Starz Entertainment Corp (STRZ) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Lionsgate FY14 third quarter earnings call.

At this time, all participants are in a listen-only mode. Later there will be an opportunity for questions.

(Operator Instructions)

As a 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 our Q3 analyst call. We'll begin with opening remarks from our CEO, Jon Feltheimer. Following his remarks, we will open the call to your questions. Joining us on the call today are our Vice Chairman, Michael Burns; Motion Picture Group Co-Chairman, Rob Friedman; Chairman of the Lionsgate Television Group, Kevin Beggs; Steve 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 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. John?

Good morning, thank you for joining us. While we continue to focus on building long-term value, I'm very pleased to mention that this quarter was our best ever in terms of revenue and adjusted EBITDA. Our excellent results are the combined product of our operating performance, the favorable environment for content, and our financial and structural innovation. Taken together these elements provide tremendous opportunities to create out-sized value, and this is particularly evident in the continued growth of our existing film franchises and the creation of new ones.

While we were very pleased with the blockbuster performance of the first Hunger Games film, its success only reinforced our commitment to continue to grow the franchise by investing in a number of ways. We made the decision to position Catching Fire as a truly global phenomenon, moving our already successful release date in March to November, to take advantage of the extended holiday play period, and capitalizing on continued expansion of the international marketplace, by kicking off our world premieres in London, Paris, Berlin, Madrid, and Rome, before our American premiere in Los Angeles.

That strategy paid off. The film not only defied the conventional wisdom by continuing to grow at the domestic box office, but increased 60% at the international box office. On March 7, the number one film of 2013 will become one of the home entertainment events of 2014, as Catching Fire is released on DVD and digital platforms.

Let me take a moment to talk about the tragic passing of Philip Seymour Hoffman. We were fortunate to have his incredible talent grace our Hunger Games family, and we send our deepest condolences to all who were close to him.

In terms of production, the timetable is basically unchanged. Director Francis Lawrence is taking advantage of the expanded world of Mockingjay to create compelling action set pieces designed to bolster the franchise's growing resonance for international audiences, and both chapters will wrap this summer. This will enable us to deliver the films for their release dates of November 21, 2014, and November 20, 2015, respectively, which will allow us to continue to reap the benefits of these coveted release dates.

If you're one of the millions of fans who have seen the new Divergent trailer since its debut on Jimmy Kimmel Live on Monday night, you know that the film's release is only six weeks away. With 13 million books sold to date, strong tracking on social media, and a soundtrack featuring Grammy-winning recording artist Zed, and British singing sensation Ellie Goulding, it's no wonder the movie site Fandango ranks Divergent as one of the most highly anticipated films of 2014.

I might add that part of our strategy of moving the Hunger Games films to our November dates was to hold on to two great pieces of real estate, and open up what we see is a very good date for Divergent in March. We are gearing up to begin shooting Insurgent, the second film in the franchise, this summer in order to make our March 2015 release date.

Looking ahead, our slate for FY15 and FY16 is a balanced portfolio of established franchises, targeted bids for new franchises, and star-driven genre films with break-out potential, all with an eye towards worldwide box office performance, and developed with a uniquely Lionsgate financial model.

I'm sure that many of you noticed the excitement during Super Bowl weekend surrounding our film Draft Day starring Kevin Costner, Jennifer Garner, and Dennis Leary, reflecting the tremendous synergies and cooperation we have received from the NFL. The NFL brand is hotter than ever, and the film's April 11 release date was timed to lead into the enormously popular NFL draft.

We just wrapped shooting in London and Los Angeles on Mordecai, the first film in our recently announced production and financing partnership with Gigi Pritzker's OddLot Entertainment. Mordecai is shaping up to be a broad and witty comedy, with a franchisable character in the vein of the Pink Panther. Led by Johnny Depp, the terrific cast also stars Gwyneth Paltrow, Ewan McGregor, and Paul Bettany in a movie that should attract the same kind of multi-generational audience that propelled Now You See Me to global blockbuster status.

With Gods of Egypt set to begin shooting next month and slated for release in February 2016, Director Alex Proyas re-envisions a mythical ancient Egypt unlike anything you've ever seen before. Though it's an event filmed with world-class production values, our risk is mitigated by significant production subsidies, and other efficiencies in keeping with our Lionsgate financial model.

We plan to begin shooting the sequel to Now You See Me in September in the US, Europe, and Asia to capitalize on the property's international appeal, with most of the original cast returning, and some exciting new additions. As you'll recall, the first film was not only the sleeper hit of last summer's North American box office, but went on to gross over $350 million worldwide.

The Expendables is another action franchise with a lot of muscle at the global box office. We'll open The Expendables 3 in August with Harrison Ford, Wesley Snipes, Mel Gibson, Antonio Banderas, and Kelsey Grammer joining our usual roster of returning action heroes, led by Sylvester Stallone.

As we continue to cultivate new franchises, a key strength is our ability to assemble and mine one of the richest and most diverse portfolios of IP in the industry. It is no coincidence that in addition to the tremendous success of The Hunger Games, Twilight, and Divergent books, current bestseller lists continue to have a very strong Lionsgate presence.

We are about to announce a filmmaker for the adaptation of the celebrated faith-based bestseller, The Shack, which has sold over 10 million copies. Expect the film in Easter of 2015. Another eagerly anticipated book that is close to film adaptation is Wonder, which has topped the New York Times' teen bestseller list since it was published over year ago. We are also extending our relationship with the amazing Jennifer Lawrence in The Glass Castle, based on the best-selling memoir, as well as developing a second Jen Lawrence film, reuniting her with Hunger Games director Gary Ross.

In addition to our core theatrical slate, we continue to support a number of specialty releases from our family of companies Roadside Attractions, Pantelion, CodeBlack, and Grindstone, which take advantage of the emerging digital revenue streams that will help propel our platform release and managed brand business to a gross contribution of nearly $60 million this year. Pantelion's Instructions Not Included, CodeBlack's Kevin Hart Let Me Explain, and Roadside's Mud will all generate significant ultimate profits for us, and we intend to continue growing our specialty business in FY15.

Our investment in the growth of our television business is continuing to pay dividends, with the success of a number of shows resonating with audiences today. In addition to our portfolio of long-running cable series, such as Mad Men, Nurse Jackie, and Anger Management, we are seeing strong ratings performances from our ABC broadcast series Nashville, Orange Is the New Black on Netflix, and syndicated shows like Wendy Williams and Family Feud.

The ratings of each of these last two series have been terrific. Wendy Williams and Family Feud both continue to achieve record ratings growth in the quarter. Wendy is up over 20% from last year, and it's one of the top-performing talk shows among its core female demographic. As it begins to capitalize on increased CPMs and integration dollars, its financial contribution will begin to reflect its status as an important long-term annuity.

Orange Is the New Black is the most-watched series on Netflix, and Nashville is the number one show in its time period this season in its core demo of women 18 to 34, giving us reason to believe both these shows will be renewed for years to come. In fact, I expect as early as today an exciting new announcement of our first syndication deal for Nashville.

We are also complementing our portfolio of shows with event programming, such as our upcoming miniseries Houdini, starring Adrien Brody for The History Channel, and our adaptation of the classic Rosemary's Baby for NBC, featuring a stellar cast of Avatar's Zoe Saldana, Patrick J. Adams of the hit TV series Suits, and Harry Potter villain Jason Isaacs, Directed by Academy Award nominee Agnieszka Holland.

Looking at the immediate future, we're about to launch several new series for which we have high expectations, including two shows for FX under the 10 plus 90 model: St. George, featuring comedy superstar George Lopez, and Braddock & Jackson, a sitcom starring Kelsey Grammer and Martin Lawrence.

Manhattan, a new period drama in the vein of The Right Stuff for WGN; Chasing Life, from our Televisa partnership for ABC Family, the off-speed comedy Deadbeat for Hulu; and the first-run syndicated series Celebrity Name Game, hosted by the Late Late Show's Craig Ferguson. Celebrity Name Game has already been sold in 90% of the country, primarily in the coveted 5 pm to 8.00 pm access time slot, giving us superb pre-launch positioning.

As you know, we've also been building the content in our libraries through a combination of organic growth and third-party distribution. We are pleased to report that our library revenue of $148.6 million this quarter is the best in our history, putting us on track for a record year, driven by high-margin sales to digital and traditional platforms alike.

We are especially pleased to see growth increasingly coming from digital sales, rather than rentals. Electronic sell-through is doing very well, doubling to around $1.2 billion industry-wide in the past year. Comcast's recent entry into the EST business is already proving to be a catalyst for accelerated growth. In the first two months of their service, relying only on the content of suite studios including Lionsgate, Comcast has captured 15% of the EST market, and expanded the business. We expect additional growth as other MSOs follow suit.

With our emphasis on flexible windowing and pricing customized to each piece of content, we are well positioned to continue to capitalize on developments like this in the digital space. Our versatile strategy was in evidence last week, when we launched Ender's Game and Escape Plan as early EST titles, and both films over-performed our expectations. We were pleased to note that Escape Plan also performed well when we released it on DVD this week, reinforcing our belief that packaged media remains resilient, and digital growth is largely incremental.

In addition to the continued growth of our businesses, our operational efficiency is a driver of value creation, as well. Since our acquisition of Summit Entertainment, we've achieved nearly $100 million in synergy-driven cost savings and benefits, and tens of millions more in additional savings, as we continue to strengthen our balance sheet.

A year ago, our long-term debt cost us 10.25%. Today, following the refinancing of our notes, it has been reduced to a blended average of 5-1/8. A year ago the balance on our $800-million revolving credit facility was $446 million. Today it stands at less than $70 million, as we've paid down over $370 million of debt in the past 13 months.

We will continue to use our free cash flow to drive our equity returns, and we will continue to find ways to return value to our shareholders. As you know, we recently announced our first quarterly dividend of $0.05, with the first dividend payable today to shareholders of record as of December 31, 2013. We are pleased that our strong financial performance and excellent visibility enable us to begin paying a dividend, which we hope to grow with the continued success of our business.

In conclusion, the third quarter reflected our strength as a leading supplier of content, investing in our feature film franchises, creating TV programming for a multitude of buyers, building our shows into long-term annuities, and expanding our distribution in an environment that is more favorable for content than ever before.

I'm pleased to note that we are tracking ahead of our three-year guidance, and as our long-term visibility becomes a little clearer, we plan to extend that guidance for another two years. I'll now open the call to your questions. Thank you.

Thank you.

(Operator Instructions)

Alan Gould, Evercore.

I have got three questions, actually. First, Jon could you tell us what percent of Catching Fire's profits were generated in the December quarter, what percent will come in the March quarter?

Second one, corporate expense was much higher than I had expected. Was there anything unusual in it this quarter? Also, I thought the stock comp might have ticked down, just to reflect the marked to market and the stock price being down in the quarter.

Third, a bigger picture question. Netflix has announced it will expand into Europe. I know there's a lot of other international [SBOT] players. How big an opportunity is international SBOT for your film and TV library? Over time, should the SBOT market mirror theatrical, where the international market is bigger than the domestic market?

All right Alan, thank you. It sounds like four questions to me, unless you're putting the stock comp and G&A together. I'll answer the first one, which is in the first cycle ultimate we have approximately two-thirds of the contribution from Catching Fire still to go. I'll let Jimmy take the rest of them.

Sure. On the stock compensation, recognize that even though there was a small decline in the current quarter of the share price, the year over year comp we had significant increase in share appreciation, from a $16 share base a year ago to over $31 at the end of the quarter. That's what's driving the year over year increase in share appreciation.

When you look at G&A cost in total, of course that share appreciation is helping drive some of the increase in the G&A line, or the corporate expenses. In addition to that, the growth was affected by the impact of, and the timing, of various accruals. That also included an accrual related to an anticipated settlement of a legal matter that goes back several years.

What I would say is for the full year, if you exclude the effect of share price appreciation and the one-time legal accrual, I would expect FY14 G&A cost to be up approximately 3%.

How big was that accrual, could you tell us? Because the corporate expense before stock comp was $33 million versus $18 million a year ago. Was that accrual like $10 million to $15 million?

Well, listen, certainly for obvious business reasons we are not going to break that amount out before final settlement. What I can tell you is that we do not expect any further accrual on this matter.

Okay.

And I will jump in on Netflix. They have been a tremendous partner for us and buyer for us, both for original programming as well as our distribution of our library. They're our pay-television partner in the UK, as you know.

We're excited about their ongoing expansion. I would probably note, as well, that you're starting to see in multiple territories numerous other players coming in as potential digital buyers, deep-pocketed players in a number of territories. Competition is great, but Netflix is very strong potential partner for us and buyer for us in any new territory that the enter.

Okay, thank you.

Ben Mogil, Stifel Nicolaus.

On the television production business, I think in the past you talked about FY14 being around the $500 million mark. Do you still think that's likely, or do we see some shift into FY15?

Okay, I will take it from the top and then Evan can add to that. But as you've seen, our overall year to date TV revenues are up about 18.5%. We expect this revenue growth to accelerate in the fourth quarter, but it still is just a bit under a $500-million pace. We expect for the full-year we will come in somewhere around $475 million.

This is almost entirely due to timing. Some movement in delivery dates, okay, according to when the new seasons and the various seasons actually going to begin airing.

In addition, I would just say that we revised our co-production deal with ABC Family to make them the lead producer on Chasing Life. As a result of that change, we will no longer recognize network licensing fee revenue for the series. However, we actually capped our risk and improved our economics as part of that.

Overall, I would just say that for FY14 revenue for TV production that we expect strong growth, somewhere in the 20% to 25% range.

Okay, sorry, that's for 4Q or for the full year?

That's for the full year.

Great, thank you. Then I wanted to talk a little bit about Divergent. Are most of the international distributors, obviously excluding the UK, the same people that were doing catching -- were doing The Hunger Games series and were doing Summit? Any kind of initial feedback that you can give us from what they are feeling, what they're seeing?

Also, more curious if you feel the fact that HarperCollins was the distributor for the book globally, or publisher for the book globally, as opposed to Scholastic, which wasn't the publisher outside the US, outside the English-speaking countries. For The Hunger Games series, it makes a difference in terms of how well-known the books are, and what your distributor's broader sort of thinking and the same?

Divergent is a Summit title, so it will be mostly the distributors that had the Twilight franchise.

Okay.

But our distributors are very excited about the international possibilities. Like many of these titles, the book sales domestically are ahead of -- well ahead of the international penetration.

But all of our distributors have been working very closely with all their local distributors and publishers to build that readership base. I think there is a tremendous amount of enthusiasm worldwide.

That's great. That's it for me. Thanks guys.

David Miller, Topeka Capital Markets

Congratulations on the stellar results. A couple questions on Divergent.

Should we assume that the pre-selling program for foreign distributors is pretty much the same in model as that seen in the first two Hunger Games films, or do you guys feel pretty confident here that you will maybe want to own a few more territories? Just any numbers you are willing to put around that would be great.

Rob, do you happen to have the number of Divergent books -- divergent across all three of the books, across all three of the books in the series, how many books have been sold, both in North America and globally?

Basically as of like close of business yesterday, or any -- what I'm trying to gauge is what is the installed base of books two months ahead of this release, versus what was the installed base of Hunger Games books two months ahead of that release. Any numbers you have around that would be wonderful. Thanks a lot.

Let me answer the last part first. Right now to date there's about 13 million books in circulation. Again, I would say the majority of those are domestic, as is historical with both The Hunger Games franchise, as well as Twilight. As I said, we're working very closely with all of our territories and trying to grow that -- well, not only our territories, but domestically as well.

We've had a tremendous trajectory of book sales, starting with pre-Christmas going through 'til the opening. We've been working very closely with HarperCollins in merchandising, as well as marketing the books to the consumers. We are excited about trajectory worldwide.

Again, going back to our distributors internationally, it is the Summit output partners that are distributing. So it will have very much similar metrics as we did with our Twilight franchise.

David its Michael. The only thing I want to add is you made the point ownership. We own every territory, we license the film to each one of those distributors.

Got it, thank you.

James Marsh, Piper Jaffray & Co.

You guys are going to be moving ahead on the second installment of Divergent here. I'm just trying to get a sense for with The Hunger Games, had you green-lit Catching Fire this early? I'm just trying to figure out, is this related to your enthusiasm for the film, or is it simply just the tighter release schedule that forced you to make a decision ahead? Then I have a follow-up.

We actually chose the release schedule because we think that these properties are succeeding very well on an annual basis. Our fan base is enjoying the timing, so it is something that we've chosen. We are moving forward with this because of our enthusiasm, and we think it is the right way to treat the property.

Yes, just to add one thing, we have not green-lit the movie, we are prepared to -- we have gotten kind of blinking green light. We're spending some modest pre-production money to make sure that we are in position to make the dates that we've chosen. Obviously, we wouldn't be doing that if we weren't very enthusiastic and seen the fans' enthusiasm, as well.

Understood. I was hoping you could give us a little color on how you see the competitive environment for the Divergent release? I guess there's some children-oriented content out there, you've got Noah and Need For Speed. Give me a sense for how you see that competitive slate, and does it concern you at all?

No, as matter of fact we are quite pleased. I think that we have been given a very nice window of release -- feel very good about it. It's not dissimilar -- as you know, in the market place there's movies week in and week out, but we feel well-positioned with Divergent. We think it's unique to the audience base.

Okay, great. Thanks very much.

Alexia Quadrani, JPMorgan Chase & Co.

Staying on Divergent, when we look at the marketing of the film, do you see it as -- should we think about it as a four-quad film, or is it more skewed toward the younger female demo? When we think about the P&A spend, should we think of it more of a figure close to the Twilight film or The Hunger Games film? Are you relying more on social marketing to that effect, in terms of reducing your marketing costs, maybe being more effective in that way?

I will answer the last part of that, yes. Social media has become an ever-increasing part of our marketing arsenal. It is a more efficient and effective way to reach our audience. We tend to try to keep our costs down by utilizing those media aggressively.

As it relates to the audience base, we are always in search of four quadrants. These titles are generally driven by three titles -- by three segments of the audience -- primarily younger and older females, and younger males. We hope that our older females bring in our older males. It's a dating medium, and we enjoy that.

Just a follow-up on a different topic, on Epix I believe you have additional carriage with the TimeWarner deal. How should we think about that in terms of the impact to your --?

Well, Epix has been -- become both a very successful channel, as well as a nice contributor for us, and for our two partners, and we expect that to continue. I think the -- we have been predicting for some time getting additional linear carriage.

We think this is a great win-win for both Epix and TimeWarner cable customers. Frankly, I would expect some of the other large MSOs for whom we don't already have a deal to be taking notice of the value proposition of Epix, and taking that very seriously. Big step, great step.

I think [Felipe Delmont] has mentioned we are certainly considering now some original programming. We already do some event programming, but looking at scripted programming, as well.

We think that will help take us to the next level. Obviously, we and Paramount and MGM know how to create exciting content.

At the end of the day, great trajectory for Epix. It is doing all the things that we want to do. Our CEO Mark Greenberg is doing a tremendous job, and it looks very positive. The trajectory looks very positive.

David Bank, RBC Capital Markets.

A couple questions. The first one is could you give us an update on the Kevin James TV project? Is this potentially the first -- do you think you could take this one to broadcast network television, and would you take it in the form of a 10-90 deal?

I guess the second -- sorry, that was a long question. In a related question, as you guys I think morphed the model from being a little more movie lumpy, particularly driven by Hunger Games 2, what seems to be more TV-driven, less volatility. Can you -- it's hard to do it apples to apples, but can you give us a sense of what on a two-, three-year basis, the profitability that one big movie like a Hunger Games could generate?

But what -- how many successful 10-90s with syndication deals? What is the equivalent on the TV side to one of those big movies, if you look at profitability, delivered over a two or three-year period? If that's a possible to answer. Thanks.

Okay, I could speak to you for about an hour on your second question, but I will try to give you some kind of answer. But first I would start with Kevin James.

Just to mention before Kevin talks about TV, the deal we made with Kevin is multi-dimensional. It is a film and television deal and we are actually talking to him about both at all times. I'll let you, Kevin, grab the TV part of that.

Hi, it's Kevin Beggs. The process with Kevin James is going quite smoothly. As we've done with all the 10-90s, there is a development period in which we are meeting with show runners and writers and trying to find the right concept to match with our star. We've had a series of meetings with writers, with Kevin and his creative team, and his representatives.

We are honing in. We would say probably in the next six to seven weeks we will find the exact right fit and be prepared to take it to the market sometime in April. We have had a lot of broadcast interest, a lot of inbound calls from all the broadcast networks, and all the cablers.

So we do expect this has great potential to work in broadcast in the 10--90 model. We're quite excited about. The fact that we have such traction on the first three that we're doing is just a great signal to the market that this model sustains and will work.

Yes, and I would say that the diverse range of profitability on television series would not enable me to answer your question very specifically. I have mentioned before that just from the things that we currently have on the air, or about to launch, that I'm expecting the gross contribution from our television business within the next two to three years to be over $100 million a year, up from the $40 million to $50 million that we've been averaging over the last couple of years.

I would say there is no out-sized contribution within that model, nor any big new show. There is no reason why -- if you're looking at syndication values of television series, particularly half-hours right now -- the profitability for those is hundreds of millions of dollars for each of them. You're looking -- it was just reported Elementary, which is an hour, showing the vitality of the overall television business.

Elementary is -- first-cycle syndication will be $3 million an episode. You can do the math and success we would expect a 10-90 to really be a 10-90-50, meaning 150 episodes, and if you are looking at $3 million to $5 million a negative for the first cycle of syndication, you can do the math yourself, David, and see how profitable that might be. I would definitely say the value from any strong syndication show would be at least equal to at least one and possibly two films in a franchise, if that's helpful at all?

Thank you very much.

David, it's Mike. I just want to tell you one thing is when you look at the movie business, what we look at when you have the opportunity for a franchise, whether it's Saw or Hunger Games, Twilight, Tyler Perry, or hopefully Divergent going forward, the film business gives us enormous optionality of up-side growth.

Terrific, thank you.

Doug Creutz, Cowen and Company.

I have got a big-picture question, which is actually a good follow-on to the last one. It seems like the increased demand for television content, both around the world and also across distribution platforms, allows you to really raise the upside on the revenue from TV production and lower the risk.

What it doesn't seem like is happening -- correct me if I'm wrong -- is that there has been a corresponding rise in the cost of producing TV content, whether due to competition from other producers to get good shows, or from higher-value extraction by talent from the value chain. Why do you think that is? Do you think it's sustainable over the long run and any thoughts you might have about that would be helpful? Thanks.

It's Kevin. Is your question about production cost rising commensurate with the amount of shows being put into the market?

Well, with the ability of TV shows, really successful TV shows, to deliver more revenue now than they were doing, let's say five years ago.

Well, look. The great news is it's -- we are in a perfect position as a content supplier. As you mentioned, so many platforms are opening up. ¶ We are in business with Netflix, with Hulu, with Amazon. 18 months ago none of those platforms were doing original programming. New cable players, WGN America. I think great talent is flowing into the TV business, amazing feature talent who aren't finding the exact right movies they want in their world are asking us to create television series.

We are always competitive and smart about where we shoot and how we shoot in keeping our model disciplined. I think we are in a good position, and not feeling the burn of a talent shortage. We are simply getting more great players in the business, and it's great from the studio side.

Yes, I think that what we're doing in television mirrors what we do in film, that if you look at, for example, the 10-90s, we are producing those both more efficiently from a production cost perspective, but also we've got our talent participating with us in the up side and taking way less money up front because of that.

Again, that's just be flexible in terms of your models, depending on who your customer is, and what your risk-reward profile is. We are going to keep doing that.

There are shows we are making for a little money for the right kind of networks, and there are shows, frankly, that we are spending a whole lot more for, because we can see a more immediate return from those shows from the international, and from other sources -- DVD, home entertainment, et cetera. You have to be flexible, you have to be innovative, but we think the world we are in right now from a perspective of available talent, as well as available buyers, has never been better.

Matthew Harrigan, Wunderlich Securities, Inc.

I have three big-picture questions. Firstly, the former HBO Chief Technology Officer was pretty dismissive of 4-K and the implications for the movie and TV ecosystem. The new CTO out at CES was really talking it up, even talking about all the stereoscopic 3D without the glasses, the higher pixelation, and the benefits for HBO, and certainly attendant benefits for the studio.

How do you feel about changes in resolution and the up side? Then feeding into the second question, everything you have done, the over-indexing on the film library and the new production and the ancillary windows -- it continues even with the larger size of your Company. With things happening in the technology side, how do you feel about film library values and the potential value if a large studio got shaken loose that maybe you could run a little better?

Lastly, I guess a derivative of Alexia's question. When you look at Gods of Egypt, it is a non-sequel, less literary social media franchise. Do have any tricks up your sleeve in terms of marketing that, and being efficient on your spend, as well as generating the type of buzz you've gotten on your recent Temple releases, in concert with OddLot of course, on that one?

Matt, this is Steve Beeks. I will answer part of your question related to technology and library, et cetera.

As John mentioned, one of the greatest -- one of the big news in the quarter is the fact that EST is growing, growing even faster than anyone predicted. I think that with it growing over $1.2 billion, the good news is a lot of that is coming not only from new releases, coming from library. We are seeing the digital business growing into a library business.

If you look at sell-through in general, which is really where library lives, if you look at the combination of packaged media sell-through and EST, numbers are getting close to being identical from year to year. I think the decline has slowed to a virtuous stop, and I think margins obviously grow.

Our operating margin in the home entertainment business overall was the highest ever last year. I think the news is only good there. You're seeing margin dollars across the industry for all studios actually growing again. That's all good news.

Rob?

On Gods of Egypt, this is a property we are very excited about. Alex Proyus is a visionary director in this space. Because of our production in Australia, the efficiencies on the production side are quite extraordinary.

The other aspect of this which is great is the film will not be coming out until 2016, so there's -- in our usual fan-building base, we will be talking to our fan base and building a fan base for an extended period of time. We have a great cast. We're very excited about the long-term prospects of building this into a future franchise.

Gary, continuing further, though, beyond the electronic sell-through, if you look at these new formats, do you think the street is sometimes underestimating film libraries? Do you think if there was an M&A transaction, the film libraries could go at a higher multiple than analysts are valuing companies at, or is it still too early to say?

I would say we have talked numerous times about how technology we used to say every five years creates a new revenue stream. I don't think there's any question. At the end of the day, whether it's 4-K, 3D, whatever it is, these are technologies which will enhance the content at the end of the day. It starts with the content.

But I do believe that technology will help, and now on a faster pace than every five years. It almost seems like it's every year. Technology will create value for our library. As you know, when we do our ultimates, we are just essentially a 10-year ultimate, and don't recognize anything beyond it. But we all know these libraries are 50-, 60-, 70-year libraries.

Again, when we keep enhancing them with all the things that new technology brings, I definitely do believe that everyone's library is undervalued. As a matter of fact, we keep wrestling with the fact that every time we do our ultimates and we do the forecast against the actuals, we are seeing what we call creep, which is essentially the up-valuing, if you will, of that library.

It is very hard to -- we are conservative with our forecasting, and so -- and probably we should be, but we are always pleased to see this creep. Again, I believe a lot of it is coming from the fact that technology does create new buyers, new ways to deliver, more efficient ways to deliver -- frankly, higher margins. I think it is a really smart question, and I think it's all heading in the right direction.

I look forward to that five-year guidance. (laughter)

Jim Goss, Barrington Research.

Thanks. I wanted to talk for a moment about the international-domestic mix, and box office mix for Hunger Games, the original, and Catching Fire. I know the original movie had somewhat less pre-sales internationally relative to domestic, because of the book sales. It seemed like the second movie did do more than half of its box office international to this point.

Even at that, and even with the pre-sale of the first movie, it still somewhat lags the roughly two-thirds, one-third or 70-30 split it seems like the overall box office mix seems to be right now. I was wondering if you could talk about what reasonable expectations should be for that, and how that might even factor into Divergent's expectations?

Then I have a couple of other smaller ones.

Yes, listen, the international opportunity is always great. As you -- as Jon said, we took great pains to build Catching Fire's international performance and presence, as we do with all of our properties. We're doing that now with Divergent.

They tend to -- especially on these literary-driven properties, they tend to be a little slower, but this is all about Mockingjay's opportunity in the future. We believe very strongly the international growth possibilities for MJ 1 and 2, and that is something that we are working constantly on in growing that fan base there, while still growing the domestic piece. We always look to have up side opportunity in the international performance, especially with these literary-driven films.

I would say -- I would add to what Rob said is it is hard to compare a movie like Divergent or Hunger Games to something like Iron Man. It's not quite as obvious for the international market place, in the sense of being this huge action-driven franchise.

I think it becomes a little more dependent upon us to build a little slower and get the book sales going in that territory. It's likely with Divergent, as well as with Hunger Games that the sequels will continue to grow beyond obviously the job we are trying to do right now, which is to get the awareness out there.

Okay, the last couple of things. Do you have your sights on the next series after Divergent that could have -- you feel might have some more out-size potential relative to a lot of movies? How does that whole process tend to play out?

The last question is very mundane. What is the -- what sort of tax rate or tax calculation assumption should we make for the fourth quarter?

Well, you mentioned Gods of Egypt as a future franchise. That's a title we are very excited about. We also have a lot of other literary properties that we continue to mine. As John talked about, Wonder, and we have Chaos Walking.

Not to mention our sequel to Now You See Me, and the Saw franchise, which always has an opportunity for us to build and grow again, as well. We are constantly on the lookout for opportunistic properties that we can grow into those franchise opportunities.

Yes, I think we can pinpoint, though, again the three larger movies that we see as new franchises -- Gods of Egypt, Chaos Walking -- Rob didn't mention that's Robert Zemeckis adapting that, a huge director; and Mordecai, which is a character that Johnny Depp absolutely loves and would love to do more of. I would say in addition to everything else Rob mentioned, those are probably the next three that we see as potential franchises.

The last thing I want to add here -- it's Michael -- is don't discount the value of the mainstay intellectual property that we have here besides Saw -- I know Rob mentioned that. Because the idea to reinvent those to reboot those always is an opportunity for us.

Jimmy, would you take the tax question?

Sure. On a year-to-date basis, our adjusted effective tax rate declined to 32%. We think this improvement is sustainable, and not only that, expect further -- that to further decline. I would look at our full-year adjusted effective tax rate and think of that as being approximately 30%. These declines actually help drive both cash and P&L to the bottom line.

The other thing I would just ask you to remember is that the adjusted effective tax rate excludes the current tax benefit from the current year related to the debt extinguishment, as well as the Q2 release of the Canadian NOL reserves.

Just to add to that, Last Witch Hunter is a title that we are also very excited about as a future franchise opportunity with Vin Diesel. There is another property, highly branded property that we have in development that we hope to be able to announce shortly.

Great.

Marla Backer, Ascendiant.

I have two questions. First of all, we have spent a lot of time on this call talking about Divergent. I can't really think of a significant amount of merchandise associated with the title.

Obviously, that is something you guys do. Do you think there is going to be much of a licensing program around that title?

Again, as you see on many of these titles, the first property tends to prime the pump for the future licensing and promotional and branding revenue. We have a lot of excitement in the partner world for Divergent, but generally those things start to really kick into high gear in the second property.

Right. No, that followed the same trajectory as you saw with Hunger Games, but you are saying there is interest in this first property?

Oh, definitely.

Okay. Then the other question is on Now You See Me. I don't think you planned it as a franchise or as a series, but we are pleasantly surprised with how well the title performed. Could you see it going the same path as The Expendables?

Could you see further installments down the road, and if so, would you think about tweaking the cast, since it is an ensemble cast? Would you think about tweaking the cast the same way that The Expendables series has been doing?

Well, we look to every property as availability for extensions. We always are looking to that. We are very responsive when we see -- not only pre the release, because there is a lot of opportunity with a title like Now You See Me with all the multiple characters, and with the situations that you can create for entertainment value.

Are there more magicians available? Absolutely, we believe there is real opportunity to keep this franchise growing.

Marla, we mentioned, we're actually in pre-production on Now You See Me. We absolutely see it as a franchise, and you've actually hit it on the nose. We are going to add some cast to it, and we see that as a potential ongoing situation.

Okay, great. Thank you.

Drew Borst, Goldman Sachs.

Jon, I just wanted to clarify -- your prepared remarks at the end there, you were mentioning you're tracking ahead of the three-year EBITDA guidance at $1.1 billion cumulative. Then you said something about extending it for two years. Were you trying to imply that 2016, 2017 could have $1.1 billion cumulative EBITDA, as well? Just wanted to clarify?

No, I am not suggesting that at all. I am trying to give you a sense of at what point we will have visibility that will continue to give long-term guidance, not short-term guidance, and that it's likely in the near future that we'll have enough visibility that we'll be confident enough to give you an additional two years, whether I wrap that around -- call it 2015, 2016, 2017, or just two years -- I'm not really sure yet. But just trying to give you a sense of where we are going with our long-term guidance.

Okay, I see it. I'm glad I clarified. Thank you for that.

Tuna Amobi, S&P Capital IQ.

First, I want to commend you on the dividend policy initiation. I know that question has come up in the past as to the free-cash-flow deployment.

Following up, can you maybe help articulate better how you envision your dividend policy evolving? Do you have any kind of target yield, and can we expect reasonably moderate increases going forward? Does that preclude also a share buy-back program?

And I have a few follow-up questions.

Hi, it's Michael. On the dividend, we declared our first quarterly dividend, as Jon mentioned. Our plan is assuming that business goes according to plan, like all the media companies of the recent past, our plan is to increase that dividend over time -- again, assuming that our cash flows are there to do it. As far as the stock buy-back, no, the dividend does not preclude us from buying back stock.

Okay, that is helpful. For John, I think you provided a lot more clarity on the EST market place, and specifically with regard to the data point from Comcast, which is pretty impressive. The question is, do you envision that the MVPD market place is going to continue to grow the EST alongside the ultraviolet, or do you think it gets to the point where there might be some potential cannibalization of the market place? How do you see that evolving?

Separately, Orange Is the New Black you alluded to the viewership on Netflix, which by all accounts is very impressive. I was just trying to get a sense of how a shall like that might have performed on broadcast or cable television? Using that as a reference point, how do you think such a hit show might have fared on broadcast and cable using the same viewership benchmarks?

Also, if you can speak to the economics from your perspective of how a show like that might have worked out financially on broadcast or cable relative to SBOT, that would be helpful? Thank you.

That's a lot of questions. I'm not sure about what question your asking about the cannibalization. The one thing I would say is there are ongoing conversations with other MSOs. You will see them into the EST space.

It has been too successful for Comcast. I think everybody ultimately that has a technological capability will be in that game. We think it's a very exciting proposition.

Steve, I don't know if you want to mention the connection or storage in terms of ultraviolet as opposed to other ways. But I think we think that ultimately it is all going to tie together, with great accessibility, most people coming through ultraviolet, but Steve --?

I think that is right. I think what Jon is saying is true that what is showing is the consumers are now comfortable, or becoming very comfortable, with digital film ownership in the cloud -- not only with the Comcast product but with the UV locker solutions offered by many retailers. We believe that some, if not all, of the MSOs, when they get into the business, will actually be linked to the UV market place.

UV, as you know, is just a way to be able to accumulate your purchases from different retailers into one locker from which you can access them. It's not cannibalization at all, per se. It really is making EST more accessible to consumers, and consumers are obviously responding.

The 10% that Jon put out is all incremental, is what I was getting at, right?

We believe that it's mostly, if not all, incremental. Yes.

Okay.

Kevin you want to talk about Orange?

On Orange is the New Black, the SBOT original model -- the best way to look at those really is to compare them most closely a premium cable HBO, Showtime Starz, which is a subscription model. Historically, those services have never been big on talking about ratings. They're mostly focused on subscription value and subscriber numbers.

That's really the value creation for them -- critical acclaim, word-of-mouth, justifying the monthly fee that their customers are paying. It's hard to compare to anything, except some of those great shows on HBO and Showtime in the past.

Really, on that score, it's a homerun. Netflix loves it. It's talked about all the time. They don't share the statistics, but the viewership is fantastic.

The anticipation for season two is palpable, and we're finding an ancillary basis in our international markets around the world that we've had similar success, because the show goes out into television outlets around the world that aren't necessarily subscriber-based, and the show is performing. We hope to be making that show for years to come, and if we have success we've had in the past with shows like Weeds, we'd be quite happy.

Just one final clarification. Since Netflix has never talked about the numbers of viewership for that show, and obviously it's been a phenomenal show, no dispute on that. Is there a way that you can help us frame what numbers?

Or maybe even generally speaking, what traction it is getting? That's why I try to use the networks as a reference point.

Yes, that's impossible to do, Tuna. I would say that we don't do any shows unless we think there's a strong profit down the road. Pay television typically has benefits in some areas in terms of revenue. It typically creates significant incremental revenue in terms of home entertainment, where -- and not quite as much revenue in the back end in terms of syndication.

But under any circumstance, as Kevin mentioned, he mentioned Weeds is a very profitable show for us. It's been reflected in prior financials that we've reported. Again, we think this will be quite a profitable show.

It really comes down to the same things we talk about a lot, which is the great pieces of content, whether it's film or television, those are the ones that typically are the most profitable, most successful. That's what we're focused on, putting the right kind of show on the right outlet, on the right network. Other than that, it's very difficult to drill down too much with the numbers, even whether we know them or not.

Okay, appreciate the color. Thanks a lot.

Okay, thank you. Back to you gentlemen for closing remarks.

Thank you all for joining us. We look forward to chatting with you on the next call.

Thank you all.

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