Starz Entertainment Corp (STRZ) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Lions Gate FY16 first-quarter earnings call.

(Operator Instructions)

I would like to remind you that the conference is being recorded. I would now turn the conference over to our host, Mr. Peter Wilkes. Please go ahead.

Good morning, thank you for joining us for our FY16 first quarter analyst call. We'll begin with opening remarks from our CEO, Jon Feltheimer, Following his remarks we'll open the call for questions. Joining us on the call today are Vice Chairman, Michael Burns; Motion Picture Group co-Chairs, Rob Friedman and Patrick Wachsberger; 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; Rick Prell, our Chief Accounting Officer; and Laura Kennedy, EVP of Corporate Development.

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 Lions Gate's 10-K filed with the SEC on May 21. 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. Thank you for joining us on the call this morning. Our first quarter results reflect another strong performance from our television production business, increased contributions from international operations and the continued momentum of our Epix platform. We also benefited from lower marketing costs and timing of product deliveries in the quarter and are on track for our full fiscal year expectations. It was also another quarter marked by robust free cash flow generation contributing to the strongest balance sheet in our history.

Although it's only been two months since we last spoke to you, we have a lot to talk about. On July 1, we launched the Hunger Games: Exhibition to record first week ticket sales for any entertainment property at its New York venue, and we announced that San Francisco will be the next stop on its global tour. We named accomplished digital executives to run our Comic-Con and Tribeca Short List SVOD services, and we announced our first original series for the Comic-Con platform. We continue to build our presence in the game space with a mobile game based on our action hero franchise, the Expendables, and a John Wick virtual reality game to extend the popularity of what we believe is evolving into one of our newest action franchises.

We established new or expanded relationships across a broad spectrum of partners, including game developer, Starbreeze and Fifth Journey, and virtual reality innovators, Valve, HTC, Samsung, WEVR, Oculus and Grab. We're already seeing exciting results from game companies Telltale and [Myx] Games and mobile game streaming platform, Mobcrush, three fast growing companies in whom we invested last year.

Telltale, in which we have an almost 15% investment stake, is about to launch Minecraft: Story Mode, a uniquely narrative driven, episodically released video game. This expansion of their Minecraft global gaming franchise adds to a growing roster of valuable properties that already includes Walking Dead, Game of Thrones and Borderlands. We also see exciting opportunities in the live game streaming and eSports sectors, one of the fastest growing areas of game content in the world. We're very pleased with the traction that we're already seeing from our early investment in Mobcrush, and we're exploring other strategic opportunities in this dynamic space as well.

Of course we're also continuing to expand our network of partnerships with some of the biggest and most visionary content companies in the world. For example, we recently announced a partnership with global branded content and play experience leader Hasbro to bring Monopoly, one of the world's greatest brands, to the big screen with a script being written by academy award nominee Andrew Nicol.

Only a few weeks after unveiling our Monopoly deal, I'm pleased to announce another film partnership with Hasbro. In 2017 we will release worldwide the beloved property, My Little Pony, currently in production with Emmy and Tony award winning actress, Kristin Chenoweth voicing an all new My Little Pony character in the film. Let me add that we believe both of these properties are repeatable franchises.

Nor has the velocity of changed within our Company been limited to new initiatives as we also continue to increase the momentum of our core film and television businesses during the quarter. Looking first at our fast growing television business, we continue to replenish our pipeline in the quarter with a powerful lineup of new series. Next month we open the writers room for Broke, a major drama series for our Mad Men partners at AMC from Clyde Phillips, the executive producer and show runner of Nurse Jackie and Dexter. Production begins at the end of the year.

Another long time partner, ABC Family has ordered the high end drama pilot, Guilt, an edgy thriller about murder, intrigue and scandal in London to be directed by Kiss the Girls director Gary Fleeter. This show marks an exciting new direction for ABC Family as once again we're helping to rebrand an important cable network partner as we did with AMC, Showtime, Netflix, WGN America and others. Last week we also announced our provocative drama series Greenleaf for Oprah Winfrey's OWN network, expanding our relationship with another key buyer. A high end show from a world class production team, Greenleaf is being created by Lost writer- producer Craig Wright. These are just a few of the record 16 new series joining our existing pipeline this year, as we continue to grow our television business and capitalize on the demand for platform defining, premium scripted programming. Between our new and existing series, we now supply television content to more than 20 different broadcast, premium, basic cable and online networks.

No recap of our television operations would be complete without mentioning the 24 Emmy nominations that we earned across five different shows including best drama Emmy nominations for both Orange is the New Black and Mad Men. And I'm crossing my fingers that Jon Hamm will finally get the best actor recognition that he deserves.

Turning to our film business. During the quarter, we laid the ground work for further enhancing the performance of current franchises, while accelerating our momentum and cultivating new ones. The global marketing campaign for Mockingjay II is already generating an incredible response, and on November 20, we will open the film worldwide with the biggest day-and-date launch in our Company's history. Insurgent is nearing the $300 million mark at the worldwide box office following a strong showing in China where it outperformed the first Divergent film by more than 50%. Book sales for the series have doubled from $17 million to $34 million, and just this week, we launched the title on home entertainment platforms in the US, Canada and the UK with very strong early sales. We believe that Divergent fans will be thrilled by the creative direction of the upcoming Allegiant films as we work in close collaboration with author Veronica Roth.

We have wrapped production of Now You See Me 2 ahead of schedule. As you heard on the last call, we believe that all of the elements are in place to take this evolving major franchise to the next level of performance. We continue to accelerate our planning for Now You See Me 3. While only part way through the 53 week post production process on Gods of Egypt, its visual effects are already taking shape, and it's clear that filmmaker Alex Proyas has created a stunning and sweeping world. We're capitalizing on its epic scope, nonstop action, and remarkable effects by releasing it worldwide in 3D next April.

One of our biggest recent accomplishments on the franchise front has been reuniting the Hunger Games creative team lead by director Francis Lawrence to adapt The Odyssey into a multi-picture event to the vein of Lord of the Rings. As we move closer to a production start in the first half of next year we're increasingly convinced that the Odyssey movies will become tentpoles in our upcoming slate.

I mentioned earlier the virtual reality game for John Wick, and I'm pleased to announce that principal photography for John Wick 2 begins in October in New York and Rome as Keanu Reeves returns to the Continental Hotel. We've added the film to a FY17 slate already loaded with crowd pleasing event movies.

During the quarter we also continue to replenish our pipeline with new high profile branded properties with multi-picture potential. We're locking in an exciting young cast for Robin Hood Origins, an edgy and contemporary look at the classic anti-hero. We're about to close a multi-picture deal with our global partner StudioCanal that includes a 3D animated adaptation of another renowned brand, Robinson Crusoe, and within the next few weeks, we will announce another three well known branded event properties that will continue to accelerate the momentum of our deepest slate ever.

We also continue to complement our organic slate with quality content from leading outside suppliers. On the heels of the success of the first film from our distribution partnership with CBS, the teen comedy The Duff, we are pleased to note that they are expanding their roster to include event movies like Patriot's Day, a big action film based on the hunt for the Boston Marathon bomber and Middle School based on James Paterson's best selling book series. CBS, Hasbro, Televisa and StudioCanal head an impressive list of deep pocketed global content companies who have chosen to partner with us, accelerating our ability to continue to broaden and deepen our content pipeline with 15 wide releases this year and nearly 20 next year.

Speaking of partners we would also like to congratulation our sister company Roadside Attractions which continued to solidify its position as one of the premier specialty distributors with a great summer at the box office. They recently achieved back-to-back successes with Love & Mercy, a possible year end awards contender and Mr. Holmes, which is shaping up to becoming one of the year's biggest Indie hits. Our slate begins to ramp up with an increased volume of releases heading into the fall. The family film Shaun the Sheep extends our relationship with global partner StudioCanal. It opened Wednesday, and we hope that strong word of mouth at its near perfect 99% score from film critics help grow its momentum as it expands to 2,300 screens for the weekend.

Coming up, the edgy comedy American Ultra, starring Kristen Stewart and Jesse Eisenberg has already generated a lot of excitement at Comic-Con and widespread conversation on social media. It opens August 21. The revenge thriller Sicario featuring critically acclaimed performances by Benicio Del Toro, Josh Brolin and Emily Blunt will be showcased at next month's Toronto Film Festival before opening on September 18. The true life drama Freeheld, starring Academy Award winner Julianne Moore, Juno's Ellen Page and Steve Carell is another potential awards contender premiering in Toronto. It opens on October 2.

I'd like to close with a few thoughts about the volatility you have seen in the media sector this week. We believe that disruption in the marketplace will play to our natural strengths as a global content company with few legacy constraints and a culture of innovation. We have a simple plan, and that's to be one of the world's foremost producers and distributors of premium content regardless of platform. That's been our strategy for the past 15 years, and whether it's part of a fat bundle, a skinny bundle or no bundle at all, the bottom line is that people are watching more content and spending more dollars across more distribution platforms than ever before. And we believe that we can serve nearly all of them.

With a record backlog of over $1.3 billion, a strong balance sheet, and a combined $1 billion between our cash balance and the availability in our revolver, we are well positioned to meet this challenge, by continuing to invest in our strategic initiatives, further accelerating our operating momentum and translating our strong financial performance into expanded opportunities for our Company and increased value for our shareholders.

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

(Operator Instructions)

And we will open the line of Alexia Quadrani with JPMorgan. Please go ahead.

Thank you very much. There's been a lot of focus as you mentioned on the evolving ecosystem and changing content consumption patterns the last few days. I guess can you talk about what this means for your TV business and how you describe the demands for programming from traditional TV networks, broadcaster cable versus your digital buyers and how does pricing differ at all depending on who the buyer is for that TV program?

Kevin why don't you take that?

It's Kevin Beggs. Generally we're finding there's so much demand. Literally our offices are empty most of the time in the TV wing which Jon gets frustrated about, but it's because we're all out pitching and scheduling the meetings with sometimes up to 18 different buyers is one of our biggest challenges right now, because there's so much demand for our product.

We're really platforming [not nick and] Jon alluded to in his remarks. We pitch year round. We're in the broadcast networks and the basic cable and the premium space and the streaming space. Often we have multiple offers on projects from each of those sectors.

Just an example of something we took out recently from one of our digital creators, we wound up with 16 pitches, several offers coming out of those pitches. The pricing varies. We customize each model to each buyer.

Obviously with legacy networks like an ABC and NBC, CBS and Fox, there's 40, 50, 60 years of deal precedent, and with a new buyer, the way we launched Orange is the New Black with Netflix, that was a six or seven month journey to figure out how we were going to work together, and that's simply replicated every week, whether it be Hulu, Amazon, OWN, WGN Amazon, a slew of new players, we think it's incredibly healthy for us, and as I mentioned at the top our biggest challenge is finding enough time in the day to get those meetings on the books.

One quick follow up, if I may, given the recent strength at the box office, so talking about your film side, are you seeing any changes, maybe splits between the studios and the theaters?

No, our splits are -- continue to be robust, and we're enjoying the fruits of the robust market right now, too.

All right. Thank you very much.

Thank you, we'll open the line of Ben Mogil with Stifel, please go ahead.

Good morning, and thank you for taking my questions. Just a couple questions. On the pay TV side, Epix's revenue was obviously up significantly year-over-year, but I think it was down sequentially. Was there in the last quarter, anything you wanted to talk about on that front?

Sure, Ben. The previous quarter did include some benefits of renegotiating the contract and renewal that allowed recognition during the period. Everything looks good there. And a strong performance overall in the quarter as you've noted.

That's great, thanks. Then following up on Alexia's question, you have a couple OTT services or a couple SBOT services in Comic-Con and in Tribeca, maybe talk either if you want to give granularity around sub numbers or a trajectory of what you're seeing on that front. And then you do have a stake in Starz, I'm curious what your thoughts are you can't obviously speak for Starz but obviously the ecosystem is under tremendous pressure so curious what you're seeing in having multiple different platforms, what you're somewhat against each other if you will.

Well, I think it's very early to talk about subs in terms of our new online channels. I can say that we're very pleased with how they're shaping up, and I think obviously we're not competing with Netflix or Amazon or Hulu. We're going to be really branded. We think these are fairly modest investments that we'll have with great partners and play to the strengths of the genres where we play and communicate with the audience on virtually a daily basis.

So, we like positioning these more narrow cast channels in the marketplace against what everybody else is doing. I would say Starz renewed their contract with AT&T. I think their programming -- I think Chris is doing a really great job with the programming.

I think you're seeing that with Outlander, with Power, with a number of his shows. He's getting a real throw weight with the audience, and I think at the end of the day, there's perhaps more pressure on the ad supported market, although our friends at AMC seem to be doing extremely well, and I think at the end of the day, as I said in my remarks, I think consumers are finding great premium content all across the board.

And I think great channels like Starz and Epix that provide a tremendous amount of content to the consumer, particularly when you look at, if you're going to be a smaller bundle for example, and you need movie content, I think, Epix is a fantastic choice for you and a fairly reasonable choice to supply a tremendous amount of content, now, particularly that we're adding these series, and,, our first series that we're providing and Epix will be putting on, starring Nick Nolte, and Susan Sarandon.

That's really premium content. We're excited about the disruption because we have figured out ways to play those in terms of both production and distribution with just about everybody. So again, we think it's a pretty robust environment.

That's great. Thank you very much, and congratulations on a good quarter.

And we will open the line of David Miller with Topeka Capital Markets, please go ahead.

Great quarter. Couple specific questions. Jon, can you go over quickly, topically the syndication schedule -- the first run syndication schedule for FY17? How many shows will be hitting the first run syndication schedule in FY17, and within that how many will straddle FY16 and FY17? And I have a follow up, thanks.

Yes, I think that will have to be an offline discussion. I don't have that information right in front of us. I mean, as you know, we're already -- syndication is a funny word right now.

Right.

Starting it early in terms of repeat programming on, digital networks, Nashville has already been sold to Hulu. We have sold a second window to AXF, and frankly we're talking about another window right now, so, we'll try to -- we'll give you a little more granularity offline.

That's fine. And then on the Power Rangers Reboot, what are the specific economics you guys have in place with Saban? Is it sort of a 50/50 split? I assume you guys are going to be pre-selling foreign territories, any kind of color you're willing to give us on splits with Saban, and how that's going to work out on the tail end of FY17? Thanks a lot.

We have a rather traditional deal with Saban at this point in time. There could be an opportunity for them to co-finance along with our JIK partners, but at this point, it's a traditional supplier distributor relationship.

Okay. Thank you.

I'll open the line of Amy Yong with Macquarie. Please go ahead.

Thanks. So two questions, first on the TV business. I think you're calling for 16 originals this year, and profitability grew pretty nicely this quarter. How are you thinking about the pace of profitability for the rest of the year, and perhaps the mid teens margin guidance that you previously gave? And I have a follow up on free cash. Thank you.

I'll have Laura Kennedy answer that.

Sure. Hi. Just to clarify that point, we have 16 new series launching this year. We should expect closer to, well, over 30 series delivered this fiscal year. So you can expect a sort of more robust delivery schedule than that. And in general, as you think about what the performance might look like for the TV business, I think we've mentioned in the past that we're expecting for us to continue to grow and hit over a $100 million annual contribution that they were tracking pretty well towards.

Perfect. And then just on prioritizing free cash flow at this point, philosophically as you look across the results of this quarter, how are you measuring the attractiveness of different players within the industry, whether or not it's digital, international, traditional players and I guess how does that measure up against buying back your own stock?

Certainly we have had strong free cash flow as you've seen, and we think certainly that free cash flow generation is sustainable, and we're obviously fully investing in our core business in terms investing in our content for TV and motion picture that is all prior to the free cash flow numbers that we continue to pump out.

So, and as you've noted, it's strong free cash flow, we have almost $200 million on our balance sheet in cash. We have $800 million unused revolver and very lightly leveraged. So we have great financial capacity, cash on the balance sheet, and we certainly will be looking at that in the context of share repurchase, obviously very viable. We purchased a lot of shares back in the past.

We'll be continuing to be opportunistic in that area. M&A, you alluded to certainly possibilities as well, but we'll continue to be very disciplined in that context, but a lot of financial capacity in cash to do great things in the future.

Amy, it's Michael. I just want to say a couple things. First off, I appreciate you picking up coverage, and sort of adding to what Jimmy said, we feel like we have been the baby recently thrown out with the bath water. And obviously our stock where it is more attractive than it was a couple of days ago, and as Jimmy said we're going to be opportunistic in that regard.

Perfect. Thank you.

And we're going to open the line of James Marsh with Piper Jaffray, please go ahead.

Great. Thanks very much. Two quick questions on strategic relationships. First, I guess I understand you're building this longer term relationship with Dr. Malone and Starz, but just wondering how you see your pay channel investment in Epix fitting into that evolving relationship over time?

And then just secondly, I wanted to follow up on your comments about the Hasbro relationship, and just, if you could just kind of frame that out for us a little bit. How deep could that relationship go over time? Is it limited to existing Hasbro intellectual property, or could you develop some new IP together as well? Thank you.

Rob, why don't you take Hasbro first.

We have an excellent relationship with them, and it's been long standing and obviously with Michael on their board it just enhances our opportunities for future synergies. We love their properties that currently exist, but there's,, our dialogue and our conversation is ongoing, so the opportunity to create new IP is very, very relevant for the relationship.

I would, to the first question, I would say, again, as I said before, we're happy to be shareholders of Starz. I think our investment right now is up about $20 million. We think,, Chris is continuing to do a really,, good jock, building that -- building that brand. And of course we're delighted that John Malone is a Lionsgate shareholder, a member of our board, and the connection that we have therefore within his orbit of companies in terms of discovery, in terms of liberty global, in terms of charter we think it's a very, very valuable relationship, and we hope we can take advantage of it.

Thank you very much.

We will open the line of David Joyce with Evercore. Please go ahead.

Thank you. I wanted to go back to the long-term franchises for the Company. You're at a record production backlog of $1.3 billion. I was wondering how far into the future calendar that represents and how you can square that with some of these, the franchises you've mentioned in the opening remarks and if you have -- and if you could extend or kind of frame that backlog, the time frame, just how far out we should be looking in our models with these, thank you.

Well, the great thing about it is backlog does not include those future franchises that we've referenced that we think we have a great lineup for the future. It of course includes existing franchises where we've presold and not recognize the revenue. So your point about the timing, with a $1.3 billion of backlog, that's yet to be recognized in revenue.

Generally that's recognized in revenue over the next 18 month period, to 2 years, something in that time frame, more front end loaded than back end loaded. And I would also note that TV and motion picture both were up nicely quarter-over-quarter with regards to our backlog, and both contributed nicely to that record level.

Great. And is there anything that has been evolving or changing as you've been adding to your portfolio of franchises in terms of the economics or the international distribution strategy, or is that all very case specific?

Well, certainly the economics continue to be strong, and what we're finding is with the continued opportunities with the windows and international territories as well. But it's also domestically, we're finding opportunities to monetize our content, both film and TV, and earlier windows and more windows that didn't exist in the past. And all of that is macro trend that continues to create opportunities for us as a pure content play.

Great. Thank you.

We'll open the line of John Janedis with Jefferies, please go ahead.

Two questions. First in your prepared remarks you talked about some of the head winds in media and your positioning, so with that in mind I though I'd start by asking about your comfort level with your three year guidance.

Sure. We continue to track our 3-year guidance of $1.2 billion to $1.3 billion of adjusted EBITDA. That's despite the fact that our forecast now includes start up costs for Tribeca Shortlist and Comic-Con SVOD, platforms and that was not including in our original guidance. So we continue to track nicely.

Thanks for that, and then secondly some of your larger peers seem to be at a point now where SVOD revenues are about to peak or have you been past peak even when factoring in international, so can you talk about where you see Lionsgate in terms of the opportunity? Is this going to continue to be a growth opportunity in both the US and non-US and has your view regarding selling exclusive versus non exclusive changed?

John, it's Kevin Beggs just on the originals front, because I spent a lot of my time on the SVOD as I alluded to earlier, it's a really growth business. Obviously Netflix is clear category leader, but that creates a lot of opportunity for competitors like Hulu and Amazon to catch up. Those are opportunities for us.

We're in business with Hulu on four series, and we're in development in Amazon on several. When Crackle is jumping into the drama market with the drama called The Art of More with Dennis Quaid that becomes a viable buyer, and we think there will be more in there. And they're each going to need a network defining scripted series to distinguish themselves and be competitive. And Michael Wolfe has alluded to in his book, old media jumping in front of the line in the new media world, and it's really happening.

So for us, on the original side, it's an absolute huge opportunity, and I think it's putting pressure as well on international buyers who are responding to Netflix, coming up with their own strategies or bolstering their original programming lineups. And many of the international buyers we're talking about in France and Germany are looking for English speaking series and looking for name brand show runners or US distribution partners and development partners that know how to deliver shows that will work for their air. We're in that space pretty actively as well.

Yes, I think you're going to see, Jon, a similar trajectory with digital players as we have seen through every new platform in our history. In the international marketplace, clearly these new over the top channels, SVOD platforms are somewhat nascent, you're going to see them all start the same way, including Netflix as it expands internationally which starting with a base of significant library as well as originals.

These are going to be new buying opportunities, and frankly we have talked about this before you are absolutely seeing it in China and India and a number of other territories, in southeast Asia you've got three new platforms Hook and iFlix, and you're going to see an up tick, I think for all of us, in terms of both library as well as some even original programming.

And in terms of the US, yes, probably as a company like Netflix gets, to its huge scale, it's going to be more selective about its buying, frankly, you're going to see the newer player, Hulu, Amazon, and all of the other new players that are about to jump into this space, they have to create a robust platform, and so, again, I think this is a very typical trajectory, and for a company like ours that supplies a huge diverse portfolio of content, we don't see the concern at all.

Maybe just given the Netflix commentary, they spoke about the Epix relationship a couple weeks ago and the potential to renew or not, can you talk about maybe a plan B if they don't renew, how does it impact your willingness to potentially take on losses to invest in programming and does this open the door to more traditional MVPDs.

Very good questions. I would say again, Epix is doing great. We're about to launch new series. We're up 30% plus in terms of subscribers over the past year, looking to be very soon having about 12 million subs. We have made a new deal with Amazon as has been reported, having a number of other conversations which I'm not going to characterize at this point in time.

But I think that for the MVPDs we did a last year sign on AT&T. I'm hopeful that our success there will lead to something positive with DirecTV again. I think we're turning out a tremendous product right now, and obviously if there is less exposure in over the top, it's possible that would be a more attractive product. But either way I think we've got a very, very compelling package of motion pictures and now television shows, and I think Epix is going to continue to grow.

Great. Thanks a lot.

Our next question is from the line of Barton Crockett with FBR Capital Management, please go ahead.

Okay. Great, yes, FBR Capital Markets and thanks for the taking the question, and two if I could, one of them a little bit smaller and one of them bigger picture. The smaller one first, I guess you quoted the 73% growth in international calling out Orange is the New Black. Is that all Netflix or are other companies that are not Netflix that are getting that signature show internationally, and along with that can you update us on where we are with the potential [totch] second run rerun rights for seasons one through three I guess domestically out of Netflix.

Rather than comment specifically on an individual program being sold to a specific platform, certainly Orange is the New Black was a major contributor in the quarter but we have significant international syndication sales that drove that as well, and we expect that to continue into the future and into the year, so a lot of opportunity in that space.

I missed the second part of your question, Barton.

You talked about international rights for Orange and I also wanted to follow up on domestic rights in that you've sold the initial runs of the seasons, and I think we are looking for rerun rights to be sold at some point, probably to Netflix and I'm just wondering where we are with that?

I think you could assume Netflix holding onto Orange domestically for a long time.

We certainly have other domestic rights with regards to that program on package media and EXP, a likewise contributor.

Okay. All right, and then the bigger question that I wanted to ask about is in the context of the market volatility here, so many of these media stocks down, you guys being positioned by Malone as a possible consolidator, does the downdraft in stock process wet your appetite to do acquisitions, does it make things more appealing or do you see what the market is doing and maybe get a little bit more nervous about the risks? So how does that affect your view of consolidation at this point?

Michael you want to grab that.

Sure. Hi, Barton, I would say obviously when prices come down, the assets become more interesting particularly if they're accretive and particularly if we have a great deal of synergies. So, yes, it becomes more interesting, but we really do look at everything, but we are very disciplined in what we buy as the history has shown over the last 15 years. Certainly some of these assets if they were spun off from conglomerates, that would be interesting to us, and certainly in our core business it becomes interesting. And every time we have done an acquisition of size in the past, I think our shareholders have benefited from that. So we're paying attention here, Barton.

Okay. That's great. Thank you.

We will open the line of Matthew Harrigan with Wunderlich Securities, please go ahead.

Thank you. With Oculus Rift and I think with your capabilities as a studio and VR and your gaming investments make you even more relevant, I was curious, for something like the Odyssey or even something like Monopoly, could you adapt that for Oculus and some of these other platforms. I guess it's kind of funny you'd be adopting Monopoly for a game for Hasbro? And then Shaun the Sheep, I know you're distributing that for Aardman. Traditionally you have been leery of big animation.

With everything you have going on now, your more scale gaming and all that, would you be tempted to look at some select animated projects other than just doing the distribution, I know the answer is probably, no but I would love to get your thoughts just on the category.

I think Shaun the sheep is a very, very, very low risk property for us. We like supporting our partner at Studio Canal, and, again, great reviews, proud of the movie, and hope that it performs well this weekend. And I think in general, the answer to your question is we are much more compelled to invest in properties that are repeatable, and part of being repeatable is that they are things that now we have really over the past yore spent a lot of time on game location based entertainment, licensing and merchandising, as I have said before, hired three fantastic executives.

And we're really starting to see that pay off, and I think you can start seeing in FY17 some significant, profit contributions from that area. We are much more compelled to invest money in properties that can both repeat and play across all of those different platforms. In terms of specifically animation, unless we have a real strategy around why we can do it better and differently, I would say the answer is probably no.

Could you look at something like the Odyssey for Oculus Rift or for gaming or is that just, beyond the pail?

This is Rob. We actually look at all of the opportunities for our franchises with Oculus Rift. We think A, number one, it's a great promotional vehicle for us and for them, but additionally, we see opportunities in expanding the franchises through games and other such things.

Yes, and I think the Odyssey, actually, again, Odyssey is not going to be a history. Odyssey is going to be a big action adventure movie with,, somebody we think is perhaps the finest film maker working right now, and the entire group that produced four Hunger Games, and again, we see it as a big spectacle that will hopefully not only be repeatable, but again, will be able to play across all of those platforms.

Thanks, congratulations on the quarter.

Our next question comes from the line of Doug Creutz with Cowen and Company. Please go ahead.

You allude to in your comments about the fact we have had a decent rebound in box office from last year, but it seems to us that we've also seen a very high concentration in that box office in a few films, particularly over the summer. Do you think that the industry is moving to one where we're going to see fewer but bigger films, and if so, what does that mean for your studio strategy?

Actually, this is Rob. The summer was up double digits, but the year in general, even prior to the summer, was up high single digits. So listen, it's always great to have big movies that are performing and box office is driven by content, but you look at our successes this summer with Love and Mercy, and you see that there's a variety of movies available and a lot of choices, breeds really great business, and we're seeing that. We see the fall schedule lining up with movies like Sicario and Last Witch Hunter and it's just a real opportunity. I think choices for consumers add to the box office potential.

Okay. Thanks.

Our next question is from the line of David Bank with ABC Capital Markets.

Change the A to an R, I guess. Can you guys talk - in your prepared remarks, I think John talked about the expansion of the third party distribution business, CBS as well as Hasbro and some other relationships, can you talk about how that improves the overall margin of the studio business? Basically you've got like a fixed cost in a, -- on the studio side, and more you can put through it. It's like free moneys, I would imagine, so can you talk about what that does to the margin structure of the studio business over the next couple of years as you expand those relationships?

And second, if Jon and Kevin in particular here,, from an investor perspective, I think a key thesis for us is that you sell the bullets,, you sell the content to the guys that own the guns or the channels. You can be ecosystem agnostic. It doesn't really matter what the platform is. Everybody has guns. Everybody needs bullets. But The gun guys on the traditional side had a rough week. There was a lot of market cap that got evaporated, a lot of concerns over the old money guns, and -- or old media guns, and I guess my question is you have been doing business with these guys selling your bullets particularly over the last 12 to 18 months. Do you sense there's a dramatic change in the traditional ecosystem that's occurring right now or about to occur. Do you see glacial changes. What are you observing as you're selling into the system? Thanks very much.

Okay. Good questions. Number one, as you know, our philosophy has always been what's the return on invested capital in terms of our movies and television business. We've rarely been concerned about winning the weekend, and so we've built what we think is a very, very efficient distribution mechanism worldwide.

And of course as you call it, that's the fixed cost, and what we have been able to do is between our core business and these mini labels that we've put together, instead of putting out just 15 sort of wide-release pictures, we're putting out 40 pictures and the pictures Rob mentioned before, the two through Roadside are quite profitable for us, and so there's no question that we see the ability to fill the pipeline, not only with product that we own 100% or 75% or 50% depending on co-financing partners but projects we just take that we like.

Obviously we're selective about everything that we put out. But projects that we take and put out purely on a distribution basis. The truth of the matter is when you look at most of the studios margins, you would probably find that the distribution fees that we get from purely distributed product is very close to the margins that they get for the product that they own or co-own. So we like this model.

We don't say it's right for everybody, but we like the model for ourselves and do believe that in the world we're going into, that flexibility into different kind of product, partners, gives us a big leg up.

And David, in terms of margins, as you saw in this quarter. The distribution film of Age of Adeline is a good example, where you don't have P&A risk, and you have higher margin associated with it because you're not recognizing the revenue. So it can increase the margin in the period. We're focused clearly on the absolute and the profitability of each project and approach it that way.

Yes, I would say, and I'll let Kevin opine on this as well, but I would say we certainly are not looking at what happened this week in terms of financial markets as any indicator of the environment for our partners' television business to change what we're all doing, I think, again, in my remarks, and I said it, and I really believe it, is people are watching more content over more platforms than ever before.

I think most of the US partners we're in business with that are the drivers, they drive the initial exploitation of premium content which then plays off in numerous other secondary platforms. I think those partners are going to continue to have a high demand for significant premium content that can be produced efficiently. I think we're pretty good at that, and, again, as Kevin said, I mean, he was out the other day.

He showed me a chart from Rocket Jump, this so called digital producer that we're in business with, one of the premiere digital producers, and what was interesting, when I looked at the chart, he had 16 pitches across network, basic cable and digital. So I think we are in a very, very robust environment right now for -- as a pure play content company. I don't see it changing because there was a bad week in the market. Kevin?

Yes, just to follow on that, I don't -- I don't see these as massive fragmentary changes. They're not glacial either. What you have seen in television for as long as television has been made is cyclical trends and the trend right now is very favourable for us in that high end, premium scripted programming that can endure for many years and many cycles is at the forefront of everyone's thinking.

These are the network defining shows, this is the Game of Thrones for HBO. This is Transparent for Amazon. It's Mad Men and Breaking Bad, and Walking Dead for AMC, et cetera, et cetera. Those are the -- premiums are being placed on those bets. It's at the expense right now of nonfiction, and every network, broadcast, cable, premium cable, and SVOD is pressured to find that defining hit. We think we're in that market in a really good way.

The shows that we have created over the past or have been involved with helping to create are driven, more and more film, theatrical talent is migrating into TV. These are artists that are watching TV shows and discovering that television has changed. They are interested in that space, and we're a natural home. We're in close collaboration with Rob and Patrick and Erica in the theatrical side.

We probably have 6 feature film adaptations set up around town for television and more on the way, and IPs that can cut through the marketing clutter of 25 or 30 buyers is essential. And it's a nice collaboration. It's a particular trend right now, and we're going to exploit it to it fullest.

Thank you very much.

Our next question is from the line of Jeff Logsdon with JBL Advisers.

Thank you. Two questions, number one, it's a little more esoteric, but around film ultimates, now that the last couple of years, we have a handful of new portals for film distribution is that the making the forecasting of ultimates a little more complicated, and I'm not just talking about for you all, but is this where we might see more variance in the future? And then secondly, just the physical package media market, the DEG comments this past week would suggest once again, maybe that the marketplace is flattening out on physical maybe see a little cessation of decline we have been experiencing for a number of years. Thanks.

The way that we forecast our film ultimates is the same way we always have. What I would note is that we continue to find that historically, because there continues to be new buyers all the time, that historically we keep seeing what we call creep, which is over each period, I would say year-to-year, we actually have to upgrade, not downgrade our film ultimate because there are new buyers and we find we have been too conservative about them, and I think, again, that's the whole concept of the enduring value of libraries and particularly we have premium content, and that's what we keep seeing. I expect to keep seeing that. I'll let Steve take the second question.

Jeff, as you mentioned, the DEG numbers show what we believe are strength, strength in the home entertainment market overall. And overall consumer spend increased in the first half. We actually expect it to continue to increase, perhaps by as much as 2% for the full year, and even though, as you mentioned, it seems that the maturation of package media is kind of stabilizing, we are seeing a tremendous of growth in EST and IVOD which will increase operating margins for the full year by as much as 5%.

It's interesting to note, as Jon mentioned the Insurgent release this week, not only was it a successful release in the US and the UK in digital, EST, VOD, but packaged media was right in line in the US with our expectations and the UK, actually up. We saw the UK results up by as much as 25% in the UK in packaged media, so there are great signs.

Great. Thank you.

Thanks, Jeff.

Our next question is from the line of Jim Goss with Barrington Research.

Thanks, I have a couple also. First, regarding games, I was wondering it you could provide any thoughts as to the size and pace of inclusion into your business model. Because they can be very large in terms of the initial take rate and very lumpy in terms of how it would blend through the model. Do you have any thinking purposes we might use.

Sure, Jim, it's still early stages in this context, and just to tell you, we're not projecting material contributions in our planning period. But we definitely like the way the opportunities are evolving and in particular, we're seeing many exciting crossover opportunities between and among gaming, TV, and our film property, so we like the space, but you're, we're not putting big projections or material numbers in our current forecast.

I should add we're also not making the kind of investments that you're seeing from studios in the past. We don't see significant losses at all, if any. And again, I think Jimmy is being a little conservative, I do believe you're going to start seeing some decent contribution in FY17.

Okay. And the Company has scaled up pretty aggressively over the past couple of years. I'm wondering if there's any shift in your thinking about the appropriate number of annual releases, film releases in the mix of self-produced, versus partnered, versus pick uppers and also perhaps the mix of big middle and small sized films.

Okay. I'll keep this short. I have sort of mentioned before what our numbers look like. Overall, from what we consider a wide release, Lionsgate or Summit releasing label strategy, I think you're looking at 15 this year and going to about 20 next year. With the overall amount when we include what we call segment due, but from our other labels, Roadside, Codeblack, Pantelion, as many as 40 again.

Those other pictures are extremely low in terms of investment and marketing costs and good use of our infrastructure, as we said earlier that kind of fixed cost infrastructure, and I would say in terms of our core product, two-thirds to one-third is our target for franchise repeatable properties. Those we hope to own as much as possible of, and filling the rest of the slate, again, with either these partnerships or straight distribution deals, I'd sat that gives you some sense of what the blend of portfolio is.

Thanks.

And our last question today comes from the line of Tuna Amobi with S&P Capital. Please go ahead.

Hi, thank you very much. So I guess my first question is on the television contribution margins. I think, obviously it's seen a major ramp up in the next several years, and with the type of pipeline that you laid out today, I'm beginning to think that, those margins should double, they'd be quicker than I previously thought over the next five years, so my question is there anything structurally that should kind of stop those -- kind of constrain those margins from a significant ramp up potentially doubling before the next five years, can you give us some color on the trajectory of how you see those margins in the context of the guidance that you've provided, and I have a separate question.

Sure, Tuna. Certainly you did see a significant increase in the margin during the quarter. Keep in mind, that's a lot of international syndication, particularly Orange is the New Black, so a high margin major franchise. I think what we've said is certainly year-over-year, we're looking at really good revenue growth in TV as well as strong gross contribution growth including increasing margins year-over-year for the full year. And going forward, we've said over our plan period, this moves into mid teen margin territory, so certainly affecting that, as you develop your pipeline, you bring new programs in, we're managing for the future in major growth and that's part of introducing new programs -- programming which naturally comes in at earlier margins, so to a certain extent, you don't want to see that ramp too fast. We could ramp it up fast but that's not our goal. The goal is in the absolute, and pursuing business in growth area that we're very excited about.

Okay. So maybe I was a little optimistic, and wasn't taking account of the ramp up costs. All right, so separately, I guess this is a question for Jon, if I can try to advance the conversation on the topic of disruption, and by the way, I couldn't agree more with you that, everything that has happened of late has played to your strengths, it just seems like all of the actions that you have taken in the last two to three years has prepared you for this moment. And I think it's fair to say that you guys have gained a lot more clout in the industry over the last couple of years or so, certainly since the Summit acquisition and all the ramp up in television and film, so I guess the question is, is it fair to expect that given this environment, that you're going to be a little bit more of a leader in terms of actually taking advantage of this disruption?

I mean, clearly you have seen what Paramount is doing with regard to the theatrical window, Netflix as well, so I'm wondering if there's specific ways that you guys can be proactive to take advantage of this disruption in the market given everything you've done to this moment. In other words to try to,, use it as a competitive advantage,, direct to consumer for example, comes to mind, and a number of other ways that you might try to lead the industry. Thank you.

Well, I appreciate your comments, Tuna. I kind of feel like what we've presented today is exactly what you're talking about. I think to continue to look at opportunities in the M&A space given our balance sheet, where we are right now, I think the use of our infrastructure and continue to expand our pipeline. I think for sure there's no question in my mind that given our financial strength and frankly, the strength, the ability of Kevin Beggs and Sandra Stern and Laura and their team who come up with strategies that allow us to supply premium content enduring content to a wide variety of buyers will give us a leg up.

Again, we're not looking for headlines. We're looking for profits, and I think there's a lot of opportunities like that out there. We constantly change our game. We keep it in the same kind of guidelines and culture, but we're constantly changing our game to adapt to the environment, and I do believe, as you say, that this is a great environment for an entrepreneurial company like us to expand our business in many ways.

Okay. Thank you very much.

Thank you everybody, we look forward to the next call.

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