Starz Entertainment Corp (STRZ) 2014 Q2 法說會逐字稿

Welcome to the Lions Gate fiscal 2014 second-quarter earnings call.

(Operator Instructions)

As reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Peter Wilkes. Please go ahead.

Good morning. Thank you for joining us for Q2 analyst call. We'll begin with opening remarks from our CEO, Jon Feltheimer. Following his remarks, we'll open the call to your questions.

Joining us on the call today are Vice Chairman Michael Burns; Motion Picture Group Co-Chairman Rob Friedman; Chairman of the Lions Gate Television Group Kevin Beggs; Steven Beeks, Co-COO and President of the Motion Picture Group; Brian Goldsmith, Co-COO; Jimmy Barge, 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 factors, including the risk factors set forth in Lions Gate'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.

I'd like to begin by welcoming Jimmy Barge, our new CFO, who is participating on the call for the first time. Jimmy has many years of major studio experience at Viacom and Time Warner, as well as a 13-year tenure at Ernst & Young. He's already proving invaluable in charting financial strategies consistent with our Company's continuing growth and evolution.

We completed a strong first six months of the year with a solid second quarter. As we previously forecast, our fiscal year will be backloaded and we're on track for another very good year and on target for our three-year guidance. Last weekend, Ender's Game opened number one, with $27 million at the domestic box office, and it has performed strongly during the week. With two financial partners and a business model designed to mitigate risk, it will become our 25th profitable film out of our last 30.

As you know, we're releasing Catching Fire on November 22, and I'm pleased to report that Francis Lawrence and the cast are already well underway in filming Mockingjay 1 and 2 back-to-back for a release on November 21, 2014, and November 20, 2015, respectively. They will, however, take a break to promote our worldwide rollout of Catching Fire premieres, beginning in London this coming Monday and continuing in Berlin, Madrid, Rome, and Paris, culminating in our signature event at the Nokia Theater back in Los Angeles on November 18. In Paris, where tickets for the premiere went sale to the public for up to EUR60 a piece, the event sold out in one minute. With 16 million viewers of the final Catching Fire trailer during Game Four of the World Series, another 20 million online viewers in the past week alone, and day-and-date launches in more than 50 territories around the world, we're confident that we have positioned Catching Fire as a global phenomenon that will continue the growth of the franchise.

When audiences go see Catching Fire on November 22, they'll also get their first look at the new Divergent trailer on the big screen. We think they'll like what they see. Continuing the momentum of the biggest pre-sale order in Harper Collins' history, the third book in the Divergent series, Allegiant, has achieved robust initial sales that have exceeded expectations. Divergent is also tracking ahead of all other films scheduled for release in the first half of calendar 2014 in social media surveys.

We have great expectations for several other high-profile films that are in production or pre-production, and I'd like to mention a few of them. Gods of Egypt, which we just greenlit for production, has all the financial and creative ingredients of a Lions Gate tentpole release. Staring Gerard Butler, Geoffrey Rush, and newcomer Brenton Thwaites, it was developed in-house from an original idea and will be directed by visionary filmmaker Alex Proyas, director of I, Robot and Summit's film, Knowing. In addition, it accesses a substantial subsidy program in Australia and is a very attractive pre-buy for our international distribution partners. These elements combine to create a tentpole opportunity using a financial model consistent with our disciplined approach to domestic gap.

Another film with big upside is the action comedy, Mortdecai, currently in production in London, starring Johnny Depp, Gwyneth Paltrow, and Ewan McGregor. We have again created a distinctively Lions Gate business model, consisting of strong international pre-sales, a co-financing partner in GiGi Pritzker's OddLot Entertainment, and a film budget that belies its all-star cast. We expect these films, along with titles like the next installment of The Expendables; Draft Day, starring Kevin Costner and Jennifer Garner, directed by Ivan Reitman; and The Last Witch Hunter, which starts production early next year, starring Vin Diesel; to drive an upcoming slate that is positioned to build upon the box office success we've achieved over the past two years.

Having seen some amazing early footage, I want to single out Expendables 3 for a moment. Adding the magnitude of Mel Gibson, Harrison Ford, Antonio Banderas, Wesley Snipes and Kelsey Grammer, along with several exciting newcomers, including UFC Champion Rhonda Rousey, to an existing cast of renowned action icons, gives us confidence that we've repositioned this franchise in a powerful way.

As we prepare our film slates through fiscal 2016, we're focused on areas with the greatest growth potential and our international theatrical businesses foremost among them. While domestic box office remains relatively steady in the $10 billion range, international box office grew 6% last year to a record $24 billion. Our own global theatrical business has mirrored this trend. With our self-distribution operations in the UK coming off a record year, our highly successful IDC joint venture in Latin America, our Celestial Tiger Partnership serving China and Southeast Asia, and output deals covering most other major territories, we believe that we're well-positioned to capitalize on these international growth opportunities.

While most of you are aware that Now You See Me has grossed more than $230 million in its international run alone, you may be surprised to learn that our recent release, Escape Plan, will generate enough revenue worldwide through a combination of minimum guarantees and overages to become a very profitable film for us. As we mentioned a moment ago, we expect Catching Fire to significantly outperform the first Hunger Games film at the international box office.

Reflecting our focus on areas of growth, we continue to operate the largest third-party international distribution business in the industry, and sales of our own and third-party titles are off to a fast start at AFM this week. It's interesting to note that this business not only enables us to sell prestige films like 12 Years a Slave internationally, but generates enough revenue to cover nearly all of our international overhead. We're also poised to capitalize on growth in niche markets, where we have already built a leadership position, contributing to the diversity of our portfolio. This year, Lions Gate has seven of the top 25 independent films through our Pantelion and Roadside Attractions partnerships.

Pantelion's Instructions Not Included is not only the biggest independent film of the year, but the highest-grossing Spanish-language film ever released in the United States. It demonstrated the appetite for commercial films with Latino themes and characters among US Latino moviegoers, and also elevated the profile of the Pantelion brand. It's worth noting that Pulling Strings, the film released immediately after Instructions Not Included, has become the second-highest grossing films in Pantelion's history. The acclaimed drama, Mud, is another of this year's top independent films, and along with Robert Redford's All Is Lost, gives our Lions Gate/Roadside partnership two important year-end award contenders.

The big news in our Television business is that new buyers continue to drive our diversification in the quarter. We added WGN America to our stable of important network relationships, as they ordered the scripted drama series, Manhattan, for their first line-up. Created by Sam Shaw, and directed by West Wing alumnus Thomas Schlamme, Manhattan is set against the backdrop of the secret mission to build the world's first atomic bomb -- think the Manhattan Project meets The Right Stuff -- and it continues our strategy of creating premium, differentiated content for emerging networks.

In that same vein, we and Netflix are very pleased with the performance of Orange is the New Black, which has become Netflix's most-watched original series to date. Book sales have skyrocketed to number one on the New York Times Bestseller List since the series launched, and international sales of the TV series have performed well ahead of our expectations.

We're also pleased with the early second-season performance of Nashville. The show premiered to 6.2 million viewers, up from the Season One finale, and it's getting a big lift in the C3 and LIVE+7 ratings, showing the breadth of its viewership in a time-shifted environment. Equally important, it has already generated millions of dollars from its two hit soundtracks, and future concert tours and merchandising have the potential to generate significantly more incremental revenue as the show progresses toward syndication.

In her fifth season, Wendy Williams has become an unqualified success story. Two weeks ago, the show reached more than 1.6 million homes, a 40% increase over the same period last year, and the highest performing week in the series' history.

Our momentum in the 1090 TV business continues to build as well. In addition to completing 55 episodes of Anger Management, we've shot the first 10 episodes of the George Lopez show, which airs early next year; and we'll start production soon on a new series with Martin Lawrence and Kelsey Grammer. During the quarter, we also continued to grow our roster of A-list TV talent, signing overall deal with film and TV star Kevin James.

Speaking of growth, TVGN, our partnership with CBS, has been the fastest-growing cable network in the country for the three months -- July through September quarter -- with triple-digit ratings growth in both primetime and late-night. TVGN has also strengthened his distribution footprint, and as we previously forecast, is now approaching 90% full-screen penetration among its 80 million-plus Nielsen homes. It has entered into a new long-term carriage agreement for full-screen distribution on Cox's digital tier, launched in HD and full-screen in key markets on Comcast Charter and Time Warner Cable, and launched in HD across Verizon's entire footprint.

Even in a quarter with a challenging comp to the prior year's quarter, which included a packaged media and digital release of the Hunger Games, we continue to be pleased with the diversity of content that is performing well in the home entertainment market, with digital overperformance driving margin growth. The Home Entertainment business has returned to growth mode, and nowhere is this more evident than our managed brand segments. Managed brands is one of our fastest growing categories of content, and it's expected to generate more than $350 million in revenue and nearly $60 million in gross contribution this year -- profit that is achieved with little or no additional overhead and is entirely incremental to our film and TV business.

We're seeing growth across the entire spectrum of specialty theatrical titles, branded fitness content, directed video releases, and third-party library products. Some of our greatest contributions are coming from titles from the A+ E distribution deal we signed last year. Duck Dynasty, currently the best-selling TV show on DVD, has performed especially well, generating tens of millions of dollars of revenue.

In closing, you saw the $36 million early extinguishment of debt charge we reported in the quarter associated with the refinancing of our notes. During the past year, we reduced our overall net debt by nearly $300 million and we've reduced cash interest expense from $75 million last year to our current running rate of approximately $40 million annually. As I mentioned earlier, we're also on track for our internal financial projections for the year as well as our three-year guidance. As this quarter's results showed, we continue to generate strong free cash flow.

As you can see, we continue to be entrepreneurial and flexible, not only in the types of content we produce, but in the financial models we build to maximize their profitability and the distribution strategies we employ to reach an expanding array of buyers. In a world of dynamic change, we'll continue to be nimble, with the only constants being the diversity of our portfolio, our commitment to differentiating ourselves from our competitors, and our continued, rigorous focus on cost discipline.

I'll now open the call to your questions.

(Operator Instructions)

Alan Gould, Evercore.

I've actually got three questions, first for Michael. You're paying down the debt pretty quickly and hopefully, Catching Fire allows you to accelerate that. Do have some sort of a target leverage ratio? Would you go to a net cash position or do you buy back stock or are there any more Summit Entertainment-type deals that you can do? I'll take the answer to that and then come to the next one.

We're going to do the best thing for our shareholders, Alan, from an accretive nature. We -- there are no giant Summit-type deals on the horizon. We're often asked what's the right amount of leverage for us. I would guess somewhere in the $300 million to $500 million range and again, we're going to be smart about paying attention to what interest rates are doing at the time and making sure that we are -- we've got the right amount of leverage to increase shareholder value. As far as the buyback, it's something that we look at. We obviously have a couple big movies on the horizon. So we are going to determine how much cash, may be excess cash that we'll have and what the best use of that for is at the time.

Okay and Jon, for you, can you just update us a little more on the (inaudible) market? I assume revenue will be up this year for you because of Orange is the New Black, but what are you seeing outside of Netflix, with Amazon, with Hulu? And I believe you just announced the international deal this week?

I'll let Steve answer that question.

Alan, as you indicated, obviously, Amazon and Google, in particular, are both growing in that area beyond what you mentioned with new productions that Kevin is working on with Orange is the New Black and working with Amazon on television pilots. They're becoming a much more aggressive buyer of product and as you mentioned, we just announced an international deal. And I think they're -- as Netflix and Amazon expand internationally, I think you're going to see a lot more of our revenue generated by that, particularly in the library sector.

Okay. Thanks Steve. My last question is the tax rate was down to almost nothing this quarter. Should we expect that trend to continue on a book basis? And I assume, Jimmy, that cash taxes are zero and should stay zero for a while?

Yes, thanks, Alan. I'll tell you, you referenced zero effective tax rate that's on a reported basis so the way we look at it is on adjusted basis, where you normalize out, for example, the one-time benefit associated with reversing the Canadian NOL. You'll notice that we adjusted that out of earnings per share when we reflect adjusted earnings per share. Similarly, I just set out when looking at the effective tax rate on an adjusted basis. As you'll see in the 10-Q as well, on an effective tax rate basis adjusted, the effective tax rate for the first six months, or our year to date was 36.5% this year. That compares to 39.5% in the prior year to date. So we've got it down, we'll trend there and we're going to continue to work hard to continue to reduce that and improve on that rate as we go forward. I would hope that we can extend that trend in terms of improving rates.

With respect to cash, from a cash perspective, as we said before with the NOLs that we have, we do not expect to be a cash taxpayer until at least fiscal year '15. But in addition, we're working hard, utilize the NOLs in the most efficient manner and to extend those further into the future as well. With regard to the effective tax rate, what I would add is that ultimately, the rate is going to be dependent upon the levels of pre-tax income and then our tax planning opportunities that are available to us in the various jurisdictions around the world in which we operate.

So should we model something in the mid-30% for financial reporting purposes?

I'm not going to -- at this is point, it's too early to provide a specific target to you, but I would say that we expect to continue the downward trend that you've seen in the year-to-date comparisons.

Ben Mogil, Stifel.

Jimmy, welcome aboard. On the margins, the margins were a little bit better on the motion picture front than I think we've seen in a little while. Is there anything structural going on there or is it just sort of more timing of what the mix was?

That's really more timing with regards to the mix. As you can see, we had a great quarter with respect to Motion Picture Group. Very difficult comps, as you know, against prior year Hunger Games [in] packaged media, but really came through strong with regards to the gross contributions, with the strong performance of Now You See Me Now -- as well as the managed brand's performance that Jon mentioned earlier. So it really felt good with the ability to mitigate the tough comp at the adjusted EBITDA line.

And then when you look over to the library, so managed brands is clearly one part of the growth. Are you seeing that growth in managed brands being physical obviously as well as digital? Because digital seemed to be very strong in library in the quarter and I think the highest run rate in a long time.

This is Steve. Yes, it's growing in all areas. Obviously, digital is a big component of that, but as you know, with strong sales across all the brands. A&E, we've got some -- A&E is doing incredibly well. Dirty -- Duck Dynasty was the number one television series on DVD this year to date and it's just knocking it down but Miramax library is doing great. The hit library is doing really well, family, fitness, so I think we're seeing at kind of across-the-board, both packaged media and digital but digital leading the way.

And again, Ben, to remind you, when you talk about library, the managed brand segment is essentially distributing third-party library, not our core library.

Sure, sure. And then just lastly, on TV Guides, it looks like the last couple quarters are, more or worse, a breakeven. Not looking so much for guidance but do you think that's a reasonable run rate for us to be thinking about things going forward?

I think that if our ratings growth continues, ad revenue should follow and I think certainly within our fiscal year, our run rate of at least breakeven, if not positive contribution should be in the cards.

And did Epics return any capital to you guys in the quarter?

Epics will be returning capital to us this year but not in the quarter.

Okay. Is Epics generally going to be returning the bulk of its EBITDA back to shareholders; is that the -- at least right now, the general game plan?

I think, basically, we are going to continue to throw off cash; no reason to really hold onto it. We are going to start looking at some original series. I think that between Lions Gate, Paramount and MGM, we're pretty capable of creating some pretty cool, original content, but that shouldn't cut too much into, at this point, our distribution, our dividending out of the excess cash.

Has a lack of originals come up in conversation with MSOs on carriage?

We're having, actually, I would say right now some pretty positive and significant conversations with MSOs who look at just the overall Epics Channel as something that they can use in a smart way in the world where they're changing a lot of their models. They're looking at various digital kinds of offering, authentication, obviously. I think we've got a fantastic theatrical line-up as good as any other pay channel. We have a lot of original stuff, but not scripted at this point so I think it's pretty clear, as you look across the board, that one or two great scripted shows can actually drive an entire channel or network and so I think they would consider it a plus for us.

David Miller, B. Riley.

Just want to drill down on this, on sort of the Delta in TV production revenue. I think a lot of us on the sales side were looking for kind of an $81 million, $85 million revenue number in TV production. It was $64 million, you guys talked about some timing issues. Maybe Kevin, if you're on the call, if you could just extrapolate on that. Would that imply a stronger December quarter in TV? And then Jimmy, what was going on with the share count? The share count declined by, it looks like, 9 million or so. Any detail on that would be helpful and then I have a follow-up. Thanks.

Jimmy, why don't you talk about TV deliveries?

Yes, with regard to television, there's some timing going on there, as you alluded to, but we've actually had a very good first half, as Jon has mentioned. We're actually running a little bit ahead of our internal projections there as well. But to give you some perspective on it for the year, and television, if you look at it, from our top six television programs, we're delivering this year about 113 episodes on a full-year basis for fiscal year '14. Only 11 of those occurred in the second quarter. So there's some timing there on delivery of episodes but we feel very good as to how we paced in our year-to-date and versus our own internal productions feel and very well poised for a strong second half.

David, actually the share count went up about 1 million or almost 2 million shares because of the exercise of options. It went up from 135.8 to about 137.8 so I'm not sure what you're looking at.

Well, I've got 149.4 versus last quarter, 144.6, but I hear what you're saying. The next question is Jimmy, the DreamWorks Animation had some nice afterglow on their stock price last Monday when they announced that they're going to regroup and reclassify their financials to include a breakout on revenues and operating income with film, TV, classic media, consumer products, et cetera. Would you guys ever consider doing it that now that you're CFO? Would you ever consider, I don't know, maybe just a little bit more transparency or a little bit more detail in the Qs and in the financial releases on maybe say, breaking out the financials between theatrical, I don't know, home entertainment, international, TV production? Any thoughts there would be helpful. Thanks a lot.

Sure, David. We're always looking at our financial statements and communications and proving where we can. This is an initiative the Company has had on an ongoing basis, so it's not just my arrival. So we'll continue to do that and see how we can break out information for you. I think there's quite a bit, actually, that's already there with regards to our communications and a lot of breakouts. And certainly as Jon and Steve have already alluded to, got a very strong managed brand business and we'll continue to provide you some highlights there and information that helps you have a better understanding and visibility into those businesses. Whether or not that translates into changing our segments or otherwise specific breakouts in our financial statements is another matter that we'd consider on an ongoing basis.

James Marsh, Piper Jaffray.

It's Stan Meyers on behalf of James. My question here is a follow-up on Catching Fire. Given virtually day-and-date global release of the film and international box is becoming the bigger story for the second film, can you share in you're tracking internationally or any other measures that you use to gauge interest internationally? Just trying to get comfortable around the estimates on international opening weekend?

Hi, it's Rob. Thanks for the question. Yes, we've been monitoring and tracking around the globe, really, and in addition to the very, very strong tracking domestically, we're seeing those same sort of results in the UK, Germany, our Italian distributor is very excited about what's going on there. So we're very, very excited about everything we're seeing internationally. The London premiere is Monday so there's a lot of excitement around that. And as Jon indicated, our creative team, our director and producers and actors are starting a world tour on Saturday, heading to London and then Spain, Berlin, Paris, Madrid, I did say Spain -- Madrid so, and Rome, so it's going to be a very exciting launch period.

And just a quick one on Divergent, the third book in the series. Obviously, breaking records in sales, but then it gets weaker than expected reviews. Does that concern you at all or is it just natural fall-off on the -- in the -- at the end of the series?

Well, the reviews we saw were quite strong. There was the debate over the ending but we're seeing a lot of very, very positive trending amongst the fan base; that's building in excitement and enthusiasm. So we're very, very happy with the results.

I'd add on that a little controversy in terms of publicity never really hurts.

Alexia Quadrani, JPMorgan.

Just a follow-up question on some of your comments on Ender's Game. Can you give us some color where it came in versus your internal expectations? What would it take -- at this point, are you considering a second film or sequel, or what would it take to put that into consideration?

I'll answer that question. It came in virtually exactly on our base case. The -- we're going to wait for a week or two to see how it finishes out. But we think it's a great piece of IP and we'll talk to our partners about what the future plans are, whether it's for sequels or television or other ancillary possibilities we have, but again, this is consistent with the kind of modeling that we do on all of our movies. And as I say, it came in basically right at our base case.

And we're just out now for seven days and our performance has been very, very good, as you know, number one in the weekend and our daily numbers have been very strong. So we're excited about it.

Okay, great and just that follow-up. When you look at the success you had in some of these digit -- in selling Orange is the New Black to Netflix, could you talk about the possibility of -- could you explain to us, is there back-end opportunity at all there when you sell direct to digitals? I assume no less so the case. I guess any color on that front would be helpful.

Yes sure. They're absolutely is. Each show is different and every studio that's now negotiating with Netflix is coming up with slightly different model but there's no question that particularly, linear syndication, packaged media, international syndication -- those are all part of the back-end revenue stream that we expect. So we think Orange is going to be a very, very nice annuity for us.

Operator, with respect to David's earlier question, with regards to a decline in shares, I would just note that, that's on a fully diluted basis, David, and the reason for that decline is because of the convertible securities were not dilutive in the period. That's more because of the level of pre-tax income during the period which was fairly close to breakeven on a reported basis. I'd expect that probably to turnaround next period. So there's nothing fundamental there with regards to that change.

David Bank, RBC Capital Markets.

If I go back to something Jon kind of glossed over in the introduction which is, I think you said something like you're comfortable with your long-term guidance. I sort of go back and I think about when you gave that guidance, if you had said to me that Now You See Me is going to be a $350 million global box office, and that basically, very little would go wrong. There have been almost no meaning -- I think, I think no meaningful misses really and you've had some real upside, the Pantelion, that partnership is starting to pay off. You have movies like Now You See Me, you've got all these franchises in the hopper. What else do you need to see before you would take guidance up?

Well, I think about two, three quarters ago, we took guidance up a little from the original $900 million to $1 billion. And as Michael says often and we say this, we want to overperform not underperform. Obviously, the results Catching Fire are going to be really important. And obviously, we budgeted Divergent very, very modestly, but that's in this fiscal year as well. I mean, it's at the end of the year, and the results of Catching Fire, the financial contributions from Catching Fire and Divergent will significantly impact '15 which is the third year of our three-year guidance. So I think that we're being appropriately conservative. We're going to continue to be. Some of our results, obviously, also will reflect the effective our -- effectiveness of our television business and again, we have two, maybe three new 1090 series that are going to come on in the next year or so. Again, we'd like to think that we're going over perform.

So I'm going with just the one follow-up would be, so is it really, I guess at the end of the day, Divergent is kind of the toggle and is that like -- that's kind of how we should think about it?

I think we -- listen, I think that we have modeled Catching Fire reasonably conservatively as well and specifically in terms of the international performance. So yes, clearly, Catching Fire and Divergent will strongly impact the results of '15 and again, the final year of our three-year guidance, but I think I would again remind everybody. We've got about $1.1 billion of backlog right now and that backlog is made up of a whole lot of movies and television shows, not having anything to do with Hunger Games and certainly not Divergent. So those will roll in, as is typical over the next 18 months. Again, we feel really good about or the majority, call it, 60% to 70% of that rolls in over the next 18 months. So we're -- again we're confident about the numbers that we've given the Street but we're not prepared to change guidance at this time.

(Operator Instructions)

One moment for our next question. Doug Creutz, Cowen and Company.

Instructions Not Included, obviously, it's done on an aura of magnitude better than any of the other Pantelion films. I just wondered if you think that's due to success, entirely what's in the target demo? Or do you think it broke out beyond Spanish-speaking audience and is there any other kind of lessons you'd draw from that Salt success? Thanks.

It was actually mostly core. So much so that actually, we're looking at remakes in about four territories right now, including domestically with a potential star. So we think obviously that, that significantly more than any of our other movies. By the way the movie released right after that, as I mentioned, doing about $6 million, maybe $7 million at the box, actually a very profitable movie for us. You have to remember these models are very, very different. Instructions was made for less than $5 million. So we're just particularly pleased, obviously, a movie that made for $5 million, and does $40 million at the box with strong sales, particularly in Latin America, you've got to understand how profitable that can be. And again, we think we're just starting to tap into this Latino audience, but of course, we do believe as well movies like that could cross-over as we continue to educate the audience and do movies that have kind of universal appeal, if you will. So very encouraged by that.

Matthew Harrigan, Wunderlich Securities.

Your friends at Netflix really put a big stick in the hive in their comments on the theatrical industry. Obviously, that's the most important growth factor internationally for the studios, but you've done phenomenal conversion ratios on a lot of smaller budget films. How do you feel about even taking the example of Pantelion and Instructions Not Included, marketing that more into almost a simultaneous release date. I'm sure you wouldn't do that for a big franchise like Divergent or Gods of Egypt or Hunger Games, but selectively, as you pointed out, you do a lot of fine-tuning on the economics of individual projects. And it looks like there's some, there's something like a sub-$5 million project like Instructions Not Included; it looks like it could really have some nice economics.

I think our calculus on these kinds of decisions is pretty simple; it's based upon two different things. One is there a kind of smart or smarter economic model that we can put together that utilizes all of the revenue streams, doesn't cannibalize one more than it improves another, and that makes a better financial model than we would if we did a traditional release. The second thing is how can we make something that all of our partners benefit from as opposed to one of them. And we're very cognizant of that and we work very closely with the exhibitors and we work very closely with our VOD partners and potentially our [S-MOD] partners to create something that makes it better for us but also makes it better for them and so these will be what I would call game-time decisions.

And then secondly, when you -- this is a real big picture question, but obviously, you brought in a lot of international expertise with the Summit deal with Rob and all that. When you look at Latin America and you got a good feel for that market with your friends at Televisa as well, what do you think the appropriate indigenous product market share is long-term and right now, it bops around ridiculously quarter to quarter, if a particular movie works in a given market. But do you think that, that, just equilibrates much more to a local product if you go out 5 to 10 years and that's a big angle for you as well, particularly in that territory?

Well, look, Latin America and Brazil are tremendous markets. We are -- actually Brazil is one of the territories we're look at remaking Instructions Not Included. I think our very close relationship with Televis gives us a leg up; our partnership in IDC gives us a leg up because we're on the ground in Latin America in a very, very positive way. I think, frankly, having Pantelion here where we're making product -- where we can take product that is created and built in Latin America, make it work here. We can create product here for the indigenous population that we can actually exploit there is also a benefit.

So this is an incredible, strong, growing population from an advertising point of view; they're starting certainly to recognize the CPMs for Spanish-language television improving so we think this is a great market. We made the commitment in terms of Pantelion years ago, three years ago, to take our time and build up our relationship with the Spanish-speaking or the Latino bilingual audience here and I think it's starting to pay off. So the answer is bullish on the market and bullish on our opportunity there.

I saw Ender's game; it really has a great tale in your library. I hope you do something on the TV side with it. Thanks.

I appreciate that, Matthew.

Jim Goss with Barrington Research.

A couple of them. First, on the television side. Once you get to some critical mass as you develop the various paths you're taking between cable and the 1090 arrangement, and potentially some additional network shows, is there some seasonality or patterns we might expect in the revenue base from the television side of your business?

That's a good question. If I could give you a sense of things, if you figure one or two of these new 1090 shows go and if you assume Nashville is in syndication, I would say, from a contribution point of view, if you look out starting at, say, fiscal '17, I know a couple of the analysts have been looking at post the initial guidance that we've given. And if you start looking at '17 and beyond, I think you're probably talking about a lot of syndication revenue coming in on a pretty consistent basis going out for at least three or four years just from sort of the stuff that we've got in the hopper right now. I would say to give you a little sense of it in terms of timing. You're probably looking at $50 million incremental contribution from that syndication from our current television business.

Okay and are you thinking -- are you inspired with Nashville to develop more broadcast partnerships programs? Or --

Let me, by the way, make it sure it was clear, that was on an annual basis.

Annual basis, $50 million. Okay.

So on an incremental to sort of the base case of kind of where our run rate is right now in the television business. The thing about the broadcast business is it's certainly a higher risk business. One of the reasons that we liked Nashville was that we saw the ancillary revenue benefit that we felt we would get and are getting from soundtracks. And we're hoping going forward, we can put together a tour that not only cross promotes the show but also as these tours are quite profitable. So I think the answer in general is we've really enjoyed our opportunity to grow our business in basic cable and pay television and now in what you would call the S-VOD space, I guess.

We've got a new show that we're doing. We're really excited about a new show that we're doing with Hulu as well. Figured out a way to do something that worked for them and for us. But there's no question on a specific show by show basis, that we look at the broadcast business as a way to have larger back-end and higher risk upfront, bigger back-end in the back and certainly on a case-by-case basis, we will try to exploit those opportunities.

Okay, thank you. A couple of others. Can I assume, given the optimism we have for Catching Fire, that the deal -- the international distribution deal was structured so that at certain levels, you may or may not be willing to divulge, you'll have some additional upside beyond which -- beyond the cost mitigation side that usually approach the international deals with?

Overages are a constant component of our output deals and any deals that are not with output territories so absolutely.

Okay. And lastly, I was wondering if -- as you've blended Summit with Lions Gate that you've had any change in attitude about what the best level of annual film slate should be or -- and will this be continually evaluated?

No, our main labels will still consistently deliver 13 to 15 titles annually. We think that's a good rate for our business and all of our internal machinery. But we're enjoying a lot of opportunity with our other labels, Pantelion, Roadside, et cetera. So we're very comfortable with the way it's looking these days.

Marla Backer, Ascendiant.

I jumped on the call a little late so if you've already addressed this, I apologize. Can you talk a little bit about the merchandising platform for Hunger Games, if there's any particular category where you're seeing strength that was a little surprising to you?

Well, the merchandising on the Hunger Games franchise has been very, very robust. We're particularly excited about our Capital Couture portion of the licensing merchandising so it's been very opportunistic and continues to be in the excitement amongst the fan base is growing, so --.

I would just add that we have been approached in two different territories by potential theme park opportunity which gives you a sense of the cultural impact of this franchise. And we are excited about those opportunities and pursuing them.

That could be a really strong opportunity.

Yes it could.

And then one other question, which is -- you just mentioned a few moments ago on Roadside. So they have that Robert Redford movie out now and if that ends up in the mix for awards, nominations, what kind of increased spending would that imply and what would that mean for you in terms of economics?

We've already built in an Oscar approach into our thinking as it relates to our spend but our spend is very, very modest. We're actually expanding again this weekend. The rollout has been very, very calculated and has been -- the movie has been responding very well to audiences. We're very conservative in the way we're going to spend and this title is being driven to a great extent by the critical or response to the performances and to the film itself so it's not a lot of increase in spend.

Tuna Amobi, S&P Capital.

I have a few. Can you talk about EST window and how you view that and kind of any specific impact that is having on your digital category in home video as a whole? And then separately on social media, I think you guys are quickly developing a very good template on how to pull off social media marketing. I think you did that pretty nicely on Hunger Games, Catching Fire and I think Jon alluded to Divergent as well. So I was trying to get a sense on how you view that, as what your philosophy and any specifics on how you guys can use that as a platform and what impact, if any, that you've been able to track using social media on your films?

And then lastly, we haven't heard a lot lately about FEARnet joint venture and I think you've seen some horror films make a big splash on broadcast television this year and I was wondering if you can update us on how you view the opportunities of horror on television, perhaps, using the FEARnet platform or any other vehicle? And specifically, if you can provide an update on the distribution and programming plans for that, that would be helpful. Thank you.

This is Steve. I'll take the -- your question on the EST window first. As you've probably seen, home entertainment growth through the year of EST has been a top performer, growing almost 50% year on year and part of that growth is being driven by the early window. So a lot of studios have adopted early EST windows, meaning that EST goes before DVD and we've done some of that as well. We've done a lot of that. The one thing we've done differently than the studios is we do it on an opportunistic basis. We look at every single film differently and make a judgment call on what kind of film we think it's going to benefit from that and that's definitely driving it; part of that growth is obviously driven by the growth in the UV marketplace. I believe we've gotten to over 14 million installed accounts.

The average number of films in each account is now I think approaching, especially the new accounts, approaching 1.5, which means there are transactions occurring so that's all good news and we think that's a trend that's going to continue. We've got, I believe, 13 retailers that are supporting UV and we've got a couple of other very large retailers that we expect in the coming months to announce support of the UV marketplace and I think that's going to grow. It's going to celebrate growth in the EST marketplace even further.

And I'd add I think you're going to see in the next couple of weeks at least one major MSO announced EST and I think when that happens, it's really going to open up amazing opportunities. We been talking about this future of digital electronics sell through and I think you're going to see it in a very short period of time.

On the social media question, we -- very, very high on our agenda daily, is the activation of our tens of millions of social media fans that we have with our product. So social media is a constant with us. We think it's an extraordinary platform for communicating with our fans, for messaging to the social media landscape in general. So it's a high priority for us on a daily basis.

I just want to add one thing to that. It's 300 million fans, Facebook fans, just on our IP alone. And Rob and his team are doing a great job cross-promoting our pictures and whether it's Facebook, Twitter, YouTube, the efficiency is finally coming into focus, which is terrific. We're also very excited on the Internet front about the merger with between Break and Alloy and particularly on the Break side, us being able to get to young men in an efficient manner and have an equity stake, we think that's exciting.

Let me add, really, a final note which is what our agenda is and what everybody in -- here at Lions Gate is tasked with is, how do we utilize the benefits of social media and drive down our cost of marketing these pictures? We really think that's possible. We think we have been more efficient this year on our film slate. And we think, frankly, we will be more efficient again next year with our film slate with the benefits we've gotten from our new consolidated agency deal, from our more efficient use of social media, and digital media in general. So I think I would say -- we don't want to just pat ourselves on the back and say we're doing a pretty good job in social media. We want to actually convert that to dollars.

Are you able to quantify the impact on marketing at this point? That's what I was actually getting that?

I don't think were prepared to give you a specific number but I can tell you, again, we are seeing some impact on the slate this year. I believe there will be more next year and maybe we can talk about it then.

Okay. And it's the last question on FEARnet and horror.

I would say, I, like you, continue to be mystified about the fact that FEARnet is not being picked up by more MSOs because horror is great. Now, as you recall, we have in our partnership with Celestial Tiger. We have thrill. I think thrill is doing very well in the six or seven Asian markets that we're in, and I think it's a pretty good model frankly for FEARnet. We've got great content on it. We're putting obviously our content and Sony's content on it. We are the largest contributors of horror content in the business together. So we're trying to figure out how to make FEARnet a more important part of our business or some other way to deliver value through FEARnet and so stay tuned.

There's certainly been an appetite for broadcast television this year for that kind of programming, wouldn't you say?

No question about it.

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