Starz Entertainment Corp (STRZ) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Lionsgate FY15 first-quarter earnings conference call.

(Operator Instructions)

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

Good morning. Thank you for joining us for our FY15 first-quarter call. We'll begin with opening remarks from our CEO, Jon Feltheimer. Following his remarks, we'll open the call for your questions. Joining us on the call today are Vice Chairman Michael Burns; Motion Picture Group Co-Chairmen Rob Friedman and Patrick Wachsberger; Chairman of the Lionsgate Television Group, Kevin Beggs; Steve Beeks, our Co-COO and President of the Motion Picture Group; Brian Goldsmith, our 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 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 Liongate's 10-K, filed May 29. 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, and thanks for joining us. We reported strong adjusted EBITDA and earnings yesterday in what is historically our lightest quarter, achieving robust margins across our business and getting our fiscal year off to a fast start. Complementing our strong financial results, we made significant progress operationally and strategically in the quarter, partnering with entrepreneurial companies with complementary resources and skills to accelerate the growth of our content business.

We launched the new drama series Manhattan on WGN America, while at the same time creating a unique next-day window for Hulu to bring the show to an expanded audience. We collaborated with Comcast to create a film-specific app cross-promoting our newest franchise, Divergent, while helping to accelerate their growth in the EST space. We formed an alliance with consumer electronics giant Samsung on Mockingjay to create an immersive fan experience that was the talk of the recent Comic-Con convention. And we announced an innovative content partnership with the Alibaba Group, one of the most prestigious consumer brands in China. Nowhere are these partnerships more in evidence than the continued evolution of our portfolio brands and franchises.

We completed production of Mockingjay 1 and 2, and with a full complement of world-class promotional partners, including Samsung, the online debut of three teaser trailers that have generated over for 45 million views to date. And last week's announcement that Grammy-winning multi-platinum recording star Lorde will curate the Mockingjay soundtrack, and write and perform its first single. We believe that all the elements are coming together to make the November 21 global rollout of Mockingjay the biggest in the franchise's history. During the quarter we also continued to extend the Hunger Games franchise into new lines of business. In addition to the mobile game partnership and the Hunger Games traveling museum we announced on the last call, we're deep into conversations with prospective partners on four continents to explore theme park attractions and other location-based entertainment opportunities.

I'm going to talk a lot this morning about Divergent because all the signs are pointing to it growing into another big young-adult franchise like Twilight and the Hunger Games. Book sales are soaring at the rate of 500,000 to 750,000 copies a week, increasing from 17 million in March to 26 million today. And not unlike the evolution of the Harry Potter franchise, author Veronica Roth continues to build out the Divergent universe with new material. Her latest book, Four: A Divergent Collection, explores the back-story of the charismatic male lead played by Theo James, and climbed to number one on the best seller list last week.

Divergent's home entertainment roll-out got underway with its July 22 launch on electronic sell-through platforms, and is on track to become the biggest EST title in Lionsgate history, underscoring both the tremendous vitality of the franchise, but also the rapid evolution of the EST space. The title also got off to an enormous first three days on packaged media, significantly over-indexing what would be expected of a film at its domestic box office level, and running approximately 30% ahead of our expectations. With first Insurgent trailer slated to debut with the release of Mockingjay in November, skyrocketing book sales, a stellar home entertainment launch, and stars Shailene Woodley, Theo James and Ansel Elgort generating ever-increasing online buzz, I think you can understand why we believe that the Divergent series is becoming very special.

We made significant progress in growing our other brands during the quarter as well. Together with Saban Entertainment, we hired Roberto Orci, the writer of Transformer, Star Trek and Mission Impossible III, to shepherd the first of our planned series of live-action films based on Saban's iconic Power Rangers brand. X-Men writers, Ashley Miller and Zack Stentz are currently working on the script.

Now You See Me 2 is slated to begin production this fall, with most of the original cast returning. It will be filmed in the US, Europe and Macau, continuing to grow the worldwide box office potential of an emerging franchise whose first installment grossed over $350 million. Gods of Egypt has wrapped principle photography in Australia, now heads into an extended post-production period to maximize its array of visual effects. It's scheduled for release on February 12, 2016. And as we said on previous calls, we have great expectations for its potential to become one of our next big properties.

We began shooting The Last Witch Hunter during the fall, with an all-star cast led by action mega-star, Vin Diesel; Academy Award winner Michael Caine; Lord of the Ring's Elijah Wood; and Game of Thrones star Rose Leslie. Completing our news on the franchise front, the action heroes of the Expendables 3 stormed the UK for the film's London premiere earlier this week. With one of the greatest casts of action stars ever assembled, we're very excited about its opening next weekend in over 3,000 theaters.

In addition to our franchises, our entire portfolio of films is deeper and more diverse than ever. We're currently assembling a world-class cast for Deepwater Horizon, which will be directed by J.C. Chandor, with whom we collaborated on Margin Call and All Is Lost, and who is emerging as one of the hottest directors in Hollywood. Based on the New York Times story about the final hours of the Deepwater Horizon oil rig, this is becoming one of the most highly anticipated projects in town.

You've heard us mention the Glass Castle, the New York Times Best Seller about a young woman coming of age in a dysfunctional family. Currently in negotiations with a major star to be teamed with Academy Award-winner Jennifer Lawrence, we're creating another prestige package built on great, underlying intellectual property that we believe will have tremendous worldwide commercial and critical appeal.

As you know, we complement our mainstream-wide releases with specialty titles from our Roadside attractions Pantelion and Codeblack partnerships, part of our managed brands and ancillary-driven film business that contributed more than [$60] million in profit last year. Our latest film with Roadside, A Most Wanted Man, stars the late Philip Seymour Hoffman in a brilliant performance that's earning rave reviews on the way to becoming one of the year's most successful indie films and a significant profit contributor for us.

We also took significant steps in the quarter to continue globalizing our business. As you may have read this morning, we moved our international sales operation to London to position us closer to our overseas markets and to benefit more fully from increasing growth opportunities worldwide. Our new international sales headquarters will be based at Lionsgate UK, which is coming off two banner years in a row, and is continuing to achieve the promise we envisioned when brought its predecessor company, Redbus, in 2005.

We continue to utilize our output agreements in most other territories, remaining the most important supplier for major independent distributors around the world. In fact, during the quarter, we extended our agreements with StudioCanal and the Tele Munchen Group in Germany, Roadshow Pictures in Australia, Nordisk in Scandinavia and Belga Films in Benelux. And we established our first output agreement in Italy by partnering with the fast-growing Leone Film Group. On the other side of the world, we recently announced an innovative new content partnership with the Alibaba Group in China, complementing a number of licensing arrangements we've already established there, including our licensing deal with Youku Tudou for Orange is the New Black and Mad Men, and our growing array of theatrical distribution partnerships.

Our television business has also been building scale and diversity. During the quarter, we replenished our pipeline with our strongest development slate ever, continued the progression of our shows toward syndication and developed new windows with our partners that will create incremental revenue and profitability. The continued and growing success of Orange is the New Black demonstrates our ability to create exciting, quality programming for new buyers. Now in its second season on Netflix and already renewed for a third, Orange earned 12 Emmy nominations, graced the cover of Time Magazine and is the most-watched television series on Netflix around the world. It's emerging as an important new brand for Lionsgate, following in the footsteps of some of our most successful shows.

Chasing Life, the first television series from our partnership with Televisa, debuted on ABC Family in June as the number one cable series in its time period with young women. Other new shows include The Royals, the first scripted drama for E, currently in production in London; Partners, our 10/90 series teaming Kelsey Grammer and Martin Lawrence for FX; and Ascension, our space-travel adventure thriller for SyFy.

Our television division continues to develop properties driven by big talent and great underlying IP, as evidenced by the previously announced pilot for Adult Swim, based on our cult hit Harold & Kumar; our syndicated game show Celebrity Name Game, hosted by late-night star Craig Ferguson; and Lifetime's order of the Earth's Children pilot from world-class producers Brian Grazer, Ron Howard and Ali [Schirmer], a show based on Jean Auel's best-selling novel that we're co-producing with Fox 21.

As we've previously discussed, we expect significant growth in revenues and margins as our television business continues to build scale and our shows move into syndication. Although the first quarter is typically our lightest revenue quarter in television, our margins are strong and we expect them to grow from under 7% last year to approximately 11% for the full year. The favorable environment for content is having a positive impact on our channel investments as well, and momentum at EPIX continues to grow. Only a few months after its rollout on Time Warner Cable, EPIX signed new carriage deals with AT&T and Bright House that increased its reach to more than 50 million households. As its profitability continues to grow, we will begin to create original programming that complements the channel's line-up of blockbuster films, original documentaries, and music and comedy specials.

Our business continued its strong cash generation in the quarter as we reported nearly $160 million in free cash flow, a strong underpinning for our strategy of allocating cash towards repurchasing our stock, growing our yearly dividend and reinvesting in content. Since the recent increase in our share repurchase authorization, we have repurchased 4.7 million shares of common stock totaling $106.4 million, and we still have over $100 million left in our current authorization.

In closing, we see several factors shaping our industry landscape: the continued emergence of new platforms worldwide; strong demand for premium, branded content from digital and traditional buyers alike, proliferation of new windows that accommodate changing consumption patterns, and a recent trend towards industry consolidation that is accelerating. We believe that we're well-positioned to flourish in this environment as a pure-play content Company with few legacy constraints, a history of innovating new business models and windowing strategies, a track record of entrepreneurial partnerships around the world, a strong balance sheet, a liquid currency, and a deep and growing portfolio of content.

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

(Operator Instructions)

Alan Gould, Evercore.

I've got three questions. My first one is to either Jon or Steve. The Diversion EST and home video results -- one, I assume it's a little early to extrapolate on the packaged goods because we don't know what returns and such are. But can you tell anything from this data as to what the implications are for Insurgent on that? And then I'll come back to Jimmy with a couple of questions.

This is Steve. I'll take that first one. As Jon mentioned, the film was released on EST at a premium price two weeks ahead of DVD and Blu-ray's release, which was this week. I can tell you that EST revenue after two weeks is already equal to EST revenue of Catching Fire earlier this year, so obviously a great sign in terms of the trajectory of the series.

And the packaged media release, as you mentioned, was just this Tuesday. But after three days, it's gotten off to such a great start, it even surprised us, and is tracking -- it's tracking more like a picture that gets 40% to 50% of its box office. Again, as you just mentioned, the story is going to become more clear after the weekend. But the trajectory is very good, and it looks like -- so far -- we've shipped a lot of units, but it looks like we're going to sell through at least every unit that we've so far shipped.

I think the [see events] say 40% -- tracking like a movie that did 40% to 50% more of box office.

Yes, right.

Okay, thank you. And then for Jimmy, I've got two questions, one on taxes and one on production spending. On taxes, you're now at 20%. I never appreciated being a Canadian Company as much as I am now. In this consolidation world, in a hypothetical example, if Lionsgate were to be acquired, would an acquirer be able to take advantage of this lower tax rate? And can you get it even lower than the 20%?

And my second question is, are your investments in and production spending this year -- does it look like it will top $1 billion? Can you give us some handle where that's going to be?

Sure. Let's take the effective tax rate question first. First of all, I'm focused on the sustainability of the adjusted effective tax rate. And the adjusted effective tax rate in the quarter was 15.5%, and that's down from 37% in the prior-year quarter. So that really reflects the downward trend that we were able to achieve in FY14 and that we foreshadowed on previous calls.

Absolutely in terms of if we were to acquire US-based assets, these clearly -- these savings would clearly project into any acquisition that we might make. Likewise, under inversion rules, there's opportunities that would similarly benefit companies that were to -- if they were to acquire Lionsgate.

So it's certainly transferable, but more importantly, this mid-teen rate at the levels of pretax income we're projecting is absolutely sustainable. And it reflects the effective tax planning that we've already put in place, as well as -- to your reference-- our status as a Canadian multi-national.

So what that means, as a result of this, we don't end up with trapped cash offshore. Likewise, we can efficiently return cash to Canada, where we can use it to drive shareholder value. This is also -- reflects future tax cash savings. And I would just add, we don't expect to pay US federal taxes before we're well-into FY17.

With regards to your question about film and TV investment, we're tracking somewhere between $800 million and $900 million for the year, with about a 60/40 split between film and TV. And theatrical P&A is tracking somewhere between $300 million and $350 million for the year.

Okay, thank you very much.

Ben Mogil, Stifel.

Why don't you talk about the margins in motion picture? Because Jon had already given guidance in TV, and I know you can't give guidance on motion picture margins because of the performance expectations. But when you look at the quarter -- and I get that obviously Catching Fire on DVD certainly helped on the margin front -- maybe you can talk about how digital -- not just on the mega-titles like the Catching Fire and the Divergent. Maybe you can talk about digital impacting margins more structurally going forward on Motion Picture Group.

Hi, Ben, this is Steve again. As we've mentioned in prior calls, and as you just said, the growth of digital formats, with EST and VOD both, have impacted the operating margin. And if you look at the results across the industry -- which we do a lot and have been saying for a long time -- operating margin at the studio level across the industry is actually growing. It has been growing for the last few years, and is now at its highest point since 2009.

A lot of people have been focusing on revenue because of the maturation of the packaged media market, but the truth is, the story is the operating margin. And that's the (technical difficulty) all good.

And then second question, just in terms of some of the smaller minority interest assets. You sold FEARnet in the quarter. Maybe you can talk about FEARnet, the reason -- the decision to sell it. EPIX is more core. And talk about TV Guide, what the path is there, if you will?

FEARnet was a partnership with Sony and Comcast. We weren't getting the kind of growth that we like from any investment. As I look at the future frankly, I think for us, subscription and even potentially online channels -- something more akin to what we're doing with Alibaba, things that we can control -- we think that's perhaps where the interesting growth is.

You can see actually we didn't take advantage of the profit that we got from the sale. We actually took it out of our adjusted EBITDA numbers, even though we had incurred some losses before, and could easily have kept it in that number, but tried to have it as -- create as much visibility there as we could. But at the end of the day, we actually believe we have a strong horror brand, and we believe if we do it perhaps again, perhaps doing it on our own and doing it in a different way might be more valuable.

We're very pleased with the growth of TV Guide. We're going to have actually a really good year. It will be profitable before one-time expense. The ratings are up, and revenue is up -- never as much as you want it to be. But we're extremely pleased with the partnership with CBS. They've been fantastic, and we're working together.

But look, I wouldn't be surprised if down the road, CBS were to want to own that entire asset. And we think it's going to be very profitable. FEARnet was profitable, and there's nothing wrong with making money. But we do think that we have to build some brands that actually are more intrinsically Lionsgate.

On the TV Guide front, are there any affiliate renewal concentrations by year?

Are you talking about TV Guide?

Yes. Any amounts on affiliate concentration time, years in particular.

I don't want to address that right now. There's a couple coming up that we'll start working on soon. One that was just extended for a period of time. I don't think it's appropriate that I deal with that on this call.

That's totally fair. Thanks, Jon.

David Miller, Topeka Capital Markets.

Couple of questions, one for Jimmy and one for Michael. Jimmy, that's just an off-the-charts free cash flow number. I think -- correct me if I'm wrong -- that's either a near-record for a fiscal Q1 or a record for a fiscal Q1. Usually in your fiscal Q1 you guys are either a net cash user or just a mild free cash flow producer. It looks like what was going on here was some working capital differences, and just lower investment spending in film, in general. But I was just wondering if there was any other components there that you're willing to call out.

And then, Michael, obviously it's just been a very dramatic three weeks, with M&A and talk about M&A and theories as to who is going to buy who, and so forth. I've always thought that what's more appropriate to talk about with you guys -- visa the M&A -- is film libraries. And I'm wondering if in the last six months you've seen any fluctuation in private multiples, with regard to the film libraries that are out there. And at the end of the day, are there really a lot of film libraries to buy that are actually willing to be sellers at this time? Thanks a lot.

Sure, David. It was a great quarter for free cash flow, as you noted. I'm not going to comment on the fact of whether it's a record or not, but certainly records are made to be broken. So we feel very good about that, and also feel great about our ability to generate significant cash going forward. We expect to continue converting a significant amount of our adjusted EBITDA free cash flow. And between our cash generation and the strength of balance sheet, this puts us in a great position to continue to drive shareholder value.

With regards to timing, just one thing to remember with regards to our business is that we've got a great deal of diversity across all of our businesses. And as we just reported, we have $1.3 billion of backlog, okay? This generally runs off -- in a very high-margin business -- generally runs off into our business over 18 to 24 months. In addition to that, we're generating $500 million a year in library also, with very healthy 35%-type margins.

So across the board, we have a lot of things that go well beyond just whatever is the great content that we're putting in place every quarter, quarter to quarter, in and out, throughout the year. But we have this underlying business that continues to drive profits and free cash flow. So we feel very good about where we are.

And David, it's Michael. On the library question, it's a scarce commodity at the moment, but we look at everything. But remember, as Jon mentioned, we have 16,000 titles. So unless we think a library purchase -- a specific library -- will be complementary to what we already have, we're not going to pay up for it.

Okay, thank you very much.

Jay Marsh, Piper Jaffray.

Two quick questions. First on EPIX, [some of it] you highlighted as a growing and invaluable asset, but in many ways, it feels like such a hidden asset. Just wondering if you guys have considered any ways to make the value of this asset more obvious, maybe potentially a spinoff or something similar? And then I have a follow-up.

We've got three partners in EPIX. I think we talk about all the possibilities every way that we can to expand it, but whether that was international, whether it's spinning it off, it's going to require all three studios to agree on that strategy. But I can tell you that we're extremely pleased that the initial reaction from customers at AT&T has been very strong, as I previously mentioned; extremely strong Time Warner Cable. I think this asset is growing very significantly, and I think as it does, the three partners are going to have to strategize about how to maximize that value.

Okay. And then on Anger Management, obviously you're poised to monetize that in the syndication market. I was wondering if you could give us some sense for how the process has been moving domestically, as well as internationally?

Well, internationally, the sales have been very strong. It is rolling out in syndication, and our numbers are strong. We're at, I think, episode 83 in production. Charlie's been great. Charlie is always ready to go out and promote the show. And again, we're very pleased with Anger Management.

Great, thanks very much.

Alexia Quadrani, JPMorgan.

Just a couple questions. First, on the incredible success you've had with Orange is the New Black -- like you said, it was just renewed. Does that change your thinking any more about how you might position your products in terms of where you want to license them? And maybe you can talk about how the profitability can eventually compare, licensing it directly to a digital player versus a more traditional TV player.

Hi, this is Kevin. We go into any new platform conservatively, not knowing exactly how we'll compare to more traditional buyers. And on every measure, Orange is the New Black has exceeded expectations -- the international numbers, the home entertainment numbers. So we've obviously revised our estimates upward on the show, and we do believe it will compare with some of our most profitable franchises. And we're very bullish on the digital space.

Not only are we thrilled about our business with Netflix, we're in business with Hulu on Deadbeat, which was recently renewed. We're in business with Amazon on a couple of pilots in development. We're deep in discussion with Yahoo on doing more series with them. And we look at this opportunity in the streaming space much the same way we looked at the cable space 10 years ago -- as an emerging and open market, and for a nimble player and disciplined producer like ourselves, a huge opportunity and lots of upside.

And then just a follow-up question. I think you mentioned a book, Four, coming out -- or it came out, on the Divergent series. Is there opportunities around -- for these franchises -- Four being an example -- to do other films that haven't been announced yet?

I think as I've said before, we certainly hope so.

Okay, thank you very much.

Barton Crockett, FBR Capital Markets.

I was interested in this repurchase space that you guys put up here, which is a great, I think, new part of the story. How do you feel about the sustainability of this going forward? Obviously you have your authorization, which -- those can always be reset as time goes on. I was wondering if you could frame what you see doing over time there.

Michael?

Yes, hi, Barton, and welcome back to following us.

Thank you.

As we said before, we're obviously -- I just finished Flash Boys, so we're not in the business of telegraphing when we're are going to be in the market and when we're not. But I will tell you that we have -- as we said before, when we see our stock as an accretive transaction, we're going to purchase more of it. Our current authorization -- we have over $100 million of capacity with that current authorization, and our sense is to continue to be opportunistic in the marketplace when we think it makes sense.

Okay, great. And then if I could switch gears a little bit on the Alibaba deal, which is very interesting. I was wondering if you could give us a little bit of color -- and I know there's a limit to how much you want to say about it. But a little bit of color about how meaningful you think that will be for your income statement over the next couple of years, and where we might see it hit the financials?

Hi, Barton. This is Brian Goldsmith. As you know, digital distribution is prevalent in China and growing. And these digital platforms are generating significant licensing revenues for shows like Orange is the New Black and Mad Men. In fact, we just sold Manhattan for our highest license fee ever in that territory. So it's really a great environment to partner with a big consumer brand and technology partner, to create a valuable piece of digital real estate.

The Alibaba collaboration is really going to take the form of a branded streaming service that offers premium content to Chinese consumers on a subscription basis, and potentially in other models. Beyond that, I can't comment on the collaboration at this time, given the quiet period ahead of Alibaba's IPO.

Okay, I'll leave it there. Thank you.

Doug Creutz, Cowen and Company.

You guys talked about consolidation. Obviously you have been consolidated in the past, with a certain amount of success. Can you talk a little bit about how you're thinking about opportunity in terms of both the scale and the scope of the Company? And maybe talk about any content verticals that you see as being attractive but you may not have a lot of exposure to yet? Thank you.

Jon, can I take a pass at this first?

Sure.

I was going to say -- hi, Doug, and I'll see you next week. We really believe that we needed to get to a critical mass place. And yes, we've had a history going way back of consolidation, but the Summit transaction, it really put us over the top, our ability to renegotiate -- or to get better settlement rates with the theater chains. On top of that, consolidating in our media department and our media buy, our new pick-pack-and-ship deal with [Messing Ram] and Fox. And all of that -- and obviously we refinanced our debt and cut our interest payments in half.

All of that, we believe, put us over the tipping point of being large enough to compete globally. And that's what's happening obviously with all these strategic relationships around the world.

We don't have to do another big acquisition. We look at everything. I we think it's accretive, we'll step up. We have looked at a couple deals that, frankly, we were outbid for, particularly in the television space. But again, we're trying to be very cognizant of making sure that whatever we do is very accretive. And if we can't find anything more accretive than our stock, then that's what we're going to buy.

I'd say, basically, the environment, we think -- when we look at some of these potential mergers with expanded scale, that we're going to keep a close eye on them, how they're going to affect our business. But we think, frankly there's more of an opportunity than a threat. And I think that as a disruptive, opportunistic Company, in a disruptive environment, I think that we're going to be poised to take advantage.

I think Michael pointed out television. We continue to see television as a tremendous opportunity for us, with the brands that Kevin has created and the relationships. But we've also proved that we're pretty good at growing things. So when there's an opportunity to expand television or other businesses in an accretive fashion, I think we're going to take advantage of that opportunity on our balance sheet. But we don't feel that we have to do anything.

Okay, great, thanks.

David Bank, RBC Capital Markets.

Could you give us an update on the status of the Kevin James project? Do you know where that's going to wind up at this point? And can you also give us a sense of -- did you factor it into guidance as a broadcast network TV show, or winding up on cable? Or, is there some sense of that?

And then second, can you give us a sense of the numbers on Manhattan versus what you were expecting? And would you think at this point that there will be a season 2 renewal? And were there any presales into digital on that one?

And then lastly, the premier date on Kelsey Grammer and Martin Lawrence -- when are we looking for that? Thanks.

Starting with Kevin James, we'll be pitching that to broadcasters and cablers alike in mid-September when Kevin wraps up the current movie that he's on. Obviously in a perfect world, we would like any or all of these to be on broadcast. But we're not planning on broadcast per se. So I think our guidance is about it finding a home in cable.

And you would see that as a mid-season -- is that fall of 2016 show at this point? Or fall of 2015 show?

Well, for broadcast it certainly could be, or even a summer launch. I mean, now television truly is year-round, when you look at Under the Dome and other networks launching summer shows very successfully. So I don't -- the 10/90 we look at as a year-round proposition, so it is wherever it has the most strategic value at that moment for the broadcaster.

And again, the cable business is entirely year-round. They like to launch in January and June traditionally, but even they are shaking things up, because summer can get crowded with so many buyers out there.

We would see a launch, though, to pinpoint a little bit more -- probably this will be a FY16 launch, if that's helpful.

Great.

On Manhattan, Manhattan premiered absolutely in line with what we and WGN were expecting. The 1.8 million households on its premier evening, which listed to 2.2 million three days later, if you include the live-plus-3.

We're also quite excited about the digital SVOD sale to Hulu, which was an unprecedented structure with a one-day hold-back. And in its first week on Hulu, its first day and then into the second week, it's trending as it's the second most popular show, which we think is a great sign. We're going to get more details on Monday.

Brian alluded to a significant digital sale in China. And all of our international clients are lining up to buy this; they look at this as a tour-driven series in the vein of Mad Men, and we feel the same way. I can't speculate on its renewal at this early stage. It's only been on for two weeks. But WGN has been very positive about the show. And since -- and dating back to Mad Men, we have probably never seen a show with this much critical acclaim across the board.

And on Kelsey Grammer and Martin Lawrence?

So Kelsey Grammer and Martin Lawrence premiered on Monday, a few days ago. It premiered solidly, but we would obviously like to grow those numbers over the next four weeks. They're running two episodes a night. It premiered well-ahead of FX's two original comedies that had premiered already this summer, Married, and You're the Worst. And we just obviously have to wait and see week to week how it trends. We're extremely proud of the show and feel good about it. It's nice to know that we're ahead of the other offerings that FX put forward this summer.

Okay, sorry about that. It's been a lot of late earnings nights. So I'll have to catch up with that on the DVR.

Yes, please watch it on DVR; that would contribute to our live-plus-3 rating.

Matthew Harrigan, Wunderlich Securities.

When you look at your business, it's a really nice barbell, theatrical, very healthy splits, due to streaming, [you do very growthy]. When you go to a market like China or Korea, and China particularly, you've got much lower splits. How does that change the equilibrium between streaming and box office and the windows, and just the percentage of revenues from each of those buckets for you? Do you think the theatrical percentages move up a lot, or somewhat over period of time?

And then secondly, in line with your horror emphasis, Hammer films -- did you look at that? Christopher Lee is only 92, so it's pretty young for Dracula. He could fit in as the young adult Dracula. You could bring him back. That seems like something that would actually work pretty well for Lionsgate.

(laughter) Okay. Well, getting a little granular there. We like Hammer films, we've done stuff with them before. We think they have actually some good assets, and it's something actually we'll keep our eye on as we grow our Lionsgate UK business.

In terms of China, I mean, look, I'm sure Paramount would like an even better split on the box office revenues, but I think they're pretty darn happy with Transformers. We think China is going to be probably in not that many more years the number one film market in the world. We think it's pretty amazing what's happening there, not only in the film business, but in terms of particularly the distribution of content through online channels. And so we think there's going to be a tremendous opportunity to monetize our content in China.

We talked about China and India before as two places where we think we're particularly under-leveraged. We're spending a lot of time right now in India, as well as China, and we think there's great opportunities.

I can't speak to whether the box office split is going to change. But you do tend to believe as you get more and more competitive, as you get more and more distributors, as there are more and more theaters, and they'll be higher and higher in theaters, you do believe that the splits probably will ultimately get better. And the market will operate like every other market in the world.

Great, thank you.

Jim Gross, Barrington Research.

First, could you provide some color on the -- that significant favorable variance in the distribution and marketing expense line. What went into last year versus this year that drove that big of variance? And what do you expect that line item to be like in the subsequent quarters?

Sure, Jim. Look, we're not going to break out the P&A spend, if you will, on a film-by-film basis, or try to really project the future quarters. But obviously it's affected by the timing, with regards to our big theatrical releases. So during the quarter, the primary impact of savings in P&A was related to the fact that we had to wide releases in the quarter versus three last year. That's the most significant driver.

Having said that, we also have had some very valuable savings that will roll over into the full year. And we were able to scale back some of the P&A spend on some films, so there's some real savings there as well. But it's primary driven by timing of the releases' end-period.

With that last comment you made, are you suggesting, Jimmy, that it could be some of that favorable type of variance, maybe not to that degree, could roll over into some of those subsequent quarters, aside from the issue of when films are released, when P&A is taken?

Those savings in particular were related to specific titles that have already rolled through the quarter, so they don't necessarily transition into the future. But as Michael alluded to earlier and as we've mentioned before, certainly we are benefiting from savings in a broad media space as a result of the scale achieved through the Lionsgate-Summit merger.

Okay. And then perhaps in a broader, strategic definition nature, as I listened to the earlier parts of the call, I'm wondering what is Lionsgate? What makes it what it is? And I'm wondering what core original principles remain untouchable and unchangeable, and what ones might be more flexible?

For example, young female target demo is very important, but there are a couple of other target demos that have been important. Does that variety of target demos get expanded over time? If you look at the international distribution, that's evolving a bit too. Are there certain things that define you and certain things that may evolve?

That's a really good question. It's a really big question. I think the characteristics that define us are of the entrepreneurial culture. And the fact that we've built a really strong, diversified business with scale and significant resources and pipeline that allow us to not only be entrepreneurial and focused. Perhaps more focused as a principle than the other studios -- not that, that's better or worse, but it's different.

But that the scale and diversity actually also allows us to be opportunistic. So it's allowing us to go after some things that is a four-quandrant picture, as far as we're concerned, like Power Rangers, and feel very strongly that we can do a good job with that.

But in general, we're going to continue with our core principles, which is focusing our television business on a high-end premium cable and pay television as our primary distribution outlet domestically, including the high-end subscription online services. We're going to continue to be focused on genres and specific affinity groups and audiences.

As you've mentioned, young adult, but also through Codeblack, urban. Our focus on the Latino growing market, which we're really excited about, had tremendous success with a couple of movies this past year, and our partnership with Televisa. So we're going to continue to stay focused and a little differentiated. But again, we do believe we do we have the market power, the balance sheet, the portfolio of brands to be opportunistic when it makes sense.

Jon, it's Michael. Let me just add one thing, Jim. We're going to stick to our financial discipline. That's been the mantra for the last 14 years, and it's not going to change. So if you look at our risk capital per picture, pre-marketing, post-output deals or foreign sales, plus that [subsidy], we've kept that at a very reasonable level without taking excessive risk on any one picture. We're going to stick to that, and the same thing applies to the television business.

Okay, thanks. One final thing, in terms of television, where some of the growth I think can materialize. How would you rank the attractiveness, from your point of view, of another opportunity with Netflix versus cable versus broadcast?

Well, I'd say we believe Orange is going to be as successful financially as most of the other really high-end cable and pay television shows over the last 5 or 10 years. So we think there's a tremendous opportunity with Netflix, with Amazon, with Hulu, maybe with Yahoo, to create extremely successful and profitable shows. Again, I think Kevin would agree that the proliferation of tremendous new buyers around the world is really creating a great playing field for our Company.

Great, thanks much.

Marla Backer, Ascendiant.

I have a couple of questions on the Divergent franchise. With this first film, as we usually see, there's not a tremendous licensing platform. Are you thinking that there will be more of an opportunity to license the brand as we move closer to the sequel?

As you've seen historically in franchised development, usually the second film is what starts to really catapult the licensing and promotional and merchandising opportunities. And we're very aggressive in what we're doing with the Divergent franchise as it relates to that.

And then the last thing on Divergent is, you originally launched Hunger Games in that same March window, but then you moved it to a holiday. Would you consider a similar move for Insurgent, depending upon its performance, or are you happy with that March timeframe?

Well, we love the March timeframe, because right now we still have two more Mockingjays in the November window. And we have three more in the Divergent series for the March window. So we're very comfortable that having two great young adult franchise windows in the year is great, and we're going to grow that as well.

Thank you.

Tuna Amobi, S&P Capital.

Jon, I think in one of your early answers on Alibaba -- just a quick clarification. I think you were suggesting that the subscriptions online channel model is where you see the future, and I'm wondering if this deal with Alibaba is something that you might think about expanding into other markets? Or is this something that's unique and specific to China because of the uniqueness of that market, and perhaps the partner that you have?

And if you do plan to expand that, I'm wondering how your relationship with Netflix might intervene in that, given Netflix is in a national expansion. I'm just trying to clarify how you see that partnership evolving, and the scope of the arrangement. Thanks.

I think that's a good question. I do believe, as I said earlier, that these online subscription channels are a wave of the future. I believe for us, mostly we'll look at them on a more branded basis. I think obviously Netflix is a huge general entertainment channel. I think they would describe it the same way. It's got something for everybody, including -- they've expanded significantly their children's and family presence lately.

I think that we see -- if we were doing these more specific to our brands and more focused at specific demos or genres, perhaps doing them with interesting branded partners. I think you will perhaps see us announce one or two of others of these in the not-so-distant future. I don't believe in any way, shape or form this will impact our tremendous relationship with Netflix or Amazon or any of our online partners.

Just to clarify, it's not out of the question that in one or two markets that you might launch it, that you would be in a position to compete with Netflix? Is that something that you would try to avoid? Or is there --

I don't see it as competition any more than you would say that with TBGN or with EPIX we're competing with our other distributors, in terms of our original content. I do believe you're talking about much more specific and niche product. And as you see right now, I believe that the consumers that also subscribe to Hulu Plus; 60% of them are subscribed to Netflix as well. I think you're starting to be in an environment where people have multiple services for different reasons, and that's how I would perceive this.

Okay, that's helpful. And then separate and last question. Obviously I think the numbers that you gave on the Divergent [comp] video -- early trends are pretty impressive. And I'm just wondering if it's fair to say that in EST markets specifically, you guys are over-indexing, in large part because of the young adult target audience that you have?

And also, I wanted to ask if you've seen this kind of correlation between EST and packaged media in the past? I mean, what's driving that? Is it specific to this title? Or have you had cases in the past where both of them were tracking positive for a period of time? Or is there any evidence that there could be potential cannibalization? I'm just trying to understand, overall, the trends in there and how that's related to the kind of films that you make.

Hi, Tuna. This is Steve. I think that -- well, first of all, you're seeing the EST market growing in general. As a matter of fact, the numbers that the DEG came out with last week indicates that EST market alone grew almost 40% just in the first half the year, and is on track to approach $1.5 billion at the consumer level for the year.

So that's huge growth, driven by growth everywhere, but particularly the [MBPD's] getting into the business -- Comcast being the first -- and really showing that there's tremendous growth there. We're seeing great EST revenue, not just with the young adult franchise, but in particular, the --male-oriented pictures. Just this last quarter, we released both Hercules and then Frankenstein, both over-performers on EST.

But again, as you indicated, I don't think it's cannibalistic at all, and we're showing with the release of Divergent this week, and then two weeks ago with EST. EST was so great. We wondered how that would impact the packaged media release, and the first indicators are it hasn't impacted really at all. And even if it is slightly cannibalistic, the margins are so much higher. So I think it's growing overall.

We've always focused on genres that over-performed in ancillary markets, particularly in EST. And I think we've been one of the first movers in terms of pushing at the windows, in terms of making product available to consumers in more avenues. And I think that's driving, not just margin, not just revenue, but also obviously the margin.

Thank you so much.

Well, thank you all for participating. We look forward to talking with you on our next quarter.

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