are going to be looking at what we think is an accretive transaction, if those make sense. We take our time, we do not rush into anything, we're not going to do anything stupid. And then at the same time, we have talked about, what are we going to do going forward? Couple of analyst have asked us, over time, are you going to pay a dividend? Are you going to buy back stock? Again, we are going to be opportunistic when we think that is the best use of our shareholders' money.

Okay. I wasn't trying to get ahead of myself. Just last question, then. Can you address the recent issue that came up with Expendables 3? The casting change? And how do you -- how does that incident affect your philosophy about your whole thinking in terms of talent management, cost, et cetera? And does that change at all your ultimate view and plans for that particular franchise?

We are -- these movies, especially a movie like that, with a significant array of star power. These deals are usually being negotiated right until the very last day. And I think the cast is not yet set for Expendables 3, but I think everybody is going to be very excited about the new starts that are in the movie. And I think I know what you are referring to. And you just never know, even on that particular piece of talent. But the bottom line is, that that franchise is going to have a lot of new and very exciting blood in it. And it's -- managing talent, whether it is on camera or off camera, these are really talented, creative people, and part of our job is to manage. That particular movie, by the way, is controlled by the producer. Obviously, we are involved in the casting, but really not as directly as some of our other in-house productions. But obviously, that is our job, is to manage talent. I think we do a pretty good job of it.

Okay.

Thank you. And with that, speakers, I would like to turn it back over to you for any closing comments.

Thank you. For a discussion of certain Non-GAAP forward-looking statements mentioned on this call, please refer to the presentations tab under the corporate reports section of the Company's website at, www.Lionsgate.com. Thanks everyone. We look forward to speaking with you on the next call.

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